cato10q2q13.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 August 3, 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 August 3, 2013, there were 27,510,139 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 August 3, 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 and Six Months Ended August 3, 2013 and July 28, 2012

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

At August 3, 2013, February 2, 2013 and July 28, 2012

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

4

 

 

For the Six Months Ended August 3, 2013 and July 28, 2012

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5 – 18

 

 

For the Three Months and Six Months Ended August 3, 2013 and July 28, 2012

 

 

 

 

 

 

Item 2.

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

19 – 26

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

 

Item 4.

Controls and Procedures

27

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

28

 

 

 

 

 

Item 1A.

Risk Factors

28

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

28

 

 

 

 

 

Item 4.

Mine Safety Disclosures

29

 

 

 

 

 

Item 5.

Other Information

29

 

 

 

 

 

Item 6.

Exhibits

29

 

 

 

 

 

Signatures

30 - 34

 

 

 

 

 

 

           

 


 

 

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

Six Months Ended

August 3, 2013

July 28, 2012

August 3, 2013

July 28, 2012

(Dollars in thousands, except per share data)

REVENUES

Retail sales

$

229,378 

$

231,450 

$

496,559 

$

504,240 

Other revenue (principally finance charges, late fees and

layaway charges)

2,340 

2,613 

4,857 

5,167 

Total revenues

231,718 

234,063 

501,416 

509,407 

COSTS AND EXPENSES, NET

Cost of goods sold (exclusive of depreciation shown below)

144,950 

142,459 

301,851 

300,291 

Selling, general and administrative (exclusive of depreciation

shown below)

58,965 

59,220 

118,354 

120,575 

Depreciation

5,436 

5,742 

10,885 

11,513 

Interest and other income

(730)

(985)

(1,605)

(1,891)

Cost and expenses, net

208,621 

206,436 

429,485 

430,488 

Income before income taxes

23,097 

27,627 

71,931 

78,919 

Income tax expense

8,322 

10,294 

26,317 

29,864 

Net income

$

14,775 

$

17,333 

$

45,614 

$

49,055 

Basic earnings per share

$

0.51 

$

0.59 

$

1.56 

$

1.68 

Diluted earnings per share

$

0.51 

$

0.59 

$

1.56 

$

1.68 

Dividends per share

$

0.05 

$

0.25 

$

0.10 

$

0.48 

Comprehensive income:

Net income

$

14,775 

$

17,333 

$

45,614 

$

49,055 

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

deferred income taxes of ($273) and ($206) for the three and six

months ended August 3, 2013 and $8 and $44 for the three

and six months ended July 28, 2012, respectively

(453)

13 

(342)

73 

Comprehensive income

$

14,322 

$

17,346 

$

45,272 

$

49,128 

 

See notes to condensed consolidated financial statements (unaudited).


 

 

Table of Contents

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(UNAUDITED)

August 3, 2013

February 2, 2013

July 28, 2012

(Dollars in thousands)

ASSETS

Current Assets:

Cash and cash equivalents

$

88,559 

$

31,069 

$

66,043 

Short-term investments

157,326 

157,578 

211,390 

Restricted cash and investments

4,807 

5,999 

5,311 

Accounts receivable, net of allowance for doubtful accounts of

$2,036, $2,053 and $2,042 at August 3, 2013, February 2, 2013

and July 28, 2012 respectively

39,908 

40,016 

43,373 

Merchandise inventories

111,206 

140,738 

107,034 

Deferred income taxes

4,837 

4,631 

3,535 

Prepaid expenses

10,997 

10,183 

4,160 

Total Current Assets

417,640 

390,214 

440,846 

Property and equipment – net

139,550 

134,227 

125,520 

Other assets

10,223 

8,205 

7,016 

Total Assets

$

567,413 

$

532,646 

$

573,382 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Accounts payable

$

80,674 

$

99,247 

$

70,573 

Accrued expenses

49,196 

43,773 

43,160 

Accrued bonus and benefits

1,609 

2,290 

4,708 

Accrued income taxes

22,523 

14,292 

19,555 

Total Current Liabilities

154,002 

159,602 

137,996 

Deferred income taxes

3,330 

3,330 

7,887 

Other noncurrent liabilities (primarily deferred rent)

