CATO CORP 10-K

Item 8. Financial Statements and Supplementary Data: INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Page Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) ..................................... 35 Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020 ................................ ........... 38 Consolidated Balance Sheets at January 29, 2022 and January 30, 2021 ............................................. 39 Consolidated Statements of Cash Flows for the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020................................ ................................................................ ......................... 40 Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020 ................................................................ ............................ 41 Notes to Consolidated Financial Statements .......................................................................................... 42 Schedule II — Valuation and Qualifying Accounts for the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020 ................................................................ ............................ 72 35 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of The Cato Corporation Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of The Cato Corporation and its subsidiaries (the “Company”) as of January 29, 2022 and January 30, 2021, and the related consolidated statements of income (loss) and comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended January 29, 2022, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 29,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 29, 2022 and January 30, 2021, and the results of its operations and its cash flows for each of the three years in the period ended January 29, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance 36 of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Impairment of Long-Lived Assets - Store Location Asset Groupings As described in Notes 1 and 6 to the consolidated financial statements, the Company’s consolidated property and equipment, net balance was $63.1 million, of which the store locations were a portion, and consolidated operating lease right-of-use assets, net balance was $181.3 million as of January 29, 2022. 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 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 management 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 historical operating results and future projected cash flows, which include contribution margin 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. An impairment charge for store assets of $0.9 million was recorded during the year ended January 29, 2022. The principal considerations for our determination that performing procedures relating to the impairment of long-lived assets – store location asset groupings is a critical audit matter are (i) the significant judgment by management when determining the fair value measurement of the store location asset groupings, which led to (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s projected cash flow assumptions related to contribution margin projections. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s long -lived assets – store location recoverability test and determination of the fair value of the asset group. These procedures also included, among others (i) testing the completeness and accuracy of underlying data used in the projected cash flows and store location asset groupings, (ii) evaluating the reasonableness of management’s assumptions related to contribution margin projections by considering current and historical performance of the store location asset groupings and whether the assumptions were consistent with evidence obtained in other areas of the audit, (iii) evaluating the appropriateness of the projected cash flow model, and (iv) evaluating 37 management’s assessment of the fair value of the leased assets included in the store location asset groupings. /s/ PricewaterhouseCoopers LLP Charlotte, North Carolina March 23, 2022 We have served as the Company’s auditor since 2003. 38 THE CATO CORPORATION CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) Fiscal Year Ended January 29, 2022 January 30, 2021 February 1, 2020 (Dollars in thousands, except per share data) REVENUES Retail sales $ 761,358 $ 567,516 $ 816,184 Other revenue (principally finance charges, late fees and layaway charges) 7,913 7,595 9,151 Total revenues 769,271 575,111 825,335 COSTS AND EXPENSES, NET Cost of goods sold (exclusive of depreciation shown below) 453,065 433,187 508,906 Selling, general and administrative (exclusive of depreciation shown below) 266,954 206,492 263,773 Depreciation 12,356 14,681 15,485 Interest expense 72 187 29 Interest and other income ( 2,141 ) ( 6,630 ) ( 6,065 ) Cost and expenses, net 730,306 647,917 782,128 Income (loss) before income taxes 38,965 ( 72,806 ) 43,207 Income tax expense (benefit) 2,121 ( 25,323 ) 7,310 Net income (loss) $ 36,844 $ ( 47,483 ) $ 35,897 Basic earnings (loss) per share $ 1.65 $ ( 2.01 ) $ 1.46 Diluted earnings (loss) per share $ 1.65 $ ( 2.01 ) $ 1.46 Dividends per share $ 0.45 $ 0.33 $ 1.32 Comprehensive income: Net income (loss) $ 36,844 $ ( 47,483 ) $ 35,897 Unrealized gain (loss) on available-for-sale securities, net of deferred income taxes of ($ 433 ), ($ 79 ), and $ 453 for fiscal 2021, 2020 and 2019, respectively ( 1,435 ) ( 268 ) 1,500 Comprehensive income (loss) $ 35,409 $ ( 47,751 ) $ 37,397 See notes to consolidated financial statements. 39 THE CATO CORPORATION CONSOLIDATED BALANCE SHEETS January 29, 2022 January 30, 2021 (Dollars in thousands) ASSETS Current Assets: Cash and cash equivalents $ 19,759 $ 17,510 Short-term investments 145,998 126,416 Restricted cash 3,918 3,512 Restricted short-term investments 1 406 Accounts receivable, net of allowance for customer credit losses of $ 803 at January 29, 2022 and $ 605 at January 30, 2021 55,812 52,743 Merchandise inventories 124,907 84,123 Prepaid expenses and other current assets 5,273 5,840 Total Current Assets 355,668 290,550 Property and equipment – net 63,083 72,550 Deferred income taxes 9,313 5,685 Other assets 24,437 22,850 Right-of-Use assets - net 181,265 199,817 Total Assets $ 633,766 $ 591,452 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 109,546 $ 73,769 Accrued expenses 40,373 40,790 Accrued bonus and benefits 26,488 1,916 Accrued income taxes 920 2,038 Current lease liability 66,808 63,421 Total Current Liabilities 244,135 181,934 Other noncurrent liabilities 17,914 19,705 Lease liability 117,521 143,315 Commitments and contingencies - - Stockholders' Equity: Preferred stock, $ 100 par value per share, 100,000 shares authorized, none issued - - Class A common stock, $ 0.033 par value per share, 50,000,000 shares authorized; 19,824,093 and 20,839,795 shares issued at January 29, 2022 and January 30, 2021, respectively 669 703 Convertible Class B common stock, $ 0.033 par value per share, 15,000,000 shares authorized; 1,763,652 and 1,763,652 shares issued at January 29, 2022 and January 30, 2021, respectively 59 59 Additional paid-in capital 119,540 115,278 Retained earnings 134,208 129,303 Accumulated other comprehensive income ( 280 ) 1,155 Total Stockholders' Equity 254,196 246,498 Total Liabilities and Stockholders’ Equity $ 633,766 $ 591,452 See notes to consolidated financial statements. 