Harry Winston Diamond Corporation Reports Fiscal 2012 Fourth Quarter and Year-End Results (3)
TORONTO, April 5, 2012 /PRNewswire/ --
The key assumptions used in performing the trademark intangible test were as follows:
2012 2011
Royalty rate - watches 7% 7%
Royalty rate - jewelry 3.5% 3%
Terminal growth rate 3% 3%
Discount rate 12% 12%
Note 11: Other Non-Current Assets
2012 2011 February 1, 2010
Prepaid pricing discount(a), net of
accumulated amortization of $10.3
million (2011 - $8.9 million) $ 1,680 $ 3,120 $ 4,560
Other assets 3,276 3,398 1,328
Refundable security deposits 9,209 8,003 9,741
$ 14,165 $ 14,521 $ 15,629
(a) Prepaid pricing discount represents funds paid to Tiffany & Co. by the Company to amend its rough diamond supply agreement. The amendment eliminated all pricing discounts on future sales. The payment has been deferred and is being amortized on a straight-line basis over the remaining life of the contract.
Note 12: Trade and Other Payables
February 1,
2012 2011 2010
Trade and other payables $ 41,031 $ 54,732 $ 25,949
Accrued expenses 17,835 17,635 15,837
Customer deposits 14,070 38,752 9,175
Payables and accruals at the Diavik
Joint Venture 31,745 28,432 24,932
$ 104,681 $ 139,551 $ 75,893
Note 13: Employee Benefit Plans
The employee benefit obligation reflected in the consolidated balance sheet is as follows:
2012 2011 February 1, 2010
Defined benefit plan
obligation - Harry Winston
luxury brand segment (a) $ 11,381 $ 9,009 $ 7,104
Defined contribution plan
obligation - Harry Winston
luxury brand segment (b) 88 80 70
Deferred compensation plan
obligation - Harry Winston
luxury brand segment (b) - - 9,207
Post-retirement benefit
plan - Diavik Diamond Mine
(c) 289 - -
RSU and DSU plans (note
17) 3,731 2,515 1,801
Total employee benefit
plan obligation $ 15,489 $ 11,604 $ 18,182
2012 2011 February 1, 2010
Non-current $ 9,463 $ 7,287 $ 6,898
Current 6,026 4,317 11,284
Total employee benefit
plan obligation $ 15,489 $ 11,604 $ 18,182
The amounts recognized in the consolidated income statement in respect of employee benefit plans are as follows:
2012 2011
Defined benefit pension plan - Harry Winston luxury
brand segment (a) $ 2,074 $ 1,907
Defined contribution plan - Harry Winston luxury brand
segment (b) 1,065 783
Defined contribution plan - Harry Winston mining
segment (b) 207 218
Defined contribution plan - Diavik Diamond Mine (b) 2,081 1,061
Post-retirement benefit plan - Diavik Diamond Mine (c) 299 -
RSU and DSU plans (note 17) 2,169 936
$ 7,595 $ 4,905
Cash settled share-based payment recovery 2,091 1,338
Total employee benefit plan expense $ 9,686 $ 6,243
Employee benefit plan expense has been included in the consolidated income statement as follows:
2012 2011
Cost of sales $ 3,135 $ 1,717
Selling, general and administrative expenses 6,551 4,526
$ 9,686 $ 6,243
(a)Defined benefit pension plan
The luxury brand segment sponsors three separate defined benefit pension plans covering employees in the United States, Japan and Switzerland. The principal pension plan is the Harry Winston Employee Retirement Plan for Harry Winston Inc. US employees. The benefits for the Harry Winston Inc. plan are based on years of service and the employee's compensation. In April 2001, Harry Winston Inc. amended its defined benefit pension plan. The amendment froze plan participation effective April 30, 2001. Harry Winston Inc.'s funding policy for the US plan is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974. Plan assets consist primarily of fixed income, equity and other short-term investments. The other two defined benefit pension plans are sponsored by luxury brand segment subsidiaries Harry Winston Japan, K.K. and Harry Winston S.A., which converted their previous pension plan arrangements into defined benefit plans effective February 1, 2007. Pension liabilities for these two non-US plans are funded in accordance with local laws and regulations.
(i) INFORMATION ABOUT HARRY WINSTON INC.'S US DEFINED BENEFIT PLAN IS AS FOLLOWS:
2012 2011
ACCRUED BENEFIT OBLIGATION
Balance, beginning of year $ 24,643 $ 20,700
Service costs 1,788 1,646
Interest cost 904 857
Employee contributions 496 372
Actuarial gain 904 1,825
Other net expenses (411) (387)
Benefits paid (1,544) (1,617)
Foreign exchange 690 1,247
Balance, end of year 27,460 24,643
PLAN ASSETS
Fair value, beginning of year 15,656 13,728
Actual return on plan assets (109) 1,355
Employee and employer contributions 1,968 1,556
Other net expenses (411) (387)
Benefits paid (1,112) (1,363)
Foreign exchange 87 745
Fair value, end of year 16,079 15,634
Funded status - plan deficit $ (11,381) $ (9,009)
The following table provides the components of the net periodic pension costs for the three plans for the years ended January 31:
2012 2011
Service cost $ (1,788) $ (1,646)
Interest cost (904) (857)
Expected return on plan assets 618 663
Amortization of prior service cost - (67)
Total $ (2,074) $ (1,907)
(ii) PLAN ASSETS
US plan assets represented approximately 47% of total luxury brand segment plan assets at January 31, 2012. The net unfunded status of the luxury brand segment plans of $11.4 million is comprised of $4.2 million attributed to the US-based Harry Winston Inc. plan, $5.2 million attributed to the Harry Winston Japan, K.K. plan, and $2.0 million attributed to the Harry Winston S.A. plan. The Harry Winston Japan, K.K. plan is non-funded with a benefit obligation of $5.2 million.
The asset allocation of luxury brand pension assets at January 31 was as follows:
2012 2011
ASSET CATEGORY
Cash equivalents 1% 1%
Equity securities 52% 57%
Fixed income securities 34% 36%
Other 13% 6%
Total 100% 100%
(iii) THE SIGNIFICANT ASSUMPTIONS USED FOR HARRY WINSTON INC.'S US PLAN ARE AS FOLLOWS:
2012 2011
ACCRUED BENEFIT OBLIGATION
Discount rate - HW Inc. 4.84% 5.24%
Expected long-term rate of return - HW Inc. 7.50% 7.50%
Discount rate - Harry Winston Japan, K.K. 1.46% 1.58%
Expected long-term rate of return - Harry Winston Japan,
K.K. -% -%
Discount rate - Harry Winston S.A. 2.50% 2.75%
Expected long-term rate of return - Harry Winston S.A. 3.50% 3.75%
BENEFIT COSTS FOR THE YEAR
Discount rate - HW Inc. 5.24% 5.56%
Expected long-term rate of return on plan assets - HW Inc. 7.50% 7.50%
Rate of compensation increase - HW Inc. -% -%
Discount rate - Harry Winston Japan, K.K. 1.58% 1.84%
Expected long-term rate of return on plan assets - Harry
Winston Japan, K.K. -% -%
Rate of compensation increase - Harry Winston Japan, K.K. 4.21% 4.36%
Discount rate - Harry Winston S.A. 2.50% 2.75%
Expected long-term rate of return on plan assets - Harry
Winston S.A. 3.50% 3.75%
Rate of compensation increase - Harry Winston S.A. 3.00% 3.00%
(b)Defined contribution plan
Harry Winston Inc. has a defined contribution 401(k) plan covering substantially all employees in the United States. For the fiscal years ended January 31, 2012 and 2011, Harry Winston Inc. elected to increase the employer-matching contribution to 100% of the first 6% of the employee's salary from 50% in fiscal 2007 and prior. Employees must meet minimum service requirements and be employed on December 31 of each year in order to receive this matching contribution.
