Document
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 July 1, 2017
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to            
coverpagelogoshrevised01002.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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
 
¨  (Do not check if a smaller reporting company)
 
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 July 1, 2017.
Class
 
Outstanding Shares
Class A Common Stock, $0.10 Par Value (Class A stock)
 
289,267,244

Class B Common Stock, $0.10 Par Value (Class B stock)
 
70,010,755

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
 
Nine Months Ended
 
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
Sales
$
9,850

 
$
9,403

 
$
28,115

 
$
27,725

Cost of Sales
8,648

 
8,179

 
24,383

 
24,117

Gross Profit
1,202

 
1,224

 
3,732

 
3,608

Selling, General and Administrative
505

 
457

 
1,482

 
1,361

Operating Income
697

 
767

 
2,250

 
2,247

Other (Income) Expense:
 
 
 
 
 
 
 
Interest income
(2
)
 
(2
)
 
(5
)
 
(5
)
Interest expense
71

 
60

 
185

 
191

Other, net
11

 
(2
)
 
22

 
(6
)
Total Other (Income) Expense
80

 
56

 
202

 
180

Income before Income Taxes
617

 
711

 
2,048

 
2,067

Income Tax Expense
169

 
226

 
665

 
687

Net Income
448

 
485

 
1,383

 
1,380

Less: Net Income Attributable to Noncontrolling Interests
1

 
1

 
3

 
3

Net Income Attributable to Tyson
$
447

 
$
484

 
$
1,380

 
$
1,377

Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
Class A Basic
296

 
312

 
296

 
318

Class B Basic
70

 
70

 
70

 
70

Diluted
370

 
388

 
371

 
394

Net Income Per Share Attributable to Tyson:
 
 
 
 
 
 
 
Class A Basic
$
1.24

 
$
1.29

 
$
3.84

 
$
3.61

Class B Basic
$
1.12

 
$
1.17

 
$
3.47

 
$
3.28

Diluted
$
1.21

 
$
1.25

 
$
3.72

 
$
3.50

Dividends Declared Per Share:
 
 
 
 
 
 
 
Class A
$
0.225

 
$
0.150

 
$
0.750

 
$
0.500

Class B
$
0.203

 
$
0.135

 
$
0.675

 
$
0.450

See accompanying Notes to Consolidated Condensed Financial Statements.

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Table of Contents

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

 
Three Months Ended
 
Nine Months Ended
 
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
Net Income
$
448

 
$
485

 
$
1,383

 
$
1,380

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

 
2

 

 
2

Investments
(1
)
 

 
(1
)
 

Currency translation
3

 
(2
)
 
(2
)
 
3

Postretirement benefits
(3
)
 
(2
)
 
(4
)
 
(5
)
Total Other Comprehensive Income (Loss), Net of Taxes
(1
)
 
(2
)
 
(7
)
 

Comprehensive Income
447

 
483

 
1,376

 
1,380

Less: Comprehensive Income Attributable to Noncontrolling Interests
1

 
1

 
3

 
3

Comprehensive Income Attributable to Tyson
$
446

 
$
482

 
$
1,373

 
$
1,377

See accompanying Notes to Consolidated Condensed Financial Statements.


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Table of Contents

TYSON FOODS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except share and per share data)
(Unaudited) 
 
July 1, 2017
 
October 1, 2016
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
231

 
$
349

Accounts receivable, net
1,710

 
1,542

Inventories
3,248

 
2,732

Other current assets
238

 
265

Assets held for sale
861

 

Total Current Assets
6,288

 
4,888

Net Property, Plant and Equipment
5,545

 
5,170

Goodwill
9,264

 
6,669

Intangible Assets, net
6,372

 
5,084

Other Assets
594

 
562

Total Assets
$
28,063

 
$
22,373

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Current debt
$
1,017

 
$
79

Accounts payable
1,608

 
1,511

Other current liabilities
1,217

 
1,172

Liabilities held for sale
23

 

Total Current Liabilities
3,865

 
2,762

Long-Term Debt
9,807

 
6,200

Deferred Income Taxes
2,989

 
2,545

Other Liabilities
1,265

 
1,242

Commitments and Contingencies (Note 16)

 

Shareholders’ Equity:
 
 
 
Common stock ($0.10 par value):
 
 
 
Class A-authorized 900 million shares, issued 370 million shares
37

 
36

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

 
7

Capital in excess of par value
4,361

 
4,355

Retained earnings
9,464

 
8,348

Accumulated other comprehensive loss
(52
)
 
(45
)
Treasury stock, at cost – 81 million shares at July 1, 2017, and 73 million shares at October 1, 2016
(3,700
)
 
(3,093
)
Total Tyson Shareholders’ Equity
10,117

 
9,608

Noncontrolling Interests
20

 
16

Total Shareholders’ Equity
10,137

 
9,624

Total Liabilities and Shareholders’ Equity
$
28,063

 
$
22,373

See accompanying Notes to Consolidated Condensed Financial Statements.

