Company Quick10K Filing
Quick10K
Tyson Foods
10-Q 2018-12-29 Quarter: 2018-12-29
10-K 2018-09-29 Annual: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-30 Quarter: 2017-12-30
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-07-01 Quarter: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-10-01 Annual: 2016-10-01
10-Q 2016-07-02 Quarter: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-Q 2016-01-02 Quarter: 2016-01-02
10-K 2015-10-03 Annual: 2015-10-03
10-Q 2015-06-27 Quarter: 2015-06-27
10-Q 2015-03-28 Quarter: 2015-03-28
10-Q 2014-12-27 Quarter: 2014-12-27
10-K 2014-09-27 Annual: 2014-09-27
10-Q 2014-06-28 Quarter: 2014-06-28
10-Q 2014-03-29 Quarter: 2014-03-29
10-Q 2013-12-28 Quarter: 2013-12-28
8-K 2019-02-25 Officers
8-K 2019-02-13 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-02-07 Shareholder Vote
8-K 2019-02-07 Earnings, Exhibits
8-K 2018-12-06 Officers
8-K 2018-11-30 Enter Agreement, M&A, Exhibits
8-K 2018-11-13 Earnings, Exhibits
8-K 2018-10-04 Officers, Exhibits
8-K 2018-09-25 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-09-14 Officers, Regulation FD, Exhibits
8-K 2018-08-17 Regulation FD, Other Events, Exhibits
8-K 2018-08-17 Enter Agreement, Exhibits
8-K 2018-08-06 Earnings, Exhibits
8-K 2018-07-30 Regulation FD, Exhibits
8-K 2018-07-12 Officers
8-K 2018-06-12 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-03-20 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-02-08 Officers, Shareholder Vote
CTY Qwest 0
GTXO GTx 0
ACLS Axcelis 0
TSIF Terra Secured Income Fund 5 0
EROS Eros International 0
KOS Kosmos Energy 0
NUVR Nuvera Communications 0
BOOM Dynamic Materials 0
EMAN Emagin 0
VSI Vitamin Shoppe 0
TSN 2018-12-29
Part I. Financial Information
Part II. Other Information
Item 1. Financial Statements
Note 1: Accounting Policies
Note 2: Acquisitions and Dispositions
Note 3: Inventories
Note 4: Property, Plant and Equipment
Note 5: Restructuring and Related Charges
Note 6: Other Current Liabilities
Note 7: Debt
Note 8: Equity
Note 9: Income Taxes
Note 10: Other Income and Charges
Note 11: Earnings per Share
Note 12: Derivative Financial Instruments
Note 13: Fair Value Measurements
Note 14: Pension and Other Postretirement Benefit Plans
Note 15: Other Comprehensive Income (Loss)
Note 16: Segment Reporting
Note 17: Commitments and Contingencies
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.4 tsn2019q1exh-104.htm
EX-10.5 tsn2019q1exh-105.htm
EX-10.6 tsn2019q1exh-106.htm
EX-10.7 tsn2019q1exh-107.htm
EX-10.8 tsn2019q1exh-108.htm
EX-10.9 tsn2019q1exh-109.htm
EX-10.10 tsn2019q1exh-1010.htm
EX-10.11 tsn2019q1exh-1011.htm
EX-10.12 tsn2019q1exh-1012.htm
EX-10.13 tsn2019q1exh-1013.htm
EX-10.14 tsn2019q1exh-1014.htm
EX-10.15 tsn2019q1exh-1015.htm
EX-10.16 tsn2019q1exh-1016.htm
EX-10.17 tsn2019q1exh-1017.htm
EX-10.18 tsn2019q1exh-1018.htm
EX-10.19 tsn2019q1exh-1019.htm
EX-31.1 tsn2019q1exh-311.htm
EX-31.2 tsn2019q1exh-312.htm
EX-32.1 tsn2019q1exh-321.htm
EX-32.2 tsn2019q1exh-322.htm

Tyson Foods Earnings 2018-12-29

TSN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended December 29, 2018
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to            
coverlogoq119a01.jpg
001-14704
(Commission File Number)
______________________________________________
TYSON FOODS, INC.
(Exact name of registrant as specified in its charter)
______________________________________________
Delaware
 
71-0225165
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
2200 West Don Tyson Parkway, Springdale, Arkansas
 
72762-6999
(Address of principal executive offices)
 
(Zip Code)
(479) 290-4000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  x    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨  
 
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of December 29, 2018.
Class
 
Outstanding Shares
Class A Common Stock, $0.10 Par Value (Class A stock)
 
295,257,039

Class B Common Stock, $0.10 Par Value (Class B stock)
 
70,010,355

TABLE OF CONENTS
PART I. FINANCIAL INFORMATION
 
 
 
PAGE
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
PART II. OTHER INFORMATION
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 



Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements
TYSON FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
 
Three Months Ended
 
December 29, 2018
 
December 30, 2017
Sales
$
10,193

 
$
10,229

Cost of Sales
8,838

 
8,786

Gross Profit
1,355

 
1,443

Selling, General and Administrative
548

 
521

Operating Income
807

 
922

Other (Income) Expense:
 
 
 
Interest income
(2
)
 
(2
)
Interest expense
99

 
88

Other, net
(3
)
 
(6
)
Total Other (Income) Expense
94

 
80

Income before Income Taxes
713

 
842

Income Tax Expense (Benefit)
161

 
(790
)
Net Income
552

 
1,632

Less: Net Income Attributable to Noncontrolling Interests
1

 
1

Net Income Attributable to Tyson
$
551

 
$
1,631

Weighted Average Shares Outstanding:
 
 
 
Class A Basic
294

 
296

Class B Basic
70

 
70

Diluted
366

 
371

Net Income Per Share Attributable to Tyson:
 
 
 
Class A Basic
$
1.54

 
$
4.54

Class B Basic
$
1.39

 
$
4.09

Diluted
$
1.50

 
$
4.40

See accompanying Notes to Consolidated Condensed Financial Statements.

