EX-13 3 ex1310k033115.htm EXHIBIT 13 ANNUAL REPORT 2015

Five Year Selected Financial Data
 
                     
Summary of Operations and Financial Condition
                   
(In thousands of dollars, except per share data and ratios)
                   
                     
Years ended March 31,
 
2015
   
2014
   
2013(a)
   
2012
   
2011(b)
 
                     
Net sales
 
$
1,286,350
   
$
1,340,208
   
$
1,276,297
   
$
1,257,805
   
$
1,189,585
 
                                         
Operating income before interest (c)
 
$
19,148
   
$
23,604
   
$
70,934
   
$
25,623
   
$
32,294
 
Interest expense, net
   
5,656
     
6,262
     
7,486
     
8,102
     
8,827
 
Net earnings (c)
   
9,899
     
13,779
     
41,413
     
11,256
     
17,671
 
                                         
Basic earnings per common share (c)
 
$
0.91
   
$
1.24
   
$
3.59
   
$
0.93
   
$
1.45
 
Diluted earnings per common share (c)
   
0.90
     
1.23
     
3.57
     
0.92
     
1.45
 
                                         
Working capital
 
$
463,545
   
$
452,771
   
$
446,899
   
$
425,082
   
$
294,712
 
Inventories
   
472,412
     
451,250
     
479,730
     
432,433
     
455,236
 
Net property, plant, and equipment
   
185,557
     
183,917
     
188,407
     
192,825
     
188,012
 
Total assets
   
805,694
     
768,853
     
798,456
     
738,036
     
744,708
 
Long-term debt
                                       
  less current portion
   
271,634
     
216,239
     
230,016
     
226,873
     
90,060
 
Stockholders' equity
   
351,730
     
393,632
     
367,166
     
354,673
     
353,832
 
                                         
Additions to property, plant, and equipment
 
$
23,734
   
$
19,448
   
$
16,371
   
$
27,425
   
$
19,473
 
                                         
Net earnings/average equity
   
2.7
%
   
3.6
%
   
11.5
%
   
3.2
%
   
5.1
%
Earnings before taxes/sales
   
1.1
%
   
1.3
%
   
5.0
%
   
1.4
%
   
2.0
%
Net earnings/sales
   
0.8
%
   
1.0
%
   
3.2
%
   
0.9
%
   
1.5
%
Long-term debt/equity (d)
   
77.2
%
   
54.9
%
   
62.6
%
   
64.0
%
   
25.5
%
Total debt/equity ratio
 
1.3:1
   
1.0:1
   
1.2:1
   
1.1:1
   
1.1:1
 
Current ratio
 
4.8:1
   
4.5:1
   
3.8:1
   
4.6:1
   
2.1:1
 
                                         
Total stockholders' equity per equivalent common share (e)
 
$
34.81
   
$
35.25
   
$
32.83
   
$
29.15
   
$
28.96
 
Stockholders' equity per common share
   
35.33
     
36.12
     
33.62
     
29.81
     
29.61
 
Class A Global Market System
                                       
    closing price range
   
32.65-25.06
     
36.07-27.80
     
33.63-21.42
     
29.73-18.34
     
32.68-22.02
 
Class B Global Market System
                                       
    closing price range
   
41.00-27.91
     
36.29-27.42
     
33.40-21.41
     
29.70-19.20
     
32.99-22.30
 
Price earnings ratio
   
31.5
     
25.6
     
9.2
     
28.7
     
20.5
 
                                         
(a) The fiscal 2013 financial results include two and one-half months of operating activity related to the Sunnyside acquisition.
 
(b) The fiscal 2011 financial results include eight months of operating activity related to the Lebanon acquisition.
 
(c) The effect of using the LIFO inventory valuation method in fiscal 2015 was to reduce operating earnings by $10.7 million and net
 
earnings by $6.9 million or $0.64 per share ($0.63 diluted). The effect of using the LIFO inventory valuation method in fiscal
 
2014 was to reduce operating earnings by $20.4 million and net earnings by $13.2 million or $1.19 per share ($1.19 diluted).
 
The effect of using the LIFO inventory valuation method in fiscal 2013 was to increase operating earnings by $4.2 million
 
and net earnings by $2.7 million or $0.24 per share ($0.24 diluted). The effect of using the LIFO inventory valuation method in
 
Fiscal 2012 was to reduce operating earnings by $47.4 million and net earnings by $30.8 million or $2.53 per share ($2.52 diluted).
 
The effect of using the LIFO inventory valuation method in fiscal 2011 was to increase operating earnings by $7.9 million and net
 
earnings by $5.1 million or $0.42 per share ($0.42 diluted).
 
(d) The long-term debt to equity percentage for fiscal 2015-2012 include the Revolving Credit Facility as discussed
 
in Note 4, Long-Term Debt. During fiscal 2011, the Revolving Credit Facility was included in current liabilities. If calculated on a
 
comparable basis to other fiscal years, the fiscal 2011 percentage would be 63.8%.
 
(e) Equivalent common shares are either common shares or, for convertible preferred shares, the number of common shares that the
 
preferred shares are convertible into. See Note 7 of the Notes to Consolidated Financial Statements for conversion details.
 
1

Management's Discussion and Analysis of
Financial Condition and Results of Operations
 
OVERVIEW
 
Our Business
 
Seneca Foods is North America's leading provider of packaged fruits and vegetables, with facilities located throughout the United States. Its high quality products are primarily sourced from over 2,000 American farms.
 
Seneca holds the largest share of the retail private label, food service, and export canned vegetable markets, distributing to over 90 countries.   Products are also sold under the highly regarded brands of Libby's®, Green Valley®, Aunt Nellie's®, READ®, Seneca Farms® and Seneca labels, including Seneca snack chips.  In addition, Seneca provides vegetable products under an alliance with General Mills Operations, LLC, a subsidiary of General Mills, Inc., under the Green Giant label.
 
The Company's business strategies are designed to grow the Company's market share and enhance the Company's sales and margins and include: 1) expand the Company's leadership in the packaged fruit and vegetable industry; 2) provide low cost, high quality fruit and vegetable products to consumers through the elimination of costs from the Company's supply chain and investment in state-of-the-art production and logistical technology; 3) focus on growth opportunities to capitalize on higher expected returns; and 4) pursue strategic acquisitions that leverage the Company's core competencies.
 
All references to years are fiscal years ended March 31 unless otherwise indicated.
 
Restructuring
 
During 2015, the Company recorded a restructuring charge of $1.4 million related to the closing of a plant in the Midwest and the realignment of two other plants, one in the Midwest and the other in the Northwest, of which $0.8 million was related to severance cost, $0.3 million was related to equipment costs (contra fixed assets), and $0.3 million was related to equipment relocation costs.
 
During 2013, the Company implemented a product rationalization program and recorded a restructuring charge of $3.5 million for related equipment costs (contra fixed assets), lease impairment costs (net of realizable value), and certain inventory costs. During 2014, the Company adjusted the costs of the product rationalization program, started in 2013, by $0.5 million, mostly related to equipment costs.
 
These charges are included under Plant Restructuring in the Consolidated Statements of Net Earnings.
 
Divestitures, Other Charges and Credits
 
Other operating income in 2015 included a gain of $5.0 million related to a contractual payment received in connection with the closing of a Midwest plant and a charge of $0.3 million related to environmental costs related to a Company-owned plant in New York State.  The Company also recorded a gain of $0.1 million from the sale of other fixed assets.
 
Other operating income in 2014 included a gain of $2.9 million from a break-up fee earned as a result of the Company being named the stalking horse bidder in an attempt to acquire substantially all the operating assets of Allens, Inc. in a bankruptcy court supervised auction, a gain of $0.7 million from the sale of two aircraft and a gain of $0.1 million as a result of adjustments related to the purchase of Sunnyside. The Company also recorded a loss of $0.5 million on the disposal of a warehouse located in Sunnyside, Washington and a net gain of $0.2 million from the sale of other fixed assets.
 
Other operating income in 2013 included a gain of $2.0 million as a result of the estimated fair market value of the net assets acquired exceeding the purchase price of Sunnyside.  The Company also recorded a gain of $0.3 million from the sale of property located in Cambria, Wisconsin and a net loss of $0.3 million on the disposal of certain other fixed assets.
 
Liquidity and Capital Resources
 
The Company's primary cash requirements are to make payments on the Company's debt, finance seasonal working capital needs and to make capital expenditures. Internally generated funds and amounts available under the revolving credit facility are the Company's primary sources of liquidity, although the Company believes it has the ability to raise additional capital by issuing additional stock, if it desires.
 
