Quarterly Report (10-q)

Date : 02/06/2020 @ 12:57PM
Source : Edgar (US Regulatory)
Stock : Tyson Foods (TSN)
Quote : 54.15  -1.19 (-2.15%) @ 12:40AM
After Hours
Last Trade
Last $ 54.20 ▲ 0.05 (0.09%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended December 28, 2019
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to            
TYSONFAMILYBRANDSSEC01.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)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Class A Common Stock
Par Value
$0.10
TSN
New York Stock Exchange
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     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      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
 
 
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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of December 28, 2019.
Class
 
Outstanding Shares
Class A Common Stock, $0.10 Par Value (Class A stock)
 
295,027,770

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

Class B stock is not listed for trading on any exchange or market system. However, Class B stock is convertible into Class A stock on a share-for-share basis.
TABLE OF CONTENTS
 
 
PAGE
Item 1.
 
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
8
 
 
 
Item 2.
27
 
 
 
Item 3.
36
 
 
 
Item 4.
38


Item 1.
39
 
 
 
Item 1A.
40
 
 
 
Item 2.
40
 
 
 
Item 3.
40
 
 
 
Item 4.
40
 
 
 
Item 5.
40
 
 
 
Item 6.
40
 
 
 
42




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 28, 2019
 
December 29, 2018
Sales
$
10,815

 
$
10,193

Cost of Sales
9,375

 
8,838

Gross Profit
1,440

 
1,355

Selling, General and Administrative
614

 
548

Operating Income
826

 
807

Other (Income) Expense:
 
 
 
Interest income
(3
)
 
(2
)
Interest expense
120

 
99

Other, net
(16
)
 
(3
)
Total Other (Income) Expense
101

 
94

Income before Income Taxes
725

 
713

Income Tax Expense
164

 
161

Net Income
561

 
552

Less: Net Income Attributable to Noncontrolling Interests
4

 
1

Net Income Attributable to Tyson
$
557

 
$
551

Weighted Average Shares Outstanding:
 
 
 
Class A Basic
293

 
294

Class B Basic
70

 
70

Diluted
367

 
366

Net Income Per Share Attributable to Tyson:
 
 
 
Class A Basic
$
1.56

 
$
1.54

Class B Basic
$
1.40

 
$
1.39

Diluted
$
1.52

 
$
1.50

See accompanying Notes to Consolidated Condensed Financial Statements.

3



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

 
Three Months Ended
 
December 28, 2019
 
December 29, 2018
Net Income
$
561

 
$
552

Other Comprehensive Income (Loss), Net of Taxes:
 
 
 
Derivatives accounted for as cash flow hedges
3

 
(9
)
Investments

 
1

Currency translation
35

 
8

Postretirement benefits

 
(3
)
Total Other Comprehensive Income (Loss), Net of Taxes
38

 
(3
)
Comprehensive Income
599

 
549

Less: Comprehensive Income Attributable to Noncontrolling Interests
4

 
1

Comprehensive Income Attributable to Tyson
$
595

 
$
548

See accompanying Notes to Consolidated Condensed Financial Statements.


4



TYSON FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except share and per share data)
(Unaudited) 
 
December 28, 2019
 
September 28, 2019
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
497

 
$
484

Accounts receivable, net
2,063

 
2,173

Inventories
4,304

 
4,108

Other current assets
329

 
404

Total Current Assets
7,193

 
7,169

Net Property, Plant and Equipment
7,384

 
7,282

Goodwill
10,862

 
10,844

Intangible Assets, net
6,975

 
7,037

Other Assets
1,397

 
765

Total Assets
$
33,811

 
$
33,097

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Current debt
$
1,947

 
$
2,102

Accounts payable
1,916

 
1,926

Other current liabilities
1,673

 
1,485

Total Current Liabilities
5,536

 
5,513

Long-Term Debt
9,772

 
9,830

Deferred Income Taxes
2,369

 
2,356

Other Liabilities
1,568

 
1,172

Commitments and Contingencies (Note 18)

 

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
4,354

 
4,378

Retained earnings
14,178

 
13,787

Accumulated other comprehensive gain (loss)
(79
)
 
(117
)
Treasury stock, at cost – 83 million shares at December 28, 2019 and 82 million shares at September 28, 2019
(4,079
)
 
(4,011
)
Total Tyson Shareholders’ Equity
14,419

 
14,082

Noncontrolling Interests
147

 
144

Total Shareholders’ Equity
14,566

 
14,226

Total Liabilities and Shareholders’ Equity
$
33,811

 
$
33,097

See accompanying Notes to Consolidated Condensed Financial Statements.

5



TYSON FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In millions)
(Unaudited) 
 
Three Months Ended
 
December 28, 2019
 
December 29, 2018
 
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
 
4,378

 
 
4,387

Stock-based compensation
 
(24
)
 
 
(55
)
Balance at end of period
 
4,354

 
 
4,332

 
 
 
 
 
 
Retained Earnings:
 
 
 
 
 
Balance at beginning of period
 
13,787

 
 
12,329

Net income attributable to Tyson
 
557

 
 
551

Dividends
 
(166
)
 
 
(161
)
Balance at end of period
 
14,178

 
 
12,719

 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
Balance at beginning of period
 
(117
)
 
 
(15
)
Other comprehensive income (loss)
 
38

 
 
(3
)
Balance at end of period
 
(79
)
 
 
(18
)
 
 
 
 
 
 
Treasury Stock:
 
 
 
 
 
Balance at beginning of period
82

(4,011
)
 
82

(3,943
)
Purchase of Class A common stock
2

(132
)
 
1

(83
)
Stock-based compensation
(1
)
64

 
(1
)
75

Balance at end of period
83

(4,079
)
 
82

(3,951
)
 
 
 
 
 
 
Total Shareholders’ Equity Attributable to Tyson

$
14,419




$
13,127

 
 
 
 
 
 
Equity Attributable to Noncontrolling Interests:
 
 
 
 
 
Balance at beginning of period
 
$
144

 
 
$
8

Net income attributable to noncontrolling interests
 
4

 
 
1

Business combination and other
 
(1
)
 
 
123

Total Equity Attributable to Noncontrolling Interests
 
$
147

 
 
$
132

 
 
 
 
 
 
Total Shareholders’ Equity
 
$
14,566

 
 
$
13,259

See accompanying Notes to Consolidated Condensed Financial Statements.



