(3) SEGMENT INFORMATION

Effective for the year ended December 31, 2013, the Partnership changed the way it reports its business segments to align it with the way management evaluates and makes decisions concerning the allocation of resources and the assessment of performance. Previously, farming operations were shown as a separate segment, but are now incorporated into the orchards segment. For financial reporting purposes, prior year information has been presented based on the new segment reporting structure.

The Partnership’s two reportable segments, orchards and branded products are organized on the basis of revenues and assets. The orchards segment derives its revenues from the sale of in shell macadamia nuts grown in orchards owned or leased by the Partnership, macadamia nut kernel sales to Royal and revenues from the farming of macadamia orchards owned by other growers. The branded products segment derives its revenues from the sale of branded macadamia nut products and bulk macadamia nut kernel reported under Royal.

Management evaluates the performance of each segment on the basis of operating income and topline revenue growth. The Partnership accounts for intersegment sales and transfers at cost and such transactions are eliminated in consolidation.

The Partnership’s reportable segments are distinct business enterprises that offer different products or services.

Revenues — Orchards Segment

Revenues from the Orchards Segment are subject to long-term nut purchase contracts and tend to vary from year to year due to changes in the calculated nut price per pound and pounds produced. Revenue generated from farming orchards owned by other growers is subject to long-term farming contracts that generally provide for a mark-up in excess of cost or is based on a fixed fee per acre and tend to be less variable than revenues generated from the sale of nuts.

Nut Purchase Contracts. The Partnership had two lease agreements, one license agreement, and two nut purchase contracts with Mauna Loa in 2013. The two lease agreements and one license agreement were assumed by the Partnership with the purchase of the IASCO orchards on August 1, 2010, and require that all macadamia nuts produced from the acquired orchards be sold to and be purchased by Mauna Loa. The agreements expire in 2029, 2078 and 2080. Under these agreements, the Partnership is paid based on wet-in-shell pounds, adjusted for the Mauna Loa wholesale price of the highest year-to-date volume fancy and choice products sold in Hawaii, and adjusted for moisture annually based upon the United States Department of Agriculture (“USDA”) report. Under the two lease agreements, the price per pound is determined based on two elements: (1) 60% of the price is computed at 37% of Mauna Loa’s year-to-date (“YTD”) price of the highest YTD volume fancy and choice products. This wholesale price is adjusted to convert kernel price to a wet-in-shell basis; and (2) 40% of the price is computed at the actual price paid as quoted in Hawaii Macadamia Nuts Annual Summary published by the USDA, for the most current crop year listed. When the USDA price for the crop year is released, Mauna Loa adjusts the payment for that crop year retrospectively. The price per pound under the license agreement is determined in a similar manner as the lease agreements, with the exception of the percent of the two components so that 50% of the price is computed at 37% of Mauna Loa’s YTD price of the highest YTD volume fancy and choice products, and 50% of the price is computed at the USDA price. For the crop year ended June 30, 2013, the Partnership and Mauna Loa agreed upon $0.80 per WIS pound for the USDA price component, which was based on a preliminary USDA report. The average nut price received by the Partnership for nuts produced from the IASCO orchards in the calendar year 2012 was $0.79 per pound.

To provide for the processing of nuts covered by the Mauna Loa nut purchase contract that expired on December 31, 2012, on July 11, 2012, the Partnership entered into a nut processing agreement with 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 paid 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. The Partnership retained ownership of the nuts for future sale. The Partnership is in the process of negotiating a one-year extension with MacFarms through December 31, 2014 and is assessing nut processing alternatives for future years. See “Business of the Partnership — Orchards Segment — Nut Sales” in Part I, Item I of this Annual Report on Form 10-K.

Husking Activities. Husking activities for the Keaau and Mauna Kea orchards are performed at Mauna Loa’s Keaau facility. Operation of the Keaau husking facility which had been performed by the Partnership was transferred to Mauna Loa in July of 2006. The Partnership made reimbursements payments to Mauna Loa of $576,000 in 2013, $405,000 in 2012 and $532,000 in 2011 for husking, as the contracts require that the Partnership deliver husked nuts. Husking for the Ka’u orchards are performed at the Partnership’s husking plant in Ka’u.

Stabilization Payments. In December 1986, the Partnership acquired a leasehold interest in a 266-acre orchard that was several years younger than its other orchards. Because of the relative immaturity of this orchard at the time of purchase, its productivity (and therefore its cash flow) was expected to be correspondingly lower for the first several years as compared to the older orchards.

Accordingly, the seller of this orchard (KACI) agreed to make cash stabilization payments to the Partnership for each year through 1993 in which the cash flow (as defined) from this orchard fell short of a target cash flow level of $507,000. Stabilization payments for a given year were limited to the lesser of the amount of the shortfall or a maximum payment amount.

