Tyson Foods 2001 Annual Report Download - page 24

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MANAGEMENT
’S DISCUSSION AND ANALYSIS
TYSON FOODS, INC. 2001 ANNUAL REPORT
IBP ACQUISITION During the fourth quarter of fiscal 2001,
the Company acquired IBP, inc. (IBP). Headquartered in Dakota
Dunes, South Dakota, IBP is the world’s largest supplier of
premium fresh beef and pork products, with more than 60 pro-
duction sites in North America, joint venture operations in
China, Ireland and Russia and sales offices throughout the
world. IBP generated annual sales of approximately $17 billion
in 2000 and employs approximately 52,000 people.
In August 2001, the Company acquired 50.1% of IBP by paying
approximately $1.7 billion in cash. In September 2001, the Company
issued approximately 129 million shares of Class A stock, with a fair
value of approximately $1.2 billion, to acquire the remaining IBP
shares, and assumed approximately $1.7 billion of IBP debt. The
total acquisition cost of approximately $4.6 billion was accounted
for as a purchase in accordance with Statement of Financial
Accounting Standards (SFAS) No.141, “Business Combinations.”
Accordingly, the tangible and identifiable intangible assets and
liabilities have been adjusted to fair values with the remainder of
the purchase price recorded as goodwill. The allocation of the
purchase price has been completed.
RESULTS OF OPERATIONS Earnings for fiscal 2001 were
$88 million or $0.40 per share compared to $151 million or $0.67
per share in fiscal 2000. The IBP results of operations for nine
weeks ending September 29, 2001, are included in the Company’s
consolidated results of operations, with the 49.9% of IBP that
was acquired on September 28, 2001, accounted for as minority
interest. This information should be considered when comparing
to previous years’ results of operations.
Earnings in fiscal 2001 were adversely affected by an over-
supply of chicken on the market for most of the year, causing an
adverse effect on the average sales prices and margins of many
of the Company’s core value-added products. In addition, costs
were adversely affected by weather conditions in the first half of
the year along with higher grain and energy costs. However,
fourth quarter earnings were favorably affected by improved
prices in the Chicken segment, improvement in industry funda-
mentals and inclusion of IBP’s operations for nine weeks.
The Company’s accounting cycle resulted in a 52-week year
for fiscal years 2001, 2000 and 1999. Additionally, the Company
adopted new accounting guidance related to shipping and
handling fees and costs (Emerging Issues Task Force 00-10). As
a result, certain costs were reclassified for fiscal years 2001, 2000
and 1999, from sales and selling expenses to cost of sales.
2001 vs. 2000
Sales increased 45.1%, with a 29.8% increase in volume and an
11.8% increase in price. The increase in sales is due primarily to
the inclusion of nine weeks of IBP’s sales in 2001. Comparable
sales increased 3.7% on a volume increase of 1.1% . Breast meat
commodity market prices were pressured by an oversupply of
chicken for much of the fiscal year causing an adverse effect on
the average sales prices and margins of many of the Company’s
core value-added products. During the fourth quarter of 2001,
the Company experienced improved pricing of value-added
products and seasonal price increases.
Cost of sales increased 49.7%, primarily due to the added cost
of sales for nine weeks of IBP’s operations. As a percent of sales,
cost of sales was 89.9% for 2001 compared to 87.1% for 2000.
Excluding IBP, comparable cost of sales as a percent of sales was
88.0%. The increase in comparable cost of sales, as a percent of
sales, was primarily due to weather-related effects combined
with higher grain and energy costs, lower market prices and
product mix changes.
Operating expenses increased 27.4%, primarily due to the
inclusion of nine weeks of IBP’s operations in 2001. As a percent
of sales, operating expenses were 7.2% for 2001 compared to
8.2% in 2000. Excluding IBP, comparable operating expenses as
a percent of sales were 8.8% for 2001. The increase is primarily
due to an increase in sales promotional expenses and litigation
costs related to the acquisition of IBP and ongoing employee
practice matters. Included in the 2000 operating expenses was
$24 million in bad debt reserve resulting from the bankruptcy
filing by AmeriServe Food Distribution, Inc. (AmeriServe).
Interest expense increased 24.9% compared to 2000. As a
percent of sales, interest expense was 1.3% compared to 1.6% for
2000. The Company’s average indebtedness increased by 24.3%
over the same period last year as a result of the IBP acquisition.
The Company’s short-term interest rates were slightly lower than
the same period last year, and the net average effective interest
rate on total debt was 6.9% for 2001 and 2000.
The effective tax rate decreased minimally to 35.4% compared
to 35.6% in 2000.