2

Management's Discussion and Analysis of
Financial Condition and Results of Operations
 Revolving Credit Facility
 
The Company completed the closing of a five year revolving credit facility ("Revolver") on July 20, 2011. The available borrowings under the Revolver are $300.0 million from April through July and $400.0 million from August through March of each year under the Revolver. The Revolver balance as of March 31, 2015 was $233.0 million and is included in Long-Term Debt in the accompanying Consolidated Balance Sheet. In order to maintain availability of funds under the facility, the Company pays a commitment fee on the unused portion of the Revolver.  The Revolver is secured by the Company's accounts receivable and inventories and contains a financial covenant and borrowing base requirements.  The Company utilizes its Revolver for general corporate purposes, including seasonal working capital needs, to pay debt principal and interest obligations, and to fund capital expenditures and acquisitions. Seasonal working capital needs are affected by the growing cycles of the vegetables and fruits the Company packages. The majority of vegetable and fruit inventories are produced during the months of June through November and are then sold over the following year. Payment terms for vegetable and fruit produce are generally three months but can vary from a few days to seven months. Accordingly, the Company's need to draw on the Revolver may fluctuate significantly throughout the year.
 
The Company believes that cash flows from operations and availability under its Revolver will provide adequate funds for the Company's working capital needs, planned capital expenditures and debt service obligations for at least the next 12 months.
 
Seasonality
 
The Company's revenues typically are higher in the second and third fiscal quarters. This is due, in part, because the Company sells, on a bill and hold basis, Green Giant canned and frozen vegetables to GMOL at the end of each pack cycle, which typically occurs during these quarters. GMOL buys the product from the Company at cost plus an equivalent case tolling fee. See the Critical Accounting Policies section for further details. The Company's non-Green Giant sales also exhibit seasonality with the third fiscal quarter generating the highest sales due to increased retail sales during the holiday season.
 
The seasonality of the Company's business is illustrated by the following table:

   
First Quarter
   
Second Quarter
   
Third Quarter
   
Fourth Quarter
 
   
(In thousands)
 
Year ended March 31, 2015:
               
Net sales
 
$
240,043
   
$
312,161
   
$
456,207
   
$
277,939
 
Gross margin
   
16,996
     
16,804
     
26,084
     
23,273
 
Net (loss) earnings
   
(107
)
   
(578
)
   
7,819
     
2,765
 
Inventories (at quarter end)
   
467,290
     
731,527
     
547,149
     
472,412
 
Revolver outstanding (at quarter end)
   
180,050
     
302,220
     
255,000
     
233,000
 
                                 
Year ended March 31, 2014:
                               
Net sales
 
$
232,127
   
$
336,628
   
$
477,694
   
$
293,759
 
Gross margin
   
19,680
     
22,379
     
31,178
     
17,726
 
Net earnings (loss)
   
1,347
     
6,603
     
6,846
     
(1,017
)
Inventories (at quarter end)
   
484,694
     
758,654
     
550,723
     
451,250
 
Revolver outstanding (at quarter end)
   
151,026
     
282,000
     
226,000
     
175,000
 
 
Short-Term Borrowings
 
During 2015, the Company entered into some interim lease notes which financed down payments for various equipment orders at market rates.  As of March 31, 2015, these interim notes had not been converted into operating leases since the equipment was not yet delivered.  These notes, which total $9.9 million and $12.3 million as of March 31, 2015 and March 31, 2014, respectively, are included in notes payable in the accompanying Consolidated Balance Sheets.  These notes are expected to be converted into operating leases within the next twelve months. Until then, they bear interest at an annual rate of 1.67% in 2015 and 1.65% in 2014.
 
The maximum level of short-term borrowings during 2015 was affected by the 50% investment in Truitt Bros. Inc. of $16.2 million, which took place in April 2014, and the purchase of treasury stock totaling $33.5 million.  During 2014, the maximum level of short-term borrowings was affected by the payoff of a $36.7 million loan to a third party lender, which took place in August 2013. Details of the Truitt acquisition are outlined in Note 2 of the Notes to Consolidated Financial Statements.
 
General terms of the Revolver include payment of interest at LIBOR plus an agreed upon spread.
 
3

Management's Discussion and Analysis of
Financial Condition and Results of Operations
 
The following table documents the quantitative data for Short-Term Borrowings during 2015 and 2014:

   
Fourth Quarter
   
Year Ended
 
   
2015
   
2014
   
2015
   
2014
 
   
(In thousands)
 
Reported end of period:
               
  Revolver outstanding
 
$
233,000
   
$
175,000
   
$
233,000
   
$
175,000
 
  Weighted average interest rate
   
1.92
%
   
1.65
%
   
1.92
%
   
1.65
%
Reported during period:
                               
  Maximum Revolver
 
$
263,627
   
$
239,482
   
$
323,646
   
$
318,601
 
  Average Revolver outstanding
 
$
252,013
   
$
213,487
   
$
234,726
   
$
214,528
 
  Weighted average interest rate
   
1.93
%
   
1.49
%
   
1.63
%
   
1.60
%

Long-Term Debt

At March 31, 2015, the Company has two mortgages outstanding for $16.9 million, and four industrial revenue bonds ("IRBs"), totaling $22.6 million. As discussed in Note 4 to the Notes to Consolidated Financial Statements, the Company classified its Revolver balance as long-term debt at March 31, 2015. On August 1, 2013, the Company paid a final $36.7 million principal payment due on a secured note payable to John Hancock Life Insurance Company. The Company issued a $1.5 million new economic development note during 2014. The Company did not issue any significant long-term debt in 2015, other than the Revolver.

As of March 31, 2015, scheduled maturities of long-term debt in each of the five succeeding fiscal years and thereafter are presented below. The March 31, 2015 Revolver balance of $233.0 million is presented as being due in fiscal 2017, based upon the Revolver's July 20, 2016 maturity date (in thousands):

 
2016
 
$
2,530
 
2017
   
235,667
 
2018
   
7,904
 
2019
   
3,034
 
2020
   
2,531
 
Thereafter
   
22,498
 
Total
 
$
274,164
 
 
       

Restrictive Covenants

The Company's debt agreements, including the Revolver, contain covenants that restrict the Company's ability to incur additional indebtedness, pay dividends on the Company's capital stock, make other restricted payments, including investments, sell the Company's assets, incur liens, transfer all or substantially all of the Company's assets and enter into consolidations or mergers. The Company's debt agreements also require the Company to meet a minimum fixed charge coverage ratio. The Revolver also contains borrowing base requirements related to accounts receivable and inventories. These financial requirements and ratios generally become more restrictive over time and are subject to allowances for seasonal fluctuations. The most restrictive financial covenant in the debt agreements is the fixed charge coverage ratio within the Master Reimbursement Agreement with General Electric Commercial Finance, which relates to the Secured Industrial Revenue Development Bonds. In connection with the Company's decision to adopt the LIFO method of inventory accounting, effective December 30, 2007, the Company executed amendments to its debt agreements, which enable the Company to compute its financial covenants as if the Company were on the FIFO method of inventory accounting. The Company was in compliance with all such financial covenants as of March 31, 2015.

4

Management's Discussion and Analysis of
Financial Condition and Results of Operations
Capital Expenditures

Capital expenditures in 2015 totaled $26.2 million and there were two major projects in 2015 as follows: 1) $7.5 million to complete a warehouse project in Sunnyside, Washington started in 2014, and 2) $2.1 million to buyout a Clyman, Wisconsin equipment lease. Capital expenditures in 2014 totaled $17.0 million and included $7.6 million towards the completion of a pouch building project in Janesville, Wisconsin, and $3.6 million for the start of a warehouse project in Sunnyside, Washington, equipment replacements and other improvements, and cost saving projects. Capital expenditures in 2013 totaled $17.0 million and included $3.3 million to complete a warehouse expansion in Ripon, Wisconsin started in 2012 and $0.5 million to complete a dock expansion project in Lebanon, Pennsylvania started in 2012, equipment replacements and other improvements, and cost saving projects.

Accounts Receivable

In 2015, accounts receivable decreased by $7.1 million or 9.3% versus 2014, due to the impact of decreased sales volume in the fourth quarter of 2015 compared to 2014.  In 2014, accounts receivable decreased by $1.3 million or 1.6% versus 2013, due to the impact on cash receipts due to the timing of year end, partially offset by higher sales volume in the fourth quarter of 2014 compared to the 2013.

Inventories

In 2015, inventories increased by $21.1 million primarily reflecting the effect of higher finished goods quantities and higher work in process quantities. The LIFO reserve balance was $164.1 million at March 31, 2015 versus $153.4 million at the prior year end.