6



TYSON FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited) 
 
Three Months Ended
 
December 28, 2019
 
December 29, 2018
Cash Flows From Operating Activities:
 
 
 
Net income
$
561

 
$
552

Depreciation and amortization
288

 
250

Deferred income taxes
3

 
18

Other, net
27

 
64

Net changes in operating assets and liabilities
15

 
(16
)
Cash Provided by Operating Activities
894

 
868

Cash Flows From Investing Activities:
 
 
 
Additions to property, plant and equipment
(312
)
 
(318
)
Purchases of marketable securities
(35
)
 
(15
)
Proceeds from sale of marketable securities
19

 
15

Acquisitions, net of cash acquired

 
(2,141
)
Proceeds from sale of business
29

 

Other, net
(82
)
 
10

Cash Used for Investing Activities
(381
)
 
(2,449
)
Cash Flows From Financing Activities:
 
 
 
Proceeds from issuance of debt
38

 
1,807

Payments on debt
(31
)
 
(12
)
Borrowings on revolving credit facility
180

 

Payments on revolving credit facility
(250
)
 

Proceeds from issuance of commercial paper
4,675

 
5,538

Repayments of commercial paper
(4,855
)
 
(5,406
)
Purchases of Tyson Class A common stock
(132
)
 
(83
)
Dividends
(150
)
 
(134
)
Stock options exercised
20

 
3

Other, net
(2
)
 
(2
)
Cash (Used for) Provided by Financing Activities
(507
)
 
1,711

Effect of Exchange Rate Changes on Cash
7

 

Increase in Cash and Cash Equivalents
13

 
130

Cash and Cash Equivalents at Beginning of Year
484

 
270

Cash and Cash Equivalents at End of Period
$
497

 
$
400

See accompanying Notes to Consolidated Condensed Financial Statements.

7



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 28, 2019. 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 28, 2019, and the results of operations for the three months ended December 28, 2019, and December 29, 2018. 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.
Leases
We determine if an agreement is or contains a lease at its inception by evaluating if an identified asset exists that we control for a period of time. When a lease exists, we classify it as a finance or operating lease and record a right-of-use ("ROU") asset and a corresponding lease liability at lease commencement. We have elected to not record leases with a term of 12 months or less in our Consolidated Condensed Balance Sheets, and accordingly, lease expense for these short-term leases is recognized on a straight-line basis over the lease term. Finance lease assets are presented within Net Property, Plant and Equipment and finance lease liabilities are presented within Current and Long-Term Debt in our Consolidated Condensed Balance Sheets. Finance lease disclosures are omitted as they are deemed immaterial. Operating ROU assets are presented within Other Assets, and operating lease liabilities are recorded within Other current liabilities and Other Liabilities in our Consolidated Condensed Balance Sheets. Lease assets are subject to review for impairment in a manner consistent with Property, Plant and Equipment.
ROU assets are presented in our Consolidated Condensed Balance Sheets based on the present value of the corresponding liabilities and are adjusted for any prepayments, lease incentives received or initial direct costs incurred. The measurement of our ROU assets and liabilities includes all fixed payments and any variable payments based on an index or rate. Variable lease payments which do not depend on an index, or where rates are unknown, are excluded from lease payments in the measurement of the ROU asset and lease liability, and accordingly, are recognized as lease expense in the period the obligation for those payments is incurred. The present value of lease payments is based on our incremental borrowing rate according to the lease term and information available at the lease commencement date, as our lease arrangements generally do not provide an implicit interest rate. The incremental borrowing rate is derived using a hypothetically-collateralized borrowing cost, based on our revolving credit facility, plus a country risk factor, where applicable. We consider our credit rating and the current economic environment in determining the collateralized rate.
Our lease arrangements can include fixed or variable non-lease components, such as common area maintenance, taxes and labor. We account for each lease and any non-lease components associated with that lease as a single lease component for all asset classes, except production and livestock grower asset classes embedded in service and supply agreements, and other asset classes that include significant maintenance or service components. We account for lease and non-lease components of an agreement separately based on relative stand-alone prices either observable or estimated if observable prices are not readily available. For asset classes where an election was made not to separate lease and non-lease components, all costs associated with a lease contract are disclosed as lease costs. The accounting for some of the Company's leases may require significant judgment when determining whether a contract is or contains a lease, the lease term, and the likelihood of exercising renewal or termination options. Our leases can include options to extend or terminate use of the underlying assets. These options are included in the lease term used to determine ROU assets and corresponding liabilities when we are reasonably certain we will exercise the option. Additionally, certain leases can have residual value guarantees, which are included within our operating lease liabilities when considered probable. Our lease agreements do not include significant restrictions or covenants.

