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Derivative Financial Instruments

9 Months Ended

Apr. 02, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

The Company is exposed to foreign currency exchange rate, interest rate, and to a lesser extent, equity market risks relating to its ongoing business operations. From time to time, the Company enters into cash flow hedges in the form of foreign currency forward exchange contracts in order to manage the foreign currency exchange rate risk on forecasted expenses and investments denominated in foreign currencies.

In the quarter ended October 4, 2019, the Company entered into certain interest rate swap agreements with a notional amount of $500 million to convert the variable interest rate on its Term Loan to fixed interest rates. The contracts will mature on September 16, 2025. The notional amount of the interest rate swap agreements was $488 million as of April 2, 2021. The objective of the interest rate swap agreements is to eliminate the variability of interest payment cash flows associated with the variable interest rate under the Term Loan. The Company designated the interest rate swaps as cash flow hedges.

The Company’s accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company records all derivatives on its Condensed Consolidated Balance Sheets at fair value. The changes in the fair value of highly effective designated cash flow hedges are recorded in Accumulated other comprehensive loss until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments or are not assessed to be highly effective are adjusted to fair value through earnings. The amount of net unrealized loss on cash flow hedges was $13 million and $24 million as of April 2, 2021 and as of July 3, 2020, respectively. As of April 2, 2021, the amount of existing net losses related to cash flow hedges recorded in Accumulated other comprehensive loss included a net loss of $7 million that is expected to be reclassified to earnings within twelve months.

The Company de-designates its cash flow hedges when the forecasted hedged transactions affect earnings or it is probable the forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in Accumulated other comprehensive loss on the Company’s Condensed Consolidated Balance Sheets are reclassified into earnings and any subsequent changes in the fair value of such derivative instruments are immediately reflected in earnings. The Company recognized a net gain of $8 million and $12 million in Cost of revenue related to the loss of hedge designation on discontinued cash flow hedges during the three and nine months ended April 2, 2021, respectively. The Company recognized a net loss of $1 million and $5 million in Interest expense related to the loss of hedge designation on discontinued cash flow hedges during the three and nine months ended April 2, 2021, respectively. The Company recognized a net gain of $1 million and an immaterial net loss in Other expense, net related to the loss of hedge designation on discontinued cash flow hedges during the three and nine months ended April 3, 2020, respectively.

Other derivatives not designated as hedging instruments consist of foreign currency forward exchange contracts that the Company uses to hedge the foreign currency exposure on forecasted expenditures denominated in currencies other than the U.S. dollar. The Company recognizes gains and losses on these contracts, as well as the related costs in Other, net on its Condensed Consolidated Statements of Operations.

The following tables show the total notional value of the Company’s outstanding foreign currency forward exchange contracts as of April 2, 2021 and July 3, 2020. All foreign currency forward exchange contracts mature within 12 months.

						As of April 2, 2021
(Dollars in millions)						Contracts Designated as Hedges						Contracts Not Designated as Hedges
Singapore Dollar						$	165					$	53
Thai Baht						131						38
Chinese Renminbi						72						22
British Pound Sterling						56						14
						$	424					$	127

						As of July 3, 2020
(Dollars in millions)						Contracts Designated as Hedges						Contracts Not Designated as Hedges
Singapore Dollar						$	187					$	56
Thai Baht						157						42
Chinese Renminbi						81						25
British Pound Sterling						64						20
						$	489					$	143

The Company is subject to equity market risks due to changes in the fair value of the notional investments selected by its employees as part of its non-qualified deferred compensation plan: the Seagate Deferred Compensation Plan (the “SDCP”). In fiscal year 2014, the Company entered into a Total Return Swap (“TRS”) in order to manage the equity market risks associated with the SDCP’s liabilities. The Company pays a floating rate, based on LIBOR plus an interest rate spread, on the notional amount of the TRS. The TRS is designed to substantially offset changes in the SDCP’s liabilities due to changes in the value of the investment options made by employees. As of April 2, 2021, the notional investments underlying the TRS amounted to $120 million and the contract term is through January 2022, settled on a monthly basis, limiting counterparty performance risk. The Company did not designate the TRS as a hedge, rather, the Company records all changes in the fair value of the TRS to earnings to offset the market value changes of the SDCP’s liabilities.

