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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 June 30, 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 August 9, 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

11-18

 

 

 

Item 4.

Controls and Procedures

18

 

 

 

Part II - Other Information

 

 

 

 

Item 6.

Exhibits

19

 

 

 

Signatures

20

 

2



Table of Contents

 

Item 1.  Unaudited Consolidated Financial Statements

 

ML Macadamia Orchards, L.P.

Consolidated Balance Sheets

(in thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

2011

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

164

 

$

234

 

$

530

 

Accounts receivable

 

386

 

256

 

4,996

 

Inventory of farming supplies

 

243

 

230

 

271

 

Inventory of kernels and packaging supplies

 

279

 

 

276

 

Inventory of finished goods

 

13

 

 

 

Deferred farming costs

 

3,629

 

3,681

 

 

Other current assets

 

249

 

394

 

334

 

Total current assets

 

4,963

 

4,795

 

6,407

 

Land, orchards and equipment, net

 

48,870

 

51,209

 

50,009

 

Intangible assets, net

 

474

 

549

 

511

 

Deferred fees

 

 

 

116

 

Other non-current assets

 

 

87

 

 

Total assets

 

$

54,307

 

$

56,640

 

$

57,043

 

 

 

 

 

 

 

 

 

Liabilities and partners’ capital

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

1,050

 

$

1,050

 

$

1,050

 

Short-term borrowings

 

1,500

 

2,500

 

2,400

 

Accounts payable

 

421

 

275

 

470

 

Accrued payroll and benefits

 

573

 

528

 

772

 

Other current liabilities

 

51

 

139

 

301

 

Total current liabilities

 

3,595

 

4,492

 

4,993

 

Non-current pension benefits

 

587

 

411

 

587

 

Long-term debt

 

7,350

 

8,488

 

7,875

 

Deferred income tax liability

 

1,031

 

1,067

 

1,051

 

Total liabilities

 

12,563

 

14,458

 

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

 

41,980

 

42,188

 

42,785

 

Accumulated other comprehensive loss

 

(317

)

(87

)

(329

)

Total partners’ capital

 

41,744

 

42,182

 

42,537

 

Total liabilities and partners’ capital

 

$

54,307

 

$

56,640

 

$

57,043

 

 

See accompanying notes to consolidated financial statements

 

3



Table of Contents

 

ML Macadamia Orchards, L.P.

Consolidated Statements of Comprehensive Income (unaudited)

(in thousands, except per unit data)

 

 

 

Three months

 

Six months

 

 

 

ended June 30,

 

ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Macadamia nut sales

 

$

352

 

$

164

 

$

3,555

 

$

2,331

 

Contract farming revenue

 

393

 

220

 

712

 

540

 

Total revenues

 

745

 

384

 

4,267

 

2,871

 

Cost of goods and services sold

 

 

 

 

 

 

 

 

 

Cost of macadamia nut sales

 

166

 

75

 

2,566

 

1,696

 

Cost of contract farming services

 

366

 

200

 

652

 

481

 

Total cost of goods and services sold

 

532

 

275

 

3,218

 

2,177

 

Gross income

 

213

 

109

 

1,049

 

694

 

General and administrative expenses

 

975

 

389

 

1,627

 

758

 

Operating loss

 

(762

)

(280

)

(578

)

(64

)

Interest expense

 

(153

)

(185

)

(316

)

(376

)

Other income

 

126

 

535

 

126

 

579

 

Income (loss) before income taxes

 

(789

)

70

 

(768

)

139

 

Income tax expense

 

8

 

4

 

37

 

24

 

Net income (loss)

 

$

(797

)

$

66

 

$

(805

)

$

115

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

2

 

 

4

 

 

Amortization of actuarial loss

 

4

 

 

8

 

 

Defined benefit pension plan

 

6

 

 

12

 

 

Other comprehensive income, net of tax

 

6

 

 

12

 

 

Comprehensive income (loss)

 

$

(791

)

$

66

 

$

(793

)

$

115

 

 

 

 

 

 

 

 

 

 

 

Net cash flow (as defined in the Partnership Agreement)

 

$

(918

)

$

(68

)

$

(760

)

$

133

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per Class A Unit

 

$

(0.11

)

$

0.01

 

$

(0.11

)

$

0.02

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(0.12

)

$

(0.01

)

$

(0.10

)

$

0.02

 

 

 

 

 

 

 

 

 

 

 

Cash distributions per Class A Unit

 

$

0.00

 

$

0.00

 

$

0.00

 

$

0.00

 

 

 

 

 

 

 

 

 

 

 

Class A Units outstanding

 

7,500

 

7,500

 

7,500

 

7,500

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

ML Macadamia Orchards, L.P.