The Partnership accounted for the $1.2 million in stabilization payments (net of general excise tax) as a reduction in the cost basis of this orchard. As a result, the payments will be reflected in the Partnership’s consolidated net income (loss) ratably through 2019 as a reduction to depreciation for this orchard.

In return, the Partnership is obligated to pay the seller 100% of any year’s cash flow from this orchard in excess of the target cash flow as additional rent until the aggregate amount of additional percentage rent equals 150% of the total amount of stabilization payments previously received. Thereafter, the Partnership is obligated to pay the owner 50% of this orchard’s cash flow in excess of the target cash flow as additional incentive rent. No additional rent was due for 2013, 2012 or 2011, as the Partnership did not generate cash flow from this orchard in excess of target cash flow.

Cash Flow Warranty Payments. In October 1989, the Partnership acquired 1,040 acres of orchards that were several years younger on average than the Partnership’s other orchards. Their productivity (and therefore their cash flow) was expected to be lower for the first several years than for the Partnership’s older orchards.

Accordingly, the sellers of these orchards (subsidiaries of C. Brewer and Company, Ltd.) agreed to make cash flow warranty payments to the Partnership for each year through 1994 in which the cash flow (as defined) from these orchards fell short of a cash flow target level. Warranty payments for any year were limited to the lesser of the amount of the shortfall or a maximum payment amount.

The Partnership accounted for the $13.8 million received in cash flow warranty payments as reductions in the cost basis of the orchards. As a result, these payments will be reflected in the Partnership’s net consolidated income (loss) ratably through 2030 as reductions to depreciation for these orchards.

Revenues — Branded Product Segment

Royal began generating revenues from the branded product segment in the fourth quarter 2012. In 2013, Royal’s sale of its savory macadamia nuts, nut and dried fruit clusters and bulk kernel resulted in $2.1 million of net revenues as compared to $91,000 in 2012. Its cost of sales was $1.9 million. The branded products segment incurred an operating loss of $1.9 million mainly due to $1.0 million in general and administrative costs and $1.0 million in selling and marketing expenses related to brand and product development.

The following is a summary of each reportable segment’s revenues, operating income (loss), assets and other information as of and for the years ended December 31, 2013, 2012 and 2011.

	Year ended December 31, 2013
	(in thousands)
	Orchards			Branded Products			Consolidation/ Reconciliation			Total
Revenues
External customers	$	11,781		$	2,072		$	—		$	13,853
Intersegment revenue	3,138						(3,138		)	—
Total revenue	$	14,919		$	2,072		$	(3,138	)	$	13,853

Operating loss
External customers	$	(1,251	)	$	(1,929	)	$	—		$	(3,180	)
Intersegment operating income (loss)	744			(176		)	(568		)	—
Total operating loss	$	(507	)	$	(2,105	)	$	(568	)	$	(3,180	)

Depreciation	$	2,468		$	16		$	—		$	2,484

Capital Expenditures	$	319		$	46		$	—		$	365

Segment assets
Segment assets	$	51,639		$	3,085		$	—		$	54,724
Intersegment elimination	6,760			568			(7,328		)	—
Total segment assets	$	58,399		$	3,653		$	(7,328	)	$	54,724

	Year ended December 31, 2012
	(in thousands)
	Orchards		Branded Products			Consolidation/ Reconciliation			Total
Revenues
External customers	$	20,016	$	91		$	—		$	20,107
Intersegment revenue	935		—			(935		)	—
Total revenue	$	20,951	$	91		$	(935	)	$	20,107

Operating income (loss)
External customers	$	1,045	$	(999	)	$	—		$	46
Intersegment operating income	—		—			—			—
Total operating income (loss)	$	1,045	$	(999	)	$	—		$	46

Depreciation	$	2,433	$	3		$	—		$	2,436

Capital Expenditures	$	413	$	129		$	—		$	542

Segment assets
Segment assets	$	54,954	$	1,387		$	—		$	56,341
Intersegment elimination	2,268		—			(2,268		)	—
Total segment assets	$	57,222	$	1,387		$	(2,268	)	$	56,341

	Year ended December 31, 2011
	(in thousands)
	Orchards		Branded Products		Consolidation/ Reconciliation		Total
Revenues
External customers	$	17,994	$	—	$	—	$	17,994
Intersegment revenue	—		—		—		—
Total revenue	$	17,994	$	—	$	—	$	17,994

Operating income
External customers	$	1,006	$	—	$	—	$	1,006
Intersegment operating income	—		—		—		—
Total operating income	$	1,006	$	—	$	—	$	1,006

Depreciation	$	2,424	$	—	$	—	$	2,424

Capital Expenditures	$	74	$	—	$	—	$	74

Segment assets
Segment assets	$	57,043	$	—	$	—	$	57,043
Intersegment elimination	—		—		—		—
Total segment assets	$	57,043	$	—	$	—	$	57,043