Harry Winston Diamond Corporation Reports Fiscal 2012 Fourth Quarter and Year-End Results (2)
TORONTO, April 5, 2012 /PRNewswire/ --
Nature of Interest in 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 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, the seasonality of mine operating expenses, exploration 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 and sold by the Company 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, the Eurozone or elsewhere, the 2011 disaster in Japan and political upheavals in the Middle East, could cause the Company to experience 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 credit facilities essential to the diamond polishing industry are largely underwritten by European banks that are currently under stress with the European sovereign debt issue. The withdrawal or reduction of such facilities could also 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 property 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 The Canadian government has established a number of policy measures in response to concerns relating to climate change. 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 unexpected 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 a total of 35 salons and 300 wholesale doors worldwide by fiscal 2016. An additional objective of the Company in the luxury brand segment is to achieve a compound annual growth rate in sales in the mid-teens and an operating profit in the low to mid-teens, in each case by fiscal 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 four 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, the Company's results of operations will be adversely affected.
Cybersecurity The Company and certain of its third-party vendors receive and store personal information in connection with human resources operations and other aspects of the business. Despite the Company's implementation of security measures, its IT systems are vulnerable to damages from computer viruses, natural disasters, unauthorized access, cyber attack and other similar disruptions. Any system failure, accident or security breach could result in disruptions to the Company's operations. A material network breach in the security of the IT systems could include the theft of intellectual property or trade secrets. To the extent that any disruption or security breach results in a loss or damage to the Company's data, or in inappropriate disclosure of confidential information, financial data, or credit card cardholder data, it could cause significant damage to the Company's reputation, affect relationships with our customers, lead to claims against the Company and ultimately harm its business. In addition, the Company may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future. Although the Company believes that it has robust information security procedures and other safeguards in place, as cyber threats continue to evolve, the Company may be required to expend additional resources to continue to enhance its information security measures and/or to investigate and remediate any information security vulnerabilities.
Disclosure Controls and Procedures
The Company has designed a system of disclosure controls and procedures to provide reasonable assurance that material information relating to Harry Winston Diamond Corporation, including its consolidated subsidiaries, is made known to the management of the Company by others within those entities, particularly during the period in which the Company's annual filings are being prepared. In designing and evaluating the disclosure controls and procedures, the management of the Company recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The management of Harry Winston Diamond Corporation was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The result of the inherent limitations in all control systems means no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
The management of Harry Winston Diamond Corporation has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by the Annual Report. Based on that evaluation, management has concluded that these disclosure controls and procedures, as defined in Canada by Multilateral Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings, and in the United States by Rule 13a-15(e) under the Securities Exchange Act of 1934 (the 'Exchange Act'), are effective as of January 31, 2012, to ensure that information required to be disclosed in reports that the Company will file or submit under Canadian securities legislation and the Exchange Act is recorded, processed, summarized and reported within the time periods specified in those rules and forms.
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 financial performance or financial position. The following discussion outlines the accounting policies and practices that are critical to determining Harry Winston Diamond Corporation's financial results.
Use of Estimates The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of earnings, revenues and expenses during the reporting year. Significant areas requiring the use of management estimates relate to the determination of impairment of property, plant and equipment, intangible assets, goodwill and deferred mineral property costs, estimation of future site restoration costs and deferred income taxes. Financial results as determined by actual events could differ from those estimated.
The most significant estimates relate to the valuation of deferred mineral property costs and future site restoration costs. Management makes significant estimates related to the measurement of reclamation obligations and the timing of the related cash flows. Such timing and measurement uncertainty could have a material effect on the reported results of operations and the financial position of the Company.
Actual results could differ materially from those estimates in the near term.
Deferred Mineral Property Costs and Mineral Reserves Harry Winston Diamond Corporation capitalizes all direct development and pre-production costs relating to mineral properties and amortizes such costs on a unit-of-production basis upon commencement of commercial production relating to the underlying property. Deferred mineral property costs are amortized based on estimated proven and probable reserves at the property.
On an ongoing basis, the Company evaluates deferred costs relating to each property to ensure that the estimated recoverable amount exceeds the carrying value. Based on the Diavik Diamond Mine's latest projected open pit and underground life from the mine plan and diamond prices from the Diavik Project feasibility study, there is no requirement to write down deferred mineral property costs.
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. Reserve estimates can be revised upward or downward based on the results of future drilling, testing or production levels, and diamond prices. Changes in reserve estimates can lead to an impairment of deferred mineral property costs.
Future Site Restoration Costs The Company has obligations for future site restoration costs. The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. As at January 31, 2012, estimates of all legal obligations at the Joint Venture level have been included in the consolidated financial statements of the Company. Processes to track and monitor these obligations are carried out at the Joint Venture level.
Intangible Assets Certain of the Company's intangible assets are recorded at fair value upon acquisition and have an indefinite useful life. The Company assesses impairment of such intangible assets by determining whether the carrying value exceeds the fair value. If the fair value is determined to be less than the carrying value, the excess of the carrying value over the fair value is charged to earnings in the year in which such impairment is determined by management. These approaches involve significant management judgment and, as a result, are subject to change.
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, 2015. The Company is currently assessing the impact of the new standard on its consolidated financial statements.