Consolidated Statements of Partners’ Capital (unaudited)

(in thousands)

 

 

 

Three months

 

Six months

 

 

 

ended June 30,

 

ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital at beginning of period:

 

 

 

 

 

 

 

 

 

General partner

 

$

81

 

$

81

 

$

81

 

$

81

 

Class A limited partners

 

42,777

 

42,122

 

42,785

 

42,073

 

Accumulated other comprehensive loss

 

(323

)

(87

)

(329

)

(87

)

 

 

42,535

 

42,116

 

42,537

 

42,067

 

 

 

 

 

 

 

 

 

 

 

Allocation of net income (loss)

 

 

 

 

 

 

 

 

 

Class A limited partners

 

(797

)

66

 

(805

)

115

 

 

 

(797

)

66

 

(805

)

115

 

 

 

 

 

 

 

 

 

 

 

Cash distributions:

 

 

 

 

 

 

 

 

 

Class A limited partners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

6

 

 

12

 

 

 

 

6

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

(791

)

66

 

(793

)

115

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital at end of period:

 

 

 

 

 

 

 

 

 

General partner

 

81

 

81

 

81

 

81

 

Class A limited partners

 

41,980

 

42,188

 

41,980

 

42,188

 

Accumulated other comprehensive loss

 

(317

)

(87

)

(317

)

(87

)

 

 

$

41,744

 

$

42,182

 

$

41,744

 

$

42,182

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

ML Macadamia Orchards, L.P.

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

 

 

Three months

 

Six months

 

 

 

ended June 30,

 

ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Cash received from goods and services

 

$

2,554

 

$

1,658

 

$

9,102

 

$

7,595

 

Cash paid to suppliers and employees

 

(3,566

)

(2,293

)

(7,652

)

(6,107

)

Interest received

 

 

 

 

1

 

Interest paid

 

(154

)

(190

)

(316

)

(302

)

Net cash provided by (used in) operating activities

 

(1,166

)

(825

)

1,134

 

1,187

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Acquisition of land and capital equipment

 

(48

)

(12

)

(75

)

(61

)

Net cash used in investing activities

 

(48

)

(12

)

(75

)

(61

)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Proceeds from drawings on line of credit

 

1,700

 

900

 

1,700

 

1,100

 

Deferred rights offering fees

 

38

 

 

 

 

Repayment on line of credit

 

(200

)

 

(2,600

)

(1,800

)

Payments on long term debt

 

(262

)

(262

)

(525

)

(437

)

Net cash provided by (used in) financing activities

 

1,276

 

638

 

(1,425

)

(1,137

)

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

62

 

(199

)

(366

)

(11

)

Cash and cash equivalents at beginning of period

 

102

 

433

 

530

 

245

 

Cash and cash equivalents at end of period

 

$

164

 

$

234

 

$

164

 

$

234

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(797

)

$

66

 

$

(805

)

$

115

 

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

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

141

 

129

 

570

 

455

 

Decrease in accounts receivable

 

1,602

 

687

 

4,611

 

4,065

 

(Increase) decrease in inventories

 

60

 

(8

)

12

 

(59

)

Increase in deferred farming costs

 

(2,119

)

(1,842

)

(2,948

)

(2,888

)

(Increase) decrease in other current assets

 

145

 

91

 

85

 

(4

)

Decrease in other non-current assets

 

116

 

 

116

 

 

Increase (decrease) in accounts payable

 

(225

)

36

 

(50

)

(292

)

Decrease in accrued payroll and benefits

 

(77

)

(18

)

(200

)

(283

)

Increase (decrease) in other current liabilities

 

(8

)

37

 

(250

)

106

 

Increase (decrease) in non-current accrued benefits

 

6

 

(3

)

13

 

(28

)

Decrease in deferred income tax liabilities

 

(10

)

 

(20

)

 

Total adjustments

 

(369

)

(891

)

1,939

 

1,072

 

Net cash provided by (used in) operating activities

 

$

(1,166

)

$

(825

)

$

1,134

 

$

1,187

 

 

See accompanying notes to consolidated financial statements.

 

6



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 June 30, 2012 and 2011 and the results of operations, changes in partners’ capital and cash flows for the three and six-month periods ended June 30, 2012 and 2011.  The results of operations for the period ended June 30, 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. a wholly-owned subsidiary.  All significant intercompany balances and transactions, including management fees and distributions, have been eliminated.

 

(3) NEW ACCOUNTING STANDARD

 

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) SUBSCRIPTION RIGHTS OFFERING

 

On April 4, 2012, the Partnership filed a registration statement on Form S-1 with the Securities and Exchange Commission (“SEC”) related to a proposed subscription rights offering of the Partnership’s Depositary Receipts representing units of limited partnership interests. The Partnership capitalized approximately $310,000 in issuance costs which were to be netted against the proceeds from the rights offering in partners’ capital.  On June 12, 2012, the Partnership decided to suspend the rights offering and filed an application with the SEC to withdraw the previously filed registration statement.  The capitalized issuance costs were expensed to general and administrative expense during the quarter ended June 30, 2012.  Although the registration statement was withdrawn, if the Partnership moves forward with a rights offering in the future, management will reevaluate whether certain issuance costs that were expensed during the quarter ended June 30, 2012 should be recapitalized.