40 THE CATO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended January 29, 2022 January 30, 2021 February 1, 2020 (Dollars in thousands) Operating Activities: Net income (loss) $ 36,844 $ ( 47,483 ) $ 35,897 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 12,356 14,681 15,485 Provision for customer credit losses 429 306 524 Purchase premium and premium amortization of investments ( 332 ) ( 691 ) ( 694 ) Gain on sale of assets held for investment - ( 2,298 ) - Share based compensation 4,090 4,092 4,669 Deferred income taxes ( 3,194 ) 3,030 2,120 Loss on disposal of property and equipment 629 461 837 Impairment of assets 901 13,702 470 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable ( 3,499 ) ( 26,935 ) 1,525 Merchandise inventories ( 40,784 ) 31,242 4,220 Prepaid and other assets ( 505 ) ( 1,596 ) 5,072 Operating lease right-of-use assets and liabilities ( 3,855 ) ( 2,611 ) ( 9,803 ) Accrued income taxes ( 1,118 ) 335 1,703 Accounts payable, accrued expenses and other liabilities 57,826 ( 16,945 ) ( 8,629 ) Net cash provided by (used in) operating activities 59,788 ( 30,710 ) 53,396 Investing Activities: Expenditures for property and equipment ( 4,105 ) ( 13,956 ) ( 8,306 ) Purchase of short-term investments ( 141,937 ) ( 74,041 ) ( 218,345 ) Sales of short-term investments 121,110 149,298 205,375 Purchase of other assets ( 400 ) - ( 1,357 ) Sales of other assets - 3,205 - Net cash provided by (used in) investing activities ( 25,332 ) 64,506 ( 22,633 ) Financing Activities: Dividends paid ( 9,972 ) ( 7,912 ) ( 32,592 ) Repurchase of common stock ( 22,033 ) ( 19,654 ) ( 9,605 ) Proceeds from line of credit - 34,000 - Payments to line of credit - ( 34,000 ) - Proceeds from employee stock purchase plan 204 391 626 Net cash used in financing activities ( 31,801 ) ( 27,175 ) ( 41,571 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 2,655 6,621 ( 10,808 ) Cash, cash equivalents, and restricted cash at beginning of period 21,022 14,401 25,209 Cash, cash equivalents, and restricted cash at end of period $ 23,677 $ 21,022 $ 14,401 Non-cash activity: Accrued plant and equipment $ 657 $ 343 $ 2,828 Accrued treasury stock - - 818 See notes to consolidated financial statements. 41 THE CATO CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Accumulated Additional Other Total Common Paid-In Retained Comprehensive Stockholders' Stock Capital Earnings Income Equity (Dollars in thousands) Balance — February 2, 2019 $ 826 $ 105,580 $ 210,507 $ ( 77 ) $ 316,836 Comprehensive income: Net income (loss) - - 35,897 - 35,897 Unrealized gains (loss) on available-for-sale securities, net of deferred income tax liability of $ 453 - - - 1,500 1,500 Dividends paid ($ 1.32 per share) - - ( 32,592 ) - ( 32,592 ) Class A common stock sold through employee stock purchase plan — 48,626 shares 1 735 - - 736 Class A common stock issued through restricted stock grant plans — 321,484 shares 14 4,498 48 - 4,560 Repurchase and retirement of treasury shares – 622,480 shares ( 21 ) - ( 10,402 ) - ( 10,423 ) Balance — February 1, 2020 $ 820 $ 110,813 $ 203,458 $ 1,423 $ 316,514 Comprehensive income: Net income (loss) - - ( 47,483 ) - ( 47,483 ) Unrealized gains (loss) on available-for-sale securities, net of deferred income tax benefit of ($ 79 ) - - - ( 268 ) ( 268 ) Dividends paid ($ 0.33 per share) - - ( 7,912 ) - ( 7,912 ) Class A common stock sold through employee stock purchase plan — 48,191 shares 1 459 - - 460 Class A common stock issued through restricted stock grant plans — 231,194 shares 8 4,006 8 - 4,022 Repurchase and retirement of treasury shares – 1,975,373 shares ( 67 ) - ( 18,768 ) - ( 18,835 ) Balance — January 30, 2021 $ 762 $ 115,278 $ 129,303 $ 1,155 $ 246,498 Comprehensive income: Net income (loss) - - 36,844 - 36,844 Unrealized gains (loss) on available-for-sale securities, net of deferred income tax benefit of ($ 433 ) - - - ( 1,435 ) ( 1,435 ) Dividends paid ($ 0.45 per share) - - ( 9,972 ) - ( 9,972 ) Class A common stock sold through employee stock purchase plan — 24,398 shares - 239 - - 239 Class A common stock issued through restricted stock grant plans — 381,002 shares 13 4,023 19 - 4,055 Repurchase and retirement of treasury shares – 1,421,102 shares ( 47 ) - ( 21,986 ) - ( 22,033 ) Balance — January 29, 2022 $ 728 $ 119,540 $ 134,208 $ ( 280 ) $ 254,196 See notes to consolidated financial statements. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 42 1. Summary of Significant Accounting Policies: Principles of Consolidation: The Consolidated Financial Statements include the accounts of The Cato Corporation and its wholly-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated. Description of Business and Fiscal Year: The Company has two reportable segments — the operation of a fashion specialty stores segment (“Retail Segment”) and a credit card segment (“Credit Segment”). The apparel specialty stores operate under the names “Cato,” “Cato Fashions,” “Cato Plus,” “It’s Fashion,” “It’s Fashion Metro” and “Versona,” including e-commerce websites. The stores are located primarily in strip shopping centers principally in the southeastern United States. The Company’s fiscal year ends on the Saturday nearest January 31 of the subsequent year. Use of Estimates: The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s financial statements include the allowance for customer credit losses, inventory shrinkage, the calculation of potential asset impairment, workers’ compensation, general and auto insurance liabilities, reserves relating to self-insured health insurance, and uncertain tax positions. Cash and Cash Equivalents: Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. Short-Term Investments: Investments with original maturities beyond three months are classified as short-term investments. See Note 3 for the Company’s estimated fair value of, and other information regarding, its short-term investments. The Company’s short-term investments are all classified as available-for-sale. As they are available for current operations, they are classified on the Consolidated Balance Sheets as Current Assets. Available-for-sale securities are carried at fair value, with unrealized gains and temporary losses, net of income taxes, reported as a component of Accumulated other comprehensive income. Other than temporary declines in the fair value of investments are recorded as a reduction in the cost of the investments in the accompanying Consolidated Balance Sheets and a reduction of Interest and other income in the accompanying Consolidated Statements of Income and Comprehensive Income. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization of premiums, accretion of discounts and realized gains and losses are included in Interest and other income. Restricted Cash and Restricted Short-term Investments: The Company had $ 3.9 million and $ 3.9 million in escrow at January 29, 2022 and January 30, 2021, respectively, as security and collateral for administration of the Company’s self-insured workers’ compensation and general liability coverage, which is reported as Restricted cash and Restricted short-term investments on the Consolidated Balance Sheets. Supplemental Cash Flow Information: Income tax payments, net of refunds received, for the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020 were a payment of $ 13,176,000 , a payment of $ 6,825,000 and a refund of $ 4,681,000 , respectively. Inventories: Merchandise inventories are stated at the net realizable value as determined by the weighted-average cost method. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 43 Property and Equipment: Property and equipment are recorded at cost, including land. Maintenance and repairs are expensed to operations as incurred; renewals and betterments are capitalized. Depreciation is determined on the straight-line method over the estimated useful lives of the related assets excluding leasehold improvements. Leasehold improvements are amortized over the shorter of the estimated useful life or lease term. For leases with renewal periods at the Company’s option, the Company generally uses the original lease term plus reasonably assured renewal option periods (generally one five-year option period) to determine estimated useful lives. Typical estimated useful lives are as follows: ` Estimated Classification Useful Lives Land improvements 10 years Buildings 30-40 years Leasehold improvements 5-10 years Fixtures and equipment 3-10 years Information technology equipment and software 3-10 years Aircraft 20 years 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 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 historical operating results and future projected cash flows, which include contribution margin 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. Asset impairment charges of $ 900,719 , $ 13,702,022 and $ 146,026 were incurred in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Other Assets: Other assets are comprised of long-term assets, primarily insurance contracts related to deferred compensation assets and land held for investment purposes. ` Fiscal Year Ended January 29, 2022 January 30, 2021 (Dollars in thousands) Other Assets Deferred Compensation Investments $ 11,472 $ 11,264 Miscellaneous Investments 1,818 1,264 Other Deposits 1,319 522 Land Held for Investment 9,334 9,334 Other 494 466 Total Other Assets $ 24,437 $ 22,850 Leases: 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 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 44 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. See Note 11 for further information. The Company leases all of its retail stores. Most lease agreements contain construction allowances and rent escalations. For purposes of recognizing incentives and minimum rental expenses on a straight- line basis over the terms of the leases, including renewal periods considered reasonably assured, the Company begins amortization as of the initial possession date which is when the Company enters the space and begins to make improvements in preparation for intended use. Revenue Recognition: The Company recognizes sales at the point of purchase when the customer takes possession of the merchandise and pays for the purchase, generally with cash or credit. Sales from purchases made with Cato credit, gift cards and layaway sales from stores are also recorded when the customer takes possession of the merchandise. E-commerce sales are recorded when the risk of loss is transferred to the customer. Gift cards are recorded as deferred revenue until they are redeemed or forfeited. Layaway sales are recorded as deferred revenue until the customer takes possession or forfeits the merchandise. Gift cards do not have expiration dates. A provision is made for estimated merchandise returns based on sales volumes and the Company’s experience; 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 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. In accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”), in fiscal 2021, 2020 and 2019, the Company recognized $ 1,482,000 , $ 891,000 and $ 921,000 , respectively, of income on unredeemed gift cards (“gift card breakage”) as a component of Other Revenue on the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). Under Topic 606, the Company recognizes gift card breakage using an expected breakage percentage based on redeemed gift cards. See Note 2 for further information on miscellaneous income. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 45 The Company offers its own proprietary credit card to customers. All credit activity is performed by the Company’s wholly-owned subsidiaries. None of the credit card receivables are secured. The Company estimated customer credit losses of $ 485,000 and $ 435,000 for the twelve months ended January 29, 2022 and January 30, 2021, respectively, on sales purchased on the Company’s proprietary credit card of $ 18.7 million and $ 15.2 million for the twelve months ended January 29, 2022 and January 30, 2021, respectively. The following table provides information about receivables and contract liabilities from contracts with customers (in thousands): ` Balance as of January 29, 2022 January 30, 2021 Proprietary Credit Card Receivables, net $ 8,998 $ 9,606 Gift Card Liability $ 8,308 $ 8,155 Cost of Goods Sold: Cost of goods sold includes merchandise costs, net of discounts and allowances, buying costs, distribution costs, occupancy costs, freight, and inventory shrinkage. Net merchandise costs and in-bound freight are capitalized as inventory costs. Buying and distribution costs include payroll, payroll-related costs and operating expenses for our buying departments and distribution center. Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities and maintenance for stores and distribution facilities. Buying, distribution, occupancy and internal transfer costs are treated as period costs and are not capitalized as part of inventory. The direct costs associated with shipping goods to customers are recorded as a component of Cost of goods sold. Advertising: Advertising costs are expensed in the period in which they are incurred. Advertising expense was approximately $ 6,037,000 , $ 4,385,000 and $ 5,600,000 for the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020, respectively. Stock Repurchase Program: For the fiscal year ended January 29, 2022, the Company had 450,047 shares remaining in open authorizations. There is no specified expiration date for the Company’s repurchase program. Share repurchases are recorded in Retained earnings, net of par value. From year end through March 23, 2022, the Company repurchased 156,707 shares for $2,515,310. The Board of Directors increased the Company’s open share repurchase authorization by one million shares at the February 24, 2022 Board of Directors meeting. Earnings Per Share: ASC 260 - Earnings Per Share requires dual presentation of basic EPS and diluted EPS on the face of all income statements for all entities with complex capital structures. The Company has presented one basic EPS and one diluted EPS amount for all common shares in the accompanying Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). While the Company’s certificate of incorporation provides the right for the Board of Directors to declare dividends on Class A shares without declaration of commensurate dividends on Class B shares, the Company has historically paid the same dividends to both Class A and Class B shareholders and the Board of Directors has resolved to continue this practice. Accordingly, the Company’s allocation of income for purposes of EPS computation is the same for Class A and Class B shares and the EPS amounts reported herein are applicable to both Class A and Class B shares. Basic EPS is computed as net income less earnings allocated to non-vested equity awards divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options and the Employee Stock Purchase Plan. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 46 The following table reflects the basic and diluted EPS calculations for the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020: ` Fiscal Year Ended January 29, 2022 January 30, 2021 February 1, 2020 Numerator (Dollars in thousands) Net earnings (loss) $ 36,844 $ ( 47,483 ) $ 35,897 (Earnings) loss allocated to non-vested equity awards ( 1,937 ) 2,096 ( 1,280 ) Net earnings (loss) available to common stockholders $ 34,907 $ ( 45,387 ) $ 34,617 Denominator Basic weighted average common shares outstanding 21,113,828 22,536,090 23,738,443 Diluted weighted average common shares outstanding 21,113,828 22,536,090 23,738,443 Net income (loss) per common share Basic earnings (loss) per share $ 1.65 $ ( 2.01 ) $ 1.46 Diluted earnings (loss) per share $ 1.65 $ ( 2.01 ) $ 1.46 Vendor Allowances: The Company receives certain allowances from vendors primarily related to purchase discounts and markdown and damage allowances. All allowances are reflected in Cost of goods sold as earned when the related products are sold. Cash consideration received from a vendor is presumed to be a reduction of the purchase cost of merchandise and is reflected as a reduction of inventory. The Company does not receive cooperative advertising allowances. Income Taxes: The Company files a consolidated federal income tax return. Income taxes are provided based on the asset and liability method of accounting, whereby deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. Unrecognized tax benefits for uncertain tax positions are established in accordance with ASC 740 – Income Taxes when, despite the fact that the tax return positions are supportable, the Company believes these positions may be challenged and the results are uncertain. The Company adjusts these liabilities in light of changing facts and circumstances. Potential accrued interest and penalties related to unrecognized tax benefits within operations are recognized as a component of Income before income taxes. The Company assesses the likelihood that deferred tax assets will be able to be realized, and based on that assessment, the Company will determine if a valuation allowance should be recorded. In addition, the Tax Cuts and Jobs Act implemented a new minimum tax on global intangible low- taxed income (“GILTI”). The Company has elected to account for GILTI tax in the period in which it is incurred, which is included as a component of its current year provision for income taxes. Store Opening Costs: Costs relating to the opening of new stores or the relocating or expanding of existing stores are expensed as incurred. A portion of construction, design, and site selection costs are capitalized to new, relocated and remodeled stores. Insurance: The Company is self-insured with respect to employee health care, workers’ compensation and general liability. The Company’s self-insurance liabilities are based on the total estimated cost of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims, and THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 47 are not discounted. Management reviews current and historical claims data in developing its estimates. The Company has stop-loss insurance coverage for individual claims in excess of $ 325,000 for employee healthcare, $ 350,000 for workers’ compensation and $ 250,000 for general liability. Fair Value of Financial Instruments: The Company’s carrying values of financial instruments, such as cash and cash equivalents, short-term investments, restricted cash and short-term investments, approximate their fair values due to their short terms to maturity and/or their variable interest rates. Stock Based Compensation: The Company records compensation expense associated with restricted stock and other forms of equity compensation in accordance with ASC 718 - Compensation – Stock Compensation. Compensation cost associated with stock awards recognized in all years presented includes: 1) amortization related to the remaining unvested portion of all stock awards based on the grant date fair value and 2) adjustments for the effects of actual forfeitures versus initial estimated forfeitures. Recently Adopted Accounting Policies: 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 Company adopted this accounting standards update on the first day of the first quarter of 2021 with no material impact on its Condensed Consolidated Financial Statements. In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting . The ASU, and subsequent clarifications, provide practical expedients for contract modification accounting related to the transition away from the London Interbank Offered Rate (LIBOR) and other interbank offering rates to alternative reference rates. The expedients are applicable to contract modifications made and hedging relationships entered into on or before December 31, 2022. The Company adopted this accounting standard the first day of the fourth quarter of 2021 with no material impact on its Condensed Consolidated Financial Statements. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 48 2. Interest and Other Income: The components of Interest and other income are shown below (in thousands): January 29, 2022 January 30, 2021 February 1, 2020 Dividend income $ ( 76 ) $ ( 5 ) $ ( 42 ) Interest income ( 1,321 ) ( 2,697 ) ( 4,954 ) Miscellaneous income ( 580 ) ( 627 ) ( 709 ) Net loss (gain) on investment sales ( 164 ) ( 3,301 ) ( 360 ) Interest and other income $ ( 2,141 ) $ ( 6,630 ) $ ( 6,065 ) During 2020, the Company recorded a gain on the sale of land held for investment of $2.3 million within Interest and other income on the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). 