Harry Winston Diamond Corporation Reports Record Fourth Quarter Sales and Strong Year-End Results
TORONTO, March 22 /CNW/ -- TORONTO, March 22 /CNW/ - Harry Winston Diamond Corporation (TSX: HW) (NYSE: HWD) (the 'Company') today announced its fourth quarter and year-end results for the period ending January 31, 2011.
Fourth Quarter Highlights:
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- Consolidated sales increased 61% to $215.4 million from
$133.7 million in the comparable quarter of the prior year.
- For the mining segment, rough diamond sales for the fourth quarter
were 30% higher at $82.7 million compared to $63.5 million for the
fourth quarter last year. This increase resulted primarily from a 23%
increase in the Company's achieved rough diamond prices.
- Rough diamond production during the calendar quarter from the Diavik
Diamond Mine was 1.54 million carats, compared to 1.53 million carats
for the fourth calendar quarter of last year (on a 100% basis).
- Luxury brand segment sales for the fourth quarter increased 89% to
$132.7 million from $70.2 million for the comparable quarter of the
prior year.
- Consolidated net earnings attributable to shareholders for the fourth
quarter were $9.9 million or $0.12 per share compared to a
consolidated net loss attributable to shareholders of $3.4 million or
$0.04 per share in the fourth quarter of the prior year. Included in
consolidated net earnings attributable to shareholders for the
quarter was a net foreign exchange loss of $3.0 million or $0.04 per
share primarily on future income tax liabilities compared to a net
foreign exchange loss of $2.0 million or $0.03 per share in the
comparable quarter of the prior year.
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Robert Gannicott, Chairman and Chief Executive Officer stated: 'This past year we have seen rapid growth in diamond demand, which has had a positive effect on both segments of our business. New customers in emerging markets, especially Asia, have replaced demand from the traditional markets such as America during the financial crisis. As recovery in America and development in the BRIC economies continues, the outlook for rough diamond prices, led by jewelry sales, is expected to be robust.'
He continued, 'Our operating earnings improved by $86 million versus the prior year as we swung decisively from loss to profitability on the back of strongly improved revenues.'
Annual Results Highlights:
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- Consolidated sales were $624.0 million for the year ended January
2011 compared to $412.9 million for the prior year, resulting in
earnings from operations of $64.5 million, compared to a loss from
operations of $22.0 million last year.
- For the mining segment, rough diamond sales increased 49% to
$279.2 million from $187.9 million in the prior year. The increase in
sales resulted from a 62% increase in the Company's achieved rough
diamond prices while the volume of carats sold during the year
decreased 8%. The increase in sales resulted in earnings from
operations for the year of $50.2 million compared to a loss from
operations of $6.3 million in the prior year.
- Rough diamond production for the calendar year 2010 was 6.5 million
carats compared to 5.5 million carats in the prior calendar year (on
a 100% basis). The lower production in the prior calendar year was a
planned response to the softness in the rough diamond market that
included a six-week summer shut-down.
- Luxury brand segment sales increased 53% to $344.8 million from
$225.0 million in the prior year. The increase in sales resulted in
earnings from operations for the year of $14.3 million compared to a
loss from operations of $15.7 million in the prior year.
- Harry Winston Diamond Corporation recorded consolidated net earnings
attributable to shareholders of $21.7 million or $0.27 per share for
the year, compared to consolidated net loss attributable to
shareholders of $73.2 million or $0.99 per share in the prior year.
Included in the consolidated net earnings attributable to
shareholders for the year was a net foreign exchange loss of
$14.4 million or $0.18 per share primarily on future income tax
liabilities compared to net foreign exchange loss of $31.5 million or
$0.43 per share in the prior year.
- The prior year consolidated net loss attributable to shareholders
also included a non-cash dilution loss of $34.8 million or $0.47 per
share as a result of the investment by Kinross Gold Corporation in
Harry Winston Diamond Limited Partnership, which holds the Company's
40% interest in the Diavik Diamond Mine.
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Fourth Quarter and Fiscal 2011 Financial Summary
(US$ in millions except Earnings per Share amounts)
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Three Three Twelve Twelve
months months months months
ended ended ended ended
Jan. 31, Jan. 31, Jan. 31, Jan. 31,
2011 2010 2011 2010
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Sales 215.4 133.7 624.0 412.9
- Mining Segment 82.7 63.5 279.2 187.9
- Luxury Brand Segment 132.7 70.2 344.8 225.0
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Earnings (loss) from operations 20.4 (3.1) 64.5 (22.0)
- Mining Segment 15.2 1.6 50.2 (6.3)
- Luxury Brand Segment 5.2 (4.7) 14.3 (15.7)
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Net earnings (loss) attributable
to shareholders 9.9 (3.4) 21.7 (73.2)
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Earnings (loss) per share $0.12 $(0.04) $0.27 $(0.99)
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Mr. Gannicott commented on the Company's outlook, 'Although the commercial impact of the human tragedy in Japan has yet to be measured, we are thankful that our personnel and retail salons there are all unharmed. Last year Japan was 11% of global diamond jewelry consumer demand and 18% of our own luxury brand sales.