26,520 

24,480 

24,231 

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 27,510,139 shares, 27,543,376 shares

and 27,530,131 shares at August 3, 2013, February 2, 2013 and

July 28, 2012 respectively

917 

918 

918 

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

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

August 3, 2013, February 2, 2013 and July 28, 2012

58 

58 

58 

Additional paid-in capital

78,356 

76,594 

73,863 

Retained earnings

303,751 

266,843 

327,420 

Accumulated other comprehensive income

479 

821 

1,009 

Total Stockholders' Equity

383,561 

345,234 

403,268 

Total Liabilities and Stockholders’ Equity

$

567,413 

$

532,646 

$

573,382 

 


 

 

See notes to condensed consolidated financial statements (unaudited).


 

 

Table of Contents

THE CATO CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Six Months Ended

August 3, 2013

July 28, 2012

(Dollars in thousands)

Operating Activities:

Net income

$

45,614 

$

49,055 

Adjustments to reconcile net income to net cash provided

by operating activities:

Depreciation

10,885 

11,513 

Provision for doubtful accounts

696 

596 

Share-based compensation

1,489 

1,444 

Excess tax benefits from share-based compensation

(28)

(98)

Loss on disposal of property and equipment

268 

610 

Changes in operating assets and liabilities which provided

(used) cash:

Accounts receivable

(588)

(945)

Merchandise inventories

29,532 

23,348 

Prepaid and other assets

(3,419)

1,489 

Accrued income taxes

8,259 

4,509 

Accounts payable, accrued expenses and other liabilities

(16,957)

(20,982)

Net cash provided by operating activities

75,751 

70,539 

Investing Activities:

Expenditures for property and equipment

(10,606)

(19,922)

Purchase of short-term investments

(11,756)

(100,289)

Sales of short-term investments

11,347 

94,792 

Change in restricted cash and investments

1,192 

14 

Net cash used in investing activities

(9,823)

(25,405)

Financing Activities:

Dividends paid

(2,939)

(14,027)

Repurchase of common stock

(5,780)

(355)

Proceeds from employee stock purchase plan

214 

259 

Excess tax benefits from share-based compensation

28 

98 

Proceeds from stock options exercised

39 

41 

Net cash used in financing activities

(8,438)

(13,984)

Net increase in cash and cash equivalents

57,490 

31,150 

Cash and cash equivalents at beginning of period

31,069 

34,893 

Cash and cash equivalents at end of period

$

88,559 

$

66,043 

Non-cash investing activity:

Change in accrued plant and equipment

$

(5,893)

$

 

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 AND SIX MONTHS ENDED AUGUST 3, 2013 AND JULY 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 three and six month periods ended August 3, 2013 and July 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 August 29, 2013, the Board of Directors maintained the quarterly dividend at $0.05 per share. The Board of Directors previously accelerated the full fiscal 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 AND SIX MONTHS ENDED AUGUST 3, 2013 AND JULY 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

Six Months Ended

August 3, 2013

July 28, 2012

August 3, 2013

July 28, 2012

Numerator

Net earnings

$

14,775 

$

17,333 

$

45,614 

$

49,055 

Earnings allocated to non-vested equity awards

(251)

(267)

(733)

(764)

Net earnings available to common stockholders

$

14,524 

$

17,066 

$

44,881 

$

48,291 

Denominator

Basic weighted average common shares outstanding

28,736,214 

28,813,766 

28,784,425 

28,759,821 

Dilutive effect of stock options

4,859 

4,285 

3,537 

4,231 

Diluted weighted average common shares outstanding

28,741,073 

28,818,051 

28,787,962 

28,764,052 

Net income per common share

Basic earnings per share

$

0.51 

$

0.59 

$

1.56 

$

1.68 

Diluted earnings per share

$

0.51 

$

0.59 

$

1.56 

$

1.68 

 

 

NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:

 

Income tax payments, net of refunds received, for the six months ended August 3, 2013 and July 28, 2012 were $18,171,000 and $25,470,000, respectively.

 

 

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2013 AND JULY 28, 2012

 

 

NOTE 4 – FINANCING ARRANGEMENTS:

 

As of August 3, 2013, the Company had an unsecured revolving credit agreement to borrow $35.0 million.  During 2013, the revolving credit agreement was amended and extended to August 2015.  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 August 3, 2013.  There were no borrowings outstanding under this credit facility during the periods ended August 3, 2013, February 2, 2013 or July 28, 2012.  The weighted average interest rate under the credit facility was zero at August 3, 2013 due to no borrowings during the year.