8



Recognition, measurement and presentation of expenses and cash flows arising from a lease will depend on classification as a finance or operating lease. Operating lease expense is recognized on a straight-line basis over the lease term, whereas the amortization of finance lease assets is recognized on a straight-line basis over the shorter of the estimated useful life of the underlying asset or the lease term. Operating lease expense and finance lease amortization are presented in Cost of Sales or Selling, General and Administrative in our Consolidated Condensed Statements of Income depending on the nature of the leased item. Interest expense on finance lease obligations is recorded over the lease term and is presented in Interest expense, based on the effective interest method. All operating lease cash payments and interest on finance leases are presented within Net cash provided by operating activities and all finance lease principal payments are presented within Net cash used in financing activities in our Consolidated Condensed Statements of Cash Flows.
Recently Issued Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board ("FASB") issued guidance that simplifies the accounting for income taxes by removing certain exceptions to general principles in Topic 740 and clarifies other general principles by adding certain requirements to Topic 740. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2020, our fiscal 2022. Early adoption is permitted for periods for which financial statements have not yet been issued, beginning our fiscal 2020. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. The application of the guidance requires various transition methods depending on the specific amendment. 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.
Changes in Accounting Principles
In August 2017, the 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 included the ineffectiveness of derivative gain/loss in highly effective cash flow hedges to be recorded in Other Comprehensive Income, alignment of the recognition and presentation of the effects related to the hedging instrument and hedged item in the financial statements, 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 simplified 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. We adopted this guidance in the first quarter of fiscal 2020 using the modified retrospective transition approach, and it did not 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. We adopted this guidance in the first quarter of fiscal 2020 using the optional transition method that allows for a cumulative-effect adjustment in the period of adoption with no restatement of prior periods. We have elected the package of practical expedients available under the transition guidance which allows us to not reassess prior conclusions related to lease classifications, existing contracts containing leases, and initial direct costs, as well as the practical expedient that allows the continued historical treatment of land easements. We did not elect the practical expedient for the use of hindsight in evaluating the expected lease term of existing leases. The adoption resulted in the recording of operating lease assets and operating lease liabilities of $549 million and $546 million, respectively, as of September 29, 2019, with no changes to our finance leases. The difference between the additional lease assets and lease liabilities, represents existing deferred rent and prepaid lease balances that were reclassified on the balance sheet. The adoption did not have a material impact on our Consolidated Condensed Statements of Income or our Consolidated Condensed Statements of Cash Flows. For further description of our lease policy refer to the Leases section above, and for quantitative lease information refer to Part I, Item 1, Notes to Consolidated Condensed Financial Statements, Note 5: Leases.

9



NOTE 2: ACQUISITIONS
On June 3, 2019, we acquired the Thai and European operations of BRF S.A. ("Thai and European operations") for $326 million, net of cash acquired, subject to certain adjustments, as a part of our growth strategy to expand offerings of value-added protein in global markets. Its results, subsequent to the acquisition closing, are included in International/Other for segment presentation. Certain estimated values for the acquisition, including goodwill, intangible assets, property, plant and equipment, noncontrolling interest, 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 preliminary purchase price allocation includes $297 million of net working capital, including $56 million of cash acquired, $93 million of Property, Plant and Equipment, $10 million of Goodwill, $23 million of Intangible Assets, $24 million of Other Liabilities, $10 million of Deferred Income Taxes and $7 million of Noncontrolling Interest. Intangible Assets included customer relationships which will be amortized over a life of 7 years. We do not expect the goodwill to be deductible for income tax purposes. During the first quarter of fiscal 2020, we recorded measurement period adjustments which increased Goodwill by $9 million, including a reduction to net working capital of $10 million and a decrease in Deferred Income Taxes of $1 million.
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 was accounted for using the acquisition method of accounting, and the results of Keystone Foods' domestic and international results, subsequent to the acquisition closing, are included in our Chicken segment and International/Other, respectively. The following table summarizes the purchase price allocation for Keystone Foods and fair values of the assets acquired and liabilities assumed at the acquisition date.
 
in millions
 
Cash and cash equivalents
 
$
186

Accounts receivable
 
106

Inventories
 
257

Other current assets
 
34

Property, Plant and Equipment
 
676

Goodwill
 
1,120

Intangible Assets
 
659

Other Assets
 
28

Current debt
 
(73
)
Accounts payable
 
(208
)
Other current liabilities
 
(99
)
Long-Term Debt
 
(113
)
Deferred Income Taxes
 
(177
)
Other Liabilities
 
(8
)
Noncontrolling Interests
 
(122
)
Net assets acquired
 
$
2,266


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 $1,120 million of goodwill. The purchase price was assigned to assets acquired and liabilities assumed based on their 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. We allocated goodwill to our segments using the acquisition method approach. This resulted in $779 million and $341 million of goodwill allocated to our Chicken segment and International/Other, respectively. We do not expect the goodwill to be deductible for 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.
In January 2020, we acquired a 40% minority interest in a vertically-integrated Brazilian poultry producer for $122 million. We will account for this investment under the equity method.

10



NOTE 3: INVENTORIES
Processed products, livestock and supplies and other are valued at the lower of cost or net realizable value. Cost includes purchased raw materials, live purchase costs, growout costs (primarily feed, livestock 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 28, 2019, the cost of inventories was determined by either the first-in, first-out ("FIFO") method or the weighted-average method, which is consistent with the methods used at September 28, 2019.
The following table reflects the major components of inventory (in millions):
 