 

7



Table of Contents

 

(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 (loss), assets and other information as of and for the three and six-month periods ended June 30, 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

 

Six months

 

 

 

ended June 30,

 

ended June 30,

 

 

 

(in thousands)

 

(in thousands)

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues:

 

 

 

 

 

 

 

 

 

Owned orchards

 

$

352

 

$

164

 

$

3,555

 

$

2,331

 

Farming

 

1,601

 

730

 

4,506

 

2,729

 

Intersegment elimination (all farming)

 

(1,208

)

(510

)

(3,794

)

(2,189

)

Total

 

$

745

 

$

384

 

$

4,267

 

$

2,871

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

Owned orchards

 

$

(789

)

$

(300

)

$

(638

)

$

(123

)

Farming

 

27

 

20

 

60

 

59

 

Total

 

$

(762

)

$

(280

)

$

(578

)

$

(64

)

 

 

 

 

 

 

 

 

 

 

Depreciation:

 

 

 

 

 

 

 

 

 

Owned orchards

 

$

21

 

$

11

 

$

330

 

$

220

 

Farming

 

101

 

99

 

202

 

197

 

Total

 

$

122

 

$

110

 

$

532

 

$

417

 

 

 

 

 

 

 

 

 

 

 

Expenditures for property and equipment:

 

 

 

 

 

 

 

 

 

Owned orchards

 

$

11

 

$

 

$

24

 

$

47

 

Farming

 

37

 

12

 

51

 

14

 

Total

 

$

48

 

$

12

 

$

75

 

$

61

 

 

 

 

 

 

 

 

 

 

 

Segment assets:

 

 

 

 

 

 

 

 

 

Owned orchards

 

 

 

 

 

$

46,277

 

$

47,914

 

Farming

 

 

 

 

 

8,030

 

8,726

 

Total

 

 

 

 

 

$

54,307

 

$

56,640

 

 

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

 

8



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.

 

Deferred farming costs amounted to $3.6 million and $3.7 million at June 30, 2012 and 2011, respectively.

 

(7) INVENTORY

 

Inventory of farming supplies amounted to $243,000 and $230,000 at June 30, 2012 and 2011, respectively.  Farming supplies inventory is relieved on an average cost basis to cost of farming expense as used.

 

Inventory of kernel, ingredients and packaging supplies was recorded at the lower of cost or market, and was valued at $279,000 at June 30, 2012.  There was no kernel and packaging inventory at June 30, 2011.  Kernel and packaging inventory was charged to finished product on an average cost basis as the finished product was manufactured.

 

In the second quarter, Royal Hawaiian Macadamia Nut, Inc., a subsidiary of the Partnership, commenced production through a co-packer of its “Ono Ono” brand of retail macadamia-based products for sales and distribution in Europe.  Finished goods inventory include the cost of kernel, ingredients, packaging supplies and manufacturing and was valued at $13,000 at June 30, 2012.

 

(8) 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 June 30, 2012 and 2011, Hawaii general excise taxes charged or passed on to customers and reflected in revenues and expenses amounted to $6,000 and $4,000, respectively.  For the six months ended June 30, 2012 and 2011, Hawaii general excise taxes charged or passed on to customers and reflected in revenues and expenses amounted to $12,000 and $10,000, respectively.

 

(9) CREDIT FACILITY - DEBT

 

On July 12, 2012, the Partnership and American AgCredit, PCA executed the Fifth Amendment to Revolving Loan Promissory Note and Second Amendment to Fourth Amended and Restated Credit Agreement which extends the maturity date of its current $5.0 million revolving credit facility from July 13, 2012 to May 1, 2014.  All other terms and conditions of the revolving credit facility and the term loan under such credit agreement as well as the collateral securing the indebtedness remain unchanged.  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.  The Partnership had $1.5 million and $2.5 million outstanding on the line of credit at June 30, 2012 and 2011, respectively.  At June 30, 2012 and 2011, interest on revolving advances was 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 monthly payments over the term and bears fixed interest at 6.5% per annum.  The Partnership had $8.4 million and $9.5 million outstanding on the term loan at June 30, 2012 and 2011, respectively.

 

The credit agreement with American AgCredit, PCA, contains various financial covenants.  The Partnership was in compliance with all debt covenants at June 30, 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 $9.1 million compared to a carrying value of $8.4 million as of June 30, 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.

 

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Table of Contents

 

(10) 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.