In 2014, inventories decreased by $28.5 million primarily reflecting a $46.3 million decrease in finished goods due to the increase in the LIFO reserve balance and the short 2013 pack (fiscal 2014) of certain commodities, partially offset by the effect of higher raw material quantities. The LIFO reserve balance was $153.4 million at March 31, 2014 versus $133.0 million at the prior year end.

The Company believes that the use of the LIFO method better matches current costs with current revenues.

Critical Accounting Policies

During the year ended March 31, 2015, the Company sold for cash, on a bill and hold basis, $138.6 million of Green Giant finished goods inventory to GMOL. As of March 31, 2015, $60.5 million of this product, included in 2015 sales, remained unshipped. At the time of the sale of the Green Giant vegetables to GMOL, title of the specified inventory transferred to GMOL. The Company believes it has met the criteria required by the accounting standards for bill and hold treatment.

Trade promotions are an important component of the sales and marketing of the Company's branded products and are critical to the support of the business. Trade promotion costs, which are recorded as a reduction of net sales, include amounts paid to encourage retailers to offer temporary price reductions for the sale of the Company's products to consumers, amounts paid to obtain favorable display positions in retail stores, and amounts paid to retailers for shelf space in retail stores. Accruals for trade promotions are recorded primarily at the time of sale of product to the retailer based on expected levels of performance. Settlement of these liabilities typically occurs in subsequent periods primarily through an authorized process for deductions taken by a retailer from amounts otherwise due to the Company. As a result, the ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions taken by retailers for amounts they consider due to them. Final determination of the permissible deductions may take extended periods of time.

The Company assesses its long-lived assets for impairment whenever there is an indicator of impairment. Property, plant, and equipment are depreciated over their assigned lives. The assigned lives and the projected cash flows used to test impairment are subjective. If actual lives are shorter than anticipated or if future cash flows are less than anticipated, a future impairment charge or a loss on disposal of the assets could be incurred. Impairment losses are evaluated if the estimated undiscounted value of the cash flows is less than the carrying value. If such is the case, a loss is recognized when the carrying value of an asset exceeds its fair value.

Obligations and Commitments

As of March 31, 2015, the Company was obligated to make cash payments in connection with its debt, operating leases, and purchase commitments. The effect of these obligations and commitments on the Company's liquidity and cash flows in future periods are listed below. All of these arrangements require cash payments over varying periods of time. Certain of these arrangements are cancelable on short notice and others require additional payments as part of any early termination.

5

Management's Discussion and Analysis of
Financial Condition and Results of Operations
   
Contractual Obligations
     
   
March 31, 2015
     
                     
               
2021
     
   
2016
     
2017-18
     
2019-20
   
and beyond
   
Total
 
   
(In thousands)
 
Long-term debt
 
$
2,530
   
$
243,571
   
$
5,565
   
$
22,498
   
$
274,164
 
Interest
   
5,373
     
3,657
     
1,524
     
2,081
     
12,635
 
Operating lease obligations
   
42,585
     
71,236
     
52,550
     
33,239
     
199,610
 
Purchase commitments
   
204,722
     
     
     
     
204,722
 
Total
 
$
255,210
   
$
318,464
   
$
59,639
   
$
57,818
   
$
691,131
 
 
In addition, the Company's defined benefit plan has an unfunded pension liability of $55.0 million which is subject to certain actuarial assumptions.  The unfunded status increased by $39.1 million during 2015 reflecting the actual fair value of plan assets and the projected benefit obligation as of March 31, 2015.  This unfunded status increase was recognized via the actual gain on plan assets and the increase in accumulated other comprehensive loss of $20.6 million after the income tax benefit of $13.2 million.  The increase in projected benefit obligation was a function of a decrease in the discount rate from 4.85% to 4.15% and the change to using an updated mortality table. During 2015, the Company converted to the RP-2014 Blue Collar and Generational Improvement mortality table for calculating the pension obligation and the related pension expense. This change increased the projected benefit obligation by $6.6 million and had no impact on 2015 pension expense. This conversion is expected to increase the 2016 defined benefit pension plan expense by $1.2 million. Plan assets increased from $154.7 million as of March 31, 2014 to $157.9 million as of March 31, 2015 due to a continued recovery in market conditions and the $0.4 million contribution by the Company.  The Company made this contribution to maintain its funding status at an acceptable level.
 
During 2015, the Company entered into new operating leases of approximately $47.9 million, based on the if-purchased value, which was primarily for agricultural and packaging equipment.
 
Purchase commitments represent estimated payments to growers for crops that will be grown during the calendar 2015 season.
 
Due to uncertainties related to FASB Accounting Standards Codification ("ASC") 740, Income Taxes, the Company is not able to reasonably estimate the cash settlements required in future periods.
 
The Company has no off-balance sheet debt or other unrecorded obligations other than operating lease obligations and purchase commitments noted above.
 
Standby Letters of Credit
 
The Company has standby letters of credit for certain insurance-related requirements. The majority of the Company's standby letters of credit are automatically renewed annually, unless the issuer gives cancellation notice in advance. On March 31, 2015, the Company had $11.0 million in outstanding standby letters of credit. These standby letters of credit are supported by the Company's Revolver and reduce borrowings available under the Revolver.
 
Cash Flows
 
In 2015, the Company's cash and cash equivalents decreased by $3.2 million, which is due to the net impact of $19.4 million provided by operating activities, $42.1 million used in investing activities, and $19.5 million provided by financing activities.
 
Operating Activities
 
Cash provided by operating activities decreased to $19.4 million in 2015 from $55.6 million in 2014. The decrease is primarily attributable to increased inventories, exclusive of LIFO, and a decrease in net earnings in 2015 versus 2014, partially offset by a decrease in accounts receivable and a decrease in other current assets (mostly lease deposits). The 2015 LIFO charge of $10.7 million resulted in an increase in the tax payment deferral of $3.7 million.
 
6

Management's Discussion and Analysis of
Financial Condition and Results of Operations
 
Cash provided by operating activities increased to $55.6 million in 2014 from $30.3 million in 2013. The increase is primarily attributable to a lower increase in other current assets (mostly lease deposits) and decreased inventories, exclusive of LIFO, partially offset by a decrease in net earnings in 2014 versus 2013. The 2014 LIFO charge of $20.4 million resulted in an increase in the tax payment deferral of $7.1 million.
 
The cash requirements of the business fluctuate significantly throughout the year to coincide with the seasonal growing cycles of vegetables and fruits. The majority of the inventories are produced during the packing months, from June through November, and are then sold over the following year. Cash flow from operating activities is one of the Company's main sources of liquidity.
 
Investing Activities
 
Cash used in investing activities was $42.1 million for 2015, principally reflecting capital expenditures and a purchase of an equity method investment of $16.2 million. Capital expenditures aggregated $26.2 million in 2015 versus $17.0 million in 2014. The increase was primarily attributable to more large projects in 2015. There were two major projects in 2015 as follows: 1) $7.5 million to complete a warehouse project in Sunnyside, Washington started in 2014, and 2) $2.1 million to buyout a Clyman, Wisconsin equipment lease.
 
Cash used in investing activities was $16.0 million for 2014, principally reflecting capital expenditures. Capital expenditures aggregated $17.0 million in 2014 and in 2013. There were two major projects in 2014 as follows: 1) $7.6 million towards the completion of pouch building project in Janesville, Wisconsin, and 2) $3.6 million for the start of a warehouse project in Sunnyside, Washington.
 
Financing Activities
 
Cash provided by financing activities was $19.5 million in 2015 representing a net increase in the Revolver of $55.6 million partially offset by a partial payoff of interim funding of $2.4 million and the purchase of $33.5 million of treasury stock during 2015 versus $0.7 million purchased in 2014.
 
Cash used by financing activities was $39.9 million in 2014 representing a net pay down on the Revolver of $51.7 million partially offset by interim funding of $12.3 million.  The Company purchased $0.7 million of treasury stock during 2014 versus $28.4 million purchased in 2013.
 
RESULTS OF OPERATIONS

Classes of similar products/services:
 
2015
   
2014
   
2013
 
   
(In thousands)
 
Net Sales:
   
GMOL *
 
$
161,993
   
$
177,881
   
$
165,684
 
Canned vegetables
   
754,556
     
753,318
     
746,892
 
Frozen *
   
94,648
     
107,109
     
84,935
 
Fruit
   
234,918
     
264,549
     
245,596
 
Snack
   
11,667
     
11,496
     
11,357
 
Other
   
28,568
     
25,855
     
21,833
 
Total
 
$
1,286,350
   
$
1,340,208
   
$
1,276,297
 
                         
* GMOL includes frozen vegetable sales exclusively for GMOL.
 
