NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
General and basis of presentation—“Aptiv,” the “Company,” “we,” “us” and “our” refer to Aptiv PLC (formerly known as Delphi Automotive PLC), a public limited company formed under the laws of Jersey on May 19, 2011, which completed an initial public offering on November 22, 2011, and its consolidated subsidiaries. On December 4, 2017, following the spin-off of Delphi Technologies PLC, the Company changed its name to Aptiv PLC and New York Stock Exchange (“NYSE”) symbol to “APTV.”
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and all adjustments, consisting of only normal recurring items, which are necessary for a fair presentation, have been included. The consolidated financial statements and notes thereto included in this report should be read in conjunction with Aptiv’s 2021 Annual Report on Form 10-K.
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 operates manufacturing facilities and technical centers utilizing a regional service model that enables the Company to efficiently and effectively serve its global customers from best cost countries.
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 three months ended September 30, 2022, Aptiv received a dividend of $3 million from one of its equity method investments. During the nine months ended September 30, 2021, Aptiv received a dividend of $6 million 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 $65 million and $30 million as of September 30, 2022 and December 31, 2021, respectively, and are classified within other long-term assets in the consolidated balance sheets. Aptiv’s investments in publicly traded equity securities totaled $15 million and $66 million as of September 30, 2022 and December 31, 2021, respectively, and are classified within other long-term assets in the consolidated balance sheets. Refer to Note 21. Investments in Affiliates for further information regarding Aptiv’s equity investments.
Use of estimates—Preparation of consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect amounts reported therein. Generally, matters subject to estimation and judgment include amounts related to accounts receivable realization, inventory obsolescence, asset impairments, useful lives of intangible and fixed assets, deferred tax asset valuation allowances, income taxes, pension benefit plan assumptions, accruals related to litigation, warranty costs, environmental remediation costs, contingent consideration arrangements, worker’s compensation accruals and healthcare accruals. Due to the inherent uncertainty involved in making estimates, including the duration and severity of the impacts of the COVID-19 pandemic, 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 generally are represented by a combination of a current purchase order and a current production schedule issued by the customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a
product or service to a customer. From time to time, Aptiv enters into pricing agreements with its customers that provide for price reductions, some of which are conditional upon achieving certain joint cost saving targets. In these instances, revenue is recognized based on the agreed-upon price at the time of shipment.
Sales incentives and allowances are recognized as a reduction to revenue at the time of the related sale. In addition, from time to time, Aptiv makes payments to customers in conjunction with ongoing business. These payments to customers are generally recognized as a reduction to revenue at the time of the commitment to make these payments. However, certain other payments to customers, or upfront fees, meet the criteria to be considered a cost to obtain a contract as they are directly attributable to a contract, are incremental and management expects the fees to be recoverable.
Aptiv collects and remits taxes assessed by different governmental authorities that are both imposed on and concurrent with a revenue-producing transaction between the Company and the Company’s customers. These taxes may include, but are not limited to, sales, use, value-added, and some excise taxes. Aptiv reports the collection of these taxes on a net basis (excluded from revenues). Shipping and handling fees billed to customers are included in net sales, while costs of shipping and handling are included in cost of sales. Refer to Note 20. 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 12. Shareholders’ Equity and Net Income Per Share for additional information including the calculation of basic and diluted net income per share.
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”) Accounting Standards Codification (“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.
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. As of September 30, 2022 and December 31, 2021, the Company reported $3,366 million and $2,784 million, respectively, of accounts receivable, net of allowances, which includes the allowance for doubtful accounts of $53 million and $37 million, respectively. Changes in the allowance for doubtful accounts were not material for the nine months ended September 30, 2022.
Inventories—As of September 30, 2022 and December 31, 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.
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—Intangible assets were $806 million and $964 million as of September 30, 2022 and December 31, 2021, respectively. Aptiv amortizes definite-lived intangible assets over their estimated useful lives. Aptiv 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. Amortization expense was $37 million and $112 million for the three and nine months ended September 30, 2022, respectively, and $37 million and $111 million for the three and nine months ended September 30, 2021, respectively, which includes the impact of any intangible asset impairment charges recorded during the period.
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. The Company qualitatively concluded there were no goodwill impairments during the nine months ended September 30, 2022 and 2021. Goodwill was $2,274 million and $2,511 million as of September 30, 2022 and December 31, 2021, respectively.
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 6. 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 when the underlying components affect earnings. Refer to Note 11. Income Taxes for additional information.
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 7. Restructuring for additional information.
Customer concentrations—As reflected in the table below, net sales to Stellantis N.V. (“Stellantis”), General Motors Company (“GM”) and Volkswagen Group (“VW”), Aptiv’s three largest customers, totaled approximately 25% and 26% of our total net sales for the three and nine months ended September 30, 2022, respectively, and 25% and 28% of our total net sales for the three and nine months ended September 30, 2021, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Percentage of Total Net Sales | | | Accounts Receivable |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | | September 30,
2022 | | December 31,
2021 |
| 2022 | | 2021 | | 2022 | | 2021 | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | (in millions) |
| Stellantis (1) | 8 | % | | 10 | % | | 9 | % | | 11 | % | | | $ | 306 | | | $ | 317 | |
| GM | 9 | % | | 7 | % | | 9 | % | | 8 | % | | | 270 | | | 208 | |
| VW | 8 | % | | 8 | % | | 8 | % | | 9 | % | | | 213 | | | 163 | |
(1)On January 16, 2021, Fiat Chrysler Automobiles N.V. (“FCA”) and Peugeot Citroën (“PSA”) merged to form a new, combined company (“Stellantis”). Net sales to FCA and PSA before the date of the merger are included in net sales to Stellantis in the table above for the nine months ended September 30, 2021.
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 insignificant 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. As the guidance is only applicable to annual disclosures, the Company is still evaluating the effects that the adoption of ASU 2021-10 will have on the Company’s consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contracts 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. As this standard is to be applied prospectively to business combinations, the impact to the
Company’s consolidated financial statements will depend on various factors associated with individual 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: | | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| | | |
| | (in millions) |
| Productive material | $ | 1,619 | | | $ | 1,311 | |
| Work-in-process | 140 | | | 172 | |
| Finished goods | 547 | | | 531 | |
| Total | $ | 2,306 | | | $ | 2,014 | |
4. ASSETS
Other current assets consisted of the following: | | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| | | |
| | (in millions) |
| Value added tax receivable | $ | 161 | | | $ | 178 | |
| | | |
| Prepaid insurance and other expenses | 61 | | | 63 | |
| Reimbursable engineering costs | 99 | | | 110 | |
| Notes receivable | 5 | | | 16 | |
| Income and other taxes receivable | 74 | | | 54 | |
| Deposits to vendors | 9 | | | 6 | |
| Derivative financial instruments (Note 14) | 20 | | | 38 | |
| Capitalized upfront fees (Note 20) | 20 | | | 34 | |
| Other | 8 | | | — | |
| Total | $ | 457 | | | $ | 499 | |
Other long-term assets consisted of the following: | | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| | | |
| | (in millions) |
| Deferred income taxes, net | $ | 151 | | | $ | 159 | |
| Unamortized Revolving Credit Facility debt issuance costs | 9 | | | 11 | |
| Income and other taxes receivable | 32 | | | 28 | |
| Reimbursable engineering costs | 169 | | | 176 | |
| Value added tax receivable | 2 | | | 20 | |
| Equity investments (Note 21) | 80 | | | 96 | |
| Derivative financial instruments (Note 14) | 10 | | | 3 | |
| Capitalized upfront fees (Note 20) | 47 | | | 58 | |
| Other | 73 | | | 71 | |
| Total | $ | 573 | | | $ | 622 | |
5. LIABILITIES
Accrued liabilities consisted of the following: | | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| | | |
| | (in millions) |
| Payroll-related obligations | $ | 318 | | | $ | 286 | |
| Employee benefits, including current pension obligations | 83 | | | 83 | |
| Income and other taxes payable | 113 | | | 157 | |
| Warranty obligations (Note 6) | 40 | | | 41 | |
| Restructuring (Note 7) | 43 | | | 42 | |
| Customer deposits | 77 | | | 83 | |
| Derivative financial instruments (Note 14) | 59 | | | 13 | |
| Accrued interest | 51 | | | 30 | |
| MCPS dividends payable | 3 | | | 3 | |
| Operating lease liabilities | 96 | | | 92 | |
| | | |
| Other | 455 | | | 416 | |
| Total | $ | 1,338 | | | $ | 1,246 | |
Other long-term liabilities consisted of the following: | | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| | | |
| | (in millions) |
| Environmental (Note 10) | $ | 1 | | | $ | 4 | |
| | | |
| Extended disability benefits | 6 | | | 5 | |
| Warranty obligations (Note 6) | 8 | | | 8 | |
| Restructuring (Note 7) | 15 | | | 21 | |
| Payroll-related obligations | 9 | | | 11 | |
| Accrued income taxes | 138 | | | 153 | |
| Deferred income taxes, net | 136 | | | 153 | |
| Derivative financial instruments (Note 14) | 32 | | | 7 | |
| | | |
| | | |
| Other | 56 | | | 74 | |
| Total | $ | 401 | | | $ | 436 | |
6. 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 September 30, 2022. The Company estimates the reasonably possible amount to ultimately resolve all matters in excess of the recorded reserves as of September 30, 2022 to be zero to $10 million.