 

(11) 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 and six-month periods ended June 30, 2012 or 2011.

 

(12) 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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

(in thousands)

 

(in thousands)

 

 

 

2012

 

2011

 

2012

 

2011

 

Service Cost

 

$

19

 

$

15

 

$

37

 

$

30

 

Interest Cost

 

12

 

11

 

24

 

22

 

Expected Return on Assets

 

(12

)

(12

)

(24

)

(24

)

Amortization of Unrecognized Prior Service Costs

 

1

 

 

3

 

 

Amortization of Unrecognized Loss

 

5

 

 

9

 

 

Net Periodic Pension Cost

 

$

25

 

$

14

 

$

49

 

$

28

 

 

(13) 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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

(in thousands)

 

(in thousands)

 

 

 

2012

 

2011

 

2012

 

2011

 

Service Cost

 

$

4

 

$

4

 

$

8

 

$

8

 

Interest Cost

 

4

 

4

 

7

 

8

 

Net Periodic Intermittent Severance Cost

 

$

8

 

$

8

 

$

15

 

$

16

 

 

(14) 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.

 

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(15) 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.

 

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.

 

(16) FIRE DAMAGE

 

In June and again in July 2012, a wildfire caused widespread damage to agricultural crops in the Ka’u region.  The fire resulted in damage to irrigation pipes and approximately 24 trees acres of the Partnership’s macadamia nut orchards in Ka’u.  The Partnership maintains a comprehensive insurance program to mitigate losses from such events.  The property insurance policy covers loss or damage to the irrigation system and losses associated with business interruption.  This policy has a $25,000 deductible and limits in excess of the estimated loss.  As of June 30, 2012, the Partnership has incurred approximately $10,000 in costs relating to the fire, which were expensed to cost of goods sold in the second quarter 2012.  The irrigation repair could cost as much as $75,000.

 

The Partnership maintains tree and crop insurance to cover losses relating to its macadamia nut trees and production. The tree insurance policy provides coverage if more than 50% of the trees in designated blocks are destroyed.  The crop insurance policy provides coverage if the production in designated blocks is less than 75% of a ten year moving average.  The full extent of the orchard damage is still being assessed and the loss will be determined as the upcoming production quality and volume is evaluated.

 

(17) SUBSEQUENT EVENTS

 

On July 11, 2012, ML Macadamia Orchards, L. P. entered into a nut processing agreement with Buderim Macadamias of Hawaii, LLC, dba MacFarms of Hawaii (“MacFarms”) to process between 1.5 and 7.0 million pounds of wet-in-shell nuts (“WIS”) into kernel for the Partnership during 2013.  The WIS nuts will be available since a nut purchase contract with Mauna Loa Macadamia Nut Corporation covering a portion of the production of the Partnership terminates on December 31, 2012 and therefore the Partnership is no longer required to sell those nuts to Mauna Loa.  Under the agreement with MacFarms, the Partnership will pay MacFarms a processing fee of $1.30 per kernel pound for the first 300,000 pounds of kernel produced and $1.20 per kernel pound for all additional pounds of kernel produced. WIS nuts that are processed into kernel by MacFarms can be used by the Partnership to pursue its strategy of vertical integration. The agreement can be terminated by either party in the event there is a sale of either the Partnership or MacFarms.

 

On July 23, 2012, Royal Hawaiian Macadamia Nut, Inc. (“Royal”), a wholly-owned subsidiary of the Partnership, entered into a non-exclusive co-packing agreement with Ocean Direct, LLC, dba American Bounty, a California limited liability company (“American”), under which American will manufacture macadamia nut crunch products for Royal.  The Partnership intends to market these products in the U.S. mainland and Hawaii under the brand name “Royal Hawaiian Orchards,” with its launch currently targeted for the fourth quarter of 2012.

 

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

 

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,

 

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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 observation 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.  Nut production in the first half of the year develop from pollination of blossoms and fruit set that occur during April through July-August of the previous year.  Factors, such as cool temperatures to promote flower development, sunlight, adequate moisture and its distribution, determine the length of the flower/pollination/fruit-set season and resulted in increased production in the first and second quarters of 2012.

 

Nut sales recorded for the three-month period ended June 30, 2012 were $352,000 and includes $292,000 from the sale of 412,000 WIS pounds produced in the second quarter 2012, $11,000 additional revenue recorded for the first quarter 2012 production from the IASCO orchards, $53,000 additional revenue for the nut production from the IASCO orchards in 2011 and a $4,000 decrease due to adjusted WIS pounds for the first quarter.  The additional revenue is the result of the adjusted price per pound of the IASCO nuts due to the final nut price for the crop year 2011-2012 published by the United States Department of Agriculture (“USDA”), which is $0.78 per pound wet-in-shell.

