What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-06-04 compared with 2019-11-26 · 154 added, 257 removed, 334 unchanged (55% of the section changed)

1 unchanged sentence

THE CATO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVE INCOME

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND

COMPREHENSIVE INCOME (LOSS)

Three Months Ended

Nine Months Ended

November 2, 2019

November 3, 2018

November 2, 2019

November 3, 2018

(Dollars in thousands, except per share data)

6 unchanged sentences

Interest and other income

Cost and expenses, net

Income before income taxes

Income tax expense

Basic earnings per share

Diluted earnings per share

Comprehensive income:

Unrealized gain (loss) on available-for-sale securities, net of

deferred income taxes of ($ 8 ) and $ 380 for the three and

nine months ended November 2, 2019 and ($ 117 ) and ($ 141 ) for

the three and nine months ended November 3, 2018, respectively

Costs and expenses, net

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Basic earnings (loss) per share

Diluted earnings (loss) per share

Comprehensive income:

Net income (loss)

Unrealized gain (loss) on available-for-sale securities, net

of deferred income taxes of ($ 90 ) and $ 126 for May 2, 2020

and May 4, 2019, respectively

Comprehensive income (loss)

See notes to condensed consolidated financial statements (unaudited).

1 unchanged sentence

CONDENSED CONSOLIDATED BALANCE SHEETS

November 2, 2019

February 1, 2020

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Accounts receivable, net of allowance for doubtful accounts of

$ 900 and $ 842 at November 2, 2019 and February 2, 2019, respectively

$ 614 and $ 726 at May 2, 2020 and February 1, 2020, respectively

Merchandise inventories

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shares authorized;

issued 22,873,215 shares and 22,838,149 shares

at November 2, 2019 and February 2, 2019, respectively

22,252,038 and 22,535,779 shares issued

at May 2, 2020 and February 1, 2020, respectively

Convertible Class B common stock, $ 0.033 par value per share,

15,000,000 shares authorized;

issued 1,763,652 shares and 1,763,652 shares

at November 2, 2019 and February 2, 2019, respectively

1,763,652 and

1,763,652 shares issued at May 2, 2020 and February 1, 2020, respectively

Additional paid-in capital

Retained earnings

Accumulated other comprehensive income/(loss)

Accumulated other comprehensive income

Total Stockholders' Equity

3 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended

November 2, 2019

November 3, 2018

Three Months Ended

(Dollars in thousands)

Operating Activities:

Net income (loss)

Adjustments to reconcile net income to net cash provided

5 unchanged sentences

Loss on disposal of property and equipment

Impairment of store assets

Changes in operating assets and liabilities which provided

2 unchanged sentences

Prepaid and other assets

Operating lease right-of-use assets and liabilities

Accrued income taxes

Accounts payable, accrued expenses and other liabilities

Net cash provided by operating activities

Net cash provided (used) by operating activities

Investing Activities:

4 unchanged sentences

Sales of other assets

Net cash (used)/provided in investing activities

Net cash provided (used) by investing activities

Financing Activities:

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Repurchase of common stock

Proceeds from line of credit

Payments on line of credit

Proceeds from employee stock purchase plan

Proceeds from stock options exercised

Net cash (used) in financing activities

Net cash provided (used) by financing activities

Net increase (decrease) in cash, cash equivalents, and restricted cash

11 unchanged sentences

Comprehensive income:

Unrealized gain (loss) on available-for-sale securities, net of

deferred income tax liability of $ 126

Net income (loss)

Unrealized gains on available-for-sale securities, net of deferred

income tax benefit of ($ 90 )

Dividends paid ($ 0.33 per share)

6 unchanged sentences

Balance — May 2, 2020

Comprehensive income:

Unrealized gain (loss) on available-for-sale securities, net of

deferred income tax liability of $ 262

Dividends paid ($ 0.33 per share)

Class A common stock sold through employee stock purchase

plan — 5,402 shares

Class B common stock sold through stock option plans —

Class A common stock issued through restricted stock grant plans —

( 9,170 ) shares

Repurchase and retirement of treasury shares – - shares

Balance — August 3, 2019

Comprehensive income:

Unrealized gain (loss) on available-for-sale securities, net of

deferred income tax liability of $ 8

Dividends paid ($ 0.33 per share)

Class A common stock sold through employee stock purchase

plan — 18,252 shares

Class B common stock sold through stock option plans —

Class A common stock issued through restricted stock grant plans —

( 18,327 ) shares

Repurchase and retirement of treasury shares – 129,339 shares

Balance — November 2, 2019

See notes to condensed consolidated financial statements (unaudited).

THE CATO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Comprehensive

3 unchanged sentences

Comprehensive income:

Unrealized gain (loss) on available-for-sale securities, net of

deferred income tax benefit of ($ 122 )

Net income (loss)

Unrealized gains on available-for-sale securities, net of deferred

income tax liability of $ 126

Dividends paid ($ 0.33 per share)

6 unchanged sentences

Balance — May 4, 2019

Comprehensive income:

Unrealized gain (loss) on available-for-sale securities, net of

deferred income tax liability of $ 98

Dividends paid ($ 0.33 per share)

Class A common stock sold through employee stock purchase

plan — 2,791 shares

Class B common stock sold through stock option plans —

Class A common stock issued through restricted stock grant plans —

13,224 shares

Repurchase and retirement of treasury shares – 423,200 shares

Balance — August 4, 2018

Comprehensive income:

Unrealized gain (loss) on available-for-sale securities, net of

deferred income tax liability of $ 117

Dividends paid ($ 0.33 per share)

Class A common stock sold through employee stock purchase

plan — 17,923 shares

Class B common stock sold through stock option plans —

Class A common stock issued through restricted stock grant plans —

System.Object[] shares

Repurchase and retirement of treasury shares – 117,300 shares

Balance — November 3, 2018

See notes to condensed consolidated financial statements (unaudited).

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019

NOTE 1 - GENERAL :

The condensed consolidated financial statements have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the “Company”), and all amounts shown as of and for the periods ended November 2, 2019 and November 3, 2018 are unaudited.

The condensed consolidated financial statements as of May 2, 2020 and for the thirteen-week periods ended May 2, 2020 and May 4, 2019 have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the “Company”), and all amounts shown are unaudited.

In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included.

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Amounts as of February 1, 2020 have been derived from the audited balance sheet, but do not include all disclosures required by accounting principles generally accepted in the United States of America.

On November 21, 2019, the Board of Directors maintained the quarterly dividend at $ 0.33 per share.

Recently Adopted Accounting Policies

In 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Codification (“ASC”) 842 - Leases , with amendments issued in 2018.

The guidance requires lessees to recognize most leases on the balance sheet but does not change the manner in which expenses are recorded in the income statement.

For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases.

The Company utilized a comprehensive approach to assess the impact of this guidance on its financial statements and related disclosures, including the increase in the assets and liabilities on its balance sheet and the impact on its current lease portfolio from a lessee perspective.

The Company completed its comprehensive review of its lease portfolio, which includes mostly store leases impacted by the new guidance.

The Company reviewed its internal controls over leases and as a result the Company enhanced these controls;

however, these changes are not considered material.

In addition, the Company implemented a new software platform, and corresponding controls, for administering its leases and facilitating compliance with the new guidance.

The Company elected the transition package of practical expedients that is permitted by the standard.

The package of practical expedients allows the Company to not reassess previous accounting conclusions regarding whether existing arrangements are or contain leases, the classification of existing leases, and the treatment of initial direct costs.

The Company did not elect the hindsight transition practical expedient allowed for by the new standard, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets.

The Company adopted ASC 842 utilizing the modified retrospective approach as of February 3, 2019.

The modified retrospective approach the Company selected provides a method of transition allowing recognition of existing leases as of the beginning of the period of adoption (i.e., February 3, 2019), and which does not require the adjustment of comparative periods.