IFRS 10, 'Consolidated Financial Statements' ('IFRS 10'), was issued by the IASB on May 12, 2011, and will replace the consolidation requirements in SIC-12, 'Consolidation - Special Purpose Entities' and IAS 27, 'Consolidated and Separate Financial Statements'. The new standard establishes control as the basis for determining which entities are consolidated in the consolidated financial statements and provides guidance to assist in the determination of control where it is difficult to assess. IFRS 10 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 10 on its consolidated 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 March 31, 2012
Authorized Unlimited
Issued and outstanding shares 84,874,781
Options outstanding 2,390,899
Fully diluted 87,265,680
Additional Information
Consolidated Balance Sheets
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
February
1,
As at January 31, 2012 2011 2010
ASSETS
Current assets
Cash and cash
equivalents (note 4) $ 78,116 $ 108,693 $ 62,969
Accounts receivable
(note 5) 26,910 22,788 23,598
Inventory and
supplies (note 6) 457,827 403,212 311,188
Other current assets
(note 7) 45,494 41,317 39,299
608,347 576,010 437,054
Property, plant and equipment -
Mining (note 8) 734,146 764,093 783,432
Property, plant and equipment -
Luxury brand (note 8) 69,781 61,019 62,277
Intangible assets, net (note 10) 127,337 127,894 129,213
Other non-current assets (note 11) 14,165 14,521 15,629
Deferred income tax assets (note
14) 77,160 60,038 50,524
Total assets $ 1,630,936 $ 1,603,575 $ 1,478,129
LIABILITIES AND EQUITY
Current liabilities
Trade and other
payables (note 12) $ 104,681 $ 139,551 $ 75,893
Employee benefit
plans (note 13) 6,026 4,317 11,284
Income taxes payable
(note 14) 29,450 6,660 46,297
Promissory note (note
15) - 70,000 -
Current portion of
interest-bearing
loans and borrowings
(note 15) 29,238 24,215 23,831
169,395 244,743 157,305
Interest-bearing loans and
borrowings (note 15) 270,485 235,516 161,691
Deferred income tax liabilities
(note 14) 325,035 309,868 246,398
Employee benefit plans (note 13) 9,463 7,287 6,898
Provisions (note 16) 65,245 50,130 43,691
Total liabilities 839,623 847,544 615,983
Equity
Share capital (note
17) 507,975 502,129 426,593
Contributed surplus 17,764 16,233 17,730
Retained earnings 255,233 229,779 242,057
Accumulated other
comprehensive income 10,086 7,624 (2,571)
Total shareholders'
equity 791,058 755,765 683,809
Non-controlling
interest 255 266 178,337
Total equity 791,313 756,031 862,146
Total liabilities and equity $ 1,630,936 $ 1,603,575 $ 1,478,129
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Income Statements
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Years ended January 31, 2012 2011
Sales $ 702,043 $ 623,963
Cost of sales 451,960 387,665
Gross margin 250,083 236,298
Selling, general and
administrative expenses 193,552 167,950
Operating profit 56,531 68,348
Finance expenses (16,687) (13,427)
Exploration costs (1,770) (666)
Finance and other income 586 669
Foreign exchange gain 1,005 357
Profit before income taxes 39,665 55,281
Net income tax expense
(note 14) 14,222 8,080
Net profit $ 25,443 $ 47,201
Attributable to
shareholders $ 25,454 $ 41,530
Attributable to
non-controlling interest $ (11) $ 5,671
Earnings per share (note
19)
Basic $ 0.30 $ 0.52
Diluted $ 0.30 $ 0.51
Weighted average number of
shares outstanding 84,660,766 79,858,018
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Comprehensive Income
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Years ended January 31, 2012 2011
Net profit $ 25,443 $ 47,201
Other comprehensive income
Net gain (loss) on translation of net
foreign operations (net of tax of nil) 3,634 10,879
Change in fair value of derivative
financial instruments (net of tax of
$0.2 million for the year ended January
31, 2011) - 354
Actuarial loss on employee benefit plans
(net of tax of
$0.6 million for the year ended January 31, 2012;
2011 - $0.2 million) (1,172) (1,038)
Other comprehensive income, net of tax 2,462 10,195
Total comprehensive income $ 27,905 $ 57,396
Attributable to shareholders $ 27,916 $ 51,725
Attributable to non-controlling interest $ (11) $ 5,671
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Changes in Equity
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Years ended January 31, 2012 2011
Common shares:
Balance at beginning of period $ 502,129 $ 426,593
Issued during the period 5,286 72,701
Transfer from contributed surplus on exercise of options 560 2,835
Balance at end of period 507,975 502,129
Contributed surplus:
Balance at beginning of period 16,233 17,730
Stock-based compensation expense 2,091 1,338
Transfer from contributed surplus on exercise of options (560) (2,835)
Balance at end of period 17,764 16,233
Retained earnings:
Balance at beginning of period 229,779 242,057
Net profit attributable to common shareholders 25,454 41,530
Reacquisition of partnership units (including transaction costs) - (53,808)
Balance at end of period 255,233 229,779
Accumulated other comprehensive income:
Balance at beginning of period 7,624 (2,571)
Other comprehensive income
Net gain on translation of net foreign operations
(net of tax of nil) 3,634 10,879
Change in fair value of derivative financial
instruments (net of
tax of $0.2 million for the year ended January 31, 2011) - 354
Actuarial loss on employee benefit plans (net of tax of
$0.6 million for the year ended January 31, 2012;
2011 - $0.2 million) (1,172) (1,038)
Balance at end of period 10,086 7,624
Non-controlling interest:
Balance at beginning of period 266 178,337
Non-controlling interest (11) 5,671
Distribution to Kinross - (9,900)
Reacquisition of Kinross interest - (173,842)
Balance at end of period 255 266
Total shareholders' equity $ 791,313 $ 756,031
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Cash Flows
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Years ended January 31, 2012 2011
Cash provided by (used in)
OPERATING
Net profit $ 25,443 $ 47,201
Depreciation and
amortization 91,639 77,007
Deferred income tax
expense (recovery) (1,088) 16,817
Current income tax expense 15,310 (8,737)
Finance expenses 16,687 13,427
Stock-based compensation 2,091 1,338
Other non-cash items 556 -
Foreign exchange gain
(loss) (5,771) 1,806
Loss on disposal of assets 9 237
Change in non-cash operating working
capital, excluding taxes and finance
expenses (79,517) (35,619)
