cato10q1qtr13.htm - Generated by SEC Publisher for SEC Filing

 

 

Table of Contents

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended May 4, 2013

 

OR

 

[ ]

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________to__________________

Commission file number 1-31340  

 

THE CATO CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

56-0484485

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

8100 Denmark Road, Charlotte, North Carolina 28273-5975  

(Address of principal executive offices)

(Zip Code)

 

(704) 554-8510

(Registrant's telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

X

No

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes

X

No

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer  þ     Accelerated filer  ¨      Non-accelerated filer  ¨      Smaller reporting company ¨ 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

 

No

X

 

As of May 4, 2013, there were 27,518,498 shares of Class A common stock and 1,743,525 shares of Class B common stock outstanding.

 


 

 

THE CATO CORPORATION

 

FORM 10-Q

 

Quarter Ended May 4, 2013

Table of Contents

 

Page No.

 

PART I – FINANCIAL INFORMATION (UNAUDITED)

 

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income

2

 

 

For the Three Months Ended May 4, 2013 and April 28, 2012

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

At May 4, 2013, February 2, 2013 and April 28, 2012

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

4

 

 

For the Three Months Ended May 4, 2013 and April 28, 2012

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5 – 16

 

 

For the Three Months Ended May 4, 2013 and April 28, 2012

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17 – 24

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

 

 

 

 

Item 4.

Controls and Procedures

25

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

26

 

 

 

 

 

Item 1A.

Risk Factors

26

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

26

 

 

 

 

 

Item 4.

Mine Safety Disclosures

27

 

 

 

 

 

Item 5.

Other Information

27

 

 

 

 

 

Item 6.

Exhibits

27

 

 

 

 

 

Signatures

28 - 32

 

 

 

 

 

 

           

 


 

 

Table of Contents

 

PART I FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

 

 

 

 

 

Three Months Ended

 

 

May 4, 2013

 

April 28, 2012

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

REVENUES

 

 

 

 

Retail sales

$

267,181 

$

272,790 

Other income (principally finance charges, late fees and

 

 

 

 

layaway charges)

 

2,517 

 

2,554 

Total revenues

 

269,698 

 

275,344 

 

 

 

 

 

COSTS AND EXPENSES, NET

 

 

 

 

Cost of goods sold (exclusive of depreciation shown below)

 

156,901 

 

157,832 

Selling, general and administrative (exclusive of depreciation

 

 

 

 

shown below)

 

59,389 

 

61,355 

Depreciation

 

5,449 

 

5,771 

Interest and other income

 

(875)

 

(906)

Cost and expenses, net

 

220,864 

 

224,052 

 

 

 

 

 

Income before income taxes

 

48,834 

 

51,292 

 

 

 

 

 

Income tax expense

 

17,995 

 

19,569 

 

 

 

 

 

Net income

$

30,839 

$

31,723 

 

 

 

 

 

Basic earnings per share

$

1.05 

$

1.09 

 

 

 

 

 

Diluted earnings per share

$

1.05 

$

1.09 

 

 

 

 

 

Dividends per share

$

0.05 

$

0.23 

 

 

 

 

 

Comprehensive income:

 

 

 

 

Net income

$

30,839 

$

31,723 

Unrealized gain on available-for-sale securities, net

 

 

 

 

of deferred income taxes of $67 and $36 for May 4, 2013

 

111 

 

60 

and April 28, 2012, respectively

 

 

 

 

Comprehensive income

$

30,950 

$

31,783 

 

See notes to condensed consolidated financial statements (unaudited).


