Harry Winston Diamond Corporation delivers strong growth in both segments of its diamond business as increased global consumer demand for jewelry and timepieces drives both sales and rough diamond prices
TORONTO, Sept. 7, 2011 /CNW/ --
TORONTO, Sept. 7, 2011 /CNW/ - Harry Winston Diamond Corporation (TSX:
HW) (NYSE:HWD) (the 'Company') today announced its second quarter
Fiscal 2012 results for the quarter ending July 31, 2011.
Robert Gannicott, Chairman and Chief Executive Officer said, 'Global retail demand, especially in the emerging economies such as China
and India, has delivered both strong retail sales growth and strong
rough diamond prices. Seeing through the effect of a small number of
high-value, lower margin sales, our own jewelry and timepiece business
shows solid growth in both sales and margin in the core bridal,
timepiece and designed jewelry segments. The market price increase in
rough diamonds has more than compensated for two complete sales versus
three in the comparable prior year quarter as well as the lower quality
diamonds mined from the upper part of the current open pit.
Looking forward we continue to see strong global jewelry and timepiece
demand from China while Japan and the Middle East improve and the US
remains subdued. On this basis we expect to continue to grow our own
jewelry and timepiece business despite challenging economic conditions
in the US and Europe. Although we do not predict further near-term
rough diamond market price increases we do see our own rough diamond
sales price already improving as we produce more from the higher valued
A-154 South and North pipes.'
Second Quarter Highlights:
-- For the mining segment, a total of 0.72 million carats were
produced, an increase of 11% over the prior year. Due to a sale
date straddling the quarter end, a total of 0.57 million carats
were sold in this quarter versus 0.78 million carats sold in
the second quarter of the prior year. The carats sold were
smaller than the prior year due to extra small diamonds from
the processing of earlier plant rejects and lower quality ore
from the upper section of the A-418 pipe. Despite these
cumulative negative variances the market price increase of 41%
led to an increase of 3% in sales.
-- For the luxury brand segment, sales were $132.8 million, an
increase of 98% versus the prior year (81% at constant exchange
rates). Seeing through the effect of $55.6 million of very
large transactions at a reduced margin, solid growth in both
sales and margin were delivered by the jewelry and timepiece
businesses. This segment generated operating profit of $6.8
million and EBITDA of $10.1 million during the second quarter.
Fiscal 2012 Second Quarter Financial Summary
(US$ in millions except Earnings per Share amounts) (Prepared in
accordance with IFRS)
__________________________________________________________________
| | Three months | Three months |Six months|Six months|
| | ended | ended | ended | ended |
| |July 31, 2011 |July 31, 2010 | July 31, | July 31, |
| | | | 2011 | 2010 |
|______________|______________|______________|__________|__________|
|Sales | $222.4 | $153.7 | $366.3 | $267.7 |
|- Mining | 89.6 | 86.8 | 151.6 | 135.7 |
|Segment | 132.8 | 66.9 | 214.7 | 132.0 |
|- Luxury | | | | |
|Brand Segment | | | | |
|______________|______________|______________|__________|__________|
|Operating | 23.1 | 29.9 | 27.8 | 32.3 |
|profit | 16.3 | 27.6 | 16.9 | 28.5 |
|- Mining | 6.8 | 2.3 | 10.9 | 3.8 |
|Segment | | | | |
|- Luxury | | | | |
|Brand Segment | | | | |
|______________|______________|______________|__________|__________|
|Net profit | 10.0 | 13.0 | 13.6 | 15.2 |
|attributable | | | | |
|to | | | | |
|shareholders | | | | |
|______________|______________|______________|__________|__________|
|Earnings per | $0.12 | $0.17 | $0.16 | $0.20 |
|share | | | | |
|______________|______________|______________|__________|__________|
Complete financial statements, MD&A and a discussion of risk factors are
included in the accompanying release.
Conference Call and Webcast
Beginning at 8:30AM (Eastern Time) on Thursday, September 8, 2011, 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 866-831-6270 within North America or 617-213-8858 from
international locations and entering passcode 34099286.
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), Thursday, September 22, 2011 by dialing
888-286-8010 within North America or 617-801-6888 from international
locations and entering passcode 69493950.
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.
Highlights
(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
Consolidated sales were $222.4 million for the second quarter compared
to $153.7 million for the comparable quarter of the prior year,
resulting in a 6% increase in gross margin to $72.2 million and an
operating profit of $23.1 million, compared to an operating profit of
$29.9 million in the comparable quarter of the prior year. Consolidated
EBITDA was $43.8 million compared to $49.4 million in the comparable
quarter of the prior year.
The mining segment recorded sales of $89.6 million, a 3% increase from
$86.8 million in the comparable quarter of the prior year. The increase
in sales resulted primarily from a 41% increase in achieved rough
diamond prices during the quarter, offset by a 27% decrease in volume
of carats sold. The mining segment recorded operating profit of $16.3
million compared to $27.6 million in the comparable quarter of the
prior year. EBITDA for the mining segment was $33.7 million compared to
$44.0 million in the comparable quarter of the prior year.
The luxury brand segment recorded sales of $132.8 million, an increase
of 98% from sales of $66.9 million in the comparable quarter of the
prior year (81% at constant exchange rates). Included in the second
quarter were $55.6 million of high-value transactions, which generally
carry lower-than-average gross margins. Operating profit was $6.8
million for the quarter compared to $2.3 million in the same quarter of
the prior year. EBITDA for the luxury brand segment was $10.1 million
compared to $5.5 million in the comparable quarter of the prior year.
The Company recorded a consolidated net profit attributable to
shareholders of $10.0 million or $0.12 per share for the quarter,
compared to a net profit attributable to shareholders of $13.0 million
or $0.17 per share in the second quarter of the prior year.
Management's Discussion and Analysis
PREPARED AS OF SEPTEMBER 7, 2011 (ALL FIGURES ARE IN UNITED STATES
DOLLARS UNLESS OTHERWISE INDICATED)
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 three
and six months ended July 31, 2011, and its financial position as at
July 31, 2011. This MD&A is based on the Company's unaudited interim
condensed consolidated financial statements prepared in accordance with
International Financial Reporting Standards ('IFRS') and should be read
in conjunction with the unaudited interim condensed consolidated
financial statements and notes thereto for the three and six months
ended July 31, 2011 and for the three months ended April 30, 2011, and
the audited consolidated financial statements of the Company and notes
thereto for the year ended January 31, 2011 (prepared in accordance
with generally accepted accounting principles in Canada ('Canadian
GAAP' or 'CDN GAAP')). Unless otherwise specified, all financial
information is presented in United States dollars. Unless otherwise
indicated, all references to 'second quarter' refer to the three months
ended July 31. Unless otherwise indicated, references to
'international' for the luxury brand segment refer to Europe and Asia.
Certain comparative figures have been reclassified to conform to the
current year's presentation.
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', 'modeled' 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 17 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, the state of world
and US economic conditions, worldwide diamond production levels, 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
17.
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, the risks of competition in the luxury jewelry
business as well as changes in demand for high-end luxury goods. Please
see page 17 of this Interim 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 retailing 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, Hong Kong
and Beverly Hills.
The Company's mining 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.
Market Commentary
The Diamond Market
The market continued to push the price of rough diamonds to new highs in
the second quarter of fiscal 2012, exceeding the record highs achieved
in the first quarter. The market price per carat for rough diamonds
increased approximately 50% over the comparable quarter of the prior
year. The driving markets remained the Far East and India. In addition,
US market demand remained steady as the retail sector restocked for the
2011 holiday season. Towards the end of the second quarter, the market
experienced resistance to further diamond price increases, which may
persist until confidence returns to the global market.
The Luxury Jewelry & Timepiece Market
Overall, the luxury jewelry and timepiece market experienced another
solid quarter with positive increases in sales and profits compared
with the comparable period of the prior year. Demand for luxury
products around the world continues to increase, supported by the
rapidly rising wealth of clients in emerging markets. Despite increased
global economic uncertainty centered in the US and Europe, the Company
expects new consumers in emerging markets to continue to drive luxury
goods demand.
Condensed Consolidated Financial Results
The following is a summary of the Company's consolidated quarterly
results for the eight quarters ended July 31, 2011 following the basis
of presentation utilized in its IFRS and Canadian GAAP financial
statements:
(expressed in thousands of United States dollars except per share amounts and where otherwise noted)
(quarterly results are unaudited)
IFRS CDN GAAP IFRS IFRS
Six Six
months months
ended ended
July July
2012 2012 2011 2011 2011 2011 2010 2010 31, 31,
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 2011 2010
Sales $ 222,378 $ 143,932 $ 215,358 $ 140,877 $ 153,728 $ 114,000 $ 133,654 $ 74,828 $ 366,310 $ 267,728
Cost of sales 150,177 96,452 141,391 84,765 85,798 75,711 96,257 45,227 246,629 161,509
Gross margin 72,201 47,480 73,967 56,112 67,930 38,289 37,397 29,601 119,681 106,219
Gross margin
(%) 32.5% 33.0% 34.3% 39.8% 44.2% 33.6% 28.0% 39.6% 32.7% 39.7%
Selling,
general and
administrative
expenses 49,101 42,795 52,722 41,282 37,998 35,948 40,479 34,542 91,896 73,946
Operating
profit (loss) 23,100 4,685 21,245 14,830 29,932 2,341 (3,082) (4,941) 27,785 32,273
Finance
expenses (5,183) (3,983) (3,727) (3,835) (2,985) (2,880) (2,396) (2,448) (9,166) (5,865)
Exploration
costs (781) (212) (351) (212) (76) (27) - - (993) (103)
Finance and
other income 83 258 278 69 154 168 129 99 341 322
Insurance
settlement - - - - - - - 100 - -
Foreign
exchange gain
(loss) 288 (177) 1,392 135 1,043 (2,213) (1,978) 1,598 111 (1,170)
Profit (loss)
before income
taxes 17,507 571 18,837 10,987 28,068 (2,611) (7,327) (5,592) 18,078 25,457
Income tax
expense
(recovery) 7,519 (3,027) 5,261 (2,410) 10,877 (5,524) (5,800) (4,221) 4,492 5,353
Net profit
(loss) $ 9,988 $ 3,598 $ 13,576 $ 13,397 $ 17,191 $ 2,913 $ (1,527) $ (1,371) $ 13,586 $ 20,104
Attributable to
shareholders $ 9,986 $ 3,596 $ 13,569 $ 12,657 $ 13,043 $ 2,137 $ (3,358) $ (214) $ 13,582 $ 15,180
Attributable to
non-controlling
interest 2 2 7 740 4,148 776 1,831 (1,157) 4 4,924
Basic earnings
(loss) per
share $ 0.12 $ 0.04 $ 0.16 $ 0.15 $ 0.17 $ 0.03 $ (0.04) $ 0.00 $ 0.16 $ 0.20
Diluted
earnings (loss)
per share $ 0.12 $ 0.04 $ 0.16 $ 0.15 $ 0.17 $ 0.03 $ (0.04) $ 0.00 $ 0.16 $ 0.20
Cash dividends
declared per
share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Total assets (
(i)) $ 1,665 $ 1,666 $ 1,606 $ 1,584 $ 1,596 $ 1,522 $ 1,495 $ 1,535 $ 1,665 $ 1,596
Total long-term
liabilities (
(i)) $ 625 $ 605 $ 597 $ 588 $ 531 $ 449 $ 477 $ 506 $ 625 $ 531
Operating
profit (loss) $ 23,100 $ 4,685 $ 21,245 $ 14,830 $ 29,932 $ 2,341 $ (3,082) $ (4,941) $ 27,785 $ 32,273
Depreciation
and
amortization (
(ii)) 20,716 20,291 24,635 18,657 19,515 14,200 18,258 11,208 41,007 33,715
EBITDA ((i)(ii)
) $ 43,816 $ 24,976 $ 45,880 $ 33,487 $ 49,447 $ 16,541 $ 15,176 $ 6,267 $ 68,792 $ 65,988
(i) Total assets and total long-term liabilities are expressed in
millions of United States dollars.
(ii) Depreciation and amortization included in cost of sales and
selling, general and administrative expenses.
(iii) Earnings before interest, taxes, depreciation and amortization
('EBITDA'). See 'Non-GAAP Measure' on page 16.
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 9
for additional information.
Three Months Ended July 31, 2011 Compared to Three Months Ended July 31,
2010
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded a second quarter consolidated net profit
attributable to shareholders of $10.0 million or $0.12 per share
compared to a net profit attributable to shareholders of $13.0 million
or $0.17 per share in the second quarter of the prior year.
CONSOLIDATED SALES
Sales for the second quarter totalled $222.4 million, consisting of
rough diamond sales of $89.6 million and luxury brand segment sales of
$132.8 million. This compares to sales of $153.7 million in the
comparable quarter of the prior year (rough diamond sales of
$86.8 million and luxury brand segment sales of $66.9 million).
See 'Segmented Analysis' on page 9 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's second quarter cost of sales was $150.2 million for a
gross margin of 32.5% compared to a cost of sales of $85.8 million and
a gross margin of 44.2% 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 9 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 and
marketing, rent and building related costs. The Company incurred SG&A
expenses of $49.1 million for the second quarter, compared to
$38.0 million in the comparable quarter of the prior year.
Included in SG&A expenses for the second quarter was $5.7 million for
the mining segment compared to $4.8 million for the comparable quarter
of the prior year and $43.4 million for the luxury brand segment
compared to $33.2 million for the comparable quarter of the prior year.
See 'Segmented Analysis' on page 9 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $7.5 million during the
second quarter, compared to a net income tax expense of $10.9 million
in the comparable quarter of the prior year. The Company's combined
Canadian federal and provincial statutory tax rate for the quarter is
27.9%. There are a number of items that can significantly impact the
Company's effective tax rate, including foreign currency exchange rate
fluctuations, the Northwest Territories mining royalty, earnings
subject to tax different than the statutory rate such as earnings in
foreign jurisdictions, and changes in valuation allowances. As a
result, the Company's recorded tax provision can be significantly
different than the expected tax provision calculated based on the
statutory tax rate.
The recorded tax provision is particularly impacted by foreign currency
exchange rate fluctuations. 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 second quarter, the Canadian dollar weakened against the US dollar.