The table below summarizes the activity in the product warranty liability for the nine months ended September 30, 2022: | | | | | |
| | Warranty Obligations |
| |
| | (in millions) |
| Accrual balance at beginning of period | $ | 49 | |
| Provision for estimated warranties incurred during the period | 33 | |
| Changes in estimate for pre-existing warranties | 2 | |
| Settlements made during the period (in cash or in kind) | (32) | |
| Foreign currency translation and other | (4) | |
| Accrual balance at end of period | $ | 48 | |
7. 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 Aptiv’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 on the continued rotation of our manufacturing footprint to best cost locations in Europe. The Company recorded employee-related and other restructuring charges related to these programs totaling approximately $11 million and $52 million during the three and nine months ended September 30, 2022, respectively. None of the Company's individual restructuring programs initiated during the three and nine months ended September 30, 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 $50 million (of which approximately $40 million relates to the Advanced Safety and User Experience segment and approximately $10 million relates to the Signal and Power Solutions segment) for programs approved as of September 30, 2022, which are primarily expected to be incurred within the next twelve months.
During the three and nine months ended September 30, 2021, Aptiv recorded employee-related and other restructuring charges totaling approximately $1 million and $21 million, respectively.
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 $50 million and $63 million in the nine months ended September 30, 2022 and 2021, respectively.
The following table summarizes the restructuring charges recorded for the three and nine months ended September 30, 2022 and 2021 by operating segment: | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| | (in millions) |
| Signal and Power Solutions | $ | 1 | | | $ | (4) | | | $ | 23 | | | $ | 5 | |
| Advanced Safety and User Experience | 10 | | | 5 | | | 29 | | | 16 | |
| Total | $ | 11 | | | $ | 1 | | | $ | 52 | | | $ | 21 | |
The table below summarizes the activity in the restructuring liability for the nine months ended September 30, 2022: | | | | | | | | | | | | | | | | | |
| Employee Termination Benefits Liability | | Other Exit Costs Liability | | Total |
| | | | | |
| | (in millions) |
| Accrual balance at January 1, 2022 | $ | 63 | | | $ | — | | | $ | 63 | |
| Provision for estimated expenses incurred during the period | 52 | | | — | | | 52 | |
| Payments made during the period | (50) | | | — | | | (50) | |
| | | | | |
| Foreign currency and other | (7) | | | — | | | (7) | |
| Accrual balance at September 30, 2022 | $ | 58 | | | $ | — | | | $ | 58 | |
8. DEBT
The following is a summary of debt outstanding, net of unamortized issuance costs and discounts, as of September 30, 2022 and December 31, 2021: | | | | | | | | | | | |
| September 30,
2022 | | December 31,
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) | 679 | | | 790 | |
| | | |
| 1.60%, Euro-denominated senior notes, due 2028 (net of $2 and $3 unamortized issuance costs, respectively) | 484 | | | 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 $2 and $2 unamortized issuance costs, respectively) | 309 | | | 311 | |
| Finance leases and other | 15 | | | 14 | |
| Total debt | 6,352 | | | 4,067 | |
| Less: current portion | (16) | | | (8) | |
| Long-term debt | $ | 6,336 | | | $ | 4,059 | |
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 during the nine months ended September 30, 2021 related to the June 2021 amendment. Aptiv paid amendment fees of $6 million during the nine months ended September 30, 2021 which are reflected as a financing activity 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 September 30, 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: | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 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. As a result of meeting the sustainability-linked targets for the 2021 calendar year, the interest rate margins and facility fees were reduced by the amounts specified above, effective in the 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 September 30, 2022, Aptiv selected the one-month LIBOR interest rate option on the Tranche A Term Loan, and the rate effective as of September 30, 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 | | |
| | | September 30, 2022 | | Rates effective as of |
| Applicable Rate | | (in millions) | | September 30, 2022 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Tranche A Term Loan | LIBOR plus 1.105% | | $ | 311 | | | 4.23 | % |
| | | | | |
Borrowings under the Credit Agreement are prepayable at Aptiv’s option without premium or penalty.
The Credit Agreement contains certain covenants that limit, among other things, the Company’s (and the Company’s subsidiaries’) ability to incur certain additional indebtedness or liens or to dispose of substantially all of its assets. In addition, under the June 2021 amendment, the Credit Agreement requires that the Company maintain a consolidated leverage ratio (the ratio of Consolidated Total Indebtedness to Consolidated EBITDA, each as defined in the Credit Agreement) of not more than 3.5 to 1.0 (or 4.0 to 1.0 for four full fiscal quarters following completion of material acquisitions, as defined in the Credit
Agreement). The Credit Agreement also contains events of default customary for financings of this type. The Company was in compliance with the Credit Agreement covenants as of September 30, 2022.
As of September 30, 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 14. 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 the $800 million of 5.00% senior unsecured notes due 2023. Aptiv incurred approximately $4 million of issuance costs in connection with the 2016 Euro-denominated Senior Notes. Interest is payable annually on September 15. The Company has designated the 2016 Euro-denominated Senior Notes as a net investment hedge of the foreign currency exposure of its investments in certain Euro-denominated wholly-owned subsidiaries. Refer to Note 14. Derivatives and Hedging Activities for further information.
On September 20, 2016, Aptiv PLC issued $300 million in aggregate principal amount of 4.40% senior unsecured notes due 2046 (the “2016 Senior Notes”) in a transaction registered under the Securities Act. The 2016 Senior Notes were priced at 99.454% of par, resulting in a yield to maturity of 4.433%. The proceeds, together with proceeds from the 2016 Euro-denominated Senior Notes, were utilized to redeem the $800 million of 5.00% senior unsecured notes due 2023. Aptiv incurred approximately $3 million of issuance costs in connection with the 2016 Senior Notes. Interest is payable semi-annually on April 1 and October 1 of each year to holders of record at the close of business on March 15 or September 15 immediately preceding the interest payment date.
On March 14, 2019, Aptiv PLC issued $650 million in aggregate principal amount of senior unsecured notes in a transaction registered under the Securities Act, comprised of $300 million of 4.35% senior unsecured notes due 2029 (the “4.35% Senior Notes”) and $350 million of 5.40% senior unsecured notes due 2049 (the “5.40% Senior Notes”) (collectively, the “2019 Senior Notes”). The 4.35% Senior Notes were priced at 99.879% of par, resulting in a yield to maturity of 4.365%, and the 5.40% Senior Notes were priced at 99.558% of par, resulting in a yield to maturity of 5.430%. The proceeds were utilized to redeem $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%. 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. The proceeds from the 2021 Senior Notes were primarily utilized to redeem $700 million of 4.15% senior unsecured notes due 2024 and $650 million of 4.25% senior unsecured notes due 2026.
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 are expected to fund a portion of the cash consideration payable in connection with the proposed acquisition of Wind River Systems, Inc. (“Wind River”). In the event that the Company does not consummate the acquisition of Wind River on or prior to July 10, 2023, or if prior to such date, the definitive agreement relating to the proposed acquisition is terminated, then the Issuers will redeem all of the 3.25% Senior Notes and 4.15% Senior Notes on the special mandatory redemption date (as defined below) at a redemption price equal to 101% of the principal amount of each of the 3.25% Senior Notes and 4.15% Senior Notes, plus accrued and unpaid interest from the date of initial issuance. The “special mandatory redemption date” means the earlier to occur of (1) July 10, 2023, if the acquisition of Wind River has not been completed on or prior to July 10, 2023, and (2) the fifth business day following the termination of the definitive agreement relating to the proposed acquisition for any reason. Refer to Note 17. Acquisitions and Divestitures for further information on this proposed acquisition.
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 September 30, 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 a term of three years, subject to Aptiv’s right to terminate at any time with three months’ notice. After expiration of the three-year term, either party can terminate with three months’ notice. Borrowings denominated in Euros under the facility 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 September 30, 2022 and December 31, 2021, Aptiv had no amounts outstanding on the European accounts receivable factoring facility.