December 28, 2019
 
September 28, 2019
Processed products
$
2,464

 
$
2,362

Livestock
1,206

 
1,150

Supplies and other
634

 
596

Total inventory
$
4,304

 
$
4,108


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

December 28, 2019
 
September 28, 2019
Land
$
199

 
$
198

Buildings and leasehold improvements
4,768

 
4,747

Machinery and equipment
8,692

 
8,607

Land improvements and other
392

 
385

Buildings and equipment under construction
857

 
713

 
14,908

 
14,650

Less accumulated depreciation
7,524

 
7,368

Net property, plant and equipment
$
7,384

 
$
7,282


NOTE 5: LEASES
We lease certain equipment, buildings and land related to transportation, distribution, storage, production, livestock grower assets and office activities. These lease arrangements can be structured as a standard lease agreement or embedded in a service or supply agreement and are primarily classified as operating leases. For further description of our lease accounting policy, refer to Part I, Item 1, Notes to the Consolidated Condensed Financial Statements, Note 1: Accounting Policies.
Operating lease ROU assets and liabilities presented in our Consolidated Condensed Balance Sheets were as follows (in millions):
 
December 28, 2019
Other Assets
$
527

Other current liabilities
161

Other Liabilities
$
367


The components of lease costs were as follows (in millions):
 
Three Months Ended
 
December 28, 2019
Operating lease cost (a)
$
49

Variable lease cost (b)
111

Short-term lease cost
6

Total
$
166


(a) Sublease income is immaterial and not deducted from operating lease cost.
(b) Variable lease costs are determined based on volume of output received, flocks placed or other performance metrics.


11



Other operating lease information includes the following:
 
Three Months Ended
 
December 28, 2019
Operating cash outflows from operating leases (in millions)
$
51

ROU assets obtained in exchange for new operating lease liabilities (in millions)
$
26

Weighted-average remaining lease term
5 years

Weighted-average discount rate
3
%

At December 28, 2019, future maturities of operating leases were as follows (in millions):
 
Operating Lease Commitments

2020 (remaining year)
$
135

2021
141

2022
96

2023
64

2024
51

2025 and beyond
73

Total undiscounted operating lease payments
$
560

Less: Imputed interest
32

Present value of total operating lease liabilities
$
528


At December 28, 2019, our leases that had not yet commenced were insignificant.
Prior Year Lease Disclosures
The following pertains to previously disclosed information set forth in the Company's 2019 Form 10-K, Part II, Item 8, Notes to the Consolidated Financial Statements, Note 20: Commitments and Contingencies.
We lease equipment, properties and certain farms for which total rentals approximated $220 million and $200 million, in fiscal 2019 and 2018, respectively. Most leases have initial terms of up to seven years, some with varying renewal periods. Minimum lease commitments under non-cancelable leases at September 28, 2019 were (in millions):
 
Operating Lease Commitments

2020
$
159

2021
113

2022
74

2023
49

2024
40

2025 and beyond
54

Total
$
489


We enter into agreements with livestock growers that can have fixed and variable payment structures, but are generally cancelable and based on flocks placed with growers. Livestock grower fixed or estimable non-cancelable commitments at September 28, 2019 were (in millions):
 
Livestock Grower Commitments

2020
$
253

2021
131

2022
86

2023
58

2024
49

2025 and beyond
122

Total
$
699



12



NOTE 6: RESTRUCTURING AND RELATED CHARGES
In the first quarter of fiscal 2020, the Company approved a restructuring program (the "2020 Program"), which is expected to contribute to the Company’s overall strategy of financial fitness through the elimination of overhead and consolidation of certain enterprise functions. This resulted in a $44 million pretax charge consisting of severance and employee related costs. As part of the 2020 Program, we estimate the elimination of approximately 500 positions across several areas and job levels, with most of the eliminated positions originating from the corporate offices in Springdale, Arkansas and Chicago, Illinois. We do not anticipate future costs of the 2020 Program to be significant.
In the fourth quarter of fiscal 2017, our Board of Directors approved a multi-year restructuring program (the “2017 Program”), which is expected to contribute to the Company’s overall strategy of financial fitness through increased operational effectiveness and overhead reduction. The 2017 Program is expected to result in cumulative pretax charges of approximately $280 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 28, 2019, $258 million of the estimated $280 million total pretax charges has been recognized. The remaining estimated charges relate to incremental costs to implement new technology.
We recognized restructuring and related charges of $52 million for the three months ended December 28, 2019, consisting of $44 million of severance and employee related costs from the 2020 Program and $8 million of technology related costs from the 2017 Program. We recorded $9 million in Cost of Sales from the 2020 Program, and we recorded $43 million in Selling, General and Administrative in our Consolidated Condensed Statements of Income, of which $35 million is related to the 2020 program and $8 million is related to the 2017 Program. For the three months ended December 29, 2018, we recognized $8 million of restructuring and related charges from the 2017 Program which 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.
The following table reflects the pretax impact of restructuring and related charges incurred in the first quarter of fiscal 2020, the charges to date and the total estimated charges, by reportable segment (in millions):
 
Three Months Ended
Restructuring and related charges to date
 
 
December 28, 2019
December 28, 2019
Total estimated Restructuring and related charges

Beef
$
5

$
18

$
18

Pork
2

7

7

Chicken
21

128

139

Prepared Foods
22

146

157

Other
2

3

3

Total restructuring and related charges, pretax
$
52

$
302

$
324


The total estimated restructuring charges include $22 million of estimated charges from the 2017 Program yet to be incurred and represent incremental costs to implement new technology in our Prepared Foods and Chicken segments. The timing and actual amounts of the estimated charges may change.
Our restructuring liability was $42 million at December 28, 2019 and we had no restructuring liability at September 28, 2019. The change in the restructuring liability was due to additional charges of $52 million, net of $10 million in payments, during the three months ended December 28, 2019.
NOTE 7: OTHER CURRENT LIABILITIES
Other current liabilities are as follows (in millions):
 
December 28, 2019
 
September 28, 2019
Accrued salaries, wages and benefits
$
551

 
$
620

Other
1,122

 
865

Total other current liabilities
$
1,673

 
$
1,485



13



NOTE 8: DEBT
The major components of debt are as follows (in millions):
 