3. Short-Term Investments: At January 29, 2022, the Company’s investment portfolio was primarily invested in corporate and governmental debt securities held in managed accounts. These securities are classified as available-for- sale as they are highly liquid and are recorded on the Consolidated Balance Sheets at estimated fair value, with unrealized gains and temporary losses reported net of taxes in Accumulated other comprehensive income. The table below reflects gross accumulated unrealized gains (losses) in short-term investments at January 29, 2022 and January 30, 2021 (in thousands): ` January 29, 2022 January 30, 2021 Debt securities Debt securities issued by the U.S issued by the U.S Government, its various Government, its various States, municipalities Corporate States, municipalities Corporate and agencies debt and agencies debt of each securities Total of each securities Total Cost basis $ 50,554 $ 96,352 $ 146,906 $ 40,701 $ 85,045 $ 125,746 Unrealized gains - - - 422 654 1,076 Unrealized (loss) ( 388 ) ( 520 ) ( 908 ) - - - Estimated fair value $ 50,166 $ 95,832 $ 145,998 $ 41,123 $ 85,699 $ 126,822 Accumulated other comprehensive income on the Consolidated Balance Sheets reflects the accumulated unrealized gains and losses in short-term investments in addition to unrealized gains and losses from equity investments and restricted cash investments. The table below reflects gross accumulated unrealized gains in these investments at January 29, 2022 and January 30, 2021 (in thousands): ` January 29, 2022 January 30, 2021 Deferred Unrealized Deferred Unrealized Unrealized Tax Benefit/ Net Gain/ Unrealized Tax Benefit/ Net Gain/ Security Type Gain/(Loss) (Expense) (Loss) Gain/(Loss) (Expense) (Loss) Short-Term Investments $ ( 908 ) $ 211 $ ( 697 ) $ 1,076 $ ( 250 ) $ 826 Equity Investments 543 ( 126 ) 417 429 ( 100 ) 329 Total $ ( 365 ) $ 85 $ ( 280 ) $ 1,505 $ ( 350 ) $ 1,155 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 49 4. Fair Value Measurements: The following tables set forth information regarding the Company’s financial assets that are measured at fair value as of January 29, 2022 and January 30, 2021 (in thousands): ` Prices in Active Significant Markets for Other Significant Identical Observable Unobservable January 29, 2022 Assets Inputs Inputs Description Level 1 Level 2 Level 3 Assets: State/Municipal Bonds $ 30,451 $ - $ 30,451 $ - Corporate Bonds 76,909 - 76,909 - U.S. Treasury/Agencies Notes and Bonds 19,715 - 19,715 - Cash Surrender Value of Life Insurance 11,472 - - 11,472 Asset-backed Securities (ABS) 18,556 - 18,556 - Corporate Equities 818 818 - - Commercial Paper 367 - 367 - Total Assets $ 158,288 $ 818 $ 145,998 $ 11,472 Liabilities: Deferred Compensation ( 10,020 ) - - ( 10,020 ) Total Liabilities $ ( 10,020 ) $ - $ - $ ( 10,020 ) Prices in Active Significant Markets for Other Significant Identical Observable Unobservable January 30, 2021 Assets Inputs Inputs Description Level 1 Level 2 Level 3 Assets: State/Municipal Bonds $ 23,254 $ - $ 23,254 $ - Corporate Bonds 67,566 - 67,566 - U.S. Treasury/Agencies Notes and Bonds 17,869 - 17,869 - Cash Surrender Value of Life Insurance 11,263 - - 11,263 Asset-backed Securities (ABS) 16,064 - 16,064 - Corporate Equities 703 703 - - Commercial Paper 2,069 - 2,069 - Total Assets $ 138,788 $ 703 $ 126,822 $ 11,263 Liabilities: Deferred Compensation ( 10,316 ) - - ( 10,316 ) Total Liabilities $ ( 10,316 ) $ - $ - $ ( 10,316 ) 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 January 29, 2022. The state, municipal and corporate bonds and asset-backed securities have contractual maturities which range from three days to 4.9 years. The U.S. Treasury Notes and Certificates of Deposit have contractual maturities which range from 4.5 months to 1.1 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 Consolidated Balance Sheets. These assets are carried at fair value with unrealized gains and losses reported net of taxes in Accumulated other comprehensive income. The asset-backed securities are bonds comprised of auto loans and bank credit cards that carry AAA ratings. The auto loan asset-backed securities are backed by static pools of auto loans that were originated and THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 50 serviced by captive auto finance units, banks or finance companies. 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 January 29, 2022, the Company had $0.8 million of corporate equities, which are recorded within Other assets in the Consolidated Balance Sheets. At January 30, 2021, the Company had $0.7 million of corporate equities, which are recorded within Other assets in the Consolidated Balance Sheets. Level 1 category securities are measured at fair value using quoted active market prices. 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. Since quoted prices in active markets for identical assets are not available, these prices are determined by the pricing service using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics, among other factors. Deferred compensation plan assets consist primarily 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 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 Consolidated Balance Sheets. These funds are designed to mirror the return of existing mutual funds and money market funds that are observable and actively traded. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 51 The following tables summarize the change in fair value of the Company’s financial assets and liabilities measured using Level 3 inputs as of January 29, 2022 and January 30, 2021 (in thousands): ` Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at January 30, 2021 $ 11,263 Total gains or (losses) Included in interest and other income (or changes in net assets) 209 Ending Balance at January 29, 2022 $ 11,472 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) Deferred Compensation Beginning Balance at January 30, 2021 $ ( 10,316 ) Redemptions 1,010 Additions ( 304 ) Total (gains) or losses Included in interest and other income (or changes in net assets) ( 410 ) Ending Balance at January 29, 2022 $ ( 10,020 ) Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at February 1, 2020 $ 10,517 Total gains or (losses) Included in interest and other income (or changes in net assets) 746 Ending Balance at January 30, 2021 $ 11,263 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) Deferred Compensation Beginning Balance at February 1, 2020 $ ( 10,391 ) Redemptions 1,714 Additions ( 652 ) Total (gains) or losses Included in interest and other income (or changes in net assets) ( 987 ) Ending Balance at January 30, 2021 $ ( 10,316 ) THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 52 5. Accounts Receivable: Accounts receivable consist of the following (in thousands): January 29, 2022 January 30, 2021 Customer accounts — principally deferred payment accounts $ 9,800 $ 10,210 Income tax receivable 38,361 33,898 Miscellaneous receivables 3,540 4,596 Bank card receivables 4,914 4,644 Total 56,615 53,348 Less allowance for customer credit losses 803 605 Accounts receivable — net $ 55,812 $ 52,743 Finance charge and late charge revenue on customer deferred payment accounts totaled $ 2,066,000 , $ 2,658,000 and $ 3,605,000 for the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020, respectively, and charges against the allowance for customer credit losses were approximately $ 429,000 , $ 306,000 and $ 524,000 for the fiscal years ended January 29, 2022, January 30, 2021 and February 1, 2020, respectively. Expenses relating to the allowance for customer credit losses are classified as a component of Selling, general and administrative expense in the accompanying Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). 