3

Table of Contents

TYSON FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited) 

 
Three Months Ended
 
December 29, 2018
 
December 30, 2017
Net Income
$
552

 
$
1,632

Other Comprehensive Income (Loss), Net of Taxes:
 
 
 
Derivatives accounted for as cash flow hedges
(9
)
 
(1
)
Investments
1

 

Currency translation
8

 
1

Postretirement benefits
(3
)
 
2

Total Other Comprehensive Income (Loss), Net of Taxes
(3
)
 
2

Comprehensive Income
549

 
1,634

Less: Comprehensive Income Attributable to Noncontrolling Interests
1

 
1

Comprehensive Income Attributable to Tyson
$
548

 
$
1,633

See accompanying Notes to Consolidated Condensed Financial Statements.


4

Table of Contents

TYSON FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except share and per share data)
(Unaudited) 
 
December 29, 2018
 
September 29, 2018
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
400

 
$
270

Accounts receivable, net
1,892

 
1,723

Inventories
3,777

 
3,513

Other current assets
232

 
182

Total Current Assets
6,301

 
5,688

Net Property, Plant and Equipment
7,018

 
6,169

Goodwill
10,814

 
9,739

Intangible Assets, net
7,441

 
6,759

Other Assets
761

 
754

Total Assets
$
32,335

 
$
29,109

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Current debt
3,917

 
1,911

Accounts payable
1,962

 
1,694

Other current liabilities
1,551

 
1,426

Total Current Liabilities
7,430

 
5,031

Long-Term Debt
8,075

 
7,962

Deferred Income Taxes
2,330

 
2,107

Other Liabilities
1,241

 
1,198

Commitments and Contingencies (Note 17)

 

Shareholders’ Equity:
 
 
 
Common stock ($0.10 par value):
 
 
 
Class A-authorized 900 million shares, issued 378 million shares
38

 
38

Convertible Class B-authorized 900 million shares, issued 70 million shares
7

 
7

Capital in excess of par value
4,332

 
4,387

Retained earnings
12,719

 
12,329

Accumulated other comprehensive loss
(18
)
 
(15
)
Treasury stock, at cost – 82 million shares at December 29, 2018 and September 29, 2018
(3,951
)
 
(3,943
)
Total Tyson Shareholders’ Equity
13,127

 
12,803

Noncontrolling Interests
132

 
8

Total Shareholders’ Equity
13,259

 
12,811

Total Liabilities and Shareholders’ Equity
$
32,335

 
$
29,109

See accompanying Notes to Consolidated Condensed Financial Statements.

5

Table of Contents

TYSON FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions)
(Unaudited) 
 
Three Months Ended
 
December 29, 2018
 
December 30, 2017
 
Shares

 
Amount

 
Shares

 
Amount

Class A Common Stock:
 
 
 
 
 
 
 
Balance at beginning and end of period
378

 
$
38

 
378

 
$
38

 
 
 
 
 
 
 
 
Class B Common Stock:
 
 
 
 
 
 
 
Balance at beginning and end of period
70

 
7

 
70

 
7

 
 
 
 
 
 
 
 
Capital in Excess of Par Value:
 
 
 
 
 
 
 
Balance at beginning of period
 
 
4,387

 
 
 
4,378

Stock-based compensation
 
 
(55
)
 
 
 
(32
)
Balance at end of period
 
 
4,332

 
 
 
4,346

 
 
 
 
 
 
 
 
Retained Earnings:
 
 
 
 
 
 
 
Balance at beginning of period
 
 
12,329

 
 
 
9,776

Net income attributable to Tyson
 
 
551

 
 
 
1,631

Dividends
 
 
(161
)
 
 
 
(135
)
Balance at end of period
 
 
12,719

 
 
 
11,272

 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
 
Balance at beginning of period
 
 
(15
)
 
 
 
16

Other Comprehensive Income (Loss)
 
 
(3
)
 
 
 
2

Balance at end of period
 
 
(18
)
 
 
 
18

 
 
 
 
 
 
 
 
Treasury Stock:
 
 
 
 
 
 
 
Balance at beginning of period
82

 
(3,943
)
 
80

 
(3,674
)
Purchase of Class A common stock
1

 
(83
)
 
2

 
(164
)
Stock-based compensation
(1
)
 
75

 
(2
)
 
112

Balance at end of period
82

 
(3,951
)
 
80

 
(3,726
)
 
 
 
 
 
 
 
 
Total Shareholders’ Equity Attributable to Tyson
 
 
$
13,127

 
 
 
$
11,955

 
 
 
 
 
 
 
 
Equity Attributable to Noncontrolling Interests:
 
 
 
 
 
 
 
Balance at beginning of period
 
 
$
8

 
 
 
$
18

Net income attributable to noncontrolling interests
 
 
1

 
 
 
1

Business combination and other
 
 
123

 
 
 

Total Equity Attributable to Noncontrolling Interests
 
 
$
132

 
 
 
$
19

 
 
 
 
 
 
 
 
Total Shareholders’ Equity
 
 
$
13,259

 
 
 
$
11,974

See accompanying Notes to Consolidated Condensed Financial Statements.