 
Fiscal 2015 versus Fiscal 2014
 
Net sales for 2015 decreased $53.9 million, from $1,340.2 million to $1,286.3 million. The decrease primarily reflects a $15.9 million decrease in GMOL sales, a $29.6 million decrease in fruit sales, a $12.5 million decrease in frozen sales, a $1.2 million increase in canned vegetables sales and a $2.7 million increase in other sales. The decrease in sales is attributable to decreased sales volume of $95.5 million partially offset by higher selling prices/more favorable sales mix of $41.6 million. The increased selling prices/more favorable sales mix is primarily due to canned fruit.
 
 
7

Management's Discussion and Analysis of
Financial Condition and Results of Operations
 
Cost of product sold as a percentage of sales increased from 93.2% in 2014 to 93.5% in 2015 primarily as a result of higher commodity costs and the impact of lower production volume with fixed costs, partially offset by a $9.7 million LIFO charge decrease in 2015 versus 2014.
 
Selling, general and administrative expense was unchanged at 5.2% of sales in 2015 and 2014.
 
Other operating income in 2015 included a gain of $5.0 million related to a contractual payment received in connection with the closing of a Midwest plant, a charge of $0.3 million related to environmental costs related to a Company-owned plant in New York State.  The Company also recorded a gain of $0.1 million from the sale of other fixed assets. Other operating income in 2014 included a gain of $2.9 million from a break-up fee earned as a result of the Company being named the stalking horse bidder in an attempt to acquire substantially all the operating assets of Allens, Inc. in a bankruptcy court supervised auction, a gain of $0.7 million from the sale of two aircraft and a gain of $0.1 million as a result of adjustments related to the purchase of Sunnyside.  The Company also recorded a loss of $0.5 million on the disposal of a warehouse located in Sunnyside, Washington and a net gain of $0.2 million from the sale of other fixed assets.
 
Plant restructuring costs, which are described in detail in the Restructuring section of Management's Discussion and Analysis of Financial Condition and Results of Operations, increased from $0.5 million in 2014 to $1.4 million in 2015.  This $1.4 million charge was mostly due to the closing of a plant in the Midwest in 2015.  Product rationalization costs incurred in 2013 were adjusted in 2014.
 
Interest expense, net, decreased from $6.3 million in 2014 to $5.7 million in 2015 due to the continuing pay down of higher cost debt in 2015 partially offset by higher average Revolver borrowings in 2015 versus 2014.
 
As a result of the aforementioned factors, pre-tax earnings decreased from $17.3 million in 2014 to $14.1 million in 2015. The effective tax rate was 29.9% in 2015 and 20.5% in 2014. Of the 9.4 percentage point increase in the effective tax rate for the year, the major contributors to this increase are the following items, 1) the establishment of a valuation allowance related to the New York State investment tax credit, 2) with lower pre-tax earnings, the permanent items have a larger impact on the effective rate, and 3) less federal credits generated in the current year compared to the prior year.  The impact of these increases was partially offset by the manufacturer's deduction being a higher percentage of current year earnings than the prior year.
 
Fiscal 2014 versus Fiscal 2013
 
Net sales for 2014 increased $63.9 million, from $1,276.3 million to $1,340.2 million. The increase primarily reflects a $22.2 million increase in frozen sales, a $19.0 million increase in fruit sales in part due to the January 2013 Sunnyside acquisition, a $12.2 million increase in GMOL sales, a $6.4 million increase in canned vegetables sales and a $4.0 million increase in other sales. The increase in sales is attributable to increased sales volume of $79.1 million partially offset by lower selling prices/less favorable sales mix of $15.2 million. The decreased selling prices/less favorable sales mix is primarily due to canned and frozen vegetables.
 
Cost of product sold as a percentage of sales increased from 88.9% in 2013 to 93.2% in 2014 primarily as a result of a $24.6 million LIFO charge increase in 2014 versus 2013, due to higher commodity costs, and somewhat lower selling prices in 2014 versus 2013.
 
Selling, general and administrative expense was 5.2% of sales in 2014 and 5.4% of sales in 2013.
 
Other operating income in 2014 included a gain of $2.9 million from a break-up fee earned as a result of the Company being named the stalking horse bidder in an attempt to acquire substantially all the operating assets of Allens, Inc. in a bankruptcy court supervised auction, a gain of $0.7 million from the sale of two aircraft and a gain of $0.1 million as a result of adjustments related to the purchase of Sunnyside.  The Company also recorded a loss of $0.5 million on the disposal of a warehouse located in Sunnyside, Washington and a net gain of $0.2 million from the sale of other fixed assets.  Other operating income in 2013 consisted of a gain of $2.0 million as a result of the estimated fair market value of the assets acquired exceeding the purchase price of Sunnyside.
 
Plant restructuring costs, which are described in detail in the Restructuring section of Management's Discussion and Analysis of Financial Condition and Results of Operations, decreased from $3.5 million in 2013 to $0.5 million in 2014.  This was due to the product rationalization costs incurred in 2013 and adjusted in 2014.
 
Interest expense, net, decreased from $7.5 million in 2013 to $6.2 million in 2014 due to the continuing pay down of higher cost debt in 2014 partially offset by higher average Revolver borrowings in 2014 versus 2013.
 
8

Management's Discussion and Analysis of
Financial Condition and Results of Operations
As a result of the aforementioned factors, pre-tax earnings decreased from $63.4 million in 2013 to $17.3 million in 2014. The effective tax rate was 20.5% in 2014 and 34.7% in 2013. Of the 14.2 percentage point decrease in the effective tax rate for the year, the major contributors to this decrease are the following items, 1) with lower pre-tax earnings due to part to a large LIFO charge versus a credit in the prior year, the permanent items have a larger impact on the effective rate, 2) the manufacturers deduction is a higher percentage of current year earnings than the prior year, 3) the reversal of certain tax reserves related to New York State investment tax credit and 4) work opportunity credit, research and experimentation credit and fuel tax credit and miscellaneous permanent items.
 
Recently Issued Accounting Standards
 
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"). ASU 2014-08 changes the definition of discontinued operations and modifies related disclosure requirements. The new guidance is effective on a prospective basis for fiscal years beginning after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. This new guidance did not have a material impact on the Company's Consolidated Financial Statements.
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard effective date was recently proposed to be delayed a year and if approved will be effective for the Company on April 1, 2018 (beginning of fiscal 2019). Early adoption is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. The Company does not anticipate a material impact on the Company's financial position, results of operations or cash flows as a result of this change.
 
9

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk
 
The Company maintained $10.6 million in cash equivalents as of March 31, 2015. As a result of its regular borrowing activities, the Company's operating results are exposed to fluctuations in interest rates, which it manages primarily through its regular financing activities. The Company uses a revolving credit facility with variable interest rates to finance capital expenditures, acquisitions, seasonal working capital requirements and to pay debt principal and interest obligations. In addition, long-term debt includes secured notes payable. Long-term debt bears interest at fixed and variable rates. With $257.4 million in average variable-rate debt during fiscal 2015, a 1% change in interest rates would have had a $2.6 million effect on interest expense. The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity date. Weighted average interest rates on long-term variable-rate debt are based on rates as of March 31, 2015.
 

Interest Rate Sensitivity of Long-Term Debt and Short-Term Investments
 
March 31, 2015
 
(In thousands)
 
                                 
   
P A Y M E N T S B Y Y E A R
         
                           
Total/
   
Estimated
 
                           
Weighted
   
Fair
 
   
2016
   
2017
   
2018
   
2019
   
2020
   
Thereafter
   
Average
   
Value
 
                                 
Fixed-rate L/T debt:
                               
  Principal cash flows
 
$
2,530
   
$
2,667
   
$
2,844
   
$
3,034
   
$
2,531
   
$
4,928
   
$
18,534
   
$
19,369
 
  Average interest rate
   
6.57
%
   
6.59
%
   
6.62
%
   
6.67
%
   
6.71
%
   
6.68
%
   
6.66
%
       
Variable-rate L/T debt:
                                                               
  Principal cash flows
 
$
-
   
$
233,000
   
$
5,060
   
$
-
   
$
-
   
$
17,570
   
$
255,630
   
$
255,630
 
  Average interest rate
   
-
%
   
1.92
%
   
2.97
%
   
-
%
   
-
%
   
2.97
%
   
2.02
%
       
Average Revolver debt:
                                                               
  Principal cash flows
                                                 
$
234,726
   
$
234,726
 
  Average interest rate
                                                   
1.63
%
       
Short-term investments:
                                                               
  Average balance
                                                 
$
8,006
   
$
8,006
 
  Average interest rate
                                                   
0.07
%
       
 
Commodity Risk
 
The materials that the Company uses, such as vegetables, fruits, steel, ingredients, and packaging materials, as well as the electricity and natural gas used in the Company's business, are commodities that may experience price volatility caused by external factors including market fluctuations, availability, weather, currency fluctuations, and changes in governmental regulations and agricultural programs. These events may result in reduced supplies of these materials, higher supply costs, or interruptions in the Company's production schedules. If prices of these raw materials increase and the Company is not able to effectively pass such price increases along to its customers, operating income will decrease. With $204.7 million in produce costs expected during 2016, a 1% change would have a $2.0 million effect on inventory costs. A 1% change in steel unit costs would equate to a $1.0 million cost impact.
 