Finance leases and other—As of September 30, 2022 and December 31, 2021, approximately $15 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 $129 million and $131 million for the nine months ended September 30, 2022 and 2021, 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 September 30, 2022 and December 31, 2021, respectively, primarily to support arrangements and other obligations at certain of its subsidiaries.
9. PENSION BENEFITS
Certain of Aptiv’s non-U.S. subsidiaries sponsor defined benefit pension plans, which generally provide benefits based on negotiated amounts for each year of service. Aptiv’s primary non-U.S. plans are located in France, Germany, Mexico, Portugal and the U.K. The U.K. and certain Mexican plans are funded. In addition, Aptiv has defined benefit plans in South Korea, Turkey and Italy for which amounts are payable to employees immediately upon separation. The obligations for these plans are recorded over the requisite service period.
Aptiv sponsors a Supplemental Executive Retirement Program (“SERP”) for those employees who were U.S. executives of the former Delphi Corporation prior to September 30, 2008 and were still U.S. executives of the Company on October 7, 2009, the effective date of the program. This program is unfunded. Executives receive benefits over five years after an involuntary or voluntary separation from Aptiv. The SERP is closed to new members.
The amounts shown below reflect the defined benefit pension expense for the three and nine months ended September 30, 2022 and 2021: | | | | | | | | | | | | | | | | | | | | | | | |
| | Non-U.S. Plans | | U.S. Plans |
| | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| | (in millions) |
| Service cost | $ | 5 | | | $ | 5 | | | $ | — | | | $ | — | |
| Interest cost | 6 | | | 5 | | | — | | | — | |
| Expected return on plan assets | (5) | | | (4) | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| Amortization of actuarial losses | 3 | | | 4 | | | — | | | — | |
| | | | | | | |
| Net periodic benefit cost | $ | 9 | | | $ | 10 | | | $ | — | | | $ | — | |
| | | | | | | |
| | Non-U.S. Plans | | U.S. Plans |
| | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| | (in millions) |
| Service cost | $ | 14 | | | $ | 15 | | | $ | — | | | $ | — | |
| Interest cost | 19 | | | 15 | | | — | | | — | |
| Expected return on plan assets | (15) | | | (14) | | | — | | | — | |
| | | | | | | |
| Curtailment loss | — | | | 5 | | | — | | | — | |
| Amortization of actuarial losses | 6 | | | 12 | | | 1 | | | 1 | |
| | | | | | | |
| Net periodic benefit cost | $ | 24 | | | $ | 33 | | | $ | 1 | | | $ | 1 | |
Other postretirement benefit obligations were approximately $1 million and $1 million at September 30, 2022 and December 31, 2021, respectively.
10. 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 continue into 2023. We, along with most automotive component manufacturers that use semiconductors, have been unable to fully meet the vehicle production demands of original equipment manufacturers (“OEMs”) because of events which are outside our control, including but not limited to, 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 September 30, 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 September 30, 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 September 30, 2022, claims totaling approximately $100 million (using September 30, 2022 foreign currency rates) have been asserted against Aptiv in Brazil. As of September 30, 2022, the Company maintains accruals for these asserted claims of $20 million (using September 30, 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 $80 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 September 30, 2022 and December 31, 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 September 30, 2022, the difference between the recorded liabilities and the reasonably possible range of potential loss was not material.
11. INCOME TAXES
At the end of each interim period, the Company makes its best estimate of the annual expected effective income tax rate and applies that rate to its ordinary year-to-date earnings or loss. The income tax provision or benefit related to unusual or infrequent items, if applicable, that will be separately reported or reported net of their related tax effects are individually computed and recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws or rates, tax status, judgment on the realizability of a beginning-of-the-year deferred tax asset in future years or income tax contingencies is recognized in the interim period in which the change occurs.
The computation of the annual expected effective income tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected pre-tax income (or loss) for the year, projections of the proportion of income (and/or loss) earned and taxed in respective jurisdictions, permanent and temporary differences, and the likelihood of the realizability of deferred tax assets generated in the current year. The future direct and indirect impacts of the ongoing volatile global economic conditions resulting from the COVID-19 pandemic, global supply chain disruptions and conflict between Ukraine and Russia are difficult to predict and may cause fluctuations in our expected results of operations for the year, which could create volatility in our annual expected effective income tax rate. Jurisdictions with a projected loss for the year or a year-to-date loss for which no tax benefit or expense can be recognized due to a valuation allowance are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the composition and timing of actual earnings compared to annual projections. The estimates used to compute the provision or benefit for income taxes may change as new events occur, additional information is obtained or as our tax environment changes. To the extent that the expected annual effective income tax rate changes, the effect of the change on prior interim periods is included in the income tax provision in the period in which the change in estimate occurs.
The Company’s income tax expense and effective tax rates for the three and nine months ended September 30, 2022 and 2021 were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| | (dollars in millions) |
| Income tax expense | $ | 59 | | | $ | 25 | | | $ | 96 | | | $ | 101 | |
| Effective tax rate | 14 | % | | 14 | % | | 15 | % | | 12 | % |
The Company’s tax rate is affected by the tax rates in Ireland and other jurisdictions in which the Company operates, the relative amount of income earned by jurisdiction and the relative amount of losses or income for which no tax benefit or expense was recognized due to a valuation allowance. The Company’s effective tax rate is also impacted by the receipt of certain tax incentives and holidays that reduce the effective tax rate for certain subsidiaries below the statutory rate. For the nine months ended September 30, 2022, the Company’s effective tax rate was impacted by impairments and other charges related to the Ukraine/Russia conflict for which no tax benefit was recognized.
The Company’s effective tax rate for the three and nine months ended September 30, 2022 includes net discrete tax benefits of approximately $1 million and $5 million, respectively, primarily related to provision to return adjustments, net changes in accruals for unremitted earnings and changes in reserves. The effective tax rate for the three and nine months ended September 30, 2021 includes net discrete tax expense of approximately $4 million and $0 million, respectively, primarily related to changes in reserves and provision to return adjustments.
Aptiv PLC is an Irish resident taxpayer and not a domestic corporation for U.S. federal income tax purposes. As such, it is not subject to U.S. tax on remitted foreign earnings and, as a result of its capital structure, is also generally not subject to Irish tax on the repatriation of foreign earnings.
Cash paid or withheld for income taxes was $146 million and $134 million for the nine months ended September 30, 2022 and 2021, respectively.
On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law in the United States. 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.
12. 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 (the “MCPS Offering”), 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 will be payable quarterly on March 15, June 15, September 15 and December 15 of each year (commencing on September 15, 2020 to, and including June 15, 2023), to the holders of record of the MCPS as they appear on the Company’s share register at the close of business on the immediately preceding March 1, June 1, September 1 or December 1, respectively.
Net Income Per Share
Basic net income per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted net income per share reflects the weighted average dilutive impact of all potentially dilutive securities from the date of issuance and is computed using the treasury stock and if-converted methods. The if-converted method is used to determine if the impact of the conversion of the MCPS into ordinary shares is more dilutive than the MCPS dividends to net income per share. If so, the MCPS are assumed to have been converted at the later of the beginning of the period or the time of issuance, and the resulting ordinary shares are included in the denominator and the MCPS dividends are added back to the numerator. Unless otherwise noted, share and per share amounts included in these notes are on a diluted basis. For the three and nine months ended September 30, 2022, 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 three and nine months ended September 30, 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 all other 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 18. 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: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| | (in millions, except per share data) |
| Numerator: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Net income attributable to ordinary shareholders | $ | 286 | | | $ | 86 | | | $ | 298 | | | $ | 512 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Denominator: | | | | | | | |
| Weighted average ordinary shares outstanding, basic | 270.93 | | | 270.51 | | | 270.88 | | | 270.44 | |
| Dilutive shares related to restricted stock units | 0.17 | | | 0.69 | | | 0.22 | | | 0.70 | |
| | | | | | | |
| Weighted average ordinary shares outstanding, including dilutive shares | 271.10 | | | 271.20 | | | 271.10 | | | 271.14 | |
| | | | | | | |
| Net income per share attributable to ordinary shareholders: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Basic | $ | 1.06 | | | $ | 0.32 | | | $ | 1.10 | | | $ | 1.89 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Diluted | $ | 1.05 | | | $ | 0.32 | | | $ | 1.10 | | | $ | 1.89 | |
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 three and nine months ended September 30, 2022 and 2021.