Cash provided from operating activities 65,359 113,477
Interest paid (14,347) (8,958)
Income and mining taxes paid 7,979 (31,763)
Net cash from operating activities 58,991 72,756
FINANCING
Decrease in interest-bearing loans and
borrowings (709) (1,399)
Increase in revolving credit 266,495 288,366
Decrease in revolving credit (226,402) (211,721)
Repayment of promissory note (70,000) -
Issue of common shares, net of issue costs 5,286 2,964
Distribution to Kinross - (9,900)
Cash provided from financing activities (25,330) 68,310
INVESTING
Reacquisition of partnership units - (51,450)
Property, plant and equipment - Mining (45,165) (41,859)
Property, plant and equipment - Luxury
brand (19,681) (6,751)
Other non-current assets (1,889) (3,230)
Cash used in investing activities (66,735) (103,290)
Foreign exchange effect on cash balances 2,497 7,948
Increase (decrease) in cash and cash
equivalents (30,577) 45,724
Cash and cash equivalents, beginning of
period 108,693 62,969
Cash and cash equivalents, end of period $ 78,116 $ 108,693
Change in non-cash operating working
capital, excluding taxes and
finance expenses
Accounts receivable (4,277) 1,029
Inventory and supplies (41,953) (86,570)
Other current assets (4,178) (2,210)
Trade and other payables (31,202) 59,163
Employee benefit plans 2,093 (7,031)
$ (79,517) $ (35,619)
The accompanying notes are an integral part of these consolidated
financial statements.
Notes to Consolidated Financial Statements
JANUARY 31, 2012 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 HWDLP 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.
Note 2: Basis of Preparation
(a)Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRS'). These are the Company's first annual consolidated financial statements under IFRS for the fiscal year ending January 31, 2012. The accounting policies adopted in these consolidated financial statements are based on IFRS as issued by the International Accounting Standards Board ('IASB') as of January 31, 2012.
(b)Basis of measurement
These consolidated financial statements have been prepared on the historical cost basis except for the following:
- financial instruments through profit and loss are measured at fair value.
- liabilities for Restricted Share Unit and Deferred Share Unit Plans are
measured at fair value.
(c)Currency of presentation
These consolidated 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: Significant Accounting Policies
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Company entities.
(a)Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at January 31, 2012. Subsidiaries are fully consolidated from the date of acquisition or creation, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intercompany balances, income and expenses, and unrealized gains and losses resulting from intercompany transactions are eliminated in full. For partly owned subsidiaries, the net assets and net earnings attributable to minority shareholders are presented as non-controlling interests on the consolidated balance sheet.
Interest in Diavik Joint Venture
HWDLP owns an undivided 40% ownership interest in the assets, liabilities and expenses of the Joint Venture. The Company records its interest in the assets, liabilities and expenses of the Joint Venture in its consolidated financial statements with a one-month lag. The accounting policies described below include those of the Joint Venture.
(b)Revenue
Sales from the sale of rough diamonds, fine jewelry and watches are recognized when significant risks and rewards of ownership are transferred to the customer, the amount of sales can be measured reliably and the receipt of future economic benefits are probable. Sales are measured at the fair value of the consideration received or receivable, net of value-added taxes, duties and other sales taxes, and after eliminating sales within the Company.
(c)Cash resources
Cash and cash equivalents consist of cash on hand, balances with banks and short-term money market instruments (with a maturity on acquisition of less than 90 days), and are carried at fair value.
(d)Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
(e)Inventory and supplies
Luxury brand raw materials and work-in-progress are valued at the lower of cost and net realizable value, with cost determined using either a weighted average or specific item identification basis depending on the nature of the inventory. Work-in-progress costs include an appropriate share of production costs such as material, labour and overhead costs.
Luxury brand merchandise inventory is recorded at the lower of cost or net realizable value and includes jewelry and watches. Cost is determined on a specific item basis for jewelry and the average cost method is used for watches.
Mining rough diamond inventory is recorded at the lower of cost or net realizable value. Cost is determined on an average cost basis including production costs and value-added processing activity.
Mining supplies inventory is recorded at the lower of cost or net realizable value. Supplies inventory includes consumables and spare parts maintained at the Diavik Diamond Mine site and at the Company's sorting and distribution facility locations.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and costs of selling the final product. In order to determine net realizable value, the carrying amount of obsolete and slow moving items is written down on a basis of an estimate of their future use or realization. A provision for obsolescence is made when the carrying amount is higher than net realizable value.
(f)Exploration, evaluation and development expenditures
Exploration and evaluation activities include: acquisition of rights to explore; topographical, geological, geochemical and geophysical studies; exploratory drilling; trenching and sampling; and activities involved in evaluating the technical feasibility and commercial viability of extracting mineral resources. Capitalized exploration and evaluation expenditures are recorded as a component of property, plant and equipment. Exploration and evaluation assets are no longer classified as such when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Before reclassification, exploration and evaluation assets are assessed for impairment. Recognized exploration and evaluation assets will be assessed for impairment when the facts and circumstances suggest that the carrying amount may exceed its recoverable amount.