For fiscal 2012 we expect a continued advance in luxury brand revenues and earnings driven by demand. Mining revenues will advance with higher diamond prices and improved ore mix. Mining costs will increase as open pit tonnage is supplemented by underground production, but to a lesser extent than originally expected due to the implementation of lower cost mining methods.'
The Company is in the process of updating the mine plan which it expects to share publicly in the near future.
Mr. Gannicott concluded, 'We believe our business makes the best use of positioning in both ends of the complex but rewarding diamond business.'
Conference Call and Webcast
Beginning at 8:30AM (ET) on Wednesday, March 23, the Company will host a conference call for analysts, investors and other interested parties. Listeners may access a live broadcast of the conference call on the Company's investor relations web site at http://investor.harrywinston.com or by dialing 800-510-9834 within North America or 617-614-3669 from international locations and entering passcode 83841709.
An online archive of the broadcast will be available by accessing the Company's investor relations web site at http://investor.harrywinston.com. A telephone replay of the call will be available one hour after the call through 11:00PM (ET) through Wednesday, April 6, 2011, by dialing 888-286-8010 within North America or 617-801-6888 from international locations and entering passcode 15226198.
New Investor Website
The Company is pleased to announce the launch of its newly redesigned investor website. We invite you to visit the new http://investor.harrywinston.com today.
About Harry Winston Diamond Corporation
Harry Winston Diamond Corporation is a diamond enterprise with premium assets in the mining and retail segments of the diamond industry. Harry Winston supplies rough diamonds to the global market from its 40 percent ownership interest in the Diavik Diamond Mine. The Company's luxury brand segment is a premier diamond jeweler and luxury timepiece retailer with salons in key locations, including New York, Paris, London, Beijing, Tokyo, Hong Kong and Beverly Hills.
The Company focuses on the two most profitable segments of the diamond industry, mining and retail, in which its expertise creates shareholder value. This unique business model provides key competitive advantages; rough diamond sales and polished diamond purchases provide market intelligence that enhances the Company's overall performance.
For more information, please visit www.harrywinston.com. or for investor information, visit http://investor.harrywinston.com.
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Highlights
(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
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Fourth Quarter Results
Consolidated sales for the fourth quarter were $215.4 million compared to $133.7 million in the comparable quarter of the prior year, resulting in earnings from operations of $20.4 million compared to a loss from operations of $3.1 million in the comparable quarter of the prior year.
The mining segment recorded sales of $82.7 million, a 30% increase from $63.5 million in the comparable quarter of the prior year. The increase in sales resulted primarily from a 23% increase in achieved rough diamond prices. The mining segment recorded earnings from operations of $15.2 million compared to $1.6 million in the comparable quarter of the prior year.
The luxury brand segment recorded sales of $132.7 million, an 89% increase from $70.2 million in the same period last year. The significant increase in sales resulted in earnings from operations for this segment of $5.2 million compared to a loss from operations of $4.7 million in the comparable quarter of the prior year.
The Company recorded fourth quarter consolidated net earnings attributable to shareholders of $9.9 million or $0.12 per share compared to a consolidated net loss attributable to shareholders of $3.4 million or $0.04 per share in the fourth quarter of the prior year. Included in consolidated net earnings attributable to shareholders for the quarter was a net foreign exchange loss of $3.0 million or $0.04 per share primarily on future income tax liabilities compared to a net foreign exchange loss of $2.0 million or $0.03 per share in the comparable quarter of the prior year.
Annual Results
Consolidated sales were $624.0 million for the fiscal year compared to $412.9 million for the prior year, resulting in earnings from operations of $64.5 million compared to a loss from operations of $22.0 million last year.
The mining segment recorded sales of $279.2 million, a 49% increase from $187.9 million in the prior year. The increase in sales resulted from a 62% increase in the Company's achieved rough diamond prices while the volume of carats sold during the year decreased 8%. The significant increase in sales resulted in earnings from operations for the year of $50.2 million compared to a loss from operations of $6.3 million in the prior year.