As of September 30, 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: | | | | | | | |
| Third quarter | | | | | $ | 1.375 | | | $ | 15 | |
| Second quarter | | | | | 1.375 | | | 16 | |
| First quarter | | | | | 1.375 | | | 16 | |
| Total | | | | | $ | 4.125 | | | $ | 47 | |
| 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 | |
13. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in accumulated other comprehensive income (loss) attributable to Aptiv (net of tax) for the three and nine months ended September 30, 2022 and 2021 are shown below: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (in millions) |
| Foreign currency translation adjustments: | | | | | | | |
Balance at beginning of period | $ | (803) | | | $ | (494) | | | $ | (588) | | | $ | (445) | |
Aggregate adjustment for the period (1) | (211) | | | (77) | | | (426) | | | (126) | |
| | | | | | | |
Balance at end of period | (1,014) | | | (571) | | | (1,014) | | | (571) | |
| | | | | | | |
| Gains (losses) on derivatives: | | | | | | | |
Balance at beginning of period | (79) | | | 38 | | | (17) | | | 40 | |
Other comprehensive loss before reclassifications (nil net tax effect for all periods presented) | (11) | | | (44) | | | (50) | | | (7) | |
Reclassification to income (nil net tax effect for all periods presented) | 6 | | | (18) | | | (17) | | | (57) | |
| | | | | | | |
| Balance at end of period | (84) | | | (24) | | | (84) | | | (24) | |
| | | | | | | |
| Pension and postretirement plans: | | | | | | | |
| Balance at beginning of period | (60) | | | (110) | | | (67) | | | (140) | |
Other comprehensive income before reclassifications (net tax effect of $(2), $(2), $(5), and $(3)) | 5 | | | 3 | | | 11 | | | 21 | |
Reclassification to income (net tax effect of $(1), $(1),$(4) and $(3)) | 2 | | | 3 | | | 3 | | | 15 | |
| | | | | | | |
| Balance at end of period | (53) | | | (104) | | | (53) | | | (104) | |
| | | | | | | |
| Accumulated other comprehensive loss, end of period | $ | (1,151) | | | $ | (699) | | | $ | (1,151) | | | $ | (699) | |
(1)Includes gains of $94 million and $191 million for the three and nine months ended September 30, 2022, respectively, and gains of $30 million and $74 million for the three and nine months ended September 30, 2021, respectively, related to non-derivative net investment hedges. Refer to Note 14. 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 during the three and nine months ended September 30, 2022.
Reclassifications from accumulated other comprehensive income (loss) to income for the three and nine months ended September 30, 2022 and 2021 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reclassification Out of Accumulated Other Comprehensive Income (Loss) |
| Details About Accumulated Other Comprehensive Income Components | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Affected Line Item in the Statements of Operations |
| 2022 | | 2021 | | 2022 | | 2021 | |
| | | | | | | | | | |
| | (in millions) | | |
| Foreign currency translation adjustments: | | | | | | | | | | |
| Liquidation of foreign subsidiary (1) | | $ | (6) | | | $ | — | | | $ | (6) | | | $ | — | | | Other income (expense), net |
| | (6) | | | — | | | (6) | | | — | | | Income before income taxes |
| | — | | | — | | | — | | | — | | | Income tax expense |
| | (6) | | | — | | | (6) | | | — | | | Net income |
| | — | | | — | | | — | | | — | | | Net income (loss) attributable to noncontrolling interest |
| | $ | (6) | | | $ | — | | | $ | (6) | | | $ | — | | | Net income attributable to Aptiv |
| | | | | | | | | | |
| Gains (losses) on derivatives: | | | | | | | | | | |
| Commodity derivatives | | $ | (13) | | | $ | 15 | | | $ | 7 | | | $ | 54 | | | Cost of sales |
| Foreign currency derivatives | | 7 | | | 3 | | | 10 | | | 3 | | | Cost of sales |
| | | | | | | | | | |
| | (6) | | | 18 | | | 17 | | | 57 | | | Income before income taxes |
| | — | | | — | | | — | | | — | | | Income tax expense |
| | (6) | | | 18 | | | 17 | | | 57 | | | Net income |
| | — | | | — | | | — | | | — | | | Net income (loss) attributable to noncontrolling interest |
| | $ | (6) | | | $ | 18 | | | $ | 17 | | | $ | 57 | | | Net income attributable to Aptiv |
| | | | | | | | | | |
| Pension and postretirement plans: | | | | | | | | | | |
| | | | | | | | | | |
| Actuarial losses | | $ | (3) | | | $ | (4) | | | $ | (7) | | | $ | (13) | | | Other income (expense), net (2) |
| Curtailment loss | | — | | | — | | | — | | | (5) | | | Other income (expense), net (2) |
| | (3) | | | (4) | | | (7) | | | (18) | | | Income before income taxes |
| | 1 | | | 1 | | | 4 | | | 3 | | | Income tax expense |
| | (2) | | | (3) | | | (3) | | | (15) | | | Net income |
| | — | | | — | | | — | | | — | | | Net income (loss) attributable to noncontrolling interest |
| | $ | (2) | | | $ | (3) | | | $ | (3) | | | $ | (15) | | | Net income attributable to Aptiv |
| | | | | | | | | | |
| Total reclassifications for the period | | $ | (14) | | | $ | 15 | | | $ | 8 | | | $ | 42 | | | |
(1)Represents accumulated currency translation adjustment losses reclassified to net income as a result of the liquidation of a foreign subsidiary during the three and nine months ended September 30, 2022.
(2)These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 9. Pension Benefits for additional details).
14. 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 September 30, 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 | 118,494 | | | pounds | | $ | 415 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Foreign Currency | Quantity Hedged | | Unit of Measure | | Notional Amount
(Approximate USD Equivalent) |
| | | | | |
| | (in millions) |
| Mexican Peso | 14,478 | | | MXN | | $ | 720 | |
| Chinese Yuan Renminbi | 2,574 | | | RMB | | 360 | |
| Euro | 122 | | | EUR | | 120 | |
| Polish Zloty | 664 | | | PLN | | 135 | |
| | | | | |
| Hungarian Forint | 23,895 | | | HUF | | 55 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
As of September 30, 2022, Aptiv has entered into derivative instruments to hedge cash flows extending out to September 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 losses on cash flow hedges included in accumulated OCI as of September 30, 2022 were $54 million (approximately $54 million, net of tax). Of this total, approximately $41 million of losses are expected to be included in cost of sales within the next 12 months and approximately $13 million of losses are expected to be included in cost of sales in subsequent periods. Cash flow hedges are discontinued when Aptiv determines it is no longer probable that the originally forecasted transactions will occur. Cash flows from derivatives used to manage commodity and foreign exchange risks designated as cash flow hedges are classified as operating activities within the consolidated statements of cash flows.
Net Investment Hedges
The Company is also exposed to the risk that adverse changes in foreign currency exchange rates could impact its net investment in non-U.S. subsidiaries. To manage this risk, the Company designates certain qualifying derivative and non-derivative instruments, including foreign currency forward contracts and foreign currency-denominated debt, as net investment hedges of certain non-U.S. subsidiaries. The gains or losses on instruments designated as net investment hedges are recognized within OCI to offset changes in the value of the net investment in these foreign currency-denominated operations. Gains and losses reported in accumulated OCI are reclassified to earnings only when the related currency translation adjustments are required to be reclassified, usually upon sale or liquidation of the investment. Cash flows from derivatives designated as net investment hedges are classified as investing activities within the consolidated statements of cash flows.
The Company has entered into a series of forward contracts, each of which have been designated as net investment hedges of the foreign currency exposure of the Company’s investments in certain Chinese Yuan Renminbi (“RMB”)-denominated subsidiaries. During the nine months ended September 30, 2022 and 2021, the Company received $9 million and paid $11 million, respectively, at settlement related to this series of forward contracts which matured during the period. In September
2022, the Company entered into forward contracts with a total notional amount of 700 million RMB (approximately $100 million, using September 30, 2022 foreign currency rates), which mature in December 2022. Refer to the tables below for details of the fair value recorded in the consolidated balance sheets and the effects recorded in the consolidated statements of operations and consolidated statements of comprehensive income related to these derivative instruments.
The Company has designated the €700 million 2015 Euro-denominated Senior Notes and the €500 million 2016 Euro-denominated Senior Notes, as more fully described in Note 8. 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 three and nine months ended September 30, 2022, $94 million and $191 million of gains, respectively, were recognized within the cumulative translation adjustment component of OCI. During the three and nine months ended September 30, 2021, $30 million and $74 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 $154 million and losses of $37 million as of September 30, 2022 and December 31, 2021, respectively.