6

Table of Contents

TYSON FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited) 
 
Three Months Ended
 
December 29, 2018
 
December 30, 2017
Cash Flows From Operating Activities:
 
 
 
Net income
$
552

 
$
1,632

Depreciation and amortization
250

 
229

Deferred income taxes
18

 
(967
)
Other, net
64

 
29

Net changes in operating assets and liabilities
(16
)
 
203

Cash Provided by Operating Activities
868

 
1,126

Cash Flows From Investing Activities:
 
 
 
Additions to property, plant and equipment
(318
)
 
(296
)
Purchases of marketable securities
(15
)
 
(12
)
Proceeds from sale of marketable securities
15

 
9

Acquisitions, net of cash acquired
(2,141
)
 
(226
)
Proceeds from sale of business

 
125

Other, net
10

 
(22
)
Cash Used for Investing Activities
(2,449
)
 
(422
)
Cash Flows From Financing Activities:
 
 
 
Payments on debt
(12
)
 
(429
)
Proceeds from issuance of debt
1,807

 

Borrowings on revolving credit facility

 
655

Payments on revolving credit facility

 
(650
)
Proceeds from issuance of commercial paper
5,538

 
5,728

Repayments of commercial paper
(5,406
)
 
(5,824
)
Purchases of Tyson Class A common stock
(83
)
 
(164
)
Dividends
(134
)
 
(108
)
Stock options exercised
3

 
63

Other, net
(2
)
 

Cash (Used for) Provided by Financing Activities
1,711

 
(729
)
Effect of Exchange Rate Changes on Cash

 

Increase (Decrease) in Cash and Cash Equivalents
130

 
(25
)
Cash and Cash Equivalents at Beginning of Year
270

 
318

Cash and Cash Equivalents at End of Period
$
400

 
$
293

See accompanying Notes to Consolidated Condensed Financial Statements.

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TYSON FOODS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: ACCOUNTING POLICIES
Basis of Presentation
The consolidated condensed financial statements are unaudited and have been prepared by Tyson Foods, Inc. (“Tyson,” “the Company,” “we,” “us” or “our”). Certain information and accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations of the United States Securities and Exchange Commission. Although we believe the disclosures contained herein are adequate to make the information presented not misleading, these consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 29, 2018. Preparation of consolidated condensed financial statements requires us to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated condensed financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
We believe the accompanying consolidated condensed financial statements contain all adjustments, which are of a normal recurring nature, necessary to state fairly our financial position as of December 29, 2018, and the results of operations for the three months ended December 29, 2018, and December 30, 2017. Results of operations and cash flows for the periods presented are not necessarily indicative of results to be expected for the full year.
Consolidation
The consolidated condensed financial statements include the accounts of all wholly-owned subsidiaries, as well as majority-owned subsidiaries over which we exercise control and, when applicable, entities for which we have a controlling financial interest or variable interest entities for which we are the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
We recognize revenue mainly through retail, foodservice, international, industrial and other distribution channels. Our revenues primarily result from contracts with customers and are generally short term in nature with the delivery of product as the single performance obligation. We recognize revenue for the sale of the product at the point in time when our performance obligation has been satisfied and control of the product has transferred to our customer, which generally occurs upon shipment or delivery to a customer based on terms of the sale. We elected to account for shipping and handling activities that occur after the customer has obtained control of the product as a fulfillment cost rather than an additional promised service. Our contracts are generally less than one year, and therefore we recognize costs paid to third party brokers to obtain contracts as expenses. Additionally, items that are not material in the context of the contract are recognized as expense. Any taxes collected on behalf of government authorities are excluded from net revenues.
Revenue is measured by the transaction price, which is defined as the amount of consideration we expect to receive in exchange for providing goods to customers. The transaction price is adjusted for estimates of known or expected variable consideration, which includes consumer incentives, trade promotions, and allowances, such as coupons, discounts, rebates, volume-based incentives, cooperative advertising, and other programs. Variable consideration related to these programs is recorded as a reduction to revenue based on amounts we expect to pay. We base these estimates on current performance, historical utilization, and projected redemption rates of each program. We review and update these estimates regularly until the incentives or product returns are realized and the impact of any adjustments are recognized in the period the adjustments are identified. In many cases, key sales terms such as pricing and quantities ordered are established on a regular basis such that most customer arrangements and related incentives have a duration of less than one year. Amounts billed and due from customers are short term in nature and are classified as receivables since payments are unconditional and only the passage of time is required before payments are due. Additionally, we do not grant payment financing terms greater than one year.
Recently Issued Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board ("FASB") issued guidance that eases certain documentation and assessment requirements of hedge effectiveness and modifies the accounting for components excluded from the assessment. Some of the modifications include the ineffectiveness of derivative gain/loss in highly effective cash flow hedges to be recorded in Other Comprehensive Income, the change in fair value of derivatives to be recorded in the same income statement line as the hedged item, and additional disclosures required on the cumulative basis adjustment in fair value hedges and the effect of hedging on financial statement lines for components excluded from the assessment. The amendment also simplifies the application of hedge accounting in certain situations to permit new hedging strategies to be eligible for hedge accounting. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2018, our fiscal 2020. Early adoption is permitted and the modified retrospective transition method should be applied. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

