Royal Hawaiian Orchards (NNUTU) 10-Q 2007 Q3 Quarterly report

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, 2007

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

Registrant’s website:                                    www.mlmacadamia.com

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class	Name of Each Exchange on Which Registered
Depositary Units Representing
Class A Limited Partners’ Interests	New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

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 is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act).  Large accelerated filer o  Accelerated filer o  Non-accelerated filer 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 September 30, 2007, Registrant had 7,500,000 Class A Units issued and outstanding.

ML MACADAMIA ORCHARDS, L.P.

INDEX

Part I - Financial Information
	Item 1.	Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	Item 4.	Controls and Procedures
Part II - Other Information
	Item 2.	Changes in Securities
	Item 5.	Other Information
	Item 6.	Exhibits and Reports on Form 8-K
	Signatures

2

ML Macadamia Orchards, L.P.

Consolidated Balance Sheets

(in thousands)

	(Unaudited)
	September 30,					December 31,
	2007			2006		2006
Assets
Current assets
Cash and cash equivalents	$	120		$	502	$	3,351
Accounts receivable	2,020			1,535		2,688
Inventory	688			237		272
Deferred farming costs	3,763			1,987		—
Other current assets	287			221		98
Total current assets	6,878			4,482		6,409
Land, orchards and equipment, net	45,985			47,693		47,232
Goodwill	306			—		306
Intangible assets, net	10			59		16
Total assets	$	53,179		$	52,234	$	53,963
Liabilities and partners’ capital
Current liabilities
Current portion of long-term debt	$	400		$	406	$	400
Short-term borrowing	1,900			—		—
Accounts payable	311			74		406
Cash distributions payable	375			375		375
Accrued payroll and benefits	711			698		858
Other current liabilities	16			32		488
Total current liabilities	3,713			1,585		2,527
Non-current accrued benefits	406			—		405
Long-term debt	800			1,200		1,200
Deferred income tax liability	1,208			1,227		1,208
Total liabilities	6,127			4,012		5,340
Commitments and Contingencies
Partners’ capital
General partner	81			81		81
Class A limited partners, no par or assigned value, 7,500 units issued and outstanding	47,041			48,141		48,612
Accumulated other comprehensive loss	(70		)	—		(70		)
Total partners’ capital	47,052			48,222		48,623
Total liabilities and partners’ capital	$	53,179		$	52,234	$	53,963

See accompanying notes to consolidated  financial statements.

3

ML Macadamia Orchards, L.P.

Consolidated Income Statements (unaudited)

(in thousands, except per unit data)

	Three months						Nine months
	ended September 30,						ended September 30,
	2007			2006			2007			2006
Macadamia nut sales	$	1,979		$	4,289		$	4,902		$	5,624
Contract farming revenue	797			1,198			2,464			2,674
Total revenues	2,776			5,487			7,366			8,298
Cost of goods and services
Cost of macadamia nut sales	1,546			3,937			3,720			4,672
Cost of contract farming services	731			1,113			2,257			2,473
Total cost of goods sold	2,277			5,050			5,977			7,145
Gross income	499			437			1,389			1,153
General and administrative expenses
Legal fees paid to related party	—			10			—			86
Other	874			451			1,744			1,109
Total general and administrative expenses	874			461			1,744			1,195
Operating loss	(375		)	(24		)	(355		)	(42		)
Interest expense	(44		)	(61		)	(105		)	(166		)
Interest income	—			—			49			13
Other income (loss)	(1		)	186			12			194
Income (loss) before tax	(420		)	101			(399		)	(1		)
Income tax expense	16			16			47			41
Net income (loss)	$	(436	)	$	85		$	(446	)	$	(42	)
Net cash flow
(as defined in the Partnership Agreement)	$	14		$	800		$	73		$	487
Net income (loss) per Class A Unit	$	(0.06	)	$	0.01		$	(0.06	)	$	(0.01	)
Net cash flow per Class A Unit	$	0.00		$	0.10		$	0.01		$	0.06
Cash distributions per Class A Unit	$	0.05		$	0.05		$	0.15		$	0.15
Class A Units outstanding	7,500			7,500			7,500			7,500

See accompanying notes to consolidated financial statements.

4

ML Macadamia Orchards, L.P.

