PINX:NNUTU Quarterly Report 10-Q Filing - 3/31/2012

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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  March 31, 2012

 

OR

 

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

 

Commission File Number  1-9145

 

ML MACADAMIA ORCHARDS, L.P.

 (Exact Name of registrant as specified in its charter)

 

DELAWARE

 

99-0248088

(State or other jurisdiction of incorporation or organization)

 

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

 

26-238 Hawaii Belt Road, HILO, HAWAII

 

96720

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (808) 969-8057

 

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 twelve 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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on it corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

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.

 

Large accelerated filer  o

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  x

 

Indicate by check mark whether the Registrant is a shell company as defined by Rule 12b-2 of the Securities Exchange Act of 1934.  Yes o No x

 

As of May 10, 2012, Registrant had 7,500,000 Class A Units issued and outstanding.

 

 

 



Table of Contents

 

ML MACADAMIA ORCHARDS, L.P.

 

INDEX

 

 

 

Page

 

 

 

Part  I - Financial Information

 

 

 

 

Item 1.

Unaudited Consolidated Financial Statements

3-11

 

 

 

Item 2.

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

11-15

 

 

 

Item 4.

Controls and Procedures

15

 

 

 

Part II - Other Information

 

 

 

 

Item 1.

Legal Proceedings

15-16

 

 

 

Item 6.

Exhibits

16

 

 

 

Signatures

17

 

2



Table of Contents

 

Item 1. Unaudited Consolidated Financial Statements

 

ML Macadamia Orchards, L.P.

Consolidated Balance Sheets

(in thousands)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

2011

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

102

 

$

433

 

$

530

 

Accounts receivable

 

1,987

 

944

 

4,996

 

Inventory of farming supplies

 

319

 

221

 

271

 

Inventory of kernels and packaging supplies

 

276

 

 

276

 

Deferred farming costs

 

1,025

 

1,343

 

 

Other current assets

 

394

 

484

 

334

 

Total current assets

 

4,103

 

3,425

 

6,407

 

Land, orchards and equipment, net

 

49,430

 

51,805

 

50,009

 

Intangible assets, net

 

493

 

568

 

511

 

Deferred fees

 

154

 

 

116

 

Other non-current assets

 

 

87

 

 

Total assets

 

$

54,180

 

$

55,885

 

$

57,043

 

 

 

 

 

 

 

 

 

Liabilities and partners’ capital

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

1,050

 

$

1,050

 

$

1,050

 

Short-term borrowings

 

 

1,600

 

2,400

 

Accounts payable

 

646

 

239

 

470

 

Accrued payroll and benefits

 

649

 

546

 

772

 

Other current liabilities

 

59

 

103

 

301

 

Total current liabilities

 

2,404

 

3,538

 

4,993

 

Non-current pension benefits

 

588

 

414

 

587

 

Long-term debt

 

7,612

 

8,750

 

7,875

 

Deferred income tax liability

 

1,041

 

1,067

 

1,051

 

Total liabilities

 

11,645

 

13,769

 

14,506

 

Commitments and contingencies

 

 

 

 

 

 

 

Partners’ capital

 

 

 

 

 

 

 

General partner

 

81

 

81

 

81

 

Class A limited partners, no par or assigned value, 7,500 units authorized, issued and outstanding

 

42,777

 

42,122

 

42,785

 

Accumulated other comprehensive loss

 

(323

)

(87

)

(329

)

Total partners’ capital

 

42,535

 

42,116

 

42,537

 

Total liabilities and partners’ capital

 

$

54,180

 

$

55,885

 

$

57,043

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

ML Macadamia Orchards, L. P.

Consolidated Statement of Comprehensive Income (unaudited)

(in thousands, except per unit data)

 

 

 

Three months

 

 

 

ended March 31,

 

 

 

2012

 

2011

 

Macadamia nut sales

 

$

3,203

 

$

2,167

 

Contract farming revenue

 

319

 

320

 

Total revenues

 

3,522

 

2,487

 

Cost of goods and services sold

 

 

 

 

 

Cost of macadamia nut sales

 

2,400

 

1,621

 

Cost of contract farming services

 

286

 

281

 

Total cost of goods and services sold

 

2,686

 

1,902

 

Gross income

 

836

 

585

 

General and administrative expenses

 

652

 

369

 

Operating income

 

184

 

216

 

Interest expense

 

(163

)

(191

)

Other income

 

 

44

 

Income before income taxes

 

21

 

69

 

Income tax expense

 

29

 

20

 

Net income (loss)

 

$

(8

)

$

49

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

 

 

 

Amortization of prior service cost

 

2

 

 

Amortization of actuarial loss

 

4

 

 

Defined benefit pension plan

 

6

 

 

Other comprehensive income, net of tax

 

6

 

 

Comprehensive income (loss)

 

$

(2

)

$

49

 

 

 

 

 

 

 

Net cash flow (as defined in the Partnership Agreement)

 

$

158

 

$

201

 

 

 

 

 

 

 

Net income (loss) per Class A Unit

 

$

0.00

 

$

0.01

 

 

 

 

 

 

 

Net cash flow per Class A Unit (as defined in the Partnership Agreement)

 

$

0.02

 

$

0.03

 

 

 

 

 

 

 

Cash distributions per Class A Unit

 

$

0.00

 

$

0.00

 

 

 

 

 

 

 

Class A Units outstanding

 

7,500

 

7,500

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

ML Macadamia Orchards, L.P.