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In March 2017, the FASB issued guidance that shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2018, our fiscal 2020. Early adoption is permitted and the modified retrospective transition method should be applied. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In June 2016, the FASB issued guidance that provides more decision-useful information about the expected credit losses on financial instruments and changes the loss impairment methodology. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2019, our fiscal 2021. Early adoption is permitted for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2018, our fiscal 2020. The application of the guidance requires various transition methods depending on the specific amendment. We do not expect the adoption of this guidance will have a material impact on our consolidated financial statements.
In February 2016, the FASB issued guidance that created new accounting and reporting guidelines for leasing arrangements. The guidance requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses and cash flows arising from a lease will depend on classification as a finance or operating lease. The guidance also requires qualitative and quantitative disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2018, our fiscal 2020. Early adoption is permitted and the modified retrospective method should be applied. While we are still evaluating the impact this guidance will have on our consolidated financial statements and related disclosures, we have completed our initial scoping reviews and have made progress in our assessment phase as we continue to identify our leasing processes that will be impacted by the new standard. We have also made progress in developing the policy elections we will make upon adoption and we are implementing software to meet the reporting requirements of this standard. We expect our financial statement disclosures will be expanded to present additional details of our leasing arrangements. Although we expect the impacts to be material, at this time we are unable to reasonably estimate the expected increase in assets and liabilities on our consolidated balance sheets or the impacts to our consolidated financial statements upon adoption.
Changes in Accounting Principles
In August 2018, the FASB issued guidance aligning the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2019, our fiscal 2021. The prospective transition method should be applied to all qualified implementation costs incurred after the adoption date. We elected to early adopt this guidance beginning in the first quarter of fiscal 2019, and it did not have a material impact on our consolidated financial statements.
In May 2017, the FASB issued guidance that clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. The prospective transition method should be applied to awards modified on or after the adoption date. We adopted this guidance in the first quarter of fiscal 2019 and it did not have a material impact on our consolidated financial statements.
In March 2017, the FASB issued guidance that changes the presentation of net periodic benefit cost related to employer sponsored defined benefit plans and other postretirement benefits. Service cost will be included within the same income statement line item as other compensation costs arising from services rendered during the period, while other components of net periodic benefit pension cost will be presented separately outside of operating income. Additionally, only the service cost component will be eligible for capitalization when applicable. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. The retrospective transition method should be applied for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement, and the prospective transition method should be applied, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The guidance includes a practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in the pension and other postretirement benefit plan note. We adopted this guidance in the first quarter of fiscal 2019 on a retrospective basis using the practical expedient and it did not have a material impact on our consolidated financial statements.
The following is a reconciliation of the effect of the reclassification of the net periodic benefit cost from operating expenses to other (income) expense in our consolidated statements of income for the three months ended December 30, 2017 (in millions):
Three Months Ended December 30, 2017:
As Previously Reported
Adjustments
As Recast
Cost of Sales
$
8,778

$
8

$
8,786

Selling, General and Administrative
$
524

$
(3
)
$
521

Operating Income
$
927

$
(5
)
$
922

Other (Income) Expense
$
85

$
(5
)
$
80



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In November 2016, the FASB issued guidance that requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. The retrospective transition method should be applied. We adopted this guidance in the first quarter of fiscal 2019 and it did not have a material impact on our consolidated financial statements.
In October 2016, the FASB issued guidance that requires companies to recognize the income tax effects of intercompany sales and transfers of assets, other than inventory, in the period in which the transfer occurs. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. The modified retrospective transition method should be applied. We adopted this guidance in the first quarter of fiscal 2019 and it did not have a material impact on our consolidated financial statements.
In August 2016, the FASB issued guidance that aims to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. The retrospective transition method should be applied. We adopted this guidance in the first quarter of fiscal 2019 and it did not have a material impact on our consolidated financial statements.
In January 2016, the FASB issued guidance that requires most equity investments be measured at fair value, with subsequent other changes in fair value recognized in net income. The guidance also impacts financial liabilities under the fair value option and the presentation and disclosure requirements on the classification and measurement of financial instruments. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. It should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, unless equity securities do not have readily determinable fair values, in which case the amendments should be applied prospectively. We adopted this guidance in the first quarter of fiscal 2019. We did not use prospective amendments for any investments and adoption did not have a material impact on our consolidated financial statements.
In May 2014, the FASB issued guidance that changes the criteria for recognizing revenue. The guidance provides for a single five-step model to be applied to all revenue contracts with customers. The standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts, including disaggregated revenue disclosures. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. This guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2017, our fiscal 2019. We adopted this guidance in the first quarter of fiscal 2019 using the modified retrospective transition method. Prior periods were not adjusted and, based on our implementation assessment, no cumulative-effect adjustment was made to the opening balance of retained earnings. The adoption of this standard did not have a material impact on our consolidated financial statements. For further description of our revenue recognition policy refer to the Revenue Recognition section above and for disaggregated revenue information refer to Part I, Item 1, Notes to the Consolidated Condensed Financial Statements, Note 16: Segment Reporting.
NOTE 2: ACQUISITIONS AND DISPOSITIONS
Acquisitions
On November 30, 2018, we acquired all of the outstanding common stock of MFG (USA) Holdings, Inc. and McKey Luxembourg Holdings S.à.r.l. (“Keystone Foods”) from Marfrig Global Foods ("Marfrig") for $2.3 billion in cash, subject to certain adjustments. The acquisition of Keystone Foods, a major supplier to the growing global foodservice industry, is our latest investment in furtherance of our growth strategy and expansion of our value-added protein capabilities. We funded the acquisition with existing cash on hand, net proceeds from the issuance of a new term loan facility and borrowings under our commercial paper program. Keystone Foods' domestic and international results, subsequent to the acquisition closing, are included in our Chicken segment and Other, respectively.
The following table summarizes the preliminary purchase price allocation and fair values of the assets acquired and liabilities assumed at the acquisition date, which is subject to change pending finalization of working capital adjustments. Certain estimated values for the acquisition, including goodwill, intangible assets, inventory, property, plant and equipment, and deferred income taxes, are not yet finalized and are subject to revision as additional information becomes available and more detailed analyses are completed. The purchase price was allocated based on information available at the acquisition date.