 

 

Table of Contents

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 4, 2013

 

February 2, 2013

 

April 28, 2012

 

(Dollars in thousands)

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

65,355 

 

$

31,069 

 

$

70,704 

Short-term investments

 

161,095 

 

 

157,578 

 

 

212,242 

Restricted cash and investments

 

4,816 

 

 

5,999 

 

 

5,318 

Accounts receivable, net of allowance for doubtful accounts of

 

 

 

 

 

 

 

 

$2,039, $2,053 and $2,143 at May 4, 2013, February 2, 2013

 

 

 

 

 

 

 

 

and April 28, 2012 respectively

 

40,059 

 

 

40,016 

 

 

44,150 

Merchandise inventories

 

126,268 

 

 

140,738 

 

 

120,755 

Deferred income taxes

 

4,564 

 

 

4,631 

 

 

3,543 

Prepaid expenses

 

10,526 

 

 

10,183 

 

 

6,156 

Total Current Assets

 

412,683 

 

 

390,214 

 

 

462,868 

Property and equipment – net

 

137,018 

 

 

134,227 

 

 

119,700 

Other assets

 

10,506 

 

 

8,205 

 

 

7,011 

Total Assets

$

560,207 

 

$

532,646 

 

$

589,579 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

$

85,264 

 

$

99,247 

 

$

88,697 

Accrued expenses

 

44,605 

 

 

43,773 

 

 

44,936 

Accrued bonus and benefits

 

1,104 

 

 

2,290 

 

 

2,854 

Accrued income taxes

 

31,312 

 

 

14,292 

 

 

30,299 

Total Current Liabilities

 

162,285 

 

 

159,602 

 

 

166,786 

Deferred income taxes

 

3,330 

 

 

3,330 

 

 

7,887 

Other noncurrent liabilities (primarily deferred rent)

 

24,938 

 

 

24,480 

 

 

22,207 

 

 

 

 

 

 

 

 

 

Commitments and contingencies:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Preferred stock, $100 par value per share, 100,000 shares

 

 

 

 

 

 

 

 

authorized, none issued

 

 

 

 

 

Class A common stock, $.033 par value per share, 50,000,000

 

 

 

 

 

 

 

 

shares authorized; issued 27,518,498 shares, 27,543,376 shares

 

 

 

 

 

 

 

 

and 27,429,113 shares at May 4, 2013, February 2, 2013 and

 

 

 

 

 

 

 

 

April 28, 2012 respectively

 

917 

 

 

918 

 

 

914 

Convertible Class B common stock, $.033 par value per share,

 

 

 

 

 

 

 

 

15,000,000 shares authorized; issued 1,743,525 shares at

 

 

 

 

 

 

 

 

May 4, 2013, February 2, 2013 and April 28, 2012

 

58 

 

 

58 

 

 

58 

Additional paid-in capital

 

77,296 

 

 

76,594 

 

 

72,977 

Retained earnings

 

290,451 

 

 

266,843 

 

 

317,754 

Accumulated other comprehensive income

 

932 

 

 

821 

 

 

996 

Total Stockholders' Equity

 

369,654 

 

 

345,234 

 

 

392,699 

Total Liabilities and Stockholders’ Equity

$

560,207 

 

$

532,646 

 

$

589,579 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements (unaudited).


 

 

Table of Contents

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

May 4, 2013

 

April 28, 2012

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

 

Net income

$

30,839 

 

$

31,723 

 

Adjustments to reconcile net income to net cash provided

 

 

 

 

 

 

by operating activities:

 

 

 

 

 

 

Depreciation

 

5,449 

 

 

5,771 

 

Provision for doubtful accounts

 

382 

 

 

303 

 

Share-based compensation

 

467 

 

 

644 

 

Excess tax benefits from share-based compensation

 

(12)

 

 

(46)

 

Loss on disposal of property and equipment

 

249 

 

 

160 

 

Changes in operating assets and liabilities which provided

 

 

 

 

 

 

(used) cash:

 

 

 

 

 

 

Accounts receivable

 

(425)

 

 

(1,429)

 

Merchandise inventories

 

14,470 

 

 

9,627 

 

Prepaid and other assets

 

(2,598)

 

 

(471)

 

Accrued income taxes

 

17,032 

 

 

15,201 

 

Accounts payable, accrued expenses and other liabilities

 

(16,764)

 

 

(3,517)

 

Net cash provided by operating activities

 

49,089 

 

 

57,966 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

Expenditures for property and equipment

 

(5,605)

 

 

(9,353)

