EXHIBIT 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined consolidated balance
sheet as of December 31, 2001 and the unaudited pro forma condensed combined
consolidated statement of earnings for the year ended December 31, 2001 give
effect to the merger of Dal-Tile International Inc. ("Dal-Tile") accounted for
as a purchase transaction and the financing transactions related to the
consummation thereof (collectively, the "Transactions"). The unaudited pro forma
condensed combined consolidated financial information is based on the historical
consolidated financial statements of Mohawk and Dal-Tile using the assumptions
and adjustments set forth in the accompanying notes. The primary reasons for the
merger included:
. the ability to combine Mohawk's current efforts in the hard-flooring
business with Dal-Tile's larger, more established ceramic tile and
natural stone business;
. the opportunity to use Mohawk and Dal-Tile's existing distribution
channels to increase sales of both carpets and hard floorcoverings;
. the opportunity to further develop Mohawk's various brands and increase
sales by distributing its products through Dal-Tile's distribution
network;
. the potential to reduce overhead and other costs by adding Dal-Tile's
distribution network to Mohawk's logistical and distribution system;
. the potential to reduce manufacturing costs and increase quality by
identifying manufacturing best practices; and
. the potential to reduce general, administrative, overhead and other
miscellaneous costs by spreading fixed costs over a larger business.
Mohawk considered whether identifiable intangible assets, such as customer
relationships, patents, covenants not to compete, software, production backlog,
marketing agreements, unpatented technology and trade secrets, might exist and
none were identified other than trademarks, during the purchase price
negotiations. Accordingly, the valuation resulted in the recognition of
goodwill.
The unaudited pro forma condensed combined consolidated balance sheet gives
effect to the Transactions as if they had been consummated at December 31, 2001.
The unaudited pro forma condensed combined consolidated statements of earnings
give effect to the Transactions as if they had been consummated at January 1,
2001. While Mohawk believes that synergies and cost savings may result from the
merger, the unaudited pro forma condensed combined consolidated financial
information does not give effect to anticipated synergies or cost savings in
connection with the merger.
The unaudited pro forma condensed combined consolidated financial information
should be read in conjunction with Mohawk's consolidated historical financial
statements and those of Dal-Tile, including the respective notes to those
statements. The pro forma information is not necessarily indicative of the
combined financial position and results of operations in the future, or of the
combined financial position and the results of operations, which would have
resulted, had the Transactions been consummated during the periods or as of the
dates for which the pro forma information is presented.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
(In thousands)
Historical
------------------------ Pro Forma Pro Forma
Mohawk Dal-Tile Adjustments Combined
---------- -------- ----------- ---------
ASSETS
Current assets:
Cash ................................... $ -- 4,206 4,206
Receivables ............................ 404,875 112,629 19,097 (a) 536,601
Inventories ............................ 531,405 149,679 (6,933)(b) 674,151
Prepaid expenses ....................... 24,884 4,664 29,548
Deferred income taxes .................. 70,058 16,545 86,603
---------- ------- --------- ---------
Total current assets ............... 1,031,222 287,723 12,164 1,331,109
Property, plant and
equipment, net .......................... 619,703 229,308 56,000 (c) 905,011
Goodwill, net ............................. 109,167 133,638 1,127,669 (d) 1,370,474
Other intangible assets, net .............. -- 16,477 132,511 (d) 148,988
Other assets .............................. 8,393 11,276 19,669
---------- ------- --------- ---------
$1,768,485 678,422 1,328,344 3,775,251
========== ======= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ...... $ 158,366 17,217 675,000 (e) 850,583
Accounts payable and
accrued expenses ..................... 423,495 104,011 527,506
---------- ------- --------- ---------
Total current liabilities .......... 581,861 121,228 675,000 1,378,089
Deferred income taxes ..................... 84,955 28,847 69,750 (f) 183,552
Long-term debt, less
current portion ......................... 150,067 219,900 49,450 (e) 419,417
Other long-term liabilities ............... 3,051 18,593 21,644
---------- ------- --------- ---------
Total liabilities .................. 819,934 388,568 794,200 2,002,702
---------- ------- --------- ---------
Stockholders' equity:
Preferred stock ........................ -- -- --
Common stock ........................... 614 561 (432)(g) 743
Additional paid-in capital ............. 197,247 461,905 361,964 (g) 1,021,116
Retained earnings (deficit) ............ 947,123 (95,003) 95,003 (g) 947,123
Accumulated other comprehensive loss.... (2,837) (77,609) 77,609 (g) (2,837)
---------- ------- --------- ---------
1,142,147 289,854 534,144 1,966,145
193,596 -- 193,596
---------- ------- --------- ---------
Total stockholders' equity ......... 948,551 289,854 534,144 1,772,549
---------- ------- --------- ---------
$1,768,485 678,422 1,328,344 3,775,251
========== ======= ========= =========
See accompanying notes to the Unaudited Pro Forma Condensed
Combined Consolidated Financial Information.
