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ACQUISITIONS AND DIVESTITURES | 3 Months Ended
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May 03, 2020
Business Combinations [Abstract] |
ACQUISITIONS AND DIVESTITURES | ACQUISITIONS AND DIVESTITURES TH CSAP Acquisition The Company acquired on July 1, 2019 the Tommy Hilfiger retail business in Central and Southeast Asia from the Company’s previous licensee in that market (the “TH CSAP acquisition”). As a result of the TH CSAP acquisition, the Company now operates directly the Tommy Hilfiger retail business in the Central and Southeast Asia market. The acquisition date fair value of the consideration paid was $74.3 million. The estimated fair value of the assets acquired consisted of $63.9 million of goodwill and $10.4 million of other net assets. The goodwill of $63.9 million was assigned as of the acquisition date to the Company’s Tommy Hilfiger International segment, which is the Company’s reporting unit that is expected to benefit from the synergies of the combination. Goodwill is not expected to be deductible for tax purposes. The Company is still in the process of finalizing the valuation of the assets acquired, which will be completed in the second quarter of 2020; thus the allocation of the acquisition consideration is subject to change. Australia Acquisition The Company acquired on May 31, 2019 the approximately 78% ownership interests in Gazal Corporation Limited (“Gazal”) that it did not already own (the “Australia acquisition”). Prior to the Australia acquisition, the Company and Gazal jointly owned and managed a joint venture, PVH Brands Australia Pty. Limited (“PVH Australia”), with each owning a 50% interest. PVH Australia licensed and operated businesses in Australia, New Zealand and other parts of Oceania under the TOMMY HILFIGER, CALVIN KLEIN and Van Heusen brands, along with other owned and licensed brands. PVH Australia came under the Company’s full control as a result of the acquisition. The Company now operates directly those businesses. Prior to May 31, 2019, the Company accounted for its approximately 22% interest in Gazal and its 50% interest in PVH Australia under the equity method of accounting. Following the completion of the Australia acquisition, the results of Gazal and PVH Australia have been consolidated in the Company’s consolidated financial statements. Gain on Previously Held Equity Investments The carrying values of the Company’s approximately 22% interest in Gazal and 50% interest in PVH Australia prior to the acquisition were $16.5 million and $41.9 million, respectively. In connection with the acquisition, these investments were remeasured to fair values of $40.1 million and $131.4 million, respectively, resulting in the recognition of an aggregate noncash gain of $113.1 million during the second quarter of 2019. The fair value of the Company’s investment in Gazal was determined using the trading price of Gazal’s common stock, which was listed on the Australian Securities Exchange, on the date of the acquisition. The Company classified this as a Level 1 fair value measurement due to the use of an unadjusted quoted price in an active market. The fair value of Gazal included the fair value of Gazal’s 50% interest in PVH Australia. As such, the Company derived the fair value of its investment in PVH Australia from the fair value of Gazal by adjusting for (i) Gazal’s non-operating assets and net debt position and (ii) the estimated future operating cash flows of Gazal’s standalone operations, which were discounted at a rate of 12.5% to account for the relative risks of the estimated future cash flows. The Company classified this as a Level 3 fair value measurement due to the use of significant unobservable inputs. Mandatorily Redeemable Non-Controlling Interest Pursuant to the terms of the acquisition agreement, key members of Gazal and PVH Australia management exchanged a portion of their interests in Gazal for approximately 6% of the outstanding shares in the previously wholly owned subsidiary of the Company that acquired 100% of the ownership interests in the Australia business. The Company is obligated to purchase this 6% interest within two years of the acquisition closing in two tranches as follows: tranche 1 – 50% of the shares one year after the closing, but the holders had the option to defer half of this tranche to tranche 2; and tranche 2 – all remaining shares two years after the closing. With respect to tranche 1, the holders elected not to defer their shares and, as a