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 September 30, 2022 and December 31, 2021 are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives | | Net Amounts of Assets and (Liabilities) Presented in the Balance Sheet |
| | Balance Sheet Location | | September 30,
2022 | | Balance Sheet Location | | September 30,
2022 | | September 30,
2022 |
| | | | | | | | | |
| | (in millions) |
Derivatives designated as cash flow hedges: | | | | | | | | |
| Commodity derivatives | Other current assets | | $ | — | | | Accrued liabilities | | $ | 55 | | | |
| Foreign currency derivatives* | Other current assets | | 29 | | | Other current assets | | 9 | | | $ | 20 | |
| Foreign currency derivatives* | Accrued liabilities | | 17 | | | Accrued liabilities | | 21 | | | (4) | |
| Commodity derivatives | Other long-term assets | | — | | | Other long-term liabilities | | 30 | | | |
| Foreign currency derivatives* | Other long-term assets | | 13 | | | Other long-term assets | | 3 | | | 10 | |
| Foreign currency derivatives* | Other long-term liabilities | | 2 | | | Other long-term liabilities | | 4 | | | (2) | |
| | | | | | | | |
| | | | | | | | | |
| Total derivatives designated as hedges | | $ | 61 | | | | | $ | 122 | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 was in a net liability position as of September 30, 2022 and a net asset position as of December 31, 2021.
Effect of Derivatives on the Statements of Operations and Statements of Comprehensive Income
The pre-tax effect of derivative financial instruments in the consolidated statements of operations and consolidated statements of comprehensive income for the three and nine months ended September 30, 2022 and 2021 is as follows:
| | | | | | | | | | | |
| Three Months Ended September 30, 2022 | (Loss) Gain Recognized in OCI | | (Loss) Gain Reclassified from OCI into Income |
| | | |
| | (in millions) |
| Derivatives designated as cash flow hedges: | | | |
| Commodity derivatives | $ | (40) | | | $ | (13) | |
| Foreign currency derivatives | 23 | | | 7 | |
| Derivatives designated as net investment hedges: | | | |
| Foreign currency derivatives | 6 | | | — | |
| Total | $ | (11) | | | $ | (6) | |
| | | | | |
| | Loss Recognized in Income |
| |
| (in millions) |
| Derivatives not designated: | |
| |
| Foreign currency derivatives | $ | (8) | |
| Total | $ | (8) | |
| | | | | | | | | | | |
| Three Months Ended September 30, 2021 | Loss Recognized in OCI | | Gain Reclassified from OCI into Income |
| | | |
| | (in millions) |
| Derivatives designated as cash flow hedges: | | | |
| Commodity derivatives | $ | (16) | | | $ | 15 | |
| Foreign currency derivatives | (24) | | | 3 | |
| Derivatives designated as net investment hedges: | | | |
| Foreign currency derivatives | (4) | | | — | |
| Total | $ | (44) | | | $ | 18 | |
| | | | | |
| | Loss Recognized in Income |
| |
| (in millions) |
| Derivatives not designated: | |
| |
| Foreign currency derivatives | $ | (3) | |
| Total | $ | (3) | |
| | | | | | | | | | | |
| Nine Months Ended September 30, 2022 | (Loss) Gain Recognized in OCI | | Gain Reclassified from OCI into Income |
| | | |
| | (in millions) |
| Derivatives designated as cash flow hedges: | | | |
| Commodity derivatives | $ | (108) | | | $ | 7 | |
| Foreign currency derivatives | 48 | | | 10 | |
| Derivatives designated as net investment hedges: | | | |
| Foreign currency derivatives | 10 | | | — | |
| Total | $ | (50) | | | $ | 17 | |
| | | | | |
| | Loss Recognized in Income |
| |
| (in millions) |
| Derivatives not designated: | |
| |
| Foreign currency derivatives | $ | (15) | |
| Total | $ | (15) | |
| | | | | | | | | | | |
| Nine Months Ended September 30, 2021 | Gain (Loss) Recognized in OCI | | Gain Reclassified from OCI into Income |
| | | |
| | (in millions) |
| Derivatives designated as cash flow hedges: | | | |
| Commodity derivatives | $ | 35 | | | $ | 54 | |
| Foreign currency derivatives | (31) | | | 3 | |
| Derivatives designated as net investment hedges: | | | |
| Foreign currency derivatives | (11) | | | — | |
| Total | $ | (7) | | | $ | 57 | |
| | | | | |
| | Gain (Loss) Recognized in Income |
| |
| (in millions) |
| Derivatives not designated: | |
| Commodity derivatives | $ | 1 | |
| Foreign currency derivatives | (5) | |
| Total | $ | (4) | |
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 three and nine months ended September 30, 2022 and 2021, respectively.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
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 September 30, 2022 and December 31, 2021, Aptiv was in a net derivative liability position of $61 million and a net derivative asset position of $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 14. 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 September 30, 2022 and December 31, 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 statements of operations.
There were no changes in the contingent consideration liability classified as a Level 3 measurement during the nine months ended September 30, 2022.
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 September 30, 2022 and December 31, 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 September 30, 2022: | |
| | | | | | | |
| Foreign currency derivatives | $ | 30 | | | $ | — | | | $ | 30 | | | $ | — | |
| Publicly traded equity securities | 15 | | | 15 | | | — | | | — | |
| | | | | | | |
| Total | $ | 45 | | | $ | 15 | | | $ | 30 | | | $ | — | |
| 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 September 30, 2022 and December 31, 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 September 30, 2022: | |
| Commodity derivatives | $ | 85 | | | $ | — | | | $ | 85 | | | $ | — | |
| Foreign currency derivatives | 6 | | | — | | | 6 | | | — | |
| Contingent consideration | 10 | | | — | | | — | | | 10 | |
| Total | $ | 101 | | | $ | — | | | $ | 91 | | | $ | 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 September 30, 2022 and December 31, 2021, total debt was recorded at $6,352 million and $4,067 million, respectively, and had estimated fair values of $4,913 million and $4,297 million, respectively. For all other financial instruments recorded at September 30, 2022 and December 31, 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, asset retirement obligations and liabilities for exit or disposal activities measured at fair value upon initial recognition. Aptiv recorded non-cash long-lived asset impairment charges of $5 million and $8 million
for the three and nine months ended September 30, 2022, respectively, and other charges of $3 million for the nine months ended September 30, 2022. These charges were primarily related to the conflict between Ukraine and Russia and were recorded within cost of sales. Aptiv recorded no non-cash asset impairment charges during the three and nine months ended September 30, 2021. In addition, Aptiv determined that our majority owned subsidiary in Russia met the held for sale criteria as of September 30, 2022. Consequently, during the nine months ended September 30, 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.
16. OTHER INCOME, NET
Other income (expense), net included: | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| | (in millions) |
| Interest income | $ | 26 | | | $ | 3 | | | $ | 35 | | | $ | 8 | |
| Loss on modification of debt | — | | | — | | | — | | | (1) | |
| | | | | | | |
| Components of net periodic benefit cost other than service cost (Note 9) | (4) | | | (5) | | | (11) | | | (19) | |
| Costs associated with acquisitions and other transactions | (6) | | | — | | | (8) | | | — | |
| | | | | | | |
| (Loss) gain on change in fair value of publicly traded equity securities | (6) | | | (1) | | | (55) | | | 8 | |
| Other, net | 10 | | | 4 | | | (5) | | | 6 | |
| Other income (expense), net | $ | 20 | | | $ | 1 | | | $ | (44) | | | $ | 2 | |
During the three months ended September 30, 2022 and 2021, net unrealized losses of $6 million and gains of $11 million, respectively, were recognized for publicly traded equity securities still held as of September 30, 2022. During the nine months ended September 30, 2022 and 2021, net unrealized losses of $51 million and gains of $11 million, respectively, were recognized for publicly traded equity securities still held as of September 30, 2022.
Also, as further discussed in Note 8. Debt, during the nine months ended September 30, 2021, Aptiv recorded a loss on debt modification of $1 million in conjunction with the June 2021 amendment to the Credit Agreement.
17. ACQUISITIONS AND DIVESTITURES
Acquisition of El-Com, Inc.
On December 30, 2021, Aptiv acquired 100% of the equity interests of El-Com, Inc. (“El-Com”), a manufacturer of custom wire harnesses and cable assemblies for high-reliability products and industries, for total consideration of up to $88 million.
The total consideration includes a cash payment of up to $10 million, contingent upon the achievement of certain performance metrics over a one-year period following the acquisition. The range of the undiscounted amounts the Company could be required to pay under this arrangement is between zero and $10 million. As of the closing date of the acquisition, the contingent consideration was assigned a fair value of approximately $10 million. Refer to Note 15. 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. Minor adjustments were recorded to goodwill and intangible assets from the amounts disclosed as of December 31, 2021. These adjustments were not significant for any period presented
after the acquisition date. The preliminary purchase price and related allocation to the acquired net assets of El-Com based on their estimated fair values is shown below (in millions):
Assets acquired and liabilities assumed | | | | | |
| Purchase price, cash consideration, net of cash acquired | $ | 78 | |
| Purchase price, fair value of contingent consideration | 10 | |
| Total consideration, net of cash acquired | $ | 88 | |
| |
| |
| Intangible assets | $ | 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 purchase price and related allocation are preliminary and could be revised as a result of adjustments made to the purchase price, additional information obtained regarding liabilities assumed, including, but not limited to, contingent liabilities, revisions of provisional estimates of fair values, including, but not limited to, the completion of independent appraisals and valuations related to property, plant and equipment and intangible assets and certain tax attributes.