Drilling and related costs are capitalized for an ore body where proven and probable reserves exist and the activities are directed at either (a) obtaining additional information on the ore body that is classified within proven and probable reserves, or (b) converting non-reserve mineralization to proven and probable reserves and the benefit is expected to be realized over an extended period of time. All other drilling and related costs are expensed as incurred.
(g)Property, plant and equipment
Items of property, plant and equipment are measured at cost, less accumulated depreciation and accumulated impairment losses. The initial cost of an asset comprises its purchase price and construction cost, any costs directly attributable to bringing the asset into operation, including stripping costs incurred in open pit mining before production commences, the initial estimate of the rehabilitation obligation, and for qualifying assets, borrowing costs. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Also included within property, plant and equipment is the capitalized value of finance leases.
When parts of an item of property, plant and equipment have different useful lives, the parts are accounted for as separate items (major components) of property, plant and equipment.
Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from the disposal with the carrying amount of property, plant and equipment and are recognized within cost of sales and selling, general and administrative expenses.
(i) DEPRECIATION
Depreciation commences when the asset is available for use. Depreciation is charged so as to write off the depreciable amount of the asset to its residual value over its estimated useful life, using a method that reflects the pattern in which the asset's future economic benefits are expected to be consumed by the Company. Depreciation methods, useful lives and residual values are reviewed, and adjusted if appropriate, at each reporting date.
The unit-of-production method is applied to a substantial portion of Diavik Diamond Mine property, plant and equipment, and, depending on the asset, is based on carats of diamonds recovered during the period relative to the estimated proven and probable ore reserves of the ore deposit being mined, or to the total ore deposit. Other plant, property and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets, for the current and comparative periods, which are as follows:
Asset Estimated useful life (years)
Buildings 10-40
Machinery and mobile equipment 3-10
Computer equipment and software 3
Furniture, fixtures and equipment 2-10
Leasehold and building improvements Up to 20
Amortization for mine related assets was charged to mineral properties during the pre-commercial production stage.
Upon the disposition of an asset, the accumulated depreciation and accumulated impairment losses are deducted from the original cost, and any gain or loss is reflected in current net profit or loss.
Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate. The impact of changes to the estimated useful lives or residual values is accounted for prospectively.
(ii) STRIPPING COSTS
Mining costs associated with stripping activities in an open pit mine are expensed unless the stripping activity can be shown to represent a betterment to the mineral property, in which case the stripping costs would be capitalized and included in deferred mineral property costs within mining assets. Stripping costs incurred during the production phase of an open pit mine are variable production costs that are included as a component of inventory to be recognized as a component of cost of sales in the same period as the sale of inventory.
(iii) MAJOR MAINTENANCE AND REPAIRS
Expenditure on major maintenance refits or repairs comprises the cost of replacement assets or parts of assets and overhaul costs. When an asset, or part of an asset that was separately depreciated, is replaced and it is probable that future economic benefits associated with the new asset will flow to the Company through an extended life, the expenditure is capitalized. The unamortized value of the existing asset or part of the existing asset that is being replaced is expensed. Where part of the existing asset was not separately considered as a component, the replacement value is used to estimate the carrying amount of the replaced assets, which is immediately written off. All other day-to-day maintenance costs are expensed as incurred.
(h)Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost, which comprises its purchase price plus any directly attributable cost of preparing the asset for its intended use. The cost of intangible assets acquired in a business combination is measured at fair value as at the date of acquisition.
Intangible assets with indefinite useful lives are not amortized after initial recognition and are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset is impaired. Harry Winston's trademark and drawings are considered to have an indefinite life because it is expected that these assets will contribute to net cash inflows indefinitely. For purposes of impairment testing, trademark and drawings are tested for recoverability individually. The Company maintains a program to protect its trademark from unauthorized use by third parties. The Harry Winston drawings are very closely related with the brand and have an enduring life expectancy. The archive of drawings reflects unique designs for jewelry and watches that form the basis for newly inspired jewelry and watch designs that are exclusive to Harry Winston and attract its clientele.
Following initial recognition, intangible assets with finite useful lives are carried at cost less any accumulated amortization and any accumulated impairment losses. Intangible assets with finite useful lives are amortized on a straight-line basis over their useful lives and recognized in profit or loss as follows:
Asset Estimated useful life (years)
Wholesale distribution network 10
The amortization methods and estimated useful lives of intangible assets are reviewed annually and adjusted if appropriate.
(i)Other non-current assets
Other non-current assets include depreciable assets amortized over a period not exceeding ten years.
(j)Financial instruments
From time to time, the Company may use a limited number of derivative financial instruments to manage its foreign currency and interest rate exposure. For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedge instrument and the item being hedged, both at inception and throughout the hedged period. Gains and losses resulting from any ineffectiveness in a hedging relationship must be recognized immediately in net profit or loss.
(k)Provisions
Provisions represent obligations to the Company for which the amount or timing is uncertain. Provisions are recognized when (a) the Company has a present obligation (legal or constructive) as a result of a past event, (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is included in net profit or loss. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the obligation. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost in net profit or loss.
Mine rehabilitation and site restoration provision:
The Company records the present value of estimated costs of legal and constructive obligations required to restore operating locations in the period in which the obligation is incurred. The nature of these restoration activities includes dismantling and removing structures, rehabilitating mines and tailings dams, dismantling operating facilities, closure of plant and waste sites, and restoration, reclamation and re-vegetation of affected areas.