 

Purchase of short-term investments

 

(7,026)

 

 

(95,883)

 

Sales of short-term investments

 

3,641 

 

 

89,482 

 

Change in restricted cash and investments

 

1,183 

 

 

 

Net cash used in investing activities

 

(7,807)

 

 

(15,747)

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

Dividends paid

 

(1,464)

 

 

(6,707)

 

Repurchase of common stock

 

(5,774)

 

 

(5)

 

Proceeds from employee stock purchase plan

 

206 

 

 

224 

 

Excess tax benefits from share-based compensation

 

12 

 

 

46 

 

Proceeds from stock options exercised

 

24 

 

 

34 

 

Net cash used in financing activities

 

(6,996)

 

 

(6,408)

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

34,286 

 

 

35,811 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

31,069 

 

 

34,893 

 

Cash and cash equivalents at end of period

$

65,355 

 

$

70,704 

 

 

See notes to condensed consolidated financial statements (unaudited).


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 4, 2013 AND APRIL 28, 2012

 

 

 

NOTE 1 - GENERAL

 

The condensed consolidated financial statements have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the “Company”), and all amounts shown as of and for the periods ended May 4, 2013 and April 28, 2012 are unaudited.  In the opinion of management, all adjustments considered necessary for a fair statement 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 February 2, 2013.  Amounts as of February 2, 2013, have been derived from the audited balance sheet, but do not include all disclosures required by accounting principles generally accepted in the United States of America.

 

On May 23, 2013, the Board of Directors maintained the quarterly dividend at $0.05 per share. The Board of Directors previously accelerated the full year 2013 dividend of $1.00 on December 28, 2012.


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 4, 2013 AND APRIL 28, 2012

 

 

 

NOTE 2 - EARNINGS PER SHARE:

 

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

 

 

 

 

 

May 4, 2013

 

 

April 28, 2012

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

 

 

 

Net earnings

 

$

30,839 

 

$

31,723 

 

 

Earnings allocated to non-vested equity awards

 

 

(468)

 

 

(498)

 

 

Net earnings available to common stockholders

 

$

30,371 

 

$

31,225 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

28,832,579 

 

 

28,705,876 

 

 

Dilutive effect of stock options

 

 

2,881 

 

 

4,786 

 

 

Diluted weighted average common shares outstanding

 

 

28,835,460 

 

 

28,710,662 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.05 

 

$

1.09 

 

 

Diluted earnings per share

 

$

1.05 

 

$

1.09 

 

 

 

NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:

 

Income tax payments, net of refunds received, for the three months ended May 4, 2013 and April 28, 2012 were $962,000 and $4,401,000, respectively.


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 4, 2013 AND APRIL 28, 2012

 

 

 

NOTE 4 – FINANCING ARRANGEMENTS:

 

As of May 4, 2013, the Company had an unsecured revolving credit agreement to borrow $35.0 million.  The revolving credit agreement is committed until August 2013.  The credit agreement contains various financial covenants and limitations, including the maintenance of specific financial ratios with which the Company was in compliance as of May 4, 2013.  There were no borrowings outstanding under this credit facility during the periods ended May 4, 2013, February 2, 2013 or April 28, 2012.  The weighted average interest rate under the credit facility was zero at May 4, 2013.

 

At May 4, 2013, February 2, 2013 and April 28, 2012, the Company had approximately $2.3 million, $2.9 million and $3.0 million, respectively, of outstanding irrevocable 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 Accessories and Credit.  As outlined in ASC 280-10, the Company has two reportable segments: Retail and Credit.  The Company has aggregated its retail operating segments 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, if the segments have similar economic characteristics, similar product, similar production processes, similar clients and similar 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 of the Company’s operating segments is sourced from the same countries and some of the same vendors, using similar production processes.  Clients of the Company’s operating segments have similar characteristics.  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, through its retail stores.

                          

The Company operates its women’s fashion specialty retail stores principally in the southeastern United States, and does business in 31 total. 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.