Consolidated Statements of Partners’ Capital (unaudited)

(in thousands)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Partners’ capital at beginning of period:

 

 

 

 

 

General partner

 

$

81

 

$

81

 

Class A limited partners

 

42,785

 

42,073

 

Accumulated other comprehensive loss

 

(329

)

(87

)

 

 

42,537

 

42,067

 

 

 

 

 

 

 

Allocation of net income (loss):

 

 

 

 

 

Class A limited partners

 

(8

)

49

 

 

 

(8

)

49

 

 

 

 

 

 

 

Cash distributions:

 

 

 

 

 

Class A limited partners

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

6

 

 

 

 

6

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

(2

)

49

 

 

 

 

 

 

 

Partners’ capital at end of period:

 

 

 

 

 

General partner

 

81

 

81

 

Class A limited partners

 

42,777

 

42,122

 

Accumulated other comprehensive loss

 

(323

)

(87

)

Total partners’ capital

 

$

42,535

 

$

42,116

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

ML Macadamia Orchards, L.P.

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Cash received from goods and services

 

$

6,548

 

$

5,937

 

Cash paid to suppliers and employees

 

(4,086

)

(3,814

)

Interest received

 

 

1

 

Interest paid

 

(162

)

(112

)

Net cash provided by operating activities

 

2,300

 

2,012

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of land and capital equipment

 

(27

)

(49

)

Net cash used in investing activities

 

(27

)

(49

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from drawings on line of credit

 

 

200

 

Deferred rights offering fees

 

(38

)

 

Repayment on line of credit

 

(2,400

)

(1,800

)

Payments on long term borrowings

 

(263

)

(175

)

Net cash used in financing activities

 

(2,701

)

(1,775

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(428

)

188

 

Cash and cash equivalents at beginning of period

 

530

 

245

 

Cash and cash equivalents at end of period

 

$

102

 

$

433

 

 

 

 

 

 

 

Reconciliation of net income (loss) to net cash

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

Net income (loss)

 

$

(8

)

$

49

 

Adjustments to reconcile net income (loss) to cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

429

 

326

 

Pension expense

 

6

 

 

Decrease in accounts receivable

 

3,009

 

3,378

 

Increase in inventories

 

(48

)

(51

)

Increase in deferred farming costs

 

(829

)

(1,046

)

Increase in other current assets

 

(60

)

(95

)

Increase (decrease) in accounts payable

 

175

 

(328

)

Decrease in accrued payroll and benefits

 

(123

)

(265

)

Increase (decrease) in other current liabilities

 

(242

)

69

 

Increase (decrease) in non-current accrued benefits

 

1

 

(25

)

Decrease in deferred income tax liability

 

(10

)

 

Total adjustments

 

2,308

 

1,963

 

Net cash provided by operating activities

 

$

2,300

 

$

2,012

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

ML MACADAMIA ORCHARDS, L.P.

Notes to Consolidated Financial Statements

 

(1) BASIS OF PRESENTATION

 

In the opinion of management, the accompanying unaudited consolidated financial statements of ML Macadamia Orchards, L.P. and its subsidiaries ML Resources, Inc. and Royal Hawaiian Macadamia Nut, Inc., (“the Partnership”) include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly its financial position as of March 31, 2012 and 2011 and the results of operations, changes in partners’ capital and cash flows for the three months then ended.  The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year or for any future period.

 

The year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  These interim consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements filed with the Securities and Exchange Commission in the Partnership’s 2011 Annual Report on Form 10-K.

 

(2)             CONSOLIDATION

 

The consolidated financial statements include the accounts of the Partnership, ML Resources, Inc. (“MLR”), its General Partner, and Royal Hawaiian Macadamia Nut, Inc. All significant intercompany balances and transactions, including management fees and distributions, have been eliminated.

 

(3) ADOPTION OF NEW ACCOUNTING STANDARDS

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-05 (“ASU 2011-05”), Comprehensive Income (Topic 220):  Presentation of Comprehensive Income.  The objective of this update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  ASU 2011-05 requires that all non owner changes in equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements reporting net income and other comprehensive income. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retroactively. In December 2011, the FASB issued ASU 2011-12: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers certain presentation requirements of ASU 2011-05.  ASU 2011-05 and ASU 2011-12 were adopted during the first quarter of 2012 and do not have a material impact on the consolidated financial statements as it only requires a change in the format of the Partnership’s current presentation. The Partnership’s other comprehensive income is presented in one consecutive statement in conjunction with the Partnership’s statement of comprehensive income.