 

At August 3, 2013, February 2, 2013 and July 28, 2012, the Company had approximately $0.6 million, $2.9 million and $5.8 million, respectively, of outstanding irrevocable letters of credit related 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 states total as of August 3, 2013. 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 AND SIX MONTHS ENDED AUGUST 3, 2013 AND JULY 28, 2012

 

 

 

NOTE 5 – REPORTABLE SEGMENT INFORMATION (CONTINUED):

 

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

 

Three Months Ended

Six Months Ended 

August 3, 2013

Retail

Credit

Total

August 3, 2013

Retail

Credit

Total

Revenues

$ 230,163 

$ 1,555 

$ 231,718 

Revenues

$ 498,242 

$ 3,174 

$ 501,416 

Depreciation

5,427 

5,436 

Depreciation

10,863 

22 

10,885 

Interest and other income

(730)

(730)

Interest and other income

(1,605)

(1,605)

Income before taxes

22,474 

623 

23,097 

Income before taxes

70,808 

1,123 

71,931 

Total assets

501,281 

66,132 

567,413 

Total assets

501,281 

66,132 

567,413 

Capital expenditures

5,001 

5,001 

Capital expenditures

10,606 

10,606 

Three Months Ended

Six Months Ended 

July 28, 2012

Retail

Credit

Total

July 28, 2012

Retail

Credit

Total

Revenues

$ 232,230 

$ 1,833 

$ 234,063 

Revenues

$ 505,772 

$ 3,635 

$ 509,407 

Depreciation

5,729 

13 

5,742 

Depreciation

11,487 

26 

11,513 

Interest and other income

(985)

(985)

Interest and other income

(1,891)

(1,891)

Income before taxes

26,747 

880 

27,627 

Income before taxes

77,281 

1,638 

78,919 

Total assets

495,526 

77,856 

573,382 

Total assets

495,526 

77,856 

573,382 

Capital expenditures

10,569 

10,569 

Capital expenditures

19,922 

19,922 

 

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

Six Months Ended

August 3, 2013

July 28, 2012

August 3, 2013

July 28, 2012

Bad debt expense

$

314 

293 

$

696 

596 

Payroll

234 

224 

465 

445 

Postage

180 

192 

379 

385 

Other expenses

195 

231 

489 

545 

Total expenses

923 

940 

2,029 

1,971 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2013 AND JULY 28, 2012

 

 

 

NOTE 6 – STOCK BASED COMPENSATION:

 

As of August 3, 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 2013 Incentive Compensation Plan is 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 23, 2013, shares for grant were no longer available under the 2004 Amended and Restated 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 August 3, 2013:

 

1987 

2004 

2013 

Plan

Plan

Plan

Total

Options and/or restricted stock initially authorized

5,850,000 

1,350,000 

1,500,000 

8,700,000 

Options and/or restricted stock available for grant:

February 2, 2013

20,127 

443,566 

463,693 

August 3, 2013

1,489,152 

1,489,152 

 

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 August 3, 2013, February 2, 2013 and July 28, 2012, there was $9.9 million, $6.4 million  and $7.7 million of total unrecognized compensation expense related to nonvested restricted stock awards, which have a remaining weighted-average vesting period of 4.5 years, 2.3 years and 2.8 years, respectively. The total fair value of the shares recognized as compensation expense during the second quarter and six months ended August 3, 2013 was $1,018,000 and $1,448,000, respectively compared to $794,000 and $1,398,000, respectively for the second quarter and six months ended July 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 six months ended August 3, 2013:

 

Weighted Average

Number of

Grant Date Fair

Shares

Value Per Share

Restricted stock awards at February 2, 2013

440,146 

$

23.70 

Granted

214,385 

23.57 

Vested

(119,652)

19.85 

Forfeited or expired

(23,212)

24.81 

Restricted stock awards at August 3, 2013

511,667 

$

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 six months ended August 3, 2013 and July 28, 2012, the Company sold 10,418 and 11,687 shares to employees at an average discount of $3.62 and $3.92 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 $38,000 and $46,000 for the six months ended August 3, 2013 and July 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 AND SIX MONTHS ENDED AUGUST 3, 2013 AND JULY 28, 2012

 

 

 


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2013 AND JULY 28, 2012

 

 

 

The following is a summary of changes in stock options outstanding during the six months ended August 3, 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 

23.57 

 

Forfeited or expired

 

Exercised

(2,500)

14.09 

 

Outstanding at August 3, 2013

27,177 

$

20.89 

7.41 years

$

131,922 

 

Vested and exercisable at August 3, 2013

7,050 

$

13.25 

0.72 years

$

88,046 

 

 

(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 six months of fiscal 2013. No options were granted in the first six months of fiscal 2012.