result, the Company purchased all of the tranche 1 shares in June 2020. The purchase price for the tranche 1 and tranche 2 shares is based on a multiple of the subsidiary’s adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) less net debt as of the end of the measurement year, and the multiple varies depending on the level of EBITDA compared to a target. The Company recognized a liability of $26.2 million for the fair value of the 6% interest on the date of the acquisition, which is being accounted for as a mandatorily redeemable non-controlling interest. The fair value of the liability was determined using a Monte Carlo simulation model, which utilizes inputs, including the volatility of financial results, in order to model the probability of different outcomes. The Company classified this as a Level 3 fair value measurement due to the use of significant unobservable inputs. In subsequent periods, the liability for the mandatorily redeemable non-controlling interest is adjusted each reporting period to its redemption value based on conditions that exist as of each subsequent balance sheet date, provided that the liability cannot be adjusted below the amount initially recorded at the acquisition date. The Company records any such adjustments to the liability in interest expense in the Company’s Consolidated Statement of Operations. For the tranche 1 shares, the measurement period ended in 2019 and the $16.3 million liability as of May 3, 2020 was equal to the aggregate purchase price for the tranche 1 shares paid to the management shareholders in June 2020 under the conditions specified in terms of the acquisition agreement. For the tranche 2 shares, the Company recorded a gain of $3.7 million in interest expense during the thirteen weeks ended May 3, 2020 in connection with the remeasurement of the liability, which reflects the negative impact of the COVID-19 pandemic on the subsidiary’s results in the first quarter of 2020 and resulted in a reduction to the liability for the tranche 2 shares. The $12.9 million liability for the tranche 2 shares at May 3, 2020 represents the amount initially recorded at the acquisition date, as the amount the Company estimates it would pay under the conditions specified in the terms of the acquisition agreement if settlement had occurred as of May 3, 2020 of $12.1 million is less than the amount initially recorded. If the payment made for the tranche 2 shares at the settlement date is less than the liability recorded, the Company would record an extinguishment gain upon settlement. The liability for the mandatorily redeemable non-controlling interest was $29.2 million as of May 3, 2020 based on exchange rates in effect on that date, of which $16.3 million related to the tranche 1 shares was included in accrued expenses and $12.9 million related to the tranche 2 shares was included in other liabilities in the Company’s Consolidated Balance Sheet. Fair Value of the Acquisition The acquisition date fair value of the business acquired was $324.6 million, consisting of:
(In millions) |  |
Cash consideration |  | $ | 124.7 |
Fair value of the Company’s investment in PVH Australia |  | 131.4 |
Fair value of the Company’s investment in Gazal |  | 40.1 |
Fair value of mandatorily redeemable non-controlling interest |  | 26.2 |
Elimination of pre-acquisition receivable owed to the Company |  | 2.2 |
Total acquisition date fair value of the business acquired |  | $ | 324.6 |
Allocation of the Acquisition Date Fair Value The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
(In millions) |  |
Cash and cash equivalents |  | $ | 6.6 |
Trade receivables |  | 15.1 |
Inventories |  | 89.9 |
Prepaid expenses |  | 1.3 |
Other current assets |  | 3.5 |
Assets held for sale |  | 58.8 |
Property, plant and equipment |  | 18.4 |
Goodwill |  | 65.9 |
Intangible assets |  | 222.2 |
Operating lease right-of-use assets |  | 56.4 |
Total assets acquired |  | 538.1 |
Accounts payable |  | 14.4 |
Accrued expenses |  | 22.5 |
Short-term borrowings |  | 50.5 |
Current portion of operating lease liabilities |  | 10.9 |
Long-term portion of operating lease liabilities |  | 43.9 |
Deferred tax liability |  | 69.6 |
Other liabilities |  | 1.7 |
Total liabilities assumed |  | 213.5 |
Total acquisition date fair value of the business acquired |  | $ | 324.6 |