 

Nut sales recorded for the three-month period ended June 30, 2011 were $164,000 and included $87,000 from the sale of 166,000 WIS pounds produced in the second quarter 2011, $19,000 additional revenue recorded for the first quarter 2011 production from the IASCO orchards, and $58,000 additional revenue for the nut production from the IASCO orchards in 2010, effective August 1, 2010, the date of the Partnership’s acquisition of those orchards.  The additional revenue was the result of the adjusted price per pound of the IASCO nuts due to the USDA final nut price for the crop year 2010-2011 of $0.75 per pound wet-in-shell.

 

Nut sales for the six-month period ended June 30, 2012 and 2011 were $3.6 million and $2.3 million, respectively. The Partnership’s WIS pounds produced for the six-month period ended June 30, 2012 and 2011 was 5.6 million pounds and 3.7 million pounds, respectively, or an increase of 53%.  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 1.8 million more WIS pounds compared to the same period in 2011, resulting in $1.2 million more in nut sales 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 half of 2011.  The average price received per WIS pound sold during the three and six-month periods ended June 30, 2012 was $0.71 and $0.63, respectively, compared to the price received per WIS pound sold for the three and six-month periods ended June 30, 2011 of $0.52 and $0.62, respectively, an increase of 37% and 2%, respectively.

 

For the six-month period ended June 30, 2012, the Partnership incurred a net loss of $805,000 from total revenues of $4.3 million.  For the six-month period ended June 30, 2011, the Partnership had a net income of $115,000 from total revenues of $2.9 million. Net loss per Class A Unit for the six-month period ended June 30, 2012 amounted to ($0.11) and net income per Class A Unit for the six-month period ended June 30, 2011 was $0.02.  The net loss in 2012 is mainly attributable to higher general and administrative expenses. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, General and Administrative Expenses, for further information on general and administrative expenses. Additionally, the $126,000 in distribution from American AgCredit, PCA, recorded as other income for the first half of 2012 was $453,000 less than other income recorded in the same period in 2011.  The net income in 2011 is mainly attributable to the crop insurance claim in the amount of $534,000 and $45,000 in distributions from American AgCredit, PCA, offset by higher interest expense.

 

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Net cash flow per Class A Unit for the six-month periods ended June 30, 2012 and 2011, as defined in the Partnership Agreement, amounted to ($0.10) and $0.02, respectively.  The negative net cash flow result in 2012 is attributable to the net loss.  The net cash flow result in 2011 is attributable to the net income.

 

The Partnership incurred a net loss of $797,000 for the second quarter of 2012 from revenues of $745,000.  Net income for the second quarter of 2011 was $66,000 from revenues of $384,000.  Net income (loss) per Class A Unit for the second quarter of 2012 and 2011 amounted to ($0.11) and $0.01, respectively.  Net cash flow per Class A Unit for the second quarters of 2012 and 2011, as defined in the Partnership Agreement was ($0.12) and ($0.01), respectively.  The net loss for the second quarter 2012 compared to the same period in 2011 was mainly attributable to higher general and administrative expenses.  See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, General and Administrative Expenses, for further information on general and administrative expenses.  The net income for the second quarter 2011 was mainly attributable to the crop insurance claim in the amount of $534,000 offset by higher interest expense.

 

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. The final nut price published by the USDA, for the crop year ended June 30, 2012, is $0.78 per WIS pound.  In the second quarter 2012, the Partnership recorded additional nut revenue of $64,000 from the IASCO orchards, including $53,000 on the production of 4.7 million WIS pounds from the IASCO orchards recorded in 2011 and $11,000 on 1.1 million WIS pounds produced in the first quarter 2012. The average nut price for nuts produced from the IASCO orchards for the three and six-month periods ended June 30, 2012 was $0.82 and $0.75 per pound, respectively. The average nut price for nuts produced from the IASCO orchards for the three and six-month periods ended June 30, 2011 was $0.67 and $0.69 per pound, respectively.

 

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 has notified Mauna Loa that it will not 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. Under the three short-term contracts, it is the Partnership’s position that 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 process the Partnership’s nuts at the expiration of the nut purchase agreements and have indicated that they do not intend to do so.  The Partnership has reserved its rights against Mauna Loa and is considering what further action it may pursue regarding this dispute.

 

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In order to mitigate any damages and to provide for the processing of nuts covered by the contract that expires on December 31, 2012, on July 11, 2012, the Partnership entered into a nut processing agreement with MacFarms of Hawaii (“MacFarms”), under which MacFarms will process between 1.5 and 7.0 million pounds of WIS nuts into kernel for the Partnership during 2013.  Under the Agreement with MacFarms, the Partnership will pay MacFarms a processing fee of $1.30 per kernel pound for the first 300,000 pounds of kernel produced and $1.20 per kernel pound for all additional pounds of kernel produced.  MacFarms will provide processing services only with the Partnership retaining ownership of the nuts for future sale.

 

For the three and six-month periods ended June 30, 2012 and 2011, nut production, nut prices and nut revenues were as follows:

 

 

 

For the Three Months

 

 

 

Ended June 30,

 

 

 

2012

 

2011

 

Nuts harvested (000’s pounds)

 

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

 

WIS pounds

 

203

 

209

 

412

 

148

 

18

 

166

 

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

 

(46

)

 

 

 

 

(45

)

 

 

 

 

Adjusted WIS pounds

 

157

 

 

 

 

 

103

 

 

 

 

 

Nut price (per adjusted WIS pounds)

 

0.7700

 

 

 

 

 

0.7300

 

 

 

 

 

Nut price (per WIS pound, IASCO only)

 

 

 

0.8182

 

 

 

 

 

0.6667

 

 

 

Net nut sales ($000’s)

 

$

121

 

$

171

 

$

292

 

$

75

 

$

12

 

$

87

 

Qtr 1 nut revenue adjustment

 

(4

)

11

 

7

 

0

 

19

 

19

 

Prior year nut revenue adjustment

 

0

 

53

 

53

 

0

 

58

 

58

 

Total nut sales ($000’s)

 

$

117

 

$

235

 

$

352

 

$

75

 

$

89

 

$

164

 

Price per WIS pound (Net nut sales)

 

$

0.5961

 

$

0.8182

 

$

0.7087

 

$

0.5068

 

$

0.6667

 

$

0.5241

 

 

 

 

For the Six Months

 

 

 

Ended June 30,

 

 

 

2012

 

2011

 

Nuts harvested (000’s pounds)

 

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

 

WIS pounds

 

4,240

 

1,341

 

5,581

 

2,434

 

1,218

 

3,652

 

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

 

(972

)

 

 

 

 

(501

)

 

 

 

 

Adjusted WIS pounds

 

3,268

 

 

 

 

 

1,933

 

 

 

 

 

Nut price (per adjusted WIS pounds)

 

0.7700

 

 

 

 

 

0.7408

 

 

 

 

 

Nut price (per WIS pound, IASCO only)

 

 

 

0.7487

 

 

 

 

 

0.6888

 

 

 

Net nut sales ($000’s)

 

$

2,517

 

$

1,004

 

$

3,521

 

$

1,432

 

$

839

 

$

2,271

 

Prior year nut revenue adjustment

 

0

 

34

 

34

 

0

 

60

 

60

 

Total nut sales ($000’s)

 

$

2,517

 

$

1,038

 

$

3,555

 

$

1,432

 

$

899

 

$

2,331

 

Price per WIS pound (Net nut sales)

 

$

0.5936

 

$

0.7487

 

$

0.6309

 

$

0.5883

 

$

0.6888

 

$

0.6219

 

 

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The Partnership produced 412,000 WIS pounds in the second quarter 2012 compared to 166,000 WIS pounds produced in the second quarter 2011.  The Partnership produced 5.6 million WIS pounds in the first half of 2012 which is 53% higher than the same period in 2011.  Cool temperatures that extended the flower/pollination season, adequate sunlight, and adequate rainfall amounts and distribution, supported the fruit-set established from April through July-August and contributed to a nut production at Ka’u that exceeded the comparable period in 2011.

 

The nut production in the first half 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 fruit-set at both sites normally ends in April with the majority of the nut production being harvested in the fall.  However, if the pollination/fruit-set season is extended into May and June, these nuts would be harvested in the first half of the following calendar year.

 

The bearing seasons at Keaau and Mauna Kea are slightly shorter than at Ka’u and normally do not produce a harvestable crop in the second quarter.

 

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.

 

Cost of goods sold (owned-orchard segment), for the six-month period ended June 30, 2012 was $0.56 per contract pound, which is higher than $0.54 per contract pound for the six-month period ended June 30, 2011.  The increase in cost per contract pound is the result of the 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.

 

Crop Year Production Results

 

Total macadamia nut production for the 2011-2012 crop year (July 1 to June 30) totaled 28.2 million wet-in-shell pounds, which was 5.7 million pounds more than the 2010-2011 crop year.  Excluding production from the IASCO orchards, acquired by the Partnership on August 1, 2010, nut production for the 2011-2012 crop year was 3.6 million pounds more than the 2010-2011 crop year and 3.0 million pounds more than the 2009-2010 crop year. Nut production from the IASCO orchards for the 2011-2012 crop year was 2.1 million pounds more than the 2010-2011 crop year. Drought conditions at Ka’u that persisted from fall 2009 through summer 2010 had a negative impact on the 2010-2011 nut production.  An extended flower season at Keaau and Mauna Kea combined with improved pollination due to favorable weather had a positive impact on nut production in 2010-2011. The return of optimum moisture conditions from October 2010 through May 2011 with adequate rains in the June-December 2011 period contributed to above average nut production in the Ka’u region.  Abnormally dry conditions, similar to the previous year, during the pollination period at Keaau contributed to a 2011-12 crop production similar to that in 2010-11.  Production at the Mauna Kea orchards