 

The total intrinsic value of options exercised during the second quarter and six months ended August 3, 2013 was $17,000 and $27,000, respectively compared to $28,000 and $50,000, respectively, for the second quarter and six months ended July 28, 2012.

 

The stock option expense was $5,000 for the three and six months ended August 3, 2013 and zero for the three and six  months ended July 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 AND SIX MONTHS ENDED AUGUST 3, 2013 AND JULY 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 August 3, 2013, February 2, 2013 and July 28, 2012.

 

Quoted

Prices in

Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

August 3, 2013

Assets

Inputs

Inputs

Description

Level 1

Level 2

Level 3

Assets:

State/Municipal Bonds

$

158,080 

$

$

158,080 

$

Auction Rate Securities (ARS)

3,450 

3,450 

U.S. Treasury Notes

1,504 

1,504 

Cash Surrender Value of Life Insurance

2,633 

2,633 

Privately Managed Funds

471 

471 

Corporate Equities

591 

591 

Certificates of Deposit

100 

100 

Total Assets

$

166,829 

$

2,195 

$

158,080 

$

6,554 

Liabilities:

Deferred Compensation

(2,746)

(2,746)

Total Liabilities

$

(2,746)

$

$

$

(2,746)


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2013 AND JULY 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

July 28, 2012

Assets

Inputs

Inputs

Description

Level 1

Level 2

Level 3

Assets:

State/Municipal Bonds

$

176,206 

$

$

176,206 

$

Corporate Bonds

18,884 

18,884 

Auction Rate Securities (ARS)

3,450 

3,450 

Variable Rate Demand Notes (VRDN)

16,865 

16,865 

U.S. Treasury Notes

3,162 

3,162 

Privately Managed Funds

871 

871 

Corporate Equities

439 

439 

Certificates of Deposit

101 

101 

Total Assets

$

219,978 

$

20,567 

$

195,090 

$

4,321 

 

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 August 3, 2013, February 2, 2013 and July 28, 2012.  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 AND SIX MONTHS ENDED AUGUST 3, 2013 AND JULY 28, 2012

 

 

 

Additionally, at August 3, 2013, the Company had $0.5 million of privately managed funds, $0.6 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 $2.6 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 July 28, 2012, the Company had $0.9 million of privately managed funds, $0.4 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 AND SIX MONTHS ENDED AUGUST 3, 2013 AND JULY 28, 2012

 

 

 

The following tables summarize the change in fair value of the Company’s financial assets measured using Level 3 inputs as of August 3, 2013 and July 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

(97)

(97)

 

 

 

Additions

494 

494 

 

 

 

Total gains or (losses)

 

 

 

Included in earnings (or changes in net assets)

88 

95 

 

 

 

Included in other comprehensive income

 

 

 

Ending Balance at August 3, 2013

$

3,450 

$

471 

$

2,633 

$

6,554 

 

 

 

 

 

 

Fair Value Measurements Using Significant

 

 

 

Unobservable Liability Inputs (Level 3)

 

 

 

Deferred

 

 

 

Compensation

Total

 

 

 

Beginning Balance at February 2, 2013

$

(2,178)

$

(2,178)

 

 

 

Additions

(425)

(425)

 

 

 

Total (gains) or losses

 

 

 

Included in earnings (or changes in net assets)

(143)

(143)

 

 

 

Included in other comprehensive income

 

 

 

Ending Balance at August 3, 2013

$

(2,746)

$

(2,746)

 

 

 

 

 

 

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

(722)

(722)

 

 

 

Assets

 

 

 

Total gains or (losses)

 

 

 

Included in earnings (or changes in net assets)

(11)

(11)

 

 

 

Included in other comprehensive income

 

 