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Table of Contents

TYSON FOODS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited) 
 
Nine Months Ended
 
July 1, 2017
 
July 2, 2016
Cash Flows From Operating Activities:
 
 
 
Net income
$
1,383

 
$
1,380

Depreciation and amortization
543

 
526

Deferred income taxes
(25
)
 
61

Other, net
106

 
45

Net changes in operating assets and liabilities
(558
)
 
(139
)
Cash Provided by Operating Activities
1,449

 
1,873

Cash Flows From Investing Activities:
 
 
 
Additions to property, plant and equipment
(782
)
 
(515
)
Purchases of marketable securities
(47
)
 
(30
)
Proceeds from sale of marketable securities
45

 
28

Acquisition, net of cash acquired
(3,081
)
 

Other, net
(2
)
 
15

Cash Used for Investing Activities
(3,867
)
 
(502
)
Cash Flows From Financing Activities:
 
 
 
Payments on debt
(1,557
)
 
(694
)
Proceeds from issuance of long-term debt
4,545

 
1

Borrowings on revolving credit facility
1,750

 
675

Payments on revolving credit facility
(2,050
)
 
(525
)
Proceeds from issuance of commercial paper
4,043

 

Repayments of commercial paper
(3,353
)
 

Payment of AdvancePierre TRA liability
(223
)
 

Purchases of Tyson Class A common stock
(768
)
 
(1,293
)
Dividends
(238
)
 
(162
)
Stock options exercised
128

 
89

Other, net
22

 
42

Cash Provided by (Used for) Financing Activities
2,299

 
(1,867
)
Effect of Exchange Rate Changes on Cash
1

 
5

Decrease in Cash and Cash Equivalents
(118
)
 
(491
)
Cash and Cash Equivalents at Beginning of Year
349

 
688

Cash and Cash Equivalents at End of Period
$
231

 
$
197

See accompanying Notes to Consolidated Condensed Financial Statements.

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Table of Contents

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 October 1, 2016. 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 July 1, 2017, and the results of operations for the three and nine months ended July 1, 2017, and July 2, 2016. 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.
Recently Issued Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board ("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. Early adoption is permitted and the prospective transition method should be applied to awards modified on or after the adoption date. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In March 2017, the FASB issued guidance which 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 March 2017, the FASB issued guidance which will change 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. Early adoption is permitted and 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. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In November 2016, the FASB issued guidance which 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. Early adoption is permitted and the retrospective transition method should be applied. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In October 2016, the FASB issued guidance which 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. 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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Table of Contents

In August 2016, the FASB issued guidance which aims to eliminate diversity in the practice of 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. Early adoption is permitted and the 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 are currently evaluating the impact this guidance will have on our consolidated financial statements.
In March 2016, the FASB issued guidance which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows and impact on earnings per share. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2016, our fiscal 2018. Early adoption is permitted and the application of the guidance requires various transition methods depending on the specific amendment. The guidance requires all income tax effects of share-based payment awards to be recognized in the consolidated statements of income when the awards vest or are settled, which is a change from the current guidance that requires such activity to be recorded in capital in excess of par value within stockholders' equity. We plan to adopt this guidance prospectively which may create volatility in our effective tax rate when adopted depending largely on future events and other factors which may include our stock price, timing of stock option exercises, and the value realized upon vesting or exercise of shares compared to the grant date fair value of those shares. Under the new guidance, companies can also make an accounting policy election to either estimate forfeitures each period or to account for forfeitures as they occur. We plan to change our accounting policy to account for forfeitures as they occur using the modified retrospective transition method and expect the impact of this change on our consolidated financial statements to be immaterial. The guidance also changes the presentation of excess tax benefits from a financing activity to an operating activity in the consolidated statements of cash flows. We plan to apply this change prospectively and do not expect a material impact on our consolidated statements of cash flows. We expect to adopt this guidance in the first quarter of fiscal 2018.
In February 2016, the FASB issued guidance which 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. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In January 2016, the FASB issued guidance that requires most equity investments be measured at fair value, with subsequent 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 are currently evaluating the impact this guidance will have on our consolidated financial statements.
In July 2015, the FASB issued guidance which requires management to evaluate inventory at the lower of cost and net realizable value. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2016, our fiscal 2018. Early adoption is permitted, and the prospective transition method should be applied. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued guidance changing 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. 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. Early adoption is permitted for fiscal years beginning after December 15, 2016, our fiscal 2018. We plan to adopt this guidance using the modified retrospective transition method beginning in the first quarter of fiscal 2019. We continue to evaluate the impact of the adoption of this guidance, but currently, we do not expect the new guidance to materially impact our consolidated financial statements other than additional disclosure requirements.

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Changes in Accounting Principles
In January 2017, the FASB issued guidance which removes step 2 from the goodwill impairment test. As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units' fair value. The guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, our fiscal 2021. Early adoption is permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017, and the prospective transition method should be applied. We adopted this guidance, prospectively, in the third quarter of fiscal 2017. The adoption did not have a material impact on our consolidated financial statements.
In October 2016, the FASB issued guidance on how a reporting entity, that is the single decision maker of a variable interest entity ("VIE"), should treat indirect interests in the entity held through related parties that are under common control with the reporting entity, when determining whether it is the primary beneficiary of that VIE. This guidance is effective for annual reporting periods and interim periods within those annual reporting periods, beginning after December 15, 2016, our fiscal 2018. We were required to adopt this guidance at the same time that we adopted the amendments in ASU 2015-02; therefore, we early adopted this guidance, retrospectively, in the first quarter of fiscal 2017. The adoption did not have a material impact on our consolidated financial statements.
In April 2015, the FASB issued guidance on the recognition of fees paid by a customer for cloud computing arrangements. The guidance clarifies that if a cloud computing arrangement includes a software license, the customer should account for the software license consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2015, our fiscal 2017, and should be applied prospectively or retrospectively. We adopted this guidance, prospectively, in the first quarter of fiscal 2017. As a result, prior period balances were not retrospectively adjusted. The adoption did not have a material impact on our consolidated financial statements.
In February 2015, the FASB issued guidance (ASU 2015-02) changing the analysis procedures that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The new guidance affects the following areas: (1) limited partnerships and similar legal entities, (2) evaluating fees paid to a decision maker or a service provider as a variable interest, (3) the effect of fee arrangements on the primary beneficiary determination, (4) the effect of related parties on the primary beneficiary determination, and (5) certain investment funds. This guidance is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2015, our fiscal 2017. We adopted this guidance, retrospectively, in the first quarter of fiscal 2017. The adoption did not have a material impact on our consolidated financial statements.