The adoption had a material impact on the Company’s financial statements, resulting in an increase of 40 % to each of its total assets and total

COVID-19 Update

The spread of COVID-19 has resulted in state and local orders mandating store closures to mitigate the spread of the virus.

Responses by customers, government and the private sector have and will likely continue to adversely impact our business operations for the remainder of 2020 and possibly beyond.

The extent to which the COVID-19 pandemic ultimately impacts the Company’s business, financial condition, results of operations, cash flows, and liquidity may differ from management’s current estimates due to inherent uncertainties regarding the duration and further spread of the outbreak, its severity, actions taken to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.

Beginning March 19, 2020, the Company temporarily closed all Cato, Its Fashion, Its Fashion Metro and Versona stores.

In addition, the Company suspended its quarterly dividend, significantly reduced capital expenditures and reduced its SG&A expense through the reduction of non-payroll expenses, as well as, furloughing associates and in certain instances eliminating positions primarily at the corporate office.

Beginning on May 1, 2020, the Company began to re-open stores based on the pertinent state and local orders.

There is significant uncertainty around the duration, breadth and severity of continued business disruptions related to COVID-19, as well as its impact on the U.S.

economy, consumer willingness to visit malls and shopping centers, and associate staffing for our stores.

At this time, it is uncertain as to the effect of national, state or local action or legislation that attempts to address the economic effects of COVID-19 on our customers, suppliers or the Company.

While the Company currently anticipates that our results for the remainder of 2020 will be adversely impacted, the extent to which COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain, including new information that may emerge concerning the severity of COVID-19, potential economic impacts to customers and suppliers, and the actions taken to contain it or mitigate its impact.

Accounting Policies - Impairment of Long-Lived Assets:

The Company invests in leaseholds, right-of use assets and equipment primarily in connection with the opening and remodeling of stores and in computer software and hardware.

The Company periodically reviews its store locations and estimates the recoverability of its long-lived assets, which primarily relate

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

liabilities on its balance sheet, but had no impact to retained earnings as of the beginning of 2019.

See Note 12 for further information.

FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019

to Fixtures and equipment, Leasehold improvements, Right-of-use assets net of Lease liabilities and Information technology equipment and software.

An impairment charge is recorded for the amount by which the carrying value exceeds the estimated fair value when the Company determines that projected cash flows associated with those long-lived assets will not be sufficient to recover the carrying value.

This determination is based on a number of factors, including the store’s projected cash flows, which include future sales growth projections.

The Company assesses the fair value of each lease by considering market rents and any lease terms that may adjust market rents under certain conditions such as the loss of an anchor tenant or a leased space in a shopping center not meeting certain criteria.

Further, in determining when to close a store, the Company considers real estate development in the area and perceived local market conditions, which can be difficult to predict and may be subject to change.

As a result of store closures, the Company determined a triggering event occurred resulting in an impairment analysis being performed.

An asset impairment charge of $ 5.3 million was recorded in the first quarter of 2020.

Recently Adopted Accounting Policies

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , which requires companies to measure and recognize expected credit losses for financial assets held at amortized costs based on expected losses rather than incurred losses.

The new accounting rules were effective for the Company in the first quarter of 2020 and will have a minimal impact on the financial statements.

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019

NOTE 2 - EARNINGS PER SHARE:

6 unchanged sentences

Three Months Ended

Nine Months Ended

November 2, 2019

November 3, 2018

November 2, 2019

November 3, 2018

(Dollars in thousands)

Net earnings (loss)

Earnings (loss) allocated to non-vested equity awards

Net earnings available to common stockholders

Net earnings (loss) available to common stockholders

Basic weighted average common shares outstanding

Diluted weighted average common shares outstanding

Net income per common share

Basic earnings per share

Diluted earnings per share

Net income (loss) per common share

Basic earnings (loss) per share

Diluted earnings (loss) per share

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019

NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME:

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended November 2, 2019:

Changes in Accumulated Other

Comprehensive Income (a)

Unrealized Gains

and (Losses) on

Available-for-Sale

Beginning Balance at August 3, 2019

Other comprehensive income before

reclassification

Amounts reclassified from accumulated

other comprehensive income (b)

Net current-period other comprehensive income

Ending Balance at November 2, 2019

(a) All amounts are net-of-tax.