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 4, 2013 AND APRIL 28, 2012

 

 

 

 

NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):

 

The following schedule summarizes certain segment information (in thousands):

 

Three Months Ended

 

 

 

May 4, 2013

Retail

Credit

Total

 

 

 

 

Revenues

$ 268,079

$ 1,619

$ 269,698

Depreciation

5,436 

13 

5,449 

Interest and other income

(875)

(875)

Income before taxes

48,334 

500 

48,834 

Total assets

494,752 

65,455 

560,207 

Capital expenditures

5,605 

5,605 

 

 

 

 

Three Months Ended

 

 

 

April 28, 2012

Retail

Credit

Total

 

 

 

 

Revenues

$ 273,542

$ 1,802

$ 275,344

Depreciation

5,758 

13 

5,771 

Interest and other income

(906)

(906)

Income before taxes

50,534 

758 

51,292 

Total assets

512,606 

76,973 

589,579 

Capital expenditures

9,353 

9,353 

 

 

 

 

 

 

 

 

 

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

 

 

May 4, 2013

 

 

April 28, 2012

 

 

 

 

 

 

Bad debt expense

$

382 

 

$

303 

Payroll

 

231 

 

 

221 

Postage

 

199 

 

 

193 

Other expenses

 

294 

 

 

433 

 

 

 

 

 

 

Total expenses

$

1,106 

 

$

1,150 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 4, 2013 AND APRIL 28, 2012

 

 

 

NOTE 6 – STOCK BASED COMPENSATION:

 

As of May 4, 2013, the Company had two long-term compensation plans pursuant to which stock-based compensation was outstanding or could be granted. The Company’s 1987 Non-Qualified Stock Option Plan is for the granting of options to officers and key employees and the 2004 Amended and Restated Incentive Compensation Plan is for the granting of various forms of equity-based awards, including restricted stock and stock options, to officers and key employees.  

 

The following table presents the number of options and shares of restricted stock initially authorized and available for grant under each of the plans as of May 4, 2013:

 

 

1987 

 

2004 

 

 

 

Plan

 

Plan

 

Total

Options and/or restricted stock initially authorized

5,850,000 

 

1,350,000 

 

7,200,000 

Options and/or restricted stock available for grant:

 

 

February 2, 2013

20,127 

 

443,566 

 

463,693 

May 4, 2013

 

231,538 

 

231,538 

 

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 May 4, 2013, February 2, 2013 and April 28, 2012, there was $10.7 million, $6.4 million  and $5.3 million of total unrecognized compensation expense related to nonvested restricted stock awards, which have a remaining weighted-average vesting period of 3.9 years, 2.3 years and 2.0 years, respectively. The total fair value of the shares recognized as compensation expense during the three months ended May 4, 2013 was $430,000 compared to $604,000 for the three months ended April 28, 2012.  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 restricted stock outstanding during the three months ended May 4, 2013:

 

 

 

 

 

Weighted Average

 

Number of

 

 

Grant Date Fair

 

Shares

 

 

Value Per Share

Restricted stock awards at February 2, 2013

440,146 

 

$

23.70 

Granted

213,029 

 

 

23.56 

Vested

(118,456)

 

 

19.89 

Forfeited or expired

(1,001)

 

 

24.10 

Restricted stock awards at May 4, 2013

533,718 

 

$

24.49 

 

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 May 4, 2013 and April 28, 2012, the Company sold 10,058 and 10,212 shares to employees at an average discount of $3.62 and $3.88 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 $37,000 and $40,000 for the three months ended May 4, 2013 and April 28, 2012, respectively.  These expenses are classified as a component of selling, general and administrative expenses.


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 4, 2013 AND APRIL 28, 2012

 

 

 

The following is a summary of changes in stock options outstanding during the three months ended May 4, 2013.