The Company does not currently hedge or otherwise use derivative instruments to manage interest rate or commodity risks.
 
10

Consolidated Statements of Net Earnings
 
Seneca Foods Corporation and Subsidiaries
           
(In thousands, except per share amounts)
           
             
Years ended March 31,
 
2015
   
2014
   
2013
 
             
             
Net sales
 
$
1,286,350
   
$
1,340,208
   
$
1,276,297
 
                         
Costs and expenses:
                       
  Cost of products sold
   
1,203,193
     
1,249,245
     
1,134,985
 
  Selling, general, and administrative expense
   
67,381
     
70,129
     
68,852
 
  Other operating income, net
   
(4,748
)
   
(3,271
)
   
(1,971
)
  Plant restructuring
   
1,376
     
501
     
3,497
 
    Total costs and expenses
   
1,267,202
     
1,316,604
     
1,205,363
 
                         
Operating income
   
19,148
     
23,604
     
70,934
 
Earnings from equity investment
   
(628
)
   
-
     
-
 
Interest expense, net of interest income of
                       
  $18, $4, and $179, respectively
   
5,656
     
6,262
     
7,486
 
                         
Earnings before income taxes
   
14,120
     
17,342
     
63,448
 
Income tax expense
   
4,221
     
3,563
     
22,035
 
    Net earnings
 
$
9,899
   
$
13,779
   
$
41,413
 
                         
  Basic earnings per common share
 
$
0.91
   
$
1.24
   
$
3.59
 
                         
  Diluted earnings per common share
 
$
0.90
   
$
1.23
   
$
3.57
 
                         
See notes to consolidated financial statements.
                       

Consolidated Statements of Comprehensive Income (Loss)
 
             
Seneca Foods Corporation and Subsidiaries
           
(In thousands)
           
             
Years ended March 31,
 
2015
   
2014
   
2013
 
             
Comprehensive income (loss):
           
  Net earnings
 
$
9,899
   
$
13,779
   
$
41,413
 
  Change in pension and postretirement benefits
                       
    (net of income tax of $13,140, $7,222, and $493, respectively)
   
(20,552
)
   
11,296
     
771
 
                         
    Total
 
$
(10,653
)
 
$
25,075
   
$
42,184
 
                         
See notes to consolidated financial statements.
                       
11

Consolidated Balance Sheets
 
Seneca Foods Corporation and Subsidiaries
       
(In thousands)
       
         
March 31,
 
2015
   
2014
 
         
Assets
       
Current Assets:
       
  Cash and cash equivalents
 
$
10,608
   
$
13,839
 
  Accounts receivable, less allowance for doubtful accounts
               
    of $145 and $160, respectively
   
69,837
     
76,964
 
  Inventories:
               
    Finished products
   
301,705
     
304,955
 
    In process
   
10,167
     
12,353
 
    Raw materials and supplies
   
160,540
     
133,942
 
     
472,412
     
451,250
 
  Deferred income taxes, net
   
6,997
     
8,412
 
  Other current assets
   
27,439
     
33,594
 
    Total Current Assets
   
587,293
     
584,059
 
Deferred income tax asset, net
   
14,829
     
-
 
Other assets
   
18,015
     
877
 
Property, plant, and equipment:
               
  Land
   
20,971
     
19,639
 
  Buildings and improvements
   
200,739
     
180,202
 
  Equipment
   
347,169
     
347,935
 
     
568,879
     
547,776
 
Less accumulated depreciation and amortization
   
383,322
     
363,859
 
  Net property, plant, and equipment
   
185,557
     
183,917
 
      Total Assets
 
$
805,694
   
$
768,853
 
                 
Liabilities and Stockholders' Equity
               
Current Liabilities:
               
  Notes payable
 
$
9,903
   
$
12,255
 
  Accounts payable
   
68,105
     
71,219
 
  Accrued vacation
   
11,347
     
10,997
 
  Accrued payroll
   
6,344
     
7,516
 
  Other accrued expenses
   
23,732
     
26,111
 
  Current portion of long-term debt
   
2,530
     
2,277
 
  Income taxes payable
   
1,787
     
913
 
    Total Current Liabilities
   
123,748
     
131,288
 
Long-term debt, less current portion
   
271,634
     
216,239
 
Pension liabilities
   
54,960
     
15,828
 
Other liabilities
   
3,622
     
11,527
 
Deferred income taxes, net
   
-
     
339
 
    Total Liabilities
   
453,964
     
375,221
 
Commitments and contingencies
               
Stockholders' Equity:
               
  Preferred stock
   
2,119
     
5,332
 
  Common stock
   
3,010
     
2,958
 
  Additional paid-in capital
   
96,578
     
93,260
 
  Treasury stock, at cost
   
(61,277
)
   
(29,894
)
  Accumulated other comprehensive loss
   
(31,804
)
   
(11,252
)
  Retained earnings
   
343,104
     
333,228
 
    Total Stockholders' Equity
   
351,730
     
393,632
 
      Total Liabilities and Stockholders' Equity
 
$
805,694
   
$
768,853
 
                 
See notes to consolidated financial statements.
               
12

Consolidated Statements of Cash Flows
 
Seneca Foods Corporation and Subsidiaries
           
(In thousands)
           
             
Years ended March 31,
 
2015
   
2014
   
2013
 
             
Cash flows from operating activities:
           
  Net earnings
 
$
9,899
   
$
13,779
   
$
41,413
 
    Adjustments to reconcile net earnings to
                       
      net cash provided by operations:
                       
        Depreciation and amortization
   
21,834
     
23,281
     
23,251
 
        Deferred income tax benefit
   
(612
)
   
(3,798
)
   
(2,950
)
        Loss (gain) on the sale of assets
   
2
     
(325
)
   
-
 
        Impairment provision
   
264
     
341
     
1,216
 
        Earnings from equity investment
   
(628
)
   
-
     
-
 
        Changes in operating assets and liabilities (net of acquisitions):
                       
            Accounts receivable
   
7,127
     
1,276
     
4,485
 
            Inventories
   
(21,162
)
   
28,320
     
(20,134
)
            Other current assets
   
6,155
     
(8,295
)
   
(16,238
)
            Accounts payable, accrued expenses,
                       
              and other liabilities
   
(4,321
)
   
4,236
     
(5,129
)
            Income taxes
   
874
     
(3,187
)
   
4,416
 
       Net cash provided by operating activities
   
19,432
     
55,628
     
30,330
 
                         
Cash flows from investing activities:
                       
    Additions to property, plant, and equipment
   
(26,213
)
   
(17,027
)
   
(17,047
)
    Purchase of an equity method investment
   
(16,242
)
   
-
     
-
 
    Collection of loan receivable
   
-
     
-
     
10,000
 
    Cash paid for acquisition (net of cash acquired)
   
-
     
-
     
(5,016
)
    Proceeds from the sale of assets
   
337
     
998
     
370
 
      Net cash used in investing activities
   
(42,118
)
   
(16,029
)
   
(11,693
)
                         
Cash flows from financing activities:
                       
    Proceeds from issuance of long-term debt
   
384,510
     
393,972
     
558,288
 
    Payments of long-term debt
   
(328,862
)
   
(445,642
)
   
(544,047
)
    (Payments) borrowings on notes payable
   
(2,352
)
   
12,255
     
-
 
    Change in other assets
   
(312
)
   
248
     
276
 
    Purchase of treasury stock
   
(33,506
)
   
(674
)
   
(28,447
)
    Preferred stock dividends paid
   
(23
)
   
(23
)
   
(23
)
      Net cash provided by (used in) financing activities
   
19,455
     
(39,864
)
   
(13,953
)
                         
Net (decrease) increase in cash and cash equivalents
   
(3,231
)
   
(265
)
   
4,684
 
Cash and cash equivalents, beginning of year
   
13,839
     
14,104
     
9,420
 
Cash and cash equivalents, end of year
 
$
10,608
   
$
13,839
   
$
14,104
 
                         
Supplemental disclosures of cash flow information:
                       
    Cash paid during the year for:
                       
        Interest
 
$
5,116
   
$
6,586
   
$
7,305
 
        Income taxes
   
6,003
     
10,695
     
20,352
 
                         
See notes to consolidated financial statements.
                       