Amounts in parentheses indicate a debit/reduction to other comprehensive income.

(b) Includes $ 183 impact of Accumulated other comprehensive income reclassifications into Interest and other income for net gains on available-for-sale securities.

The tax impact of this reclassification was $ 43 .

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the nine months ended November 2, 2019:

The following tables set forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended May 2, 2020:

Changes in Accumulated Other

9 unchanged sentences

Net current-period other comprehensive income

Ending Balance at November 2, 2019

(a) All amounts are net-of-tax.

Amounts in parentheses indicate a debit/reduction to other comprehensive income.

(b) Includes $ 234 impact of Accumulated other comprehensive income reclassifications into Interest and other income for net gains on available-for-sale securities.

The tax impact of this reclassification was $ 55 .

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED):

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended November 3, 2018:

Changes in Accumulated Other

Comprehensive Income (a)

Unrealized Gains

and (Losses) on

Available-for-Sale

Beginning Balance at August 4, 2018

Other comprehensive income before

reclassifications

Amounts reclassified from accumulated

other comprehensive income (b)

Net current-period other comprehensive income

Ending Balance at November 3, 2018

Ending Balance at May 2, 2020

(a) All amounts are net-of-tax.

Amounts in parentheses indicate a debit/reduction to other comprehensive income.

Amounts in parentheses indicate a debit/reduction to other comprehensive income ("OCI").

(b) Includes $ 655 impact of accumulated other comprehensive income reclassifications into Interest and other income for net gains on available-for-sale securities.

The tax impact of this reclassification was $ 151 .

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the nine months ended November 3, 2018:

The following tables set forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended May 4, 2019:

Changes in Accumulated Other

5 unchanged sentences

Other comprehensive income before

reclassifications

reclassification

Amounts reclassified from accumulated

1 unchanged sentence

Net current-period other comprehensive income

Ending Balance at November 3, 2018

Ending Balance at May 4, 2019

(a) All amounts are net-of-tax.

Amounts in parentheses indicate a debit/reduction to other comprehensive income.

Amounts in parentheses indicate a debit/reduction to other comprehensive income ("OCI").

(b) Includes $ 12 impact of accumulated other comprehensive income reclassifications into Interest and other income for net gains on available-for-sale securities.

2 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019

NOTE 4 – FINANCING ARRANGEMENTS:

As of November 2, 2019, the Company had an unsecured revolving credit agreement to borrow $ 35.0 million less the balance of any revocable letters of credit as discussed below.

On May 24, 2019, the Company extended its revolving credit agreement through May 2022.

The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of November 2, 2019.

There were no borrowings outstanding under this credit facility during the periods ended November 2, 2019 or February 2, 2019.

The weighted average interest rate under the credit facility was zero at November 2, 2019 due to no borrowings outstanding.

At November 2, 2019 and February 2, 2019, the Company had no outstanding revocable letters of credit relating to purchase commitments.

As of May 2, 2020, the Company had an unsecured revolving credit agreement allowing the Company to borrow $ 35.0 million less the balance of any letters of credit as discussed below.

The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of May 2, 2020.

There were $ 30.0 million in outstanding borrowings under this credit facility at May 2, 2020 and no outstanding borrowings at February 1, 2020.

As of May 2, 2020, the $ 30.0 million of outstanding borrowings is recorded in Accounts payable in the Condensed Consolidated Balance Sheets.

The weighted average interest rate under the credit facility was 1.76 % at May 2, 2020.

On June 2, 2020, the Company signed an amendment extending the revolving credit agreement through May 2023.

This new amendment, among other items, temporarily lowers the liquidity amount the Company is required to maintain.

In addition, a fixed charge ratio covenant is applicable beginning in the fourth quarter of 2021.