6. Property and Equipment: Property and equipment consist of the following (in thousands): January 29, 2022 January 30, 2021 Land and improvements $ 13,595 $ 13,595 Buildings 35,403 35,335 Leasehold improvements 79,327 80,874 Fixtures and equipment 178,027 198,513 Information technology equipment and software 34,758 35,303 Construction in progress 1,498 - Total 342,608 363,620 Less accumulated depreciation 279,525 291,070 Property and equipment — net $ 63,083 $ 72,550 Construction in progress primarily represents costs related to new store development and investments in new technology. 7. Accrued Expenses: Accrued expenses consist of the following (in thousands): January 29, 2022 January 30, 2021 Accrued employment and related items $ 6,974 $ 6,122 Property and other taxes 15,218 16,574 Accrued self-insurance 8,462 10,994 Fixed assets 657 343 Other 9,062 6,757 Total $ 40,373 $ 40,790 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 53 8. Financing Arrangements: As of January 29, 2022, the Company had an unsecured revolving credit agreement to borrow $ 35.0 million less the balance of any revocable credits discussed below. The revolving credit agreement is committed until May 2022. The Company is in the process of obtaining a new revolving credit agreement and expects this to be completed by May of 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 January 29, 2022. There were no borrowings outstanding under this credit facility as of January 29, 2022, January 30, 2021 or February 1, 2020. At January 29, 2022, the weighted average interest rate under the credit facility was zero due to no borrowings outstanding at the end of the year. At January 29, 2022, January 30, 2021 and February 1, 2020, the Company had no outstanding revocable letters of credit relating to purchase commitments. 9. Stockholders’ Equity: The holders of Class A Common Stock are entitled to one vote per share, whereas the holders of Class B Common Stock are entitled to ten votes per share. Each share of Class B Common Stock may be converted at any time into one share of Class A Common Stock. Subject to the rights of the holders of any shares of Preferred Stock that may be outstanding at the time, in the event of liquidation, dissolution or winding up of the Company, holders of Class A Common Stock are entitled to receive a preferential distribution of $1.00 per share of the net assets of the Company. Cash dividends on the Class B Common Stock cannot be paid unless cash dividends of at least an equal amount are paid on the Class A Common Stock. The Company’s certificate of incorporation provides that shares of Class B Common Stock may be transferred only to certain “Permitted Transferees” consisting generally of the lineal descendants of holders of Class B Common Stock, trusts for their benefit, corporations and partnerships controlled by them and the Company’s employee benefit plans. Any transfer of Class B Common Stock in violation of these restrictions, including a transfer to the Company, results in the automatic conversion of the transferred shares of Class B Common Stock held by the transferee into an equal number of shares of Class A Common Stock. 10. Employee Benefit Plans: The Company has a defined contribution retirement savings plan (“401(k) plan”) which covers all associates who meet minimum age and service requirements. The 401(k) plan allows participants to contribute up to 75% of their annual compensation up to the maximum elective deferral, designated by the IRS. The Company is obligated to make a minimum contribution to cover plan administrative expenses. Further Company contributions are at the discretion of the Board of Directors. The Company’s contributions for the years ended January 29, 2022, January 30, 2021 and February 1, 2020 were approximately $ 1,210,000 , $ 0 and $ 1,499,000 , respectively. The Company has a trusteed, non-contributory Employee Stock Ownership Plan (“ESOP”), which covers substantially all associates who meet minimum age and service requirements. The amount of the Company’s discretionary contribution to the ESOP is determined by the Compensation Committee of the Board of Directors and can be made in Company Class A Common stock or cash. The Committee approved a contribution to the ESOP for the year ended January 29, 2022 of $29,430,000, of which $15,000,000 was contributed in the third quarter of fiscal 2021. The Company’s contribution was $ 0 and $ 7,198,000 for the years ended January 30, 2021 and February 1, 2020, respectively. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 54 The Company is primarily self-insured for healthcare. These costs are significant primarily due to the large number of the Company’s retail locations and associates. The Company’s self-insurance liabilities are based on the total estimated costs of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims. Management reviews current and historical claims data in developing its estimates. If the underlying facts and circumstances of the claims change or the historical trend is not indicative of future trends, then the Company may be required to record additional expense or a reduction to expense which could be material to the Company’s reported financial condition and results of operations. The Company funds healthcare contributions to a third-party provider. 11. Leases: The Company determines whether an arrangement is a lease at inception. The Company has operating leases for stores, offices and equipment. Its leases have remaining lease terms of one year to 10 years, some of which include options to extend the lease term for up to five years, and some of which include options to terminate the lease within one year. The Company considers these options in determining the lease term used to establish its right-of-use assets and lease liabilities. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. As most of the Company’s leases do not provide an implicit rate, the Company 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): ` Twelve Months Ended January 29, 2022 January 30, 2021 Operating lease cost (a) $ 68,763 $ 69,601 Variable lease cost (b) $ 3,041 $ 1,555 (a) Includes right-of-use asset amortization of ($ 2.2 ) million and ($ 4.6 ) million for the twelve months ended January 29, 2022 and January 30, 2021, respectively. (b) Primarily related to monthly percentage rent for stores not presented on the balance sheet. Supplemental cash flow information and non-cash activity related to the Company’s operating leases are as follows (in thousands): Operating cash flow information: Twelve Months Ended January 29, 2022 January 30, 2021 Cash paid for amounts included in the measurement of lease liabilities $ 63,201 $ 62,559 Non-cash activity: Right-of-use assets obtained in exchange for lease obligations, net of rent violations $ 40,756 $ 58,978 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 55 Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows: ` As of January 29, 2022 January 30, 2021 Weighted-average remaining lease term 2.7 years 2.9 years Weighted-average discount rate 3.55 % 4.06 % Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands): Fiscal Year 2022 $ 71,250 2023 52,791 2024 36,066 2025 21,230 2026 10,035 Thereafter 2,456 Total lease payments 193,828 Less: Imputed interest 9,499 Present value of lease liabilities $ 184,329 12. Income Taxes: Unrecognized tax benefits for uncertain tax positions, primarily recorded in Other noncurrent liabilities, are established in accordance with ASC 740 when, despite the fact that the tax return positions are supportable, the Company believes these positions may be challenged and the results are uncertain. The Company adjusts these liabilities in light of changing facts and circumstances. As of January 29, 2022, the Company had gross unrecognized tax benefits totaling approximately $5.3 million, of which approximately $ 6.4 million (inclusive of interest) would affect the effective tax rate if recognized. The Company had approximately $ 2.0 million, $ 2.8 million and $ 3.3 million of interest and penalties accrued related to uncertain tax positions as of January 29, 2022, January 30, 2021 and February 1, 2020, respectively. The Company recognizes interest and penalties related to the resolution of uncertain tax positions as a component of income tax expense. The Company recognized $ 452,000 , $ 424,000 and $ 574,000 of interest and penalties in the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the years ended January 29, 2022, January 30, 2021 and February 1, 2020, respectively. The Company is no longer subject to U.S. federal income tax examinations for years before 2018. In state and local tax jurisdictions, the Company has limited exposure before 2011. During the next 12 months, various state and local taxing authorities’ statutes of limitations will expire and certain state examinations may close, which could result in a potential reduction of unrecognized tax benefits for which a range cannot be determined. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands): THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 56 ` January 29, 2022 January 30, 2021 February 1, 2020 Fiscal Year Ended Balances, beginning $ 5,946 $ 7,942 $ 8,485 Additions for tax positions of the current year 1,312 286 375 Additions for tax positions prior years 680 - - Reduction for tax positions of prior years for: Settlements during the period - 614 2 Lapses of applicable statutes of limitations ( 2,652 ) ( 2,896 ) ( 920 ) Balances, ending $ 5,286 $ 5,946 $ 7,942 The provision for income taxes consists of the following (in thousands): ` January 29, 2022 January 30, 2021 February 1, 2020 Fiscal Year Ended Current income taxes: Federal $ 2,532 $ ( 31,927 ) $ 3,321 State 802 1,842 96 Foreign 1,984 1,731 1,763 Total 5,318 ( 28,354 ) 5,180 Deferred income taxes: Federal ( 2,558 ) 1,905 574 State ( 639 ) 1,129 1,556 Foreign - ( 3 ) - Total ( 3,197 ) 3,031 2,130 Total income tax expense (benefit) $ 2,121 $ ( 25,323 ) $ 7,310 THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 57 Significant components of the Company’s deferred tax assets and liabilities as of January 29, 2022 and January 30, 2021 are as follows (in thousands): ` January 29, 2022 January 30, 2021 Deferred tax assets: Allowance for customer credit losses $ 171 $ 131 Inventory valuation 1,176 1,004 Non-deductible accrued liabilities 1,367 1,613 Other taxes 1,135 1,184 Federal benefit of uncertain tax positions 972 1,001 Equity compensation expense 3,666 4,097 Net operating losses 4,206 4,531 Charitable contribution carryover 241 394 State tax credits 1,115 1,115 Lease liabilities 42,268 47,428 Other 4,293 2,204 Total deferred tax assets before valuation allowance 60,610 64,702 Valuation allowance ( 4,473 ) ( 5,256 ) Total deferred tax assets after valuation allowance 56,137 59,446 Deferred tax liabilities: Property and equipment - 1,480 Accrued self-insurance reserves 504 466 Right-of-Use assets 46,320 51,350 Other - 465 Total deferred tax liabilities 46,824 53,761 Net deferred tax assets $ 9,313 $ 5,685 The changes in the valuation allowance are presented below: January 29, 2022 January 30, 2021 Valuation Allowance Beginning Balance $ (5,256) $ (1,079) Net Valuation Allowance (Additions) / Reductions 783 (4,177) Valuation Allowance Ending Balance $ (4,473) $ (5,256) As of January 29, 2022, the Company had $1.1 million of state tax credits to offset future state income tax expense, which are set to expire by fiscal 2023. Based on the available evidence, the Company has recorded a valuation allowance of $1.1 million. As of January 29, 2022, the Company had $4.2 million of state net operating loss carryforwards. The Company assessed the likelihood that deferred tax assets related to state net operating loss carryforwards will be realized 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 the Company will not be able to realize net operating losses and, accordingly, has recorded a valuation allowance of $3.4 million for the portion it expects to not be realized. The net change in the valuation allowance for January 29, 2022 and January 30, 2021 is for state net operating losses. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 58 As of January 29, 2022, the Company’s position is that its overseas subsidiaries will not invest undistributed earnings indefinitely. Future unremitted earnings when distributed are expected to be either distributions of GILTI-previously taxed income or eligible for a 100% dividends received deduction. The withholding tax rate on any unremitted earnings is zero and state income taxes on such earnings are considered immaterial. Therefore, the Company has not provided deferred U.S. income taxes on approximately $26.9 million of earnings from non-U.S. subsidiaries. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 59 The reconciliation of the Company’s effective income tax rate with the statutory rate is as follows: ` January 29, 2022 January 30, 2021 February 1, 2020 Fiscal Year Ended Federal income tax rate 21.0 % 21.0 % 21.0 % State income taxes 2.7 4.0 1.7 CARES ACT - Carryback differential ( 5.8 ) 18.3 - Global intangible low-taxed income 6.7 ( 5.3 ) 5.9 Foreign tax credit ( 4.3 ) - ( 3.7 ) Foreign rate differential ( 2.8 ) 1.2 ( 2.5 ) Offshore claim ( 5.5 ) 2.5 ( 5.2 ) Limitation on officer compensation 1.9 ( 0.4 ) 1.4 Work opportunity credit ( 1.8 ) 0.2 ( 3.2 ) Addback on wage related credits 0.4 - 0.7 Tax exempt interest - - ( 0.2 ) Charitable contribution of inventory ( 1.1 ) ( 0.2 ) - Uncertain tax positions ( 3.5 ) 3.3 ( 1.0 ) Deferred rate change 0.1 ( 0.1 ) - Valuation allowance ( 2.1 ) ( 5.7 ) 2.6 Other ( 0.5 ) ( 4.0 ) ( 0.6 ) Effective income tax rate 5.4 % 34.8 % 16.9 % 13. Reportable Segment Information: The Company has determined that it has four operating segments, as defined under ASC 280-10, including Cato, It’s Fashion, Versona and Credit. As outlined in ASC 280-10, the Company has two reportable segments: Retail and Credit. The Company has aggregated its three retail operating segments, including e-commerce, based on the aggregation criteria outlined in ASC 280-10, which states that two or more operating segments may be aggregated into a single reportable segment if aggregation is consistent with the objective and basic principles of ASC 280-10, which require the segments have similar economic characteristics, products, production processes, clients and methods of distribution. The Company’s retail operating segments have similar economic characteristics and similar operating, financial and competitive risks. They are similar in terms of product offered, as they all offer women’s apparel, shoes and accessories. Merchandise inventory of 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 retail operating segments is distributed to retail stores in a similar manner through the Company’s single distribution center and is subsequently distributed to clients in a similar manner. 