 

(4)  PROPOSED SUBSCRIPTION RIGHTS OFFERING

 

On April 4, 2012, the Partnership filed a registration statement on Form S-1 with the Securities and Exchange Commission in connection with a proposed distribution of non-transferable subscription rights to holders of the Partnership’s Depositary Receipts representing Class A Units of limited partnership interests, to purchase up to 7,500,000 new Depositary Receipts.  After the registration statement becomes effective under the Securities Act of 1933, as amended, the Partnership currently intends to distribute one subscription right for each Depositary Receipt held with each Right entitling the holder to purchase one new Depositary Receipt, on the terms and conditions set forth in the registration statement.

 

Assuming the subscription rights offering is completed, the Partnership intends to use the net proceeds to (1) commence implementation of its vertical integration strategy to market and sell macadamia nuts in branded and bulk form, (2) if it elects to husk and dry its nuts before sale, to construct drying and storage facilities and improve its husking facility, (3) invest in restoration and improvements to existing orchards to improve crop yields, (4) seek to acquire additional macadamia nut orchards, and (5) for general Partnership purposes.

 

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Table of Contents

 

There is no assurance that the registration statement will become effective, or that the Partnership will distribute rights or commence the subscription rights offering (as outlined above or otherwise).  Information on the deferral and accounting treatment of costs relating to the offering can be found in the Form S-1.

 

(5)  SEGMENT INFORMATION

 

The Partnership has two reportable segments, the owned-orchard segment and the farming segment which are organized on the basis of revenues and assets.  The owned-orchard segment derives its revenues from the sale of macadamia nuts grown in orchards owned or leased by the Partnership.  The farming segment derives its revenues from the farming of macadamia orchards owned by other growers.  The Partnership also farms the orchards it owns and leases.

 

Management evaluates the performance of each segment on the basis of operating income.  The Partnership accounts for intersegment sales and transfers at cost.  Such intersegment sales and transfers are eliminated in consolidation. The Partnership’s reportable segments are distinct business enterprises that offer different products or services.  Revenues from the owned-orchard segment are subject to nut purchase contracts and tend to vary from year to year due to changes in the prices paid under its various nut contracts.  The farming segment’s revenues are based on farming contracts that generate a farming profit based on a pass through of farming cost plus a fee which is a percentage of farming cost or a fixed amount per acre and tend to be less variable than revenues from the owned-orchard segment.

 

The following tables summarize each reportable segment’s revenues, operating income, assets and other information as of and for the three months ended March 31, 2012 and 2011.  Due to the seasonality of crop patterns and the timing of nut purchase contract fulfillment, interim results are not necessarily indicative of annual performance.

 

 

 

Three months

 

 

 

ended March 31,

 

 

 

(in thousands)

 

 

 

2012

 

2011

 

Revenues:

 

 

 

 

 

Owned orchard

 

$

3,203

 

$

2,167

 

Farming

 

2,905

 

1,999

 

Intersegment elimination (all farming)

 

(2,586

)

(1,679

)

Total

 

$

3,522

 

$

2,487

 

Operating income:

 

 

 

 

 

Owned orchard

 

$

151

 

$

177

 

Farming

 

33

 

39

 

Total

 

$

184

 

$

216

 

Depreciation:

 

 

 

 

 

Owned orchard

 

$

309

 

$

209

 

Farming

 

101

 

98

 

Total

 

$

410

 

$

307

 

Expenditures for property and equipment:

 

 

 

 

 

Owned orchard

 

$

13

 

$

47

 

Farming

 

14

 

2

 

Total

 

$

27

 

$

49

 

Segment assets:

 

 

 

 

 

Owned orchard

 

$

46,357

 

$

47,762

 

Farming

 

7,823

 

8,123

 

Total

 

$

54,180

 

$

55,885

 

 

All revenues are from sources within the United States of America.

 

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Table of Contents

 

(6) DEFERRED FARMING COSTS

 

Orchard costs (e.g. irrigation, fertilizer, pruning, etc.) related to nuts sold under nut purchase contracts and services provided under farming contracts are expensed to cost of goods sold and cost of services provided based on management’s estimate of the costs incurred to produce macadamia nuts sold during the interim reporting period, with the difference between costs incurred-to-date and costs expensed-to-date reported on the consolidated balance sheet as deferred farming costs.

 

(7)  GENERAL EXCISE TAXES

 

The Partnership records Hawaii general excise taxes when goods and services are sold on a gross basis as components of revenues and expenses.  For the three months ended March 31, 2012 and 2011, Hawaii general excise taxes charged or passed on to customers and reflected in revenues and expenses amounted to $6,000.