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NOTE 2: ACQUISITION AND DISPOSITIONS
Acquisition
On June 7, 2017, we acquired all of the outstanding common stock of AdvancePierre Foods Holdings, Inc. ("AdvancePierre") as part of our strategy to sustainably feed the world with the fastest growing portfolio of protein-packed brands. The purchase price was equal to $40.25 per share for AdvancePierre's outstanding common stock, or approximately $3.2 billion. We funded the acquisition with existing cash on hand, net proceeds from the issuance of new senior notes and a new term loan facility, as well as borrowings under our commercial paper program (refer to Note 6: Debt). AdvancePierre's results from operations subsequent to the acquisition closing are included in the Prepared Foods and Chicken segments.
The following table summarizes the preliminary purchase price allocation and fair values of the assets acquired and liabilities assumed at the acquisition date. 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.
 
in millions
 
Cash and cash equivalents
 
$
126

Accounts receivable
 
80

Inventories
 
272

Other current assets
 
5

Property, Plant and Equipment
 
306

Goodwill
 
2,922

Intangible Assets
 
1,601

Current debt
 
(1,148
)
Accounts payable
 
(114
)
Other current liabilities
 
(90
)
Tax receivable agreement (TRA) due to former shareholders
 
(223
)
Long-Term Debt
 
(33
)
Deferred Income Taxes
 
(492
)
Other Liabilities
 
(5
)
Net assets acquired
 
$
3,207

The fair value of identifiable intangible assets is as follows:
 
 
 
 
 
 
in millions

Intangible Asset Category
 
Type
 
Life in Years
 
Fair Value
Brands & Trademarks
 
Amortizable
 
Weighted Average of 15 years
 
$
380

Customer Relationships
 
Amortizable
 
Weighted Average of 17 years
 
1,221

Total identifiable intangible assets
 
 
 
 
 
$
1,601

As a result of the acquisition, we preliminarily recognized a total of $2,922 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 allocation of goodwill to our reporting units is pending finalization of the expected synergies and the impact of the synergies to our reporting units. We do not expect the final fair value of 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 analysis, relief-from-royalty, 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 and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data.
The acquisition of AdvancePierre was accounted for using the acquisition method of accounting, and consequently, the results of operations for AdvancePierre are reported in our consolidated condensed financial statements from the date of acquisition. AdvancePierre's results from the date of the acquisition through July 1, 2017, were insignificant to our Consolidated Condensed Statements of Income.

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The following unaudited pro forma information presents the combined results of operations as if the acquisition of AdvancePierre had occurred at the beginning of fiscal 2016. AdvancePierre's pre-acquisition results have been added to our historical results. The pro forma results contained in the table below include adjustments for amortization of acquired intangibles, depreciation expense, interest expense related to the financing and related income taxes. Any potential cost savings or other operational efficiencies that could result from the acquisition are not included in these pro forma results.
The nine months ended July 2, 2016, pro forma results include transaction related expenses incurred by AdvancePierre prior to the acquisition of $84 million, including items such as consultant fees, accelerated stock compensation and other deal costs; transaction related expenses incurred by the Company of $53 million, including fees paid to third parties, financing costs and other deal costs; and $36 million of expense related to the fair value inventory adjustment at the date of acquisition.
These pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations as they would have been had the acquisitions occurred on the assumed dates, nor is it necessarily an indication of future operating results.
in millions (unaudited)
Three Months Ended
 
Nine Months Ended
 
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
Pro forma sales
$
10,117

 
$
9,769

 
$
29,185

 
$
28,861

Pro forma net income attributable to Tyson
491

 
530

 
1,434

 
1,313

Pro forma net income per diluted share attributable to Tyson
$
1.33

 
$
1.36

 
$
3.87

 
$
3.34

Dispositions
On April 24, 2017, we announced our intent to sell three non-protein businesses as part of our strategic focus on protein-packed brands. These businesses, which are all part of our Prepared Foods segment, include 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 is also expected to include 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 anticipate we will close the transactions by the end of calendar 2017 and expect to record a net pretax gain as a result of the sale of these businesses. We have reclassified the assets and liabilities related to these businesses to assets and liabilities held for sale in our consolidated condensed balance sheet as of July 1, 2017. The Company concluded the businesses were not significant disposal groups and did not represent a strategic shift, and therefore were not classified as discontinued operations for any of the periods presented.
The following table summarizes the net assets and liabilities held for sale:
 
in millions

 
July 1, 2017
Assets held for sale:
 
Accounts receivable, net
$
3

Inventories
105

Net Property, Plant and Equipment
185

Goodwill
327

Intangible Assets
241

Total assets held for sale
$
861

Liabilities held for sale:
 
Accounts payable
$
2

Other current liabilities
2

Deferred Income Taxes
19

Total liabilities held for sale
$
23


11

Table of Contents

NOTE 3: INVENTORIES
Processed products, livestock and supplies and other are valued at the lower of cost or market. 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 July 1, 2017, 64% of the cost of inventories was determined by the first-in, first-out ("FIFO") method as compared to 61% at October 1, 2016. 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):
 