As of June 4, 2020, the Company had paid down $ 7.0 million of its outstanding line of credit, reducing the outstanding borrowings to $ 23.0 million.

At May 2, 2020 and February 1, 2020, the Company had no outstanding letters of credit relating to purchase commitments.

NOTE 5 – REPORTABLE SEGMENT INFORMATION:

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Merchandise inventory for the Company’s retail operating segments is sourced from the same countries and some of the same vendors, using similar production processes.

Merchandise for the Company’s operating segments is distributed to retail stores in a similar manner through the Company’s single distribution center and is subsequently distributed to customers in a similar manner.

The Company operates its women’s fashion specialty retail stores in 31 states as of November 2, 2019, principally in the southeastern United States .

The Company operates its women’s fashion specialty retail stores in 31 states as of May 2, 2020, principally in the southeastern United States .

The Company offers its own credit card to its customers and all credit authorizations, payment processing and collection efforts are performed by a separate subsidiary of the Company.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019

NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):

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Three Months Ended

Nine Months Ended

November 2, 2019

Interest and other income

Income/(Loss) before

Capital expenditures

Income before taxes

Capital expenditures

Three Months Ended

Nine Months Ended

November 3, 2018

Interest and other income

Income/(Loss) before

Capital expenditures

Income before taxes

Capital expenditures

Total assets as of November 2, 2019

Total assets as of May 2, 2020

Total assets as of February 1, 2020

3 unchanged sentences

Three Months Ended

Nine Months Ended

November 2, 2019

November 3, 2018

November 2, 2019

November 3, 2018

Other expenses

2 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019

NOTE 6 – STOCK BASED COMPENSATION:

As of November 2, 2019, the Company had two long-term compensation plans pursuant to which stock-based compensation was outstanding.

As of May 2, 2020, the Company had two long-term compensation plans pursuant to which stock-based compensation was outstanding or could be granted.

The 2018 Incentive Compensation Plan and 2013 Incentive Compensation Plan are for the granting of various forms of equity-based awards, including restricted stock and stock options for grant, to officers, directors and key employees.

Effective May 24, 2018, shares for grant were no longer available under the 2013 Incentive Compensation Plan.

The following table presents the number of options and shares of restricted stock initially authorized and available for grant under each of the plans as of November 2, 2019:

The following table presents the number of options and shares of restricted stock initially authorized and available for grant under each of the plans as of May 2, 2020:

Options and/or restricted stock initially authorized

Options and/or restricted stock available for grant:

November 2, 2019

In accordance with ASC 718, the fair value of current restricted stock awards is estimated on the date of grant based on the market price of the Company’s stock and is amortized to compensation expense on a straight-line basis over the related vesting periods.

As of November 2, 2019 and February 2, 2019, there was $ 13,261,000 and $ 11,989,000 , respectively, of total unrecognized compensation expense related to nonvested restricted stock awards, which had a remaining weighted-average vesting period of 2.4 years and 2.2 years, respectively.

The total compensation expense during the three and nine months ended November 2, 2019 was $ 1,211,000 and $ 3,351,000 , respectively, compared to $ 1,233,000 and $ 3,601,000 , respectively, for the three and nine months ended November 3, 2018.

These expenses are classified as a component of Selling, general and administrative expenses in the Condensed Consolidated Statements of Income and Comprehensive Income.

The following summary shows the changes in the shares of unvested restricted stock outstanding during the nine months ended November 2, 2019:

As of May 2, 2020 and February 1, 2020, there was $ 14,216,000 and $ 11,900,000 , respectively, of total unrecognized compensation expense related to nonvested restricted stock awards, which had a remaining weighted-average vesting period of 2.9 years and 2.2 years, respectively.

The total compensation expense during the three months ended May 2, 2020 was $ 606,000 compared to $ 645,000 for the three months ended May 4, 2019.

These expenses are classified as a component of Selling, general and administrative expenses in the Condensed Consolidated Statements of Income.