December 28, 2019
 
September 28, 2019
Revolving credit facility
$

 
$
70

Commercial paper
819

 
1,000

Senior notes:
 
 
 
Notes due June 2020 (2.46% at 12/28/2019)
350

 
350

Notes due August 2020 (2.34% at 12/28/2019)
400

 
400

4.10% Notes due September 2020
279

 
280

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

4.00% Notes due March 2026 ("2026 Notes")
800

 
800

3.55% Notes due June 2027
1,350

 
1,350

7.00% Notes due January 2028
18

 
18

4.35% Notes due March 2029 ("2029 Notes")
1,000

 
1,000

6.13% Notes due November 2032
160

 
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 ("2048 Notes")
1,500

 
1,500

Discount on senior notes
(47
)
 
(48
)
Other
253

 
216

Unamortized debt issuance costs
(63
)
 
(65
)
Total debt
11,719

 
11,932

Less current debt
1,947

 
2,102

Total long-term debt
$
9,772

 
$
9,830


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 28, 2019, before deducting amounts to backstop our commercial paper program. At December 28, 2019, we had no outstanding borrowings and no outstanding letters of credit issued under this facility. At December 28, 2019, we had $99 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. In the future, if 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 28, 2019. As of December 28, 2019, we had $819 million of commercial paper outstanding at a weighted average interest rate of 2.01% with maturities of less than 50 days.
Debt Covenants
Our revolving credit facility contains 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 28, 2019.

14



NOTE 9: EQUITY
Share Repurchases
As of December 28, 2019, 19.5 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 28, 2019
 
December 29, 2018
 
 
Shares
 
Dollars
 
Shares
 
Dollars
Shares repurchased:
 
 
 
 
 
 
 
 
Under share repurchase program
 
1.1

 
$
100

 
0.9

 
$
50

To fund certain obligations under equity compensation plans
 
0.4

 
32

 
0.5

 
33

Total share repurchases
 
1.5

 
$
132

 
1.4

 
$
83


NOTE 10: INCOME TAXES
Our effective tax rate was 22.7% and 22.6% for the first quarter of fiscal 2020 and 2019, respectively. The effective tax rates for the first quarter of fiscal 2020 and 2019 were higher than the federal statutory tax rate primarily due to state taxes, partially offset by various tax benefits.
Unrecognized tax benefits were $169 million at December 28, 2019 and September 28, 2019. We do not expect material changes to our unrecognized tax benefits during the next twelve months.
NOTE 11: 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, and recorded the amount in the Consolidated Condensed Statements of Income in Other, net.

15



NOTE 12: 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 28, 2019
 
December 29, 2018
Numerator:
 
 
 
Net income
$
561

 
$
552

Less: Net income attributable to noncontrolling interests
4

 
1

Net income attributable to Tyson
557

 
551

Less dividends declared:
 
 
 
Class A
137

 
133

Class B
29

 
28

Undistributed earnings
$
391

 
$
390

 
 
 
 
Class A undistributed earnings
$
322

 
$
321

Class B undistributed earnings
69

 
69

Total undistributed earnings
$
391

 
$
390

 
 
 
 
Denominator:
 
 
 
Denominator for basic earnings per share:
 
 
 
Class A weighted average shares
293

 
294

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
4

 
2

Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversions
367

 
366

 
 
 
 
Net income per share attributable to Tyson:
 
 
 
Class A basic
$
1.56

 
$
1.54

Class B basic
$
1.40

 
$
1.39

Diluted
$
1.52

 
$
1.50

Dividends Declared Per Share:
 
 
 
Class A
$
0.465

 
$
0.450

Class B
$
0.419

 
$
0.405


Approximately 2 million and 4 million of our stock-based compensation shares were antidilutive for the three months ended December 28, 2019 and December 29, 2018, respectively. 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.
NOTE 13: 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.

16



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 28, 2019.
We had the following aggregated outstanding notional amounts related to our derivative financial instruments:
in millions, except soy meal tons
Metric
 
December 28, 2019
 
September 28, 2019
Commodity:
 
 
 
 
 
Corn
Bushels
 
115

 
111

Soy Meal
Tons
 
1,281,300

 
1,078,800

Live Cattle
Pounds
 
5

 
14

Lean Hogs
Pounds
 
199

 
309

Foreign Currency
United States dollar
 
$
364

 
$
148

Interest Rate Swaps
Average monthly debt
 
$
400

 
$
400

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 (e.g., 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 (e.g., grains), interest rate swaps and locks, and certain foreign exchange forward contracts.
Fair Value Hedges – include certain commodity forward contracts of firm commitments (e.g., 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. As of December 28, 2019, we have net pretax losses of $6 million for our commodity contracts and net pretax losses of $3 million for our interest rate swap hedges, expected to be reclassified into earnings within the next 12 months. Additionally, we have $18 million of realized losses related to treasury rate locks in connection with our 364-day term loan extinguished during the second quarter of fiscal 2019, which will be reclassified to earnings over the lives of the 2026, 2029 and 2048 Notes. During the three months ended December 28, 2019, and December 29, 2018, 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 recognized in Other Comprehensive Income (in millions):
 
Gain (Loss) Recognized in OCI
On Derivatives
 
 
Three Months Ended
 
December 28, 2019
 
December 29, 2018
Cash flow hedge – derivatives designated as hedging instruments:
 
 
 
Commodity contracts
$

 
$
(2
)
Interest rate hedges

 
(18
)
Total
$

 
$
(20
)

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 (e.g., livestock purchase firm commitments) in the same line item, Cost of Sales, as the offsetting gain or loss on the related livestock forward position. Ineffectiveness related to fair value hedges was insignificant for the three months ended December 28, 2019, and December 29, 2018. The carrying amount of fair value hedge assets (liabilities) as of December 28, 2019 and September 28, 2019 were as follows (in millions):
Consolidated Condensed
Balance Sheets Classification
 