 

(8)  CREDIT FACILITY - DEBT

 

The Partnership has a $5.0 million revolving credit facility with American AgCredit, PCA which expires on July 13, 2012. Advances under the revolving credit facility bear interest at the base rate of 4% or the prime rate as published in the Wall Street Journal plus 1%, whichever is higher.    There were no drawings outstanding on the revolving credit facility as of March 31, 2012. The Partnership had $1.6 million outstanding on the revolving credit facility as of March 31, 2011, with interest at 4.25% per annum.

 

In addition to the revolving credit facility, the Partnership has a 10-year $10.5 million term loan with American AgCredit, PCA which was entered into on August 4, 2010.  The term loan matures on July 1, 2020, requires equal monthly payments over the term and bears fixed interest at 6.5% per annum.  The Partnership had $8.7 million and $9.8 million outstanding on the term loan at March 31, 2012 and 2011, respectively.

 

The credit agreements with American AgCredit, PCA, contain various financial covenants.  The Partnership was in compliance with all financial covenants at March 31, 2012 and 2011.

 

The fair value of the line of credit is approximately the carrying value due to the variability of the interest rate and frequency that the interest rate resets.  The 10-year term loan has a fixed rate and has a fair value of approximately $9.4 million compared to a carrying value of $8.7 million as of March 31, 2012.

 

The estimated fair value of the Partnership’s fixed rate term loan was determined using an estimated market interest rate of 4.25% over a life equal to the remaining maturity.  The Partnership has not considered lender fees in determining the estimated fair value.

 

The Partnership’s lender has indicated a willingness to extend the revolving credit facility, as it has in the past, if the Partnership elects to do so.  The Partnership intends to assess its position in June 2012 and if it does not appear that it will be able to meet its working capital needs through cash flow from operations and the sale of equity prior to the expiration of the revolving credit facility, it would then seek to obtain an extension of the facility from the lender.

 

(9)  PARTNERS’ CAPITAL

 

Net income (loss) per Class A Unit is calculated by dividing 100% of Partnership net income (loss) by the average number of Class A Units outstanding for the period.

 

(10)  CASH DISTRIBUTIONS

 

The credit agreement with American AgCredit, PCA prohibits the declaration and payment of cash distributions without prior approval from the lender.  No distributions were declared or paid during the three-month periods ended March 31, 2012 or 2011.

 

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(11)  PENSION PLAN

 

The Partnership sponsors a defined benefit pension plan covering employees that are members of a union bargaining unit.  The Partnership’s funding policy is to contribute an amount to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974.

 

COMPONENTS OF NET PERIODIC BENEFIT COST

 

 

 

Pension Benefits

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

(in thousands)

 

 

 

2012

 

2011

 

Service Cost

 

$

18

 

$

15

 

Interest Cost

 

12

 

11

 

Expected Return on Assets

 

(12

)

(12

)

Amortization of Unrecognized Prior Service Costs

 

2

 

 

Amortization of Unrecognized Loss

 

4

 

 

Net Periodic Pension Cost

 

$

24

 

$

14

 

 

(12)  INTERMITTENT SEVERANCE PLAN

 

The Partnership sponsors a defined intermittent severance benefit plan covering employees that are members of a union bargaining unit and not covered by the defined benefit pension plan.  Payment of the severance benefit is made when covered employees cease employment with the Partnership under certain terms and conditions as defined in the union bargaining agreement.

 

COMPONENTS OF NET PERIODIC BENEFIT COST

 

 

 

 

Intermittent Severance Benefits

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

(in thousands)

 

 

 

2012

 

2011

 

Service Cost

 

$

4

 

$

4

 

Interest Cost

 

3

 

4

 

Net Periodic Intermittent Severance Cost

 

$

7

 

$

8

 

 

(13)  EMPLOYEES

 

The Partnership has two bargaining agreements with the ILWU Local 142.  These agreements cover all production, maintenance, and agricultural employees of the Ka’u Orchard Division and the Keaau and Mauna Kea Orchard Division.  On June 1, 2011 the Partnership and the ILWU Local 142 agreed to a two-year contract, which is effective June 1, 2011 through May 31, 2013. The Partnership believes that relations with its employees and the ILWU are good.

 

(14)  LEGAL PROCEEDINGS

 

On March 21, 2012, Kaiwiki Orchards, LLC, as the lessor of macadamia orchards consisting of 636 gross acres (326 tree acres) leased to the Partnership, filed a Complaint in the Circuit Court of the Third Circuit, State of Hawaii seeking a declaratory judgment that the Partnership has breached the terms of the lease for failing, inter alia, to exercise “good husbandry” and permitting waste in its agricultural practices on the leased land and that the lease  may be terminated by the lessor and seeking damages in an amount to be proven at trial.

 

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Table of Contents

 

Although the complaint has only recently been served on the Partnership, the plaintiff has given the Partnership an open ended extension of the time to file a responsive pleading pending the results of settlement discussions between the parties. The Partnership produced approximately 1,000,000 field pounds of macadamia nuts from these leased orchards during 2011.

