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Derivative Financial Instruments | 6 Months Ended
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Dec. 29, 2023
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. The Company entered into certain interest rate swap agreements to convert the variable interest rate on its Term Loans to fixed interest rates. The objective of the interest rate swap agreements was to eliminate the variability of interest payment cash flows associated with the variable interest rate under the Term Loans. The Company designated the interest rate swaps as cash flow hedges. On September 13, 2023, the Company terminated its then existing interest rate swap agreements as a result of the repayment of Term Loans A1, A2 and A3 and received cash proceeds of $25 million from the counterparty. The cash proceeds are reported within Net cash provided by operating activities in the Company’s Condensed Consolidated Statements of Cash Flows during the six months ended December 29, 2023. The Company discontinued the related hedge accounting prospectively and realized a net gain of $104 million in Net gain recognized from termination of interest rate swap in the Condensed Consolidated Statements of Operations during the six months ended December 29, 2023. Additionally, $6 million of the gains were amortized to Interest expense prior to the termination of interest rate swap in the Company’s Condensed Consolidated Statements of Operations. Refer to “Note 3. Debt” for more details. As of December 29, 2023, the Company does not have any interest rate swap contracts. 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 AOCI 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 net unrealized gain on cash flow hedges was $4 million as of December 29, 2023, all of which is expected to be reclassified to earnings within twelve months. The net unrealized gain on cash flow hedges was $12 million as of June 30, 2023. 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 AOCI 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 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 six months ended December 29, 2023:
|  |  |  | 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 Six Months |  |
Foreign currency forward exchange contracts |  | Other, net |  | $ | 6 |  |  | $ | — |  |  |
Total return swap |  | Operating expenses |  | (13) |  |  | (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(1) |  | Amount of Gain/(Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
| For the Three Months |  | For the Six Months |  |  | For the Three Months |  | For the Six Months |  |  | For the Three Months |  | For the Six Months
Foreign currency forward exchange contracts |  | $ | 13 |  |  | $ | 6 |  |  | Cost of revenue |  | $ | (5) |  |  | $ | (6) |  |  | Other, net |  | $ | 1 |  |  | $ | 1 |
Interest rate swap |  | — |  |  | (15) |  |  | Interest expense |  | — |  |  | 11 |  |  | Net gain recognized from termination of interest rate swap |  | — |  |  | 104 |
(1)The net gain recognized into earnings as a result of the discontinuance of interest rate swap during the six months ended December 29, 2023. 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 six months ended December 30, 2022:
(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 Six Months
Foreign currency forward exchange contracts |  | Other, net |  | $ | 4 |  |  | $ | (6) |
Total return swap |  | Operating expenses |  | — |  |  | (8) |
(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 Six Months |  |  | For the Three Months |  | For the Six Months |  |  | For the Three Months |  | For the Six Months |
Foreign currency forward exchange contracts |  | $ | 19 |  |  | $ | (1) |  |  | Cost of revenue |  | $ | (12) |  |  | $ | (19) |  |  | Other, net |  | $ | — |  |  | $ | (1) |  |
Interest rate swap |  | — |  |  | 52 |  |  | Interest expense |  | 6 |  |  | 8 |  |  | Interest expense |  | — |  |  | — |  |
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 also enters into foreign currency forward contracts with contractual maturities of less than one month, which are designed to mitigate the effect of changes in foreign exchange rates on monetary assets and liabilities. 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 December 29, 2023 and June 30, 2023. All of the foreign currency forward exchange contracts mature within 12 months:
|  | As of December 29, 2023
(Dollars in millions) |  | Contracts Designated as Hedges |  | Contracts Not Designated as Hedges
Singapore Dollar |  | $ | 126 |  |  | $ | 102 |
Thai Baht |  | 95 |  |  | 16 |
Chinese Renminbi |  | 40 |  |  | 19 |
British Pound Sterling |  | 38 |  |  | 7 |
Total |  | $ | 299 |  |  | $ | 144 |
|  | As of June 30, 2023
(Dollars in millions) |  | Contracts Designated as Hedges |  | Contracts Not Designated as Hedges
Singapore Dollar |  | $ | 195 |  |  | $ | 161 |
Thai Baht |  | 129 |  |  | 16 |
Chinese Renminbi |  | 64 |  |  | 12 |
British Pound Sterling |  | 57 |  |  | 8 |
Total |  | $ | 445 |  |  | $ | 197 |
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 SOFR 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 December 29, 2023, the notional investments underlying the TRS amounted to $107 million. This contract, which settles monthly and matures in January 2024, effectively mitigates counterparty risk. Currently, the Company is renegotiating the contract's maturity terms without altering other aspects. 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 December 29, 2023 and June 30, 2023:
|  | As of December 29, 2023
|  | 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 |  | $ | 5 |  |  | Accrued expenses |  | $ | (1) |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Foreign currency forward exchange contracts |  | Other current assets |  | 1 |  |  | Accrued expenses |  | — |
Total derivatives |  |  |  | $ | 6 |  |  |  |  | $ | (1) |
|  | As of June 30, 2023
|  | 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 |  | $ | (10) |
Interest rate swap |  | Other current assets |  | 20 |  |  | Accrued expenses |  | — |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Foreign currency forward exchange contracts |  | Other current assets |  | — |  |  | Accrued expenses |  | (1) |
Total return swap |  | Other current assets |  | 1 |  |  | Accrued expenses |  | — |
Total derivatives |  |  |  | $ | 23 |  |  |  |  | $ | (11) |

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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://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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