 
December 28, 2019
 
September 28, 2019
Inventory
 
 
$
(1
)
 
$
(19
)


17



Undesignated Positions
In addition to our designated positions, we also hold derivative contracts for which we do not apply hedge accounting. These include certain derivative instruments related to commodities price risk, including grains, livestock, energy and foreign currency risk. We mark these positions to fair value through earnings at each reporting date.
Reclassification to Earnings
The following table sets forth the total amounts of each income and expense line item presented in the Consolidated Condensed Statements of Income in which the effects of hedges are recorded (in millions):
Consolidated Condensed
Statements of Income
Classification
 
Three Months Ended
December 28, 2019
 
December 29, 2018
Cost of Sales
 
$
9,375

 
$
8,838

Interest Expense
 
120

 
99

Other Income/(Expense)
 
(16
)
 
(3
)

The following table sets forth the pretax impact of the cash flow, fair value and undesignated derivative instruments in the Consolidated Condensed Statements of Income (in millions):
Consolidated Condensed
Statements of Income
Classification
 
Three Months Ended
December 28, 2019
 
December 29, 2018
Sales
Gain (Loss) on derivatives not designated as hedging instruments:
 
 
 
 
Commodity contracts
$

 
$
1

 
 
 
 
 
Cost of Sales
Gain (Loss) on cash flow hedges reclassified from OCI to Earnings:
 
 
 
 
Commodity contracts
$
(2
)
 
$
(7
)
 
Gain (Loss) on fair value hedges:
 
 
 
 
Commodity contracts
16

 
(1
)
 
Hedged item
(16
)
 
1

 
Gain (Loss) on derivatives not designated as hedging instruments:
 
 
 
 
Commodity contracts
29

 
3

Total
 
$
27

 
$
(4
)
 
 
 
 
 
Interest Expense
Gain (Loss) on cash flow hedges reclassified from OCI to Earnings:
 
 
 
 
Interest rate contracts
$
(1
)
 
$

 
 
 
 
 
Other Income/(Expense)
Gain (Loss) on derivatives not designated as hedging instruments:
 
 
 
 
Foreign exchange contracts
$
4

 
$


The fair value of all outstanding derivative instruments in the Consolidated Condensed Balance Sheets are included in Note 14: Fair Value Measurements.
NOTE 14: FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels as follows:
Level 1 — Unadjusted quoted prices available in active markets for the identical assets or liabilities at the measurement date.
Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
Quoted prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets in non-active markets;
Inputs other than quoted prices that are observable for the asset or liability; and
Inputs derived principally from or corroborated by other observable market data.

18



Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
The following tables set forth by level within the fair value hierarchy our financial assets and liabilities accounted for at fair value on a recurring basis according to the valuation techniques we used to determine their fair values (in millions): 
December 28, 2019
Level 1
 
Level 2
 
Level 3
 
Netting (a)
 
Total
Other Current Assets:
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
 
Designated as hedges
$

 
$
11

 
$

 
$
(2
)
 
$
9

Undesignated

 
67

 

 
(15
)
 
52

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Current

 

 
1

 

 
1

Other Assets:
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Non-current

 
54

 
48

 

 
102

Deferred compensation assets
10

 
339

 

 

 
349

Total assets
$
10

 
$
471

 
$
49

 
$
(17
)
 
$
513

Other Current Liabilities:
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
 
Designated as hedges
$

 
$
14

 
$

 
$
(11
)
 
$
3

Undesignated

 
45

 

 
(43
)
 
2

Total liabilities
$

 
$
59

 
$

 
$
(54
)
 
$
5

September 28, 2019
Level 1
 
Level 2
 
Level 3
 
Netting (a)
 
Total
Other Current Assets:
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
 
Designated as hedges
$

 
$
26

 
$

 
$
(3
)
 
$
23

Undesignated

 
58

 

 
(5
)
 
53

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Current

 

 
1

 

 
1

Other Assets:
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Non-current

 
51

 
51

 

 
102

Deferred compensation assets
7

 
311

 

 

 
318

Total assets
$
7

 
$
446

 
$
52

 
$
(8
)
 
$
497

Other Current Liabilities:
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
 
Designated as hedges
$

 
$
17

 
$

 
$
(13
)
 
$
4

Undesignated

 
93

 

 
(90
)
 
3

Total liabilities
$

 
$
110

 
$

 
$
(103
)
 
$
7

(a) Our derivative assets and liabilities are presented in our Consolidated Condensed Balance Sheets on a net basis when a legally enforceable master netting arrangement exists between the counterparty to a derivative contract and us. Additionally, at December 28, 2019, and September 28, 2019, we had $37 million and $95 million, respectively, of net cash collateral with various counterparties where master netting arrangements exist.