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UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2001
(In thousands, except per share data)
Historical
------------------------- Pro Forma Pro Forma
Mohawk Dal-Tile Adjustments Combined
---------- --------- ----------- ---------
Net sales .................................... $3,445,945 1,036,795 4,482,740
79,607 (h)
Cost of sales ................................ 2,613,043 546,345 5,600 (i) 3,244,595
---------- --------- ------- ---------
Gross profit .......................... 832,902 490,450 (85,207) 1,238,145
(79,607)(h)
Selling, general and
administrative expenses .................... 505,745 341,229 (5,512)(j) 761,855
---------- --------- ------- ---------
Operating income ...................... 327,157 149,221 (88) 476,290
---------- --------- ------- ---------
Other expense (income):
Interest expense, net ..................... 29,787 21,448 26,579 (k) 77,814
Other expense ............................. 7,780 1,616 9,396
Other income .............................. (1,826) (2,137) (3,963)
---------- --------- ------- ---------
35,741 20,927 26,579 83,247
---------- --------- ------- ---------
Earnings before income taxes .......... 291,416 128,294 (26,667) 393,043
Income taxes ................................. 102,824 49,393 (9,867)(l) 142,350
---------- --------- ------- ---------
Earnings before extraordinary item .... $ 188,592 78,901 (16,800) 250,693
========== ========= ======= =========
Basic earnings per share ..................... $ 3.60 3.84
========== =========
Weighted-average common shares outstanding ... 52,418 12,876 (m) 65,294
========== ======= =========
Diluted earnings per share .................. $ 3.55 3.79
========== =========
Weighted-average common and dilutive
potential common shares outstanding ........ 53,141 13,040 (m) 66,181
========== ======= =========
See accompanying notes to the Unaudited Pro Forma Condensed
Combined Consolidated Financial Information.
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Notes to the Unaudited Pro Forma Condensed Combined Consolidated
Financial Information
This section sets forth (i) an unaudited pro forma condensed combined
consolidated balance sheet as of December 31, 2001, (ii) an unaudited pro forma
condensed combined consolidated statement of earnings for the year ended
December 31, 2001 and (iii) the related notes thereto. The unaudited pro forma
condensed combined consolidated financial information should be read in
conjunction with the historical consolidated financial statements and the
related notes thereto of Mohawk and of Dal-Tile included elsewhere in this
offering circular.
The unaudited pro forma condensed combined consolidated balance sheet
combines the historical consolidated balance sheets of
Mohawk and Dal-Tile, as of December 31, 2001 and December 28, 2001,
respectively, as if the Transactions had been completed on December 31, 2001.