The luxury brand segment recorded sales of $344.8 million and earnings from operations of $14.3 million for the year compared to sales of $225.0 million and a loss from operations of $15.7 million, respectively, in the prior year.
The Company recorded consolidated net earnings attributable to shareholders of $21.7 million or $0.27 per share for the fiscal year ended January 31, 2011 compared to a consolidated net loss attributable to shareholders of $73.2 million or $0.99 per share in the prior year. Included in the consolidated net earnings attributable to shareholders for the year was a net foreign exchange loss of $14.4 million or $0.18 per share primarily on future income tax liabilities compared to a net foreign exchange loss of $31.5 million or $0.43 per share in the prior year. The prior year consolidated net loss attributable to shareholders also included a non-cash dilution loss of $34.8 million or $0.47 per share as a result of the investment by Kinross Gold Corporation in Harry Winston Diamond Limited Partnership, which holds the Company's 40% interest in the Diavik Diamond Mine.
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Management's Discussion and Analysis
Prepared as of March 22, 2011 (ALL FIGURES ARE IN UNITED STATES
DOLLARS UNLESS OTHERWISE INDICATED)
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The following is management's discussion and analysis ('MD&A') of the results of operations for Harry Winston Diamond Corporation ('Harry Winston Diamond Corporation', or the 'Company') for the fiscal year ended January 31, 2011, and its financial position as at January 31, 2011. This MD&A is based on the Company's consolidated financial statements prepared in accordance with generally accepted accounting principles in Canada ('Canadian GAAP') and should be read in conjunction with the consolidated financial statements and notes. Unless otherwise specified, all financial information is presented in United States dollars. Unless otherwise indicated, all references to 'year' refer to the fiscal year ended January 31. Unless otherwise indicated, references to 'international' for the luxury brand segment (previously referred to as the retail segment) refer to Europe and Asia.
Certain comparative figures have been reclassified to conform to the current year's presentation.
Caution Regarding Forward-Looking Information
Certain information included in this MD&A may constitute forward-looking information within the meaning of Canadian and United States securities laws. In some cases, forward-looking information can be identified by the use of terms such as 'may', 'will', 'should', 'expect', 'plan', 'anticipate', 'foresee', 'appears', 'believe', 'intend', 'estimate', 'predict', 'potential', 'continue', 'objective' or other similar expressions concerning matters that are not historical facts. Forward-looking information may relate to management's future outlook and anticipated events or results, and may include statements or information regarding plans, timelines and targets for construction, mining, development, production and exploration activities at the Diavik Diamond Mine, future mining and processing at the Diavik Diamond Mine, projected capital expenditure requirements and the funding thereof, liquidity and working capital requirements and sources, estimated reserves and resources at, and production from, the Diavik Diamond Mine, the number and timing of expected rough diamond sales, the demand for rough diamonds, expected diamond prices and expectations concerning the diamond industry and the demand for luxury goods, expected cost of sales and gross margin trends in the mining segment, targets for compound annual growth rates of sales and operating income in the luxury brand segment, plans for expansion of the retail salon network, and expected sales trends and market conditions in the luxury brand segment. Actual results may vary from the forward-looking information. See 'Risks and Uncertainties' on page 19 for material risk factors that could cause actual results to differ materially from the forward-looking information.
Forward-looking information is based on certain factors and assumptions regarding, among other things, mining, production, construction and exploration activities at the Diavik Diamond Mine, world and US economic conditions and the worldwide demand for luxury goods. Specifically, in making statements regarding expected diamond prices and expectations concerning the diamond industry and expected sales trends and market conditions in the luxury brand segment, the Company has made assumptions regarding, among other things, continuing recovery of world and US economic conditions and demand for luxury goods. While the Company considers these assumptions to be reasonable based on the information currently available to it, they may prove to be incorrect. See 'Risks and Uncertainties' on page 19.
Forward-looking information is subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from what we currently expect. These factors include, among other things, the uncertain nature of mining activities, including risks associated with underground construction and mining operations, risks associated with joint venture operations, risks associated with the remote location of and harsh climate at the Diavik Diamond Mine site, risks associated with regulatory requirements, fluctuations in diamond prices and changes in US and world economic conditions, the risk of fluctuations in the Canadian/US dollar exchange rate, cash flow and liquidity risks and the risks of competition in the luxury jewelry business as well as changes in demand for high-end luxury goods, and risks associated with the expected impact of the Company's transition to International Financial Reporting Standards. Please see page 19 of this Annual Report, as well as the Company's current Annual Information Form, available at www.sedar.com, for a discussion of these and other risks and uncertainties involved in the Company's operations.