19



The following table provides a reconciliation between the beginning and ending balance of marketable debt securities measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3) (in millions): 
 
Three Months Ended
 
December 28, 2019
 
December 29, 2018
Balance at beginning of year
$
52

 
$
51

Total realized and unrealized gains (losses):
 
 
 
Included in earnings

 

Included in other comprehensive income (loss)

 

Purchases
3

 
7

Issuances

 

Settlements
(6
)
 
(6
)
Balance at end of period
$
49

 
$
52

Total gains (losses) for the three-month period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at end of period
$

 
$


The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Derivative Assets and Liabilities: Our derivative financial instruments primarily include exchange-traded and over-the-counter contracts which are further described in Note 13: Derivative Financial Instruments. We record our derivative financial instruments at fair value using quoted market prices, adjusted where necessary for credit and non-performance risk and internal models that use readily observable market inputs as their basis, including current and forward market prices and rates. We classify these instruments in Level 2 when quoted market prices can be corroborated utilizing observable current and forward commodity market prices on active exchanges or observable market transactions.
Available-for-Sale Securities: Our investments in marketable debt securities are classified as available-for-sale and are reported at fair value based on pricing models and quoted market prices adjusted for credit and non-performance risk. Short-term investments with maturities of less than 12 months are included in Other current assets in the Consolidated Condensed Balance Sheets and primarily include certificates of deposit and commercial paper. All other marketable debt securities are included in Other Assets in the Consolidated Condensed Balance Sheets and have maturities ranging up to 32 years.
We classify our investments in U.S. government, U.S. agency, certificates of deposit and commercial paper debt securities as Level 2 as fair value is generally estimated using discounted cash flow models that are primarily industry-standard models that consider various assumptions, including time value and yield curve as well as other readily available relevant economic measures. We classify certain corporate, asset-backed and other debt securities as Level 3 as there is limited activity or less observable inputs into valuation models, including current interest rates and estimated prepayment, default and recovery rates on the underlying portfolio or structured investment vehicle. Significant changes to assumptions or unobservable inputs in the valuation of our Level 3 instruments would not have a significant impact to our consolidated condensed financial statements.
The following table sets forth our available-for-sale securities' amortized cost basis, fair value and unrealized gain (loss) by significant investment category (in millions):
 
December 28, 2019
 
September 28, 2019
 
Amortized
Cost Basis
 
Fair
Value
 
Unrealized
Gain (Loss)
 
Amortized
Cost Basis
 
Fair
Value
 
Unrealized
Gain (Loss)
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury and agency
$
54

 
$
54

 
$

 
$
51

 
$
51

 
$

Corporate and asset-backed
48

 
49

 
1

 
51

 
52

 
1


Unrealized holding gains (losses), net of tax, are excluded from earnings and reported in OCI until the security is settled or sold. On a quarterly basis, we evaluate whether losses related to our available-for-sale securities are temporary in nature. Losses on equity securities are recognized in earnings if the decline in value is judged to be other than temporary. If losses related to our debt securities are determined to be other than temporary, the loss would be recognized in earnings if we intend, or will more likely than not be required, to sell the security prior to recovery. For debt securities in which we have the intent and ability to hold until maturity, losses determined to be other than temporary would remain in OCI, other than expected credit losses which are recognized in earnings.

20



We consider many factors in determining whether a loss is temporary, including the length of time and extent to which the fair value has been below cost, the financial condition and near-term prospects of the issuer and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. We recognized no other than temporary impairment in earnings and no other than temporary losses in OCI for the three months ended December 28, 2019, and December 29, 2018.
Deferred Compensation Assets: We maintain non-qualified deferred compensation plans for certain executives and other highly compensated employees. Investments are maintained within a trust and include money market funds, mutual funds and life insurance policies. The cash surrender value of the life insurance policies is invested primarily in mutual funds. The investments are recorded at fair value based on quoted market prices and are included in Other Assets in the Consolidated Condensed Balance Sheets. We classify the investments which have observable market prices in active markets in Level 1 as these are generally publicly-traded mutual funds. The remaining deferred compensation assets are classified in Level 2, as fair value can be corroborated based on observable market data. Realized and unrealized gains (losses) on deferred compensation are included in earnings.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
In addition to assets and liabilities that are recorded at fair value on a recurring basis, we record assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. We did not have any significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition during the three months ended December 28, 2019, and December 29, 2018.
Other Financial Instruments
Fair value of our debt is principally estimated using Level 2 inputs based on quoted prices for those or similar instruments. Fair value and carrying value for our debt are as follows (in millions):
 
December 28, 2019
 
September 28, 2019
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Total debt
$
12,869

 
$
11,719

 
$
12,978

 
$
11,932


NOTE 15: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The components of the net periodic cost for the pension and postretirement benefit plans for the three months ended December 28, 2019, and December 29, 2018, are as follows (in millions):
 
Pension Plans
 
Three Months Ended
 
December 28, 2019
 
December 29, 2018
 
 
 
 
Service cost
$

 
$
1

Interest cost
10

 
16

Expected return on plan assets
(9
)
 
(14
)
Amortization of:
 
 
 
Net actuarial loss
1

 

Prior service cost

 

Settlement loss

 
19

Net periodic cost
$
2

 
$
22

 
Postretirement Benefit Plans
 
Three Months Ended
 
December 28, 2019
 
December 29, 2018
 
 
 
 
Interest cost
$

 
$

Amortization of prior service cost (credit)

 
(4
)
Net periodic cost (credit)
$

 
$
(4
)

Net periodic benefit cost, excluding the service cost component, was recorded in the Consolidated Condensed Statements of Income in Other, net. We contributed $1 million and $3 million to our pension plans for the three months ended December 28, 2019 and December 29, 2018, respectively. The amount of contributions made to pension plans in any year is dependent upon a number of factors, including minimum funding requirements in the jurisdictions in which we operate.