10

Table of Contents

 
in millions
 
Cash and cash equivalents
 
$
186

Accounts receivable
 
118

Inventories
 
257

Other current assets
 
34

Property, Plant and Equipment
 
725

Goodwill
 
1,073

Intangible Assets
 
745

Other Assets
 
28

Current debt
 
(73
)
Accounts payable
 
(206
)
Other current liabilities
 
(100
)
Long-Term Debt
 
(115
)
Deferred Income Taxes
 
(213
)
Other Liabilities
 
(10
)
Noncontrolling Interests
 
(122
)
Net assets acquired
 
$
2,327


The fair value of identifiable intangible assets primarily consisted of customer relationships with a weighted average life of 25 years. As a result of the acquisition, we recognized a total of $1,073 million of goodwill. The purchase price was assigned to assets acquired and liabilities assumed based on their preliminary estimated fair values as of the date of acquisition, and any excess was allocated to goodwill, as shown in the table above. Goodwill represents the value we expect to achieve through the implementation of operational synergies and growth opportunities. The preliminary allocation of goodwill to our segments was $739 million and $334 million to our Chicken segment and Other, respectively. We do not expect the goodwill to be deductible for U.S. income tax purposes.
We used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow, relief-from-royalty, market pricing multiple and multi-period excess earnings valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under these valuation approaches, we are required to make estimates and assumptions about sales, operating margins, growth rates, royalty rates, EBITDA multiples, and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data.
The acquisition of Keystone Foods was accounted for using the acquisition method of accounting and, consequently, the results of operations for Keystone Foods are reported in our consolidated financial statements from the date of acquisition. Keystone's results from the date of the acquisition through December 29, 2018, were insignificant to our Consolidated Condensed Statements of Income.
On February 6, 2019, the Company announced it had reached a definitive agreement to acquire the Thai and European operations of BRF S.A. for $340 million in cash, subject to certain adjustments. This acquisition builds on our growth strategy to expand offerings of value-added protein in global markets. The transaction is expected to close before the end of our fiscal third quarter 2019 and is subject to customary closing conditions, including regulatory approvals, however, there can be no assurance that the acquisition will close at such time. We expect the operations results will be included in Other for segment presentation.
On August 20, 2018, we acquired the assets of American Proteins, Inc. and AMPRO Products, Inc. ("American Proteins"), a poultry rendering and blending operation for $866 million, subject to net working capital adjustments, as part of our strategic expansion and sustainability initiatives. Its results, subsequent to the acquisition closing, are included in our Chicken segment. The preliminary purchase price allocation included $71 million of net working capital, $155 million of Property, Plant and Equipment, $411 million of Intangible Assets, $242 million of Goodwill, and $13 million of Other liabilities. Intangible Assets primarily included $358 million assigned to supply network which will be amortized over 14 years and $51 million assigned to customer relationships which will be amortized over a weighted average of 12 years. All of the goodwill acquired is amortizable for tax purposes. Certain estimated values for the acquisition, including goodwill, intangible assets, and property, plant and equipment, are not yet finalized and are subject to revision as additional information becomes available and more detailed analyses are completed.

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Table of Contents

On June 4, 2018, we acquired Tecumseh Poultry, LLC ("Tecumseh"), a vertically integrated value-added protein business for $382 million, net of cash acquired, as part of our strategy to grow in the high quality, branded poultry market. Its results, subsequent to the acquisition closing, are included in our Chicken segment. The preliminary purchase price allocation included $13 million of net working capital, including $1 million of cash acquired, $49 million of Property, Plant and Equipment, $227 million of Intangible Assets and $94 million of Goodwill. Intangible Assets included $193 million assigned to brands and trademarks which will be amortized over 20 years. All of the goodwill acquired is amortizable for tax purposes. Certain estimated values for the acquisition, including goodwill, intangible assets, and property, plant and equipment, are not yet finalized and are subject to revision as additional information becomes available and more detailed analyses are completed.
On November 10, 2017, we acquired Original Philly Holdings, Inc. ("Original Philly"), a value-added protein business, for $226 million, net of cash acquired, as part of our strategic expansion initiative. Its results, subsequent to the acquisition closing, are included in our Prepared Foods and Chicken segments. The purchase price allocation included $21 million of net working capital, including $10 million of cash acquired, $13 million of Property, Plant and Equipment, $90 million of Intangible Assets and $111 million of Goodwill. We completed the allocation of goodwill to our segments in the second quarter of fiscal 2018 using the acquisition method approach. This resulted in $82 million and $29 million of goodwill allocated to our Prepared Foods and Chicken segments, respectively. All of the goodwill acquired is amortizable for tax purposes.
Dispositions
On April 24, 2017, we announced our intent to sell three non-protein businesses as part of our strategic focus on protein brands. These businesses, which were all part of our Prepared Foods segment, included Sara Lee® Frozen Bakery, Kettle and Van’s® and produce items such as frozen desserts, waffles, snack bars, and soups, sauces and sides. The sale also included the Chef Pierre®, Bistro Collection®, Kettle Collection™, and Van’s® brands, a license to use the Sara Lee® brand in various channels, as well as our Tarboro, North Carolina, Fort Worth, Texas, and Traverse City, Michigan, prepared foods facilities.
We completed the sale of our Kettle business on December 30, 2017, and received net proceeds of $125 million including a working capital adjustment. As a result of the sale, we recorded a pretax gain of $22 million, which is reflected in Cost of Sales in our Consolidated Condensed Statement of Income for the three months ended December 30, 2017. We utilized the net proceeds to pay down term loan debt.
We completed the sale of our Sara Lee® Frozen Bakery and Van’s® businesses on July 30, 2018 for $623 million including a working capital adjustment. Prior to the sale, in the first quarter of fiscal 2018, we recorded a pretax impairment charge totaling $26 million, due to revised estimates of the businesses fair value based on expected net sales proceeds. The impairment charge was recorded in Cost of Sales in our Consolidated Condensed Statement of Income for the three months ended December 30, 2017, and primarily consisted of goodwill previously classified within assets held for sale.
In the first quarter of fiscal 2018, we made the decision to sell TNT Crust, our pizza crust business, which was also included in our Prepared Foods segment, as part of our strategic focus on protein brands. We completed the sale of this business on September 2, 2018, for $57 million net of adjustments.
NOTE 3: INVENTORIES
Processed products, livestock and supplies and other are valued at the lower of cost and net realizable value. Cost includes purchased raw materials, live purchase costs, growout costs (primarily feed, grower pay and catch and haul costs), labor and manufacturing and production overhead, which are related to the purchase and production of inventories.
At December 29, 2018, 66% of the cost of inventories was determined by the first-in, first-out ("FIFO") method as compared to 63% at September 29, 2018. The remaining cost of inventories for both periods is determined by the weighted-average method.
The following table reflects the major components of inventory (in millions):
 