 

Management has denied the allegations of the Complaint in correspondence between the parties and intends to defend this suit vigorously if settlement discussions are not successful.

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

Significant Accounting Policies and Estimates

 

The Partnership prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.  Certain of our accounting policies, including the estimated lives assigned to our assets, nut pricing under certain nut sales agreements, determination of bad debt, deferred farming costs, asset impairment, goodwill and goodwill impairment, self-insurance reserves, assumptions used to determine employee benefit obligations, and the calculation of our income tax liabilities, require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates.  By their nature, these judgments are subject to an inherent degree of uncertainty.  Our judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry and crop, information provided by our customers and information available from outside sources, as appropriate.  There can be no assurance that the actual results will not differ from our estimates.  To provide an understanding of the methodology we apply, our significant accounting policies are discussed where appropriate in this discussion and analysis and in the notes to consolidated financial statements in the 2011 Form 10-K.

 

Results of Operations

 

The Partnership’s financial results are principally driven by nut production, which is seasonal and highly contingent upon Hawaii’s climatic conditions, as well as nut prices.  Traditionally, nut production is highest during the third and fourth quarters, with very low production in the first and second quarters.  Production at the Ka’u region in the quarter ended March 31, 2012 was affected by better than expected pollination/nut-set late in the flower season and improved rainfall that followed this late nut-set from July through December 2011.  At the wetter areas of Keaau and Mauna Kea, nut production was negligible as normally expected in the first quarter of the new calendar year.

 

Nut sales recorded for the first quarter 2012 and 2011 were $3.2 million and $2.2 million, respectively. The Partnership’s wet-in-shell (“WIS”) pounds produced for the three-month period ended March 31, 2012 and 2011 was 5.2 million pounds and 3.5 million pounds, respectively, or an increase of 48%. WIS pounds refer to the actual wet-in shell pounds of macadamia nuts. The increase in nut sales in 2012 is mainly attributable to the increase in production and nut sales from the Ka’u orchards which produced 1.5 million more WIS pounds compared to the same period in 2011 and generated $960,000 more in nut sales as compared with the same period in 2011.  The effects of the drought in 2010 in the Ka’u region adversely impacted nut production in the first quarter of 2011.   The average price received per WIS pound sold during the first quarter 2012 and 2011 was $0.62.

 

Contract farming revenue for the first quarter 2012 and 2011 was $319,000 and $320,000 respectively.  Cost of contract farming services for the first quarter 2012 and 2011 was $286,000 and $281,000, respectively.

 

For the three-month period ended March 31, 2012, the Partnership recorded a net loss of $8,000 from total revenues of $3.5 million. Net income for the three-month period ended March 31, 2011 was $49,000 from revenues of $2.5 million.  Net loss per Class A Unit for the first quarter of 2012 was $0.00 and net income per Class A Unit for the same period in 2011 amounted to $0.01.  The net loss in 2012 is attributable to higher general and administrative expenses, including $170,000 in retail product development expenses, $60,000 increase in legal fees, $44,000 higher general and administrative costs in the farming operations due to higher production, and $10,000 increase in costs related to the general partner.

 

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The net income in 2011 is the result of increased nut sales and $43,000 in distributions from American AgCredit, PCA, offset by higher interest expense.

 

Net cash flow per Class A Unit for the first quarter 2012 and 2011, as defined in the Partnership Agreement, amounted to $0.02 and $0.03, respectively.  The lower net cash flow result in 2012 is mainly attributable to the net loss.

 

Owned-orchard Segment

 

The Partnership currently sells all of the macadamia nuts to Mauna Loa Macadamia Nut Corporation (“Mauna Loa”) under various nut purchase contracts.  Effective August 1, 2010, in connection with the purchase of the real property, orchards and farming assets from IASCO, the Partnership acquired two lease agreements and one license agreement under which all macadamia nuts produced in the acquired orchards must be sold to and are required to be purchased by Mauna Loa.  The agreements are long term agreements which expire at various dates through 2080.  Under these agreements, the Partnership is paid based on wet-in-shell pounds, at a price which is derived annually from a formula which factors in the Mauna Loa wholesale price of the highest year-to-date volume fancy and choice products sold in Hawaii, and the USDA reported sales of WIS Hawaii macadamia nuts.  To the extent that the Final USDA Report for the year contains a price or moisture that varies from that used in the formula price calculations for nuts delivered during the year, then an adjustment is made between the parties. For the first quarter 2012, the average nut price received by the Partnership for nuts produced from the IASCO orchards was $0.73 per wet-in-shell pound; however the final nut price will not be known until the USDA price is released for the crop year ended June 30, 2012, which is expected to occur in the third quarter of 2012.