The obligations generally arise when the asset is installed or the ground/environment is disturbed at the production location. When the liability is initially recognized, the present value of the estimated cost is capitalized by increasing the carrying amount of the related assets. Over time, the discounted liability is increased/decreased for the change in present value based on the discount rates that reflect current market assessments and the risks specific to the liability. Additional disturbances or changes in rehabilitation costs, including re-measurement from changes in the discount rate, are recognized as additions or charges to the corresponding assets and rehabilitation liability when they occur. The periodic unwinding of the discount is recognized in net profit or loss as a finance cost.
(l)Foreign currency
Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are translated to US dollars at exchange rates in effect at the balance sheet date, and non-monetary assets and liabilities are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Revenues and expenses are translated at rates in effect at the time of the transactions. Foreign exchange gains and losses are included in net profit or loss.
For certain subsidiaries of the Company where the functional currency is not the US dollar, the assets and liabilities of these subsidiaries are translated at the rate of exchange in effect at the reporting date. Sales and expenses are translated at the rate of exchange in effect at the time of the transactions. Foreign exchange gains and losses are accumulated in other comprehensive income under shareholders' equity. When a foreign operation is disposed of, in part or in full, the relevant amount in the foreign exchange reserve account is reclassified to net profit or loss as part of profit or loss on disposal.
(m)Income taxes
Current and deferred taxes
Income tax expense comprises current and deferred tax and is recognized in net profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity or in other comprehensive income.
Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax expense is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax expense is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is probable that the related tax benefit will not be realized.
Deferred income and mining tax assets and deferred income and mining tax liabilities are offset, if a legally enforceable right exists to offset current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
The Company classifies exchange differences on deferred tax assets or liabilities in jurisdictions where the functional currency is different from the currency used for tax purposes as income tax expense.
(n)Stock-based payment transactions
Stock-based compensation
The Company applies the fair value method to all grants of stock options. The fair value of options granted is estimated at the date of grant using a Black-Scholes option pricing model incorporating assumptions regarding risk-free interest rates, dividend yield, volatility factor of the expected market price of the Company's stock, and a weighted average expected life of the options. When option awards vest in installments over the vesting period, each installment is accounted for as a separate arrangement. The estimated fair value of the options is recorded as an expense with an offsetting credit to shareholders' equity. Any consideration received on amounts attributable to stock options is credited to share capital.
Restricted and Deferred Share UnitPlans
The Restricted and Deferred Share Unit ('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. Under the prior RSU Plan, each RSU grant vests on the third anniversary of the grant date. Under the 2010 RSU Plan, each RSU grant vests equally over a three-year period. Vesting under both RSU Plans is subject to special rules for death, disability and change in control. Grants under the DSU Plan are awarded to non-executive directors of the Company. Each DSU grant vests immediately on the grant date. The expenses related to the RSUs and DSUs are accrued based on fair value. When a share-based payment award vests in installments over the vesting period, each installment is accounted for as a separate arrangement. These awards are accounted for as liabilities with the value of these liabilities being remeasured at each reporting date based on changes in the fair value of the awards, and at settlement date. Any changes in the fair value of the liability are recognized as employee benefit plan expense in net profit or loss.
(o)Employee benefit plans
The Company operates defined benefit pension plans, which require contributions to be made to separately administered funds. The cost of providing benefits under the defined benefit plans is determined separately using the projected unit credit valuation method by qualified actuaries. Actuarial gains and losses are recognized immediately in other comprehensive income.
The defined benefit asset or liability comprises the present value of the defined benefit obligation, plus any actuarial gains (less any losses) not recognized as a result of the treatment above, less past service cost not yet recognized and less the fair value of plan assets out of which the obligations are to be settled directly. The value of any asset is restricted to the sum of any past service cost not yet recognized and the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.
Contributions to defined contribution pension plans are expensed as incurred.
(p)Segment reporting
A segment is a distinguishable component of the Company that is engaged either in providing related products or services (business segment) or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and returns that are different from those of other segments. The Company's primary format for segment reporting is based on business segments. Each operating segment's operations are reviewed regularly by the Company's Chief Executive Officer to make decisions about resources to be allocated to the segment and to assess its performance, and for which discrete financial information is available.
(q)Operating leases
Minimum rent payments under operating leases, including any rent-free periods and/or construction allowances, are recognized on a straight-line basis over the term of the lease and included in net profit or loss.
(r)Impairment of non-financial assets
The carrying amounts of the Company's non-financial assets other than inventory and deferred taxes are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. For an intangible asset that has an indefinite life, the recoverable amount is estimated annually at the same time, or more frequently if events or changes in circumstances indicate that the asset may be impaired.
The recoverable amount of an asset is the greater of its fair value less costs to sell and its value in use. In the absence of a binding sales agreement, fair value is estimated on the basis of values obtained from an active market or from recent transactions or on the basis of the best information available that reflects the amount that the Company could obtain from the disposal of the asset. Value in use is defined as the present value of future pre-tax cash flows expected to be derived from the use of an asset, using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the 'cash-generating unit').
An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in the consolidated statement of income in those expense categories consistent with the function of the impaired asset. Impairment losses recognized in respect of cash-generating units would be allocated to reduce the carrying amounts of the assets in the unit (group of units) on a pro rata basis.
For property, plant and equipment, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Company makes an estimate of the recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognized. If this is the case, the carrying amount of the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statement of income.
(s)Basic and diluted earnings per share
Basic earnings per share are calculated by dividing net profit or loss by the weighted average number of shares outstanding during the period. Diluted earnings per share are determined using the treasury stock method to calculate the dilutive effect of options and warrants. The treasury stock method assumes that the exercise of any 'in-the-money' options with the option proceeds would be used to purchase common shares at the average market value for the period. Options with an exercise price higher than the average market value for the period are not included in the calculation of diluted earnings per share as such options are not dilutive.
