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 September 30, 2011

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)

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.

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 November 9, 2011, Registrant had 7,500,000 Class A Units issued and outstanding.

Table of Contents

ML MACADAMIA ORCHARDS, L.P.

INDEX

2

Table of Contents

Item 1.  Unaudited Consolidated Financial Statements

ML Macadamia Orchards, L.P.

Consolidated Balance Sheets

(in thousands)

See accompanying notes to consolidated  financial statements.

3

Table of Contents

ML Macadamia Orchards, L.P.

Consolidated Income Statements (unaudited)

(in thousands, except per unit data)

See accompanying notes to consolidated financial statements.

4

Table of Contents

ML Macadamia Orchards, L.P.

Consolidated Statements of Partners’ Capital (unaudited)

(in thousands)

See accompanying notes to consolidated financial statements.

5

Table of Contents

ML Macadamia Orchards, L.P.

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

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 subsidiary ML Resources, Inc., (“the Partnership”) include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly its financial position as of September 30, 2011 and 2010 and the results of operations, changes in partners’ capital and cash flows for the three and nine-month periods ended September 30, 2011 and 2010.  The results of operations for the period ended September 30, 2011 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 2010 Annual Report on Form 10-K.

(2) CONSOLIDATION

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

(3)  REVISION

The amounts reported as net cash flow (as defined in the Partnership Agreement) and net cash flow per Class A Unit for the three and nine months ended September 30, 2010 in the Form 10-Q for the quarter ended September 30, 2010 have been revised to be consistent with the presentation in the 2010 Form 10-K, which excludes the $120,000 bargain purchase price gain and $306,000 goodwill impairment related to the IASCO acquisition from such calculation.  This revision does not affect the financial statements and other financial information set forth in said Form 10-Q.

The Partnership revised the amounts previously reported as follows:

(4) RECLASSIFICATIONS

Certain balances have been reclassified to conform to the current year presentation.  These reclassifications had no impact on net income (loss) previously reported.

(5) RECENT AUTHORITATIVE PRONOUNCEMENTS

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 stockholders’ equity be presented either in a single continuous

7

Table of Contents

statement of comprehensive income or in two separate but consecutive statements.  In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total comprehensive income.  ASU 2011-5 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retroactively.  The Partnership does not expect this Update to have a significant effect on its financial statements.

(6) 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 nine-month periods ended September 30, 2011 and 2010.  Due to seasonality of crop patterns and the timing of nut purchase contract fulfillment, interim results are not necessarily indicative of annual performance.

8

Table of Contents

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

(7) 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 cost amounted to $2.7 million and $3.4 million at September 30, 2011 and 2010, respectively.

(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 September 30, 2011 and 2010, Hawaii general excise taxes charged or passed on to customers and reflected in revenues and expenses amounted to $10,000.  For the nine months ended September 30, 2011 and 2010, Hawaii general excise taxes charged or passed on to customers and reflected in revenues and expenses amounted to $20,000 and $42,000, respectively.

9

Table of Contents

(9) CREDIT FACILITY - DEBT

The Partnership has a $5.0 million revolving credit facility with American AgCredit, PCA which expires on July 13, 2012.  Drawings on the revolving credit facility bear interest at the base rate, which is defined as the prime lending rate plus 1%.    The Partnership had $4.8 million and $4.7 million outstanding on the revolving credit facility at September 30, 2011 and 2010, respectively.  At September 30, 2011 and 2010, 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 equal monthly payments over the term and bears fixed interest at 6.5% per annum.  The Partnership had $9.2 million and $10.3 million outstanding on the term loan at September 30, 2011 and 2010, respectively.

The credit agreements with American AgCredit, PCA, contain various financial covenants.  The Partnership was in compliance with all debt covenants at September 30, 2011 and 2010.

The fair value of the revolving credit facility 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 $10.0 million compared to a carrying value of $9.2 million as of September 30, 2011.

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.

(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 nine-month periods ended September 30, 2011 or 2010.

(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

10

Table of Contents

(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 benefits 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

(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.

(15) LEGAL PROCEEDINGS

The Partnership is not a party to any legal proceedings.

(16) ACQUISITION

Effective August 1, 2010 the Partnership acquired from IASCO certain real property and assets used in connection with the macadamia nut farming operations on the property, for a purchase price of $12.5 million.  The acquisition provides the Partnership with a significant increase in owned orchards.  As a result of the acquisition the Partnership has acquired approximately 1,100 acres of mature macadamia nut orchards along with the associated infrastructure and equipment necessary to the business of growing macadamia nuts.

Effective as of the acquisition date, the sales of nuts grown in these orchards are recorded by the Partnership as macadamia nut revenue and related costs are reported as cost of goods sold.  Prior to the acquisition, the Partnership performed farming services on these orchards for IASCO and generated contract farming revenue based on a pass through of farming cost plus a management fee.  The contract farming revenue and cost of contract farming services relating to the IASCO orchards are eliminated as of the effective date of the Partnership’s acquisition of these orchards.  The elimination of the IASCO farming contract, which represented approximately 50% to 55% of the cash flow of the contract farming segment, resulted in the impairment of goodwill.

11

Table of Contents

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 2010 Form 10-K.

Results of Operations

The Partnership’s results of operations and financial condition at September 30, 2011 are not necessarily directly comparable to the Partnership’s results of operations and financial condition at September 30, 2010 due to the acquisition of real property and assets from IASCO on August 1, 2010 and the financing as previously reported by the Partnership.  Effective as of the acquisition date, the sales of nuts grown in the IASCO orchards are recorded by the Partnership as macadamia nut revenue and related costs are reported as cost of nuts sold.  The orchard acquisition effectively cancelled the farming contract for those acres resulting in lower contract farming revenue and lower contract farming costs.

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.  Improved rainfall distribution from October 2010 at Ka’u and the earlier than normal start of flower development at Keaau and Mauna Kea and nuts that fell in the second quarter at all orchards locations increased the nut production for the nine-month period ended September 30, 2011 compared to the same period in 2010.

Nut sales recorded for the three-month period ended September 30, 2011 and 2010 were $5.4 million and $4.1 million, respectively.  Nut sales for the nine-month period ended September 30, 2011 and 2010 were $7.7 million and $5.3 million, respectively.  The Partnership’s WIS pounds produced for the three-month period ended September 30, 2011 and 2010 was 9.5 million pounds and 7.1 million pounds, respectively, or an increase of 32%.  The Partnership’s WIS pounds produced for the nine-month period ended September 30, 2011 and 2010 was 13.1 million pounds and 8.9 million pounds, respectively, or an increase of 48%. WIS pounds refers to the actual wet-in-shell pounds of macadamia nuts. The increase in nut sales in 2011 is mainly attributable to the nut sales from the IASCO orchards of $1.6 million which includes $1.5 million from 2.2 million pounds produced in 2011 and $58,000 additional sales due to the nut price adjustment for the prior year’s production.  Nut sales in 2010 were lower than 2011 for the nine-month period due to the shortfall of nut production because of the drought conditions at the Ka’u orchards during the fall and winter of 2009.

For the nine-month period ended September 30, 2011, the Partnership had a net income of $153,000 from total revenues of $8.9 million.  Net loss for the nine-month period ended September 30, 2010 was $451,000 from total revenue of $7.7 million. Net income per Class A Unit for the nine-month period ended September 30, 2011 was $0.02 and net loss per Class A Unit for the same period in 2010 amounted to ($0.06).  The net income in 2011 is mainly attributable to increased nut sales primarily due to the nut sales from the IASCO orchards, crop insurance claim in the amount of $534,000 compared with $303,000 in 2010, and $45,000 in distributions from American AgCredit, PCA compared with $7,000 in 2010, offset by higher interest expense. The net loss in 2010 is a result of lower nut sales, IASCO acquisition costs and the impairment of goodwill.

12

Table of Contents

Net cash flow per Class A unit for the nine-month period ended September 30, 2011 and 2010, as defined in the Partnership Agreement, amounted to $0.09 and ($0.04), respectively.  The net cash flow for the nine-month period ended September 30, 2010 excludes the $120,000 bargain purchase price gain and $306,000 goodwill impairment related to the IASCO acquisition.  The improved net cash flow result in 2011 is attributable to higher net income and lower debt payments.  The net cash flow result in 2010 is attributable to lower net income and the Partnership paying off $1.1 million of debt.