The Joint Venture sponsors a defined contribution plan whereby the employer contributes 6% of the employee's salary.
Harry Winston Diamond Corporation sponsors a defined contribution plan for Canadian employees whereby the employer contributes to a maximum of 6% of the employee's salary to the maximum contribution limit under Canada's Income Tax Act. The total defined contribution plan liability at January 31, 2012 was $0.1 million ($0.1 million at January 31, 2011).
(c)Post-retirement benefit plan
The Joint Venture provides non-pension post-retirement benefits to retired employees. The post-retirement benefit plan liability was $0.3 million at January 31, 2012 ($nil at January 31, 2011).
Note 14: Income Taxes
The deferred income tax asset of the Company is $77.2 million, of which $50.4 million relates to the luxury brand segment. Included in the deferred tax asset is $36.9 million that has been recorded to recognize the benefit of $125.0 million of net operating losses that the Company has available for carry forward to shelter income taxes for future years. Certain net operating losses are scheduled to expire between 2013 and 2032.
The deferred income tax liability of the Company is $325.0 million of which $100.6 million relates to the luxury brand segment. The luxury brand segment deferred income tax liabilities include $52.1 million from a previous purchase price allocation. The Company's deferred income tax asset and liability accounts are revalued to take into consideration the change in the Canadian dollar compared to the US dollar and the unrealized foreign exchange gain or loss is recorded as part of deferred tax expenses for each year.
(a) The income tax provision consists of the following:
2012 2011
CURRENT TAX EXPENSE
Current period $ 18,326 $ (8,616)
Adjustment for prior period (3,016) (121)
Total current tax expense 15,310 (8,737)
DEFERRRED TAX EXPENSE
Origination and reversal of temporary differences (45) 17,315
Change in unrecognized deductible temporary
differences (525) (718)
Current year losses for which no deferred tax asset
was recognized 1,489 894
Recognition of previously unrecognized tax losses (2,007) (674)
Total deferred tax expense (1,088) 16,817
Total income tax expenses $ 14,222 $ 8,080
(b) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at January 31, 2012 and 2011 are as follows:
2012 2011
DEFERRED INCOME TAX ASSETS:
Net operating loss carryforwards $ 36,935 $ 27,046
Property, plant and equipment 4,625 3,449
Future site restoration costs 23,161 16,450
Luxury brand inventory 6,211 6,169
Deferred mineral property costs 251 283
Other deferred income tax assets 5,977 6,641
Deferred income tax assets 77,160 60,038
DEFERRED INCOME TAX LIABILITIES:
Deferred mineral property costs (29,339) (31,781)
Property, plant and equipment (160,616) (159,936)
Future site restoration costs (12,078) (7,059)
Luxury brand inventory (47,927) (34,630)
Intangible assets (52,081) (52,365)
Other deferred income tax liabilities (22,994) (24,097)
Deferred income tax liabilities (325,035) (309,868)
Deferred income tax liabilities, net $ (247,875) $ (249,830)
Movement in net deferred tax liabilities:
2012 2011
Balance at the beginning of the year $ (249,831) $ (195,902)
Recognized in profit (loss) 1,088 (16,817)
Recognized in accumulated other comprehensive
income 606 (647)
Acquired on business combination - (36,464)
Other 262 -
Balance at the end of the year $ (247,875) $ (249,830)
(c) Unrecognized deferred tax assets and liabilities:
Deferred tax assets have not been recognized in respect of the following items:
2012 2011
Tax losses $ 6,460 $ 5,121
Deductible temporary differences 166 691
Total $ 6,626 $ 5,812
The tax losses not recognized expire as per the amount and years noted below. The deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Company can utilize the benefits therefrom.
The following table summarizes the Company's non-capital losses as at January 31, 2012 that may be applied against future taxable profit:
Jurisdiction Type Amount Expiry Date
Luxemburg Net operating losses $ 1,918 No expiry
France Net operating losses 5,837 No expiry
United Kingdom Net operating losses 9,021 No expiry
China Net operating losses 5,840 2013 - 2017
Taiwan Net operating losses 952 2022
Singapore Net operating losses 521 No expiry
The deductible temporary differences associated with investments in subsidiaries and joint ventures, for which a deferred tax asset has not been recognized, aggregate to $67.2 million (2011 - $71.2 million).
(d) The difference between the amount of the reported consolidated income tax provision and the amount computed by multiplying the earnings (loss) before income taxes by the statutory tax rate of 28% (2011 - 29%) is a result of the following:
2012 2011
Expected income tax expense $ 11,106 $ 16,030
Non-deductible (non-taxable) items 592 133
Impact of foreign exchange 1,153 (8,278)
Northwest Territories mining royalty (net of income
tax relief) 3,242 4,265
Earnings subject to tax different than statutory rate 1,687 918
Assessments and adjustments (2,622) (2,254)
Current year losses for which no deferred tax asset
was recognized 1,489 894
Recognition of previously unrecognized tax losses (2,007) (674)
Change in unrecognized temporary differences (525) (718)
Other 107 (2,236)
Recorded income tax expense (recovery) $ 14,222 $ 8,080
(e) The mining segment has net operating loss carryforwards for Canadian income tax purposes of approximately $1.2 million and $1.9 million for other foreign jurisdictions' tax purposes. The luxury brand segment has net operating loss carryforwards for US income tax purposes of $95.7 million and $26.2 million for other foreign jurisdictions' tax purposes.
Note 15: Interest-Bearing Loans and Borrowings
2012 2011
Mining segment credit facilities $ 48,460 $ 47,895
Mining segment promissory note - 70,000
Harry Winston Inc. credit facilities 217,071 181,715
First mortgage on real property 6,342 7,048
Bank advances 27,850 22,902
Finance leases - 171
Total interest-bearing loans and borrowings 299,723 329,731
Less current portion (29,238) (94,215)
$ 270,485 $ 235,516
Nominal
interest
Currency rate Date of maturity
Secured bank loan (b)(i) US 3.75% March 31, 2013
Secured bank loan (b)(ii) CHF 3.15% April 22, 2013
Secured bank loan (b)(ii) CHF 3.55% January 31, 2033
Secured bank loan (a)(i) US 4.60% June 24, 2013
First mortgage on real
property (a)(iii) CDN 7.98% September 1, 2018
Secured bank advance (d) US 12.00% Due on demand
Secured bank advance (d) YEN 2.50% February 22, 2012
Unsecured bank advance
(d) YEN 2.98% February 27, 2012
Unsecured bank advance
(d) YEN 2.98% February 29, 2012
Unsecured bank advance
(d) YEN 2.00% October 31, 2012
TABLE CONT'D
Carrying amount at Face value at
January 31, 2012 January 31, 2012 Borrower
Secured bank loan (b)(i) $200.5 million $200.5 million Harry Winston Inc.