As a result, the Company recorded an unrealized foreign exchange gain
of $1.9 million on the revaluation of the Company's Canadian dollar
denominated deferred income tax liability. This compares to an
unrealized foreign exchange gain of $1.8 million in the comparable
quarter of the prior year. The unrealized foreign exchange gain is
recorded as part of the Company's deferred income tax recovery, and is
not taxable for Canadian income tax purposes. During the second
quarter, the Company also recognized a deferred income tax expense of
$4.0 million for temporary differences arising from the difference
between the historical exchange rate and the current exchange rate
translation of foreign currency non-monetary items. This compares to a
deferred income tax expense of $3.4 million recognized in the
comparable quarter of the prior year. The recorded tax provision
during the second quarter also included a net income tax recovery of
$1.2 million relating to foreign exchange differences between income in
the currency of the country of origin and the US dollar. This compares
to a net income tax recovery of $0.2 million recognized in the
comparable period of the prior year.
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.
Due to the number of factors that can potentially impact the effective
tax rate and the sensitivity of the tax provision to these factors, as
discussed above, it is expected that the Company's effective tax rate
will fluctuate in future periods.
CONSOLIDATED FINANCE EXPENSES
Finance expenses of $5.2 million were incurred during the second quarter
compared to $3.0 million during the comparable quarter of the prior
year. Finance expenses were impacted by increased debt levels in the
mining segment relating to the drawdown of $50.0 million on the
Standard Chartered Bank credit facility on July 31, 2010 and the $70.0
million promissory note payable to Kinross Gold Corporation ('Kinross')
issued on August 25, 2010.
CONSOLIDATED EXPLORATION EXPENSE
Exploration expense of $0.8 million was incurred during the second
quarter compared to $0.1 million in the comparable quarter of the prior
year.
CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.1 million was recorded during the quarter
compared to $0.2 million in the comparable quarter of the prior year.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of $0.3 million was recognized during the
quarter compared to a net foreign exchange gain of $1.0 million in the
comparable quarter of the prior year. The Company does not currently
have any significant foreign exchange derivative instruments
outstanding.
Six Months Ended July 31, 2011 Compared to Six Months Ended July 31,
2010
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded consolidated net profit attributable to
shareholders of $13.6 million or $0.16 per share for the six months
ended July 31, 2011, compared to a net profit attributable to
shareholders of $15.2 million or $0.20 per share in the comparable
period of the prior year.
CONSOLIDATED SALES
Sales for the six months ended July 31, 2011, totalled $366.3 million,
consisting of rough diamond sales of $151.6 million and luxury brand
segment sales of $214.7 million. This compares to sales of $267.7
million in the comparable period of the prior year (rough diamond sales
of $135.7 million and luxury brand segment sales of $132.0 million).
See 'Segmented Analysis' on page 9 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's cost of sales for the six months ended July 31, 2011, was
$246.6 million for a gross margin of 32.7% compared to a cost of sales
of $161.5 million and a gross margin of 39.7% in the comparable period
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 9 for additional
information.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of SG&A expenses include expenses for salaries
and benefits, advertising and marketing, rent and building related
costs. The Company incurred SG&A expenses of $91.9 million for the six
months ended July 31, 2011, compared to $73.9 million in the comparable
period of the prior year.
Included in SG&A expenses for the six months ended July 31, 2011, was
$13.7 million for the mining segment compared to $8.7 million for the
comparable period of the prior year and $78.2 million for the luxury
brand segment compared to $65.2 million for the comparable period of
the prior year. See 'Segmented Analysis' on page 9 for additional
information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $4.5 million during the
six months ended July 31, 2011, compared to a net income tax expense of
$5.4 million in the comparable period of the prior year. The Company's
combined Canadian federal and provincial statutory tax rate for the
quarter is 27.9%. There are a number of items that can significantly
impact the Company's effective tax rate, including foreign currency
exchange rate fluctuations, the Northwest Territories mining royalty,
earnings subject to tax different than the statutory rate such as
earnings in foreign jurisdictions, and changes in valuation
allowances. As a result, the Company's recorded tax provision can be
significantly different than the expected tax provision calculated
based on the statutory tax rate.
The recorded tax provision is particularly impacted by foreign currency
exchange rate fluctuations. 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 six months ended July 31, 2011, the Canadian dollar strengthened
against the US dollar. As a result, the Company recorded an unrealized
foreign exchange loss of $9.8 million on the revaluation of the
Company's Canadian dollar denominated deferred income tax liability.
This compares to an unrealized foreign exchange loss of $6.2 million in
the comparable period of the prior year. The unrealized foreign
exchange loss is recorded as part of the Company's deferred income tax
recovery, and is not deductible for Canadian income tax purposes.
During the six months ended July 31, 2011, the Company also recognized
a deferred income tax recovery of $8.6 million for temporary
differences arising from the difference between the historical exchange
rate and the current exchange rate translation of foreign currency
non-monetary items. This compares to a deferred income tax recovery of
$6.6 million recognized in the comparable period of the prior year.
The recorded tax provision during the six months ended July 31, 2011
also included a net income tax recovery of $3.2 million relating to
foreign exchange differences between income in the currency of the
country of origin and the US dollar. This compares to a net income tax
recovery of $1.8 million recognized in the comparable period of the
prior year.
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.
Due to the number of factors that can potentially impact the effective
tax rate and the sensitivity of the tax provision to these factors, as
discussed above, it is expected that the Company's effective tax rate
will fluctuate in future periods.
CONSOLIDATED FINANCE EXPENSES
Finance expenses of $9.2 million were incurred during the six months
ended July 31, 2011, compared to $5.9 million during the comparable
period of the prior year. Finance expenses were impacted by increased
debt levels in the mining segment relating to the drawdown of $50.0
million on the Standard Chartered Bank credit facility on July 31, 2010
and the $70.0 million promissory note payable to Kinross issued on
August 25, 2010.
CONSOLIDATED EXPLORATION EXPENSE
Exploration expense of $1.0 million was incurred during the six months
ended July 31, 2011, compared to $0.1 million in the comparable period
of the prior year.
CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.3 million was recorded during the six
months ended July 31, 2011, consistent with the comparable period of
the prior year.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of $0.1 million was recognized during the
six months ended July 31, 2011, compared to a net foreign exchange loss
of $1.2 million in the comparable period of the prior year. The Company
does not currently have any significant foreign exchange derivative
instruments outstanding.
Segmented Analysis
The operating segments of the Company include 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)
IFRS CDN GAAP IFRS IFRS
Six Six
months months
ended ended
July July
2012 2012 2011 2011 2011 2011 2010 2010 31, 31,
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 2011 2010
Sales $ 89,608 $ 62,035 $ 82,697 $ 60,708 $ 86,827 $ 48,922 $ 63,489 $ 20,765 $ 151,643 $ 135,749
Cost of sales 67,613 53,443 61,822 45,039 54,408 44,143 57,027 20,319 121,056 98,551
Gross margin 21,995 8,592 20,875 15,669 32,419 4,779 6,462 446 30,587 37,198
Gross margin
(%) 24.5% 13.9% 25.2% 25.8% 37.3% 9.8% 10.2% 2.1% 20.2% 27.4%
Selling,
general and
administrative
expenses 5,709 8,026 4,828 6,231 4,813 3,870 4,885 4,932 13,735 8,683
Operating
profit (loss) $ 16,286 $ 566 $ 16,047 $ 9,438 $ 27,606 $ 909 $ 1,577 $ (4,486) $ 16,852 $ 28,515
Depreciation
and
amortization (
(i)) 17,461 17,083 20,669 15,428 16,352 10,975 14,976 7,845 34,544 27,327
EBITDA ((ii) ) $ 33,747 $ 17,649 $ 36,716 $ 24,866 $ 43,958 $ 11,884 $ 16,553 $ 3,359 $ 51,396 $ 55,842
((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 'Non-GAAP Measure' on page 16.
Three Months Ended July 31, 2011 Compared to Three Months Ended July 31,
2010
MINING SALES
During the quarter, the Company sold 0.57 million carats for a total of
$89.6 million for an average price per carat of $157 compared to
0.78 million carats for a total of $86.8 million for an average price
per carat of $112 in the comparable quarter of the prior year.
The Company held two complete rough diamond sales in the second
quarter, compared to three complete sales in the comparable quarter of
the prior year. The 41% increase in the Company's achieved rough
diamond price per carat was impacted by a sales mix, dominated by
production from the lower value A-418 B ore.
On a quarterly basis, the Company expects that 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, rough diamond prices and the volume, size
and quality distribution of rough diamonds delivered from the Diavik
Diamond Mine in each quarter.
MINING COST OF SALES AND GROSS MARGIN
The Company's second quarter cost of sales was $67.6 million resulting
in a gross margin of 24.5% compared to a cost of sales of $54.4 million
and a gross margin of 37.3% in the comparable quarter of the prior
year. Cost of sales included $16.8 million of depreciation and
amortization compared to $15.7 million in the comparable quarter of the
prior year. The increase in cost of sales was due primarily to a
greater volume of production during the quarter from the higher-cost
underground development mining. The mining gross margin is anticipated
to fluctuate between quarters, resulting from variations in the
specific mix of product sold during each quarter and rough diamond
prices.
A substantial portion of cost of sales is mining operating costs, which
are incurred at the Diavik Diamond Mine. Cost of sales also includes
sorting costs, which consist of the Company's cost of handling and
sorting product in preparation for sales to third parties, and
amortization and depreciation, the majority of which is recorded using
the unit-of-production method over estimated proven and probable
reserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment increased by $0.9 million from the
comparable quarter of the prior year due to a mark-to-market on
stock-based compensation and the strengthening of the Canadian dollar.
Six Months Ended July 31, 2011 Compared to Six Months Ended July 31,
2010
MINING SALES
During the six months ended July 31, 2011, the Company sold 1.0 million
carats for a total of $151.6 million for an average price per carat of
$146 compared to 1.2 million carats for a total of $135.7 million for
an average price per carat of $109 in the comparable period of the
prior year. The Company held four complete rough diamond sales in the
six months ended July 31, 2011, compared to five complete sales in the
comparable period of the prior year. The 34% increase in the Company's
achieved rough diamond price per carat was impacted by a sales mix,
dominated by production from the lower value A-418 B ore.
The Company expects that 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,
rough diamond prices and the volume, size and quality distribution of
rough diamonds delivered from the Diavik Diamond Mine in each quarter.
MINING COST OF SALES AND GROSS MARGIN
The Company's cost of sales for the six months ended July 31, 2011, was
$121.1 million resulting in a gross margin of 20.2% compared to a cost
of sales of $98.6 million and a gross margin of 27.4% in the comparable
period of the prior year. Cost of sales included $33.2 million of
depreciation and amortization compared to $26.1 million in the
comparable period of the prior year. The increase in cost of sales was
due primarily to a higher volume of production during the period from
the higher-cost underground mine. The mining gross margin is
anticipated to fluctuate between quarters, resulting from variations in
the specific mix of product sold during each quarter and rough diamond
prices.
A substantial portion of cost of sales is mining operating costs, which
are incurred at the Diavik Diamond Mine. Cost of sales also includes
sorting costs, which consist of the Company's cost of handling and
sorting product in preparation for sales to third parties, and
amortization and depreciation, the majority of which is recorded using
the unit-of-production method over estimated proven and probable
reserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment increased by $5.1 million from the
comparable period of the prior year due to executive severance, a
mark-to-market on stock-based compensation and the strengthening of the
Canadian dollar during the period.
MINING SEGMENT OPERATIONAL UPDATE
Ore production for the second calendar quarter consisted of 1.47 million
carats produced from 0.43 million tonnes of ore from the A-418
kimberlite pipe, 0.18 million carats produced from 0.09 million tonnes
of ore from the A-154 North kimberlite pipe, and 0.09 million carats
produced from 0.02 million tonnes of ore from the A-154 South
kimberlite pipe. Also included in production for the calendar quarter
was an estimated 0.05 million carats from reprocessed plant rejects
('RPR'). These RPR are not included in the Company's reserves and
resource statement and are therefore incremental to production. Rough
diamond production was 11% higher than the comparable calendar quarter
of the prior year due primarily to the improvement in grade of the ore
from the A-418 open pit.
HARRY WINSTON DIAMOND LIMITED PARTNERSHIP'S 40% SHARE OF DIAVIK DIAMOND
MINE PRODUCTION
(reported on a
one-month lag)
Three Three Six Six
months months months months
ended ended ended ended
June June June June
30, 30, 30, 30,
2011 2010 2011 2010
Diamonds 716 645 1,256 1,270
recovered
(000s carats)
Grade 3.29 3.09 3.06 3.48
(carats/tonne)
Mining Segment Outlook
PRODUCTION
The approved mine plan and budget for calendar 2011 estimates Diavik
Diamond Mine production of approximately 6.9 million carats from the
mining of 2.0 million tonnes of ore and processing of 2.2 million
tonnes of ore, with the increment delivered from stockpile. It is
expected that with the accelerated production towards the end of the
year, carats shipped will be lower than carats produced in the calendar
year. This difference is expected to reverse in calendar 2012.
Production for the year is expected to comprise approximately 1.4
million tonnes from the A-418 open pit, and 0.6 million tonnes from the
underground portions of A-154 South and A-154 North. The Company
expects that in the second half of the year, the higher grade A-154
South will continue to be mined using sub-level retreat, the higher
velocity and lower cost mining method that commenced in July 2011.
Looking beyond calendar 2011, the objective is to fully utilize
processing capacity with a combination of underground and open pit
production. Current plans see A-21 development beginning in 2013, with
production in 2015. In addition, exploration work has identified
extensions at depth to the A-418 and A-154 North kimberlite pipes. The
inclusion of these extensions into ore reserves will be largely
dependent upon the costs of new underground mining techniques currently
under review. The Company is in the process of updating the
life-of-mine plan, which it expects to release publicly later this
year.
PRICING
The rough diamond market continued to improve into the second quarter of
fiscal 2012. Towards the end of the second quarter, the market
experienced resistance to further diamond price increases which may
persist until confidence returns to the global market. Based on Harry
Winston Diamond Corporation's rough diamond sales prices as of July
2011 and the current diamond recovery profile of the Diavik processing
plant, the Company has modeled the approximate rough diamond price per
carat for each of the Diavik ore types as follows:
Average
price
per
carat
Ore (in US
type dollars)
A-154 $ 200
South
A-154 260
North
A-418 185
A
Type
Ore
A-418 120
B
Type
Ore
RPR 65
COST OF SALES
The Company expects cost of sales in fiscal 2012 to be approximately
$265 million. Included in this amount is depreciation and amortization
of approximately $80 million at an assumed average Canadian/US dollar
exchange rate of $1.00. This increase in cost of sales as compared to
fiscal 2011 is expected to result primarily from an increase in the
proportion of underground ore mined.