Readers are cautioned not to place undue importance on forward-looking information, which speaks only as of the date of this MD&A, and should not rely upon this information as of any other date. Due to assumptions, risks and uncertainties, including the assumptions, risks and uncertainties identified above and elsewhere in this MD&A, actual events may differ materially from current expectations. The Company uses forward-looking statements because it believes such statements provide useful information with respect to the expected future operations and financial performance of the Company, and cautions readers that the information may not be appropriate for other purposes. While the Company may elect to, it is under no obligation and does not undertake to update or revise any forward-looking information, whether as a result of new information, future events or otherwise at any particular time, except as required by law. Additional information concerning factors that may cause actual results to materially differ from those in such forward-looking statements is contained in the Company's filings with Canadian and United States securities regulatory authorities and can be found at www.sedar.com and www.sec.gov, respectively.
Summary Discussion
Harry Winston Diamond Corporation is a diamond enterprise with premium assets in the mining and luxury brand segments of the diamond industry. The Company supplies rough diamonds to the global market from its 40% ownership interest in the Diavik Diamond Mine, located in Canada's Northwest Territories. The Company's luxury brand segment is a premier diamond jeweler and luxury timepiece retailer with salons in key locations including New York, Paris, London, Beijing, Tokyo and Beverly Hills.
The Company's most significant asset is an ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the 'Joint Venture') is an unincorporated joint arrangement between Diavik Diamond Mines Inc. ('DDMI') (60%) and Harry Winston Diamond Limited Partnership ('HWDLP') (40%) where HWDLP holds an undivided 40% ownership interest in the assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is the operator of the Diavik Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England.
On August 25, 2010, Harry Winston Diamond Corporation reacquired from Kinross Gold Corporation ('Kinross') for $191.2 million (including transaction costs) its 9% indirect interest in the Diavik Joint Venture (the 'Kinross Buy Back Transaction'), representing Kinross's direct 22.5% interest in HWDLP previously acquired in March 2009. The purchase price for Kinross's 22.5% interest in HWDLP was based on the market value of consideration on the closing date and was satisfied by the payment of $50.0 million in cash, the issuance to Kinross of approximately 7.1 million Harry Winston Diamond Corporation common shares from treasury with a market value of $69.7 million and the issuance to Kinross of a promissory note in the amount of $70.0 million, maturing on August 25, 2011. The note bears interest at a rate of 5% per annum and can be repaid in cash or, subject to certain limitations, treasury common shares issued by the Company. The issuance of such shares is expected to be subject to approval by the Company's shareholders in most circumstances. With this transaction, the Company's ownership interest in the Diavik Joint Venture was increased back to 40%.
Market Commentary
The Diamond Market
Improved world economic conditions positively impacted the price of rough diamonds throughout the fiscal year. The market price for rough diamonds has increased approximately 45% over the prior year. Increasing demand from the Far East and India was bolstered by an improved US market. The demand for rough diamonds is outpacing the increase in mine supply, inevitably leading to shortages in the rough and polished market. This trend is expected to continue and to result in rising rough and polished diamond prices in fiscal 2012.
The Luxury Brand Jewelry Market
Consumer demand for luxury brands continued to strengthen in all markets, especially from China with its expanding economy, and from the Middle East and Russia as a result of high energy prices. In the US, a relatively weak dollar and a strong rebound in the equity markets contributed to growth in that market, particularly in the fourth quarter. The jewelry market in the US experienced a strong holiday season as consumer confidence improved with the gradual recovery of the global economy throughout fiscal 2011.