December 29, 2018
 
September 29, 2018
Processed products
$
2,064

 
$
1,981

Livestock
1,121

 
1,006

Supplies and other
592

 
526

Total inventory
$
3,777

 
$
3,513



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Table of Contents

NOTE 4: PROPERTY, PLANT AND EQUIPMENT
The major categories of property, plant and equipment and accumulated depreciation are as follows (in millions): 

December 29, 2018
 
September 29, 2018
Land
$
168

 
$
154

Buildings and leasehold improvements
4,455

 
4,115

Machinery and equipment
8,122

 
7,720

Land improvements and other
363

 
357

Buildings and equipment under construction
917

 
689

 
14,025

 
13,035

Less accumulated depreciation
7,007

 
6,866

Net property, plant and equipment
$
7,018

 
$
6,169


NOTE 5: RESTRUCTURING AND RELATED CHARGES
In the fourth quarter of fiscal 2017, our Board of Directors approved a multi-year restructuring program (the “Financial Fitness Program”), which is expected to contribute to the Company’s overall strategy of financial fitness through increased operational effectiveness and overhead reduction. The Company currently anticipates the Financial Fitness Program will result in cumulative pretax charges, once implemented, of approximately $253 million which consist primarily of severance and employee related costs, impairments and accelerated depreciation of technology assets, incremental costs to implement new technology, and contract termination costs. 
Through December 29, 2018, $217 million of the estimated $253 million total pretax charges has been recognized. The majority of the remaining estimated charges relate to incremental costs to implement new technology.
We recognized restructuring and related charges of $8 million and $19 million for the three months ended December 29, 2018, and December 30, 2017, respectively, associated with the Financial Fitness Program. These costs were recorded in Selling, General and Administrative in our Consolidated Condensed Statements of Income and represent incremental costs to implement new technology and accelerated depreciation of technology assets.
Our restructuring liability was $10 million and $5 million at September 29, 2018, and December 29, 2018, respectively. The change in the restructuring liability was due to payment of $5 million during the first quarter of fiscal 2019.
NOTE 6: OTHER CURRENT LIABILITIES
Other current liabilities are as follows (in millions):
 
December 29, 2018
 
September 29, 2018
Accrued salaries, wages and benefits
$
476

 
$
549

Income taxes payable
237

 
72

Other
838

 
805

Total other current liabilities
$
1,551

 
$
1,426



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Table of Contents

NOTE 7: DEBT
The major components of debt are as follows (in millions):
 
December 29, 2018
 
September 29, 2018
Revolving credit facility
$

 
$

Commercial paper
737

 
605

Senior notes:
 
 
 
Notes due May 2019 (3.16% at 12/29/2018)
300

 
300

2.65% Notes due August 2019
1,000

 
1,000

Notes due June 2020 (3.29% at 12/29/2018)
350

 
350

Notes due August 2020 (3.10% at 12/29/2018)
400

 
400

4.10% Notes due September 2020
281

 
281

2.25% Notes due August 2021
500

 
500

4.50% Senior notes due June 2022
1,000

 
1,000

       3.90% Senior notes due September 2023
400

 
400

3.95% Notes due August 2024
1,250

 
1,250

3.55% Notes due June 2027
1,350

 
1,350

7.00% Notes due January 2028
18

 
18

6.13% Notes due November 2032
161

 
161

4.88% Notes due August 2034
500

 
500

5.15% Notes due August 2044
500

 
500

4.55% Notes due June 2047
750

 
750

5.10% Notes due September 2048
500

 
500

Discount on senior notes
(15
)
 
(15
)
Term loan:
 
 
 
364-Day Term Loan due November 2019 (3.50% at 12/29/2018)
1,800

 

Other
257

 
73

Unamortized debt issuance costs
(47
)
 
(50
)
Total debt
11,992

 
9,873

Less current debt
3,917

 
1,911

Total long-term debt
$
8,075

 
$
7,962


Revolving Credit Facility and Letters of Credit
We have a $1.75 billion revolving credit facility that supports short-term funding needs and serves as a backstop to our commercial paper program which will mature and the commitments thereunder will terminate in March 2023. Amounts available for borrowing under this facility totaled $1.75 billion at December 29, 2018, before deducting amounts to backstop our commercial paper program. At December 29, 2018, we had no outstanding borrowings and no outstanding letters of credit issued under this facility. At December 29, 2018, we had $111 million of bilateral letters of credit issued separately from the revolving credit facility, none of which were drawn upon. Our letters of credit are issued primarily in support of leasing and workers’ compensation insurance programs and other legal obligations.
If in the future any of our subsidiaries shall guarantee any of our material indebtedness, such subsidiary shall be required to guarantee the indebtedness, obligations and liabilities under this facility.
Commercial Paper Program
We have a commercial paper program under which we may issue unsecured short-term promissory notes ("commercial paper") up to an aggregate maximum principal amount of $1 billion as of December 29, 2018. As of December 29, 2018, we had $737 million of commercial paper outstanding at a weighted average interest rate of 2.94% with maturities of less than 15 days.
364-Day Term Loan Agreement
In November 2018, as part of the financing for the Keystone Foods acquisition, we borrowed $1.8 billion under an unsecured term loan facility, which is due November 2019. Interest will reset based on the selected LIBOR interest period plus 1.125%, and will be reset according to the terms of the term loan facility at 180 days after the initial borrowing date.