13

Consolidated Statements of Stockholders' Equity
 
Seneca Foods Corporation and Subsidiaries
                 
(In thousands, except share amounts)
                     
                   
Accumulated
     
           
Additional
       
Other
     
   
Preferred
   
Common
   
Paid-In
   
Treasury
   
Comprehensive
   
Retained
 
   
Stock
   
Stock
   
Capital
   
Stock
   
Loss
   
Earnings
 
                         
Balance March 31, 2012
 
$
6,268
   
$
2,938
   
$
92,139
   
$
(1,435
)
 
$
(23,319
)
 
$
278,082
 
  Net earnings
   
-
     
-
     
-
     
-
     
-
     
41,413
 
  Cash dividends paid
                                               
    on preferred stock
   
-
     
-
     
-
     
-
     
-
     
(23
)
  Equity incentive program
   
-
     
-
     
72
     
-
     
-
     
-
 
  Stock issued for profit sharing plan
   
-
     
-
     
29
     
-
     
-
     
-
 
  Purchase of treasury stock
   
-
     
-
     
-
     
(29,769
)
   
-
     
-
 
  Preferred stock conversion
   
(846
)
   
17
     
829
     
-
     
-
     
-
 
  Change in pension and postretirement
                                               
    benefits adjustment (net of tax $493)
   
-
     
-
     
-
     
-
     
771
     
-
 
Balance March 31, 2013
   
5,422
     
2,955
     
93,069
     
(31,204
)
   
(22,548
)
   
319,472
 
  Net earnings
   
-
     
-
     
-
     
-
     
-
     
13,779
 
  Cash dividends paid
                                               
    on preferred stock
   
-
     
-
     
-
     
-
     
-
     
(23
)
  Equity incentive program
   
-
     
-
     
100
     
-
     
-
     
-
 
  Stock issued for profit sharing plan
   
-
     
-
     
4
     
-
     
-
     
-
 
  Contribution of 401(k) match
   
-
     
-
     
-
     
1,984
     
-
     
-
 
  Purchase of treasury stock
   
-
     
-
     
-
     
(674
)
   
-
     
-
 
  Preferred stock conversion
   
(90
)
   
3
     
87
     
-
     
-
     
-
 
  Change in pension and postretirement
                                               
    benefits adjustment (net of tax $7,222)
   
-
     
-
     
-
     
-
     
11,296
     
-
 
Balance March 31, 2014
   
5,332
     
2,958
     
93,260
     
(29,894
)
   
(11,252
)
   
333,228
 
  Net earnings
   
-
     
-
     
-
     
-
     
-
     
9,899
 
  Cash dividends paid
                                               
    on preferred stock
   
-
     
-
     
-
     
-
     
-
     
(23
)
  Equity incentive program
   
-
     
-
     
100
     
-
     
-
     
-
 
  Stock issued for profit sharing plan
   
-
     
1
     
56
     
-
     
-
     
-
 
  Contribution of 401(k) match
   
-
     
-
     
-
     
2,123
     
-
     
-
 
  Purchase of treasury stock
   
-
     
-
     
-
     
(33,506
)
   
-
     
-
 
  Preferred stock conversion
   
(3,213
)
   
51
     
3,162
     
-
     
-
     
-
 
  Change in pension and postretirement
                                               
    benefits adjustment (net of tax $13,140)
   
-
     
-
     
-
     
-
     
(20,552
)
   
-
 
Balance March 31, 2015
 
$
2,119
   
$
3,010
   
$
96,578
   
$
(61,277
)
 
$
(31,804
)
 
$
343,104
 

 
Preferred Stock
 
Common Stock
 
     
6
%
   
10
%
       
 
Cumulative Par
 
Cumulative Par
   
2003 Series
     
 
Value $.25
 
Value $.025
 
Participating
 
Participating
 
Class A
 
Class B
 
 
Callable at Par
 
Convertible
 
Convertible Par
 
Convertible Par
 
Common Stock
 
Common Stock
 
 
Voting
 
Voting
 
Value $.025
 
Value $.025
 
Par Value $.25
 
Par Value $.25
 
Shares authorized and designated:
                       
March 31, 2015
   
200,000
     
1,400,000
     
90,826
     
50,500
     
20,000,000
     
10,000,000
 
Shares outstanding:
                                               
March 31, 2013
   
200,000
     
807,240
     
91,962
     
262,790
     
8,705,243
     
2,055,424
 
March 31, 2014
   
200,000
     
807,240
     
90,901
     
257,790
     
8,735,714
     
2,013,953
 
March 31, 2015
   
200,000
     
807,240
     
90,826
     
50,500
     
7,926,280
     
1,967,958
 
Stock amount
 
$
50
   
$
202
   
$
1,084
   
$
783
   
$
2,506
   
$
504
 
                                                 
                                                 
See notes to consolidated financial statements.
                                 
14

Notes to Consolidated Financial Statements
 
Seneca Foods Corporation and Subsidiaries

1. Summary of Significant Accounting Policies

Nature of Operations — Seneca Foods Corporation and subsidiaries (the "Company") conducts its business almost entirely in food packaging, operating 24 plants and 30 warehouses in eight states. The Company markets private label and branded packaged foods to retailers and institutional food distributors.

Principles of Consolidation — The consolidated financial statements include the accounts for the parent company and all of its wholly-owned subsidiaries after elimination of intercompany transactions, profits, and balances.

Revenue Recognition — Sales and related cost of product sold are recognized when legal title passes to the purchaser, which is primarily upon shipment of products. When customers, under the terms of specific orders, request that the Company invoice but hold the goods ("Bill and Hold") for future shipment, the Company recognizes revenue when legal title to the finished goods inventory passes to the purchaser. Generally, the Company receives cash from the purchaser when legal title passes. During the years ended March 31, 2015 and 2014, the Company sold for cash, on a bill and hold basis, $138.6 million and $150.3 million, respectively, of Green Giant finished goods inventory to General Mills Operations, LLC ("GMOL"). At the time of the sale of the Green Giant vegetables to GMOL, title of the specified inventory transferred to GMOL. The Company believes it has met the criteria required by the accounting standards for Bill and Hold treatment. As of March 31, 2015, $60.5 million of 2015 product remained unshipped.

Trade promotions are an important component of the sales and marketing of the Company's branded products, and are critical to the support of the business. Trade promotion costs, which are recorded as a reduction of sales, include amounts paid to retailers for shelf space, to obtain favorable display positions and to offer temporary price reductions for the sale of our products to consumers. Accruals for trade promotions are recorded primarily at the time of sale to the retailer based on expected levels of performance. Settlement of these liabilities typically occurs in subsequent periods primarily through an authorized process for deductions taken by a retailer from amounts otherwise due to the Company. As a result, the ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions taken by retailers. Final determination of the permissible deductions may take extended periods of time.

Concentration of Credit Risk — Financial instruments that potentially subject the Company to credit risk consist of trade receivables and interest-bearing investments. Wholesale and retail food distributors comprise a significant portion of the trade receivables; collateral is generally not required. A relatively limited number of customers account for a large percentage of the Company's total sales. GMOL sales represented 13% of net sales in each of 2015, 2014 and 2013. The top ten customers, including GMOL, represented approximately 49%, 50% and 47% of net sales for 2015, 2014 and 2013, respectively. The Company closely monitors the credit risk associated with its customers. The Company places substantially all of its interest-bearing investments with financial institutions and monitors credit exposure. Cash and short-term investments in certain accounts exceed the federal insured limit; however, the Company has not experienced any losses in such accounts.

Cash Equivalents — The Company considers all highly liquid instruments purchased with an original maturity of three months or less as cash equivalents.

Fair Value of Financial Instruments  The carrying values of cash and cash equivalents (Level 1), accounts receivable, short-term debt (Level 2) and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. See Note 9, Fair Value of Financial Instruments, for a discussion of the fair value of long-term debt.