(t)Use of estimates, judgments and assumptions
The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities and contingent liabilities at the date of the consolidated financial statements, and the reported amounts of sales and expenses during the reporting period. Estimates and assumptions are continually evaluated and are based on management's experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ from these estimates. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is as follows:
Mineral reserves, mineral properties and exploration costs
The estimation of mineral reserves is a subjective process. The Company estimates its mineral reserves based on information compiled by an appropriately qualified person. 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. Reserve estimates can be revised upward or downward based on the results of future drilling, testing or production levels, and diamond prices. Changes in reserve estimates may impact the carrying value of exploration and evaluation assets, mineral properties, property, plant and equipment, mine rehabilitation and site restoration provision, recognition of deferred tax assets, and depreciation charges. Estimates and assumptions about future events and circumstances are also used to determine whether economically viable reserves exist that can lead to commercial development of an ore body.
Estimated mineral reserves are used in determining the depreciation of mine-specific assets. This results in a depreciation charge proportional to the depletion of the anticipated remaining life of mine production. A units-of-production depreciation method is applied, and depending on the asset, is based on carats of diamonds recovered during the period relative to the estimated proven and probable reserves of the ore deposit being mined or to the total ore deposit. Changes in estimates are accounted for prospectively.
Impairment of long-lived assets
The Company assesses each cash-generating unit at least annually to determine whether any indication of impairment exists. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made, which is considered to be the higher of the fair value of an asset less costs to sell and its value in use. These assessments require the use of estimates and assumptions such as long-term commodity prices, discount rates, future capital requirements, exploration potential and operating performance. Financial results as determined by actual events could differ from those estimated.
Impairment of intangible assets with an indefinite life
The impairment assessment for trademark and drawings requires the use of estimates and assumptions. Financial results as determined by actual events could differ from those estimated.
Recovery of deferred tax assets
Judgment is required in determining whether deferred tax assets are recognized in the consolidated balance sheet. Deferred tax assets, including those arising from un-utilized tax losses, require management to assess the likelihood that the Company will generate taxable earnings in future periods in order to utilize recognized deferred tax assets. Estimates of future taxable income are based on forecasted income from operations and the application of existing tax laws in each jurisdiction. To the extent that future taxable income differs significantly from estimates, the ability of the Company to realize the deferred tax assets recorded at the consolidated balance sheet date could be impacted. Additionally, future changes in tax laws in the jurisdictions in which the Company operates could limit the ability of the Company to obtain tax deductions in future periods.
Mine rehabilitation and site restoration provision
The mine rehabilitation and site restoration provision has been provided by management of the Diavik Diamond Mine and is based on internal estimates. Assumptions, based on the current economic environment, have been made which DDMI management believes are a reasonable basis upon which to estimate the future liability. These estimates are reviewed regularly by management of the Diavik Diamond Mine to take into account any material changes to the assumptions. However, actual rehabilitation costs will ultimately depend upon future costs for the necessary decommissioning work required, which will reflect market conditions at the relevant time. Furthermore, the timing of rehabilitation is likely to depend on when the Diavik Diamond Mine ceases to produce at economically viable rates. This, in turn, will depend upon a number of factors including future diamond prices, which are inherently uncertain.
Commitments and contingencies
The Company has conducted its operations in the ordinary course of business in accordance with its understanding and interpretation of applicable tax legislation in the countries where the Company has operations. The relevant tax authorities could have a different interpretation of those tax laws that could lead to contingencies or additional liabilities for the Company. The Company believes that its tax filing positions as at the balance sheet date are appropriate and supportable. Should the ultimate tax liability materially differ from the provision, the Company's effective tax rate and its profit or loss could be affected positively or negatively in the period in which the matters are resolved.
(u)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.
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, 2015. The Company is currently assessing the impact of the new standard on its consolidated financial statements.
IFRS 10, 'Consolidated Financial Statements' ('IFRS 10'), was issued by the IASB on May 12, 2011, and will replace the consolidation requirements in SIC-12, 'Consolidation - Special Purpose Entities' and IAS 27, 'Consolidated and Separate Financial Statements'. The new standard establishes control as the basis for determining which entities are consolidated in the consolidated financial statements and provides guidance to assist in the determination of control where it is difficult to assess. IFRS 10 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 10 on its consolidated 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
2012 2011 February 1, 2010
Cash on hand and balances with banks $ 76,030 $ 107,993 $ 61,449
Short-term investments (a) 2,086 700 1,520
Total cash resources $ 78,116 $ 108,693 $ 62,969
(a) Short-term investments are held in overnight deposits and money market instruments with a maturity of 30 days.
The Company's exposure to interest rate risk and sensitivity analysis is disclosed in Note 23.
Note 5: Accounts Receivable
February 1,
2012 2011 2010
Luxury brand trade receivables $ 25,828 $ 20,672 $ 20,306
Mining other receivables 1,923 2,746 3,824
Luxury brand allowance for doubtful
accounts (841) (630) (532)
Total accounts receivable $ 26,910 $ 22,788 $ 23,598
The Company's exposure to interest rate risk and sensitivity analysis is disclosed in Note 23.
Note 6: Inventory and Supplies
2012 2011 February 1, 2010
Luxury brand raw materials $ 62,188 $ 50,109 $ 43,139
Mining rough diamond inventory 62,472 30,451 25,318
124,660 80,560 68,457
Luxury brand work-in-progress 45,407 29,904 13,406
Luxury brand merchandise inventory 218,844 226,358 161,104
Mining supplies inventory 68,916 66,390 68,221
Total inventory and supplies $ 457,827 $ 403,212 $ 311,188
Total inventory and supplies is net of a provision for obsolescence of $3.1 million ($2.9 million at January 31, 2011). Cost of sales includes inventory of $418.9 million sold during the year (2011 - $373.6 million), with another $33.1 million of non-inventoried costs (2011 - $14.1 million).