July 1, 2017
 
October 1, 2016
Processed products
$
1,933

 
$
1,530

Livestock
910

 
772

Supplies and other
405

 
430

Total inventory
$
3,248

 
$
2,732

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

July 1, 2017
 
October 1, 2016
Land
$
137

 
$
126

Buildings and leasehold improvements
3,763

 
3,662

Machinery and equipment
6,943

 
6,789

Land improvements and other
313

 
300

Buildings and equipment under construction
664

 
290

 
11,820

 
11,167

Less accumulated depreciation
6,275

 
5,997

Net property, plant and equipment
$
5,545

 
$
5,170

NOTE 5: OTHER CURRENT LIABILITIES
Other current liabilities are as follows (in millions):
 
July 1, 2017
 
October 1, 2016
Accrued salaries, wages and benefits
$
529

 
$
563

Accrued marketing, advertising and promotion expense
184

 
212

Other
504

 
397

Total other current liabilities
$
1,217

 
$
1,172


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Table of Contents

NOTE 6: DEBT
The major components of debt are as follows (in millions):
 
July 1, 2017
 
October 1, 2016
Revolving credit facility
$

 
$
300

Commercial paper
690

 

Senior notes:
 
 
 
7.00% Notes due May 2018
120

 
120

Notes due May 2019 (2019 Floating-Rate Notes) (1.66% at 07/01/17)
300

 

2.65% Notes due August 2019
1,000

 
1,000

Notes due June 2020 (2020 Floating-Rate Notes) (1.76% at 07/01/17)
350

 

4.10% Notes due September 2020
283

 
284

4.50% Senior notes due June 2022
1,000

 
1,000

3.95% Notes due August 2024
1,250

 
1,250

3.55% Notes due June 2027 (2027 Notes)
1,350

 

7.00% Notes due January 2028
18

 
18

6.13% Notes due November 2032
162

 
163

4.88% Notes due August 2034
500

 
500

5.15% Notes due August 2044
500

 
500

4.55% Notes due June 2047 (2047 Notes)
750

 

Discount on senior notes
(14
)
 
(8
)
Term loans:
 
 
 
Tranche B due April 2019 (2.19% at 07/01/17)
500

 
500

Tranche B due August 2019 (2.56% at 07/01/17)
552

 
552

Tranche due June 2020 (2.38% at 07/01/17)
1,455

 

Amortizing notes - tangible equity units (see Note 7: Equity)
18

 
71

Other
91

 
58

Unamortized debt issuance costs
(51
)
 
(29
)
Total debt
10,824

 
6,279

Less current debt
1,017

 
79

Total long-term debt
$
9,807

 
$
6,200

Revolving Credit Facility
In May 2017, we amended our existing credit facility which, among other things, increased our line of credit from $1.25 billion to $1.50 billion. The facility supports short-term funding needs and letters of credit and will mature and the commitments thereunder will terminate in May 2022. Amounts available for borrowing under this facility totaled $1,492 million at July 1, 2017, net of outstanding letters of credit. At July 1, 2017, we had outstanding letters of credit issued under this facility totaling $8 million, none of which were drawn upon. We had an additional $113 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 obligations and workers’ compensation insurance programs.
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.
2019 Floating-Rate / 2020 Floating-Rate / 2027 / 2047 Notes
In June 2017, as part of the financing for the AdvancePierre acquisition, we issued senior unsecured notes with an aggregate principal amount of $2,750 million, consisting of $300 million due May 2019, $350 million due June 2020, $1,350 million due June 2027, and $750 million due June 2047. The 2019 Floating-Rate Notes, 2020 Floating-Rate Notes, 2027 Notes and 2047 Notes carry interest rates of 3-month LIBOR plus 0.45%, 3-month LIBOR plus 0.55%, 3.55% and 4.55%, respectively. Interest payments on the 2019 Floating-Rate Notes are due quarterly February 28, May 30, August 30, and November 30. Interest payments on the 2020 Floating-Rate Notes are due quarterly March 2, June 2, September 2, and December 2. Interest payments on the 2027 Notes and 2047 Notes are due semi-annually on June 2 and December 2. After the original issue discounts of $7 million, we received net proceeds of $2,743 million. In addition, we incurred debt issuance costs of $22 million related to this issuance.

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Table of Contents

Term Loan Tranche due June 2020
In June 2017, as part of the financing for the AdvancePierre acquisition, we borrowed $1,800 million under an unsecured term loan facility, which is due June 2020. The facility will amortize at 2.5% per quarter and interest will reset based on the selected LIBOR interest period plus 1.25%. In addition, we incurred debt issuance costs of $5 million related to this borrowing. In June 2017, we also paid down the term loan by $345 million.
AdvancePierre's debt extinguishment
In June 2017, in connection with our AdvancePierre acquisition, we assumed $1,119 million of AdvancePierre's gross debt, which had an estimated fair value of approximately $1,181 million as of the acquisition date. We recorded the assumed debt at fair value and used the funds borrowed under our new senior notes and term loan to extinguish $1,146 million of the total outstanding balance. Additionally, we assumed a $223 million TRA liability due to AdvancePierre's former shareholders. The assumed debt and TRA liability were non cash investing activities.
Commercial Paper Program
In April 2017, our Board of Directors increased our commercial paper program capacity from $500 million to $1 billion. The maximum borrowing capacity under the commercial paper program is $800 million. We intend to use the net proceeds from the commercial paper program for general corporate purposes and as part of the financing for the AdvancePierre acquisition. As of July 1, 2017, we had $690 million of commercial paper outstanding at a weighted average interest rate of 1.45% with maturities of less than 45 days.
Debt Covenants
Our revolving credit and term loan facilities 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 July 1, 2017.
NOTE 7: EQUITY
Share Repurchases
As of July 1, 2017, 27.8 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
 