The pro forma effects of this acquisition would not materially impact the Company’s reported results for any period presented, and as a result no pro forma financial statements were presented.
Acquisition of Krono-Safe Automotive, SAS
On November 9, 2021, Aptiv acquired 100% of the equity interests of Krono-Safe Automotive, SAS (“Krono-Safe Automotive”), a leading software developer of safety-critical real-time embedded systems, for total consideration of $13 million, which was comprised of Aptiv’s previous investment of $6 million in Krono-Safe, SAS that was previously made in 2019 and $7 million of cash. The results of operations of Krono-Safe Automotive are reported within the Advanced Safety and User Experience segment from the date of acquisition.
The acquisition was accounted for as a business combination, with the total purchase price allocated on a preliminary basis using information available, in the fourth quarter of 2021, which primarily resulted in the recognition of goodwill of $9 million and intangible assets of $4 million. Goodwill recognized in this transaction is primarily attributable to synergies expected to arise after the acquisition and is not deductible for tax purposes.
The purchase price and related allocation are preliminary and could be revised as a result of adjustments made to the purchase price, additional information obtained regarding liabilities assumed, including, but not limited to, contingent liabilities, revisions of provisional estimates of fair values, including, but not limited to, the completion of independent appraisals and valuations related to property, plant and equipment and intangible assets and certain tax attributes.
The pro forma effects of this acquisition would not materially impact the Company’s reported results for any period presented, and as a result no pro forma financial statements were presented.
Acquisition of Ulti-Mate Connector, Inc.
On April 30, 2021, Aptiv acquired certain assets of Ulti-Mate Connector, Inc. (“Ulti-Mate”), a manufacturer of miniature and micro-miniature connectors and cable assemblies, for total consideration of $45 million, net of cash acquired. The results of the operations of Ulti-Mate are reported within the Signal and Power Solutions segment from the date of acquisition. The Company acquired Ulti-Mate utilizing cash on hand.
The acquisition was accounted for as a business combination, with the total purchase price allocated on a preliminary basis using information available, in the second quarter of 2021. The 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.
Proposed Acquisition of Intercable Automotive Solutions
In September 2022, Aptiv entered into a definitive agreement to acquire 85% of the equity interests of Intercable Automotive Solutions S.r.l. (“Intercable Automotive”), a manufacturer of high-voltage busbars and interconnect solutions, for €595 million, subject to customary post-closing adjustments. The acquisition is expected to close in the fourth quarter of 2022, subject to regulatory approvals and customary closing conditions. Upon completion, Intercable Automotive will become part of Aptiv’s Signal and Power Solutions segment. The Company intends to acquire its interest in Intercable Automotive utilizing cash on hand.
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 to the Company, the remaining 15% of Intercable Automotive for cash at a contractually defined value beginning in 2026.
Proposed Acquisition of Wind River Systems, Inc.
In January 2022, Aptiv entered into a definitive agreement to acquire 100% of the equity interests of Wind River, a global leader in delivering software for the intelligent edge, for $4.3 billion, subject to customary post-closing adjustments. The transaction is subject to regulatory approvals and customary closing conditions, and we are targeting a closing this year as we work through the regulatory approval process. Upon completion, we anticipate that Wind River will become part of Aptiv’s Advanced Safety and User Experience segment. The Company intends to acquire Wind River primarily utilizing cash on hand, including proceeds from the 2022 Senior Notes. Refer to Note 8. Debt for additional information regarding the 2022 Senior Notes.
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 September 30, 2022. Consequently, during the nine months ended September 30, 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 September 30, 2022.
18. SHARE-BASED COMPENSATION
Long-Term Incentive Plan
The Aptiv PLC Long-Term Incentive Plan, as amended and restated effective April 23, 2015 (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, restricted stock units (“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) 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 | | Fair Value of Shares at Issuance | | 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 | |
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, 2022 | 1,344 | | | $ | 131.40 | |
| Granted | 793 | | | 128.42 | |
| Vested | (371) | | | 96.95 | |
| Forfeited | (262) | | | 137.98 | |
| Nonvested, September 30, 2022 | 1,504 | | | 137.17 | |
Aptiv recognized share-based compensation expense of $19 million ($19 million, net of tax) and $19 million ($19 million, net of tax) based on the Company’s best estimate of ultimate performance against the respective targets during the three months ended September 30, 2022 and 2021, respectively. Aptiv recognized share-based compensation expense of $65 million ($65 million, net of tax) and $76 million ($75 million, net of tax) based on the Company’s best estimate of ultimate performance against the respective targets during the nine months ended September 30, 2022 and 2021, 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 September 30, 2022, unrecognized compensation expense on a pre-tax basis of approximately $124 million is anticipated to be recognized over a weighted average period of approximately two years. For the nine months ended September 30, 2022 and 2021, approximately $36 million and $45 million, respectively, of cash was paid and reflected as a financing activity in the statements of cash flows related to the tax withholding for vested RSUs.
19. SEGMENT REPORTING
Aptiv operates its core business along the following operating segments, which are grouped on the basis of similar product, market and operating factors:
•Signal and Power Solutions, which includes complete electrical architecture and component products.
•Advanced Safety and User Experience, which includes vehicle technology and systems integration expertise in advanced safety, user experience and connectivity and security solutions, as well as advanced software development and autonomous driving technologies.
•Eliminations and Other, which includes i) the elimination of inter-segment transactions, and ii) certain other expenses and income of a non-operating or strategic nature.
The accounting policies of the segments are the same as those described in Note 2. Significant Accounting Policies, except that the disaggregated financial results for the segments have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for which Aptiv’s chief operating decision maker regularly reviews financial results to assess performance of, and make internal operating decisions about allocating resources to, the segments.
Generally, Aptiv evaluates segment performance based on stand-alone segment net income before interest expense, other income (expense), net, income tax (expense) benefit, equity income (loss), net of tax, 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 non-GAAP financial measure will be more useful to both management and investors in their analysis of the Company’s results of operations due to recent and pending 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 three and nine months ended September 30, 2022 and 2021. | | | | | | | | | | | | | | | | | | | | | | | | | |
| Signal and Power Solutions | | | | Advanced Safety and User Experience | | Eliminations and Other (1) | | Total |
| | | | | | | | | |
| | (in millions) |
| For the Three Months Ended September 30, 2022: | | | | | | | | | |
| Net sales | $ | 3,424 | | | | | $ | 1,199 | | | $ | (9) | | | $ | 4,614 | |
| Depreciation and amortization | $ | 147 | | | | | $ | 43 | | | $ | — | | | $ | 190 | |
| Adjusted operating income | $ | 444 | | | | | $ | 81 | | | $ | — | | | $ | 525 | |
| Operating income | $ | 403 | | | | | $ | 67 | | | $ | — | | | $ | 470 | |
| Equity income (loss), net of tax | $ | 7 | | | | | $ | (74) | | | $ | — | | | $ | (67) | |
| Net income attributable to noncontrolling interest | $ | 5 | | | | | $ | — | | | $ | — | | | $ | 5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Signal and Power Solutions | | | | Advanced Safety and User Experience | | Eliminations and Other (1) | | Total |
| | | | | | | | | |
| | (in millions) |
| For the Three Months Ended September 30, 2021: | | | | | | | | | |
| Net sales | $ | 2,705 | | | | | $ | 959 | | | $ | (10) | | | $ | 3,654 | |
| Depreciation and amortization | $ | 149 | | | | | $ | 44 | | | $ | — | | | $ | 193 | |
| Adjusted operating income (2) | $ | 234 | | | | | $ | 22 | | | $ | — | | | $ | 256 | |
| Operating income | $ | 200 | | | | | $ | 15 | | | $ | — | | | $ | 215 | |
| Equity income (loss), net of tax | $ | 5 | | | | | $ | (56) | | | $ | — | | | $ | (51) | |
Net income attributable to noncontrolling interest | $ | 3 | | | | | $ | — | | | $ | — | | | $ | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Signal and Power Solutions | | | | Advanced Safety and User Experience | | Eliminations and Other (1) | | Total |
| | | | | | | | | |
| | (in millions) |
| For the Nine Months Ended September 30, 2022: | | | | | | | | | |
| Net sales | $ | 9,569 | | | | | $ | 3,307 | | | $ | (27) | | | $ | 12,849 | |
| Depreciation and amortization | $ | 441 | | | | | $ | 133 | | | $ | — | | | $ | 574 | |
| Adjusted operating income | $ | 995 | | | | | $ | 67 | | | $ | — | | | $ | 1,062 | |
| Operating income | $ | 796 | | | | | $ | 27 | | | $ | — | | | $ | 823 | |
| Equity income (loss), net of tax | $ | 15 | | | | | $ | (217) | | | $ | — | | | $ | (202) | |
| Net loss attributable to noncontrolling interest | $ | (21) | | | | | $ | — | | | $ | — | | | $ | (21) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Signal and Power Solutions | | | | Advanced Safety and User Experience | | Eliminations and Other (1) | | Total |
| | | | | | | | | |
| | (in millions) |
| For the Nine Months Ended September 30, 2021: | | | | | | | | | |
| Net sales | $ | 8,573 | | | | | $ | 2,940 | | | $ | (29) | | | $ | 11,484 | |
| Depreciation and amortization | $ | 451 | | | | | $ | 132 | | | $ | — | | | $ | 583 | |
| Adjusted operating income (2) | $ | 953 | | | | | $ | 115 | | | $ | — | | | $ | 1,068 | |
| Operating income | $ | 837 | | | | | $ | 92 | | | $ | — | | | $ | 929 | |
| Equity income (loss), net of tax | $ | 10 | | | | | $ | (156) | | | $ | — | | | $ | (146) | |
| Net income attributable to noncontrolling interest | $ | 11 | | | | | $ | — | | | $ | — | | | $ | 11 | |
(1)Eliminations and Other includes the elimination of inter-segment transactions.