Consolidated Statements of Partners’ Capital (unaudited)

(in thousands)

	Three months					Nine months
	ended September 30,					ended September 30,
	2007			2006		2007			2006
Partners’ capital at beginning of period:
General partner	$	81		$	81	$	81		$	81
Class A limited partners	47,852			48,431		48,612			49,308
Accumulated other comprehensive loss	(70		)	—		(70		)	—
	47,863			48,512		48,623			49,389
Allocation of net income (loss)
Class A limited partners	(436		)	85		(446		)	(42		)
	(436		)	85		(446		)	(42		)
Cash distributions:
Class A limited partners	375			375		1,125			1,125
	375			375		1,125			1,125
Partners’ capital at end of period:
General partner	81			81		81			81
Class A limited partners	47,041			48,141		47,041			48,141
Accumulated other comprehensive loss	(70		)	—		(70		)	—
	$	47,052		$	48,222	$	47,052		$	48,222

See accompanying notes to consolidated financial statements.

5

ML Macadamia Orchards, L.P.

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

	Three months						Nine months
	ended September 30,						ended September 30,
	2007			2006			2007			2006
Cash flows from operating activities:
Cash received from sale of goods and services	$	1,841		$	4,767		$	8,282		$	15,627
Cash paid to suppliers and employees	(3,637		)	(3,707		)	(11,642		)	(10,426		)
Interest paid	(44		)	(61		)	(105		)	(166		)
Interest received	—			—			49			13
Net cash provided by (used in) operating activities	(1,840		)	999			(3,416		)	5,048
Cash flows from investing activities:
Acquisition of capital equipment	(60		)	(21		)	(190		)	(471		)
Net cash used in investing activities	(60		)	(21		)	(190		)	(471		)
Cash flows from financing activities:
Proceeds from line of credit	1,900			2,400			1,900			4,100
Payment of line of credit	—			(3,400		)	—			(7,000		)
Payments on long term borrowing	—			—			(400		)	(400		)
Capital lease payments	—			(10		)	—			(28		)
Cash distributions paid	(375		)	(375		)	(1125		)	(1125		)
Net cash provided by (used in) financing activities	1,525			(1,385		)	375			(4,453		)
Net increase (decrease) in cash	(375		)	(407		)	(3,231		)	124
Cash at beginning of period	495			909			3,351			378
Cash at end of period	$	120		$	502		$	120		$	502
Reconciliation of net income (loss) to net cash provided by (used in) operating activities:
Net income (loss)	$	(436	)	$	85		$	(446	)	$	(42	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization	452			694			920			926
Decrease (increase) in accounts receivable	(1,022		)	(829		)	669			6,898
Decrease (increase) in inventories	(393		)	65			(416		)	33
Decrease (increase) in deferred farming costs	(841		)	841			(3,242		)	(1,406		)
Decrease (increase) in other current assets	19			(1		)	(189		)	(44		)
Increase (decrease) in accounts payable	270			58			(95		)	(696		)
Increase (decrease) in accrued payroll and benefits	150			84			(146		)	(237		)
Increase (decrease) in other current liabilities	(39		)	2			(471		)	(384		)
Total adjustments	(1,404		)	914			(2,970		)	5,090
Net cash provided by (used in) operating activities	$	(1,840	)	$	999		$	(3,416	)	$	5,048
Supplemental schedule of non-cash financing activities
Distributions declared not paid	$	375		$	375		$	375		$	375

See accompanying notes to consolidated financial statements.

6

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 (“the Partnership”) include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly its financial position as of September 30, 2007, September 30, 2006 and December 31, 2006 and the results of operations, changes in partners’ capital and cash flows for the three and nine-month periods ended September 30, 2007 and 2006. The results of operations for the period ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year or for any future period.

The year-end condensed balance sheet data was derived from audited 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 2006 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)SIGNIFICANT ACCOUNTING POLICY

The Partnership reports revenues net of sales and general excise taxes remitted to government authorities that are collected from or passed on to its customers.

(4)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 and orchards owned or leased by the Partnership.