The following summary shows the changes in the shares of unvested restricted stock outstanding during the three months ended May 2, 2020:

Weighted Average

3 unchanged sentences

Forfeited or expired

Restricted stock awards at November 2, 2019

Restricted stock awards at May 2, 2020

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

NOTE 6 – STOCK BASED-COMPENSATION (CONTINUED):

FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019

The Company’s Employee Stock Purchase Plan allows eligible full-time employees to purchase a limited number of shares of the Company’s Class A Common Stock during each semi-annual offering period at a 15% discount through payroll deductions.

During the nine months ended November 2, 2019 and November 3, 2018, the Company sold 44,330 and 40,477 shares to employees at an average discount of $ 2.24 and $ 2.26 per share, respectively, under the Employee Stock Purchase Plan.

The compensation expense recognized for the 15% discount given under the Employee Stock Purchase Plan was approximately $ 99,000 and $ 91,000 for the nine months ended November 2, 2019 and November 3, 2018, respectively.

These expenses are classified as a component of Selling, general and administrative expenses.

During the three months ended May 2, 2020 and May 4, 2019, the Company sold 26,957 and 20,676 shares to employees at an average discount of $ 1.64 and $ 2.23 per share, respectively, under the Employee Stock Purchase Plan.

The compensation expense recognized for the 15% discount given under the Employee Stock Purchase Plan was approximately $ 44,000 and $ 46,000 for the three months ended May 2, 2020 and May 4, 2019, respectively.

These expenses are classified as a component of Selling, general and administrative expenses in the Condensed Consolidated Statements of Income.

NOTE 7 – FAIR VALUE MEASUREMENTS:

The following tables set forth information regarding the Company’s financial assets and liabilities that are measured at fair value (in thousands) as of November 2, 2019 and February 2, 2019:

November 2, 2019

The following tables set forth information regarding the Company’s financial assets and liabilities that are measured at fair value (in thousands) as of May 2, 2020 and February 1, 2020:

State/Municipal Bonds

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019

February 1, 2020

8 unchanged sentences

Total Liabilities

The Company’s investment portfolio was primarily invested in corporate bonds and tax-exempt and taxable governmental debt securities held in managed accounts with underlying ratings of A or better at November 2, 2019 and February 2, 2019.

The state, municipal and corporate bonds have contractual maturities which range from one month to 6.0 years.

Treasury Notes and Certificates of Deposit have contractual maturities which range from 13 days to 3.0 years.

These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted cash and Restricted short-term investments on the accompanying Condensed Consolidated Balance Sheets.

The state, municipal and corporate bonds have contractual maturities which range from two days to seven years .

Treasury Notes and Certificates of Deposit have contractual maturities which range from one month to two years .

These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted cash, Restricted short-term investments and Other assets on the accompanying Condensed Consolidated Balance Sheets.

These assets are carried at fair value with unrealized gains and losses reported net of taxes in Accumulated other comprehensive income.

2 unchanged sentences

The bank credit card asset-backed securities are backed by revolving pools of credit card receivables generated by account holders of cards from American Express, Citibank, JPMorgan Chase, Capital One, and Discover.

Additionally, at November 2, 2019, the Company had $ 0.7 million of corporate equities and deferred compensation plan assets of $ 10.3 million.

Additionally, at May 2, 2020, the Company had $ 0.6 million of corporate equities and deferred compensation plan assets of $ 9.7 million.

At February 1, 2020, the Company had $ 0.7 million of corporate equities and deferred compensation plan assets of $ 10.5 million.

1 unchanged sentence

Level 1 category securities are measured at fair value using quoted active market prices.

Level 2 investment securities include corporate bonds, municipal bonds and asset-backed securities for which quoted prices may not be available on active exchanges for identical instruments.

Level 2 investment securities include corporate and municipal bonds for which quoted prices may not be available on active exchanges for identical instruments.

Their fair value is principally based on market values determined by management with assistance of a third-party pricing service.

1 unchanged sentence

Deferred compensation plan assets consist of life insurance policies.