Consolidated Financial Results
The following is a summary of the Company's consolidated quarterly results for the eight quarters ended January 31, 2011 following the basis of presentation utilized in its Canadian GAAP financial statements:
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(expressed in thousands of United States dollars, except per share
amounts and where otherwise noted)
(quarterly results are unaudited)
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2011 2011 2011 2011
Q4 Q3 Q2 Q1
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Sales $215,358 $140,877 $153,728 $114,000
Cost of sales 142,242 85,831 86,797 76,692
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Gross margin 73,116 55,046 66,931 37,308
Gross margin (%) 34.0% 39.1% 43.5% 32.7%
Selling, general and
administrative expenses 52,698 41,306 37,998 35,948
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Earnings (loss) from operations 20,418 13,740 28,933 1,360
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Interest and financing expenses (3,322) (3,338) (2,483) (2,384)
Other income 95 69 154 168
Insurance settlement - - - -
Dilution loss - - - -
Impairment charge - - - -
Foreign exchange gain (loss) (2,973) (2,960) 3,319 (11,792)
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Earnings (loss) before income
taxes 14,218 7,511 29,923 (12,648)
Income taxes (recovery) 4,316 2,833 9,114 (3,879)
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Net earnings (loss) $ 9,902 $ 4,678 $ 20,809 $ (8,769)
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Attributable to shareholders $ 9,895 $ 3,938 $ 16,490 $ (8,654)
Attributable to non-controlling
interest(i) 7 740 4,319 (115)
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Basic earnings (loss) per share $ 0.12 $ 0.05 $ 0.22 $ (0.11)
Diluted earnings (loss) per share $ 0.12 $ 0.05 $ 0.21 $ (0.11)
Cash dividends declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00
Total assets(ii) $ 1,618 $ 1,600 $ 1,613 $ 1,539
Total long-term liabilities(ii) $ 639 $ 631 $ 565 $ 487
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Earnings (loss) from operations $ 20,418 $ 13,740 $ 28,933 $ 1,360
Depreciation and
amortization(iii) 25,487 19,723 20,512 15,181
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EBITDA(iv) $ 45,905 $ 33,463 $ 49,445 $ 16,541
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2010 2010 2010 2010
Q4 Q3 Q2 Q1
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Sales $133,654 $ 74,828 $ 94,776 $109,643
Cost of sales 96,257 45,227 66,294 83,944
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Gross margin 37,397 29,601 28,482 25,699
Gross margin (%) 28.0% 39.6% 30.1% 23.4%
Selling, general and
administrative expenses 40,479 34,542 32,380 35,749
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Earnings (loss) from operations (3,082) (4,941) (3,898) (10,050)
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Interest and financing expenses (2,396) (2,448) (2,998) (3,699)
Other income 129 99 83 281
Insurance settlement - 100 - 3,250
Dilution loss - - (539) (34,222)
Impairment charge - - - -
Foreign exchange gain (loss) (1,978) 1,598 (25,274) (5,839)
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Earnings (loss) before income
taxes (7,327) (5,592) (32,626) (50,279)
Income taxes (recovery) (5,800) (4,221) (5,662) (3,120)
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Net earnings (loss) $ (1,527) $ (1,371) $(26,964) $(47,159)
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Attributable to shareholders $ (3,358) $ (214) $(24,521) $(45,084)
Attributable to non-controlling
interest(i) 1,831 (1,157) (2,443) (2,075)
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Basic earnings (loss) per share $ (0.04) $ 0.00 $ (0.32) $ (0.68)
Diluted earnings (loss) per share $ (0.04) $ 0.00 $ (0.32) $ (0.68)
Cash dividends declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00
Total assets(ii) $ 1,495 $ 1,535 $ 1,533 $ 1,592
Total long-term liabilities(ii) $ 477 $ 506 $ 507 $ 496
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Earnings (loss) from operations $ (3,082) $ (4,941) $ (3,898) $(10,050)
Depreciation and
amortization(iii) 18,258 11,208 16,971 17,675
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EBITDA(iv) $ 15,176 $ 6,267 $ 13,073 $ 7,625
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2011 2010 2009
Total Total Total
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Sales $623,963 $412,901 $609,220
Cost of sales 391,562 291,722 287,278
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Gross margin 232,401 121,179 321,942
Gross margin (%) 37.2% 29.3% 52.8%
Selling, general and
administrative expenses 167,950 143,150 155,876
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Earnings (loss) from operations 64,451 (21,971) 166,066
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Interest and financing expenses (11,527) (11,541) (20,457)
Other income 486 592 2,246
Insurance settlement - 3,350 17,240
Dilution loss - (34,761) -
Impairment charge - - (93,780)
Foreign exchange gain (loss) (14,406) (31,493) 59,087
---------------------------------------------------------------
Earnings (loss) before income
taxes 39,004 (95,824) 130,402
Income taxes (recovery) 12,384 (18,803) 60,256
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Net earnings (loss) $ 26,620 $(77,021) $ 70,146
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Attributable to shareholders $ 21,669 $(73,176) $ 70,121
Attributable to non-controlling
interest(i) 4,951 (3,845) 25
---------------------------------------------------------------
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Basic earnings (loss) per share $ 0.27 $ (0.99) $ 1.15
Diluted earnings (loss) per share $ 0.27 $ (0.99) $ 1.15
Cash dividends declared per share $ 0.00 $ 0.00 $ 0.20
Total assets(ii) $ 1,618 $ 1,495 $ 1,495
Total long-term liabilities(ii) $ 639 $ 477 $ 550
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Earnings (loss) from operations $ 64,451 $(21,971) $166,066
Depreciation and
amortization(iii) 80,903 64,112 76,970
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EBITDA(iv) $145,354 $ 42,141 $243,036
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(i) Effective February 1, 2010, the Company early adopted Handbook
Section 1582, 'Business Combinations', Handbook Section 1601,
'Consolidated Financial Statements', Handbook Section 1602, 'Non-
Controlling Interests', and amendments to Handbook Section 3251,
'Equity', from the Canadian Institute of Chartered Accountants
('CICA'), which have been applied retrospectively. Under these
sections, non-controlling interest is reported as a component of
shareholders' equity. As a result, the prior year amounts for non-
controlling interest in the consolidated balance sheet have been
reclassified into shareholders' equity. In addition, non-
controlling interest of $4.2 million reported in the first two
quarters of fiscal 2011 as a reduction to earnings was reclassified
as a direct charge to retained earnings.