CAPITAL EXPENDITURES
During fiscal 2012, HWDLP's 40% share of the planned capital
expenditures at the Diavik Diamond Mine is expected to be approximately
$62 million at an assumed average Canadian/US dollar exchange rate of
$1.00. During the second quarter, HWDLP's share of capital expenditures
was $9.7 million.
EXPLORATION
The Company has additionally staked 226,000 acres of mineral claims on
the prospective geological trend to the southwest of the existing mine
site and is starting a small but important basal till drilling program
to assess the potential for new diamondiferous kimberlite pipes over
the coming years. On September 6, 2011, the Company announced that
Harry Winston Diamond Mines Ltd. and its wholly owned subsidiary
6355137 Canada Inc. have entered into an option agreement with North
Arrow Minerals Inc.('North Arrow') and Springbok Holdings Inc.,
('Springbok') in regards to their Lac de Gras properties in the
Northwest Territories. Under the terms of the agreement, the two
properties collectively will form a 'Joint Venture Property'. In order
for the option to vest, the Company is to carry out exploration on the
Joint Venture Property, making expenditures of at least $5 million over
a five year period. Upon vesting, a joint venture will be formed, in
which the Company will hold a 55% interest, and North Arrow and
Springbok will equally share a 45% interest, in the entire Joint
Venture Property.
Luxury Brand
The luxury brand segment includes sales from Harry Winston salons, which
are located in prime markets around the world, including eight salons
in the United States: New York, Beverly Hills, Bal Harbour, Honolulu,
Las Vegas, Dallas, Chicago and Costa Mesa; five salons in Japan: Ginza,
Roppongi Hills, Osaka, Omotesando and Nagoya; two salons in Europe:
Paris and London; and four salons in Asia outside of Japan: Beijing,
Taipei, Hong Kong and Singapore.
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
IFRS CDN GAAP IFRS IFRS
Six Six
months months
ended ended
July July
2012 2012 2011 2011 2011 2011 2010 2010 31, 31,
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 2011 2010
Sales $ 132,770 $ 81,897 $ 132,661 $ 80,169 $ 66,901 $ 65,078 $ 70,165 $ 54,063 $ 214,667 $ 131,979
Cost of sales 82,564 43,009 79,569 39,726 31,390 31,568 39,230 24,908 125,573 62,958
Gross margin 50,206 38,888 53,092 40,443 35,511 33,510 30,935 29,155 89,094 69,021
Gross margin
(%) 37.8% 47.5% 40.0% 50.4% 53.1% 51.5% 44.1% 53.9% 41.5% 52.3%
Selling,
general and
administrative
expenses 43,392 34,769 47,894 35,051 33,185 32,078 35,594 29,610 78,161 65,263
Operating
profit (loss) $ 6,814 $ 4,119 $ 5,198 $ 5,392 $ 2,326 $ 1,432 $ (4,659) $ (455) $ 10,933 $ 3,758
Depreciation
and
amortization (
(i)) 3,255 3,209 3,966 3,229 3,162 3,226 3,282 3,363 6,463 6,388
EBITDA ((ii) ) $ 10,069 $ 7,328 $ 9,164 $ 8,621 $ 5,488 $ 4,658 $ (1,377) $ 2,908 $ 17,396 $ 10,146
((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 'Non-GAAP Measure' on page 16.
Three Months Ended July 31, 2011 Compared to Three Months Ended July 31,
2010
LUXURY BRAND SALES
Sales for the second quarter were $132.8 million compared to $66.9
million for the comparable quarter of the prior year, an increase of
98% (81% at constant exchange rates). Sales in Asia increased 223% to
$72.9 million, European sales increased 24.6% to $30.8 million, and US
sales increased 48% to $29.1 million. Included in the second quarter
were $55.6 million of high-value transactions, which generally carry
lower-than-average gross margins.
LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the second quarter was
$82.6 million compared to $31.4 million for the comparable quarter of
the prior year. Gross margin for the quarter was $50.2 million or 37.8%
compared to $35.5 million or 53.1% for the second quarter of the prior
year. The decrease in gross margin resulted primarily from exceptional
high-value transactions during the second quarter, which carry
generally lower-than-average gross margins.
LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 31% to $43.4 million from $33.2 million in
the comparable quarter of the prior year (21% at constant exchange
rates). The increase was due primarily to higher advertising, marketing
and selling expenses, higher variable compensation expenses resulting
from higher sales and increased rent and building related expenses.
Fixed costs accounted for $8.3 million of the increase, while variable
expenses linked to higher volume of sales accounted for $1.9 million of
the increase. SG&A expenses include depreciation and amortization
expense of $3.2 million consistent with the comparable quarter of the
prior year.
Six Months Ended July 31, 2011 Compared to Six Months Ended July 31,
2010
LUXURY BRAND SALES
Sales for the six months ended July 31, 2011, were $214.7 million
compared to $132.0 million for the comparable period of the prior year,
an increase of 63% (48% at constant exchange rates). Sales in Asia
increased 112% to $97.8 million, US sales increased 57% to $65.5
million and European sales increased 16% to $51.4 million. During the
period there were $60.8 million of high-value transactions, which carry
generally lower-than-average gross margins.
LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the six months ended July
31, 2011, was $125.6 million compared to $63.0 million for the
comparable period of the prior year. Gross margin for the six months
ended July 31, 2011, was $89.1 million or 41.5% compared to $69.0
million or 52.3% for the comparable period of the prior year. The
decrease in gross margin resulted primarily from exceptional high-value
transactions during the period, which carry generally
lower-than-average gross margins.
LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 20% to $78.2 million from $65.3 million in
the comparable period of the prior year (11% at constant exchange
rate). The increase was due primarily to higher advertising, marketing
and selling expenses, higher variable compensation expenses resulting
from higher sales and increased rent and building related expenses.
Fixed costs accounted for $9.8 million of the increase, while variable
expenses linked to higher volume of sales accounted for $3.1 million of
the increase. SG&A expenses include depreciation and amortization
expense of $6.3 million consistent with the comparable period of the
prior year.
LUXURY BRAND SEGMENT OPERATIONAL UPDATE
During the six months ended July 31, 2011, the luxury brand segment
generated sales of $214.7 million, an increase of 63% over the
comparable period of the prior year at actual exchange rates. The
Company recorded significant high-value transactions of $60.8 million
during the six month period. Sales growth was achieved across all
geographic regions. The US market generated sales of $65.5 million, an
increase of 57% over the comparable quarter of the prior year. The US
market continues to benefit from strong tourist flows supported by a
weak US dollar. In Japan, sales of $33.0 million increased by 17% at
actual exchange rates and by 4% on a constant exchange rate basis over
the comparable period of the prior year. Asia excluding Japan had
sales of $64.8 million representing an increase of 262% at actual
exchange rates and positive 240% on a constant exchange basis over the
comparable period of the prior year. In Europe, sales of $51.4 million
were 16% higher at actual exchange rates and negative 2% on a constant
exchange basis over the comparable period of the prior year.
Harry Winston successfully launched the Lily Cluster jewelry collection
and the Midnight watch collection during the quarter, supported by a
global marketing campaign. Consumers responded positively to the new
collections.
The luxury brand segment's distribution network consists of 19 directly
operated salons, 2 licensed salons (in Manila, Philippines, and Kiev,
Ukraine) and 189 wholesale watch doors around the world.
Luxury Brand Segment Outlook
Although the current economic disruptions emanating primarily from the
US and Europe represent significant challenges, the Company is
optimistic that the introduction of new products supported by an
innovative advertising campaign will translate into increasing sales
and profitability.
The Company continues to focus on expanding its global distribution
network. A new directly operated salon will be opened in Shanghai,
China, in the fourth quarter as well as three licensed salons and 35
wholesale watch doors through the remainder of the fiscal year. A key
component of the luxury brand's growth strategy is the expansion of its
current salon network and wholesale distribution channel. The growth
target is to expand to approximately 35 directly operated salons, 15
licensed salons, and 300 wholesale doors by fiscal 2016.
On May 19, 2011, the Company announced that it had entered into a
business arrangement with Diamond Asset Advisors AG ('DAA'), which is
in the process of establishing a polished diamond investment fund (the
'Fund'). The Fund will be structured as a limited partnership with
total funding of up to $250 million, offering institutional investors
direct exposure to the wholesale market price of polished diamonds.
Under the terms of the Company's arrangement with the Fund, the
Company's expert diamond team will source diamonds for the Fund that
have the same high-quality characteristics that the luxury brand
segment uses in its jewelry and watches, with a portion of the diamonds
coming from the Company's existing inventory. The Fund will purchase
the diamonds and then consign them to the Company, which will act as
custodian. The Company will use the consigned polished diamonds in the
manufacturing of its jewelry and watches, paying the Fund when the
jewelry or watch is sold. The price paid by the Fund to replace the
sold polished diamonds will be used to determine the Fund's market
value. This arrangement will increase the inventory available to the
Company's expanding international salon network without additional
demands on working capital. The Fund is expected to raise the first
capital subscription of approximately $100 million from investors later
this fiscal year, with the remaining $150 million expected to be raised
over the following year, subject to market conditions.
Liquidity and Capital Resources
Working Capital
As at July 31, 2011, the Company had unrestricted cash and cash
equivalents of $139.9 million compared to $108.7 million at January 31,
2011. The Company had cash on hand and balances with banks of
$132.5 million and short-term investments of $7.4 million at July 31,
2011. During the quarter ended July 31, 2011, the Company reported cash
from operations of $40.1 million compared to $2.4 million in the
comparable quarter of the prior year.
Working capital increased to $396.1 million at July 31, 2011 from
$328.6 million at January 31, 2011. During the quarter, the Company
increased accounts receivable by $2.8 million, decreased other current
assets by $3.2 million, decreased inventory and supplies by
$38.0 million, decreased trade and other payables by $54.7 million and
increased employee benefit plans by $0.1 million.
The Company's liquidity requirements fluctuate from quarter to quarter
depending on, among other factors, the seasonality of production at the
Diavik Diamond Mine, seasonality of mine operating expenses, capital
expenditure programs, the number of rough diamond 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, along with the seasonality of sales and salon
expansion in the luxury brand segment. The Company's principal working
capital needs include investments in inventory, other current assets,
and trade and other payables and income taxes payable.
The Company assesses liquidity and capital resources on a consolidated
basis. The Company's requirements are for cash operating expenses,
working capital, contractual debt requirements and capital
expenditures. The Company believes that it will generate sufficient
liquidity to meet its anticipated requirements for the next twelve
months.
Financing Activities
The mining segment maintains a senior secured revolving credit facility
with Standard Chartered Bank that was increased from $100.0 million to
$125.0 million on February 28, 2011. At July 31, 2011, $50.0 million
was outstanding; this amount remains unchanged from January 31, 2011.
As at July 31, 2011, $1.6 million was outstanding under the Company's
revolving financing facility relating to its India subsidiary,
Harry Winston Diamond (India) Private Limited, compared to $nil at
January 31, 2011.
During the quarter ended July 31, 2011, the luxury brand subsidiary,
Harry Winston Inc., increased the amount outstanding on its secured
five-year revolving credit facility to $188.3 million from $165.0
million at January 31, 2011.
Investing Activities
During the second quarter, the Company purchased property, plant and
equipment of $14.5 million, of which $12.6 million was purchased for
the mining segment and $1.9 million for the luxury brand segment.
Contractual Obligations
The Company has contractual payment obligations with respect to
interest-bearing loans and borrowings and, through its participation in
the Joint Venture, future site restoration costs at the Diavik Diamond
Mine level. Additionally, at the Joint Venture level, contractual
obligations exist with respect to operating purchase obligations, as
administered by DDMI, the operator of the mine. In order to maintain
its 40% ownership interest in the Diavik Diamond Mine, HWDLP is
obligated to fund 40% of the Joint Venture's total expenditures on a
monthly basis. HWDLP's current projected share of the planned capital
expenditures at the Diavik Diamond Mine, which are not reflected in the
table below, including capital expenditures for the calendar years 2011
to 2015, is approximately $140 million assuming a Canadian/US average
exchange rate of $1.00 for the five years. The most significant
contractual obligations for the ensuing five-year period can be
summarized as follows:
CONTRACTUAL Less Year Year After
OBLIGATIONS than
(expressed in Total 1 year 2-3 4-5 5 years
thousands of
United States
dollars)
Interest-bearing $ 383,454 $ 104,563 $ 254,138 $ 5,168 $ 19,585
loans and
borrowings (a)
(b)
Environmental 99,171 86,112 713 865 11,481
and
participation
agreements
incremental
commitments (c)
Operating lease 240,209 25,640 41,148 39,735 133,686
obligations (d)
Total $ 722,834 $ 216,315 $ 295,999 $ 45,768 $ 164,752
contractual
obligations
(a) Interest-bearing loans and borrowings presented in the foregoing
table include current and long-term portions. The mining segment
maintains a senior secured revolving credit facility with
Standard Chartered Bank for $125.0 million. The facility has an
initial maturity date of June 24, 2013 with two one-year
extensions at the Company's option. There are no scheduled
repayments required before maturity. At July 31, 2011, $50.0
million was outstanding.
On August 25, 2010, the Company issued a promissory note in the
amount of $70.0 million, maturing on August 25, 2011, as part of
the consideration for reacquiring its 9% indirect interest in
the Diavik Joint Venture (the 'Kinross Buy Back Transaction')
from Kinross. The note bears interest at a rate of 5% per annum
and can be paid in cash. On August 25, 2011, the Company paid
the $70.0 million promissory note plus accrued interest to
Kinross from cash on hand.
The Company has available a $45.0 million revolving financing
facility (utilization in either US dollars or Euros) for
inventory and receivables funding in connection with marketing
activities through its Belgian subsidiary, Harry Winston Diamond
International N.V., and its Indian subsidiary, Harry Winston
Diamond (India) Private Limited. Borrowings under the Belgian
facility bear interest at the bank's base rate plus 1.5%.