 

Ending Balance at July 28, 2012

$

3,450 

$

871 

$

4,321 

 

 

Quantitative information regarding the significant unobservable inputs related to the ARS as of August 3, 2013 and July 28, 2012 were as follows:

 

 

As of August 3, 2013

 

Fair Value

Valuation Technique

Unobservable Inputs

 

$3,450

Net present value

Total Term

9.1 Years

 

of cash flows

Yield

0.11%

 

Comparative bond discount rate

0.19%

 

 

 

As of July 28, 2012

 

Fair Value

Valuation Technique

Unobservable Inputs

 

$3,450

Net present value

Total Term

10.1 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 AND SIX MONTHS ENDED AUGUST 3, 2013 AND JULY 28, 2012

 

 

NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE INCOME:

 

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the first three months of fiscal 2013:

Changes in Accumulated Other

Comprehensive Income (a)

Unrealized Gains

and (Losses) on

Available-for-Sale

Securities

Beginning Balance at May 4, 2013

$

932 

Other comprehensive income before

reclassifications

(436)

Amounts reclassified from accumulated

other comprehensive income (b)

(17)

Net current-period other comprehensive income

(453)

Ending Balance at August 3, 2013

$

479 

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

(b) Includes $28 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 $11.

The following table sets forth information regarding the reclassification out of Accumulated other comprehensive income (in thousands) for the first six months of fiscal 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

(283)

Amounts reclassified from accumulated

other comprehensive income (b)

(59)

Net current-period other comprehensive income

(342)

Ending Balance at August 3, 2013

$

479 

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

(b) Includes $94 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 $35.


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2013 AND JULY 28, 2012

 

 

 

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.

 

In the first quarter of 2014, the Company will adopt new accounting guidance which requires unrecognized tax benefits to be presented as a decrease in net operating loss, similar to tax loss or tax credit carryforward if certain criteria are met. The new guidance may affect balance sheet classification of certain unrecognized tax benefits and will have no impact on the Company’s consolidated results of operations or cash flows,


 

Table of Contents

 

THE CATO CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 2013 AND JULY 28, 2012

 

 

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.


 

 

 

 

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

Six Months Ended

August 3, 2013

July 28, 2012

August 3, 2013

July 28, 2012

Total retail sales

100.0 

%

100.0 

%

100.0 

%

100.0 

%

Other revenue

1.0 

1.1 

1.0 

1.0 

Total revenues

101.0 

101.1 

101.0 

101.0 

Cost of goods sold (exclusive of depreciation)

63.2 

61.6 

60.8 

59.6 

Selling, general and administrative (exclusive of depreciation)

25.7 

25.6 

23.8 

23.9 

Depreciation

2.4 

2.5 

2.2 

2.3 

Interest and other income

(0.3)

(0.4)

(0.3)

(0.4)

Income before income taxes

10.1 

11.9 

14.5 

15.6 

Net income

6.4 

7.5 

9.2 

9.7 


 

Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

RESULTS OF OPERATIONS (CONTINUED):

 

Comparison of Second  Quarter of 2013 with 2012

 

Total retail sales for the second quarter were $229.4 million compared to last year’s second quarter sales of $231.5 million, a 1.0% decrease.  Same-store sales decreased 2.0% in the second quarter of fiscal 2013.  For the six months ended August 3, 2013, total retail sales were $496.6 million compared to last year’s comparable six month sales of $504.2 million, and same-store sales decreased 4.0% for the comparable six month period. The Company believes the second quarter and first six month period of fiscal 2013 were both affected by slow economic growth, high unemployment and our customers’ limited discretionary spending.  Same-store sales includes stores that have been open more than 15 months.  Stores that have been relocated or expanded are also included in the same-store sales calculation after they have been open more than 15 months.  The method of calculating same-store sales varies across the retail industry.  As a result, our same-store sales calculation may not be comparable to similarly titled measures reported by other companies.  Total revenues, comprised of retail sales and other revenue (principally, finance charges and late fees on customer accounts receivable and layaway fees), were $231.7 million and $501.4 million for the second quarter and six months ended August 3, 2013, compared to $234.1 million and $509.4 million for the second quarter and six months ended July 28, 2012, respectively. The Company operated 1,306 stores at August 3, 2013 compared to 1,295 stores at the end of last year’s second quarter.  For the first six months of fiscal  2013, the Company opened four new stores, relocated three stores and closed eight stores.  The Company currently expects to open approximately 51 stores, relocate nine stores and close approximately 17 stores in fiscal 2013.