These life insurance policies are valued based on the cash surrender value of the insurance contract, which is determined based on such factors as the

These life insurance policies are valued based on the cash surrender value of the insurance contract, which is determined based on such factors as the fair value of the underlying assets and discounted cash flow and are therefore classified within Level 3 of the valuation hierarchy.

The Level 3 liability associated with the life insurance policies represents a deferred

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

fair value of the underlying assets and discounted cash flow and are therefore classified within Level 3 of the valuation hierarchy.

The Level 3 liability associated with the life insurance policies represents a deferred compensation obligation, the value of which is tracked via underlying insurance funds’ net asset values, as recorded in Other noncurrent liabilities in the Condensed Consolidated Balance Sheets.

FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019

compensation obligation, the value of which is tracked via underlying insurance funds’ net asset values, as recorded in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet.

These funds are designed to mirror mutual funds and money market funds that are observable and actively traded.

The following tables summarize the change in fair value of the Company’s financial assets and liabilities measured using Level 3 inputs as of November 2, 2019 and February 2, 2019 (in thousands):

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019

The following tables summarize the change in fair value of the Company’s financial assets measured using Level 3 inputs as of May 2, 2020 and February 1, 2020 (dollars in thousands):

Measurements Using

6 unchanged sentences

Included in other comprehensive income

Ending Balance at November 2, 2019

Ending Balance at May 2, 2020

Measurements Using

6 unchanged sentences

Included in other comprehensive income

Ending Balance at November 2, 2019

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

Ending Balance at May 2, 2020

Measurements Using

12 unchanged sentences

Beginning Balance at February 2, 2019

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019

Total (gains) or losses

4 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019

NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which modifies the measurement of expected credit losses of certain financial instruments.

Topic 326 is effective for annual reporting periods beginning after December 15, 2019 with early adoption permitted.

The Company is currently assessing the impact of the ASU on its financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes .

The new accounting rules reduce complexity by removing specific exceptions to general principles related to intraperiod tax allocations, ownership changes in foreign investments, and interim period income tax accounting for year-to-date losses that exceed anticipated losses.

The new accounting rules also simplify accounting for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods.

The new accounting rules will be effective for the Company in the first quarter of 2021.

The Company is currently in the process of evaluating the impact of adoption of the new accounting rules on the Company’s financial position, results of operations, cash flows and disclosures.

NOTE 9 – INCOME TAXES:

The Company had an effective tax rate for the first nine months of 2019 of 14.3 % compared to 7.9 % for the first nine months of 2018.

The increase in the effective tax rate for the first nine months was primarily due to higher pre-tax earnings, more taxable interest income, more non-deductible IRS Section 162(m) compensation, and a release of reserves for uncertain tax positions due to state audit settlements in the first quarter of 2018.

The Company had an effective tax rate for the first quarter of 2020 of 24.3 % (Benefit) compared to an effective tax rate of 16.9 % (Expense) for the first quarter of 2019.

The increase in the 2020 first quarter tax rate was primarily due to the federal net operating loss carryback provisions of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), offset by valuation allowances against state income net operating losses, and an upward adjustment in the reserves for uncertain tax positions specific to state income taxes in the first quarter of 2020.

The Company assessed the ability to realize these state net operating losses in light of the adverse impact on the Company’s financial statements and operations due to COVID-19.

Based on this assessment, the Company concluded that it is more likely than not that the Company will not be able to realize the state net operating losses and, accordingly, has recorded a valuation allowance for these items including the value of its state net operating loss deferred tax assets as of February 1, 2020.

The estimated annual effective tax rate for the current fiscal year is impacted by the ability to carryback federal net operating losses due to the CARES Act, partially offset by changes in management’s judgement regarding the ability to realize deferred tax assets, primarily state income net operating losses generated in the current fiscal year.

The Company has factored the realizability of these deferred tax assets generated as a result of projected current year losses into its estimated annual effective rate for the current year.