 

On January 31, 2011, the Partnership entered into three nut purchase contracts with Mauna Loa, each effective January 1, 2012.  These contracts replace the addendum to the 2006 nut purchase contract executed in December 2009, which expired on December 31, 2011. The new contracts are identical except for the terms, which are one, two and three years, respectively.  Each contract requires that Mauna Loa purchase and the Partnership sell 1/3 of all macadamia nut production of the Partnership (or approximately 6.5 million pounds of wet-in-shell nuts annually) excluding production from the IASCO orchards. These nut purchase contracts are based on wet-in-shell production adjusted to moisture at 20% (“WIS”) and saleable kernel/dry-in-shell of 30% (“SK/DIS”).  Under these contracts, the Partnership is paid $0.77 based on the adjusted pounds, WIS @ 20% SK/DIS @ 30%.  To the extent the Partnership delivers unhusked nuts, a $0.055 per wet-in-shell pound husking charge will be assessed by Mauna Loa. The Partnership does not intend to renew the nut purchase contract expiring on December 31, 2012.  Instead, the Partnership intends to have the related production processed into kernel in 2013 to be marketed by the Partnership in branded and bulk forms.   The Partnership is assessing the nut processing alternatives that may be available through third parties either in Hawaii or elsewhere. Under the three short-term contracts, Mauna Loa is obligated, at the Partnership’s option, to use commercially reasonable efforts to process the Partnership’s available production covered by such contract at a fee equal to Mauna Loa’s cost for a period of two years after a contract is not renewed.  Mauna Loa has advised the Partnership that they believe they are not required to co-process the Partnership’s nuts at the expiration of the nut purchase agreements and have indicated that they do not intend to do so.

 

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For the three months ended March 31, 2012 and 2011, nut production, nut prices and nut revenue were as follows:

 

 

 

For the Three Months
Ended March 31,

 

 

 

2012

 

2011

 

 

 

Nut
Purchase
Contract
Based on
Adjusted
WIS Pounds

 

Nut Purchase
Contracts
IASCO
Orchards
Based on WIS
Pounds

 

Total
Production

 

Nut
Purchase
Contract
Based on
Adjusted
WIS Pounds

 

Nut Purchase
Contracts
IASCO
Orchards
Based on WIS
Pounds

 

Total
Production

 

Nuts harvested (000’s pounds)

 

 

 

 

 

 

 

 

 

 

 

 

 

WIS pounds

 

4,037

 

1,132

 

5,169

 

2,287

 

1,199

 

3,486

 

Adjustment for WIS @ 20% SK/DIS @ 30%

 

(919

)

 

 

 

(456

)

 

 

 

Adjusted WIS pounds

 

3,118

 

1,132

 

 

 

1,831

 

1,199

 

 

 

Nut price (per adjusted WIS pound)

 

0.7700

 

 

 

 

 

0.7411

 

 

 

 

 

Nut price (per WIS pound, IASCO only)

 

 

 

0.7253

 

 

 

 

 

0.6756

 

 

 

Net nut sales ($000’s)

 

$

2,401

 

$

821

 

$

3,222

 

$

1,357

 

$

810

 

$

2,167

 

Prior year nut revenue adjustment

 

 

(19

)

(19

)

 

 

 

Total nut sales ($000’s)

 

$

2,401

 

$

802

 

$

3,203

 

$

1,357

 

$

810

 

$

2,167

 

Price per WIS pound (Net nut sales)

 

$

0.5947

 

$

0.7253

 

$

0.6233

 

$

0.5934

 

$

0.6756

 

$

0.6216

 

 

Total nut production for the first quarter 2012 was 48% higher than the first quarter of 2011.  Good rainfall distribution during late spring and early summer of 2011 at Ka’u improved nut set that extended into late summer contributed to good nut production in the first quarter of 2012.  Above average rains in April and May 2011 supported the nut sets that continued through the month of July.  These sets were further supported by light, but well distributed rainfall in the fall, which contributed to nut development and maturity.

 

The nut production in the first quarter of each calendar year at the Keaau and Mauna Kea orchards is affected by the length of the flower season at the respective sites.  Pollination and nut-set at both sites normally ends in April with the majority of the nut production being harvested in the fall.  However, if the pollination/nut-set season is extended into May and June, these nuts would be harvested in the first quarter of the calendar year.

 

The timing and manner in which farming costs are recognized in the Partnership’s consolidated financial statements over the course of the year is based on management’s estimate of annual farming costs expected to be incurred.  For interim financial reporting purposes, farming costs are recognized as expense based on an estimate of the cost incurred to produce macadamia nuts sold during the quarter.  Management estimates the average cost per pound for each orchard based on the estimated annual costs to farm each orchard and the anticipated annual production from each orchard.  The amount of farming costs recognized as expense throughout the year is calculated by multiplying each orchard’s estimated cost per pound by the actual production from that orchard.  The difference between actual farming costs incurred and the amount of farming costs recognized as expense is recorded as either an increase or decrease in deferred farming costs, which is reported as an asset in the consolidated balance sheets.  Deferred farming costs accumulate throughout the year, typically peaking midway through the third quarter, since nut production is lowest during the first and second quarter of the year.  Deferred farming costs are expensed over the remainder of the year since nut production is highest at the end of the third and fourth quarters.  Management evaluates the validity of each orchard’s estimated cost on a monthly basis based on actual production and farming costs incurred, as well as any known events that might significantly affect forecasted annual production and farming costs for the remainder of the year.