The Partnership had a net income of $38,000 for the three-month period ended September 30, 2011 from revenues of $6.0 million.  Net loss for the three-month period ended September 30, 2010 was $308,000 from revenues of $4.7 million.  Net income per Class A Unit for the third quarter of 2011 amounted to $0.01 and net loss per Class A Unit for the same period in 2010 amounted to ($0.04). The net income for the third quarter 2011 is mainly attributable to increased nut sales primarily due to the IASCO orchards, lower general and administrative expenses, offset by higher interest expense. The net loss for the third quarter 2010 is mainly attributable to acquisition costs of $125,000 and the impairment of goodwill in the amount of $306,000, offset by crop insurance claim in the amount of $99,000 and the bargain purchase price gain of $120,000.

Net cash flow per Class A Unit for the third quarters of 2011 and 2010, as defined in the Partnership Agreement was $0.08 and $0.07, respectively.  The net cash flow for the third quarter 2010 excludes the $120,000 bargain purchase price gain and $306,000 goodwill impairment related to the IASCO acquisition.  The improved net cash flow result for the third quarter 2011 is attributable to higher net income, offset by higher debt payments.

Owned-orchard Segment

The Partnership currently sells all of its macadamia nuts to Mauna Loa Macadamia Nut Corporation (“Mauna Loa”) under various nut purchase agreements.  In December 2009 the Partnership executed a nut purchase contract with Mauna Loa under which it agreed to sell its entire production from its then existing orchards at a fixed price for the calendar years 2010 and 2011.  This nut purchase contract is based on wet-in-shell production adjusted to moisture at 20% (“WIS”) and saleable kernel/dry-in-shell of 30% (“SK/DIS”). Under this contract, the Partnership is paid $0.73 based on the adjusted pounds, WIS @ 20% SK/DIS @ 30%.  In January 2011 Mauna Loa agreed to an incremental $0.10 per pound WIS SK/DIS for nuts produced, up to 400,000 wet-in-shell pounds, from certain orchards in Keaau with lower nut densities.  Similarly, in March 2011 Mauna Loa agreed to an incremental $0.10 per pound WIS SK/DIS for nuts produced from certain orchards in Ka’u, up to 200,000 wet-in-shell pounds.  The additional $0.10 per pound, applicable to nuts harvested from certain orchards in the first quarter, was subject to the same quality terms as outlined in the December 2009 contract and helped offset additional harvest costs incurred for nuts harvested from orchards with lower nut densities.    In the first quarter 2011, 273,000 wet-in-shell pounds harvested from the orchards subject to this additional payment produced 203,000 contract pounds at a nut purchase price of $0.83 per adjusted WIS pound.  The additional $0.10 per pound resulted in $20,300 additional revenue above the revenue generated by the standard contract purchase price.

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.  In 2011 the Partnership recorded additional nut revenue of $58,000 on the production from the IASCO orchards recorded in 2010, which includes $4,000 on nuts produced in the third quarter and $54,000 on nuts produced in the fourth quarter 2010.  Including the additional revenue recorded in 2011, the average nut price received by the Partnership for nuts produced from the IASCO orchards for the five-month period beginning August 1, 2010, the date of the Partnership’s acquisition of those orchards, is $0.66 per pound.  The average price received for WIS nuts produced from the IASCO orchards for the three and nine-month periods ended September 30, 2011 was $0.73 and $0.71 per pound, respectively. Including the additional revenue recorded in 2011, the average nut price for nuts recorded from the IASCO orchards for the third quarter 2010 was $0.68 per pound.

13

Table of Contents

On January 31, 2011, the Partnership entered into three nut purchase contracts with Mauna Loa, each effective January 1, 2012.  These contracts replace the nut purchase contract executed in December 2009, which expires 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. The nut purchase price under each of the contracts will be $0.77 per adjusted pound on a WIS SK/DIS basis.  The contracts will terminate on the respective expiration dates if the parties are unable to extend the agreements on mutually acceptable terms.  In the event any of the agreements are terminated, Mauna Loa is obligated, at the Partnership’s option, to use commercially reasonable efforts to convert the nuts into kernel, for a period of two years after a contract is terminated, at a cost equal to Mauna Loa’s average processing cost.

For the three and nine-month periods ended September 30, 2011 and 2010, nut production, nut prices and nut revenues were as follows:

14

Table of Contents