To the extent that actual results and/or events differ from the predicted results, the Company may continue to see effects on the estimated annual effective tax rate.

NOTE 10 – COMMITMENTS AND CONTINGENCIES:

1 unchanged sentence

Although such litigation is routine and incidental to the conduct of the Company’s business, as with any business of its size with a significant number of employees and significant merchandise sales, such litigation could result in large monetary awards.

Based on information currently available, management does not believe that any reasonably possible losses arising from current pending litigation will have a material adverse effect on the Company’s condensed consolidated financial statements.

However, given the inherent uncertainties involved in such matters, an adverse outcome in one or more such matters could materially and adversely affect the Company’s financial condition, results of operations and cash flows in any particular reporting period.

However, given the inherent

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019

uncertainties involved in such matters, an adverse outcome in one or more such matters could materially and adversely affect the Company’s financial condition, results of operations and cash flows in any particular reporting period.

The Company accrues for these matters when the liability is deemed probable and reasonably estimable.

8 unchanged sentences

actual returns have not varied materially from historical amounts.

A provision is made for estimated write-offs associated with sales made with the Company’s

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

proprietary credit card.

A provision is made for estimated write-offs associated with sales made with the Company’s proprietary credit card.

Amounts related to shipping and handling billed to customers in a sales transaction are classified as Other revenue and the costs related to shipping product to customers (billed and accrued) are classified as Cost of goods sold.

2 unchanged sentences

None of the credit card receivables are secured.

The Company estimated uncollectible amounts of $, 670000 and $, 681000 for the nine months ended November 2, 2019 and November 3, 2018, respectively, on sales purchased on the Company’s proprietary credit card of $ 20.3 million and $ 20.8 million for the nine months ended November 2, 2019 and November 3, 2018, respectively.

The Company estimated uncollectible amounts of $ 69,000 and $, 226000 for the periods ended May 2, 2020 and May 4, 2019, respectively, on sales purchased by the Company’s proprietary credit card of $ 2.6 million and $ 6.9 million for the periods ended May 2, 2020 and May 4, 2019, respectively.

The following table provides information about receivables and contract liabilities from contracts with customers (in thousands):

Balance as of

November 2, 2019

February 1, 2020

8 unchanged sentences

As most of the Company’s leases do not provide an implicit rate, it uses its estimated incremental borrowing rate based on the information available at commencement date of the lease in determining the present value of lease payments.

The components of lease cost are shown below (in thousands):

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

FOR THE THREE MONTHS ENDED MAY 2, 2020 AND MAY 4, 2019

The components of lease cost are shown below (in thousands):

Three Months Ended

Nine Months Ended

November 2, 2019

Operating lease cost (a)

1 unchanged sentence

ASC 840 prepaid rent expense (c)

(a) Includes contra right-of-use asset amortization of ($1.0) million and ($3.9) million for the three months and nine months ended November 2, 2019, respectively.

(a) Includes right-of-use asset amortization of ($1.7) million and ($2.0) million for the three months ended May 2, 2020 and May 4, 2019, respectively.

(b) Primarily related to monthly percentage rent for stores not presented on the balance sheet.

2 unchanged sentences

Operating cash flow information:

Nine Months Ended

November 2, 2019

Three Months Ended

Cash paid for amounts included in the measurement of lease liabilities

2 unchanged sentences

Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows:

November 2, 2019

Weighted-average remaining lease term

Weighted-average discount rate

Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands):

As of May 2, 2020, the maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands):

Total lease payments

1 unchanged sentence

Present value of lease liabilities

(a) Excluding the nine months ended November 2, 2019.

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 2, 2019 AND NOVEMBER 3, 2018

As of February 2, 2019, the minimum rental commitments under non-cancelable operating leases are (in thousands):

Total minimum lease payments

A summary of rent expense for the fiscal years ended February 2, 2019 and February 3, 2018 was as follows (in thousands):

Balance as of

February 2, 2019

February 3, 2018

(a) Excluding the 3 months ended May 2, 2020.

THE CATO CORPORATION

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements