CATO CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended April 30, 2022 May 1, 2021 (Dollars in thousands, except per share data) REVENUES Retail sales $ 204,933 $ 211,234 Other revenue (principally finance charges, late fees and layaway charges) 1,788 1,851 Total revenues 206,721 213,085 COSTS AND EXPENSES, NET Cost of goods sold (exclusive of depreciation shown below) 132,243 123,675 Selling, general and administrative (exclusive of depreciation shown below) 60,441 63,237 Depreciation 2,743 3,042 Interest and other income ( 403 ) ( 663 ) Costs and expenses, net 195,024 189,291 Income before income taxes 11,697 23,794 Income tax expense 1,949 3,081 Net income $ 9,748 $ 20,713 Basic earnings per share $ 0.46 $ 0.92 Diluted earnings per share $ 0.46 $ 0.92 Comprehensive income: Net income $ 9,748 $ 20,713 Unrealized gain (loss) on available-for-sale securities, net of deferred income taxes of ($ 362 ) and ($ 40 ) for April 30, 2022 ( 1,206 ) ( 134 ) and May 1, 2021, respectively Comprehensive income $ 8,542 $ 20,579 See notes to condensed consolidated financial statements (unaudited). 3 THE CATO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) April 30, 2022 January 29, 2022 (Dollars in thousands) ASSETS Current Assets: Cash and cash equivalents $ 25,881 $ 19,759 Short-term investments 120,021 145,998 Restricted cash 3,920 3,919 Accounts receivable, net of allowance for customer credit losses of $ 801 and $ 803 at April 30, 2022 and January 29, 2022, respectively 60,121 55,812 Merchandise inventories 127,576 124,907 Prepaid expenses and other current assets 6,029 5,273 Total Current Assets 343,548 355,668 Property and equipment – net 67,079 63,083 Noncurrent deferred income taxes 9,674 9,313 Other assets 23,192 24,437 Right-of-Use assets – net 168,537 181,265 Total Assets $ 612,030 $ 633,766 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 106,229 $ 109,546 Accrued expenses 45,377 40,373 Accrued bonus and benefits 18,901 26,488 Accrued income taxes 2,062 920 Current lease liability 63,175 66,808 Total Current Liabilities 235,744 244,135 Other noncurrent liabilities 17,797 17,914 Lease liability 107,837 117,521 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; 19,223,633 and 19,824,093 shares issued at April 30, 2022 and January 29, 2022, respectively 649 669 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 April 30, 2022 and January 29, 2022, respectively 59 59 Additional paid-in capital 120,249 119,540 Retained earnings 131,181 134,208 Accumulated other comprehensive income ( 1,486 ) ( 280 ) Total Stockholders' Equity 250,652 254,196 Total Liabilities and Stockholders’ Equity $ 612,030 $ 633,766 See notes to condensed consolidated financial statements (unaudited). 4 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended April 30, 2022 May 1, 2021 (Dollars in thousands) Operating Activities: Net income $ 9,748 $ 20,713 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation 2,743 3,042 Provision for customer credit losses 72 113 Purchase premium and premium amortization of investments 388 ( 1,121 ) Share-based compensation 624 306 Deferred income taxes - ( 1 ) Loss on disposal of property and equipment 16 58 Changes in operating assets and liabilities which provided (used) cash: Accounts receivable ( 4,382 ) ( 2,510 ) Merchandise inventories ( 2,669 ) ( 726 ) Prepaid and other assets 474 ( 493 ) Operating lease right-of-use assets and liabilities ( 590 ) ( 1,242 ) Accrued income taxes 1,142 356 Accounts payable, accrued expenses and other liabilities ( 8,331 ) 26,005 Net cash provided (used) by operating activities ( 765 ) 44,500 Investing Activities: Expenditures for property and equipment ( 4,440 ) ( 554 ) Purchase of short-term investments ( 1,529 ) ( 62,075 ) Sales of short-term investments 25,566 28,397 Net cash provided (used) by investing activities 19,597 ( 34,232 ) Financing Activities: Dividends paid ( 3,638 ) - Repurchase of common stock ( 9,162 ) ( 5,629 ) Proceeds from employee stock purchase plan 91 128 Net cash provided (used) by financing activities ( 12,709 ) ( 5,501 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 6,123 4,767 Cash, cash equivalents, and restricted cash at beginning of period 23,678 21,022 Cash, cash equivalents, and restricted cash at end of period $ 29,801 $ 25,789 Non-cash activity: Accrued other assets and property and equipment $ 2,971 $ 263 See notes to condensed consolidated financial statements (unaudited). 5 THE CATO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) Accumulated Additional Other Total Common Paid-in Retained Comprehensive Stockholders' Stock Capital Earnings Income Equity (Dollars in thousands) Balance — January 29, 2022 $ 728 $ 119,540 $ 134,208 $ ( 280 ) $ 254,196 Comprehensive income: Net income - - 9,748 - 9,748 Unrealized net losses on available-for-sale securities, net of deferred income tax benefit of ($ 362 ) - - - ( 1,206 ) ( 1,206 ) Dividends paid ($ 0.17 per share) - - (3,638) - (3,638) Class A common stock sold through employee stock purchase plan — 9,468 shares - 111 - - 111 Class A common stock issued through restricted stock grant plans — 0 shares - 598 5 - 603 Repurchase and retirement of treasury shares – 609,928 shares (20) - ( 9,142 ) - ( 9,162 ) Balance — April 30, 2022 $ 708 $ 120,249 $ 131,181 $ ( 1,486 ) $ 250,652 Accumulated Additional Other Total Common Paid-in Retained Comprehensive Stockholders' Stock Capital Earnings Income Equity (Dollars in thousands) Balance — January 30, 2021 $ 762 $ 115,278 $ 129,303 $ 1,155 $ 246,498 Comprehensive income: Net income - - 20,713 - 20,713 Unrealized net losses on available-for-sale securities, net of deferred income tax benefit of ($ 40 ) - - - ( 134 ) ( 134 ) Dividends paid ($0.00 per share) - - - - - Class A common stock sold through employee stock purchase plan — 19,248 shares 1 150 - - 151 Class A common stock issued through restricted stock grant plans — 396,558 shares 13 271 - - 284 Repurchase and retirement of treasury shares – 425,661 shares (14) - ( 5,615 ) - ( 5,629 ) Balance — May 1, 2021 $ 762 $ 115,699 $ 144,401 $ 1,021 $ 261,883 See notes to condensed consolidated financial statements (unaudited). THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 2022 AND MAY 1, 2021 6 NOTE 1 - GENERAL : The condensed consolidated financial statements as of April 30, 2022 and for the thirteen-week periods ended April 30, 2022 and May 1, 2021 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. All such adjustments are of a normal, recurring nature unless otherwise noted. The results of the interim period may not be indicative of the results expected for the entire year. The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2022. Amounts as of January 29, 2022 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. As planned, in May 2022, the Company made a $14.4 million contribution to its Employee Stock Ownership Plan, which is included in Accrued bonus and benefits on the accompanying Condensed Consolidated Balance Sheets. Subsequent to April 30, 2022, the Company received $18 million of its income tax receivable, which is included in Accounts receivable. The Company anticipates that the remaining balance will be received by the end of the second quarter of fiscal 2022. On May 19, 2022, the Board of Directors declared the quarterly dividend at $0.17 per share. THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 2022 AND MAY 1, 2021 7 NOTE 2 - EARNINGS PER SHARE: Accounting Standard Codification (“ASC”) 260 – Earnings Per Share requires dual presentation of basic and diluted Earnings Per Share (“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 Condensed Consolidated Statements of Income and Comprehensive Income. 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 the 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. Three Months Ended April 30, 2022 May 1, 2021 (Dollars in thousands) Numerator Net earnings $ 9,748 $ 20,713 Earnings allocated to non-vested equity awards ( 541 ) ( 942 ) Net earnings available to common stockholders $ 9,207 $ 19,771 Denominator Basic weighted average common shares outstanding 20,149,201 21,489,162 Diluted weighted average common shares outstanding 20,149,201 21,489,162 Net income per common share Basic earnings per share $ 0.46 $ 0.92 Diluted earnings per share $ 0.46 $ 0.92 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 2022 AND MAY 1, 2021 8 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 April 30, 2022: Changes in Accumulated Other Comprehensive Income (a) Unrealized Gains and (Losses) on Available-for-Sale Securities Beginning Balance at January 29, 2022 $ ( 280 ) Other comprehensive income (loss) before reclassification ( 1,203 ) Amounts reclassified from accumulated other comprehensive income (b) ( 3 ) Net current-period other comprehensive income (loss) ( 1,206 ) Ending Balance at April 30, 2022 $ ( 1,486 ) (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income ("OCI"). (b) Includes $ 4 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 $ 1 . The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the three months ended May 1, 2021: 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 ( 173 ) Amounts reclassified from accumulated other comprehensive income (b) 39 Net current-period other comprehensive income (loss) ( 134 ) Ending Balance at May 1, 2021 $ 1,021 (a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to other comprehensive income ("OCI"). (b) Includes $ 51 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 $ 12 . THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 2022 AND MAY 1, 2021 9 NOTE 4 – FINANCING ARRANGEMENTS: At April 30, 2022, the Company had an unsecured revolving credit agreement, which provided for borrowings of up to $35.0 million less the balance of letters of credit discussed below and was committed through May 2022. In May 2022, the Company signed a new unsecured revolving credit agreement, which replaces the prior credit agreement, provides up to $35.0 million in committed availability and is committed through May 2027. The prior credit