Borrowings under the Indian facility bear an interest rate of
12.0%. At July 31, 2011, $nil and $1.6 million were outstanding
under this facility relating to its Belgian subsidiary,
Harry Winston Diamond International N.V., and its Indian
subsidiary, Harry Winston Diamond (India) Private Limited,
respectively. The facility is guaranteed by Harry Winston
Diamond Corporation.
Harry Winston Inc. maintains a credit agreement with a syndicate
of banks for a $250.0 million five-year revolving credit
facility, which expires on March 31, 2013. There are no
scheduled repayments required before maturity. At July 31, 2011,
$188.3 million had been drawn against this secured credit
facility.
Also included in long-term debt of Harry Winston Inc. is a
25-year loan agreement for CHF 17.5 million ($21.6 million) used
to finance the construction of the Company's watch factory in
Geneva, Switzerland. The loan agreement is comprised of a CHF
3.5 million ($4.3 million) loan and a CHF 14.0 million ($17.3
million) loan. The CHF 3.5 million loan bears interest at a rate
of 3.15% and matures on April 22, 2013. The CHF 14.0 million
loan bears interest at a rate of 3.55% and matures on January
31, 2033. At July 31, 2011, $19.3 million was outstanding. The
bank has a secured interest in the factory building.
Harry Winston Japan, K.K. maintains unsecured credit agreements
with two banks, amounting to ¥1,215 million ($15.8 million).
Harry Winston Japan, K.K. also maintains a secured credit
agreement amounting to ¥575 million ($7.5 million). This
facility is secured by inventory owned by Harry Winston Japan,
K.K.
The Company's first mortgage on real property has scheduled
principal payments of approximately $0.2 million quarterly, may
be prepaid at any time, and matures on September 1, 2018. On
July 31, 2011, $7.0 million was outstanding on the mortgage
payable.
(b) Interest on loans and borrowings is calculated at various fixed
and floating rates. Projected interest payments on the current
debt outstanding were based on interest rates in effect at July
31, 2011, and have been included under interest-bearing loans
and borrowings in the table above. Interest payments for the
next twelve months are approximated to be $10.3 million.
(c) The Joint Venture, under environmental and other agreements,
must provide funding for the Environmental Monitoring Advisory
Board. These agreements also state that the Joint Venture must
provide security deposits for the performance by the Joint
Venture of its reclamation and abandonment obligations under all
environmental laws and regulations. The operator of the Joint
Venture has fulfilled such obligations for the security deposits
by posting letters of credit of which HWDLP's share as at July
31, 2011 was $84.3 million based on its 40% ownership interest
in the Diavik Diamond Mine. There can be no assurance that the
operator will continue its practice of posting letters of credit
in fulfillment of this obligation, in which event HWDLP would be
required to post its proportionate share of such security
directly, which would result in additional constraints on
liquidity. The requirement to post security for the reclamation
and abandonment obligations may be reduced to the extent of
amounts spent by the Joint Venture on those activities. The
Joint Venture has also signed participation agreements with
various native groups. These agreements are expected to
contribute to the social, economic and cultural well-being of
area Aboriginal bands. The actual cash outlay for the Joint
Venture's obligations under these agreements is not anticipated
to occur until later in the life of the Diavik Diamond Mine.
(d) Operating lease obligations represent future minimum annual
rentals under non-cancellable operating leases for Harry Winston
Inc. salons and office space, and long-term leases for property,
land, office premises and a fuel tank farm for the Diavik
Diamond Mine.
Non-GAAP Measure
In addition to discussing earnings measures in accordance with IFRS, the
MD&A provides the following non-GAAP measure, which is also used by
management to monitor and evaluate the performance of the Company and
its business segments.
The term EBITDA (earnings before interest, taxes, depreciation and
amortization) does not have a standardized meaning according to IFRS
and therefore may not be comparable to similar measures presented by
other issuers. The Company defines EBITDA as sales minus cost of sales
and selling, general and administrative expenses, meaning it represents
operating profit before depreciation and amortization.
EBITDA is a measure commonly reported and widely used by investors and
analysts as an indicator of the Company's operating performance and
ability to incur and service debt and as a valuation metric. EBITDA
margin is defined as the ratio obtained by dividing EBITDA by sales.
CONSOLIDATED
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
IFRS CDN GAAP IFRS IFRS
Six Six
months months
ended ended
July July
2012 2012 2011 2011 2011 2011 2010 2010 31, 31,
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 2011 2010
Operating $ 23,100 $ 4,685 $ 21,245 $ 14,830 $ 29,932 $ 2,341 $ (3,082) $ (4,941) $ 27,785 $ 32,273
profit
(loss)
Depreciation 20,716 20,291 24,635 18,657 19,515 14,200 18,258 11,208 41,007 33,715
and
amortization
EBITDA $ 43,816 $ 24,976 $ 45,880 $ 33,487 $ 49,447 $ 16,541 $ 15,176 $ 6,267 $ 68,792 $ 65,988
MINING SEGMENT
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
IFRS CDN GAAP IFRS IFRS
Six Six
months months
ended ended
July July
2012 2012 2011 2011 2011 2011 2010 2010 31, 31,
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 2011 2010
Operating $ 16,286 $ 566 $ 16,047 $ 9,438 $ 27,606 $ 909 $ 1,577 $ (4,486) $ 16,852 $ 28,515
profit
(loss)
Depreciation 17,461 17,083 20,669 15,428 16,352 10,975 14,976 7,845 34,544 27,327
and
amortization
EBITDA $ 33,747 $ 17,649 $ 36,716 $ 24,866 $ 43,958 $ 11,884 $ 16,553 $ 3,359 $ 51,396 $ 55,842
LUXURY BRAND SEGMENT
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
IFRS CDN GAAP IFRS IFRS
Six Six
months months
ended ended
July July
2012 2012 2011 2011 2011 2011 2010 2010 31, 31,
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 2011 2010
Operating $ 6,814 $ 4,119 $ 5,198 $ 5,392 $ 2,326 $ 1,432 $ (4,659) $ (455) $ 10,933 $ 3,758
profit
(loss)
Depreciation 3,255 3,209 3,966 3,229 3,162 3,226 3,282 3,363 6,463 6,388
and
amortization
EBITDA $ 10,069 $ 7,328 $ 9,164 $ 8,621 $ 5,488 $ 4,658 $ (1,377) $ 2,908 $ 17,396 $ 10,146
Subsequent Event
On August 25, 2011, the Company paid the $70.0 million promissory note
plus accrued interest owing to Kinross from cash on hand. The
promissory note was issued to Kinross on August 25, 2010, as part of
the consideration for reacquiring Kinross's 9% indirect interest in the
Diavik Joint Venture.
Risks and Uncertainties
Harry Winston Diamond Corporation is subject to a number of risks and
uncertainties as a result of its operations. In addition to the other
information contained in this MD&A and the Company's other publicly
filed disclosure documents, readers should give careful consideration
to the following risks, each of which could have a material adverse
effect on the Company's business prospects or financial condition.
Nature of Mining
The operation of the Diavik Diamond Mine is subject to risks inherent in
the mining industry, including variations in grade and other geological
differences, unexpected problems associated with required water
retention dikes, water quality, surface and underground conditions,
processing problems, equipment performance, accidents, labour disputes,
risks relating to the physical security of the diamonds, force majeure
risks and natural disasters. Particularly with underground mining
operations, inherent risks include variations in rock structure and
strength as it impacts on mining method selection and performance,
de-watering and water handling requirements, achieving the required
paste backfill strengths, and unexpected local ground conditions.
Hazards, such as unusual or unexpected rock formations, rock bursts,
pressures, collapses, flooding or other conditions, may be encountered
during mining. Such risks could result in personal injury or fatality;
damage to or destruction of mining properties, processing facilities or
equipment; environmental damage; delays, suspensions or permanent
reductions in mining production; monetary losses; and possible legal
liability.
The Diavik Diamond Mine, because of its remote northern location and
access only by winter road or by air, is subject to special climate and
transportation risks. These risks include the inability to operate or
to operate efficiently during periods of extreme cold, the
unavailability of materials and equipment, and increased transportation
costs due to the late opening and/or early closure of the winter road.
Such factors can add to the cost of mine development, production and
operation and/or impair production and mining activities, thereby
affecting the Company's profitability.
Nature of Joint Arrangement with DDMI
HWDLP holds an undivided 40% interest in the assets, liabilities and
expenses of the Diavik Diamond Mine and the Diavik group of mineral
claims. The Diavik Diamond Mine and the exploration and development of
the Diavik group of mineral claims is a joint arrangement between DDMI
(60%) and HWDLP (40%), and is subject to the risks normally associated
with the conduct of joint ventures and similar joint arrangements.
These risks include the inability to exert influence over strategic
decisions made in respect of the Diavik Diamond Mine and the Diavik
group of mineral claims. By virtue of DDMI's 60% interest in the Diavik
Diamond Mine, it has a controlling vote in virtually all Joint Venture
management decisions respecting the development and operation of the
Diavik Diamond Mine and the development of the Diavik group of mineral
claims. Accordingly, DDMI is able to determine the timing and scope of
future project capital expenditures, and therefore is able to impose
capital expenditure requirements on HWDLP that the Company may not have
sufficient cash to meet. A failure to meet capital expenditure
requirements imposed by DDMI could result in HWDLP's interest in the
Diavik Diamond Mine and the Diavik group of mineral claims being
diluted.
Diamond Prices and Demand for Diamonds
The profitability of the Company is dependent upon production from the
Diavik Diamond Mine and on the results of the operations of its luxury
brand operations. Each, in turn, is dependent in significant part upon
the worldwide demand for and price of diamonds. Diamond prices
fluctuate and are affected by numerous factors beyond the control of
the Company, including worldwide economic trends, particularly in the
US, Japan, China and India, worldwide levels of diamond discovery and
production, and the level of demand for, and discretionary spending on,
luxury goods such as diamonds and jewelry. Low or negative growth in
the worldwide economy, renewed or additional credit market disruptions,
natural disasters or the occurrence of further terrorist attacks or
similar activities creating disruptions in economic growth could result
in decreased demand for luxury goods such as diamonds and jewelry,
thereby negatively affecting the price of diamonds and jewelry.
Similarly, a substantial increase in the worldwide level of diamond
production or in diamonds available for sale through recommencement of
suspended mining activity or the release of stocks held back during
recent periods of low demand could also negatively affect the price of
diamonds. In each case, such developments could have a material adverse
effect on the Company's results of operations.
Cash Flow and Liquidity
The Company's liquidity requirements fluctuate from quarter to quarter
and year to year depending on, among other factors, the seasonality of
production at the Diavik Diamond Mine, seasonality of mine operating
expenses, capital expenditure programs, the number of rough diamond
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, along with the seasonality of sales and
salon refurbishment and expansion in the luxury brand segment. The
Company's principal working capital needs include investments in
inventory, prepaid expenses and other current assets, and accounts
payable and income taxes payable. There can be no assurance that the
Company will be able to meet each or all of its liquidity requirements.
A failure by the Company to meet its liquidity requirements could
result in the Company failing to meet its planned development
objectives, or in the Company being in default of a contractual
obligation, each of which could have a material adverse effect on the
Company's business prospects or financial condition.
Economic Environment
The Company's financial results are tied to the global economic
conditions and their impact on levels of consumer confidence and
consumer spending. The global markets have experienced the impact of a
significant US and international economic downturn since the fall of
2008. This has restricted the Company's growth opportunities both
domestically and internationally, and a return to a recession or weak
recovery, due to recent disruptions in financial markets in the US and
the European Union or otherwise, the 2011 disaster in Japan and
political upheavals in the Middle East, could cause the Company to
experience further revenue declines across both of its business
segments due to deteriorated consumer confidence and spending, and a
decrease in the availability of credit, which could have a material
adverse effect on the Company's business prospects or financial
condition. The Company monitors economic developments in the markets in
which it operates and uses this information in its continuous strategic
and operational planning in an effort to adjust its business in
response to changing economic conditions.
Currency Risk
Currency fluctuations may affect the Company's financial performance.
Diamonds are sold throughout the world based principally on the
US dollar price, and although the Company reports its financial results
in US dollars, a majority of the costs and expenses of the
Diavik Diamond Mine are incurred in Canadian dollars. Further, the
Company has a significant deferred income tax liability that has been
incurred and will be payable in Canadian dollars. The Company's
currency exposure relates primarily to expenses and obligations
incurred by it in Canadian dollars and, secondarily, to revenues of
Harry Winston Inc. in currencies other than the US dollar. The
appreciation of the Canadian dollar against the US dollar, and the
depreciation of other currencies against the US dollar, therefore, will
increase the expenses of the Diavik Diamond Mine and the amount of the
Company's Canadian dollar liabilities relative to the revenue
the Company will receive from diamond sales, and will decrease the US
dollar revenues received by Harry Winston Inc. From time to time, the
Company may use a limited number of derivative financial instruments to
manage its foreign currency exposure.
Licences and Permits
The operation of the Diavik Diamond Mine and exploration on the Diavik
property requires licences and permits from the Canadian government.
The Diavik Diamond Mine Type 'A' Water Licence was renewed by the
regional Wek'eezhii Land and Water Board to October 31, 2015. While the
Company anticipates that DDMI, the operator of the Diavik Diamond Mine,
will be able to renew this licence and other necessary permits in the
future, there can be no guarantee that DDMI will be able to do so or
obtain or maintain all other necessary licences and permits that may be
required to maintain the operation of the Diavik Diamond Mine or to
further explore and develop the Diavik property.
Regulatory and Environmental Risks
The operation of the Diavik Diamond Mine, exploration activities at the
Diavik Project and the manufacturing of jewelry and watches are subject
to various laws and regulations governing the protection of the
environment, exploration, development, production, taxes, labour
standards, occupational health, waste disposal, mine safety,
manufacturing safety and other matters. New laws and regulations,
amendments to existing laws and regulations, or more stringent
implementation or changes in enforcement policies under existing laws
and regulations could have a material adverse effect on the Company by
increasing costs and/or causing a reduction in levels of production
from the Diavik Diamond Mine and in the manufacture of jewelry and
watches. As well, as the Company's international operations expand, it
or its subsidiaries become subject to laws and regulatory regimes that
could differ materially from those under which they operate in Canada
and the US.