 

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was affected by poor pollination and fruit-set due to inclement weather.  Comparative crop year results by orchard area are shown below:

 

 

 

Wet-In-Shell Pounds Harvested for

 

 

 

 

 

 

 

Crop Year Ended June 30, 2012, 2011, 2010

 

2012

 

2011

 

 

 

(in thousands)

 

over

 

over

 

 

 

2012

 

2011

 

2010

 

2011

 

2010

 

Keaau

 

7,807

 

7,675

 

6,418

 

+2

%

+20

%

Ka’u (excludes IASCO orchards)

 

13,392

 

9,443

 

11,765

 

+42

%

-20

%

Mauna Kea

 

1,042

 

1,477

 

1,013

 

-29

%

+46

%

Subtotal

 

22,241

 

18,595

 

19,196

 

+20

%

-3

%

IASCO orchards (acquired August 1, 2010)

 

6,002

 

3,902

 

 

+54

%

 

 

Total Production

 

28,243

 

22,497

 

19,196

 

+26

%

+17

%

 

Farming Segment

 

Farming service revenue and expense for the second quarter of 2012 were 79% and 83% higher, respectively, compared to the same period in 2011.  The increase is mainly attributable to replanting of macadamia nut trees in 2012.  Farming service revenue and expense for the six-month period ended June 30, 2012 were 32% and 36% higher, respectively, compared to the same period in 2011. Depreciation expense included in farming expense for the three and six-month periods ended June 30, 2012 were $101,000 and $202,000, respectively, compared to the three and six-month periods ended June 30, 2011 which were $99,000 and $197,000, respectively.  The increase in depreciation expense was due to the purchase of additional farm equipment.

 

General and Administrative Expense

 

General and administrative expenses for the six-month period ended June 30, 2012 were $1.6 million, an increase of 115% compared to the same period in 2011. The increase is mainly attributable to $303,000 in retail product development expenses, $68,000 in travel and consulting costs relating to the exploration of nut processing options, $83,000 higher general and administrative costs in the farming operations due to higher production, $20,000 increase in costs related to the general partner, $23,000 increase in other professional costs and $372,000 increase in legal fees attributable to various matters, including $310,000 incurred with the proposed subscription rights offering which was withdrawn in June 2012. If the Partnership determines to move forward with a rights offering in the future, management will reevaluate whether certain issuance costs that were expensed during the quarter ended June 30, 2012 should be recapitalized.

 

General and administrative expenses for the three-month period ended June 30, 2012 were $1.0 million, an increase of 151% compared to the same period in 2011. The increase was mainly attributable to $133,000 in retail product development expenses, $68,000 in travel and consulting costs relating to the exploration of nut processing options, $39,000 higher general and administrative costs in the farming operations due to higher production, $9,000 increase in costs related to the general partner, $27,000 increase in various professional costs, and $310,000 increase in legal fees.

 

Other Income and Expenses

 

Interest expense for the three and six-month periods ended June 30, 2012 was $153,000 and $316,000, respectively, compared to $185,000 and $376,000 for the same periods 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 $1.5 million outstanding on the revolving line of credit at the end of the second quarter 2012 compared to $2.5 million outstanding on the line of credit at the end of the second quarter 2011.  The Partnership had a $8.4 million principal balance on its term loan at the end of the second quarter 2012 compared to $9.5 million principal balance on its term loan at the end of the second quarter 2011.

 

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Other income of $126,000 recorded for the three and six-month periods ended June 30, 2012 was attributable to a distribution from American AgCredit, PCA.  Other income of $535,000 recorded for the second quarter 2011 was primarily attributable to $534,000 in crop insurance proceeds, net of general excise tax and a $1,000 adjustment to the accrual of the American AgCredit, PCA distribution which was recorded in the first quarter.  Other income of $579,000 recorded for the six-month period ended June 30, 2011 was primarily attributable to crop insurance proceeds of $534,000, net of general excise tax and $45,000 in distribution from American AgCredit, PCA. Crop insurance claims result from an insurance policy that provides coverage if the production in designated blocks is less than 75% of a ten year moving average.

 

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 May 1, 2014 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 June 30, 2012, the Partnership had $8.4 million outstanding on the term loan and $1.5 million outstanding on the revolving credit facility.  At June 30, 2011, the Partnership had $9.5 million outstanding on the term loan and $2.5 million outstanding on the revolving credit facility.