agreement contained various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of April 30, 2022. The new credit agreement also contains various financial covenants and limitations, including the maintenance of specific financial ratios. There were no outstanding borrowings under the prior credit facility as of April 30, 2022 or January 29, 2022. The weighted average interest rate under the prior credit facility was zero at April 30, 2022 due to no outstanding borrowings. At April 30, 2022 and January 29, 2022, the Company had no outstanding letters of credit relating to purchase commitments. NOTE 5 – 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 to 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 nature of product, as they all offer women’s apparel, shoes and accessories. 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 clients in a similar manner. The Company operates its women’s fashion specialty retail stores in 32 states as of April 30, 2022, 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. THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 2022 AND MAY 1, 2021 10 NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED): The following schedule summarizes certain segment information (in thousands): Three Months Ended April 30, 2022 Retail Credit Total Revenues $ 206,208 $ 513 $ 206,721 Depreciation 2,743 - 2,743 Interest and other income ( 403 ) - ( 403 ) Income before taxes 11,613 84 11,697 Capital expenditures 4,440 - 4,440 Three Months Ended May 1, 2021 Retail Credit Total Revenues $ 212,547 $ 538 $ 213,085 Depreciation 3,042 - 3,042 Interest and other income ( 663 ) - ( 663 ) Income before taxes 23,540 254 23,794 Capital expenditures 554 - 554 Retail Credit Total Total assets as of April 30, 2022 $ 574,601 $ 37,429 $ 612,030 Total assets as of January 29, 2022 595,487 38,279 633,766 The Company evaluates segment performance based on income before taxes. The Company does not allocate certain corporate expenses or income taxes 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): Three Months Ended April 30, 2022 May 1, 2021 Payroll $ 137 $ 117 Postage 93 78 Other expenses 199 89 Total expenses $ 429 $ 284 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 2022 AND MAY 1, 2021 11 NOTE 6 – STOCK BASED COMPENSATION: As of April 30, 2022, 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 April 30, 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: April 30, 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 the related vesting periods. As of April 30, 2022 and January 29, 2022, there was $ 9,868,000 and $ 11,096,000 , respectively, of total unrecognized compensation expense related to unvested restricted stock awards, which had a remaining weighted-average vesting period of 2.4 years and 2.3 years, respectively. The total compensation expense during the three months ended April 30, 2022 was $ 603,000 compared to $ 283,000 for the three months ended May 1, 2021. 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 April 30, 2022: Weighted Average Number of Grant Date Fair Shares Value Per Share Restricted stock awards at January 29, 2022 1,196,288 $ 13.76 Granted - - Vested - - Forfeited or expired - - Restricted stock awards at April 30, 2022 1,196,288 $ 13.76 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 2022 AND MAY 1, 2021 12 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 three months ended April 30, 2022 and May 1, 2021, the Company sold 9,468 and 19,248 shares to employees at an average discount of $ 2.21 and $ 1.17 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 $ 21,000 and $ 23,000 for the three months ended April 30, 2022 and May 1, 2021, 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 April 30, 2022 and January 29, 2022: Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable April 30, 2022 Assets Inputs Inputs Description Level 1 Level 2 Level 3 Assets: State/Municipal Bonds $ 28,514 $ - $ 28,514 $ - Corporate Bonds 56,515 - 56,515 - U.S. Treasury/Agencies Notes and Bonds 21,112 - 21,112 - Cash Surrender Value of Life Insurance 11,033 - - 11,033 Asset-backed Securities (ABS) 13,512 - 13,512 - Corporate Equities 803 803 - - Commercial Paper 367 - 367 - Total Assets $ 131,856 $ 803 $ 120,020 $ 11,033 Liabilities: Deferred Compensation ( 9,272 ) - - ( 9,272 ) Total Liabilities $ ( 9,272 ) $ - $ - $ ( 9,272 ) THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 2022 AND MAY 1, 2021 13 Quoted 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 ) 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 April 30, 2022 and January 29, 2022. The state, municipal and corporate bonds have contractual maturities which range from one day to 4.6 years. The U.S. Treasury Notes have contractual maturities which range from 46 days to 2.4 years. These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted cash 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. 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 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 April 30, 2022, the Company had $ 0.8 million of corporate equities and deferred compensation plan assets of $ 11.0 million. At January 29, 2022, the Company had $ 0.8 million of corporate equities and deferred compensation plan assets of $ 11.5 million. All of these assets are recorded within Other assets in the Condensed 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 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 THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 2022 AND MAY 1, 2021 14 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 April 30, 2022 and January 29, 2022 (dollars in thousands): Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at January 29, 2022 $ 11,472 Redemptions - Additions - Total gains or (losses) Included in interest and other income (or changes in net assets) ( 439 ) Included in other comprehensive income - Ending Balance at April 30, 2022 $ 11,033 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) Deferred Compensation Beginning Balance at January 29, 2022 $ ( 10,020 ) Redemptions 489 Additions ( 149 ) Total (gains) or losses Included in interest and other income (or changes in net assets) 408 Included in other comprehensive income - Ending Balance at April 30, 2022 $ ( 9,272 ) Fair Value Measurements Using Significant Unobservable Asset Inputs (Level 3) Cash Surrender Value Beginning Balance at January 30, 2021 $ 11,263 Redemptions - Additions - Total gains or (losses) Included in interest and other income (or changes in net assets) 209 Included in other comprehensive income - Ending Balance at January 29, 2022 $ 11,472 Fair Value Measurements Using Significant Unobservable Liability Inputs (Level 3) THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 2022 AND MAY 1, 2021 15 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 ) Included in other comprehensive income - Ending Balance at January 29, 2022 $ ( 10,020 ) THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 2022 AND MAY 1, 2021 16 NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS: None. NOTE 9 – INCOME TAXES: The Company had an effective tax rate for the first quarter of 2022 of 16.7 % compared to an effective tax rate of 12.9 % for the first quarter of 2021. The increase in the 2022 first quarter tax rate was primarily due to higher Global Intangible Low-taxed Income (GILTI), partially offset by the ability to realize foreign tax credits. NOTE 10 – COMMITMENTS AND CONTINGENCIES: The Company is, from time to time, involved in routine litigation incidental to the conduct of its business, including litigation regarding the merchandise that it sells, litigation regarding intellectual property, litigation instituted by persons injured upon premises under its 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 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 its 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. The Company accrues for these matters when the liability is deemed probable and reasonably estimable. NOTE 11 – 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. 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 $ 86,000 and $ 131,000 for the periods ended April 30, 2022 and May THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 2022 AND MAY 1, 2021 17 1, 2021, respectively, on sales purchased by the Company’s proprietary credit card of $ 5.7 million and $ 4.4 million for the periods ended April 30, 2022 and May 1, 2021, respectively. The following table provides information about receivables and contract liabilities from contracts with customers (in thousands): Balance as of April 30, 2022 January 29, 2022 Proprietary Credit Card Receivables, net $ 9,522 $ 8,998 Gift Card Liability $ 6,556 $ 8,308 NOTE 12 – 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, 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): Three Months Ended April 30, 2022 May 1, 2021 Operating lease cost (a) $ 17,754 $ 16,726 Variable lease cost (b) $ 768 $ 793 (a) Includes right-of-use asset amortization of ($0.4) million and ($1.2) million for the three months ended April 30, 2022 and May 1, 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): THE CATO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED APRIL 30, 2022 AND MAY 1, 2021 18 Operating cash flow information: Three Months Ended April 30, 2022 May 1, 2021 Cash paid for amounts included in the measurement of lease liabilities $ 16,836 $ 15,947 Non-cash activity: Right-of-use assets obtained in exchange for lease obligations $ 3,515 $ 734 Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows: As of April 30, 2022 May 1, 2021 Weighted-average remaining lease term 2.4 years 2.7 years Weighted-average discount rate 2.92 % 3.73 % As of April 30, 2022, the maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands): Fiscal Year 2022 (a) $ 53,370 2023 53,633 2024 36,956 2025 21,875 2026 10,602 Thereafter 2,986 Total lease payments 179,422 Less: Imputed interest 8,410 Present value of lease liabilities $ 171,012 (a) Excluding the 3 months ended April 30, 2022. 19 THE CATO CORPORATION