Derivative Financial Instruments

3 Months Ended

Oct. 04, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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. The objective of foreign currency forward exchange contracts is to manage the foreign currency exchange rate risk on forecasted expenses and investments denominated in foreign currencies.

In the September 2019 quarter, 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 were effective as of October 4, 2019 and will mature on September 16, 2025. The objective of the interest rate swap agreements is to eliminate the variability of interest payment cash flows associated with variable interest rates. 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 not material as of October 4, 2019 and as of June 28, 2019.

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 immediately into earnings and any subsequent changes in the fair value of such derivative instruments are immediately reflected in earnings. The Company did not recognize any material amounts related to the loss of hedge designation on discontinued cash flow hedges during the three months ended October 4, 2019 and September 28, 2018, 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 currency 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. Deferred gains and deferred losses on derivatives are recognized in Other current assets and Accrued expenses, respectively, on the Condensed Consolidated Balance Sheets.

The following tables show the total notional value of the Company’s outstanding foreign currency forward exchange contracts and interest rate swaps as of October 4, 2019 and June 28, 2019. All of the foreign currency forward exchange contracts mature within 12 months.



	As of October 4, 2019
(Dollars in millions)	Contracts Designated as Hedges		Contracts Not Designated as Hedges
Singapore Dollar	$	58	$	46
Chinese Renminbi	30		30
British Pound Sterling	—		6
	$	88	$	82



	As of June 28, 2019
(Dollars in millions)	Contracts Designated as Hedges		Contracts Not Designated as Hedges
Singapore Dollar	$	60	$	40
Chinese Renminbi	79		20
British Pound Sterling	6		12
	$	145	$	72

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 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 liability due to changes in the value of the investment options made by employees. As of October 4, 2019, the notional investments underlying the TRS amounted to $117 million. The contract term of the TRS is through January 2020 and is settled on a monthly basis, therefore limiting counterparty performance risk. The Company does 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 liabilities.

The following tables show the Company’s derivative instruments measured at gross fair value as reflected on its Condensed Consolidated Balance Sheets as of October 4, 2019 and June 28, 2019:



	As of October 4, 2019
	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	$	—	Accrued expenses	$	(2	)
Derivatives not designated as hedging instruments:
Foreign currency forward exchange contracts	Other current assets	—		Accrued expenses	(2		)
Total derivatives		$	—		$	(4	)



	As of June 28, 2019
	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	$	—	Accrued expenses	$	—
Derivatives not designated as hedging instruments:
Foreign currency forward exchange contracts	Other current assets	1		Accrued expenses	(1		)
Total derivatives		$	1		$	(1	)

The following tables show the effect of the Company’s derivative instruments on its Condensed Consolidated Statements of Comprehensive Income and the Condensed Consolidated Statements of Operations for the three months ended October 4, 2019:

The amount of loss recognized in the Condensed Consolidated Statement of Comprehensive Income on derivatives designated as cash flow hedges was $1 million for the three months ended October 4, 2019. The amount of loss recognized in income related to the ineffective portion of the hedging relationships and to the amount excluded from the assessment of hedge ineffectiveness was not material for the three months ended October 4, 2019.

The following table shows the effect of the Company’s derivative instruments on its Condensed Consolidated Statement of Comprehensive Income and its Condensed Consolidated Statement of Operations for the three months ended September 28, 2018:



(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)
Foreign currency forward exchange contracts	$	3	Other expense, net	$	1	Other expense, net	$	—

Derivatives Not Designated as Hedging Instruments

Location of Gain/
(Loss) Recognized in
Income on Derivatives

Amount of Gain/
(Loss) Recognized in
Income on Derivatives

Foreign currency forward exchange contracts

Other, net