Secured bank loan (b)(ii) $3.8 million $3.8 million Harry Winston S.A.
Secured bank loan (b)(ii) $12.8 million $12.8 million Harry Winston S.A.
Secured bank loan (a)(i) $50.0 million $50.0 million Harry Winston Diamond
Corporation and
Harry Winston Diamond
Mines Ltd.
First mortgage on real
property (a)(iii) $6.3 million $6.3 million 6019838 Canada Inc.
Secured bank advance (d) $4.3 million $4.3 million Harry Winston Diamond
(India) Private Limited
Secured bank advance (d) $7.5 million $7.5 million Harry Winston Japan,
K.K.
Unsecured bank advance
(d) $7.0 million $7.0 million Harry Winston Japan,
K.K.
Unsecured bank advance
(d) $7.7 million $7.7 million Harry Winston Japan,
K.K.
Unsecured bank advance
(d) $1.3 million $1.3 million Harry Winston Japan,
K.K.
(a)Mining segment credit facilities
(i) 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. 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. The facility is available to the Company and Harry
Winston Diamond Mines Ltd. for general corporate purposes.
Borrowings bear an interest margin of 3.5% above the higher of LIBOR
or lender cost of funds. The Company is required to comply with
financial covenants at the mining segment level customary for a
financing of this nature, with change in control provisions at the
Company and Diavik Diamond Mines level. These provisions include
consolidated minimum tangible net worth, maximum mining segment debt
to equity ratio, maximum mining segment debt to EBITDA ratio and
minimum interest coverage ratio. At January 31, 2012, the Company
had $50.0 million outstanding on its mining segment senior secured
(ii) revolving credit facility.
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 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
(iii) Kinross from cash on hand.
The Company's first mortgage on real property has scheduled
principal payments of approximately $0.2 million quarterly, and may
be prepaid at any time.
(b)Luxury brand segment credit facilities
(i) Harry Winston Inc. maintains a credit agreement with a syndicate of
banks for a $250.0 million five-year revolving credit facility. In
addition, Harry Winston Inc. may increase the credit facility by an
additional $50.0 million to $300.0 million during the term of the
facility. There are no scheduled repayments required before maturity
on March 31, 2013. The credit facility is supported by a $20.0
million limited guarantee provided by Harry Winston Diamond
Corporation. The amount available under this facility is subject to a
borrowing base formula based on certain assets of Harry Winston Inc.
The credit agreement contains affirmative and negative non-financial
and financial covenants, which apply to the luxury brand segment.
These provisions include consolidated minimum tangible net worth,
minimum coverage of fixed charges, and leverage ratio limitations on
capital expenditures and certain investments, including the
restriction to advance funds to the parent company. The credit
agreement also includes a change of control provision, which would
result in the entire unpaid principal and all accrued interest of the
facility becoming due immediately upon change of control, as defined.
Any material adverse change, as defined, in the luxury brand
segment's business, assets, liabilities, consolidated financial
position or consolidated results of operations constitutes an event
of default under the agreement.
The luxury brand segment has pledged 100% of Harry Winston Inc.'s
common stock and 66a...'% of the common stock of its foreign
subsidiaries to the bank to secure the loan. Inventory, accounts
receivable and the trademark of Harry Winston Inc. are pledged as
collateral to secure the borrowings of Harry Winston Inc. In
addition, an assignment of proceeds on insurance covering pledged
collateral was made.
Loans under the credit facility can be either fixed rate loans or
revolving line of credit loans. The fixed rate loans will bear
interest within a range of 1.50% to 2.25% above LIBOR, based upon a
pricing grid determined by the fixed charge coverage ratio. Interest
under this option will be determined for periods of either one, two,
three or six months. The revolving line of credit loans will bear
interest within a range of 0.50% to 0.75% above the bank's prime rate
based upon a pricing grid determined by the fixed charge coverage
ratio as well.
(ii) Harry Winston S.A. maintains a 25-year loan agreement for CHF 17.5
million ($18.9 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 ($3.8 million) loan and a CHF 14.0
million ($15.1 million) loan. The bank has a secured interest in the
factory building.
(c)Required principal repayments
2013 $ 29,239
2014 255,738
2015 1,515
2016 1,587
2017 1,664
Thereafter 11,522
(d)Bank advances
The Company has available a $45.0 million (utilization in either US dollars or Euros) revolving financing facility 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 January 31, 2012, $4.3 million was drawn under the Company's revolving financing facility relating to Harry Winston Diamond (India) Private Limited and $nil was drawn by Harry Winston Diamond International N.V. The facility is guaranteed by Harry Winston Diamond Corporation.
Harry Winston Japan, K.K., maintains unsecured credit agreements with three banks, each amounting to Yen1,250 million ($16.1 million). Harry Winston Japan, K.K., also maintains a secured credit agreement amounting to Yen575 million ($7.5 million). This facility is secured by inventory owned by Harry Winston Japan, K.K.
Note 16: Provisions
(a)Future site restoration costs
2012 2011
At February 1, 2011 and 2010 $ 50,130 $ 43,691
Revision of previous estimates 13,179 4,435
Accretion of provision 1,936 2,004
At January 31, 2012 and 2011 $ 65,245 $ 50,130
The Joint Venture has an obligation under various agreements (Note 22) to reclaim and restore the lands disturbed by its mining operations.
The Company's share of the total undiscounted amount of the future cash flows that will be required to settle the obligation incurred at January 31, 2012 is estimated to be $84.7 million, of which approximately $23.7 million is expected to occur at the end of the mine life. The revision of previous estimates in fiscal 2012 is based on revised expectations of reclamation activity costs and changes in estimated reclamation timelines. The anticipated cash flows relating to the obligation at the time of the obligation have been discounted at an annualized rate of 1.5%.
(b)Provisions for litigation claims
By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. The Company is subject to various litigation actions, whose outcome could have an impact on the Company's results should it be required to make payments to the plaintiffs. Legal advisors assess the potential outcome of the litigation and the Company establishes provisions for future disbursements as required. At January 31, 2012, the Company does not have any material provisions for litigation claims.
Note 17: Share Capital
(a)Authorized
Unlimited common shares without par value.
(b)Issued
Number of shares Amount
Balance, January 31, 2010 76,588,593 $ 426,593
SHARES ISSUED FOR:
Issued to Kinross 7,142,857 69,737
Exercise of options 428,401 5,799
Balance, January 31, 2011 84,159,851 502,129
SHARES ISSUED FOR:
Exercise of options 714,930 5,846
Balance, January 31, 2012 84,874,781 $ 507,975
(c)Stock options
Under the Employee Stock Option Plan, amended and approved by the shareholders on June 4, 2008, the Company may grant options for up to 6,000,000 shares of common stock. Options may be granted to any director, officer, employee or consultant of the Company or any of its affiliates. Options granted to directors vest immediately and options granted to officers, employees or consultants vest over three to four years. The maximum term of an option is ten years. The number of shares reserved for issuance to any one optionee pursuant to options cannot exceed 2% of the issued and outstanding common shares of the Company at the date of grant of such options.
The exercise price of each option cannot be less than the fair market value of the shares on the last trading day preceding the date of grant.