The unaudited pro forma condensed combined consolidated statement of earnings
combines the historical consolidated statements of earnings of Mohawk and
Dal-Tile for the years ended December 31, 2001 and December 28, 2001,
respectively, as if the Trasactions had been completed on January 1, 2001. The
merger will be accounted for as a purchase for financial accounting purposes as
required by SFAS No. 141, Business Combinations, in accordance with accounting
principles generally accepted in the United States. For purposes of preparing
Mohawk's consolidated financial statements, Mohawk will establish a new basis
for Dal-Tile's assets and liabilities based upon their fair values, the merger
consideration and the cost of the merger. Mohawk believes that any excess cost
over fair value of the net assets of Dal-Tile will be recorded as goodwill and
other intangible assets. A final determination of the intangible asset values
and required purchase accounting adjustments, including the allocation of the
purchase price to the assets acquired and liabilities assumed based on their
respective fair values, has not yet been made. Mohawk will determine the fair
value of Dal-Tile's assets and liabilities and will make appropriate purchase
accounting adjustments upon completion of such determination. However, for
purposes of disclosing pro forma information in this offering circular, Mohawk
has made a preliminary determination of the purchase price allocation based upon
current estimates and assumptions, which is subject to revision upon completion
of the valuation of Dal-Tile being performed.
Before Mohawk can finalize its purchase price allocation, it must complete
the valuation of Dal-Tile. Mohawk has not identified any preacquisition
contingencies at this time and does not anticipate any material changes to the
purchase price allocation included in the unaudited pro forma condensed combined
consolidated financial information. However, factors such as the final closing
balance sheet of Dal-Tile and the results of the final valuation of Dal-Tile all
will have an impact on the final purchase price allocation. Mohawk expects to
complete the allocation within one year from the closing date of the merger.
The unaudited pro forma condensed combined consolidated financial information
is intended for informational purposes only and is not necessarily indicative of
the future financial position or future results of operations of the combined
company, or of the financial position or results of operations of the combined
company that would have actually occurred had the merger been in effect as of
the date or for the periods presented. For purposes of the unaudited pro forma
condensed combined consolidated financial information, certain reclassifications
have been made to Dal-Tile's historical amounts to conform to Mohawk
classifications.
Note 1. Purchase Price
The merger agreement provided that, each share of Dal-Tile common stock
outstanding at the completion of the merger (subject to certain limitations
described below), would be converted into and become the right to receive 0.2213
of a share of Mohawk common stock and $11.00 in cash. The Dal-Tile stock option
holders had the alternatives of (1) exercising their options prior to the
effective time and converting the Dal-Tile stock resulting from the exercise to
the combination of cash and Mohawk
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Notes to the Unaudited Pro Forma Condensed Combined Consolidated
Financial Information, Continued
stock, (2) electing to receive (a) cash (at $22.00 per option less the exercise
price of Dal-Tile stock) for one half of their options and (b) options to
acquire Mohawk stock (equal to 0.446 multiplied by the number of options) for
one-half of their options at an exercise price equal to the Dal-Tile exercise
price divided by two times the exchange ratio or (3) continuing to hold their
Dal-Tile stock options which shall become exercisable for the amount of cash and
the number of shares of Mohawk common stock such holder would have received had
such holder exercised their options immediately prior to the completion of the
merger. For purposes of the pro forma financial statements it has been assumed
that all Dal-Tile stock option holders elected alternative (2).
The total purchase price, based upon the number of shares of Dal-Tile common
stock and options outstanding at December 31, 2001, would be as follows:
(In thousands)
--------------
Total assigned value of Mohawk stock to be issued ........ $ 708,714 (1)
Cash consideration ....................................... 699,450 (2)
Estimated fair value of stock options exchanged .......... 115,284 (3)
Direct merger costs ...................................... 25,000 (4)
----------
Total purchase price .............................. $1,548,448
==========
- --------
(1) Assumes a Mohawk stock price of $55.04 per share.
(2) Represents the cash paid for outstanding Dal-Tile stock and for Dal-Tile
options cashed out.
(3) Represents the fair value of Dal-Tile options exchanged for Mohawk options.
The fair value of the Dal-Tile options was determined based upon the Mohawk
stock price of $55.04 and an exchange ratio of 0.4426 using the
Black-Scholes option valuation model using a risk-free rate of 3.5%, a
volatility rate of 43.81% and an expected term of the vested options of 2.5
years.