Mining and manufacturing are subject to potential risks and liabilities
associated with pollution of the environment and the disposal of waste
products occurring as a result of mining and manufacturing operations.
To the extent that the Company's operations are subject to uninsured
environmental liabilities, the payment of such liabilities could have a
material adverse effect on the Company.
Climate Change
Canada ratified the Kyoto Protocol to the United Nations Framework
Convention on Climate Change in late 2002 and the Kyoto Protocol came
into effect in Canada in February 2005. The Canadian government has
established a number of policy measures in order to meet its emission
reduction guidelines. While the impact of these measures cannot be
quantified at this time, the likely effect will be to increase costs
for fossil fuels, electricity and transportation; restrict industrial
emission levels; impose added costs for emissions in excess of
permitted levels; and increase costs for monitoring and reporting.
Compliance with these initiatives could have a material adverse effect
on the Company's results of operations.
Resource and Reserve Estimates
The Company's figures for mineral resources and ore reserves on the
Diavik group of mineral claims are estimates, and no assurance can be
given that the anticipated carats will be recovered. The estimation of
reserves is a subjective process. Forecasts are based on engineering
data, projected future rates of production and the timing of future
expenditures, all of which are subject to numerous uncertainties and
various interpretations. The Company expects that its estimates of
reserves will change to reflect updated information as well as to
reflect depletion due to production. Reserve estimates may be revised
upward or downward based on the results of current and future drilling,
testing or production levels, and on changes in mine design. In
addition, market fluctuations in the price of diamonds or increases in
the costs to recover diamonds from the Diavik Diamond Mine may render
the mining of ore reserves uneconomical.
Mineral resources that are not mineral reserves do not have demonstrated
economic viability. Due to the uncertainty that may attach to inferred
mineral resources, there is no assurance that mineral resources at the
Diavik property will be upgraded to proven and probable ore reserves.
Insurance
The Company's business is subject to a number of risks and hazards,
including adverse environmental conditions, industrial accidents,
labour disputes, unusual or unexpected geological conditions, risks
relating to the physical security of diamonds and jewelry held as
inventory or in transit, changes in the regulatory environment and
natural phenomena such as inclement weather conditions. Such
occurrences could result in damage to the Diavik Diamond Mine, personal
injury or death, environmental damage to the Diavik property, delays in
mining, the closing of Harry Winston Inc.'s manufacturing facilities or
salons, monetary losses and possible legal liability. Although
insurance is maintained to protect against certain risks in connection
with the Diavik Diamond Mine and the Company's operations, the
insurance in place will not cover all potential risks. It may not be
possible to maintain insurance to cover insurable risks at economically
feasible premiums.
Fuel Costs
The Diavik Diamond Mine's expected fuel needs are purchased periodically
during the year for storage, and transported to the mine site by way
of the winter road. These costs will increase if transportation by air
freight is required due to a shortened 'winter road season' or
unexpectedly high fuel usage.
The cost of the fuel purchased is based on the then prevailing price and
expensed into operating costs on a usage basis. The Diavik Diamond Mine
currently has no hedges for its future anticipated fuel consumption.
Reliance on Skilled Employees
Production at the Diavik Diamond Mine is dependent upon the efforts of
certain skilled employees of DDMI. The loss of these employees or the
inability of DDMI to attract and retain additional skilled employees
may adversely affect the level of diamond production from the
Diavik Diamond Mine.
The Company's success in marketing rough diamonds and operating the
business of Harry Winston Inc. is dependent on the services of key
executives and skilled employees, as well as the continuance of key
relationships with certain third parties, such as diamantaires. The
loss of these persons or the Company's inability to attract and retain
additional skilled employees or to establish and maintain relationships
with required third parties may adversely affect its business and
future operations in marketing diamonds and operating its luxury brand
segment.
Expansion and Refurbishment of the Existing Salon Network
A key component of the Company's luxury brand strategy in recent years
has been the expansion of its salon network. The Company currently
expects to expand its retail salon network to 35 salons (in total) and
300 wholesale doors worldwide by fiscal 2016. An additional objective
of the Company is to achieve compound annual growth rate in sales in
the mid-teens in the luxury brand segment and an operating profit in
the low to mid-teens in the luxury brand segment, in each case over the
five-year period from fiscal 2012 to 2016. Although the Company
considers these objectives to be reasonable, they are subject to a
number of risks and uncertainties, and there can be no assurance that
these objectives will be realized. This strategy requires the Company
to make ongoing capital expenditures to build and open new salons, to
refurbish existing salons from time to time, and to incur additional
operating expenses in order to operate the new salons. To date, much of
this expansion has been financed by Harry Winston Inc. through
borrowings. The successful expansion of the Company's global salon
network, and achieving an increase in sales and in operating profit,
will depend on a variety of factors, including worldwide economic
conditions, market demand for luxury goods, the strength of the Harry
Winston brand and the availability of sufficient funding. There can be
no assurance that the expansion of the salon network will continue or
that the current expansion will prove successful in increasing annual
sales or earnings from the luxury brand segment, and the increased debt
levels resulting from this expansion could negatively impact the
Company's liquidity and its results from operations in the absence of
increased sales and earnings.
The Company has to date licensed two retail salons to operate under the
Harry Winston name and currently expects to increase the number of
licensed salons to 15 by fiscal 2016. There is no assurance that the
Company will be able to find qualified third parties to enter into
these licensing arrangements, or that the licensees will honour the
terms of the agreements. The conduct of licensees may have a negative
impact on the Company's distinctive brand name and reputation.
Competition in the Luxury Brand Segment
The Company is exposed to competition in the luxury brand market from
other luxury goods, diamond, jewelry and watch retailers. The ability
of Harry Winston Inc. to successfully compete with such luxury goods,
diamond, jewelry and watch retailers is dependent upon a number of
factors, including the ability to source high-end polished diamonds and
protect and promote its distinctive brand name and reputation. If
Harry Winston Inc. is unable to successfully compete in the luxury
jewelry segment, then the Company's results of operations will be
adversely affected.
Changes in Disclosure Controls and Procedures and Internal Control over
Financial Reporting
During the second quarter of fiscal 2012, there were no changes in the
Company's disclosure controls and procedures or internal control over
financial reporting that materially affected, or are reasonably likely
to materially affect, the Company's disclosure controls and procedures
or internal control over financial reporting.
Critical Accounting Estimates
Management is often required to make judgments, assumptions and
estimates in the application of IFRS that have a significant impact on
the financial results of the Company. Certain policies are more
significant than others and are, therefore, considered critical
accounting policies. Accounting policies are considered critical if
they rely on a substantial amount of judgment (use of estimates) in
their application or if they result from a choice between accounting
alternatives and that choice has a material impact on the Company's
reported results or financial position. There have been no significant
changes to critical accounting estimates since the first quarter of
fiscal 2012.
Changes in Accounting Policies
The International Accounting Standards Board ('IASB') has issued a new
standard, IFRS 9, 'Financial Instruments' ('IFRS 9'), which will
ultimately replace IAS 39, 'Financial Instruments: Recognition and
Measurement' ('IAS 39'). IFRS 9 provides guidance on the classification
and measurement of financial assets and financial liabilities. This
standard becomes effective for the Company's fiscal year end beginning
February 1, 2013. The Company is currently assessing the impact of the
new standard on its financial statements.
IFRS 11, 'Joint Arrangements' ('IFRS 11'), was issued by the IASB on May
12, 2011 and will replace IAS 31, 'Interest in Joint Ventures'. The new
standard will apply to the accounting for interests in joint
arrangements where there is joint control. Under IFRS 11, joint
arrangements are classified as either joint ventures or joint
operations. The structure of the joint arrangement will no longer be
the most significant factor in determining whether a joint arrangement
is either a joint venture or a joint operation. Proportionate
consolidations will no longer be allowed and will be replaced by equity
accounting. IFRS 11 is effective for the Company's fiscal year end
beginning February 1, 2013, with early adoption permitted. The Company
is currently assessing the impact of IFRS 11 on its results of
operations and financial position.
IFRS 13, 'Fair Value Measurement' ('IFRS 13'), was also issued by the
IASB on May 12, 2011. The new standard makes IFRS consistent with
generally accepted accounting principles in the United States ('US
GAAP') on measuring fair value and related fair value disclosures. The
new standard creates a single source of guidance for fair value
measurements. IFRS 13 is effective for the Company's fiscal year end
beginning February 1, 2013, with early adoption permitted. The Company
is assessing the impact of IFRS 13 on its consolidated financial
statements.
Outstanding Share Information
As at
August 31,
2011
Authorized Unlimited
Issued and 84,793,781
outstanding
shares
Options 2,481,899
outstanding
Fully 87,275,680
diluted
Additional Information
Additional information relating to the Company, including the Company's
most recently filed Annual Information Form, can be found on SEDAR at www.sedar.com, and is also available on the Company's website at http://investor.harrywinston.com.
Condensed Consolidated Balance Sheets
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
July 31, January 31,
2011 2011
ASSETS
Current assets
Cash and cash $ 139,881 $ 108,693
equivalents (note 4)
Accounts receivable 31,032 22,788
Inventory and supplies 430,204 403,212
(note 5)
Other current assets 36,034 38,662
637,151 573,355
Property, plant and 755,501 764,093
equipment - Mining
Property, plant and 63,986 61,019
equipment - Luxury brand
Intangible assets, net 127,616 127,894
(note 7)
Other non-current assets 14,000 16,626
Deferred income tax assets 67,085 62,693
Total assets $ 1,665,339 $ 1,605,680
LIABILITIES AND EQUITY
Current liabilities
Trade and other payables $ 112,256 $ 136,490
Income taxes payable 25,740 6,660
Employee benefit plans 6,682 7,378
(note 8)
Promissory note (note 9) 70,000 70,000
Current portion of 26,350 24,215
interest-bearing loans
and borrowings (note 9)
241,028 244,743
Interest-bearing loans and 260,972 237,621
borrowings (note 9)
Deferred income tax 304,393 301,980
liabilities
Employee benefit plans 7,857 7,287
(note 8)
Provisions 51,716 50,130
Total liabilities 865,966 841,761
Equity
Share capital (note 10) 509,410 502,129
Contributed surplus 15,043 16,233
Retained earnings 251,249 237,667
Accumulated other 23,401 7,624
comprehensive income
Total shareholders' 799,103 763,653
equity
Non-controlling interest 270 266
Total equity 799,373 763,919
Total Liabilities and $ 1,665,339 $ 1,605,680
Equity
The accompanying notes are an integral part of these unaudited interim
condensed consolidated financial statements.
Condensed Consolidated Income Statements
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS,
EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2011 2010 2011 2010
Sales $ 222,378 $ 153,728 $ 366,310 $ 267,728
Cost of sales 150,177 85,798 246,629 161,509
Gross margin 72,201 67,930 119,681 106,219
Selling, 49,101 37,998 91,896 73,946
general and
administrative
expenses
Operating 23,100 29,932 27,785 32,273
profit
Finance (5,183) (2,985) (9,166) (5,865)
expenses
Exploration (781) (76) (993) (103)
costs
Finance and 83 154 341 322
other income
Foreign 288 1,043 111 (1,170)
exchange gain
(loss)
Profit before 17,507 28,068 18,078 25,457
income taxes
Net income tax 7,519 10,877 4,492 5,353
expense
Net profit $ 9,988 $ 17,191 $ 13,586 $ 20,104
Attributable to $ 9,986 $ 13,043 $ 13,582 $ 15,180
shareholders
Attributable to $ 2 $ 4,148 $ 4 $ 4,924
non-controlling
interest
Earnings per
share
Basic $ 0.12 $ 0.17 $ 0.16 $ 0.20
Diluted $ 0.12 $ 0.17 $ 0.16 $ 0.20
Weighted 84,688,002 76,639,693 84,491,901 76,635,651
average number
of shares
outstanding
The accompanying notes are an integral part of these unaudited interim
condensed consolidated financial statements.
Condensed Consolidated Statements of Comprehensive Income
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2011 2010 2011 2010
Net profit $ 9,988 $ 17,191 $ 13,586 $ 20,104
Other
comprehensive
income
Net gain on
translation
of net
foreign
operations
(net of tax
of nil) 8,531 3,784 15,777 2,030
Change in
fair value of
derivative
financial
instrument
(net of tax
of $0.1
million for
the three
months and
$0.2 million
for the six
months ended
July 31,
2010) - 95 - 253
Actuarial
loss on
employee
benefit plans
(net of tax
of nil) - - - (636)
Other
comprehensive
income, net of
tax 8,531 3,879 15,777 1,647
Total $ $ $ $
comprehensive
income 18,519 21,070 29,363 21,751
Attributable to $ $ $ $
shareholders 18,517 16,922 29,359 16,827
Attributable to $ $ $ $
non-controlling
interest 2 4,148 4 4,924
The accompanying notes are an integral part of these unaudited interim
condensed consolidated financial statements.