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Table of Contents

Debt Covenants
Our revolving credit facility and term loan contain affirmative and negative covenants that, among other things, may limit or restrict our ability to: create liens and encumbrances; incur debt; merge, dissolve, liquidate or consolidate; make acquisitions and investments; dispose of or transfer assets; change the nature of our business; engage in certain transactions with affiliates; and enter into hedging transactions, in each case, subject to certain qualifications and exceptions. In addition, we are required to maintain minimum interest expense coverage and maximum debt-to-capitalization ratios.
Our senior notes also contain affirmative and negative covenants that, among other things, may limit or restrict our ability to: create liens; engage in certain sale/leaseback transactions; and engage in certain consolidations, mergers and sales of assets.
We were in compliance with all debt covenants at December 29, 2018.
NOTE 8: EQUITY
Share Repurchases
As of December 29, 2018, 22.1 million shares remained available for repurchase under our share repurchase program. The share repurchase program has no fixed or scheduled termination date and the timing and extent to which we repurchase shares will depend upon, among other things, our working capital needs, markets, industry conditions, liquidity targets, limitations under our debt obligations and regulatory requirements. In addition to the share repurchase program, we purchase shares on the open market to fund certain obligations under our equity compensation plans.
A summary of share repurchases of our Class A stock is as follows (in millions):
 
 
Three Months Ended
 
 
December 29, 2018
 
December 30, 2017
 
 
Shares
 
Dollars
 
Shares
 
Dollars
Shares repurchased:
 
 
 
 
 
 
 
 
Under share repurchase program
 
0.9

 
$
50

 
1.5

 
$
120

To fund certain obligations under equity compensation plans
 
0.5

 
33

 
0.6

 
44

Total share repurchases
 
1.4

 
$
83

 
2.1

 
$
164


NOTE 9: INCOME TAXES
The "Tax Cuts and Jobs Act" (the "Tax Act") was signed into law in the first quarter of fiscal 2018. In the first quarter of fiscal 2019, we completed our accounting for the Tax Act and recorded an immaterial adjustment to income tax expense. We finalized the remeasurement of domestic deferred tax balances from the former 35% corporate tax rate to the newly enacted 21% tax rate and finalized our accounting for the global intangible low-taxed income tax, for which we elected the period cost method, and neither had a material impact on our consolidated condensed financial statements in the first quarter of fiscal 2019.
Our effective tax rate was 22.6% and (93.8)% for the first quarter of fiscal 2019 and 2018, respectively. The effective tax rates for the first quarter of fiscal 2019 and 2018 were impacted by state income taxes. Additionally, changes resulting from the remeasurement of deferred income taxes at newly enacted tax rates reduced the effective tax rate for the first quarter of fiscal 2018 by 118.1%. The effective tax rate for the first quarter of fiscal 2018 also includes a 2.3% benefit related to excess tax benefits associated with share-based payments to employees and a 1.8% benefit related to the domestic production deduction.
Unrecognized tax benefits were $296 million and $308 million at December 29, 2018, and September 29, 2018, respectively.
We estimate that during the next twelve months it is reasonably possible that unrecognized tax benefits could decrease by as much as $13 million primarily due to expiration of statutes of limitations in various jurisdictions.
NOTE 10: OTHER INCOME AND CHARGES
During the first quarter of fiscal 2019, we recognized $17 million of net periodic pension and postretirement benefit cost, excluding the service cost component, which was recorded in the Consolidated Condensed Statements of Income in Other, net. Additionally, we recorded $5 million of equity earnings in joint ventures and $1 million in net foreign currency exchange losses, which were also recorded in the Consolidated Condensed Statements of Income in Other, net.
During the first quarter of fiscal 2018, we recorded $3 million of equity earnings in joint ventures and $3 million in net foreign currency exchange losses, which were recorded in the Consolidated Condensed Statements of Income in Other, net. Additionally, in accordance with recently adopted accounting guidance, we have retrospectively recognized $5 million of net periodic pension and postretirement benefit credit, excluding the service cost component, which was recorded in the Consolidated Condensed Statements of Income in Other, net.

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NOTE 11: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data): 
 
Three Months Ended
 
December 29, 2018
 
December 30, 2017
Numerator:
 
 
 
Net income
$
552

 
$
1,632

Less: Net income attributable to noncontrolling interests
1

 
1

Net income attributable to Tyson
551

 
1,631

Less dividends declared:
 
 
 
Class A
133

 
111

Class B
28

 
24

Undistributed earnings
$
390

 
$
1,496

 
 
 
 
Class A undistributed earnings
$
321

 
$
1,233

Class B undistributed earnings
69

 
263

Total undistributed earnings
$
390

 
$
1,496

Denominator:
 
 
 
Denominator for basic earnings per share:
 
 
 
Class A weighted average shares
294

 
296

Class B weighted average shares, and shares under the if-converted method for diluted earnings per share
70

 
70

Effect of dilutive securities:
 
 
 
Stock options, restricted stock and performance units
2

 
5

Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversions
366

 
371

 
 
 
 
Net income per share attributable to Tyson:
 
 
 
Class A basic
$
1.54

 
$
4.54

Class B basic
$
1.39

 
$
4.09

Diluted
$
1.50

 
$
4.40

Dividends Declared Per Share:
 