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. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 60 The following schedule summarizes certain segment information (in thousands): ` Fiscal 2021 Retail Credit Total Revenues $ 767,205 $ 2,066 $ 769,271 Depreciation 12,354 2 12,356 Interest and other income 2,141 - 2,141 Income (loss) before taxes 38,340 625 38,965 Capital expenditures 4,101 4 4,105 Fiscal 2020 Retail Credit Total Revenues $ 572,453 $ 2,658 $ 575,111 Depreciation 14,680 1 14,681 Interest and other income 6,630 - 6,630 Income (loss) before taxes ( 73,972 ) 1,166 ( 72,806 ) Capital expenditures 13,955 1 13,956 Fiscal 2019 Retail Credit Total Revenues $ 821,730 $ 3,605 $ 825,335 Depreciation 15,484 1 15,485 Interest and other income 6,065 - 6,065 Income (loss) before taxes 41,386 1,821 43,207 Capital expenditures 8,287 19 8,306 Retail Credit Total Total assets as of January 29, 2022 $ 595,487 $ 38,279 $ 633,766 Total assets as of January 30, 2021 549,349 42,103 591,452 The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in Note 1. The Company evaluates performance based on profit or loss from operations before income taxes. The Company does not allocate certain corporate expenses to the credit segment. The following schedule summarizes the direct expenses of the credit segment which are reflected in Selling, general and administrative expenses (in thousands): ` January 29, 2022 January 30, 2021 February 1, 2020 Payroll $ 501 $ 541 $ 644 Postage 342 360 488 Other expenses 595 590 651 Total expenses $ 1,438 $ 1,491 $ 1,783 14. Stock Based Compensation: As of January 29, 2022, the Company had two long-term compensation plans pursuant to which stock- based compensation was outstanding. 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 CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 61 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 January 29, 2022: ` 2013 2018 Plan Plan Total Options and/or restricted stock initially authorized 1,500,000 4,725,000 6,225,000 Options and/or restricted stock available for grant: January 30, 2021 - 3,961,473 3,961,473 January 29, 2022 - 3,580,471 3,580,471 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 a five-year vesting period. As of January 29, 2022, there was $ 11,096,000 of total unrecognized compensation expense related to unvested restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of 2.3 years. The total grant date fair value of the shares recognized as compensation expense during the twelve months ended January 29, 2022, January 30, 2021 and February 1, 2020 was $ 4,055,000 , $ 4,023,000 and $ 4,559,000 , respectively. The expenses are classified as a component of Selling, general and administrative expenses in the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). The following summary shows the changes in the shares of unvested restricted stock outstanding during the years ended January 29, 2022, January 30, 2021 and February 1, 2020: ` Weighted Average Number of Grant Date Fair Shares Value Per Share Restricted stock awards at February 2, 2019 771,851 $ 24.22 Granted 361,170 14.89 Vested ( 129,108 ) 34.44 Forfeited or expired ( 61,351 ) 19.61 Restricted stock awards at February 1, 2020 942,562 $ 19.55 Granted 335,317 11.11 Vested ( 129,682 ) 34.01 Forfeited or expired ( 124,241 ) 16.37 Restricted stock awards at January 30, 2021 1,023,956 $ 15.33 Granted 407,910 13.49 Vested ( 176,575 ) 22.22 Forfeited or expired ( 59,003 ) 13.95 Restricted stock awards at January 29, 2022 1,196,288 $ 13.76 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 twelve month period ended January 29, 2022, the Company sold 24,398 shares to employees at an average discount of $ 1.47 per share under the Employee Stock Purchase Plan. The compensation expense recognized for the 15% discount given under the Employee Stock Purchase Plan was approximately $ 36,000 , $ 69,000 and $ 111,000 for fiscal years 2021, 2020 and 2019, respectively. These expenses are classified as a component of Selling, general and administrative expenses. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 62 15. Commitments and Contingencies: The Company is, from time to time, involved in routine litigation incidental to the conduct of our business, including litigation regarding the merchandise that we sell, litigation regarding intellectual property, litigation instituted by persons injured upon premises under our control, litigation with respect to various employment matters, including alleged discrimination and wage and hour litigation, and litigation with present or former employees. Although such litigation is routine and incidental to the conduct of our business, as with any business of our 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 our 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. The Company accrues for these matters when the liability is deemed probable and reasonably estimable. 16. Accumulated Other Comprehensive Income: The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) as of January 29, 2022: ` Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at January 30, 2021 $ 1,155 Other comprehensive income (loss) before reclassification ( 1,561 ) Amounts reclassified from accumulated other comprehensive income (b) 126 Net current-period other comprehensive income (loss) ( 1,435 ) Ending Balance at January 29, 2022 $ ( 280 ) (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income (“OCI”). (b) Includes $ 164 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 $ 38 . Amounts in parentheses indicate a debit/reduction to OCI. THE CATO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 63 The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) as of January 30, 2021: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at February 1, 2020 $ 1,423 Other comprehensive income (loss) before reclassification ( 1,038 ) Amounts reclassified from accumulated other comprehensive income (b) 770 Net current-period other comprehensive income (loss) ( 268 ) Ending Balance at January 30, 2021 $ 1,155 (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to OCI. (b) Includes $ 1,003 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 $ 233 . Amounts in parentheses indicate a debit/reduction to OCI. 64 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure: None.