 

Credit revenue of $1.6 million represented 0.7% of total revenues in the second quarter of fiscal 2013, compared to 2012 credit revenue of $1.8 million or 0.8% of total revenues.  Credit revenue dollars decreased slightly for the most recent comparable period due to lower finance charge income and lower late fee income from sales under the Company’s proprietary credit card. Credit revenue is comprised of interest earned on the Company’s private label credit card portfolio and related fee income.  Related expenses principally include bad debt expense, payroll, postage and other administrative expenses and remained flat at $0.9 million for both comparable quarters.

 

Other revenue in total, as included in total revenues, was $2.3 million and $4.9 million for the second quarter and first six months of fiscal 2013, compared to $2.6 million and $5.2 million for the prior year’s comparable second quarter and first six months. The slight overall decrease in the second quarter and first six months of fiscal 2013 resulted primarily from lower finance, late fee and layaway charges.

 

Cost of goods sold was $145.0 million, or 63.2% of retail sales and $301.9 million or 60.8% of retail sales for the second quarter and first six months of fiscal 2013, compared to $142.5 million, or 61.6% of retail sales and $300.3 million or 59.6% of retail sales for the prior year’s comparable three and six month periods of fiscal 2012.  The overall increase in cost of goods sold as a percent of retail sales for the second quarter of fiscal 2013 resulted primarily from an increase in markdowns and occupancy costs related to store development. 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 the buying departments and distribution center.  Occupancy expenses include rent, real estate taxes, insurance, common area maintenance, utilities and maintenance for stores and distribution facilities.  Total gross margin dollars (retail sales less cost of goods sold exclusive of depreciation) decreased by 5.2% to $84.4 million for the second quarter of fiscal 2013 and decreased by 4.5% to $194.7 million for the first six months of fiscal 2013 compared to $89.0 million and $203.9 million for the prior year’s comparable three and six months of fiscal 2012.  Gross margin as presented may not be comparable to those of other entities.


 

Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

Selling, general and administrative expenses (“SG&A”) primarily include corporate and store payroll, related payroll taxes and benefits, insurance, supplies, advertising, bank and credit card processing fees and bad debts.  SG&A expenses were $59.0 million, or 25.7% of retail sales and $118.4 million, or 23.8% of retail sales for the second quarter and first six months of fiscal 2013, respectively, compared to $59.2 million, or 25.6% of retail sales and $120.6 million, or 23.9% of retail sales for the prior year’s comparable three and six month periods, respectively.  SG&A expenses as a percentage of retail sales slightly increased for the second quarter of fiscal 2013 as a result of higher insurance costs, partially offset by lower incentive compensation expense.  For the first six months of fiscal 2013, SG&A expenses as a percentage of retail sales slightly decreased due to lower incentive compensation expense, partially offset by higher insurance expense and higher payroll costs.

 

Depreciation expense was $5.4 million, or 2.4% of retail sales and $10.9 million, or 2.2% of retail sales for the second quarter and first six months of fiscal 2013, respectively, compared to $5.7 million, or 2.5% of retail sales and $11.5 million or 2.3% of retail sales for the prior year’s comparable three and six month periods of fiscal 2012, respectively.  The slight decrease in depreciation expense was due to limited overall store development compared to prior years.

 

Interest and other income was $0.7 million, or 0.3% of retail sales and $1.6 million, or 0.3% of retail sales for the second quarter and first six months of fiscal 2013, respectively, compared to $1.0 million, or 0.4% of retail sales and $1.9 million, or 0.4% of retail sales for the prior year’s comparable three and six month periods of fiscal 2012.  The slight decrease was due to lower interest income driven by lower interest rates in the second fiscal quarter of 2013 and the first six months of fiscal 2013.