(4) Estimated direct merger costs include:
(In thousands)
--------------
Change in control payments to Dal-Tile management ......... $11,200
Investment banking fees ................................... 8,150
Legal fees ................................................ 2,500
Accounting fees ........................................... 1,200
Other costs ............................................... 1,950
-------
Total transaction costs ............................ $25,000
=======
Note 2. Allocation of Purchase Price
(In thousands)
--------------
Total purchase price ...................................... $1,548,448
----------
Net assets of Dal-Tile based on historical
carrying amounts as of December 28, 2001 ................ 289,854
Income tax receivable for Dal-Tile options
cashed-out .............................................. 19,097
Increase (decrease) in net assets to reflect
estimated fair value adjustments under the
purchase method of accounting:
Inventory adjustment ...................................... (6,933)
Property, plant and equipment ............................. 56,000
Trademarks ................................................ 132,511
Deferred tax liability .................................... (69,750)
----------
Fair value of net assets acquired ...................... 420,779
----------
Goodwill $1,127,669
==========
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Notes to the Unaudited Pro Forma Condensed Combined Consolidated
Financial Information, Continued
Note 3. Pro Forma Adjustments
The following are descriptions of the pro forma purchase accounting and other
merger-related adjustments, labeled (a) through (m), which have been reflected
in the accompanying pro forma condensed combined consolidated balance sheet and
pro forma condensed combined consolidated statement of earnings:
(a) Represents income tax receivable on options exercised.
(b) This adjustment reflects the amounts necessary to state Dal-Tile inventories
on a first-in, first-out (FIFO) basis versus the historical last-in, first-out
(LIFO) basis.
(c) Adjustment to reflect the estimated fair market value of property, plant
and equipment.
(d) The adjustments of $1,127.7 million and $132.5 million represent the
estimated increase to Dal-Tile's existing goodwill and other intangible assets,
respectively, related to the merger. In accordance with SFAS No. 142, the
goodwill recorded in the merger will not be amortized. Additionally, the
trademark intangible asset has an indefinite life. The following table
summarizes the goodwill and other intangible assets (amounts in thousands):
Historical
-----------------
Pro Forma Pro Forma
Mohawk Dal-Tile Adjustments Combined
-------- -------- ----------- ---------
Goodwill, net $109,167 133,638 1,127,669 1,370,474
======== ======= ========= =========
Trademarks $ -- 13,906 132,511 146,417
Other intangible assets -- 2,571 -- 2,571
-------- ------- --------- ---------
Total other intangible
assets, net $ -- 16,477 132,511 148,988
======== ======= ========= =========
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142.
Mohawk was required to adopt the provisions of SFAS No. 141 effective June
30, 2001, and SFAS No. 142 effective January 1, 2002. Furthermore, any Mohawk
goodwill that was acquired in a purchase business combination completed after
June 30, 2001 will not be amortized. Goodwill acquired by Mohawk in business
combinations completed before July 1, 2001 is no longer being amortized after
December 31, 2001.
Mohawk has evaluated its existing goodwill that was acquired in prior
purchase business combinations for impairment and has concluded that no
adjustment to the Mohawk historical consolidated financial statements is
required.
As of the date of adoption, Mohawk had unamortized goodwill in the amount of
$109.2 million. Amortization expense related to goodwill was $3.2 million for
the year ended December 31, 2001.
No adjustments for Mohawk's goodwill amortization have been included in the
pro forma financial information for Mohawk's acquisitions prior to July 1, 2001.
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Notes to the Unaudited Pro Forma Condensed Combined Consolidated
Financial Information, Continued
(e) Represents an increase in Mohawk borrowings of $961.6 million to fund the
cash portion of the purchase price ($699.5 million cash consideration plus $25.0
million direct merger costs) and to refinance Dal-Tile's existing indebtedness
($17.2 million current portion of long-term debt plus $219.9 million long-term
debt). Initially, Mohawk financed the purchase price with a combination of the
bridge credit facility, its existing revolving credit facility and a receivables
securitization. The revolving credit facility, which provides total credit
availability of $450.0 million, is due January 28, 2004, and has been classified
in long-term liabilities. Since December 31, 2001, reductions in Dal-Tile's
long-term debt and the current portions thereof have occurred, which have not
been reflected in the unaudited pro forma condensed combined consolidated
balance sheet.