Note 7: Other Current Assets
2012 2011 February 1, 2010
Luxury brand prepaid assets $ 10,264 $ 10,916 $ 10,704
Luxury brand other current assets 7,082 6,746 5,175
Mining prepaid assets 28,148 23,655 23,420
Total other current assets $ 45,494 $ 41,317 $ 39,299
Note 8:
Property, Plant and Equipment
MINING SEGMENT
Diavik
equipment Furniture,
Mineral and equipment
properties(a) leaseholds(b) and other(c)
Cost:
Balance at February 1, 2011 $ 250,047 $ 768,515 $ 7,927
Additions - - 1,379
Disposals - (942) -
Impairments for the year - (13,193) -
Foreign exchange
differences - - -
Transfers and other
movements (520) 100,833 -
Balance at January 31, 2012 $ 249,527 $ 855,213 $ 9,306
Accumulated
depreciation/amortization:
Balance at February 1, 2011 $ 149,814 $ 239,883 $ 5,677
Depreciation and
amortization for the year 12,254 58,304 351
Disposals - (942) -
Foreign exchange
differences - - -
Balance at January 31, 2012 162,068 297,245 6,028
Net book value at January
31, 2012 $ 87,459 $ 557,968 $ 3,278
TABLE CONT'D
MINING SEGMENT
Real Mine
property - Assets rehabilitation
land and under and site
building(d) construction restoration(e) Total
Cost:
Balance at February 1,
2011 $ 35,227 $ 82,135 $ 40,291 $ 1,184,142
Additions 2,450 41,872 13,180 58,881
Disposals - - - (942)
Impairments for the year - - - (13,193)
Foreign exchange
differences (100) - - (100)
Transfers and other
movements - (100,833) - (520)
Balance at January 31,
2012 $ 37,577 $ 23,174 $ 53,471 $ 1,228,268
Accumulated
depreciation/amortization:
Balance at February 1,
2011 $ 8,063 $ - $ 16,613 $ 420,050
Depreciation and
amortization for the year 1,293 - 2,833 75,035
Disposals - - - (942)
Foreign exchange
differences (21) - - (21)
Balance at January 31,
2012 9,335 - 19,446 494,122
Net book value at January
31, 2012 $ 28,242 $ 23,174 $ 34,025 $ 734,146
Diavik
equipment Furniture,
Mineral and equipment
properties(a) leaseholds(b) and other(c)
Cost:
Balance at February 1, 2010 $ 250,415 $ 494,613 $ 7,742
Additions - - 185
Disposals - (6,222) -
Foreign exchange
differences - - -
Transfers and other
movements (368) 280,124 -
Balance at January 31, 2011 $ 250,047 $ 768,515 $ 7,927
Accumulated
depreciation/amortization:
Balance at February 1, 2010 $ 136,223 $ 196,587 $ 5,319
Depreciation and
amortization for the year 13,591 49,282 358
Disposals - (5,986) -
Foreign exchange
differences - - -
Transfers and other
movements - - -
Balance at January 31, 2011 149,814 239,883 5,677
Net book value at January
31, 2011 $ 100,233 $ 528,632 $ 2,250
TABLE CONT'D
Real Mine
property - Assets rehabilitation
land and under and site
building(d) construction restoration(e) Total
Cost:
Balance at February 1,
2010 $ 32,468 $ 321,245 $ 32,985 $ 1,139,468
Additions 1,028 40,646 7,306 49,165
Disposals - - - (6,222)
Foreign exchange
differences 1,731 - - 1,731
Transfers and other
movements - (279,756) - -
Balance at January 31,
2011 $ 35,227 $ 82,135 $ 40,291 $ 1,184,142
Accumulated
depreciation/amortization:
Balance at February 1,
2010 $ 6,696 $ - $ 11,211 $ 356,036
Depreciation and
amortization for the year 1,086 - 5,402 69,719
Disposals - - - (5,986)
Foreign exchange
differences 280 - - 280
Transfers and other
movements - - - -
Balance at January 31,
2011 8,062 - 16,613 420,049
Net book value at January
31, 2011 $ 27,165 $ 82,135 $ 23,678 $ 764,093
LUXURY BRAND SEGMENT
Furniture, Real
equipment property -
and land and Assets under
other(c) building(d) construction Total
Cost:
Balance at February 1,
2011 $ 34,866 $ 85,430 $ 63 $ 120,359
Additions 8,196 1,587 9,898 19,681
Disposals (765) (1,366) - (2,131)
Foreign exchange
differences 727 2,177 - 2,904
Balance at January 31,
2012 43,024 87,828 9,961 140,813
Accumulated
depreciation/amortization:
Balance at February 1,
2011 $ 23,879 $ 35,461 $ - $ 59,340
Depreciation and
amortization for the year 5,835 6,487 - 12,322
Disposals (763) (1,358) - (2,121)
Foreign exchange
differences 509 982 - 1,491
Balance at January 31,
2012 29,460 41,572 - 71,032
Net book value at January
31, 2012 $ 13,564 $ 46,256 $ 9,961 $ 69,781
Furniture, Real
equipment property -
and land and Assets under
other(c) building(d) construction Total
Cost:
Balance at February 1,
2010 $ 29,278 $ 77,244 $ 241 $ 106,763
Additions 2,475 - 4,276 6,751
Disposals (266) - - (266)
Foreign exchange
differences 1,673 5,438 - 7,111
Transfers and other
movements 1,706 2,748 (4,454) -
Balance at January 31,
2011 $ 34,866 $ 85,430 $ 63 $ 120,359
Accumulated
depreciation/amortization:
Balance at February 1,
2010 $ 18,139 $ 26,347 $ - $ 44,486
Depreciation and
amortization for the year 5,049 7,215 - 12,264
Disposals (263) - - (263)
Foreign exchange
differences 954 1,899 - 2,853
Balance at January 31,
2011 23,879 35,461 - 59,340
Net book value at January
31, 2011 $ 10,987 $ 49,969 $ 63 $ 61,019
(a) The Company holds a 40% ownership interest in the Diavik group of mineral claims, which contains commercially mineable diamond reserves. DDMI, a subsidiary of Rio Tinto plc, is the operator of the Joint Venture and holds the remaining 60% interest. The claims are subject to private royalties, which are in the aggregate 2% of the value of production. (b) Diavik equipment and leaseholds are project related assets at the Joint Venture level. (c) Furniture, equipment and other includes equipment located at the Company's diamond sorting facility and at Harry Winston Inc. salons. (d) Real property is comprised of land and a building that houses the corporate activities of the Company, and various leasehold improvements to Harry Winston Inc. salons and corporate offices. (e)The Joint Venture has an obligation under various agreements (note 22) to reclaim and restore the lands disturbed by its mining operations.