 

Income tax expense was $8.3 million or 3.6% of retail sales and $26.3  million, or 5.3% of retail sales for the second  quarter and first six  months of fiscal 2013, respectively, compared to $10.3 million, or 4.4% of retail sales and $29.9 million, or 5.9% of retail sales for the prior year’s comparable three and six  month periods of fiscal 2012, respectively. The second  quarter decrease resulted from lower pre-tax income and a lower effective tax rate.  The effective income tax rate for the second  quarter of fiscal 2013 was 36.0% compared to 37.3% for the second  quarter of 2012. The effective tax rate for the first six  months of fiscal 2013 was 36.6% compared to 37.8% for the first six  months of fiscal 2012.  This decrease is due to the Work Opportunity Tax Credit, which had not been renewed by Congress at this time last year and was therefore not in effect for second quarter 2012, but was for second quarter 2013.   

 

LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:

 

The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during the first six months of fiscal 2013 was $75.8 million as compared to $70.5 million in the first six months of fiscal 2012. These amounts enable the Company to fund its regular operating needs, capital expenditure program, cash dividend payments, and share repurchases.  In addition, the Company maintains a $35.0 million unsecured revolving credit facility for short-term financing of seasonal cash needs. There were no outstanding borrowings on this facility at August 3, 2013, February 2, 2013 and July 28, 2012.


 

Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):

 

Cash provided by operating activities for the first six months of fiscal 2013 was primarily generated by earnings adjusted for depreciation and changes in working capital. The increase of $5.3 million for the first six months of fiscal 2013 as compared to the first six months of fiscal 2012 was primarily due to an increase in accounts payable and slower growth in merchandise inventories.

 

The Company believes that its cash, cash equivalents and short-term investments, together with cash flows from operations and borrowings available under its revolving credit agreement, will be adequate to fund the Company’s regular operating requirements, expected capital expenditures, dividends and share repurchases for fiscal 2013 and for the foreseeable future.

 

At August 3, 2013, the Company had working capital of $263.6 million compared to $230.6 million at February 2, 2013 and $302.9 million at July 28, 2012.  Additionally, the Company had $1.1 million, $1.0 million and $1.3 million invested in privately managed investment funds and other miscellaneous equities and a single auction rate security of $3.5 million at August 3, 2013, February 2, 2013 and July 28, 2012, respectively, which are included in Other assets on the Condensed Consolidated Balance Sheets.

 

At August 3, 2013, February 2, 2013 and July 28, 2012, the Company had an unsecured revolving credit agreement, which provides for borrowings of up to $35.0 million.  The revolving credit agreement is committed until August 2015. 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 August 3, 2013.  There were no borrowings outstanding under the credit facility as of August 3, 2013, February 2, 2013 and July 28, 2012.

 

At August 3, 2013, February 2, 2013 and July 28, 2012, the Company had approximately $0.6 million, $2.9 million and $5.8 million, respectively, of outstanding irrevocable letters of credit relating to purchase commitments.

 

Expenditures for property and equipment totaled $10.6 million in the first six months of fiscal 2013, compared to $19.9 million in last year’s first six months.  The expenditures for the first six months of 2013 were primarily for the development of four new stores, additional investments in new technology, home office renovations and the e-commerce initiative.  For the full fiscal 2013 year, the Company expects to invest approximately $42.0 million for capital expenditures.  This includes expenditures to open 51 new stores and relocate nine stores, the home office renovations and e-commerce start-up.

 

Net cash used in investing activities totaled $9.8 million in the first six months of fiscal 2013 compared to $25.4 million used in the comparable period of 2012.  The decrease was due primarily to a decrease in expenditures for property and a net decrease in purchases and sales of short-term investments.

 

On August 29, 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.

 

As of August 3, 2013, the Company had 1,728,115 shares remaining in open authorizations under its share repurchase program. 

 

The Company does not use derivative financial instruments.


 

Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

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 August 3, 2013, February 2, 2013 and July 28, 2012.  At July 28, 2012, the Company also held tax-exempt variable rate demand notes (“VRDN”). 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 at estimated fair value, with unrealized gains and losses reported net of taxes in Accumulated other comprehensive income.

 

Additionally, at August 3, 2013, the Company had $0.5 million of privately managed funds, $0.6 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 $2.6 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 July 28, 2012, the Company had $0.9 million of privately managed funds, $0.4 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.

 


 

Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

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.

 

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.