 
 
Class A
$
0.450

 
$
0.375

Class B
$
0.405

 
$
0.338


Approximately 4 million of our stock-based compensation shares were antidilutive for the three months ended December 29, 2018 and approximately 1 million for the three months ended December 30, 2017. These shares were not included in the diluted earnings per share calculation.
We have two classes of capital stock, Class A stock and Class B stock. Cash dividends cannot be paid to holders of Class B stock unless they are simultaneously paid to holders of Class A stock. The per share amount of cash dividends paid to holders of Class B stock cannot exceed 90% of the cash dividends paid to holders of Class A stock.
We allocate undistributed earnings based upon a 1 to 0.9 ratio per share to Class A stock and Class B stock, respectively. We allocate undistributed earnings based on this ratio due to historical dividend patterns, voting control of Class B shareholders and contractual limitations of dividends to Class B stock.

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Table of Contents

NOTE 12: DERIVATIVE FINANCIAL INSTRUMENTS
Our business operations give rise to certain market risk exposures mostly due to changes in commodity prices, foreign currency exchange rates and interest rates. We manage a portion of these risks through the use of derivative financial instruments to reduce our exposure to commodity price risk, foreign currency risk and interest rate risk. Our risk management programs are periodically reviewed by our Board of Directors' Audit Committee. These programs are monitored by senior management and may be revised as market conditions dictate. Our current risk management programs utilize industry-standard models that take into account the implicit cost of hedging. Risks associated with our market risks and those created by derivative instruments and the fair values are strictly monitored, using value-at-risk and stress tests. Credit risks associated with our derivative contracts are not significant as we minimize counterparty concentrations, utilize margin accounts or letters of credit, and deal with credit worthy counterparties. Additionally, our derivative contracts are mostly short-term in duration and we generally do not make use of credit-risk-related contingent features. No significant concentrations of credit risk existed at December 29, 2018.
We had the following aggregated outstanding notional amounts related to our derivative financial instruments:
in millions, except soy meal tons
Metric
 
December 29, 2018
 
September 29, 2018
Commodity:
 
 
 
 
 
Corn
Bushels
 
63

 
112

Soy Meal
Tons
 
607,200

 
651,700

Live Cattle
Pounds
 
256

 
105

Lean Hogs
Pounds
 
151

 
39

Foreign Currency
United States dollar
 
$
261

 
$
89

Interest Rate Swaps
Average monthly debt
 
$
400

 
$
400

Treasury Rate Locks
Average monthly debt
 
$
1,200

 
$

We recognize all derivative instruments as either assets or liabilities at fair value in the Consolidated Condensed Balance Sheets, with the exception of normal purchases and normal sales expected to result in physical delivery. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument based upon the exposure being hedged (i.e., cash flow hedge or fair value hedge). We designate certain forward contracts as follows:
Cash Flow Hedges – include certain commodity forward and option contracts of forecasted purchases (i.e., grains), interest rate swaps and locks, and certain foreign exchange forward contracts.
Fair Value Hedges – include certain commodity forward contracts of firm commitments (i.e., livestock).
Cash Flow Hedges
Derivative instruments are designated as hedges against changes in the amount of future cash flows related to procurement of certain commodities utilized in our production processes as well as interest rates related to our variable rate debt. For the derivative instruments we designate and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income ("OCI") and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses representing hedge ineffectiveness are recognized in earnings in the current period. Ineffectiveness related to our cash flow hedges was not significant for the three months ended December 29, 2018, and December 30, 2017. As of December 29, 2018, we have net pretax losses of $6 million for our commodity contracts and $1 million of pretax losses related to our interest rate swap hedges, expected to be reclassified into earnings within the next 12 months. Additionally, we have $16 million of pretax losses related to our treasury rate locks, which will be reclassified to earnings over the life of a forecasted fixed-rate debt issuance. During the three months ended December 29, 2018, and December 30, 2017, we did not reclassify significant pretax gains or losses into earnings as a result of the discontinuance of cash flow hedges.
The following table sets forth the pretax impact of cash flow hedge derivative instruments on the Consolidated Condensed Statements of Income (in millions):
 
Gain (Loss)
Recognized in OCI
On Derivatives
 
 
Consolidated Condensed
Statements of Income
Classification
 
Gain (Loss)
Reclassified from
OCI to Earnings
 
 
Three Months Ended
 
 
 
Three Months Ended
 
December 29, 2018
 
December 30, 2017
 
 
 
December 29, 2018
 
December 30, 2017
Cash flow hedge – derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
$
(2
)
 
$
(2
)
 
Cost of Sales
 
$
(7
)
 
$
(1
)
Interest rate hedges
(18
)
 

 
Interest expense
 

 

Total
$
(20
)
 
$
(2
)
 
 
 
$
(7
)
 
$
(1
)


17

Table of Contents

Fair Value Hedges
We designate certain derivative contracts as fair value hedges of firm commitments to purchase livestock for harvest. Our objective of these hedges is to minimize the risk of changes in fair value created by fluctuations in commodity prices associated with fixed price livestock firm commitments. For these derivative instruments we designate and qualify as a fair value hedge, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in earnings in the same period. We include the gain or loss on the hedged items (i.e., livestock purchase firm commitments) in the same line item, Cost of Sales, as the offsetting gain or loss on the related livestock forward position.
 
 
 
in millions
 
 
Consolidated Condensed
Statements of Income
Classification
 
Three Months Ended
 
 
December 29, 2018
 
December 30, 2017
Gain (Loss) on forwards
Cost of Sales
 
$
(1
)
 
$
(7
)
Gain (Loss) on purchase contract
Cost of Sales
 
1

 
7


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