Condensed Consolidated Statements of Changes in Equity
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2011 2010 2011 2010
Common shares:
Balance at $ $ $ $
beginning of
period 507,207 426,753 502,129 426,593
Issued during
the period 1,063 89 4,981 249
Transfer from
contributed
surplus on
exercise of
options 1,140 - 2,300 -
Balance at end
of period 509,410 426,842 509,410 426,842
Contributed
surplus:
Balance at
beginning of
period 15,670 17,917 16,233 17,730
Stock-based
compensation
expense 513 161 1,110 348
Transfer from
contributed
surplus on
exercise of
options (1,140) - (2,300) -
Balance at end
of period 15,043 18,078 15,043 18,078
Retained
earnings:
Balance at
beginning of
period 241,263 252,205 237,667 250,068
Net profit
attributable to
common
shareholders 9,986 13,043 13,582 15,180
Balance at end
of period 251,249 265,248 251,249 265,248
Accumulated
other
comprehensive
income:
Balance at
beginning of
period 14,870 (4,802) 7,624 (2,570)
Other
comprehensive
income
Net gain on
translation
of net
foreign
operations
(net of tax
of nil) 8,531 3,784 15,777 2,030
Change in
fair value of
derivative
financial
instruments
(net of tax
of $0.1
million for
the three
months and
$0.2 million
for the six
months ended
July 31,
2010) - 95 - 253
Actuarial
loss on
employee
benefit plans
(net of tax
of nil) - - - (636)
Balance at end
of period 23,401 (923) 23,401 (923)
NON-CONTROLLING
INTEREST:
Balance at
beginning of
period 268 179,113 266 178,337
Non-controlling
interest 2 4,148 4 4,924
Distribution to
Kinross - (9,900) - (9,900)
Balance at end
of period 270 173,361 270 173,361
Total $ $ $ $
Shareholders'
Equity 799,373 882,606 799,373 882,606
The accompanying notes are an integral part of these unaudited interim
condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2011 2010 2011 2010
Cash provided by
(used in)
OPERATING
Net profit $ 9,988 $ 17,191 $ 13,586 $ 20,104
Depreciation
and
amortization 20,716 19,515 41,007 33,715
Deferred
income tax
expense
(recovery) (771) 9,081 (3,419) 3,043
Current income
tax expense 8,290 1,796 7,911 2,310
Finance
expenses 5,183 2,985 9,166 5,865
Stock-based
compensation 513 161 1,110 348
Foreign
exchange gain
(loss) (725) (1,189) (192) 1,781
Loss on
disposal of
assets - - - 243
Income tax
refund (paid),
net 13,165 (16,083) 10,454 (17,568)
Change in
non-cash
operating
working capital,
excluding taxes
and finance
expenses (16,302) (31,099) (57,516) (22,677)
Cash provided
from operating
activities 40,057 2,358 22,107 27,164
FINANCING
Decrease in
interest-bearing
loans and
borrowings (180) (79) (354) (131)
Increase in
revolving credit 67,719 136,749 85,604 162,175
Decrease in
revolving credit (57,690) (78,209) (58,007) (90,242)
Interest paid (3,689) (2,188) (5,197) (4,008)
Issue of common
shares, net of
issue costs 1,063 89 4,981 249
Distribution to
Kinross - (9,900) - (9,900)
Cash provided
from financing
activities 7,223 46,462 27,027 58,143
INVESTING
Property, plant
and equipment -
Mining (12,649) (10,711) (25,084) (20,008)
Property, plant
and equipment -
Luxury brand (1,900) (892) (3,289) (1,097)
Other
non-current
assets (427) (3,754) (823) (3,460)
Cash used in
investing
activities (14,976) (15,357) (29,196) (24,565)
Foreign exchange
effect on cash
balances 6,363 1,637 11,250 1,263
Increase in cash
and cash
equivalents 38,667 35,100 31,188 62,005
Cash and cash
equivalents,
beginning of
period 101,214 89,874 108,693 62,969
Cash and cash $ $ $ $
equivalents, end
of period 139,881 124,974 139,881 124,974
Change in
non-cash
operating
working capital,
excluding taxes
and finance
expenses
Accounts
receivable (2,845) (1,770) (8,226) (2,440)
Inventory and
supplies 37,959 (34,132) (24,436) (59,106)
Other current
assets 3,173 (4,291) 2,617 3,153
Trade and other
payables (54,726) 15,811 (27,172) 42,490
Employee benefit
plans 137 (6,717) (299) (6,774)
$ (16,302) $ (31,099) $ (57,516) $ (22,677)
The accompanying notes are an integral part of these unaudited interim
condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
JULY 31, 2011 WITH COMPARATIVE FIGURES
(TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT AS
OTHERWISE NOTED)
Note 1:
Nature of Operations
Harry Winston Diamond Corporation (the 'Company') is a diamond
enterprise with assets in the mining and luxury brand segments of the
diamond industry.
The Company's mining 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, and Harry Winston Diamond Limited
Partnership is a wholly owned subsidiary of Harry Winston Diamond
Corporation of Toronto, Canada.
The Company also owns Harry Winston Inc., the premier fine jewelry and
watch retailer with select locations throughout the world. Its head
office is located in New York City, United States.
Certain comparative figures have been reclassified to conform with
current year's presentation.
The Company is incorporated and domiciled in Canada and its shares are
publicly traded on the Toronto Stock Exchange and the New York Stock
Exchange. The address of its registered office is Toronto, Ontario.
These unaudited interim condensed consolidated financial statements have
been approved for issue by the Audit Committee on September 7, 2011.
Note 2:
Basis of Preparation
(a) Statement of compliance
These unaudited interim condensed consolidated financial
statements have been prepared in accordance with International
Financial Reporting Standards ('IFRS') International Accounting
Standard ('IAS') 34, 'Interim Financial Reporting'. The
Company's first annual consolidated financial statements under
IFRS will be presented for the fiscal year ending January 31,
2012. The accounting policies adopted in these unaudited interim
condensed consolidated financial statements are consistent with
the accounting policies the Company expects to adopt in its IFRS
consolidated financial statements for the fiscal year ending
January 31, 2012, and are based on IFRS as issued by the
International Accounting Standards Board ('IASB') that the
Company expects to be applicable at that time.
These unaudited interim condensed consolidated financial
statements do not include all disclosures required by IFRS for
annual consolidated financial statements and accordingly should
be read in conjunction with the Company's audited consolidated
financial statements for the year ended January 31, 2011
presented under generally accepted accounting principles in
Canada (''Canadian GAAP'') and in conjunction with the IFRS
transition disclosures in Note 15 to these interim statements.
These unaudited interim condensed consolidated financial
statements have been prepared following the same accounting
policies and methods of computation as presented in the
unaudited interim condensed consolidated financial statements of
April 30, 2011.
(b) Basis of measurement
These unaudited interim condensed consolidated financial
statements have been prepared on the historical cost basis
except for the following:
-- financial instruments held for trading are measured at
fair value through profit and loss
-- liabilities for RSU and DSU plans are measured at fair
value
(c) Currency of presentation
These condensed consolidated interim financial statements are
expressed in United States dollars, consistent with the
predominant functional currency of the Company's operations. All
financial information presented in United States dollars has
been rounded to the nearest thousand.
Note 3:
Changes in Accounting Policies
Standards issued but not yet effective
The following standards and interpretations have been issued but are not
yet effective and have not been early adopted in these financial
statements. These standards may result in consequential changes to the
accounting policies and other note disclosures.
(i) Fair Value Measurement Guidelines
(ii) IAS 1 (Revised) - Presentation of Financial Statements
(iii) IAS17 (Replacement) - Leases
(iv) IAS 32 (Replacement) - Liabilities and Equity
(v) IAS 19 (Replacement) - Employee Benefits and Pensions
(vi) IAS 11 and IAS 18 (Replacement) - Revenue Recognition
(vii) Improvements to IFRSs
The IASB has issued a new standard, IFRS 9, 'Financial Instruments'
('IFRS 9'), which will ultimately replace IAS 39, 'Financial
Instruments: Recognition and Measurement' ('IAS 39'). IFRS 9 provides
guidance on the classification and measurement of financial assets and
financial liabilities. This standard becomes effective for the
Company's fiscal year end beginning February 1, 2013. The Company is
currently assessing the impact of the new standard on its financial
statements.
IFRS 11, 'Joint Arrangements' ('IFRS 11') was issued by the IASB on May
12, 2011 and will replace IAS 31, 'Interest in Joint Ventures'. The new
standard will apply to the accounting for interests in joint
arrangements where there is joint control. Under IFRS 11, joint
arrangements are classified as either joint ventures or joint
operations. The structure of the joint arrangement will no longer be
the most significant factor in determining whether a joint arrangement
is either a joint venture or a joint operation. Proportionate
consolidations will no longer be allowed and will be replaced by equity
accounting. IFRS 11 is effective for the Company's fiscal year end
beginning February 1, 2013, with early adoption permitted. The Company
is currently assessing the impact of IFRS 11 on its results of
operations and financial position.
IFRS 13, 'Fair Value Measurement' ('IFRS 13') was also issued by the
IASB on May 12, 2011. The new standard makes IFRS consistent with
generally accepted accounting principles in the United States ('US
GAAP') on measuring fair value and related fair value disclosures. The
new standard creates a single source of guidance for fair value
measurements. IFRS 13 is effective for the Company's fiscal year end
beginning February 1, 2013, with early adoption permitted. The Company
is assessing the impact of IFRS 13 on its consolidated financial
statements.
Note 4:
Cash Resources
July January
31, 31,
2011 2011
Cash on $ $
hand and
balances
with banks 132,475 107,993
Short-term
investments
((a)()) 7,406 700
Total cash $ $
resources 139,881 108,693
((a)) Short-term investments are held in overnight deposits and money market
instruments with a maturity of 30 days.
Note 5:
Inventory and Supplies
July January
31, 31,
2011 2011
Luxury brand raw $ 115,974 $ 80,013
materials and
work-in-progress
Luxury brand 208,763 226,358
merchandise
inventory
Mining rough 37,881 30,451
diamond
inventory
Mining supplies 67,586 66,390
inventory
Total inventory $ 430,204 $ 403,212
and supplies
Total inventory and supplies is net of a provision for obsolescence of $
1.9 million ($2.9 million at January 31, 2011).
Note 6:
Diavik Joint Venture
The following represents HWDLP's 40% proportionate interest in the Joint
Venture as at June 30, 2011 and December 31, 2010:
January
July 31, 31,
2011 2011
Current
assets $ 94,219 $ 92,487
Non-current
assets 704,257 714,386
Current
liabilities 31,811 31,493
Non-current
liabilities
and
participant's
account 766,665 775,380
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2011 2010 2011 2010
Expenses net
of interest
income ((a)
(b)) $ 62,775 $ 42,818 $ 123,658 $ 95,465
Cash flows
resulting
from (used
in) operating
activities (46,872) (22,188) (89,896) (53,315)
Cash flows
resulting
from
financing
activities 61,101 34,644 115,084 71,919
Cash flows
resulting
from (used
in) investing
activities (10,044) (12,456) (22,221) (18,989)
((a)) The Joint Venture only earns interest income.
((b)) Expenses net of interest income for the three and six months
ended July 31, 2011 of $nil and $0.1 million, respectively
(three and six months ended July 31, 2010 of $nil and $0.1
million, respectively)
HWDLP is contingently liable for DDMI's portion of the liabilities of
the Joint Venture, and to the extent HWDLP's participating interest has
increased because of the failure of DDMI to make a cash contribution
when required, HWDLP would have access to an increased portion of the
assets of the Joint Venture to settle these liabilities.
Note 7:
Intangible Assets
Amortization Accumulated July January
31, 31,
period Cost amortization 2011 2011
net net
Trademark indefinite $ 112,995 $ - $ 112,995 $ 112,995
life
Drawings indefinite 12,365 - 12,365 12,365
life
Wholesale 120 months 5,575 (3,319) 2,256 2,534
distribution
network
Intangible $ 130,935 $ (3,319) $ 127,616 $ 127,894
assets
Amortization expense for the six months ended July 31, 2011 was $0.3
million ($0.7 million for the six months ended July 31, 2010). The
Company completed a valuation of its trademark and drawings as of
January 31, 2011 and concluded that there was no impairment of these
assets.
Note 8:
Employee Benefit Plans
The employee benefit obligation reflected in the consolidated balance
sheet is as follows:
July 31, January 31,
2011 2011
Defined benefit $ 10,437 $ 9,009
plan obligation -
Harry Winston
luxury brand
segment
Defined 560 80
contribution plan
obligation -
Harry Winston
luxury brand
segment
Defined 138 -
contribution plan
obligation -
Harry Winston
mining segment
Defined - 3,061
contribution plan
obligation -
Diavik Diamond
Mine
RSU and DSU plans 3,404 2,515
(note 10)
Total employee $ 14,539 $ 14,665
benefit plan
obligation
July 31, January 31,
2011 2011
Non-current $ 7,857 $ 7,287
Current 6,682 7,378
Total employee $ 14,539 $ 14,665
benefit plan
obligation
The amounts recognized in the consolidated income statement in respect
of employee benefit plans are as follows:
Three Three Six Six
months months months months
ended ended ended ended
July July July July
31, 31, 31, 31,
2011 2010 2011 2010
Defined $ 622 $ 598 $ 1,253 $ 1,008
benefit
pension plan
- Harry
Winston
luxury brand
segment
Defined 240 210 480 420
contribution
plan - Harry
Winston
luxury brand
segment
Defined 71 52 143 106
contribution
plan - Harry
Winston
mining
segment
Defined 484 338 1,134 550
contribution
plan -
Diavik
Diamond Mine
RSU and DSU 180 370 1,715 692
plans (note
10)
$ 1,597 $ 1,568 $ 4,725 $ 2,776
Note 9:
Interest-Bearing Loans and Borrowings
July 31, January
2011 31,
2011
Mining segment credit facilities $ 48,938 $ 50,000
Mining segment promissory note 68,970 70,000
Harry Winston Inc. credit facilities 207,519 181,715
First mortgage on real property 7,029 7,048
Bank advances 24,866 22,902
Finance leases - 171
Total interest-bearing loans and borrowings 357,322 331,836
Less current portion (96,350) (94,215)
$ 260,972 $ 237,621
Face
Carrying value
amount at
Nominal at July
interest Date of July 31, 31,
Currency rate maturity 2011 2011 Borrower
Secured US 3.75% March 31, $188.3 $188.3 Harry Winston Inc.
bank loan 2013 million million
Secured CHF 3.15% April 22, $4.3 $4.3 Harry Winston S.A.
bank loan 2013 million million
Secured CHF 3.55% January $15.0 $15.0 Harry Winston S.A.
bank loan 31, 2033 million million
Secured US 4.01% June 24, $50.0 $50.0 Harry Winston Diamond
bank loan 2013 million million Corporation and
Harry Winston Diamond
Mines Ltd.
First CDN 7.98% September $7.0 $7.0 6019838 Canada Inc.
mortgage 1, 2018 million million
on real
property
Promissory US 5.00% August $70.0 $70.0 Harry Winston Diamond
note 25, 2011 million million Corporation
Secured US N/A Due on $nil $nil Harry Winston Diamond
bank demand International N.V.
advance
US 12.00% $1.6 $1.6 Harry Winston Diamond
million million (India)
Private Limited
Secured YEN 2.25% August $7.5 $7.5 Harry Winston Japan,
bank 22, 2011 million million K.K.
advance
Unsecured YEN 2.98% August $8.1 $8.1 Harry Winston Japan,
bank 31, 2011 million million K.K.
advance
Unsecured YEN 2.98% August $7.7 $7.7 Harry Winston Japan,
bank 22, 2011 million million K.K.
advance
On February 28, 2011, the Company increased the mining segment senior
secured revolving credit facility with Standard Chartered Bank by $25.0
million to $125.0 million.