Management evaluates the performance of each segment on the basis of operating income. The Partnership accounts for inter segment sales and transfers at cost. Such inter segment 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 long-term nut purchase contracts and tend to vary from year to year due to changes in the prices paid under it various nut contracts. The farming segment’s revenues are based on long-term farming contracts which generate a farming profit based on a percentage of farming cost or based on a fixed fee per acre and tend to be less variable than revenues from the owned-orchard segment.

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The following tables summarize each reportable segment’s operating income (loss) and assets as of, and for the three and nine-month periods ended September 30, 2007 and 2006 (000’s). Due to seasonality of crop patterns, interim results are not necessarily indicative of annual performance.

	Three months						Nine months
	ended September 30,						ended September 30,
	2007			2006			2007			2006
Revenues:
Owned orchards	$	1,979		$	4,289		$	4,902		$	5,624
Contract farming	1,424			4,403			6,547			8,000
Intersegment elimination (all contract farming)	(627		)	(3,205		)	(4,083		)	(5,326		)
Total	$	2,776		$	5,487		$	7,366		$	8,298
Operating income (loss):
Owned orchards	$	(441	)	$	(189	)	$	(562	)	$	(242	)
Contract farming	66			165			207			200
Total	$	(375	)	$	(24	)	$	(355	)	$	(42	)
Depreciation:
Owned orchards	$	416		$	640		$	812		$	764
Contract farming	34			54			102			162
Total	$	450		$	694		$	914		$	926
Expenditures for property and equipment:
Owned orchards	$	60		$	—		$	190		$	440
Contract farming	—			21			—			31
Total	$	60		$	21		$	190		$	471
Segment assets:
Owned orchards							$	46,030		$	46,326
Contract farming							7,112			5,948
Total							$	53,142		$	52,274

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

(5)DEFERRED FARMING COSTS

Orchard costs (e.g. irrigation, fertilizer, pruning, etc.) are annualized for interim reporting purposes, with the difference between costs incurred-to-date and costs expensed-to-date (based on projected annual cost per nut harvested) being reported on the balance sheet as deferred farming costs, which amounted to $3.8 million and $2.0 million at September 30, 2007 and 2006, respectively. The increase in deferred farming costs was primarily attributable to less than expected production during the first three quarters of 2007 compared to 2006 and a greater per pound expected cost in 2007 than 2006.

(6)LONG-TERM DEBT

The Partnership has a $5 million revolving credit facility with American AgCredit, PCA, which expires on May 1, 2008. Amounts drawn on the line bear interest at the prime lending rate. The amounts drawn at September 30, 2007 amounted to $1.9 million. There were no amounts drawn on the credit facility at September 30, 2006.

8

In addition to the revolving credit facility the Partnership has a $4 million promissory note payable to American AgCredit, PCA, which is scheduled to mature in 2010. Amounts outstanding bear interest at rates from 6.37 percent to 7.77 percent. At September 30, 2007 and 2006, the outstanding balance under the promissory note agreement amounted to $1.2 million and $1.6 million, respectively.

The credit agreements with American AgCredit, PCA, contain various covenants. July 2007 an amendment was made to the covenant related to minimum tangible net worth. The Partnership was in compliance with all debt covenants at September 30, 2007 and 2006.

The Partnership had no capital lease obligations related to leased equipment at September 30, 2007 and $6,000 at September 30, 2006.

(7)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.

(8)CASH DISTRIBUTIONS

On September 25, 2007 a third quarter cash distribution was declared in the amount of five cents ($0.05) per Class A Unit, payable on November 15, 2007 to unit holders of record as of the close of business on September 28, 2007.

(9)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						Pension Benefits
	3 months ended						9 months ended
	9/30/07			9/30/06			9/30/07			9/30/06
Service Cost	$	15,002		$	14,817		$	45,008		$	44,451
Interest Cost	7,116			7,041			21,348			21,123
Less Expected Return on Assets	(9,880		)	(4,742		)	(29,640		)	(14,226		)
Amortization of Unrecognized Prior Service Costs	1,661			1,661			4,983			4,983
Amortization of Unrecognized Actuarial Loss	—			740			—			2,221
Net Periodic Pension Cost	$	13,899		$	19,517		$	41,699		$	58,554

(10)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 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.

9

COMPONENTS OF NET PERIODIC BENEFIT COST

	Intermittent Severance Benefits
	3 months ended		9 months ended
	9/30/07		9/30/07
Service cost	$	4,624	$	13,872
Interest cost	4,740		14,219
Net periodic intermittent severance cost	$	9,364	$	28,091

10

ML MACADAMIA ORCHARDS, L.P.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Significant Accounting Policies and Estimates

The Partnership prepares its 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, 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 2006 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 climactic conditions and nut prices which are either fixed or market based. Traditionally, nut production is highest during the third and fourth quarters, with very low production in the first and second quarters.

Production during the third quarter of 2007 was 1.6 million pounds less than the same period in 2006 which had higher that normal production due to the main harvest starting early. Production for the nine-month period ended September 30, 2007 was about 1.1 million pounds greater than the same period in 2006. About 700,000 pounds, or 17% of the total 2007 third quarter production, were contract processed under the Hamakua nut purchase agreement and will be sold by the Partnership as processed macadamia nut kernel in future period.

Net loss for the third quarter of 2007 was $436,000 compared to net income of $85,000 in 2006. Revenues in the third quarter of 2007 amounted to $2.8 million compared to $5.5 million in 2006. Net income (loss) per Class A Unit for the third quarters 2007 and 2006 amounted to ($0.06) and $0.01, respectively. Net cash flow per Class A Unit for the third quarters 2007 and 2006, as defined by the Partnership Agreement, was $0.00 and $0.10, respectively. The decrease in revenue during the third quarter of 2007 in comparison to 2006 was attributable to lower nut prices, not selling all the nuts harvested and lower production. During the third quarter of 2007, the Partnership harvested 1.6 million contract pounds less and received $0.17 per pound less than in 2006. Harvesting activities related to contract farming services were also lower in the third quarter of 2007 in comparison to 2006. Although revenues decreased by 49% during the third quarter of 2007, cost of revenues decreased by 55%. The net loss for the three-month period ended September 30, 2007 was mainly attributable to the increase in general and administrative expense for professional fees and other costs related to the potential acquisition of Mac Farms of Hawaii, LLC, $874,000 compared to the third quarter 2006 of $451,000, an increase of 90%.

11

Net loss for the nine-month period ended September 30, 2007 was $446,000 compared to $42,000 in 2006. Revenues for the nine-month periods ended September 30, 2007 and 2006 were $7.4 million and $8.3 million, respectively. Net loss per Class A Unit for the nine-month periods ended September 30, 2007 and 2006 amounted to $0.06 and $0.01, respectively. Net cash flow per Class A Unit for the nine-month periods ended September 30, 2007 and 2006, as defined in the Partnership Agreement, was $0.01 and $0.06, respectively. The decrease in revenue for the nine-months period ended September 30, 2007 in comparison to the same period in 2006 was the result of lower nut price and not selling all the nuts harvested. The net loss for the nine-month period ended September 30, 2007 was mainly attributable to the increase in general and administrative expense, of $1.7 million as compared to $1.2 million for the same period in 2006 or 46%, for professional fees and other costs related to the potential acquisition of Mac Farms of Hawaii, LLC .

Owned-orchard Segment

For the three and nine-month periods ended September 30, 2007 and 2006, nut production, nut prices and nut revenues based upon the contract terms with moisture at 20% (WIS @ 20%) and recovery at 30% (SK/DIS @ 30%) were as follows:

	For the three months
	Ended September 30,
	2007	2006	Change
Nuts harvested (000’s pounds @ WIS 20% and SK/DIS @ 30%)	4,124	5,764	-28	%
Less kernel inventory	694	0
Net nuts sold	3,430	5,764	-40	%
Nut price (per pound)	0.5771	0.7441	-22	%
Net nut sales ($000’s)	1,979	4,289	-54	%
2005 nut price adjustment	0	0
Total nut sales ($000’s)	1,979	4,289	-54	%

	For the nine months
	Ended September 30,
	2007	2006	Change
Nuts harvested (000’s pounds @ WIS 20% and SK/DIS @ 30%)	8,194	7,108	15	%
Less kernel inventory	694	0
Net nuts sold	7,500	7,108	6	%
Nut price (per pound)	0.6536	0.7430	-12	%
Net nut sales ($000’s)	4,902	5,281	-7	%
2005 nut price adjustment	0	343
Total nut sales ($000’s)	4,902	5,624	-13	%

12

Production for the third quarter of 2007 was 28% lower than 2006 and 17% below the historical average for this period. Production for the nine-month period ended September 30, 2007 was 15% higher than 2006, however 5% lower than the historical average for this period. The decrease in production for the quarter was primarily attributable to the timing of nuts dropping from trees, and the increase in production for the nine-month period is the result of the above average harvest in the first quarter of 2007.

The average nut price received for the third quarter of 2007 was $0.58 per pound compared to $0.74 in 2006 based on contract prices. The average nut price received the nine-month period ended September 30, 2007 was $0.65 compared to $0.74 in 2006 based on contract prices. The decrease was primarily attributable to a decrease in the market-based contract price from Mac Farms of Hawaii, LLC and Purdyco International, Ltd. for 2007.

The Partnership does not have purchase or processing contracts covering all of its potential harvest.  Due to current market conditions and capacity constraints at smaller processor, there is no assurance that the entire 4th quarter harvest will be processed or sold.

Production costs are based on annualized standard unit costs for interim reporting periods. Cost of goods sold (owned-orchards segment) for the third quarter of 2007 was $1.5 million or $0.45 per pound compared to $3.9 million or $0.50 per pound in 2006. Cost of goods sold (owned-orchards segment) for the nine-month period ended September 30, 2007 was $3.7 million or $0.50 per pound compared to $4.7 million or $0.51 per pound in 2006. The decrease in cost of goods sold for the nine-month period ended September 30, 2007 compared to the same period in 2006 was a result of costs being capitalized into inventory for the nuts processed and held for sale as macadamia kernel by the Partnership.

Farming Segment

Revenue from the farming of macadamia orchards that are owned by other growers amounted to $797,000 for the third quarter of 2007, 33% less than the third quarter of 2006. Farming costs for the third quarter of 2006 were $731,000, which included $34,000 in depreciation expense. The decrease in revenue during the quarter was attributable to less harvesting activity. Farming revenues for the nine-month period ended September 30, 2007 amounted to $2.5 million, 8% lower than 2006. Farming expenses for the nine-month period ended September 30, 2007 were $2.3 million including $102,000 of depreciation expense. The decrease in farming revenues during the nine-month period ended September 30, 2007 was attributable to less harvesting activity.

General and Administrative Expense

General and administrative expense amounted to $874,000 for the third quarter of 2007, 90% greater than the third quarter of 2006. General and administrative expense for the nine-month period ended September 30, 2006 was $1.7 million, 46% greater than 2006. The increase in general and administrative expense was mainly attributable to professional fees and other costs related to the potential acquisition of Mac Farms of Hawaii, LLC .

Other Income and Expenses

Interest expense for the third quarter 2007 was $44,000, 28% less than to 2006. Interest expense decreased by $61,000 for the nine-month period ended September 30, 2007, which was 37% less than 2006, and was primarily attributable to a lower balance on the long-term debt.

Interest income for the third quarter 2007 was comparable to 2006. However, interest income increased by $36,000 for the nine-month period ended September 30, 2007, primarily due to higher interest rates and higher cash balances.

Other income for the three and nine-month periods ended September 30, 2007 was primarily attributable to a cash distribution of $14,000 received from American AgCredit, PCA. Other

13

income for the three and nine-month periods ended September 30, 2006 was primarily attributable to a cash distribution received from American AgCredit, PCA of $15,000, crop insurance proceeds of $168,000 and recognition of a gain of $21,000 on the sale of property and equipment. Crop insurance proceeds result from an insurance policy that provides coverage if the crop in designated blocks is less that 75% of a ten year moving average.

Liquidity and Capital Resources

Macadamia nut farming is seasonal, with production 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 harvest season.

The Partnership has a master Credit Agreement with American AgCredit, PCA comprised of a $5 million revolving line of credit and a 10-year, $4 million term loan. The Credit Agreement contains certain restrictions which are discussed in Part II — Item 2, below.