The following tables show the Company’s derivative instruments measured at gross fair value as reflected in the Condensed Consolidated Balance Sheets as of April 2, 2021 and July 3, 2020:

As of April 2, 2021

Derivative Assets

Derivative Liabilities

(Dollars in millions)

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments:

Foreign currency forward exchange contracts

Other current assets

$

2

Accrued expenses

$

(2)

Interest rate swap

Other current assets

—

Accrued expenses

(13)

Derivatives not designated as hedging instruments:

Foreign currency forward exchange contracts

Other current assets

2

Accrued expenses

(1)

Total return swap

Other current assets

2

Accrued expenses

—

Total derivatives

$

6

$

(16)

As of July 3, 2020

Derivative Assets

Derivative Liabilities

(Dollars in millions)

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments:

Foreign currency forward exchange contracts

Other current assets

$

3

Accrued expenses

$

—

Interest rate swap

Other current assets

—

Accrued expenses

(27)

Derivatives not designated as hedging instruments:

Foreign currency forward exchange contracts

Other current assets

2

Accrued expenses

(2)

Total return swap

Other current assets

1

Accrued expenses

—

Total derivatives

$

6

$

(29)

The following tables show the effect of the Company’s derivative instruments on the Condensed Consolidated Statements of Comprehensive Income and the Condensed Consolidated Statements of Operations for the three and nine months ended April 2, 2021:    

												Amount of Gain/(Loss) Recognized in Income on Derivatives
(Dollars in millions) Derivatives Not Designated as Hedging Instruments						Location of Gain/(Loss) Recognized in Income on Derivatives						For the Three Months						For the Nine Months
Foreign currency forward exchange contracts						Other, net						$	(3)					$	11
Total return swap						Operating expenses						6						22

(Dollars in millions) Derivatives Designated as Hedging Instruments						Amount of Gain/(Loss) Recognized in OCI on Derivatives (Effective Portion)												Location of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)						Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)												Location of Gain/(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)						Amount of Gain/(Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
						For the Three Months						For the Nine Months												For the Three Months						For the Nine Months												For the Three Months						For the Nine Months
Foreign currency forward exchange contracts						$	(5)					$	10					Cost of revenue						$	8					$	12					Other, net						$	(1)					$	—
Interest rate swap						9						10						Interest expense						(1)						(5)						Interest expense						—						—

The following tables show the effect of the Company’s derivative instruments on the Condensed Consolidated Statements of Comprehensive Income and the Condensed Consolidated Statements of Operations for the three and nine months ended April 3, 2020:

(Dollars in millions) Derivatives Not Designated as Hedging Instruments						Location of Gain/(Loss) Recognized in Income on Derivatives						Amount of Gain/(Loss) Recognized in Income on Derivatives
												For the Three Months						For the Nine Months
Foreign currency forward exchange contracts						Other, net						$	(3)					$	(5)
Total return swap						Operating expenses						$	(23)					$	(16)

(Dollars in millions) Derivatives Designated as Hedging Instruments						Amount of Gain/(Loss) Recognized in OCI on Derivatives (Effective Portion)												Location of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)						Amount of Gain/(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)												Location of Gain/(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)						Amount of Gain/(Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
						For the Three Months						For the Nine Months												For the Three Months						For the Nine Months												For the Three Months						For the Nine Months
Foreign currency forward exchange contracts						$	(2)					$	(2)					Other, net						$	—					$	(1)					Other, net						$	—					$	—
Interest rate swap						(27)						(25)						Interest expense						1						1						Interest expense						—						—

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- References

No definition available.

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- Definition

The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.

+ References

Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-URI http://asc.fasb.org/topic&trid=2229140

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