On August 25, 2010, the Company issued a promissory note in the amount
of $70.0 million, maturing on August 25, 2011, as part of the
consideration for reacquiring Kinross Gold Corporation's ('Kinross') 9%
indirect interest in the Diavik Joint Venture (the 'Kinross Buy Back
Transaction') from Kinross. On August 25, 2011, the Company paid the
$70.0 million promissory note plus accrued interest to Kinross from
cash on hand.
Note 10:
Share Capital
(a) Authorized
Unlimited common shares without par value.
(b) Issued
Number of Amount
shares
Balance, 84,159,851 $ 502,129
January 31,
2011
Shares
issued for:
Exercise of 633,930 4,981
options
Transfer - 2,300
from
contributed
surplus on
exercise of
options
Balance, 84,793,781 $ 509,410
July 31,
2011
(c) RSU and DSU Plans
RSU Number
of units
Balance, January 155,946
31, 2011
Awards and
payouts during
the year (net)
RSU 66,991
awards
RSU (46,963)
payouts
Balance, July 175,974
31, 2011
DSU Number
of units
Balance, January 193,214
31, 2011
Awards
and
payouts
during
the
year
(net)
DSU 19,598
awards
DSU (17,127)
payouts
Balance, July 195,685
31, 2011
During the period, the Company granted 66,991 RSUs (net of forfeitures)
and 19,598 DSUs under an employee and director incentive compensation
program, respectively. The RSU and DSU Plans are full value phantom
shares that mirror the value of Harry Winston Diamond Corporation's
publicly traded common shares.
Grants under the RSU Plan are on a discretionary basis to employees of
the Company subject to Board of Directors approval. The RSUs granted
vest one-third on March 31 and one-third on each anniversary
thereafter. The vesting of grants of RSUs is subject to special rules
for a change in control, death and disability. The Company shall pay
out cash on the respective vesting dates of RSUs and redemption dates
of DSUs.
Only non-executive directors of the Company are eligible for grants
under the DSU Plan. Each DSU grant vests immediately on the grant date.
The expenses related to the RSUs and DSUs are accrued based on fair
value. This expense is recognized on a straight-line basis over each
vesting period.
Note 11:
Commitments and Guarantees
(a) Environmental agreements
Through negotiations of environmental and other agreements, the
Joint Venture must provide funding for the Environmental
Monitoring Advisory Board. HWDLP anticipates its share of this
funding requirement will be approximately $0.2 million for
calendar 2011. Further funding will be required in future years;
however, specific amounts have not yet been determined. These
agreements also state that the Joint Venture must provide security
deposits for the performance by the Joint Venture of its
reclamation and abandonment obligations under all environmental
laws and regulations. HWDLP's share of the letters of credit
outstanding posted by the operator of the Joint Venture with
respect to the environmental agreements as at July 31, 2011, was
$84.3 million. The agreement specifically provides that these
funding requirements will be reduced by amounts incurred by the
Joint Venture on reclamation and abandonment activities.
(b) Participation agreements
The Joint Venture has signed participation agreements with various
native groups. These agreements are expected to contribute to the
social, economic and cultural well-being of the Aboriginal bands.
The agreements are each for an initial term of twelve years and
shall be automatically renewed on terms to be agreed for
successive periods of six years thereafter until termination. The
agreements terminate in the event that the mine permanently ceases
to operate. Harry Winston Diamond Corporation's share of the Joint
Venture's participation agreements as at July 31, 2011 was $1.8
million.
(c) Commitments
Commitments include the cumulative maximum funding commitments
secured by letters of credit of the Joint Venture's environmental
and participation agreements at HWDLP's 40% ownership interest,
before any reduction of future reclamation activities; and future
minimum annual rentals under non-cancellable operating and capital
leases for luxury brand salons and corporate office space, and
long-term leases for property, land, office premises and a fuel
tank farm at the Diavik Diamond Mine; and are as follows:
2012 $ 111,752
2013 107,835
2014 106,905
2015 112,071
2016 107,207
Thereafter 232,857
Note 12:
Capital Management
The Company's capital includes cash and cash equivalents, short-term
debt, long-term debt and equity, which includes issued common shares,
contributed surplus and retained earnings.
The Company's primary objective with respect to its capital management
is to ensure that it has sufficient cash resources to maintain its
ongoing operations, to provide returns to shareholders and benefits for
other stakeholders, and to pursue growth opportunities. To meet these
needs, the Company may from time to time raise additional funds through
borrowing and/or the issuance of equity or debt or by securing
strategic partners, upon approval by the Board of Directors. The Board
of Directors reviews and approves any material transactions out of the
ordinary course of business, including proposals on acquisitions or
other major investments or divestitures, as well as annual capital and
operating budgets.
The Company assesses liquidity and capital resources on a consolidated
basis. The Company's requirements are for cash operating expenses,
working capital, contractual debt requirements and capital
expenditures. The Company believes that it will generate sufficient
liquidity to meet its anticipated requirements for the next twelve
months.
Note 13:
Financial Instruments
The Company has various financial instruments comprising cash and cash
equivalents, cash collateral and cash reserves, accounts receivable,
accounts payable and accrued liabilities, bank advances, promissory
note and long-term debt.
Cash and cash equivalents consist of cash on hand and balances with
banks and short-term investments held in overnight deposits with a
maturity on acquisition of less than 90 days. Cash and cash
equivalents, which are designated as held-for-trading, are carried at
fair value based on quoted market prices and are classified within
Level 1 of the fair value hierarchy established by the International
Accounting Standards Board.
The fair value of accounts receivable is determined by the amount of
cash anticipated to be received in the normal course of business from
the financial asset.
The promissory note is short term in nature; hence the fair value of
this instrument at July 31, 2011 is considered to approximate its
carrying value.
The Company's interest-bearing loans and borrowings are fully secured;
hence the fair values of these instruments at July 31, 2011 are
considered to approximate their carrying value.
The carrying values of these financial instruments are as follows:
July 31, 2011 January 31, 2011
Estimated Carrying Estimated Carrying
fair value value fair value value
Financial Assets
Cash and cash $ 139,881 $ 139,881 $ 108,693 $ 108,693
equivalents
Accounts receivable 31,032 31,032 22,788 22,788
$ 170,913 $ 170,913 $ 131,481 $ 131,481
Financial Liabilities
Trade and other $ 112,256 $ 112,256 $ 136,490 $ 136,490
payables
Promissory note 70,000 70,000 70,000 70,000
Interest-bearing 287,322 287,322 261,836 261,836
loans and borrowings
$ 469,578 $ 469,578 $ 468,326 $ 468,326
Note 14:
Segmented Information
The Company operates in two segments within the diamond industry, mining
and luxury brand, for the three and six months ended July 31, 2011.
The mining segment consists of the Company's rough diamond business.
This business includes the 40% ownership interest in the Diavik group
of mineral claims and the sale of rough diamonds.
The luxury brand segment consists of the Company's ownership in Harry
Winston Inc. This segment consists of the marketing of fine jewelry and
watches on a worldwide basis.
For the three months ended July
31, 2011 Mining Luxury brand Total
Sales
Canada $ 89,608 $ - $ 89,608
United States - 29,058 29,058
Europe - 30,780 30,780
Asia ((a)) - 72,932 72,932
Total sales 89,608 132,770 222,378
Cost of sales
Depreciation and amortization 16,802 77 16,879
All other costs 50,811 82,487 133,298
Total cost of sales 67,613 82,564 150,177
Gross margin 21,995 50,206 72,201
Gross margin (%) 24.5% 37.8% 32.5%
Selling, general and
administrative expenses
Selling and related expenses 777 32,977 33,754
Administrative expenses 4,932 10,415 15,347
Total other operating expenses 5,709 43,392 49,101
Operating profit 16,286 6,814 23,100
Finance expense (3,787) (1,396) (5,183)
Exploration costs (781) - (781)
Finance and other income 78 5 83
Foreign exchange gain (loss) 846 (558) 288
Segmented profit before income $
taxes 12,642 $ 4,865 $ 17,507
Segmented assets as at July 31,
2011
Canada $ 983,625 $ - $ 983,625
United States - 426,721 426,721
Other foreign countries 33,536 221,457 254,993
$ 1,017,161 $ 648,178 $ 1,665,339
Capital expenditures $ 12,649 $ 1,900 $ 14,549
Other significant non-cash
items:
Deferred income tax expense
(recovery) $ (3,408) $ 2,637 $ (771)
((a)) Sales to one significant customer in the luxury brand segment totalled
$45.0 million for the three months ended July 31, 2011.
.
For the three months ended July Mining Luxury brand Total
31, 2010
Sales
Canada $ 86,827 $ - $ 86,827
United States - 19,640 19,640
Europe - 24,704 24,704
Asia - 22,557 22,557
Total sales 86,827 66,901 153,728
Cost of sales
Depreciation and amortization 15,722 80 15,802
All other costs 38,686 31,310 69,996
Total cost of sales 54,408 31,390 85,798
Gross margin 32,419 35,511 67,930
Gross margin (%) 37.3% 53.1% 44.2%
Selling, general and
administrative expenses
Selling and related expenses 831 24,484 25,315
Administrative expenses 3,982 8,701 12,683
Total other operating expenses 4,813 33,185 37,998
Operating profit 27,606 2,326 29,932
Finance expense (1,341) (1,644) (2,985)
Exploration costs (76) - (76)
Finance and other income 43 111 154
Foreign exchange gain 898 145 1,043
Segmented profit before income $ 27,130 $ 938 $ 28,068
taxes
Segmented assets as at July 31,
2010
Canada $ 1,000,758 $ - $ 1,000,758
United States - 411,292 411,292
Other foreign countries 13,596 170,747 184,343
$ 1,014,354 $ 582,039 $ 1,596,393
Capital expenditures $ 10,711 $ 892 $ 11,603
Other significant non-cash
items:
Deferred income tax expense $ 9,293 $ (212) $ 9,081
For the six months ended July Mining Luxury brand Total
31, 2011
Sales
Canada $ 151,643 $ - $ 151,643
United States - 65,452 65,452
Europe - 51,367 51,367
Asia ((a)) - 97,848 97,848
Total sales 151,643 214,667 366,310
Cost of sales
Depreciation and amortization 33,232 157 33,389
All other costs 87,824 125,416 213,240
Total cost of sales 121,056 125,573 246,629
Gross margin 30,587 89,094 119,681
Gross margin (%) 20.2% 41.5% 32.7%
Selling, general and
administrative expenses
Selling and related expenses 1,426 59,298 60,724
Administrative expenses 12,309 18,863 31,172
Total other operating 13,735 78,161 91,896
expenses
Operating profit 16,852 10,933 27,785
Finance expense (6,480) (2,686) (9,166)
Exploration costs (993) - (993)
Finance and other income 155 186 341
Foreign exchange gain (loss) (131) 242 111
Segmented profit before income $ 9,403 $ 8,675 $ 18,078
taxes
Segmented assets as at July
31, 2011
Canada $ 983,625 $ - $ 983,625
United States - 426,721 426,721
Other foreign countries 33,536 221,457 254,993
$ 1,017,161 $ 648,178 $ 1,665,339
Capital expenditures $ 25,084 $ 3,289 $ 28,373
Other significant non-cash
items:
Deferred income tax expense $ (7,963) $ 4,544 $ (3,419)
(recovery)
((a)) Sales to one significant customer in the luxury brand segment totalled
$45.0 million for the six months ended July 31, 2011.
For the six months ended July Mining Luxury brand Total
31, 2010
Sales
Canada $ 135,749 $ - $ 135,749
United States - 41,680 41,680
Europe - 44,138 44,138
Asia - 46,161 46,161
Total sales 135,749 131,979 267,728
Cost of sales
Depreciation and amortization 26,068 160 26,228
All other costs 72,483 62,798 135,281
Total cost of sales 98,551 62,958 161,509
Gross margin 37,198 69,021 106,219
Gross margin (%) 27.4% 52.3% 39.7%
Selling, general and
administrative expenses
Selling and related expenses 1,396 45,918 47,314
Administrative expenses 7,287 19,345 26,632
Total other operating expenses 8,683 65,263 73,946
Operating profit 28,515 3,758 32,273
Finance expense (2,654) (3,211) (5,865)
Exploration costs (103) - (103)
Finance and other income 114 208 322
Foreign exchange gain (loss) (1,497) 327 (1,170)
Segmented profit before income $ 24,375 $ 1,082 $ 25,457
taxes
Segmented assets as at July 31,
2010
Canada $ 1,000,758 $ - $ 1,000,758
United States - 411,292 411,292
Other foreign countries 13,596 170,747 184,343
$ 1,014,354 $ 582,039 $ 1,596,393
Capital expenditures $ 20,008 $ 1,097 $ 21,105
Other significant non-cash
items:
Deferred income tax expense $ 2,622 $ 421 $ 3,043
Note 15:
Explanation of Transition to IFRS
As stated in Note 2(a), these are the Company's second consolidated
interim financial statements prepared in accordance with IFRS.
The accounting policies described in Note 3 of the April 30, 2011
unaudited interim condensed consolidated financial statements have been
applied in preparing: the interim financial statements for the three
and six months ended July 31, 2011, and the comparative information
presented in these interim financial statements for both the three and
six months ended July 31, 2010. In preparing these interim financial
statements, the Company has adjusted amounts reported previously in
financial statements prepared in accordance with Canadian GAAP. An
explanation of how the transition from Canadian GAAP to IFRS has
affected the Company's financial position and financial performance is
set out in the following tables and the notes that accompany the
tables.