 

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Table of Contents

 

Cost of goods sold (owned-orchard segment), for the first quarter of 2012 was $0.56 per contract pound which is higher than $0.53 per contract pound for the first quarter of 2011.  The increase in cost per pound is the result of a lower recovery percentage of saleable kernels, thus lower contract pounds relative to WIS pounds, in 2012 as compared with the same period in 2011. Contract pounds are the pounds for which the Partnership is paid.  Accordingly, contract pounds relating to the IASCO orchards are WIS pounds and contract pounds relating to the non-IASCO orchards are WIS SK/DIS pounds.

 

Farming Segment

 

Farming service revenue for the first quarter of 2012 decreased slightly compared to the first quarter 2011.  Farming service expense for the first quarter 2012 was 2% higher compared to the same period in 2011.  Depreciation expense included in farming expense amounted to $101,000 for the first quarter of 2012 compared to $98,000 for the first quarter of 2011.  The increase in depreciation expense was due to the purchase of additional farm equipment.

 

General and Administrative Expenses

 

General and administrative expenses for the first quarter of 2012 increased by 77% compared with the same period in 2011.  The increase in 2012 is mainly attributable to retail product development expenses of $170,000, $60,000 increase in legal fees attributable to various matters, including the complaint filed by a lessor of land, further explained in Note 14 Legal Proceedings, $44,000 higher general and administrative costs in the farming operations due to higher production, and $10,000 increase in costs related to the general partner.

 

Other Income and Expenses

 

The Partnership recorded interest expense for the first quarter 2012 of $163,000 compared to $191,000 in 2011.  The decrease was attributable to a lower average outstanding balance on the revolving credit facility and lower outstanding balance on the term loan in 2012. The Partnership had $8.7 million principal balance on its term loan at the end of the first quarter 2012 compared to a $9.8 million balance on its term loan at the end of the first quarter 2011.   The Partnership had no interest income in the first quarter 2012 compared to $1,000 in interest income in the first quarter 2011.

 

The Partnership had no other income in the first quarter of 2012. Other income of $43,000, net of general excise tax, recorded for the first quarter of 2011 was attributable to the accrual of the distribution from American AgCredit, PCA.

 

Liquidity and Capital Resources

 

Macadamia nut farming is seasonal, with production normally peaking in the fall and winter, however, farming operations continue year round. In general, a significant amount of working capital is required for much of the harvesting season.

 

The Partnership has a master Credit Agreement with American AgCredit, PCA providing a revolving credit facility of $5.0 million until July 13, 2012 and a $10.5 million term loan.  This ten-year term loan bears fixed interest at 6.5% per annum, matures on July 1, 2020 and requires equal monthly payments over the term.  The proceeds of this loan were used by the Partnership on August 6, 2010 for the acquisition of the real property and assets used in connection with the macadamia farming operations of IASCO.  At March 31, 2012, the Partnership had $8.7 million outstanding on the term loan and no drawings outstanding on the revolving credit facility.  At March 31, 2011, the Partnership had $9.8 million outstanding on the term loan and $1.6 million outstanding on the revolving credit facility.

 

At March 31, 2012 the Partnership had a cash balance of $102,000 compared to $433,000 at March 31, 2011.  Cash flows provided by operating activities for the three-month period ended March 31, 2012 and March 31, 2011 totaled $2.3 million and $2.0 million, respectively.  The increase in operating cash flows was primarily attributable to cash received in 2012 on the increased nut sales in the fourth quarter of 2011, compared to less cash received in the first quarter 2011 for 2010 nut sales.

 

At March 31, 2012 the Partnership had working capital of $1.7 million and a current ratio of 1.71 to 1 compared to a working capital of negative $113,000 and a current ratio of 0.97 to 1 at March 31, 2011. The increase in working capital was primarily due to no short-term borrowing as of March 31, 2012 and an increase in nut revenue.

 

14



Table of Contents

 

In connection with the Partnership’s development of a branded macadamia nut product, the Partnership has spent approximately $170,000 in the first quarter 2012 and management estimates that the Partnership will expend approximately $8 to $9 million over the next four years (approximately $400,000 in 2012, $2 million in 2013 and the remainder in later years) in product development and marketing and other expenses.  At this time, the Partnership believes that even if the Partnership’s plan is successful, this effort will not be profitable until at least 2014 and the Partnership expects to incur losses from these activities during 2012 and 2013.  The extent of the losses is dependent upon many factors, many of which are outside the control of the Partnership.  If the Partnership elects to husk and dry its nuts to enable it to sell the nuts outside of Hawaii, management estimates that the Partnership will expend approximately $1.5 million over the next two to three years (approximately $750,000 in 2012) constructing additional drying and sorting facilities for its macadamia nuts.