 
 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

 

Average

 

Remaining

 

 

Aggregate

 

 

 

 

 

Exercise

 

Contractual

 

 

Intrinsic

 

 

Shares

 

 

Price

 

Term

 

 

Value(a)

 

Options outstanding at February 2, 2013

9,550 

 

$

13.47 

 

2.12 years

 

$

136,185 

 

Granted

20,127 

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

 

 

 

 

 

 

 

Exercised

(1,000)

 

 

 

 

 

 

 

 

 

Outstanding at May 4, 2013

28,677 

 

$

20.53 

 

7.32 years

 

$

125,685 

 

Vested and exercisable at May 4, 2013

8,550 

 

$

13.39 

 

1.01 years

 

$

98,514 

 

 

(a) The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

 

20,127 options were granted in the first three months of fiscal 2013. No options were granted in the first three months of fiscal 2012.

 

The total intrinsic value of options exercised during the first quarter ended May 4, 2013 was $10,000 compared to $22,000 for the first quarter and three months ended April 28, 2012.

 

The stock option expense was de minimis for the three months ended May 4, 2013 and zero for the three  months ended April 28, 2012.

 

Stock option awards outstanding under the Company’s current plans were granted at exercise prices which were equal to the market value of the Company’s stock on the date of grant, vest over five years and expire no later than ten years after the grant date.


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 4, 2013 AND APRIL 28, 2012

 

 

 

NOTE 7 – FAIR VALUE MEASUREMENTS:

 

The following tables set forth information regarding the Company’s financial assets that are measured at fair value (in thousands) as of May 4, 2013, February 2, 2013 and April 28, 2012.

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

May 4, 2013

 

Assets

 

Inputs

 

Inputs

Description

 

 

 

Level 1

 

Level 2

 

Level 3

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

State/Municipal Bonds

 

$

158,996 

 

$

 

$

158,996 

 

$

Corporate Bonds

 

 

1,915 

 

 

 

 

1,915 

 

 

Auction Rate Securities (ARS)

 

 

3,450 

 

 

 

 

 

 

3,450 

U.S. Treasury Notes

 

 

3,554 

 

 

3,554 

 

 

 

 

Cash Surrender Value of Life Insurance

 

 

2,411 

 

 

 

 

 

 

2,411 

Privately Managed Funds

 

 

523 

 

 

 

 

 

 

523 

Corporate Equities

 

 

520 

 

 

520 

 

 

 

 

Certificates of Deposit

 

 

100 

 

 

100 

 

 

 

 

Total Assets

 

$

171,469 

 

$

4,174 

 

$

160,911 

 

$

6,384 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Compensation

 

 

(2,493)

 

 

 

 

 

 

(2,493)

Total Liabilities

 

$

(2,493)

 

$

 

$

 

$

(2,493)

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 4, 2013 AND APRIL 28, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

February 2, 2013

 

Assets

 

Inputs

 

Inputs

Description

 

 

 

Level 1

 

Level 2

 

Level 3

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

State/Municipal Bonds

 

$

151,377 

 

$

 

$

151,377 

 

$

Corporate Bonds

 

 

8,035 

 

 

 

 

8,035 

 

 

Auction Rate Securities (ARS)

 

 

3,450 

 

 

 

 

 

 

3,450 

U.S. Treasury Notes

 

 

3,906 

 

 

3,906 

 

 

 

 

Cash Surrender Value of Life Insurance

 

 

2,051 

 

 

 

 

 

 

2,051 

Privately Managed Funds

 

 

561 

 

 

 

 

 

 

561 

Corporate Equities

 

 

474 

 

 

474 

 

 

 

 

Certificates of Deposit

 

 

100 

 

 

100 

 

 

 

 

Total Assets

 

$

169,954 

 

$

4,480 

 

$

159,412 

 

$

6,062 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Compensation

 

 

(2,178)

 

 

 

 

 

 

(2,178)

Total Liabilities

 

$

(2,178)

 

$

 

$

 

$

(2,178)

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

April 28, 2012

 

Assets

 

Inputs

 

Inputs

Description

 

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

State/Municipal Bonds

$

173,786 

 

$

 

$

173,786 

 

$

Corporate Bonds

 

22,316 

 

 

 

 

22,316 

 

 

Auction Rate Securities (ARS)

 

3,450 

 

 

 

 

 

 

3,450 

Variable Rate Demand Notes (VRDN)

 

16,965 

 

 

16,965 

 

 

 

 

U.S. Treasury Notes

 

3,161 

 

 

3,161 

 

 

 

 

Privately Managed Funds

 

970 

 

 

 

 

 

 

970 

Corporate Equities

 

469 

 

 

469 

 

 

 

 

Certificates of Deposit

 

101 

 

 

101 

 

 

 

 

Total Assets

$

221,218 

 

$

20,696 

 

$

196,102 

 

$

4,420 

 

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 May 4, 2013, February 2, 2013 and April 28, 2012.  At April 28, 2012, the Company also held tax-exempt variable rate demand notes (“VRDN”). At May 4, 2013, the securities had contractual maturities which range from 11 days to 28 years.  Although the Company’s investments in VRDN’s had underlying securities with contractual maturities longer than one year, the VRDN’s themselves have interest rate resets of 7 days and are considered short-term investments.  These securities are classified as available-for-sale and are recorded as Short-term investments, Restricted investments and Other assets on the accompanying Condensed Consolidated Balance Sheets. These assets are carried at fair value with unrealized gains and losses reported net of taxes in Accumulated other comprehensive income.


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 4, 2013 AND APRIL 28, 2012

 

 

 

Additionally, at May 4, 2013, the Company had $0.5 million of privately managed funds, $0.5 million of corporate equities and a single auction rate security (“ARS”) of $3.5 million which continues to fail its auction, and deferred compensation plan assets of $2.4 million.  At February 2, 2013, the Company had $0.6 million of privately managed funds, $0.5 million of corporate equities, a single ARS of $3.5 million and deferred compensation plan assets of $2.1 million.  At April 28, 2012, the Company had $1.0 million of privately managed funds, $0.5 million of corporate equities and a single ARS of $3.5 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.

 

The ARS of $3,450,000 par value was issued by the Wake County, NC Industrial Facilities & Pollution Control Financing Authority. The security is an obligation of Carolina Power & Light Company and has a credit rating of AAA. The Company has collected all interest payments when due since the security was purchased and continues to expect that it will receive all interest due on the security in full and on a timely basis in the future.

 

The Company’s failed ARS is recorded at par value which approximates fair value using Level 3 inputs at each reporting period.  Because there is no active market for this particular ARS, its fair value was determined to approximate par value based on an estimate of fair value through the use of a discounted cash flow analysis. The terms used in the analysis were based on management’s estimate of the timing of future liquidity, which assumes that the security will be called or refinanced by the issuer or settled with a broker dealer prior to maturity. The discount rates used in the discounted cash flow analysis were based on market rates for similar liquid tax exempt securities with comparable ratings and maturities. Due to the uncertainty surrounding the timing of future liquidity, the Company also considered a liquidity/risk value reduction. In estimating the fair value of this ARS, the Company also considered the financial condition and near-term prospects of the issuer, the probability that the Company will be unable to collect all amounts due according to the contractual terms of the security and whether the security has been downgraded by a rating agency.  The Company’s valuation is sensitive to market conditions and management’s judgment and can change significantly based on the assumptions used.

 

The Company’s privately managed funds consist of two types of funds.  The privately managed funds cannot be redeemed at net asset value at a specific date without advance notice.  As a result, the Company has classified the investments as Level 3.

 

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. These funds are designed to mirror existing mutual funds and money market funds that are observable and actively traded. Cash surrender values are provided by third parties and reviewed for reasonableness by the Company.


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 4, 2013 AND APRIL 28, 2012

 

 

 

The following tables summarize the change in fair value of the Company’s financial assets measured using Level 3 inputs as of May 4, 2013 and April 28, 2012 (dollars in thousands):

 

 

 

Fair Value Measurements Using Significant

 

 

Unobservable Asset Inputs (Level 3)

 

Available-For-Sale

 

 

 

 

 

Cash

 

 

 

 

Debt Securities

 

Other Investments

 

 

Surrender

 

 

 

 

ARS

 

Private Equity

 

 

Value

 

Total

Beginning Balance at February 2, 2013

$

3,450 

 

$

561 

 

$

2,051 

 

$

6,062 

Redemptions

 

 

 

(45)

 

 

 

 

(45)

Additions

 

 

 

 

 

292 

 

 

292 

Total gains or (losses)

 

 

 

 

 

 

 

 

 

 

 

Included in earnings (or changes in net assets)

 

 

 

 

 

68 

 

 

75 

Included in other comprehensive income

 

 

 

 

 

 

 

Ending Balance at May 4, 2013

$

3,450 

 

$

523 

 

$

2,411 

 

$

6,384 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using Significant

 

 

 

 

 

 

 

Unobservable Liability Inputs (Level 3)

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

Total

 

 

 

 

 

 

Beginning Balance at February 2, 2013

$

(2,178)

 

$

(2,178)

 

 

 

 

 

 

Additions

 

(223)

 

 

(223)

 

 

 

 

 

 

Total (gains) or losses

 

 

 

 

 

 

 

 

 

 

 

Included in earnings (or changes in net assets)

 

(92)

 

 

(92)

 

 

 

 

 

 

Included in other comprehensive income

 

 

 

 

 

 

 

 

 

Ending Balance at May 4, 2013

$

(2,493)

 

$

(2,493)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using Significant

 

 

 

 

Unobservable Asset Inputs (Level 3)

 

 

 

 

Available-For-Sale

 

 

 

 

 

 

 

 

 

 

Debt Securities

 

Other Investments

 

 

 

 

 

 

 

ARS

 

Private Equity

 

 

Total

 

 

 

Beginning Balance at January 28, 2012

$

3,450 

 

$

1,604 

 

$

5,054 

 

 

 

Redemptions

 

 

 

(634)

 

 

(634)

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Total gains or (losses)

 

 

 

 

 

 

 

 

 

 

 

Included in earnings (or changes in net assets)

 

 

 

 

 

 

 

 

Included in other comprehensive income

 

 

 

 

 

 

 

 

Ending Balance at April 28, 2012

$

3,450 

 

$

970 

 

$

4,420 

 

 

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 4, 2013 AND APRIL 28, 2012

 

 

 

Quantitative information regarding the significant unobservable inputs related to the ARS as of May 4, 2013 and April 28, 2012 were as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

May 4, 2013

 

 

Fair Value

 

Valuation Technique

 

Unobservable Inputs

 

 

$3,450

 

Net present value

 

Total Term

 

9.4 Years

 

 

 

 

of cash flows

 

Yield

 

0.28%

 

 

 

 

 

 

Comparative bond discount rate

 

0.14%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

April 28, 2012

 

 

Fair Value

 

Valuation Technique

 

Unobservable Inputs

 

 

$3,450

 

Net present value

 

Total Term

 

10.4 Years

 

 

 

 

of cash flows

 

Yield

 

0.28%

 

 

 

 

 

 

Comparative bond discount rate

 

0.20%

 

 

 

 

 

 

 

 

 

 

 

Significant increases or decreases in certain of the inputs could result in a lower fair value measurement. For example, a decrease in the yield, or an increase to the comparative bond discount rate could result in a lower fair value.

 
 
 

 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 4, 2013 AND APRIL 28, 2012

 

 

 

NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE INCOME:

 

The following tables set forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) as of May 4, 2013:

 

 

 

Changes in Accumulated Other

 

 

 

 

 

Comprehensive Income (a)

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

 

 

 

 

 

and Losses on

 

 

 

 

 

 

 

 

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

Securities

 

 

 

 

 

 

Beginning Balance at February 2, 2013

 

$

821 

 

 

 

 

 

 

Other comprehensive income before

 

 

 

 

 

 

 

 

 

reclassifications

 

 

153 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated

 

 

 

 

 

 

 

 

 

other comprehensive income (b)

 

 

(42)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income

 

 

111 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance at May 4, 2013

 

$

932 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) All amounts are net-of-tax. Amounts in parentheses indicate a debit/reduction to OCI.

 

 

 

(b) See separate table below for details about these reclassifications.

 

 

 

Three Months Ended

 

 

May 4, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Reclassified

 

Affected Line Item

 

 

 

 

 

from Accumulated

 

in the Statement

 

 

Details about Accumulated Other

 

 

Other Comprehensive

 

Where Net Income

 

 

Comprehensive Income Components

 

 

Income

 

is Presented

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains and losses on

 

 

 

 

 

 

 

available-for-sale securities

 

$

66 

 

Interest and other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66 

 

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24)

 

Income tax expense

 

 

Total reclassification for the period (a)

 

$

42 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 9 – RECENT ACCOUNTING PRONOUNCEMENTS:

 

During the first quarter of 2013, the Company adopted guidance that requires additional disclosures on reclassifications from accumulated other comprehensive income into net income. The new accounting guidance requires entities to report either parenthetically on the face of the financial statements or in the footnotes of these reclassifications for each financial statement line item. This new guidance only impacts disclosures and as such will have no impact on the Company’s consolidated financial position, results of operations or cash flows.


 

 

 

Table of Contents

 

THE CATO CORPORATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

 

FORWARD-LOOKING INFORMATION:

 

The following information should be read along with the unaudited Condensed Consolidated Financial Statements, including the accompanying Notes appearing in this report. Any of the following are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended: (1) statements in this Form 10-Q that reflect projections or expectations of our future financial or economic performance; (2) statements that are not historical information; (3) statements of our beliefs, intentions, plans and objectives for future operations, including those contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; (4) statements relating to our operations or activities for fiscal 2013 and beyond, including, but not limited to, statements regarding expected amounts of capital expenditures and store openings, relocations, remodels and closures; and (5) statements relating to our future contingencies. When possible, we have attempted to identify forward-looking statements by using words such as “will,” “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “hopes,” “intends,” “may,” “plans,” “should” and any variations or negative formations of such words and similar expressions. We can give no assurance that actual results or events will not differ materially from those expressed or implied in any such forward-looking statements. Forward-looking statements included in this report are based on information available to us as of the filing date of this report, but subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated by the forward-looking statements.  Such factors include, but are not limited to, the following:  any actual or perceived deterioration in, or uncertainties regarding, prevailing U.S. and global economic, political or financial market conditions; changes in other factors that drive consumer or corporate confidence and spending, including, but not limited to, levels of unemployment, fuel, energy and food costs, wage rates, tax rates, home values, consumer net worth and the availability of credit; uncertainties regarding the impact of any governmental responses to the foregoing conditions; competitive factors and pricing pressures; our ability to predict fashion trends; consumer apparel and accessory buying patterns; adverse weather or similar conditions that may affect our sales or operations; inventory risks due to shifts in market demand; and other factors discussed under “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended February 2, 2013 (“fiscal 2012”), as amended or supplemented, and in other reports we file with or furnish to the Securities and Exchange Commission (“SEC”) from time to time.  We do not undertake, and expressly decline, any obligation to update any such forward-looking information contained in this report, whether as a result of new information, future events, or otherwise.


 

Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

CRITICAL ACCOUNTING POLICIES:

 

The Company’s accounting policies are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2013. As disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include the allowance for doubtful accounts receivable, reserves related to self-insured health insurance, workers’ compensation, general and auto insurance liabilities, calculation of potential asset impairment, inventory shrinkage and uncertain tax positions.

 

The Company’s critical accounting policies and estimates are discussed with the Audit Committee.


 

Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

 

RESULTS OF OPERATIONS:

 

The following table sets forth, for the periods indicated, certain items in the Company's unaudited Condensed Consolidated Statements of Income as a percentage of total retail sales:

 

 

Three Months Ended

 

 

May 4, 2013

April 28, 2012

 

Total retail sales

100.0 

%

100.0 

%

Other income

0.9 

 

0.9 

 

Total revenues

100.9 

 

100.9 

 

Cost of goods sold (exclusive of depreciation)

58.7 

 

57.9