Nine Months Ended
 
 
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
 
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Shares
 
Dollars
Shares repurchased:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Under share repurchase program
 
1.3

 
$
80

 
7.1

 
$
457

 
12.5

 
$
797

 
22.0

 
$
1,235

To fund certain obligations under equity compensation plans
 
0.2

 
10

 
0.1

 
10

 
0.8

 
51

 
1.2

 
58

Total share repurchases
 
1.5

 
$
90

 
7.2

 
$
467

 
13.3

 
$
848

 
23.2

 
$
1,293


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Table of Contents

Tangible Equity Units
In fiscal 2014, we completed the public issuance of 30 million 4.75% tangible equity units (TEUs). Total proceeds, net of underwriting discounts and other expenses, were $1,454 million. Each TEU had a stated amount of $50 and was comprised of a prepaid stock purchase contract and a senior amortizing note due July 15, 2017. We allocated the proceeds from the issuance of the TEUs to equity and debt based on the relative fair values of the respective components of each TEU. The fair value of the prepaid stock purchase contracts, which was $1,295 million, was recorded in Capital in Excess of Par Value, net of issuance costs. The fair value of the senior amortizing notes, which was $205 million, was recorded in debt. Issuance costs associated with the TEU debt were recorded as deferred debt issuance cost and was amortized over the term of the instrument to July 15, 2017.
The aggregate values assigned upon issuance of each component of the TEUs, based on the relative fair value of the respective components of each TEU, were as follows (in millions, except price per TEU):
 
Equity Component
 
Debt Component
 
Total
Price per TEU
$
43.17

 
$
6.83

 
$
50.00

Gross proceeds
1,295

 
205

 
1,500

Issuance cost
(40
)
 
(6
)
 
(46
)
Net proceeds
$
1,255

 
$
199

 
$
1,454

As of July 1, 2017, holders settled 22.8 million purchase contracts and, in exchange, the Company issued 24.2 million shares of its Class A stock. Upon early settlement of these purchase contracts, the corresponding amortizing notes remained outstanding and beneficially owned by the holders that settled purchase contracts early. As of July 1, 2017, 7.2 million TEUs remained outstanding.
On July 17, 2017, the Company made the final quarterly cash installment payment of $0.59 per senior amortizing note, or a total of $18 million, and issued 7.8 million shares of its Class A stock upon automatic settlement of each outstanding purchase contract.
NOTE 8: INCOME TAXES
The effective tax rate was 27.4% and 31.8% for the third quarter of fiscal 2017 and 2016, respectively, and 32.5% and 33.2% for the nine months of fiscal 2017 and 2016, respectively. The effective tax rates for the third quarter and nine months of fiscal 2017 and fiscal 2016 were impacted by such items as the domestic production deduction and state income taxes. In addition, changes in tax reserves resulting from the expiration of statutes of limitations and settlements with taxing authorities reduced the effective tax rate for the third quarter of fiscal 2017 and 2016 by 2.9% and 1.1%, respectively, and the nine months of fiscal 2016 by 1.4%. Lastly, the tax benefit recognized on the outside basis difference in an asset held for sale reduced the effective tax rate for the third quarter and the nine months of fiscal 2017 by 4.2% and 1.3%, respectively.
Unrecognized tax benefits were $311 million and $305 million at July 1, 2017, and October 1, 2016, respectively.
We estimate that during the next twelve months it is reasonably possible that unrecognized tax benefits could decrease by as much as $10 million primarily due to expiration of statutes of limitations in various jurisdictions.
NOTE 9: OTHER INCOME AND CHARGES
In the second quarter of fiscal 2017, we recorded a $52 million impairment charge related to our San Diego Prepared Foods operation. The impairment was comprised of $43 million of property, plant and equipment, $8 million of definite lived intangible assets and $1 million of other assets. This charge, of which $44 million was included in the Consolidated Condensed Statements of Income in Cost of Sales and $8 million was included in the Consolidated Condensed Statements of Income in Selling, General and Administrative, was triggered by a change in a co-manufacturing contract and ongoing losses.
During the nine months of fiscal 2017, we recorded $16 million of legal cost related to a 1995 plant closure of an apparel manufacturing facility operated by a former subsidiary of The Hillshire Brands Company, which we acquired in fiscal 2014, $18 million of acquisition bridge financing fees related to the AdvancePierre acquisition, $11 million of equity earnings in joint ventures and $1 million in net foreign currency exchange gains, which were recorded in the Consolidated Condensed Statements of Income in Other, net.
During the nine months of fiscal 2016, we recorded $8 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.