21



NOTE 16: OTHER COMPREHENSIVE INCOME (LOSS)
The before and after tax changes in the components of other comprehensive income (loss) are as follows (in millions):
 
Three Months Ended
 
December 28, 2019
 
December 29, 2018
 
Before Tax
Tax
After Tax
 
Before Tax
Tax
After Tax
 
 
 
 
 
 
 
 
Derivatives accounted for as cash flow hedges:
 
 
 
 
 
 
 
(Gain) loss reclassified to interest expense
$
1

$

$
1

 
$

$

$

(Gain) loss reclassified to cost of sales
2


2

 
7

(2
)
5

Unrealized gain (loss)



 
(20
)
6

(14
)
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
Unrealized gain (loss)



 
1


1

 
 
 
 
 
 
 
 
Currency translation:
 
 
 
 
 
 
 
Translation adjustment
35


35


9

(1
)
8

Translation loss reclassified to cost of sales



 



 
 
 
 
 
 
 
 
Postretirement benefits:
 
 
 
 
 
 
 
Unrealized gain (loss)




(28
)
8

(20
)
Pension settlement reclassified to other (income) expense




23

(6
)
17

Total other comprehensive income (loss)
$
38

$

$
38

 
$
(8
)
$
5

$
(3
)

NOTE 17: SEGMENT REPORTING
We operate in four reportable segments: Beef, Pork, Chicken, and Prepared Foods. We measure segment profit as operating income (loss). International/Other primarily includes our foreign operations in Australia, China, South Korea, Malaysia, Mexico, the Netherlands, Thailand and the United Kingdom, third-party merger and integration costs and corporate overhead related to Tyson New Ventures, LLC.
Beef: Beef includes our operations related to processing live fed cattle and fabricating dressed beef carcasses into primal and sub-primal cuts and case-ready products. Products are marketed domestically to consumer products and food retailers, foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, healthcare facilities, the military and other food processors, as well as to international export markets. This segment also includes sales from allied products such as hides and variety meats, as well as logistics operations to move products through the supply chain.
Pork: Pork includes our operations related to processing live market hogs and fabricating pork carcasses into primal and sub-primal cuts and case-ready products. Products are marketed domestically to consumer products and food retailers, foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, healthcare facilities, the military and other food processors, as well as to international export markets. This segment also includes our live swine group, related allied product processing activities and logistics operations to move products through the supply chain.
Chicken: Chicken includes our domestic operations related to raising and processing live chickens into, and purchasing raw materials for, fresh, frozen and value-added chicken products, as well as sales from allied products. Our value-added chicken products primarily include breaded chicken strips, nuggets, patties, tenders, wings and other ready-to-fix or fully cooked chicken parts. Products are marketed domestically to consumer products and food retailers, foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, convenience stores, healthcare facilities, the military and other food processors, as well as to international export markets. This segment also includes logistics operations to move products through our domestic supply chain and the global operations of our chicken breeding stock subsidiary.
Prepared Foods: Prepared Foods includes our operations related to manufacturing and marketing frozen and refrigerated food products and logistics operations to move products through the supply chain. This segment includes brands such as Jimmy Dean®, Hillshire Farm®, Ball Park®, Wright®, State Fair®, as well as artisanal brands Aidells®, and Gallo Salame®. Products primarily include ready-to-eat sandwiches, sandwich components such as flame-grilled hamburgers and Philly steaks, pepperoni, bacon, breakfast sausage, turkey, lunchmeat, hot dogs, flour and corn tortilla products, appetizers, snacks, prepared meals, ethnic foods, side dishes, meat dishes, breadsticks and processed meats. Products are marketed domestically to consumer products and food retailers, foodservice distributors, restaurant operators, hotel chains and noncommercial foodservice establishments such as schools, convenience stores, healthcare facilities, the military and other food processors, as well as to international export markets.

22



We allocate expenses related to corporate activities to the segments, except for third-party merger and integration costs and corporate overhead related to Tyson New Ventures, LLC, which are included in International/Other. Intersegment transactions, which were at market prices, are included in the segment sales in the table below.
Information on segments and a reconciliation to income before income taxes are as follows (in millions): 
 
Three Months Ended
 
 
December 28, 2019
 
December 29, 2018
 
Sales:
 
 
 
 
Beef
$
3,838

 
$
3,926

 
Pork
1,379

 
1,179

 
Chicken
3,292

 
3,115

 
Prepared Foods
2,140

 
2,149

 
International/Other
498

 
143

 
Intersegment
(332
)
 
(319
)
 
Total sales
$
10,815

 
$
10,193

 

 
Three Months Ended
 
 
December 28, 2019
 
December 29, 2018
 
Operating income (loss):
 
 
 
 
Beef
$
410

 
$
305

 
Pork
191

 
95

 
Chicken
57

 
160

(a) 
Prepared Foods
158

 
265

 
International/Other
10

(b) 
(18
)
(b) 
Total operating income
826

 
807

 
 
 
 
 
 
Total other expense
101

 
94

 
 
 
 
 
 
Income before income taxes
$
725

 
$
713

 
(a) Chicken operating income included $8 million in Keystone Foods purchase accounting and acquisition related costs for the three months ended December 29, 2018.
(b) International/Other operating results included $18 million in Keystone Foods purchase accounting and acquisition related costs for the three months ended December 29, 2018, and other third-party merger and integration costs and corporate overhead of Tyson New Ventures, LLC of $4 million for each of the three months ended December 28, 2019, and December 29, 2018.
The following tables further disaggregate our sales to customers by major distribution channels (in millions):
 
Three Months Ended
 
December 28, 2019
 
Consumer Products(a)
 
Foodservice(b)
 
International(c)
 
Industrial and Other(d)
 
Intersegment
 
Total
Beef
$
1,857

 
$
1,045

 
$
514

 
$
326

 
$
96

 
$
3,838

Pork
400

 
117

 
280

 
360

 
222

 
1,379

Chicken
1,389

 
1,307

 
161

 
421

 
14

 
3,292

Prepared Foods
1,211

 
846

 
37

 
46

 

 
2,140

International/Other

 

 
498

 

 

 
498

Intersegment

 

 

 

 
(332
)
 
(332
)
Total
$
4,857


$
3,315


$
1,490

 
$
1,153

 
$

 
$