Depreciation expense for 2012 was $87.4 million (2011 - $82.0 million).
Note 9: Diavik Joint Venture
The following represents HWDLP's 40% interest in the Joint Venture at the period end as at December 31, 2011 and 2010:
2011 2010
Current assets $ 101,454 $ 92,487
Non-current assets 685,590 714,386
Current liabilities 31,745 31,493
Non-current liabilities and participant's
account 755,298 775,380
2011 2010
Expenses net of interest income of $0.1
million (2010 - interest income of $0.1
million)(a) $ 257,807 $ 205,541
Cash flows resulting from (used in) operating
activities (166,854) (129,851)
Cash flows resulting from financing activities 214,834 168,045
Cash flows resulting from (used in) investing
activities (43,499) (40,105)
(a) The Joint Venture only earns interest income.
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. Additional information on commitments and contingencies related to the Diavik Joint Venture is found in Note 22.
During fiscal 2012, the Company recognized a non-cash $13.0 million charge in cost of sales related to the de-recognition of certain components of the backfill plant (the 'Paste Plant') associated with paste production at the Diavik Diamond Mine. The original mine plan envisioned the use of blastholestoping and underhand cut and fill underground mining methods for the Diavik ore bodies using paste to preserve underground stability. It is now expected that the higher velocity and lower cost sub-level retreat mining method, which does not require paste, will be used for both the A-154 South and A-418 underground ore bodies. As a result, certain components of the Paste Plant necessary for the production of paste will no longer be required and accordingly were de-recognized during the year.
Note 10: Intangible Assets
Wholesale
distribution
Trademark Drawings network Total
Cost:
Balance at February 1,
2011 $ 112,995 $ 12,365 $ 5,575 $ 130,935
Additions - - - -
Balance at January 31,
2012 112,995 12,365 5,575 130,935
Accumulated
amortization:
Balance at February 1,
2011 $ - $ - $ 3,041 $ 3,041
Amortization for the
year - - 557 557
Balance at January 31,
2012 - - 3,598 3,598
Net book value at
January 31, 2012 $ 112,995 $ 12,365 $ 1,977 $ 127,337
Wholesale
distribution Store
Trademark Drawings network leases Total
Cost:
Balance at
February 1,
2010 $ 112,995 $ 12,365 $ 5,575 $ 5,639 $ 136,574
Additions - - - - -
Balance at
January 31,
2011 112,995 12,365 5,575 5,639 136,574
Accumulated
amortization:
Balance at
February 1,
2010 $ - $ - $ 2,483 $ 4,878 $ 7,361
Amortization
for the year - - 558 761 1,319
Balance at
January 31,
2011 - - 3,041 5,639 8,680
Net book value
at January 31,
2011 $ 112,995 $ 12,365 $ 2,534 $ - $ 127,894
Trademark and drawings are considered to have an indefinite life because it is expected that they will contribute to net cash inflows indefinitely. For purposes of impairment testing, trademark and drawings are tested for recoverability individually. The Company maintains a program to protect its trademark from unauthorized use by third parties. The Harry Winston drawings are closely related with the brand and have an enduring life expectancy. The archive of drawings includes unique designs for jewelry and watches that form the basis for newly inspired product designs that are exclusive to Harry Winston. The carrying amount of the trademark and drawings was determined to be lower than its recoverable amount.
The test for impairment for the drawings is to compare the replacement cost of the drawings to the carrying amount. Replacement cost is based on the cost the Company would incur to reproduce the drawings.
The test for impairment for the trademark is to compare the recoverable amount to the carrying amount. To determine the recoverable amount, the Company uses a fair value less cost to sell ('FVLCS') valuation premise, which is calculated using a relief-from-royalty approach. This approach conceptually recognizes that the trademark could be sold separately, and the purchaser could generate a future income stream through licensing agreements. Revenue projections are based on the most recent budget prepared by management. Key assumptions include those regarding the royalty rates, discount rate and terminal growth rate. The pre-tax discount rates are based on the weighted average cost of capital adjusted for specific company and market risk factors.
CONT'D
Harry Winston Diamond Corporation