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NOTE 10: 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
 
Nine Months Ended
 
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
Numerator:
 
 
 
 
 
 
 
Net income
$
448

 
$
485

 
$
1,383

 
$
1,380

Less: Net income attributable to noncontrolling interests
1

 
1

 
3

 
3

Net income attributable to Tyson
447

 
484

 
1,380

 
1,377

Less dividends declared:
 
 
 
 
 
 
 
Class A
66

 
45

 
217

 
149

Class B
14

 
9

 
47

 
31

Undistributed earnings
$
367

 
$
430

 
$
1,116

 
$
1,197

 
 
 
 
 
 
 
 
Class A undistributed earnings
$
302

 
$
358

 
$
920

 
$
999

Class B undistributed earnings
65

 
72

 
196

 
198

Total undistributed earnings
$
367

 
$
430

 
$
1,116

 
$
1,197

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share:
 
 
 
 
 
 
 
Class A weighted average shares
296

 
312

 
296

 
318

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

 
70

 
70

 
70

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, restricted stock and performance units
4

 
6

 
5

 
6

Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversions
370

 
388

 
371

 
394

 
 
 
 
 
 
 
 
Net income per share attributable to Tyson:
 
 
 
 
 
 
 
Class A basic
$
1.24

 
$
1.29

 
$
3.84

 
$
3.61

Class B basic
$
1.12

 
$
1.17

 
$
3.47

 
$
3.28

Diluted
$
1.21

 
$
1.25

 
$
3.72

 
$
3.50

Approximately 1 million of our stock-based compensation shares were antidilutive for each of the three and nine months ended July 1, 2017. We had no stock-based compensation shares that were antidilutive for the three and nine months ended July 2, 2016.
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 11: 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 July 1, 2017.
We had the following aggregated outstanding notional amounts related to our derivative financial instruments (in millions, except soy meal tons):
 
Metric
 
July 1, 2017
 
October 1, 2016
Commodity:
 
 
 
 
 
Corn
Bushels
 
52

 
50

Soy meal
Tons
 
705,900

 
389,700

Live cattle
Pounds
 
347

 
28

Lean hogs
Pounds
 
309

 
158

       Feeder Cattle
Pounds
 
97

 

Foreign currency
United States dollar
 
$
63

 
$
38

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) 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. 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 and nine months ended July 1, 2017, and July 2, 2016. As of July 1, 2017, the net amounts expected to be reclassified into earnings within the next 12 months are pretax losses of $4 million. During the three and nine months ended July 1, 2017, and July 2, 2016, we did not reclassify significant pretax gains/losses into earnings as a result of the discontinuance of cash flow hedges.

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Table of Contents

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
 
July 1, 2017
 
July 2, 2016
 
 
 
July 1, 2017
 
July 2, 2016
Cash flow hedge – derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
$
(2
)
 
$
2

 
Cost of sales
 
$

 
$
(1
)
Foreign exchange contracts

 

 
Other income/expense
 

 

Total
$
(2
)
 
$
2

 
 
 
$

 
$
(1
)
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss)
Recognized in OCI
On Derivatives
 
 
Consolidated Condensed
Statements of Income
Classification
 
Gain (Loss)
Reclassified from
OCI to Earnings
 
 
Nine Months Ended
 
 
 
Nine Months Ended
 
July 1, 2017
 
July 2, 2016
 
 
 
July 1, 2017
 
July 2, 2016
Cash flow hedge – derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
$
(2
)
 
$

 
Cost of sales
 
$
(1
)
 
$
(3
)
Foreign exchange contracts

 

 
Other income/expense
 

 

Total
$
(2
)
 
$

 
 
 
$
(1
)
 
$
(3
)
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
 
Nine Months Ended
 
 
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
Gain (Loss) on forwards
Cost of sales
 
$
(32
)
 
$
19

 
$
(16
)
 
$
58

Gain (Loss) on purchase contract
Cost of sales
 
32

 
(19
)
 
16

 
(58
)
Ineffectiveness related to our fair value hedges was not significant for the three and nine months ended July 1, 2017, and July 2, 2016.

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Table of Contents

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.
The following table sets forth the pretax impact of the undesignated derivative instruments in the Consolidated Condensed Statements of Income (in millions):
 
Consolidated Condensed
Statements of Income
Classification
 
Gain (Loss)
Recognized in Earnings
 
 
Gain (Loss)
Recognized in Earnings
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Commodity contracts
Sales
 
$
41

 
$
(20
)
 
$
117

 
$
(27
)
Commodity contracts
Cost of sales
 
(57
)
 
44

 
(103
)
 
36

Foreign exchange contracts
Other income/expense
 

 

 

 
1

Total
 
 
$
(16
)
 
$
24

 
$
14

 
$
10

The fair value of all outstanding derivative instruments in the Consolidated Condensed Balance Sheets are included in Note 12: Fair Value Measurements.
NOTE 12: 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.
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.

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Table of Contents

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): 
July 1, 2017
Level 1
 
Level 2
 
Level 3
 
Netting (a)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
 
Designated as hedges
$

 
$
3

 
$

 
$

 
$
3

Undesignated

 
43

 

 
8

 
51

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Current

 
3

 
1

 

 
4

Non-current

 
42

 
51

 

 
93

Deferred compensation assets
8

 
264

 

 

 
272

Total assets
$
8

 
$
355

 
$
52

 
$
8

 
$
423

Liabilities:
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
 
Designated as hedges
$

 
$
32

 
$

 
$
(32
)
 
$

Undesignated

 
52

 

 
(41
)
 
11

Total liabilities
$

 
$
84

 
$

 
$
(73
)
 
$
11

October 1, 2016
Level 1
 
Level 2
 
Level 3
 
Netting (a)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
 
Designated as hedges
$

 
$
72

 
$

 
$
(27
)
 
$
45

Undesignated

 
38

 

 
(34
)
 
4

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Current

 
2

 
2

 

 
4

Non-current

 
38

 
55

 

 
93

Deferred compensation assets
18

 
236

 

 

 
254

Total assets
$
18

 
$
386

 
$
57

 
$
(61
)
 
$
400

Liabilities:
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
 
Designated as hedges
$

 
$
1

 
$

 
$
(1
)
 
$

Undesignated

 
68

 

 
(68
)
 

Total liabilities
$

 
$
69

 
$

 
$
(69
)
 
$


(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 July 1, 2017, and October 1, 2016, we had $81 million and $8 million, respectively, of cash collateral posted with various counterparties where master netting arrangements exist and held no cash collateral.