The three-tier value hierarchy is utilized to prioritize the inputs used in measuring fair value.  The hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobserved inputs (Level 3).  The three levels are defined as follows:

·
Level 1- Quoted prices for identical instruments in active markets.
·
Level 2- Quoted prices for similar instruments; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable.
·
Level 3- Model-derived valuations in which one or more inputs or value-drivers are both significant to the fair value measurement and unobservable.
15

Notes to Consolidated Financial Statements
 
Deferred Financing Costs — Deferred financing costs incurred in obtaining debt are amortized on a straight-line basis over the term of the debt, which is not materially different than using the effective interest rate method. As of March 31, 2015, there were $0.5 million of unamortized financing costs included in other assets on the Consolidated Balance Sheets.

Inventories — Substantially all inventories are stated at the lower of cost; determined under the last-in, first-out ("LIFO") method; or market.

Income Taxes — The provision for income taxes includes federal and state income taxes currently payable and those deferred because of temporary differences between the financial statement and tax basis of assets and liabilities and tax credit carryforwards.  The Company uses the flow-through method to account for its investment tax credits.

The Company evaluates the likelihood of realization of its net deferred income tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are the Company's forecast of future taxable income, the projected reversal of temporary differences and available tax planning strategies that could be implemented to realize the net deferred income tax assets.

Current rules on the accounting for uncertainty on income taxes prescribe a minimum recognition threshold for a tax position taken or expected to be taken in a tax return that is required to be met before being recognized in the financial statements. Those rules also provide guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company recognizes interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable settlements within income tax expense.

Shipping and Handling Costs — The Company includes all shipping and handling costs billed to customers in net sales and the corresponding costs in cost of products sold.

Advertising Costs — Advertising costs are expensed as incurred.  Advertising costs charged to operations were $1.7 million, $1.5 and $1.4 million in 2015, 2014 and 2013, respectively.

Accounts Receivable and Doubtful Accounts Accounts receivable is stated at invoice value, which is net of any off invoice promotions.  A provision for doubtful accounts is recorded based upon an assessment of credit risk within the accounts receivable portfolio, experience of delinquencies (accounts over 15 days past due) and charge-offs (accounts removed from accounts receivable for expectation of non-payment), and current market conditions. Management believes these provisions are adequate based upon the relevant information presently available.

Earnings per Common Share — The Company has three series of convertible preferred stock, which are deemed to be participating securities that are entitled to participate in any dividend on Class A common stock as if the preferred stock had been converted into common stock immediately prior to the record date for such dividend. Basic earnings per share for common stock is calculated using the "two-class" method by dividing the earnings attributable to common stockholders by the weighted average of common shares outstanding during the period. Restricted stock is included in all earnings per share calculations.

Diluted earnings per share is calculated by dividing earnings attributable to common stockholders by the sum of the weighted average common shares outstanding plus the dilutive effect of convertible preferred stock using the "if-converted" method, which treats the contingently-issuable shares of convertible preferred stock as common stock.
16

Notes to Consolidated Financial Statements
Years ended March 31,
 
2015
   
2014
   
2013
 
   
(In thousands, except per share amounts)
 
Basic
           
Net earnings
 
$
9,899
   
$
13,779
   
$
41,413
 
Deduct preferred stock dividends
   
23
     
23
     
23
 
Undistributed earnings
   
9,876
     
13,756
     
41,390
 
Earnings attributable to participating
                       
   preferred shareholders
   
160
     
438
     
1,406
 
Earnings attributable to common
                       
   shareholders
 
$
9,716
   
$
13,318
   
$
39,984
 
Weighted average common shares
                       
   outstanding
   
10,690
     
10,747
     
11,147
 
Basic earnings per common share
 
$
0.91
   
$
1.24
   
$
3.59
 
Diluted
                       
Earnings attributable to common
                       
   shareholders
 
$
9,716
   
$
13,318
   
$
39,984
 
Add dividends on convertible
                       
   preferred stock
   
20
     
20
     
20
 
Earnings attributable to common
                       
   stock on a diluted basis
 
$
9,736
   
$
13,338
   
$
40,004
 
Weighted average common shares
                       
   outstanding-basic
   
10,690
     
10,747
     
11,147
 
Additional shares to be issued related to
                       
   the equity compensation plan
   
5
     
5
     
5
 
Additional shares to be issued under
                       
   full conversion of preferred stock
   
67
     
67
     
67
 
Total shares for diluted
   
10,762
     
10,819
     
11,219
 
Diluted earnings per share
 
$
0.90
   
$
1.23
   
$
3.57
 
                         
 
Depreciation and Valuation — Property, plant, and equipment are stated at cost. Interest incurred during the construction of major projects is capitalized. For financial reporting, the Company provides for depreciation on the straight-line method at rates based upon the estimated useful lives of the various assets. Depreciation was $21.5 million, $22.9 million, and $22.8 million in 2015, 2014, and 2013, respectively. The estimated useful lives are as follows: buildings and improvements — 30 years; machinery and equipment — 10-15 years; computer software — 3-5 years; vehicles — 3-7 years; and land improvements — 10-20 years. The Company assesses its long-lived assets for impairment whenever there is an indicator of impairment. Impairment losses are evaluated if the estimated undiscounted cash flows from using the assets are less than carrying value. A loss is recognized when the carrying value of an asset exceeds its fair value. There were $1.2 million of impairment losses in 2013 included in Plant Restructuring  (see Note 14, Plant Restructuring).  There were no significant impairment losses in 2015 and 2014.
 
Use of Estimates in the Preparation of Financial Statements — The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the related revenues and expenses during the reporting period. Actual amounts could differ from those estimated.
 
Recently Issued Accounting Standards — In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"). ASU 2014-08 changes the definition of discontinued operations and modifies related disclosure requirements. The new guidance is effective on a prospective basis for fiscal years beginning after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. This new guidance did not have a material impact on the Company's Consolidated Financial Statements.
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard effective date was recently proposed to be delayed a year and if approved will be effective for the Company on April 1, 2018 (beginning of fiscal 2019). Early adoption is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. The Company does not anticipate a material impact on the Company's financial position, results of operations or cash flows as a result of this change.
 
17

Notes to Consolidated Financial Statements
 
Reclassifications — Certain previously reported amounts have been reclassified to conform to the current period classification.
 
2. Acquisition of Equity Interest
 
In April 2014, the Company purchased a 50% equity interest in Truitt Bros. Inc. ("Truitt") for $16.2 million.  The purchase agreement grants the Company the right to acquire the remaining 50% ownership of Truitt in the future under certain conditions.  Truitt is known for its industry innovation related to packing shelf stable foods in trays, pouches and bowls.  Truitt has two state-of-the-art plants located in Oregon and Kentucky.  This investment is included in Other Assets in the Consolidated Balance Sheets as of March 31, 2015 and is accounted for using the equity method of accounting.
 
3.  Short-Term Borrowings
 
The Company completed the closing of a five year revolving credit facility ("Revolver") on July 20, 2011. The available borrowings under the Revolver are $300.0 million from April through July and $400.0 million from August through March of each year under the Revolver. The maturity date for the Revolver is July 20, 2016. As of March 31, 2015, the outstanding balance of the Revolver was $233.0 million, with a weighted average interest rate of 1.92% (LIBOR plus a spread), and is included in the Long-Term Debt on the Consolidated Balance Sheet. The Revolver is secured by accounts receivable and inventories with a carrying value of $542.4 million.  The Company had $11.0 million and $10.6 million of outstanding standby letters of credit as of March 31, 2015 and 2014, respectively, which reduces borrowing availability under the Revolver. See Note 4, Long-Term Debt, for additional comments related to the Revolver.
 
During 2015, the Company entered into some interim lease notes which financed down payments for various equipment orders at market rates.  As of March 31, 2015, these interim notes had not been converted into operating leases since the equipment was not yet delivered.  These notes, which total $9.9 million as of March 31, 2015 and $12.3 million as of March 31, 2014, are included in notes payable in the accompanying Consolidated Balance Sheets.  These notes are expected to be converted into operating leases within the next twelve months. Until then, they bear interest at an annual rate of 1.67% as of March 31, 2015 and 1.65% as of March 31, 2014.

4.  Long-Term Debt
       
         
   
2015
   
2014
 
   
(In thousands)
 
Revolving credit facility,
       
  1.92% and 1.65%, due through 2017
 
$
233,000
   
$
175,000
 
Secured Industrial Revenue Development Bonds,
               
  2.97%, and 3.23%, due through 2029
   
22,630
     
22,630
 
Secured promissory note,
               
  6.98%, due through 2022
   
13,769
     
15,313
 
Secured promissory note,
               
  6.35%, due through 2020
   
3,122
     
3,731
 
Economic development note,
               
  2.00%, due through 2021
   
1,398
     
1,500
 
Other
   
245
     
342
 
     
274,164
     
218,516
 
Less current portion
   
2,530
     
2,277
 
   
$
271,634
   
$
216,239
 
 
See Note 3, Short-Term Borrowings, for discussion of the Revolver.
 