(2)As described above, the calculation of adjusted operating income now excludes amortization expense. The historical presentation of adjusted operating income as shown in this table has been revised to be consistent with the updated calculation.
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 three and nine months ended September 30, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | |
| Signal and Power Solutions | | | | Advanced Safety and User Experience | | | | Total |
| | | | | | | | | |
| | (in millions) |
| For the Three Months Ended September 30, 2022: | | | | | | | | | |
| Adjusted operating income | $ | 444 | | | | | $ | 81 | | | | | $ | 525 | |
| Amortization | (35) | | | | | (2) | | | | | (37) | |
| Restructuring | (1) | | | | | (10) | | | | | (11) | |
| | | | | | | | | |
| Other acquisition and portfolio project costs | — | | | | | (2) | | | | | (2) | |
| Asset impairments | (5) | | | | | — | | | | | (5) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Operating income | $ | 403 | | | | | $ | 67 | | | | | 470 | |
| Interest expense | | | | | | | | | (58) | |
| Other income, net | | | | | | | | | 20 | |
| Income before income taxes and equity loss | | | | | | | | | 432 | |
| Income tax expense | | | | | | | | | (59) | |
Equity loss, net of tax | | | | | | | | | (67) | |
| | | | | | | | | |
| | | | | | | | | |
| Net income | | | | | | | | | 306 | |
| Net income attributable to noncontrolling interest | | | | | | | | | 5 | |
| Net income attributable to Aptiv | | | | | | | | | $ | 301 | |
| | | | | | | | | | | | | | | | | | | | | |
| Signal and Power Solutions | | | | Advanced Safety and User Experience | | | | Total |
| | | | | | | | | |
| | (in millions) |
| For the Three Months Ended September 30, 2021: | | | | | | | | | |
| Adjusted operating income | $ | 234 | | | | | $ | 22 | | | | | $ | 256 | |
| Amortization | (35) | | | | | (2) | | | | | (37) | |
| Restructuring | 4 | | | | | (5) | | | | | (1) | |
| Other acquisition and portfolio project costs | (3) | | | | | — | | | | | (3) | |
| | | | | | | | | |
| | | | | | | | | |
| Operating income | $ | 200 | | | | | $ | 15 | | | | | 215 | |
| Interest expense | | | | | | | | | (36) | |
| Other income, net | | | | | | | | | 1 | |
| Income before income taxes and equity loss | | | | | | | | | 180 | |
| Income tax expense | | | | | | | | | (25) | |
| Equity loss, net of tax | | | | | | | | | (51) | |
| | | | | | | | | |
| | | | | | | | | |
| Net income | | | | | | | | | 104 | |
| Net income attributable to noncontrolling interest | | | | | | | | | 3 | |
| Net income attributable to Aptiv | | | | | | | | | $ | 101 | |
| | | | | | | | | | | | | | | | | | | | | |
| Signal and Power Solutions | | | | Advanced Safety and User Experience | | | | Total |
| | | | | | | | | |
| | (in millions) |
| For the Nine Months Ended September 30, 2022: | | | | | | | | | |
| Adjusted operating income | $ | 995 | | | | | $ | 67 | | | | | $ | 1,062 | |
| Amortization | (107) | | | | | (5) | | | | | (112) | |
| Restructuring | (23) | | | | | (29) | | | | | (52) | |
| | | | | | | | | |
| Other acquisition and portfolio project costs | (7) | | | | | (6) | | | | | (13) | |
| Asset impairments | (8) | | | | | — | | | | | (8) | |
| Other charges related to Ukraine/Russia conflict (1) | (54) | | | | | — | | | | | (54) | |
| | | | | | | | | |
| | | | | | | | | |
| Operating income | $ | 796 | | | | | $ | 27 | | | | | 823 | |
| Interest expense | | | | | | | | | (157) | |
| Other expense, net | | | | | | | | | (44) | |
| Income before income taxes and equity loss | | | | | | | | | 622 | |
| Income tax expense | | | | | | | | | (96) | |
Equity loss, net of tax | | | | | | | | | (202) | |
| | | | | | | | | |
| | | | | | | | | |
| Net income | | | | | | | | | 324 | |
| Net loss attributable to noncontrolling interest | | | | | | | | | (21) | |
| Net income attributable to Aptiv | | | | | | | | | $ | 345 | |
(1)Primarily consists of charges related to the designation of our majority owned Russian subsidiary as held for sale as of September 30, 2022. Refer to Note 17. Acquisitions and Divestitures for further information.
| | | | | | | | | | | | | | | | | | | | | |
| Signal and Power Solutions | | | | Advanced Safety and User Experience | | | | Total |
| | | | | | | | | |
| | (in millions) |
| For the Nine Months Ended September 30, 2021: | | | | | | | | | |
| Adjusted operating income | $ | 953 | | | | | $ | 115 | | | | | $ | 1,068 | |
| Amortization | (106) | | | | | (5) | | | | | (111) | |
| Restructuring | (5) | | | | | (16) | | | | | (21) | |
| | | | | | | | | |
| Other acquisition and portfolio project costs | (5) | | | | | (2) | | | | | (7) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Operating income | $ | 837 | | | | | $ | 92 | | | | | 929 | |
| Interest expense | | | | | | | | | (114) | |
| Other income, net | | | | | | | | | 2 | |
| Income before income taxes and equity loss | | | | | | | | | 817 | |
| Income tax expense | | | | | | | | | (101) | |
| Equity loss, net of tax | | | | | | | | | (146) | |
| | | | | | | | | |
| | | | | | | | | |
| Net income | | | | | | | | | 570 | |
| Net income attributable to noncontrolling interest | | | | | | | | | 11 | |
| Net income attributable to Aptiv | | | | | | | | | $ | 559 | |
20. REVENUE
Refer to Note 2. Significant Accounting Policies for a complete description of the Company’s revenue recognition accounting policy.
Nature of Goods and Services
The principal activity from which the Company generates its revenue is the manufacturing of production parts for OEM customers. Aptiv recognizes revenue for production parts at a point in time, rather than over time, as the performance obligation
is satisfied when customers obtain control of the product upon title transfer and not as the product is manufactured or developed.
Although production parts are highly customized with no alternative use, Aptiv does not have an enforceable right to payment as customers have the right to cancel a product program without a notification period. The amount of revenue recognized is based on the purchase order price and adjusted for revenue allocated to variable consideration (i.e. estimated rebates and price discounts), as applicable. Customers typically pay for production parts based on customary business practices with payment terms averaging 60 days.
