DERIVATIVE FINANCIAL INSTRUMENTS

The Company utilizes various raw materials in its operations, including corn, soybean meal, soybean oil, and energy, such as natural gas, electricity and diesel fuel, which are all considered commodities. The Company considers these raw materials generally available from a number of different sources and believes it can obtain them to meet its requirements. These commodities are subject to price fluctuations and related price risk due to factors beyond our control, such as economic and political conditions, supply and demand, weather, governmental regulation and other circumstances. Generally, the Company purchases derivative financial instruments, specifically exchange-traded futures and options, in an attempt to mitigate price risk related to its anticipated consumption of commodity inputs for approximately the next 12 months. The Company may purchase longer-term derivative financial instruments on particular commodities if deemed appropriate.

The Company has operations in Mexico and Europe (including the U.K.) and, therefore, has exposure to translational foreign exchange risk when the financial results of those operations are remeasured in U.S. dollars. The Company has purchased foreign currency forward contracts to manage this translational foreign exchange risk.

The fair value of derivative assets is included in the line item Prepaid expenses and other current assets on the Condensed Consolidated and Combined Balance Sheets while the fair value of derivative liabilities is included in the line item Accrued expenses and other current liabilities on the same statements. Our counterparties require that we post cash collateral for changes in the net fair value of the derivative contracts.

We have not designated certain derivative financial instruments that we have purchased to mitigate commodity purchase or foreign currency transaction exposures on our Mexico operations as cash flow hedges. Items designated as cash flow hedges are disclosed and described further below. Therefore, we recognized changes in the fair value of these derivative financial instruments immediately in earnings. Gains or losses related to these derivative financial instruments are included in the line item Cost of sales in the Condensed Consolidated and Combined Statements of Income.

We have designated certain derivative financial instruments related to our U.K. and Europe segment that we have purchased to mitigate foreign currency transaction exposures as cash flow hedges. Before the settlement date of the financial derivative instruments, we recognize changes in the fair value of the effective portion of the cash flow hedge into accumulated other comprehensive income (“AOCI”) while we recognize changes in the fair value of the ineffective portion immediately in earnings. When the derivative financial instruments associated with the effective portion are settled, the amount in AOCI is then reclassified to earnings. Gains or losses related to these derivative financial instruments are included in the line item Cost of sales in the Condensed Consolidated and Combined Statements of Income.

The Company recognized net gains of $6.9 million and net losses of $16.7 million related to changes in the fair value of its derivative financial instruments during the thirteen weeks ended September 24, 2017 and September 25, 2016, respectively. The Company also recognized net gains of $7.3 million and net losses of $10.5 million related to changes in the fair value of its derivative financial instruments during the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively.

Information regarding the Company’s outstanding derivative instruments and cash collateral posted with (owed to) brokers is included in the following table:



	September 24, 2017			December 25, 2016
	(Fair values in thousands)
Fair values:
Commodity derivative assets	$	3,368		$	5,439
Commodity derivative liabilities	(3,782		)	(6,827		)
Foreign currency derivative assets	586			516
Foreign currency derivative liabilities	(387		)	(153		)
Cash collateral posted with brokers	4,841			4,979
Derivatives coverage^(a):
Corn	0.7		%	2.3		%
Soybean meal	0.2		%	0.3		%
Period through which stated percent of needs are covered:
Corn	September 2018			September 2018
Soybean meal	August 2018			July 2017


(a)	Derivatives coverage is the percent of anticipated commodity needs covered by outstanding derivative instruments through a specified date.

The following tables present the components of the gain or loss on derivatives that qualify as cash flow hedges:



	Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)
	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	September 24, 2017			September 25, 2016			September 24, 2017			September 25, 2016
	(In thousands)
Foreign currency derivatives	$	(779	)	$	(220	)	$	(128	)	$	132
Total	$	(779	)	$	(220	)	$	(128	)	$	132

	Net Realized Gains (Losses) Recognized in Income on Derivative (Ineffective Portion)
	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	September 24, 2017			September 25, 2016			September 24, 2017			September 25, 2016
	(In thousands)
Foreign currency derivatives	$	—		$	—		$	—		$	—
Total	$	—		$	—		$	—		$	—

	Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	September 24, 2017			September 25, 2016			September 24, 2017			September 25, 2016
	(In thousands)
Foreign currency derivatives	$	—		$	285		$	(9	)	$	35
Total	$	—		$	285		$	(9	)	$	35

At September 24, 2017, the before-tax deferred net gains on derivatives recorded in AOCI that are expected to be reclassified to the Condensed Consolidated and Combined Statements of Income during the next twelve months are $1.2 million. This expectation is based on the anticipated settlements on the hedged investments in foreign currencies that will occur over the next twelve months, at which time the Company will recognize the deferred gains (losses) to earnings.

The Company reported a $16.9 million adjustment resulting from the translation of a British pound-denominated note payable owed to JBS S.A. as a component of Accumulated other comprehensive loss in the Condensed Consolidated Balance Sheet as of September 24, 2017. The Company designated this note payable as a hedge of its net investment in Moy Park.