The Company's debt agreements, including the Revolver, contain covenants that restrict the Company's ability to incur additional indebtedness, pay dividends on the Company's capital stock, make other restricted payments, including investments, sell the Company's assets, incur liens, transfer all or substantially all of the Company's assets and enter into consolidations or mergers. The Company's debt agreements also require the Company to meet certain financial covenants, including a minimum fixed charge coverage ratio. The Revolver also contains borrowing base requirements related to accounts receivable and inventories. These financial requirements and ratios generally become more restrictive over time and are subject to allowances for seasonal fluctuations. The most restrictive financial covenant in the debt agreements is the fixed charge coverage ratio within the Master Reimbursement Agreement with General Electric Commercial Finance, which relates to the Secured Industrial Revenue Development Bonds. In connection with the Company's decision to adopt the LIFO method of inventory accounting, effective December 30, 2007, the Company executed amendments to its debt agreements, which enable the Company to compute its financial covenants as if the Company were on the FIFO method of inventory accounting. The Company was in compliance with all such financial covenants as of March 31, 2015.
 
18

Notes to Consolidated Financial Statements
 
The Company's debt agreements limit the payment of dividends and other distributions.  There is an annual total distribution limitation of $50,000, less aggregate annual dividend payments totaling $23,000 that the Company presently pays on two outstanding classes of preferred stock.
 
The Company has four outstanding Industrial Revenue Development Bonds ("IRBs"), totaling $22.6 million that are secured by direct pay letters of credit. The interest rates shown for these IRBs in the table above reflect the costs of the direct pay letters of credit and amortization of other related costs of those IRBs.  A Master Reimbursement Agreement with General Electric Commercial Finance, which provides for the direct pay letters of credit, expires in July 2016.
 
On August 1, 2013, the Company paid a final $36.7 million principal payment due on a secured note payable to John Hancock Life Insurance Company.
 
The carrying value of assets pledged for secured debt, including the Revolver, is $657.9 million.
 
Debt repayment requirements for the next five fiscal years are (in thousands):

Years ending March 31:
 
2016
 
$
2,530
 
2017
   
235,667
 
2018
   
7,904
 
2019
   
3,034
 
2020
   
2,531
 
Thereafter
   
22,498
 
Total
 
$
274,164
 
 
5. Leases
 
The Company had no capital leases as of March 31, 2015 and 2014. The Company has operating leases expiring at various dates through 2025. Operating leases generally provide for early purchase options one year prior to expiration.
 
The following is a schedule, by year, of minimum operating lease payments due as of March 31, 2015 (in thousands):

Years ending March 31:
     
2016
   
$
42,585
 
2017
     
37,760
 
2018
     
33,476
 
2019
     
28,367
 
2020
     
24,183
 
2021-2025      
33,239
 
Total minimum payment required
   
$
199,610
 
             
Lease expense in fiscal 2015, 2014 and 2013 was $49.6 million, $43.9 million and $38.1 million, respectively.
 

 
19

Notes to Consolidated Financial Statements
6.  Income Taxes
               
                 
The Company files a consolidated federal and various state income tax returns. The provision for income taxes is as follows:
 
                 
   
2015
     
2014
     
2013
 
   
(In thousands)
 
Current:
               
  Federal
 
$
4,380
     
$
7,238
     
$
21,356
 
  State
   
453
       
123
       
3,629
 
     
4,833
       
7,361
       
24,985
 
Deferred:
                           
  Federal
   
(925
)
     
(3,231
)
     
(2,770
)
  State
   
313
       
(567
)
     
(180
)
     
(612
)
     
(3,798
)
     
(2,950
)
Total income taxes
 
$
4,221
     
$
3,563
     
$
22,035
 
                             
A reconciliation of the expected U.S. statutory rate to the effective rate follows:
 
                             
     
2015
       
2014
       
2013
 
Computed (expected tax rate)
   
35.0
 
%
   
 
   
35.0
 
%
   
 
   
35.0
%
State income taxes (net of federal tax benefit)
   
2.9
       
3.4
       
3.8
 
State tax credits
   
(8.7
)
     
(1.6
)
     
(0.8
)
Federal credits
   
(2.4
)
     
(3.6
)
     
(0.2
)
Manufacturer's deduction
   
(5.0
)
     
(4.6
)
     
(3.4
)
(Reversal of) addition to uncertain tax positions
   
(1.0
)
     
(0.8
)
     
0.2
 
State VDA/Nexus Changes
   
-
       
(1.7
)
     
-
 
Other permanent differences not deductible
   
0.7
       
0.5
       
0.1
 
Change in valuation allowance
   
9.9
       
(2.1
)
     
-
 
Tax effect of pension contribution
   
-
       
0.4
       
-
 
Other
   
(1.5
)
     
(4.4
)
     
-
 
   Effective income tax rate
   
29.9
 
%
   
 
   
20.5
 
%
   
 
   
34.7
%
 
The effective tax rate was 29.9% in 2015, 20.5% in 2014 and 34.7% in 2013. Of the 9.4 percentage point increase in the effective tax rate for the year, the major contributors to this increase are the following items, 1) the establishment of a valuation allowance related to the New York State investment tax credit, 2) with lower pre-tax earnings, the permanent items have a larger impact on the effective rate, and 3) less federal credits generated in the current year compared to the prior year.  The impact of these increases was partially offset by the manufacturer's deduction being a higher percentage of current year earnings than the prior year.
 
The following is a summary of the significant components of the Company's deferred income tax assets and liabilities as of March 31:

   
2015
   
2014
 
   
(In thousands)
 
Deferred income tax assets:
       
  Future tax credits
 
$
4,021
   
$
3,042
 
  Inventory valuation
   
2,348
     
3,353
 
  Employee benefits
   
3,009
     
2,884
 
  Insurance
   
816
     
1,244
 
  Other comprehensive loss
   
20,335
     
7,194
 
  Interest
   
46
     
138
 
  Deferred gain on sale/leaseback
   
-
     
26
 
  Prepaid revenue
   
701
     
1,118
 
  Other
   
1,364
     
859
 
  Pension
   
1,372
     
-
 
  Severance
   
256
     
87
 
     
34,268
     
19,945
 
                 
Deferred income tax liabilities:
               
  Property basis and depreciation difference
   
9,129
     
10,757
 
  481(a) adjustment
   
1,281
     
-
 
  Earnings from equity investment
   
245
     
-
 
  Pension
   
-
     
725
 
     
10,655
     
11,482
 
  Valuation allowance - non-current
   
1,787
     
390
 
    Net deferred income tax asset
 
$
21,826
   
$
8,073
 
 
20

Notes to Consolidated Financial Statements
 
Net current deferred income tax assets of $7.0 million and $8.4 million as of March 31, 2015 and 2014, respectively, are recognized in the Consolidated Balance Sheets. Also recognized are net non-current deferred income tax assets of $14.8 million as of March 31, 2015 and net non-current deferred income tax liabilities of $0.3 million as of March 31, 2014.
 
The Company has State tax credit carryforwards amounting to $1.3 million (California, net of Federal impact), $0.8 million (New York, net of Federal impact), and $1.8 million (Wisconsin, net of Federal impact), which are available to reduce future taxes payable in each respective state through 2030 (Wisconsin), through 2030 (New York), and through 2025 (California). The Company has performed the required assessment regarding the realization of deferred tax assets and at March 31, 2015, the Company has recorded a valuation allowance amounting to $1.8 million, which relates primarily to tax credit carryforwards which management has concluded it is more likely than not they will not be realized in the ordinary course of operations. Although realization is not assured, management has concluded that it is more likely than not that the deferred tax assets for which a valuation allowance was determined to be unnecessary will be realized in the ordinary course of operations. The amount of net deferred tax assets considered realizable, however, could be reduced if actual future income or income taxes rates are lower than estimated or if there are differences in the timing or amount of future reversals of existing taxable or deductible temporary differences.
 
Current rules on the accounting for uncertainty on income taxes prescribe a minimum recognition threshold for a tax position taken or expected to be taken in a tax return that is required to be met before being recognized in the financial statements. Those rules also provide guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company classifies the liability for uncertain tax positions in other accrued expenses or other long-term liabilities depending on their expected settlement.  The change in the liability for the years ended March 31, 2015 and 2014 consists of the following:
 
   
2015
   
2014
 
   
(In thousands)
 
Beginning balance
 
$
2,273
   
$
2,470