The Company's shares are primarily traded on a Canadian dollar based exchange, and accordingly stock option information is presented in Canadian dollars, with conversion to US dollars at the average exchange rate for the year.
Compensation expense for stock options was $2.1 million for fiscal 2012 (2011 - $1.3 million) and is presented as a component of both cost of sales and selling, general and administrative expenses. The amount credited to share capital for the exercise of the options is the sum of (a) the cash proceeds received and (b) the amount debited to contributed surplus upon exercise of stock options by optionees (2012 - $0.6 million; 2011 - $2.8 million).
Changes in share options outstanding are as follows:
2012
Weighted average
Options exercise price
000s CDN $ US $
Outstanding, beginning of year 2,868 $ 12.58 $ 12.26
Granted 350 16.70 17.44
Exercised (715) 7.26 7.43
Expired (102) 25.54 26.14
Outstanding, end of year 2,401 $ 14.21 $ 14.34
TABLE CONT'D
2011
Weighted average
Options exercise price
000s CDN $ US $
Outstanding, beginning of year 3,234 $ 12.89 $ 7.61
Granted 300 12.35 11.78
Exercised (428) 7.14 6.92
Expired (238) 26.34 25.79
Outstanding, end of year 2,868 $ 12.58 $ 12.26
Exercisable options totaled 1.9 million at January 31, 2012 (2.2 million at January 31, 2011).
The following summarizes information about stock options outstanding at January 31, 2012:
Weighted
average
remaining
Number contractual
Range of exercise prices outstanding life in years
CDN $ 000s
$3.78 1,015 7.2
12.35-16.70 650 6.8
23.35-29.25 600 0.6
41.45 136 2.2
2,401
TABLE CONT'D
Options outstanding Options exercisable
Weighted Weighted
average Number average
Range of
exercise prices exercise price exercisable exercise price
CDN $ CDN $ 000s CDN $
$3.78 $ 3.78 1,016 $ 3.78
12.35-16.70 14.69 100 12.35
23.35-29.25 25.21 600 25.21
41.45 41.45 136 41.45
$ 14.21 1,852 $ 13.94
(d)Stock-based compensation
The Company applies the fair value method to all grants of stock options.
The fair value of options granted during the years ended January 31, 2012 and 2011 was estimated using a Black-Scholes option pricing model with the following weighted average assumptions:
2012 2011
Risk-free interest rate 2.41% 2.13%
Dividend yield 0.00% 0.00%
Volatility factor 50.00% 50.00%
Expected life of the options 3.5 years 5.9 years
Average fair value per option, CDN $ 6.51 $ 5.90
Average fair value per option, US $ 6.80 $ 5.63
Expected volatility is estimated by considering historic average share price volatility based on the average expected life of the options.
(e)RSU and DSU Plans
RSU Number of units
Balance, January 31, 2010 45,880
Awards and payouts during the year (net)
RSU awards 145,880
RSU payouts (35,814)
Balance, January 31, 2011 155,946
Awards and payouts during the year (net)
RSU awards 66,991
RSU payouts (46,963)
Balance, January 31, 2012 175,974
DSU Number of units
Balance, January 31, 2010 159,475
Awards and payouts during the year (net)
DSU awards 33,739
DSU payouts -
Balance, January 31, 2011 193,214
Awards and payouts during the year (net)
DSU awards 38,781
DSU payouts (17,127)
Balance, January 31, 2012 214,868
During the fiscal year, the Company granted 66,931 RSUs (net of forfeitures) and 38,781 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. The Company recognized an expense of $2.2 million (2011 - $0.9 million) for the year ended January 31, 2012. The total carrying amount of liabilities for cash settled share-based payment arrangements is $3.7 million (2011 - $2.5 million). The amounts for obligations and expense (recovery) for cash settled share-based payment arrangements have been grouped with Employee Benefit Plans in Note 13 for presentation purposes.
Note 18: Segmented Information
The Company operates in three segments within the diamond industry - mining, luxury brand and corporate, for the years ended January 31, 2012 and 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.
The corporate segment captures costs not specifically related to operations of the mining or luxury brand segments.
For the year ended
January 31, 2012 Mining Luxury brand Corporate Total
Sales
North America $ 15,018 $ 133,024 $ - $ 148,042
Europe 231,722 94,309 - 326,031
Asia excluding
Japan 43,374 103,815 - 147,189
Japan - 80,781 - 80,781
Total sales 290,114 411,929 - 702,043
Cost of sales
Depreciation
and
amortization 76,052 262 - 76,314
All other
costs 151,899 223,611 136 375,646
Total cost of
sales 227,951 223,873 136 451,960
Gross margin 62,163 188,056 (136) 250,083
Gross margin (%) 21.4% 45.7% -% 35.6%
Selling, general and
administrative
expenses
Selling and
related
expenses 3,412 129,445 - 132,857
Administrative
expenses 10,042 39,166 11,487 60,695
Total selling,
general and
administrative
expenses 13,454 168,611 11,487 193,552
Operating profit
(loss) 48,709 19,445 (11,623) 56,531
Finance expenses (10,787) (5,900) - (16,687)
Exploration costs (1, 770) - - (1, 770)
Finance and other
income 462 124 - 586
Foreign exchange gain 834 171 - 1,005
Segmented profit
(loss) before income
taxes $ 37,448 $ 13,840 $ (11,623) $ 39,665
Segmented assets as
at January 31, 2012
Canada $ 936,723 $ - $ - $ 936,723
United States - 347,430 116,076 463,506
Other foreign
countries 19,759 210,948 - 230,707
$ 956,482 $ 558,378 $ 116,076 $ 1,630,936
Capital expenditures $ 45,165 $ 19,681 $ - $ 64,846
Other significant
non-cash items:
Deferred
income tax
expense
(recovery) $ (2,291) $ 1,486 $ (283) $ (1,088)
Operating profit (loss) for the year ended January 31, 2012
includes the following items of expense:
Mining Luxury Brand Corporate Total
Research and
development $ 4,147 $ 2,412 $ - $ 6,559
Operating lease 317 30,269 - 30,586
Employee compensation
expense 43,500 68,782 4,089 116,371
Depreciation and
amortization 78,760 12,321 558 91,639
For the year ended
January 31, 2011 Mining Luxury brand Corporate Total
Sales
North America $ 10,418 $ 108,500 $ - $ 118,918
Europe 247,677 78,624 - 326,301
Asia excluding
Japan 21,059 92,504 - 113,563
Japan - 65,181 - 65,181
Total sales 279,154 344,809 - 623,963
Cost of sales
Depreciation
and
amortization 60,923 320 - 61,243
All other
costs 144,489 181,729 204 326,422
Total cost of
sales 205,412 182,049 204 387,665
Gross margin 73,742 162,760 (204) 236,298
Gross margin (%) 26.4% 47.2% -% 37.9%
Selling, general and
administrative
expenses
Selling and
related
expenses 2,786 106,498 - 109,284
Administrative
expenses 8,692 41,358 8,616 58,666
Total selling,
general and
administrative
expenses 11,478 147,856 8,616 167,950
Operating profit
(loss) 62,264 14,904 (8,820) 68,348
Finance expenses (7,136) (6,291) - (13,427)
Exploration costs (666) - - (666)
Finance and other
income 280 389 - 669
Foreign exchange gain
(loss) (1,644) 2,001 - 357
Segmented profit
(loss) before income
taxes $ 53,098 $ 11,003 $ (8,820) $ 55,281
Segmented assets as
at January 31, 2011
Canada $ 954,072 $ - $ - $ 954,072
United States - 331,138 106,767 437,905
Other foreign
countries 25,413 186,185 - 211,598
$ 979,485 $ 517,323 $ 106,767 $ 1,603,575
Capital expenditures $ 41,859 $ 6,751 $ - $ 48,610
Other significant
non-cash items:
Deferred
income tax
expense
(recovery) $ 12,380 $ 5,060 $ (623) $ 16,817
Operating profit (loss) for the year ended January 31, 2011
includes the following items of expense:
Mining Luxury Brand Corporate Total
Research and
development $ 5,165 $ 1,719 $ - $ 6,884
Operating lease 317 21,244 - 21,561
Employee compensation
expense 38,557 58,786 3,334 100,677
Depreciation and
amortization 63,424 12,264 1,319 77,007
Note 19: Earnings per Share
The following table presents the calculation of diluted earnings per share:
2012 2011
NUMERATOR
Net earnings for the year attributable to
shareholders $ 25,454 $ 41,530
DENOMINATOR (000s SHARES)
Weighted average number of shares outstanding 84,661 79,858
Dilutive effect of employee stock options 871 1,083
85,532 80,941
Note 20: Related Party Disclosure
(a) Operational information
The Company had the following investments in significant subsidiaries at January 31, 2012:
Name of company Effective interest Country of incorporation
Harry Winston Diamond
Mines Ltd. 100% Canada
Harry Winston Diamond
Limited Partnership 100% Canada
Harry Winston Diamond
(India) Private Limited 100% India
Harry Winston Diamond
International N.V. 100% Belgium
Harry Winston Technical
Services Inc. 100% Canada
6019838 Canada Inc. 100% Canada
Harry Winston Inc. 100% US
Harry Winston SARL 100% France
Harry Winston Japan,
K.K. 100% Japan
Harry Winston (UK)
Limited 100% UK
Harry Winston Inc.