Explanation of Transition to IFRS: Reconciliation of Equity
(in thousands of United
States dollars)
(unaudited) July 31, 2010
Effect of
Canadian Transition to
Ref. GAAP IFRS IFRS
ASSETS
Current assets:
Cash and cash equivalents $ 124,974 $ - $ 124,974
Accounts receivable 26,118 - 26,118
Inventory and supplies 375,835 - 375,835
Other current assets (b) 41,072 (7,515) 33,557
567,999 (7,515) 560,484
Property, plant and (c) 791,163 (18,673) 772,490
equipment
- Mining
Property, plant and 58,348 - 58,348
equipment
- Luxury brand
Intangible assets, net 128,519 - 128,519
Other non-current assets 18,149 - 18,149
Deferred income tax (b) 48,511 9,892 58,403
assets
Total assets $ 1,612,689 $ (16,296) $ 1,596,393
LIABILITIES AND EQUITY
Current liabilities:
Trade and other payables (d) $ 124,113 $ (4,986) $ 119,127
Employee benefit plans (d) - 6,037 6,037
Income taxes payable 32,508 - 32,508
Bank advances (d) 23,995 (23,995) -
Interest-bearing loans (d) 1,211 24,204 25,415
and
borrowings
181,827 1,260 183,087
Interest-bearing loans (d) 231,884 155 232,039
and
borrowings
Employee benefit plans (e) 3,158 3,988 7,146
Provisions (f) 42,383 2,416 44,799
Deferred income tax (g) 287,831 (41,115) 246,716
liabilities
Total liabilities 747,083 (33,296) 713,787
Equity:
Share capital 426,842 - 426,842
Contributed surplus 18,078 - 18,078
Retained earnings (h) 217,837 47,411 265,248
Accumulated other (i) 30,728 (31,652) (924)
comprehensive income
Total shareholders' 693,485 15,759 709,244
equity
Non-controlling interest (j) 172,121 1,241 173,362
Total equity 865,606 17,000 882,606
Total liabilities and $ 1,612,689 $ (16,296) $ 1,596,393
equity
Explanation of Transition to IFRS: Reconciliation of Profit
(in thousands of For the three months ended July 31, For the six months ended July 31,
United States 2010 2010
dollars)
(unaudited)
Effect of Effect of
Canadian Transition Canadian Transition
Ref. GAAP to IFRS IFRS GAAP to IFRS IFRS
Sales $ 153,728 $ - $ 153,728 $ 267,728 $ - $ 267,728
Cost of sales (k) 86,797 (999) 85,798 163,489 (1,980) 161,509
Gross margin 66,931 999 67,930 104,239 1,980 106,219
Selling, general 37,998 - 37,998 73,946 - 73,946
and
administrative
expenses
Operating profit 28,933 999 29,932 30,293 1,980 32,273
Finance expenses (l) (2,483) (502) (2,985) (4,867) (998) (5,865)
Exploration (m) - (76) (76) - (103) (103)
costs
Finance and 154 154 322 322
other income
Foreign exchange (n) 3,319 (2,276) 1,043 (8,473) 7,303 (1,170)
gain (loss)
Profit (loss) 29,923 (1,855) 28,068 17,275 8,182 25,457
before income
taxes
Current income 1,797 - 1,797 2,311 - 2,311
tax expense
Deferred income (o) 7,317 1,763 9,080 2,923 119 3,042
tax expense
Net profit $ 20,809 $ (3,618) $ 17,191 $ 12,041 $ 8,063 $ 20,104
(loss)
Attributable to:
Shareholders $ 16,490 $ (3,447) $ 13,043 $ 7,837 $ 7,343 $ 15,180
Non-controlling 4,319 (171) 4,148 4,204 720 4,924
interest
Net profit $ 20,809 $ (3,618) $ 17,191 $ 12,041 $ 8,063 $ 20,104
(loss)
Earnings (loss)
per share
Basic $ 0.22 $ (0.05) $ 0.17 $ 0.10 $ 0.10 $ 0.20
Fully diluted $ 0.21 $ (0.04) $ 0.17 $ 0.10 $ 0.10 $ 0.20
Weighted average 76,639,693 76,639,693 76,639,693 76,635,651 76,635,651 76,635,651
number of share
outstanding
Explanation of Transition to IFRS: Reconciliation of Comprehensive
Income
(in thousands of For the three months ended For the six months ended July
United States July 31, 2010 31, 2010
dollars)
(unaudited)
Effect of Effect of
Canadian Transition Canadian Transition
Ref. GAAP to IFRS IFRS GAAP to IFRS IFRS
Net profit $ 20,809 $ (3,618) $ 17,191 $ 12,041 $ 8,063 $ 20,104
(loss) - as
above
Other
comprehensive
income
Net gain on 3,784 - 3,784 2,030 - 2,030
translation of
net foreign
operations
Change in fair 95 - 95 253 - 253
value of
derivative
financial
instrument
Actuarial (e) - - - (636) (636)
loss on employee (i)
benefit plans
Total $ 24,688 $ (3,618) $ 21,070 $ 14,324 $ 7,427 $ 21,751
comprehensive
income (loss)
Attributable to:
Shareholders $ 20,369 $ (3,447) $ 16,922 $ 10,120 $ 6,707 $ 16,827
Non-controlling 4,319 (171) 4,148 4,204 720 4,924
interest
Total $ 24,688 $ (3,618) $ 21,070 $ 14,324 $ 7,427 $ 21,751
comprehensive
income (loss)
References to the reconciliation of equity and profit
(a) Reclassification of assets
To conform to IFRS presentation requirements, certain asset balances
have been reclassified to current or non-current asset accounts.
(b) Other current assets
Ref. July 31, 2010
Reclassification of assets See (a) $ (9,892)
Deferred tax impact on intra-group transfer of (i) 2,377
assets
Net decrease in other current assets $ (7,515)
(i) Under IFRS, deferred taxes are recognized for the difference in tax
bases between jurisdictions as a result of an intra-group transfer of
assets. The deferred tax component under IFRS is computed using the tax
rate applicable to the purchaser, whereas the seller's tax rate was
applied under Canadian GAAP.
During the three months ended July 31, 2010, the accounting under IFRS
resulted in a $0.1 million reduction in deferred income tax asset and
increase in deferred income tax expense.
During the six months ended July 31, 2010, the accounting under IFRS
resulted in a $0.5 million reduction in deferred income tax asset and
increase in deferred income tax expense.
(c) Property, plant and equipment - Mining
Ref. July 31, 2010
Derecognition of exploration costs (i) $ (17,753)
capitalized
Remeasurement of the asset retirement See (f)(i) (920)
obligation
Total decrease in property, plant and equipment $ (18,673)
- Mining
(i) Under Canadian GAAP, the Company's policy on exploration
expenditures incurred is to capitalize and to amortize using the
units-of-production method. For IFRS purposes, the Company's accounting
policy on exploration expenditures is to expense unless the exploration
activity relates to proven and probable reserves.
For the three months ended July 31, 2010, the accounting under IFRS
increased mining capital assets by $0.4 million, decreased cost of
goods sold by approximately $0.5 million, and increased exploration
costs nominally, reflecting the net impact of reversing Canadian GAAP
depreciation on capitalized exploration costs, partially offset by the
expensing of exploration costs incurred in the quarter. Nominal changes
were also made to deferred income tax liabilities, non-controlling
interest and deferred income tax expense.
For the six months ended July 31, 2010, the accounting under IFRS
increased mining capital assets by $0.9 million, decreased cost of
goods sold by approximately $1.0 million, and increased exploration
costs by $0.1 million, reflecting the net impact of reversing Canadian
GAAP depreciation on capitalized exploration costs, partially offset by
the expensing of exploration costs incurred. Nominal changes were also
made to deferred income tax liabilities, non-controlling interest and
deferred income tax expense.
(d) Reclassification of liabilities
To conform to IFRS presentation requirements, various liability balances
have been reclassified.
(e) Employee benefit plans
Ref. July 31, 2010
Retrospective application of IAS 19 employee (i) $ 5,402
benefits
Reclassification of liabilities See (d) (1,414)
Net increase in employee benefit plans $ 3,988
(i) Under Canadian GAAP, actuarial gains or losses for defined benefit
plans that exceeded the corridor threshold (10% of the greater of the
obligation and fair value of plan assets at the beginning of the
period) were recognized over the remaining average service life of
active employees. For IFRS purposes, the Company's accounting policy is
to recognize its actuarial gains and losses immediately in other
comprehensive income, and has retrospectively applied this approach at
the date of transition.
For the six months ended July 31, 2010, the accounting under IFRS
resulted in a $0.6 million increase to the defined benefit plan
obligation and a corresponding charge to other comprehensive income,
reflecting the recognition of actuarial losses. A nominal change was
made to deferred income tax liabilities.
(f) Provisions
Ref. July 31, 2010
Remeasurement of the asset retirement obligation (i) $ 2,416
(i) The Company has elected to utilize the IFRS 1 optional exemption
relating to 'Changes in decommissioning, restoration and similar
liabilities' in preparing its opening balance sheet under IFRS. There
was no further remeasurement of the asset retirement obligation from
the amount on February 1, 2010.
(g) Deferred income tax liabilities
Ref. July 31, 2010
Recognition of new deferred tax balances (i) $ (31,239)
Derecognition of exploration costs See (c)(i) (5,230)
capitalized
Retrospective application of IAS 19 employee See (e)(i) (2,550)
benefits
Remeasurement of the asset retirement See (f)(i) (985)
obligation
Revaluation of deferred income tax (ii) (1,111)
liabilities
Total decrease in deferred income tax liabilities $ (41,115)
(i) Under IFRS, in the determination of temporary differences, the
carrying value of non-monetary assets and liabilities is translated
into the functional currency at the historical rate and compared to its
tax value translated into the functional currency at the current rate.
The resulting temporary difference (measured in the functional
currency) is then multiplied by the appropriate tax rate to determine
the related deferred tax balance.
Under Canadian GAAP, in the determination of temporary differences
related to non-monetary assets and liabilities, the temporary
differences computed in local currency are multiplied by the
appropriate tax rate. The resulting future income tax amount is then
translated into the Company's functional currency if it is different
from the local currency.
For the three months ended July 31, 2010, the accounting under IFRS
resulted in a $3.3 million increase in deferred income tax liabilities
and a $3.3 million increase in deferred income tax expense. Net profit
attributable to non-controlling interest also decreased by $0.2
million.
For the six months ended July 31, 2010, the accounting under IFRS
resulted in a $6.9 million decrease in deferred income tax liabilities
and a $6.9 million increase in deferred income tax recovery. Net profit
attributable to non-controlling interest also increased by $0.5
million.
(ii) For the three months ended July 31, 2010, the above IFRS
adjustments to deferred income tax liabilities required a revaluation
of the account balance resulting in a $0.5 million increase in deferred
income tax liabilities and a corresponding increase in deferred income
tax expense. Net profit attributable to non-controlling interest also
decreased nominally.
For the six months ended July 31, 2010, the above IFRS adjustments to
deferred income tax liabilities required a revaluation of the account
balance resulting in a $1.1 million reduction in deferred income tax
liabilities and a corresponding increase in deferred income tax
recovery. Net profit attributable to non-controlling interest also
increased nominally.
(h) Retained earnings
The effect of all IFRS adjustments has increased (decreased) retained
earnings as follows:
Ref. July 31, 2010
Reset of cumulative translation differences See (i)(i) $ 28,800
Recognition of new deferred tax balances See (g)(i) 29,182
Derecognition of exploration costs See (c)(i) (11,835)
capitalized
Deferred tax impact on intra-group transfer See (b)(i) 2,377
of assets
Remeasurement of the asset retirement See (f)(i) (2,152)
obligation
Revaluation of deferred income tax See (g)(ii) 1,039
liabilities
Net increase in retained earnings $ 47,411
(i) Accumulated other comprehensive income
Ref. July 31, 2010
Reset of cumulative translation differences (i) $ (28,800)
Retrospective application of IAS 19 employee See (e)(i) (2,852)
benefits
Total decrease in accumulated other comprehensive $ (31,652)
income
(i) The Company has elected to utilize the IFRS 1 optional exemption
relating to 'Cumulative translation differences' in preparing its
opening balance sheet under IFRS. Through application of this exemption
on transition date, existing cumulative translation differences as at
February 1, 2010 were reset to zero and retained earnings was increased
by $28.8 million.
(j) Non-controlling interest
Ref. July 31, 2010
Derecognition of exploration costs See (c)(i) (689)
capitalized
Remeasurement of the asset retirement See (f)(i) (199)
obligation
Recognition of new deferred tax balances See (g)(i) 2,057
Revaluation of deferred income tax See (g)(ii) 72
liabilities
Net change in non-controlling interest $ 1,241
(k) Cost of sales
Three months Six months ended
ended July 31, 2010
Ref. July 31, 2010
Reclassification (i) $ (502) $ (998)
of accretion
expense
Derecognition of See (c)(i) (497) (982)
exploration costs
capitalized
Decrease in cost of sales $ (999) $ (1,980)
(i) In accordance with IFRIC 1, 'Changes in Existing
Decommissioning, Restoration and Similar Liabilities', accretion
expense is treated as interest expense whereas under Canadian GAAP it
had been recorded as a component of cost of sales.
(l) Finance expenses
Ref. Three months ended Six months ended
July 31, 2010 July 31, 2010
Reclassification See (k)(i) $ (502) $ (998)
of accretion
expense
(m) Exploration costs
Three months Six months ended
ended July 31, 2010
Ref. July 31, 2010
Derecognition of See (c)(i) $ (76) $ (103)
exploration costs
capitalized
(n) Decrease in foreign exchange loss (gain)
Three months ended Six months ended
Ref. July 31, 2010 July 31, 2010
Reclassification of (i) $ (2,276) $ 7,303
foreign exchange loss
(gain)
(i) Under Canadian GAAP, the foreign exchange difference from the
translation of deferred taxes was presented within the foreign exchange
gain/loss account. For IFRS reporting purposes, these foreign exchange
differences have been reclassified to deferred income tax
recovery/expense.
(o) Deferred income tax expense (recovery)
Three months Six months ended
ended July 31, 2010
Ref. July 31, 2010
Derecognition of See (c)(i) $ 138 $ 291
exploration costs
capitalized
Recognition of See (g)(i) 3,303 (6,863)
new deferred
income tax
liability
balances
Deferred tax See (b)(i) 84 499
impact on
intra-group
transfer of
assets
Reclassification See (n)(i) (2,276) 7,303
of foreign
exchange
Revaluation of See (g)(ii) 514 (1,111)
deferred income
tax liabilities
Total increase in deferred income $ 1,763 $ 119
tax expense
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Ms. Laura Kiernan, Director, Investor Relations - (212) 315-7934 or lkiernan@harrywinston.com
Ms. Kelley Stamm, Manager, Investor Relations - (416) 205-4380 or kstamm@harrywinston.com