 

At June 30, 2012 the Partnership had a cash balance of $164,000 compared to $234,000 at June 30, 2011.  Cash flows provided by operating activities for the six-month period ended June 30, 2012 and 2011 totaled $1.1 million and $1.2 million, respectively.  Cash flows used in operating activities for the three-month period ended June 30, 2012 and 2011 totaled $1.2 million and $825,000, respectively.  The decrease in operating cash flows for the six-month period ended June 30, 2012 was primarily attributable to an increase in cash paid for operating expenses and interest, compared to the same period in 2011.  The decrease in operating cash flows for the three-month period ended June 30, 2012 was primarily attributable to an increase in cash paid for operating expenses, compared to the same period in 2011.

 

At June 30, 2012 the Partnership had working capital of $1.4 million and a current ratio of 1.38 to 1 compared to a working capital of $303,000 and a current ratio of 1.07 to 1 at June 30, 2011. The increase in working capital was primarily due to lower short-term borrowing as of June 30, 2012.

 

Management anticipates additional draws on the revolving line of credit to fund working capital needs arising from the normal seasonal requirements of macadamia nut farming and the implementation of the Partnership’s vertical integration strategy will be adequate to support the Partnership’s cash needs through at least the second quarter of next year.  The Partnership has decided not to pursue a rights offering at this time and has withdrawn its Registration Statement.  However, in the future, if it believes such an offering is in the best interests of the Partnership, the Board of Directors of the General Partner could reconsider such course of action.

 

The Partnership’s fixed price nut purchase contract with Mauna Loa requires Mauna Loa to make nut payments in accordance with The Hershey Company’s (Mauna Loa’s parent company) standard payment terms which are up to sixty days from date of nut delivery.  The payment terms of the two lease agreements and one license agreement are thirty days after the end of month delivery.  During certain parts of the year, if payments are not received as the contract requires, available cash resources could be depleted.

 

Vertical Integration Progress

 

As previously reported, the Partnership is pursuing a vertical integration strategy under which the Partnership would allow one or more nut purchase contracts with Mauna Loa to expire, have the nuts processed into macadamia kernel and sell the kernel directly in both bulk and branded forms.  The nut purchase contract covering approximately 7 million wet-in-shell pounds per annum which expires December 31, 2012 with Mauna Loa will not be renewed by the parties, which makes this portion of the nut crop available for use by

 

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the Partnership. A nut processing agreement has been executed with Buderim Macadamias of Hawaii under which they will process between 1.5 million and 7 million pounds of wet-in-shell nuts into macadamia kernel for the Partnership for a fee in 2013. The Partnership is currently designing and intends to construct a drying facility adjacent to its husking facility which will allow the Partnership to process a portion of its wet-in-shell nuts to a stage where they can be shipped for further processing or sale outside of Hawaii. Construction is scheduled to begin in the fourth quarter of 2012 and the facility is expected to be completed in the first quarter of 2013.

 

Management has developed products and packaging for two distinct product lines which it intends to sell under the Royal Hawaiian Orchards brand name. The two product lines consist of healthful, tasty snack offerings in stand-up bags of flavored macadamia nuts and clusters of nuts and dried fruits. A co-packing agreement has been signed with a production facility on the mainland U.S. to produce these products to the Partnership’s specifications.  The products are expected to be available in the 4th quarter of 2012, initially using kernel purchased from other sources and the Partnership is pursuing sales efforts in anticipation of the launch of the products. Consumer testing has been conducted and initial reactions from the trade regarding packaging, product and pricing have been positive. A website for the products is under development with the intent that a strong e-commerce capability will ensure the product is available to consumers while U.S. distribution is being pursued. If the product launch and marketing efforts are successful and requires additional nut products, the other short-term contracts with Mauna Loa will expire at the end of 2013 and 2014 which, if they are not renewed, can provide another 14 million pounds of wet-in-shell nuts (equating to approximately 3 million pounds of kernel after processing) for expanded distribution. The Partnership intends to pursue bulk kernel sales on an opportunistic basis to the extent prices remain strong and excess kernel is available.

 

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 second quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II - Other Information

 

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 and six months ended June 30, 2012, filed on August 9, 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.

 


* 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.

 

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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: August 9, 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

 

20



Table of Contents

 

Exhibit Index

 

Exhibit

 

 

 

Page

Number

 

Description

 

Number

 

 

 

 

 

11.1

 

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

 

22

 

 

 

 

 

31.1

 

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

 

23

 

 

 

 

 

31.2

 

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

 

24

 

 

 

 

 

32.1

 

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

 

25

 

 

 

 

 

32.2

 

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

 

26

 

 

 

 

 

101*

 

Financial statements from the quarterly report on Form 10-Q of ML Macadamia Orchards, L.P. for the quarter and six months ended June 30, 2012, filed on August 9, 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.

 


* 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.

 

21


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