Taiwan Branch 100% Taiwan
Harry Winston S.A. 100% Switzerland
Harry Winston (Hong
Kong) Limited 100% Hong Kong
Harry Winston Commercial
(Beijing) Co., Ltd 100% China
Harry Winston N.A. Pte
Ltd. 100% Singapore
Note 21: Reclassifications
Certain comparative figures have been reclassified to conform with the current year's presentation.
Note 22: 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 $0.3 million for calendar 2012. 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 January 31, 2012, was $81.1 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 upon 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 January 31, 2012 was $1.5 million.
(c)Operating lease commitments
The Company has entered into leases for the rental of luxury brand salons and office premises. The leases have varying terms, escalation clauses and renewal rights. Any renewal terms are at the option of the lessee at lease payments based on market prices at the time of renewal. Certain leases contain either restrictions relating to opening additional salons within a specified radius or contain additional rents related to sales levels. Future minimum lease payments under non-cancellable operating leases as at January 31 are as follows:
2012 2011
Within one year $ 22,439 $ 18,720
After one year but not more than five years 75,285 49,973
More than five years 122,628 35,856
$ 220,352 $ 104,549
(d)Capital commitments related to the Joint Venture
At January 31, 2012, Harry Winston Diamond Corporation's share of approved capital expenditures at the Joint Venture was $23.4 million (2011 - $14.6 million). At January 31, 2012, Harry Winston Diamond Corporation's current projected share of the planned capital expenditures at the Diavik Diamond Mine for the calendar years 2012 to 2016, is approximately $140 million (2011 - $170 million) assuming a Canadian/US average exchange rate of $1.00 for the five years (2011 - $1.00).
Note 23: Financial Risk Management Objectives and Policies
The Company is exposed, in varying degrees, to a variety of financial-instrument-related risks by virtue of its activities. The Company's overall financial risk-management program focuses on the preservation of capital and protecting current and future Company assets and cash flows by minimizing exposure to risks posed by the uncertainties and volatilities of financial markets.
The Company's Audit Committee has responsibility to review and discuss significant financial risks or exposures and to assess the steps management has taken to monitor, control, report and mitigate such risks to the Company.
Financial risk management is carried out by the Finance department, which identifies and evaluates financial risks and establishes controls and procedures to ensure financial risks are mitigated.
The types of risk exposure and the way in which such exposures are managed are as follows:
(i)Currency risk
The Company's sales are predominantly denominated in US dollars. As the Company operates in an international environment, some of the Company's financial instruments and transactions are denominated in currencies other than the US dollar. The results of the Company's operations are subject to currency transaction risk and currency translation risk. The operating results and financial position of the Company are reported in US dollars in the Company's consolidated financial statements.
The Company's primary foreign exchange exposure impacting pre-tax profit arises from the following sources:
Net Canadian dollar denominated monetary assets and liabilities - The
Company's functional and reporting currency is US dollars; however,
many of the mining segment's monetary assets and liabilities are in
Canadian dollars. As such, the Company is continually subject to
foreign exchange fluctuations, particularly as the Canadian dollar
moves against the US dollar. The weakening/strengthening of the
Canadian dollar versus the US dollar results in an unrealized foreign
exchange gain/loss on the revaluation of the Canadian dollar
denominated assets and liabilities.
Committed or anticipated foreign currency denominated transactions -
primarily Canadian dollar costs at the Diavik Diamond Mine.
Based on the Company's net exposure to Canadian dollar monetary assets and liabilities at January 31, 2012, a one-cent change in the exchange rate would have impacted pre-tax profit for the year by $0.5 million (2011 - $0.2 million).
The Company also has foreign exchange exposure impacting accumulated other comprehensive income arising from assets recorded in currencies other than the US dollar at its luxury brand salons and watch factory. A one percent change in these underlying currencies at January 31, 2012 would have impacted accumulated other comprehensive income by $0.5 million.
(ii)Interest rate risk
Interest rate risk is the risk borne by an interest-bearing asset or liability as a result of fluctuations in interest rates. Financial assets and financial liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company's most significant interest rate risk arises from its various credit facilities, which bear variable interest based on LIBOR. Based on the Company's LIBOR-based credit facilities at January 31, 2012, a 100 basis point change in LIBOR would have impacted pre-tax net profit for the year by $2.3 million (2011 - $1.9 million).
(iii)Concentration of credit risk
Credit risk is the risk of a financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligation.
Financial instruments that potentially subject the Company to credit risk consist of trade receivables from luxury brand segment clients. While economic factors can affect credit risk, the Company manages risk by providing credit terms on a case-by-case basis only after a review of the client's financial position and credit history. The Company has not experienced significant losses in the past from its customers.
The Company's exposure to credit risk in the mining segment is minimized by its sales policy, which requires receipt of cash prior to the delivery of rough diamonds to its customers.
The Company manages credit risk, in respect of short-term investments, by maintaining bank accounts with Tier 1 banks and investing only in term deposits or banker's acceptances with highly rated financial institutions that are capable of prompt liquidation. The Company monitors and manages its concentration of counterparty credit risk on an ongoing basis.