Prior to the closing of the Australia acquisition, Gazal had entered into an agreement to sell an office building and warehouse to a third party and, as such, the building was classified as held for sale on the acquisition date. In June 2019, the Company completed the sale of the building and warehouse for $59.4 million, incurring costs of $1.0 million, and leased back the building without an option to repurchase. No gain or loss was recognized on the transaction. The goodwill of $65.9 million was assigned as of the acquisition date to the Company’s Tommy Hilfiger International and Calvin Klein International segments in the amounts of $56.8 million and $9.1 million, respectively, which include the Company’s reporting units that are expected to benefit from the synergies of the combination. Goodwill is not deductible for tax purposes. The other intangible assets of $222.2 million consisted of reacquired perpetual license rights of $204.9 million, which are indefinite-lived, order backlog of $0.3 million, which was amortized on a straight-line basis over 0.5 years, and customer relationships of $17.0 million which are being amortized on a straight-line basis over 10.0 years. The Company finalized the purchase price allocation during the first quarter of 2020. Sale of the Speedo North America Business The Company entered into a definitive agreement on January 9, 2020 to sell its Speedo North America business to Pentland, the parent company of the Speedo brand, for $170.0 million in cash, subject to a working capital adjustment. The Company classified the assets and liabilities of the Speedo North America business as held for sale in the Company’s Consolidated Balance Sheet as of February 2, 2020 and recorded a pre-tax noncash loss of $142.0 million during the fourth quarter of 2019 (including a $116.4 million noncash impairment charge related to the Speedo perpetual license right) to reduce the carrying value of the Speedo North America business to its estimated fair value, less costs to sell. The estimated fair value, less costs to sell, reflected the amount of consideration the Company expected to receive upon closing of the transaction, inclusive of the working capital adjustment. The Company completed the sale of its Speedo North America business on April 6, 2020 for net proceeds of $169.1 million, subject to a final adjustment based on terms of the agreement, and deconsolidated the net assets of the business. In connection with the closing of the transaction, the Company recorded a pre-tax noncash loss of $5.9 million in the first quarter of 2020 resulting from the remeasurement of the loss recorded in the fourth quarter of 2019, primarily due to changes to the net assets of the Speedo North America business subsequent to February 2, 2020. The loss was recorded in other noncash loss, net in the Company’s Consolidated Statement of Operations and included in the Heritage Brands Wholesale segment. Upon the closing of the transaction, U.S.-based employees who were engaged primarily in the Speedo North America business terminated their employment with the Company. However, the Company retained the liability for any deferred vested benefits earned under its retirement plans. No further benefits will be accrued under the plans and as a result, the Company recognized a gain of $2.8 million in the first quarter of 2020 with a corresponding decrease to its pension benefit obligation. The gain was included in other noncash loss, net in the Company’s Consolidated Statement of Operations. Please see Note 8, “Retirement and Benefit Plans,” for further discussion. The assets and liabilities of the Speedo North America business classified as held for sale in the Company’s Consolidated Balance Sheet as of February 2, 2020 were included in the Heritage Brands Wholesale segment and consisted of the following:
(In millions) |  |
Assets held for sale: |  |
Trade receivables |  | $ | 48.8 |
Inventories, net |  | 54.3 |
Prepaid expenses |  | 0.6 |
Other current assets |  | 0.6 |
Property, plant and equipment, net |  | 6.1 |
Operating lease right-of-use assets |  | 9.0 |
Goodwill |  | 48.1 |
Other intangibles, net (1) |  | 95.3 |
Allowance for reduction of assets held for sale |  | (25.6) |
Total assets held for sale |  | $ | 237.2 |
Liabilities related to assets held for sale: |  |
Accounts payable |  | $ | 38.7 |
Accrued expenses |  | 5.4 |
Current portion of operating lease liabilities |  | 0.6 |
Long-term portion of operating lease liabilities |  | 10.6 |
Other liabilities |  | 1.8 |
Total liabilities related to assets held for sale |  | $ | 57.1 |
(1) Other intangibles, net includes a perpetual license right of $87.4 million and customer relationships of $7.9 million.

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