20

Table of Contents

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): 
 
Nine Months Ended
 
July 1, 2017
 
July 2, 2016
Balance at beginning of year
$
57

 
$
61

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

 

Included in other comprehensive income (loss)
(1
)
 

Purchases
11

 
12

Issuances

 

Settlements
(15
)
 
(14
)
Balance at end of period
$
52

 
$
59

Total gains (losses) for the nine-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 11: Derivative Financial Instruments. We record our derivative financial instruments at fair value using quoted market prices adjusted for credit and non-performance risk and internal models that use as their basis readily observable market inputs including current and forward market prices. 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):
 
July 1, 2017
 
October 1, 2016
 
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
$
45

 
$
45

 
$

 
$
40

 
$
40

 
$

Corporate and asset-backed
52

 
52

 

 
56

 
57

 
1


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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 more likely than not will 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. 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 for the three and nine months ended July 1, 2017, and July 2, 2016. No other than temporary losses were deferred in OCI as of July 1, 2017, and October 1, 2016.
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.
In the second quarter of fiscal 2017, we recorded a $52 million impairment charge related to our San Diego Prepared Foods operation. The impairment was comprised of $43 million of property, plant and equipment, $8 million of definite lived intangibles assets and $1 million of other assets. This charge, of which $44 million was included in the Consolidated Condensed Statements of Income in Cost of Sales and $8 million was included in the Consolidated Condensed Statements of Income in Selling, General and Administrative, was triggered by a change in a co-manufacturing contract and ongoing losses. Our valuation of these assets was primarily based on discounted cash flows and relief-from-royalty models, which included unobservable Level 3 inputs.
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 and nine months ended July 2, 2016.
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):
 
July 1, 2017
 
October 1, 2016
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Total debt
$
11,188

 
$
10,824

 
$
6,698

 
$
6,279


NOTE 13: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The components of the net periodic cost for the pension and postretirement benefit plans for the three and nine months ended July 1, 2017, and July 2, 2016, are as follows (in millions):
 
Pension Plans
 
Three Months Ended
 
Nine Months Ended
 
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
 
 
 
 
 
 
 
 
Service cost
$
4

 
$
4

 
$
10

 
$
11

Interest cost
16

 
18

 
48

 
56

Expected return on plan assets
(15
)
 
(16
)
 
(44
)
 
(49
)
Amortization of:
 
 
 
 
 
 
 
   Net actuarial loss
1

 
2

 
5

 
5

Settlement (gain) loss (a)

 

 
2

 
(12
)
Net periodic cost
$
6

 
$
8

 
$
21

 
$
11


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Postretirement Benefit Plans
 
Three Months Ended
 
Nine Months Ended
 
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
 
 
 
 
 
 
 
 
Interest cost
$

 
$
1

 
$
1

 
$
3

Amortization of:
 
 
 
 
 
 
 
   Net actuarial gain

 
(5
)
 

 
(14
)
   Prior service credit
(6
)
 
(4
)
 
(18
)
 
(13
)
Net periodic cost (credit)
$
(6
)
 
$
(8
)
 
$
(17
)
 
$
(24
)
(a) We made lump-sum settlement payments using plan assets of $5 million and $265 million for the nine months ended July 1, 2017 and July 2, 2016, respectively, to certain deferred vested participants within our qualified pension plans.
We contributed $9 million and $1 million to our pension plans for the three months ended July 1, 2017, and July 2, 2016, respectively. We contributed $31 million and $54 million to our pension plans for the nine months ended July 1, 2017, and July 2, 2016, respectively. We expect to contribute an additional $12 million during the remainder of fiscal 2017. 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. As a result, the actual funding in fiscal 2017 may differ from the current estimate.
NOTE 14: 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
 
Nine Months Ended
 
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
 
Before Tax
Tax
After Tax
 
Before Tax
Tax
After Tax
 
Before Tax
Tax
After Tax
 
Before Tax
Tax
After Tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives accounted for as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Gain) loss reclassified to cost of sales
$

$

$

 
$
1

$

$
1

 
$
1

$
(1
)
$

 
$
3

$
(1
)
$
2

Unrealized gain (loss)
(2
)
2


 
2

(1
)
1

 
(2
)
2


 



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss)
(1
)

(1
)
 
(1
)
1


 
(1
)

(1
)
 
(1
)
1


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency translation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Translation adjustment
3


3

 
(2
)

(2
)
 
(2
)

(2
)
 
3


3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Postretirement benefits
(5
)
2

(3
)
 
(3
)
1

(2
)
 
(8
)
4

(4
)
 
(9
)
4

(5
)
Total other comprehensive income (loss)
$
(5
)
$
4

$
(1
)
 
$
(3
)
$
1

$
(2
)
 
$
(12
)
$
5

$
(7
)
 
$
(4
)
$
4

$

NOTE 15: SEGMENT REPORTING
We operate in four reportable segments: Beef, Pork, Chicken, and Prepared Foods. We measure segment profit as operating income (loss). Other primarily includes our foreign chicken production operations in China and India, third-party merger and integration costs and corporate overhead related to Tyson New Ventures, LLC.
On June 7, 2017, we acquired AdvancePierre, a producer and distributor of value-added, convenient, ready-to-eat sandwiches, sandwich components and other entrées and snacks. AdvancePierre's results from operations subsequent to the acquisition closing are included in the Prepared Foods and Chicken segments.
Beef: Beef includes our operations related to processing live fed cattle and fabricating dressed beef carcasses into primal and sub-primal meat cuts and case-ready products. Products are marketed domestically to 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 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.