At January 31, 2012, the Company's maximum counterparty credit exposure consists of the carrying amount of cash and cash equivalents and accounts receivable, which approximates fair value.
The Company considers any accounts receivables outstanding more than 30 days to be past due. At January 31, 2012, past due accounts receivable were as follows:
2012 2011
31- 60 days $ 4,651 $ 531
61 - 90 days 1,692 338
Over 90 days 2,115 10,329
$ 8,458 $ 11,198
(iv)Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due.
The Company manages its liquidity by ensuring that there is sufficient capital to meet short-term and long-term business requirements, after taking into account cash flows from operations and the Company's holdings of cash and cash equivalents. The Company also strives to maintain sufficient financial liquidity at all times in order to participate in investment opportunities as they arise, as well as to withstand sudden adverse changes in economic circumstances. The Company assesses liquidity and capital resources on a consolidated basis. Management forecasts cash flows for its current and subsequent fiscal years to predict future financing requirements. Future financing requirements are met through a combination of committed credit facilities and access to capital markets.
At January 31, 2012, the Company had $78.2 million of cash and cash equivalents and $116.0 million available under credit facilities.
The following table summarizes the aggregate amount of contractual undiscounted future cash outflows for the Company's financial liabilities:
Less than
Total 1 year
Trade and other payables $ 104,681 $ 104,681
Income taxes payable 29,450 29,450
Interest-bearing loans and borrowings(a) 321,751 39,578
Environmental and participation
agreement incremental commitments 93,330 82,676
Operating lease obligations 220,352 22,439
TABLE CONT'D
Year Year After
2-3 4-5 5 years
Trade and other payables $ - $ - $ -
Income taxes payable - - -
Interest-bearing loans and borrowings(a) 260,954 4,852 16,367
Environmental and participation
agreement incremental commitments 4,844 - 5,810
Operating lease obligations 39,288 35,997 122,628
(a) Includes projected interest payments on the current debt outstanding based on interest rates in effect at January 31, 2012.
(vi)Capital management
The Company's capital includes cash and cash equivalents, current and non-current interest-bearing loans and borrowings 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 24: Financial Instruments
The Company has various financial instruments comprising cash and cash equivalents, accounts receivable, trade and other payables, and interest-bearing loans and borrowings.
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 Company's interest-bearing loans and borrowings are for the most part fully secured; hence the fair values of these instruments at January 31, 2012 are considered to approximate their carrying value.
The carrying values and estimated fair values of these financial instruments are as follows:
January 31, 2012 January 31, 2011
Estimated Carrying Estimated Carrying
fair value value fair value value
Financial assets
Cash and cash
equivalents $ 78,116 $ 78,116 $ 108,693 $ 108,693
Accounts
receivable 26,910 26,910 22,788 22,788
$ 105,026 $ 105,026 $ 131,481 $ 131,481
Financial liabilities
Trade and other
payables $ 104,681 $ 104,681 $ 139,551 $ 139,551
Promissory note - - 70,000 70,000
Interest-bearing
loans and
borrowings 299,723 299,723 259,731 259,731
$ 404,404 $ 404,404 $ 469,282 $ 469,282
Note 25: Explanation of Transition to IFRS
As stated in Note 2(a), these are the Company's first audited consolidated financial statements prepared in accordance with IFRS.
The preparation of these first consolidated financial statements in accordance with IFRS has resulted in changes to the accounting policies as compared with the most recent annual financial statements prepared under generally accepted accounting principles in Canada ('Canadian GAAP'). Canadian GAAP differs in some areas from IFRS. IFRS 1, 'First-time Adoption of International Financial Reporting Standards', generally requires full retrospective application of the standards and interpretations in force assuming that the IFRS accounting policies had always been applied. However, IFRS 1 allows certain exemptions in the application of particular standards to prior periods in order to assist companies with the transition process. The Company has elected to take the following significant optional exemptions as permitted under IFRS 1 in preparing its opening IFRS balance sheet.
Business Combinations - IFRS 1 allows the Company not to apply IFRS 3,
'Business Combinations' ('IFRS 3 (Revised)'), retrospectively to past
acquisitions.
Leases - The Company has utilized this exemption, which allows an
entity not to have to reassess contracts that have already been
assessed under Canadian GAAP, and which would have resulted in a
similar conclusion as International Financial Reporting
Interpretations Committee ('IFRIC') 4, 'Determining Whether an
Arrangement Contains a Lease'.
Cumulative Translation Differences - Retrospective application of IFRS
would require the Company to determine cumulative currency translation
differences in accordance with IAS 21, 'The Effects of Changes in
Foreign Exchange Rates' ('IAS 21'), from the date a subsidiary or
associate was formed or acquired. This exemption permits the Company
to reset existing cumulative translation differences to zero at
transition date.
Borrowing Costs - This exemption allows the Company to adopt IAS 23,
'Borrowing Costs' ('IAS 23'), which requires the capitalization of
borrowing costs on all qualifying assets, prospectively from the date
of the opening IFRS balance sheet. The alternative to this exemption
requires the Company to retrospectively restate borrowing costs in
accordance with IFRS requirements, in addition to capitalizing
borrowing costs from the date of transition.
Decommissioning Liabilities Included in the Cost of Property, Plant
and Equipment - IFRS 1 provides an optional exemption from the full
retrospective application of decommissioning liabilities, which allows
an entity to re-measure provisions on the transition date under IAS
37, 'Provisions, Contingent Liabilities and Contingent Assets' ('IAS
37'), and estimate the amount to be included in the cost of the
related asset by discounting the liability to the date at which it
first arose. The alternative to this election, retrospective
application, would require the Company to estimate its provision for
reclamation and remediation at the original date incurred and reflect
changes in estimate and discount rates through to the date of
transition to IFRS.
The accounting policies described in Note 3 of the audited consolidated financial statements have been applied in preparing: the financial statements for the year ended January 31, 2012, the comparative information presented in these financial statements for both the year ended January 31, 2011, and in the preparation of an opening IFRS balance sheet at February 1, 2010 (the Company's date of transition).
An explanation of how the transition to IFRS has affected the reported financial position and financial performance of the Company is shown below, including reconciliations of equity, profit and loss and comprehensive income for the comparative periods and of equity at the date of transition reported under previous Canadian GAAP to those reported for those periods and at the date of transition under IFRS.