(ii) Total assets and total long-term liabilities are expressed in
millions of United States dollars.
(iii) Depreciation and amortization included in cost of sales and
selling, general and administrative expenses.
(iv) Earnings before interest, taxes, depreciation and amortization
('EBITDA'). See 'Supplementary Measure' on page 17.
The comparability of quarter-over-quarter results is impacted by
seasonality for both the mining and luxury brand segments. Harry
Winston Diamond Corporation expects that the quarterly results for
its mining segment will continue to fluctuate depending on the
seasonality of production at the Diavik Diamond Mine, the number of
sales events conducted during the quarter, and the volume, size and
quality distribution of rough diamonds delivered from the Diavik
Diamond Mine in each quarter. The quarterly results for the luxury
brand segment are also seasonal, with generally higher sales during
the fourth quarter due to the holiday season. See 'Segmented
Analysis' on page 10 for additional information.
>>
Year Ended January 31, 2011 Compared to Year Ended January 31, 2010
CONSOLIDATED NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded consolidated net earnings attributable to shareholders of $21.7 million or $0.27 per share for the fiscal year ended January 31, 2011 compared to a consolidated net loss attributable to shareholders of $73.2 million or $0.99 per share in the prior year. Included in the consolidated net earnings attributable to shareholders for the year was a net foreign exchange loss of $14.4 million or $0.18 per share primarily on future income tax liabilities compared to a net foreign exchange loss of $31.5 million or $0.43 per share in the prior year. The prior year consolidated net loss attributable to shareholders also included a non-cash dilution loss of $34.8 million or $0.47 per share as a result of the investment by Kinross Gold Corporation in Harry Winston Diamond Limited Partnership, which holds the Company's 40% interest in the Diavik Diamond Mine.
CONSOLIDATED SALES
The Company recorded sales for the fiscal year ended January 31, 2011 of $624.0 million compared to sales of $412.9 million for the prior year. On a segment basis, rough diamond sales accounted for $279.2 million of these sales compared to $187.9 million for the prior year. The Company completed nine rough diamond sales during the fiscal year, one of which was a tender sale, compared to eight rough diamond sales in the prior year. Luxury brand segment sales were $344.8 million compared to $225.0 million for the prior year. See 'Segmented Analysis' on page 10 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company recorded cost of sales of $391.6 million for a gross margin of 37.2% during the fiscal year compared to $291.7 million and a gross margin of 29.3% during the prior year. The Company's cost of sales includes costs associated with mining, rough diamond sorting and luxury brand sales activities. See 'Segmented Analysis' on page 10 for additional information.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of selling, general and administrative ('SG&A') expenses include expenses for salaries and benefits, advertising, professional fees, rent and building related costs. The Company incurred SG&A expenses of $168.0 million for the fiscal year compared to $143.2 million in the prior year.
Included in SG&A expenses for the year are $19.8 million for the mining segment compared to $19.5 million for the prior year, and $148.2 million for the luxury brand segment compared to $123.6 million for the prior year. For the luxury brand segment, the increase was due primarily to higher advertising, marketing and selling expenses and higher variable compensation expenses resulting from higher sales. See 'Segmented Analysis' on page 10 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a tax expense of $12.4 million during the twelve months ended January 31, 2011, compared to a tax recovery of $18.8 million in the comparable period of the prior year. The Company's effective income tax rate for the year, excluding the luxury brand segment, is 30%, which is based on a statutory income tax rate of 29% adjusted for various items including Northwest Territories mining royalty, impact of foreign exchange, and earnings subject to tax different than the statutory rate.
The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the twelve months ended January 31, 2011, the Company recorded an unrealized foreign exchange loss of $14.8 million on the revaluation of the Canadian denominated future income tax liability, as compared to an unrealized foreign exchange loss of $24.4 million recorded in the comparable period of the prior year. The unrealized foreign exchange loss is not deductible for Canadian income tax purposes.