(f) Adjustment to record deferred taxes for temporary differences between the
fair value and the tax bases of certain acquired assets since the merger will be
completed as a tax-free reorganization.
(g) Represents (i) the elimination of Dal-Tile's historical stockholders'
equity, (ii) the issuance by Mohawk of 12.9 million common shares as the stock
portion of the merger consideration, at a total assigned value of $708.7 million
based on a Mohawk stock price of $55.04 with an exchange ratio of 0.2213 and
(iii) an adjustment of $115.3 million to record the fair value of Dal-Tile
options that will be exchanged for Mohawk options. See Note 1 of the Unaudited
Pro Forma Condensed Combined Consolidated Financial Information.
(h) For purposes of the unaudited pro forma condensed combined consolidated
financial information, Dal-Tile's shipping and handling costs have been
reclassified to cost of sales so Dal-Tile's historical amounts conform to Mohawk
classifications.
(i) Represents the estimated adjustment in depreciation expense as a result of
adjusting certain property, plant and equipment to fair value and changing
Dal-Tile fixed asset useful lives to conform to Mohawk. The estimated
adjustments were calculated based on the historical net book value of Dal-Tile's
property, plant and equipment plus the estimated step-up to fair value for the
property, plant and equipment. It was assumed in calculating the adjustment that
the useful life of each asset would start over for purposes of depreciation. The
useful life of Dal-Tile's buildings was changed from 30 to 35 years and
furniture and fixtures was changed from an average of approximately 7 1/2 years
to five years. The useful life of buildings was extended because Mohawk's
practice is to utilize its buildings for at least their estimated useful lives,
making the necessary repairs and performing the required maintenance to realize
the longer useful life.
(j) Represents the reversal of goodwill and other intangible amortization
included in Dal-Tile's historical financial statements. Amounts reversed are
$4.7 million and $.8 million for goodwill and tradenames, respectively.
(k) Includes an increase in interest expense as a result of the planned
borrowing to fund the cash portion of the purchase price. The refinancing of the
existing Dal-Tile debt and the cash portion of the purchase price was initially
made through Mohawk's existing variable-rate debt and the $600 million borrowed
under the bridge credit facility which also carries a variable interest rate.
Mohawk's existing variable-rate debt and the bridge credit facility each incur
annual interest at LIBOR plus 1.37% and LIBOR plus .37%, respectively. The
average LIBOR rate was 3.78% for the year ended December 31, 2001. A change of
1/8% in the interest rate would change interest expense by approximately $1.3
million for the year ended December 31, 2001. Mohawk plans to refinance the
bridge credit facility. If successful, interest rates are expected to increase
over those rates reflected in the unaudited pro forma condensed combined
consolidated statement of earnings.
7
(l) Represents the income tax effect of the pro forma adjustments at an
estimated rate of 37.0%.
(m) Under the terms of the merger agreement, Dal-Tile stockholders received for
each Dal-Tile share $11.00 in cash and 0.2213 of a share of Mohawk common stock.
Pro forma basic earnings per share was calculated by dividing pro forma net
earnings by the pro forma weighted-average number of shares of Mohawk common
stock outstanding during the period. Pro forma diluted earnings per share was
calculated in a manner similar to that of basic earnings per share except that
the pro forma weighted-average number of common shares outstanding is increased
to include the number of incremental common shares (computed using the treasury
stock method) that would have been outstanding if all potentially dilutive
common shares were issued during the period. In making these pro forma
calculations, average outstanding shares include the additional Mohawk common
shares issued in connection with the merger, based on the 0.2213 exchange ratio.
Additionally, the diluted earnings per share calculation include the Dal-Tile
options converted into Mohawk options based on a 0.4426 exchange ratio, after
consideration of the treasury stock method.
8