Explanation of transition to IFRS: Reconciliation of equity
TABLE CONT'D
(in thousands of United
States dollars)
(unaudited) February 1, 2010
Effect of
Canadian transition
Ref. GAAP to IFRS IFRS
ASSETS
Current assets:
Cash and cash
equivalents $ 62,969 $ - $ 62,969
Accounts
receivable (a) 23,520 78 23,598
Inventory and
supplies 311,188 - 311,188
Other current
assets (b) 44,220 (4,921) 39,299
441,897 (4,843) 437,054
Property, plant and
equipment
- Mining (c) 802,984 (19,552) 783,432
Property, plant and
equipment
- Luxury brand 62,277 - 62,277
Intangible assets, net 129,213 - 129,213
Other non-current assets (a) 15,629 - 15,629
Deferred income tax
assets (a) 42,805 7,719 50,524
Total assets $ 1,494,805 $ (16,676) $ 1,478,129
LIABILITIES AND EQUITY
Current liabilities:
Trade and other
payables (d) $ 87,448 $ (11,555) $ 75,893
Employee benefit
plans (d) - 11,284 11,284
Income taxes
payable 46,297 - 46,297
Bank advances (d) 22,485 (22,485) -
Promissory note - - -
Current portion
of
interest-bearing
loans and
borrowings (d) 1,154 22,677 23,831
157,384 (79) 157,305
Interest-bearing loans
and
borrowings (d) 161,538 153 161,691
Employee benefit plans (e) 2,201 4,697 6,898
Provisions (f) 41,275 2,416 43,691
Deferred income tax
liabilities (g) 271,822 (25,424) 246,398
Total liabilities 634,220 (18,237) 615,983
Equity:
Share capital 426,593 - 426,593
Contributed
surplus 17,730 - 17,730
Retained
earnings (h) 210,001 32,056 242,057
Accumulated
other
comprehensive
income (i) 28,445 (31,016) (2,571)
Total shareholders'
equity 682,769 1,040 683,809
Non-controlling interest (j) 177,816 521 178,337
Total equity 860,585 1,561 862,146
Total liabilities and
equity $ 1,494,805 $ (16,676) $ 1,478,129
TABLE CONT'D
(in thousands of United
States dollars)
(unaudited) January 31, 2011
Effect of
Canadian transition
Ref. GAAP to IFRS IFRS
ASSETS
Current assets:
Cash and cash
equivalents $ 108,693 $ - $ 108,693
Accounts
receivable (a) 22,723 65 22,788
Inventory and
supplies 403,212 - 403,212
Other current
assets (b) 45,681 (4,364) 41,317
580,309 (4,299) 576,010
Property, plant and
equipment
- Mining (c) 777,807 (13,714) 764,093
Property, plant and
equipment
- Luxury brand 61,019 - 61,019
Intangible assets, net 127,894 - 127,894
Other non-current assets (a) 16,626 (2,105) 14,521
Deferred income tax
assets (a) 53,857 6,181 60,038
Total assets $ 1,617,512 $ (13,937) $ 1,603,575
LIABILITIES AND EQUITY
Current liabilities:
Trade and other
payables (d) $ 142,339 $ (2,788) $ 139,551
Employee benefit
plans (d) - 4,317 4,317
Income taxes
payable 6,660 - 6,660
Bank advances (d) 22,902 (22,902) -
Promissory note 70,000 - 70,000
Current portion
of
interest-bearing
loans and
borrowings (d) 1,313 22,902 24,215
243,214 1,529 244,743
Interest-bearing loans
and
borrowings (d) 237,450 (1,934) 235,516
Employee benefit plans (e) 3,001 4,286 7,287
Provisions (f) 43,390 6,740 50,130
Deferred income tax
liabilities (g) 355,531 (45,663) 309,868
Total liabilities 882,586 (35,042) 847,544
Equity:
Share capital 502,129 - 502,129
Contributed
surplus 16,233 - 16,233
Retained
earnings (h) 176,620 53,159 229,779
Accumulated
other
comprehensive
income (i) 39,678 (32,054) 7,624
Total shareholders'
equity 734,660 21,105 755,765
Non-controlling interest (j) 266 - 266
Total equity 734,926 21,105 756,031
Total liabilities and
equity $ 1,617,512 $ (13,937) $ 1,603,575
References to the Reconciliation of Equity and Profit
(a)Reclassification of assets
To conform to IFRS presentation requirements, certain asset balances have been reclassified.
Explanation of transition to IFRS: Reconciliation of profit
(in thousands of United States dollars)
(unaudited) For the fiscal year ended January 31, 2011
Effect of
Canadian transition to
Ref. GAAP IFRS IFRS
Sales $ 623,963 $ - $ 623,963
Cost of sales (k) 391,562 (3,897) 387,665
Gross margin 232,401 3,897 236,298
Selling, general and
administrative
expenses 167,950 - 167,950
Operating profit 64,451 3,897 68,348
Finance expenses (l) (11,527) (1,900) (13,427)
Exploration costs (m) - (666) (666)
Finance and other income (m) 486 183 669
Foreign exchange gain
(loss) (n) (14,406) 14,763 357
Profit before income taxes 39,004 16,277 55,281
Current income tax recovery (8,737) - (8,737)
Deferred income tax expense(o) 21,121 (4,304) 16,817
Net profit $ 26,620 $ 20,581 $ 47,201
Attributable to:
Shareholders $ 21,669 $ 19,861 $ 41,530
Non-controlling
interest 4,951 720 5,671
Net profit $ 26,620 $ 20,581 $ 47,201
Earnings per share
Basic $ 0.27 $ 0.25 $ 0.52
Diluted $ 0.27 $ 0.24 $ 0.51
Weighted average number of shares
outstanding 79,858,018 79,858,018 79,858,018
Explanation of transition to IFRS: Reconciliation of comprehensive income
(in thousands of United States dollars)
(unaudited) For the fiscal year ended January 31, 2011
Effect of
Canadian transition to
Ref. GAAP IFRS IFRS
Net profit - as above $ 26,620 $ 20,581 $ 47,201
Other comprehensive income
Net gain (loss) on
translation of net
foreign operations 10,879 - 10,879
Change in fair value
of derivative
financial
instruments 354 - 354
Actuarial loss on
employee benefit
plans (e)(i) - (1,038) (1,038)
Total comprehensive income $ 37,853 $ 19,543 $ 57,396
Attributable to:
Shareholders $ 32,902 $ 18,823 $ 51,725
Non-controlling
interest 4,951 720 5,671
Total comprehensive income $ 37,853 $ 19,543 $ 57,396
(b)Other current assets
Twelve months ended
Ref. February 1, 2010 January 31, 2011
Reclassification
of assets See (a) $ (7,797) $ (6,246)
Deferred tax
impact on
intra-group
transfer of
assets (i) 2,876 1,882
Net decrease in
other current
assets $ (4,921) $ (4,364)
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. On transition to IFRS at February 1,
2010, deferred income tax asset increased by $2.9 million along with a
(i) corresponding increase in retained earnings.
For the fiscal year ended January 31, 2011, the accounting under IFRS
resulted in a reduction of $1.0 million in both deferred income tax
asset and deferred income tax recovery.
(c)Property, plant and equipment - Mining
Twelve months ended
Ref. February 1, 2010 January 31, 2011
Derecognition
of exploration
costs
capitalized (i) $ (18,632) $ (17,072)
Remeasurement
of the asset
retirement
obligation See (f)(i) (920) 3,358
Net decrease
in property,
plant and
equipment -
Mining $ (19,552) $ (13,714)
(d)Reclassification of liabilities
To conform to IFRS presentation requirements, various liability balances have been reclassified.
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. The
retrospective application of this new accounting policy at the date of
transition has resulted in the $18.6 million write-off of the net book
value of capitalized exploration costs, and a decrease in deferred
income tax liability, non-controlling interest and retained earnings
(i) by $5.5 million, $0.9 million and $12.2 million, respectively.
For the fiscal year ended January 31, 2011, the accounting under IFRS
increased mining property, plant and equipment, deferred income tax
liabilities and non-controlling interest by $1.6 million, $0.6 million
and $0.2 million, respectively. Cost of sales decreased by $2.0
million, and exploration costs, deferred income tax expense and profit
attributable to non-controlling interest increased by $0.5 million,
$0.6 million and $0.2 million, respectively.