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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 and other ready-to-fix or fully cooked chicken parts. Products are marketed domestically to 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 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®, Van's®, Sara Lee® and Chef Pierre®, as well as artisanal brands Aidells®, Gallo Salame®, and Golden Island®. 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, pizza crusts and toppings, flour and corn tortilla products, desserts, appetizers, snacks, prepared meals, ethnic foods, soups, sauces, side dishes, meat dishes, breadsticks and processed meats. Products are marketed domestically to 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.
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 Other.
Information on segments and a reconciliation to income before income taxes are as follows (in millions): 
 
Three Months Ended
 
Nine Months Ended
 
 
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
 
Sales:
 
 
 
 
 
 
 
 
Beef
$
4,000

 
$
3,783

 
$
11,015

 
$
11,036

 
Pork
1,322

 
1,271

 
3,876

 
3,674

 
Chicken
2,870

 
2,743

 
8,374

 
8,116

 
Prepared Foods
1,944

 
1,809

 
5,590

 
5,509

 
Other
85

 
99

 
257

 
284

 
Intersegment sales
(371
)
 
(302
)
 
(997
)
 
(894
)
 
Total sales
$
9,850

 
$
9,403

 
$
28,115

 
$
27,725

 
 
 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
 
Beef
$
147

 
$
91

 
$
572

 
$
208

 
Pork
136

 
122

 
524

 
420

 
Chicken
294

(a) 
380

 
790

(a) 
1,085

 
Prepared Foods
174

(b) 
197

 
451

(b) 
601

 
Other
(54
)
(c) 
(23
)
(c) 
(87
)
(c) 
(67
)
(c) 
Total operating income
697

 
767

 
2,250

 
2,247

 
 
 
 
 
 
 
 
 
 
Total other (income) expense
80

(d) 
56

 
202

(d) 
180

 
 
 
 
 
 
 
 
 
 
Income before income taxes
$
617

 
$
711

 
$
2,048

 
$
2,067

 
(a) Chicken operating income includes $4 million AdvancePierre purchase accounting for the three and nine months ended July 1, 2017.
(b) Prepared Foods operating income includes $21 million AdvancePierre purchase accounting and acquisition related costs
for the three and nine months ended July 1, 2017 and a $52 million impairment charge related to our San Diego Prepared Foods operation (see Note 9: Other Income and Charges) for the nine months ended July 1, 2017.
(c) Other operating loss includes third-party merger and integration costs and corporate overhead of Tyson New Ventures, LLC of $45 million and $11 million for the three months ended July 1, 2017, and July 2, 2016, respectively, and $58 million and $29 million for the nine months ended July 1, 2017, and July 2, 2016, respectively. Third-party merger and integration costs includes $34 million of AdvancePierre acquisition related costs for the three and nine months ended July 1, 2017.
(d) Total other (income) expense includes $18 million of acquisition bridge financing fees for the three and nine months ended July 1, 2017.

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Table of Contents

The Beef segment had sales of $116 million and $90 million in the third quarter of fiscal 2017 and 2016, respectively, and sales of $276 million and $240 million in the nine months of fiscal 2017 and 2016, respectively, from transactions with other operating segments of the Company. The Pork segment had sales of $235 million and $204 million in the third quarter of fiscal 2017 and 2016, respectively, and sales of $685 million and $639 million in the nine months of fiscal 2017 and 2016, respectively, from transactions with other operating segments of the Company. The Chicken segment had sales of $20 million and $8 million in the third quarter of fiscal 2017 and 2016, respectively, and sales of $36 million and $15 million in the nine months of fiscal 2017 and 2016, respectively, from transactions with other operating segments of the Company. The aforementioned sales from intersegment transactions, which were at market prices, were included in the segment sales in the above table.
NOTE 16: COMMITMENTS AND CONTINGENCIES
Commitments
We guarantee obligations of certain outside third parties, consisting primarily of leases, debt and grower loans, which are substantially collateralized by the underlying assets. Terms of the underlying debt cover periods up to 10 years, and the maximum potential amount of future payments as of July 1, 2017, was $29 million. We also maintain operating leases for various types of equipment, some of which contain residual value guarantees for the market value of the underlying leased assets at the end of the term of the lease. The remaining terms of the lease maturities cover periods over the next 10 years. The maximum potential amount of the residual value guarantees is $108 million, of which $99 million could be recoverable through various recourse provisions and an additional undeterminable recoverable amount based on the fair value of the underlying leased assets. The likelihood of material payments under these guarantees is not considered probable. At July 1, 2017, and October 1, 2016, no material liabilities for guarantees were recorded.
We have cash flow assistance programs in which certain livestock suppliers participate. Under these programs, we pay an amount for livestock equivalent to a standard cost to grow such livestock during periods of low market sales prices. The amounts of such payments that are in excess of the market sales price are recorded as receivables and accrue interest. Participating suppliers are obligated to repay these receivables balances when market sales prices exceed this standard cost, or upon termination of the agreement. Our maximum commitment associated with these programs is limited to the fair value of each participating livestock supplier’s net tangible assets. The potential maximum commitment as of July 1, 2017, was approximately $380 million. The total receivables under these programs were $3 million and $2 million at July 1, 2017, and October 1, 2016, respectively. These receivables are included, net of allowance for uncollectible amounts, in Accounts Receivable in ou