 

It is the opinion of management that the Partnership has adequate cash on hand and borrowing capacity available to meet anticipated working capital needs for operations as presently conducted through the expiration of the revolving credit facility on July 13, 2012.  The Partnership’s lender has indicated a willingness to extend the revolving credit facility, as it has in the past, if the Partnership elects to do so.   The Partnership intends to assess its position in June 2012 and if it does not appear that it will be able to meet its working capital needs through cash flow from operations and the sale of equity prior to the expiration of the revolving credit facility, it would then seek to obtain an extension of the facility from the lender.  There is no assurance that credit markets or the circumstances relating to the Partnership may not change prior to July 13, 2012 in a manner that could impact the willingness of this or other lenders to make loans to the Partnership.  A failure to pay off the balance of or to extend the revolving credit facility when it matures would constitute a default under the credit agreement entitling the lender to pursue remedies, including a realization upon the collateral pledged as security for the loans under the credit agreement.

 

Item 4.  Controls and Procedures

 

(a)         As of the end of the period covered by this Quarterly Report (the “Evaluation Date”) on Form 10-Q, the Partnership carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Partnership’s disclosure controls and procedures were effective.  The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Partnership in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the applicable SEC’s rules and forms, and (ii) accumulated and communicated to the Partnership’s management, including the Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure.

 

(b)         There have been no significant changes to internal control over financial reporting during the first quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II - Other Information

 

Item 1. Legal Proceedings

 

On March 21, 2012, Kaiwiki Orchards, LLC, as the lessor of macadamia orchards consisting of 636 gross acres (326 tree acres) leased to the Partnership, filed a Complaint in the Circuit Court of the Third Circuit, State of Hawaii seeking a declaratory judgment that the Partnership has breached the terms of the lease for failing, inter alia, to exercise “good husbandry” and permitting waste in its agricultural practices on the leased land and that the lease  may be terminated by the lessor and seeking damages in an amount to be proven at trial.

 

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Table of Contents

 

Although the complaint has only recently been served on the Partnership, the plaintiff has given the Partnership an open ended extension of the time to file a responsive pleading pending the results of settlement discussions between the parties.  The Partnership produced approximately 1,000,000 field pounds of macadamia nuts from these leased orchards during 2011.

 

Management has denied the allegations of the Complaint in correspondence between the parties and intends to defend this suit vigorously if settlement discussions are not successful.

 

Item 6. Exhibits

 

The following documents are filed as part of this report:

 

Exhibit

 

 

Number

 

Description

11.1

 

Statement re Computation of Net Income (Loss) per Class A Unit

 

 

 

31.1

 

Form of Rule 13a-14(a) [Section 302] Certification

 

 

 

31.2

 

Form of Rule 13a-14(a) [Section 302] Certification

 

 

 

32.1

 

Certification pursuant to 18 U.S.C. Section 1350 As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification pursuant to 18 U.S.C. Section 1350 As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101*

 

Financial statements from the quarterly report on Form 10-Q of ML Macadamia Orchards, L.P. for the quarter ended March 31, 2012, filed on May 10, 2012, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Partners’ Capital, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.

 


* XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities and Exchange Act of 1933, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

 

16



Table of Contents

 

SIGNATURE

 

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.

 

 

 

ML MACADAMIA ORCHARDS, L.P.

 

 

(Registrant)

 

 

 

 

 

 

 

By

ML Resources, Inc.

 

 

Managing General Partner

 

 

 

Date: May 10, 2012

By

/s/ Dennis J. Simonis

 

 

Dennis J. Simonis

 

 

President and Chief Executive Officer

 

 

(and Duly Authorized Officer)

 

 

 

 

By

/s/ Wayne W. Roumagoux

 

 

Wayne W. Roumagoux

 

 

Principal Accounting Officer

 

 

Chief Financial Officer

 

17



Table of Contents

 

Exhibit Index

 

Exhibit

 

 

Number

 

Description

 

 

 

11.1

 

Statement re Computation of Net Income (Loss) per Class A Unit

 

 

 

31.1

 

Form of Rule 13a-14(a) [Section 302] Certification

 

 

 

31.2

 

Form of Rule 13a-14(a) [Section 302] Certification

 

 

 

32.1

 

Certification pursuant to 18 U.S.C. Section 1350 As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

32.2

 

Certification pursuant to 18 U.S.C. Section 1350 As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101*

 

Financial statements from the quarterly report on Form 10-Q of ML Macadamia Orchards, L.P. for the quarter ended March 31, 2012, filed on May 10, 2012, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Partners’ Capital, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.

 


* XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities and Exchange Act of 1933, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

18


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