Disaggregation of Revenue
Revenue generated from Aptiv’s operating segments is disaggregated by primary geographic market in the following tables for the three and nine months ended September 30, 2022 and 2021. Information concerning geographic market reflects the manufacturing location.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2022: | Signal and Power Solutions | | Advanced Safety and User Experience | | Eliminations and Other | | Total |
| | | | | | | |
| (in millions) |
| Geographic Market | | | | | | | |
| | | | | | | |
| North America | $ | 1,317 | | | $ | 352 | | | $ | (2) | | | $ | 1,667 | |
| Europe, Middle East and Africa | 785 | | | 553 | | | (3) | | | 1,335 | |
| Asia Pacific | 1,214 | | | 294 | | | (4) | | | 1,504 | |
| South America | 108 | | | — | | | — | | | 108 | |
| Total net sales | $ | 3,424 | | | $ | 1,199 | | | $ | (9) | | | $ | 4,614 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2021: | Signal and Power Solutions | | Advanced Safety and User Experience | | Eliminations and Other | | Total |
| | | | | | | |
| (in millions) |
| Geographic Market | | | | | | | |
| | | | | | | |
| North America | $ | 973 | | | $ | 295 | | | $ | (3) | | | $ | 1,265 | |
| Europe, Middle East and Africa | 737 | | | 405 | | | (2) | | | 1,140 | |
| Asia Pacific | 923 | | | 259 | | | (5) | | | 1,177 | |
| South America | 72 | | | — | | | — | | | 72 | |
| Total net sales | $ | 2,705 | | | $ | 959 | | | $ | (10) | | | $ | 3,654 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2022: | Signal and Power Solutions | | Advanced Safety and User Experience | | Eliminations and Other | | Total |
| | | | | | | |
| (in millions) |
| Geographic Market | | | | | | | |
| | | | | | | |
| North America | $ | 3,740 | | | $ | 1,022 | | | $ | (6) | | | $ | 4,756 | |
| Europe, Middle East and Africa | 2,440 | | | 1,525 | | | (8) | | | 3,957 | |
| Asia Pacific | 3,094 | | | 760 | | | (13) | | | 3,841 | |
| South America | 295 | | | — | | | — | | | 295 | |
| Total net sales | $ | 9,569 | | | $ | 3,307 | | | $ | (27) | | | $ | 12,849 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2021: | Signal and Power Solutions | | Advanced Safety and User Experience | | Eliminations and Other | | Total |
| | | | | | | |
| (in millions) |
| Geographic Market | | | | | | | |
| | | | | | | |
| North America | $ | 3,052 | | | $ | 891 | | | $ | (6) | | | $ | 3,937 | |
| Europe, Middle East and Africa | 2,629 | | | 1,298 | | | (8) | | | 3,919 | |
| Asia Pacific | 2,682 | | | 751 | | | (15) | | | 3,418 | |
| South America | 210 | | | — | | | — | | | 210 | |
| Total net sales | $ | 8,573 | | | $ | 2,940 | | | $ | (29) | | | $ | 11,484 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Contract Balances
Consistent with the recognition of production parts revenue at a point in time as title transfers to the customer, Aptiv has no contract assets or contract liabilities balances as of September 30, 2022 and December 31, 2021.
Outstanding Performance Obligations
As customer contracts generally are represented by a combination of a current purchase order and a current production schedule issued by the customer for a production part, there are no contracts outstanding beyond one year. Aptiv does not enter into fixed long-term supply agreements.
As permitted, Aptiv does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Costs to Obtain a Contract
From time to time, Aptiv makes payments to customers in conjunction with ongoing business. These payments to customers are generally recognized as a reduction to revenue at the time of the commitment to make these payments. However, certain other payments to customers, or upfront fees, meet the criteria to be considered a cost to obtain a contract as they are directly attributable to a contract, are incremental and management expects the fees to be recoverable. As of September 30, 2022 and December 31, 2021, Aptiv has recorded $67 million (of which $20 million was classified within other current assets and $47 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 $7 million and $5 million for the three months ended September 30, 2022 and 2021, respectively, and $20 million and $19 million for the nine months ended September 30, 2022 and 2021, respectively.
21. INVESTMENTS IN AFFILIATES
Equity Method Investments
As part of Aptiv’s operations, it has investments in various non-consolidated affiliates accounted for under the equity method of accounting. These affiliates are not publicly traded companies and are located in North America, Europe and Asia Pacific. Aptiv’s ownership percentages vary generally from approximately 20% to 50%, with the most significant investment being in Motional, Inc. (“Motional”) (of which Aptiv owns 50%). Motional was deemed a significant equity investee under Rule 10-01(b) of Regulation S-X for the nine months ended September 30, 2022. Accordingly, summarized interim income statement information of Motional is presented below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | | | |
| | (in millions) | | (in millions) |
| Net sales | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | | | |
| Gross margin | $ | (94) | | | $ | (73) | | | $ | (280) | | | $ | (224) | | | | | | | |
| Net loss | $ | (139) | | | $ | (112) | | | $ | (419) | | | $ | (312) | | | | | | | |
Motional Lease Agreement
In connection with the formation of Motional, Aptiv agreed to sublease certain office space to Motional, which has a remaining lease term of approximately six years as of September 30, 2022. Total income under the agreement was $1 million during the three months ended September 30, 2022, and $3 million and $2 million during the nine months ended September 30, 2022 and 2021, 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.
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 leading forensic information technology firms and legal counsel, Motional conducted an investigation of the incident and has been in communication with law enforcement authorities regarding this matter. Based on the results of the Motional investigation, the Company believes that this incident has not had a material impact to the Company’s or to Motional’s operations or financial results and financial condition. Motional has since resumed its testing operations.
Investment in TTTech Auto AG
On March 15, 2022, Aptiv acquired approximately 20% of the equity interests of TTTech Auto AG (“TTTech Auto”), a leading provider of safety-critical middleware solutions for advanced driver-assistance systems and autonomous driving applications, in exchange 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 $188 million as of September 30, 2022, which is included in the Advanced Safety and User Experience segment. As of September 30, 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 $138 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 September 30, 2022 and December 31, 2021: | | | | | | | | | | | | | | | | | | | | | | | |
| Investment Name | | Segment | | | | | September 30, 2022 | | December 31, 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 | | | | | 6 | | | 5 | |
| Total equity investments without readily determinable fair values | | | | | 65 | | | 30 | |
| | | | | | | | | |
| Publicly traded equity securities: | | | | | | | | | |
| Smart Eye AB | | Advanced Safety and User Experience | | | | | 3 | | | 11 | |
| Otonomo Technologies Ltd. | | Advanced Safety and User Experience | | | | | 3 | | | 39 | |
| Valens Semiconductor Ltd. | | Signal and Power Solutions | | | | | 9 | | | 16 | |
| Total publicly traded equity securities | | | | | 15 | | | 66 | |
| | | | | | | | | |
| Total investments | | | $ | 80 | | | $ | 96 | |
(1)Quanergy Systems, Inc. experienced a change in measurement basis due to an underlying transaction during the nine months ended September 30, 2022 and we liquidated our entire investment in the company after the transaction and during the nine months ended September 30, 2022. See below for further details on the transaction.
During the second quarter of 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 nine months ended September 30, 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 $2 million as of September 30, 2022. These contractual sale restrictions will fully expire during the next twelve months as of September 30, 2022.
There were no 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q, including the exhibits being filed as part of this report, as well as other statements made by Aptiv PLC (“Aptiv,” the “Company,” “we,” “us” and “our”), contain forward-looking statements that reflect, when made, the Company’s current views with respect to current events, certain investments and acquisitions and financial performance including the potential impact of the proposed acquisition of Wind River Systems, Inc. Such forward-looking statements are subject to many risks, uncertainties and factors relating to the Company’s operations and business environment, which may cause the actual results of the Company to be materially different from any future results, express or implied, by such forward-looking statements. All statements that address future operating, financial or business performance or the Company’s strategies or expectations are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential,” “outlook” or “continue,” and other comparable terminology. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following: global and regional economic conditions, including conditions affecting the credit market; uncertainties posed by the COVID-19 pandemic and the difficulty in predicting its future course and its impact on the global economy and the Company’s future operations; uncertainties created by the conflict between Ukraine and Russia, and its impacts to the European and global economies and our operations in each country; fluctuations in interest rates and foreign currency exchange rates; the cyclical nature of global automotive sales and production; the potential disruptions in the supply of and changes in the competitive environment for raw material and other components integral to the Company’s products, including the current semiconductor supply shortage; the Company’s ability to maintain contracts that are critical to its operations; potential changes to beneficial free trade laws and regulations such as the United States-Mexico-Canada Agreement; the ability of the Company to integrate and realize the expected benefits of recent transactions; the ability of the Company to attract, motivate and/or retain key executives; the ability of the Company to avoid or continue to operate during a strike, or partial work stoppage or slow down by any of its unionized employees or those of its principal customers; and the ability of the Company to attract and retain customers. Additional factors are discussed under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s filings with the Securities and Exchange Commission, including those set forth in the Company’s Annual Report on Form 10-K for fiscal year ended December 31, 2021 and within the Quarterly Report on Form 10-Q for the quarter ended March 31, 2022. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect the Company. It should be remembered that the price of the ordinary shares and any income from them can go down as well as up. Aptiv disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events and/or otherwise, except as may be required by law.