The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2031.
The Company has provided a table below summarizing the movement from the statutory to the effective income tax rate as a percentage of earnings before taxes:
<<
Year ended Year ended
January 31, January 31,
2011 2010
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Statutory income tax rate 29% 30%
Stock compensation 1% -%
Northwest Territories mining royalty
(net of income tax relief) 11% -%
Impact of foreign exchange 3% (3)%
Earnings subject to tax different than
statutory rate -% 5%
Changes in valuation allowance (1)% (2)%
Assessments and adjustments (6)% 3%
Tax effect on income allocated to
non-controlling interest (2)% (2)%
Tax effect on dilution loss -% (11)%
Other items (3)% -%
Effective income tax rate 32% 20%
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CONSOLIDATED INTEREST AND FINANCING EXPENSES
Interest and financing expenses of $11.5 million were unchanged from the prior year.
CONSOLIDATED OTHER INCOME
Other income, which includes interest income on the Company's various bank balances, was $0.5 million during the year compared to $0.6 million in the prior year.
CONSOLIDATED INSURANCE SETTLEMENT
In the prior year, the Company received the remaining insurance settlement of $3.4 million pre-tax related to the December 2008 robbery at the Harry Winston Paris salon.
CONSOLIDATED DILUTION LOSS
In the prior year, the Company recorded a non-cash dilution loss of $34.8 million as a result of the investment by Kinross in HWDLP, which holds the Company's 40% interest in the Diavik Diamond Mine. On August 25, 2010, the Company reacquired from Kinross its interest in HWDLP.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange loss of $14.4 million was recognized during the fiscal year compared to a net foreign exchange loss of $31.5 million in the prior year. The current year loss relates principally to the revaluation of the Company's Canadian dollar denominated long-term future income tax liability as a result of the strengthening of the Canadian dollar against the US dollar at January 31, 2011. The Company's ongoing currency exposure relates primarily to expenses and obligations incurred in Canadian dollars, as well as the revaluation of certain Canadian monetary balance sheet amounts. The Company does not currently have any significant foreign exchange derivative instruments outstanding.
Three Months Ended January 31, 2011 Compared to Three Months Ended January 31, 2010
CONSOLIDATED NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded fourth quarter consolidated net earnings attributable to shareholders of $9.9 million or $0.12 per share compared to a consolidated net loss attributable to shareholders of $3.4 million or $0.04 per share in the fourth quarter of the prior year. Included in consolidated net earnings attributable to shareholders for the quarter was a net foreign exchange loss of $3.0 million or $0.04 per share primarily on future income tax liabilities compared to a net foreign exchange loss of $2.0 million or $0.03 per share in the comparable quarter of the prior year.
CONSOLIDATED SALES
Sales for the fourth quarter totalled $215.4 million, consisting of rough diamond sales of $82.7 million and luxury brand segment sales of $132.7 million. This compares to sales of $133.7 million in the comparable quarter of the prior year (rough diamond sales of $63.5 million and luxury brand segment sales of $70.2 million). The Company held two rough diamond sales in the fourth quarter compared to three in the comparable quarter of the prior year. See 'Segmented Analysis' on page 10 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's fourth quarter cost of sales was $142.2 million for a gross margin of 34.0% compared to a cost of sales of $96.3 million and a gross margin of 28.0% for the comparable quarter of the prior year. The Company's cost of sales includes costs associated with mining, rough diamond sorting and luxury brand sales activities. See 'Segmented Analysis' on page 10 for additional information.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of SG&A expenses include expenses for salaries and benefits, advertising, professional fees, rent and building related costs. The Company incurred SG&A expenses of $52.7 million for the fourth quarter compared to $40.5 million in the comparable quarter of the prior year.
Included in SG&A expenses for the fourth quarter are $4.8 million for the mining segment compared to $4.9 million for the comparable quarter of the prior year, and $47.9 million for the luxury brand segment compared to $35.6 million for the comparable quarter of the prior year. For the luxury brand segment, the increase was due primarily to higher advertising, marketing and selling expenses and higher variable compensation expenses resulting from higher sales. See 'Segmented Analysis' on page 10 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a tax expense of $4.3 million during the fourth quarter, compared to a tax recovery of $5.8 million in the comparable quarter of the prior year. The Company's effective income tax rate for the quarter, excluding the luxury brand segment, is 19%, which is based on a statutory income tax rate of 29% adjusted for various items including Northwest Territories mining royalty, impact of foreign exchange, and earnings subject to tax different than the statutory rate.
The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the fourth quarter of fiscal 2011, the Canadian dollar strengthened against the US dollar. As a result, the Company recorded a foreign exchange loss of $4.4 million on the revaluation of the Company's Canadian dollar denominated future income tax liability. This compares to a foreign exchange loss of $2.2 million in the comparable quarter of the previous year. The unrealized foreign exchange loss is not deductible for Canadian income tax purposes.
The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2031.
The Company has provided a table below summarizing the movement from the statutory to the effective income tax rate as a percentage of earnings before taxes:
<<
Three months Three months
ended ended
January 31, January 31,
2011 2010
-------------------------------------------------------------------------
Statutory income tax rate 29% 30%
Stock compensation 1% -%
Northwest Territories mining royalty
(net of income tax relief) 8% 3%
Impact of foreign exchange 3% 8%
Earnings subject to tax different than
statutory rate 2% (3)%
Changes in valuation allowance -% (12)%
Assessments and adjustments (4)% 53%
Other items (8)% -%
Effective income tax rate 31% 79%
-------------------------------------------------------------------------
>>
CONSOLIDATED INTEREST AND FINANCING EXPENSES
Interest and financing expenses of $3.3 million were incurred during the fourth quarter compared to $2.4 million during the comparable quarter of the prior year. Interest and financing expenses were impacted primarily by an increase in debt levels in the mining segment.
CONSOLIDATED OTHER INCOME
Other income of $0.1 million was unchanged from the comparable quarter of the prior year.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange loss of $3.0 million was recognized during the quarter compared to a net foreign exchange loss of $2.0 million in the comparable quarter of the prior year. The loss relates principally to the revaluation of the Company's Canadian dollar denominated long-term future income tax liability as a result of the strengthening of the Canadian dollar against the US dollar at January 31, 2011. The Company's ongoing currency exposure relates primarily to expenses and obligations incurred in Canadian dollars, as well as the revaluation of certain Canadian monetary balance sheet amounts. The Company does not currently have any significant foreign exchange derivative instruments outstanding.
Segmented Analysis
The operating segments of the Company are the mining and luxury brand segments.
Mining
The mining segment includes the production and sale of rough diamonds.
<<
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
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2011 2011 2011 2011
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 82,697 $ 60,708 $ 86,827 $ 48,922
Cost of sales 62,672 46,105 55,407 45,124
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Gross margin 20,025 14,603 31,420 3,798
Gross margin (%) 24.2% 24.1% 36.2% 7.8%
Selling, general and
administrative expenses 4,805 6,255 4,813 3,870
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Earnings (loss) from operations $ 15,220 $ 8,348 $ 26,607 $ (72)
Depreciation and amortization(i) 21,520 16,494 17,350 11,956
-------------------------------------------------------------------------
EBITDA(ii) $ 36,740 $ 24,842 $ 43,957 $ 11,884
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2010 2010 2010 2010
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 63,489 $ 20,765 $ 45,941 $ 57,690
Cost of sales 57,027 20,319 40,049 57,256
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Gross margin 6,462 446 5,892 434
Gross margin (%) 10.2% 2.1% 12.8% 0.8%
Selling, general and
administrative expenses 4,885 4,932 4,182 5,503
-------------------------------------------------------------------------
Earnings (loss) from operations $ 1,577 $ (4,486) $ 1,710 $ (5,069)
Depreciation and amortization(i) 14,976 7,845 13,760 14,573
-------------------------------------------------------------------------
EBITDA(ii) $ 16,553 $ 3,359 $ 15,470 $ 9,504
-------------------------------------------------------------------------
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2011 2010 2009
Total Total Total
---------------------------------------------------------------
Sales $279,154 $187,885 $328,223
Cost of sales 209,308 174,651 139,769
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Gross margin 69,846 13,234 188,454
Gross margin (%) 25.0% 7.0% 57.4%
Selling, general and
administrative expenses 19,743 19,502 19,903
---------------------------------------------------------------
Earnings (loss) from operations $ 50,103 $ (6,268) $168,551
Depreciation and amortization(i) 67,320 51,154 64,374
---------------------------------------------------------------
EBITDA(ii) $117,423 $ 44,886 $232,925
---------------------------------------------------------------
---------------------------------------------------------------
(i) Depreciation and amortization included in cost of sales and selling,
general and administrative expenses.
(ii) Earnings before interest, taxes, depreciation and amortization
('EBITDA'). See 'Supplementary Measure' on page 17.
>>
Year Ended January 31, 2011 Compared to Year Ended January 31, 2010
MINING SALES
During the year the Company sold 2.6 million carats for a total of