 

In the first quarter of 2014, the Company will adopt new accounting guidance which requires unrecognized tax benefits to be presented as a decrease in net operating loss, similar to tax loss or tax credit carryforward if certain criteria are met. The new guidance may affect balance sheet classification of certain unrecognized tax benefits and will have no impact on the Company’s consolidated results of operations or cash flows,


 

Table of Contents

 

THE CATO CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

 

The Company is subject to market rate risk from exposure to changes in interest rates based on its financing, investing and cash management activities, but the Company does not believe such exposure is material.

 

ITEM 4. CONTROLS AND PROCEDURES

 

We carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as of August 3, 2013.  Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of August 3, 2013, our disclosure controls and procedures, as defined in Rule 13a-15(e), under the Securities Exchange Act of 1934 (the “Exchange Act”), were effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING:

 

No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) has occurred during the Company’s fiscal quarter ended August 3, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


 

Table of Contents

 

THE CATO CORPORATION

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

 

ITEM 1.  LEGAL PROCEEDINGS

 

            Not Applicable

 

ITEM 1A.  RISK FACTORS

 

            In addition to the other information in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended February 2, 2013.  These risks could materially affect our business, financial condition or future results; however, they are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or results of operations.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

      The following table summarizes the Company’s purchases of its common stock for the three months ended August 3, 2013:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Total Number of

Maximum Number

Shares Purchased as

(or Approximate Dollar

Total Number

Average

Part of Publicly

Value) of Shares that may

of Shares

Price Paid

Announced Plans or

Yet be Purchased Under

Period

Purchased

per Share (1)

Programs (2)

The Plans or Programs (2)

May 2013

$

June 2013

221 

25.11 

221 

July 2013

Total

221 

$

25.11 

221 

1,728,115 

 

(1)   Prices include trading costs.

 

(2)   As of May 4, 2013, the Company’s share repurchase program had 1,728,336 shares remaining in open authorizations.  During the second quarter ending August 3, 2013, the Company repurchased and retired 221 shares under this program for approximately $5,550 or an average market price of $25.11 per share.  As of the second quarter ending August 3, 2013, the Company had 1,728,115 shares remaining in open authorizations.  There is no specified expiration date for the Company’s repurchase program.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

      Not Applicable


 

Table of Contents

 

PART II   OTHER INFORMATION

 

THE CATO CORPORATION

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

      Not Applicable

 

ITEM 5.  OTHER INFORMATION

 

      Not Applicable

 

ITEM 6.  EXHIBITS

 

Exhibit No.

 

Item

 

 

 

3.1

 

Registrant’s Restated Certificate of Incorporation dated March 6, 1987, incorporated by reference to Exhibit 4.1 to Form S-8 of the Registrant filed February 7, 2000 (SEC File No. 333-96283).

 

 

 

3.2

 

Registrant’s By Laws incorporated by reference to Exhibit 99.2 to Form
8-K of the Registrant Filed December 10, 2007.

 

 

 

4.1

 

Rights Agreement dated December 18, 2003, incorporated by reference to Exhibit 4.1 to Form 8-A12G of the Registrant filed December 22, 2003 and as amended in Form 8-A12B/A filed January 6, 2004.

 

 

 

 

 

10.1*

 

2013 Incentive Compensation Plan, incorporated by reference to Exhibit 4.1 to Form S-8 of the Registrant filed May 31, 2013 (SEC File No. 333-188993).

 

 

 

31.1*

 

Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.

 

 

 

31.2*

 

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.

 

 

 

32.1*

 

Section 1350 Certification of Principal Executive Officer.

 

 

 

32.2*

 

Section 1350 Certification of Principal Financial Officer.

 

 

 

101.1*

 

The following materials from Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 3, 2013, formatted in XBRL: (i) Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months and Six Months Ended August 3, 2013 and July 28, 2012; (ii) Condensed Consolidated Balance Sheets at August 3, 2013, February 2, 2013 and July 28, 2012; (iii) Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 3, 2013 and July 28, 2012; and (iv) Notes to Condensed Consolidated Financial Statements.

 

                      * Submitted electronically herewith.       


 

Table of Contents

 

PART II   OTHER INFORMATION

 

THE CATO CORPORATION

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

                                                                                    THE CATO CORPORATION

 

 

August 30, 2013

 

/s/ John P. D. Cato

Date

 

John P. D. Cato

Chairman, President and

Chief Executive Officer

 

 

 

 

August 30, 2013

 

/s/ John R. Howe

Date

 

John R. Howe

Executive Vice President

Chief Financial Officer