At September 30, 2007 the Partnership had a cash balance of $120,000. For the nine-month period ended September 30, 2007, cash flows used by operating activities totaled a $3.4 million which were used to pay distributions to unit holders and repay debt. At September 30, 2007 the Partnership’s working capital was $3.2 million and its current ratio 1.85 to 1, compared to $2.9 million and 2.83 to 1 at September 30, 2006. The improvement in the Partnership’s working capital position and liquidity were primarily due to an increase in accounts receivable, inventory, and deferred farming costs, offset by a decrease in cash and increases in accounts payable and line-of-credit borrowing.

For the three months ended September 30, 2007 net cash used by operations was $1.8 million compared to net cash provided by operation for the three months ended September 30, 2006 of $1.0 million. For the nine months ended September 30, 2007 net cash used by operations was $3.4 compared to net cash provided of $5.0 million at September 30, 2006. The change in the payment terms from quarter to monthly, in the nut purchase contracts January 2006 resulted in a one-time increase in cash and decrease in accounts receivable during the nine-month period ended September 30, 2006 of $5.7 million.

At September 30, 2007, the Partnership had $1.2 million in outstanding long-term debt, comprised of $1.2 million under the 10-year term loan and $1.9 million drawn on the line-of-credit.

The Partnership anticipates borrowing from the revolving line of credit as necessary to fund working capital needs arising from the normal seasonal requirements of macadamia nut farming. 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. However, the Partnership’s nut purchase contracts require all purchasers to make nut payments 30 days after the date of delivery. During certain parts of the year, if payments are not received as the contracts require, available cash resources could be depleted.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Partnership is exposed to market risks resulting from changes in interest rates. The Partnership has market risk exposure on its Credit Agreement due to its variable rate pricing that is based on rates based on LIBOR, the Farm Credit Discount Note Rate and the Farm Credit Medium Term Note Rate. As of September 30, 2006, a one percent increase or decrease in the applicable rate under the Credit agreement will result in an interest expense fluctuation of approximately $12,000.

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The Partnership is exposed to market risks resulting from changes in the market price of macadamia kernel. Pricing for two of its nut purchase contracts is adjusted every six months based upon the prevailing market price of macadamia kernel from Australia and Hawaii. During the first half of 2007 there was a decrease in global macadamia prices. A $0.25 increase or decrease in the kernel price would affect the price received by the Partnership by $0.038 per pound at 20% WIS and 30% SK/DIS. The market price nut purchase contracts for the second half of 2007 will reflect a decrease in kernel price of $0.75, resulting in a price decrease of $0.114 per pound on deliveries under these contracts.

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 third quarter of 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II - Other Information

Item 2. Changes in Securities

In connection with the Credit Agreement with American AgCredit, PCA, certain restrictions are placed on the Partnership in regard to indebtedness, sales of assets and maintenance of certain financial minimums. The Partnership’s cash distributions will be restricted unless all requirements of these covenants are met and the effects of any cash distributions do not breach any of the financial covenants. The restrictive covenants consist of the following:

1.Minimum working capital of $2.5 million.

2.Minimum current ratio of 1.5 to 1.

3.Cumulative cash distributions beginning January 1, 2004 cannot exceed the total of cumulative net cash flow beginning January 1, 2004 plus a base amount of $3.3 million.

4.Minimum tangible net worth of $49.6 million (reduced by the amount of allowed cash distributions over net income).

5.Maximum ratio of funded debt to capitalization of 20%.

6.Minimum debt coverage ratio of 2.5 to 1.

The Partnership was in compliance with all loan covenants as of September 30, 2007 and 2006.

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Item 5. Other Information

Acquisition of Mac Farms of Hawaii, LLC

The Partnership is continuing negotiations to acquire the assets of Mac Farms of Hawaii, LLC as reported in its Form 8-K filing on October 20, 2006.

Item 6. Exhibits and Reports on Form 8-K

(a)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

(b)Reports on Form 8-K:

On July 24, 2007, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership related to the amendment of a Material Definitive Agreement.

On August 13, 2007, the Partnership filed a “Regulation FD Disclosure” on Form 8-K, which included a copy of a press release issued by the Partnership setting forth the results of operations for the quarter and six months ended June 30, 2007.

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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: November 7, 2007	By	/s/ Dennis J. Simonis
		Dennis J. Simonis
		President and
		Chief Executive Officer
	By	/s/ Wayne W. Roumagoux
		Wayne W. Roumagoux
		Principal Accounting Officer

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