(e)Employee benefit plans
Twelve months ended
Ref. February 1, 2010 January 31, 2011
Retrospective
application of
IAS 19, 'Employee
Benefits' (i) $ 4,771 $ 5,986
Reclassification
of liabilities See (d) (74) (1,700)
Net increase in
employee benefit
plans $ 4,697 $ 4,286
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. As a result, $2.2 million in previously
unrecognized cumulative actuarial losses at February 1, 2010 were
recognized in accumulated other comprehensive income within equity,
along with a $4.8 million increase in the defined benefit plan
obligation and a $2.6 million decrease in deferred income tax
(i) liabilities.
For the fiscal year ended January 31, 2011, the accounting under IFRS
resulted in a $1.2 million increase to the defined benefit plan
obligation, a $1.0 million charge to other comprehensive income, and a
$0.2 million decrease in deferred income tax liabilities.
(f)Provisions
Twelve months ended
Ref. February 1, 2010 January 31, 2011
Remeasurement of the
asset retirement
obligation (i) $ 2,416 $ 6,740
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.
Through application of this IFRS exemption, the site restoration
provision under Canadian GAAP has been increased by $2.4 million along
with reductions in mining capital assets, deferred income tax
liability, non-controlling interest and retained earnings by $0.9
(i) million, $1.0 million, $0.2 million and $2.2 million, respectively.
For the fiscal year ended January 31, 2011, the accounting under IFRS
resulted in increases of $4.3 million in both mining capital assets
and restoration site provision. Nominal changes were also made to
deferred income tax liabilities, cost of sales, finance expenses and
deferred income tax recovery.
(g)Deferred income tax liabilities
Twelve months ended
Ref. February 1, 2010 January 31, 2011
Recognition of
new deferred
tax balances (i) $ (16,363) $ (34,749)
Derecognition
of exploration
costs
capitalized See (c)(i) (5,521) (4,887)
Retrospective
application of
IAS 19,
'Employee
Benefits' See (e)(i) (2,555) (2,732)
Remeasurement
of the asset
retirement
obligation See (f)(i) (985) (1,002)
Revaluation of
deferred
income tax
liabilities (ii) - (2,293)
Total decrease
in deferred
income tax
liabilities $ (25,424) $ (45,663)
(h)Retained earnings
The effect of all IFRS adjustments has increased (decreased) retained earnings as follows:
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
(i) 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.
On transition, the accounting under IFRS related to the determination
of temporary differences of foreign currency non-monetary assets and
liabilities and other temporary differences that were treated as
permanent under Canadian GAAP has reduced deferred tax liability by
$24.4 million and increased retained earnings and non-controlling
interest by $22.8 million and $1.6 million, respectively.
In addition, upon finalizing the IFRS adjustments, the Company
recorded an additional deferred tax liability of $8.0 million, with a
corresponding impact on retained earnings related to immaterial
adjustments of prior period balances, which were not previously
recorded in the April 30, 2011 unaudited interim condensed
consolidated financial statements. The Company has determined that
these amounts were not material to its consolidated financial
statements for any prior interim or annual periods.
For the fiscal year ended January 31, 2011, the accounting under IFRS
resulted in an $18.4 million decrease in deferred income tax
liabilities and an $18.4 million increase in deferred income tax
recovery. Net profit attributable to non-controlling interest also
increased by $0.5 million.
For the fiscal year ended January 31, 2011, the above IFRS
adjustments to deferred income tax liabilities required a revaluation
of the account balance resulting in a $2.3 million reduction in
deferred income tax liabilities and a corresponding increase in
deferred income tax recovery. Nominal changes were also made to
(ii) non-controlling interest.
Twelve months ended
Ref. February 1, 2010 January 31, 2011
Reset of
cumulative
translation
differences See (i)(i) $ 28,800 $ 28,800
Recognition
of new
deferred tax
balances See (g)(i) 14,775 32,692
Derecognition
of
exploration
costs
capitalized See (c)(i) (12,243) (11,496)
Deferred tax
impact on
intra-group
transfer of
assets See (b)(i) 2,876 1,882
Remeasurement
of the asset
retirement
obligation See (f)(i) (2,152) (2,181)
Revaluation
of deferred
income tax
liabilities See (g)(ii) - 2,221
Reacquisition
of
partnership
units See (i)(i) - 1,241
Net increase
in retained
earnings $ 32,056 $ 53,159
(i)Accumulated other comprehensive income
Twelve months ended
Ref. February 1, 2010 January 31, 2011
Reset of
cumulative
translation
differences (i) $ (28,800) $ (28,800)
Retrospective
application
of IAS 19,
'Employee
Benefits' See (e)(i) (2,216) (3,254)
Total
decrease in
accumulated
other
comprehensive
income $ (31,016) $ (32,054)
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 have been reset to zero and retained earnings has been
(i) increased by $28.8 million.
(j)Non-controlling interest
Twelve months ended
Ref. February 1, 2010 January 31, 2011
Derecognition
of exploration
costs
capitalized See (c)(i) $ (868) $ (689)
Remeasurement
of the asset
retirement
obligation See (f)(i) (199) (199)
Recognition of
new deferred
tax balances See (g)(i) 1,588 2,057
Revaluation of
deferred income
tax liabilities See (g)(ii) - 72
Reacquisition
of partnership
units (i) - (1,241)
Net change in
non-controlling
interest $ 521 $ -
During the third quarter of fiscal 2011, the Company reacquired its 9%
indirect interest in the Diavik Joint Venture from Kinross resulting
in the reversal of previously recorded profit adjustments attributable
(i) to non-controlling interest.
(k)Cost of sales
Twelve months
ended
January 31,
Ref. 2011
Reclassification of accretion expense (i) $ (2,004)
Derecognition of exploration costs
capitalized See (c)(i) (2,043)
Remeasurement of the asset retirement
obligation See (f)(i) 150
Net decrease in cost of sales $ (3,897)
(l)Finance expenses
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
(i) component of cost of sales.
(m)Exploration costs
Twelve months ended
Ref. January 31, 2011
Reclassification of accretion
expense See (k)(i) $ (2,004)
Remeasurement of the asset
retirement obligation See (f)(i) 104
Net increase in finance expenses $ (1,900)
Twelve months ended
Ref. January 31, 2011
Derecognition of exploration costs
capitalized See (c)(i) $ (483)
Reclassification of exploration
costs See (m) (183)
Increase in exploration costs $ (666)
(n)Decrease in foreign exchange loss
Twelve months ended
Ref. January 31, 2011
Reclassification of foreign exchange
loss (i) $ 14,763
(o)Deferred income tax recovery
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
(i) recovery/expense.
Diavik Diamond Mine Mineral Reserve and
Mineral Resource Statement
AS OF DECEMBER 31, 2011
Proven and Probable Reserves
Twelve months ended
Ref. January 31, 2011
Derecognition of exploration
costs capitalized See (c)(i) $ 634
Recognition of new deferred
income tax liability balances See (g)(i) (18,385)
Deferred tax impact on
intra-group transfer of assets See (b)(i) 994
Remeasurement of the asset
retirement obligation See (f)(i) (17)
Reclassification of foreign
exchange loss See (n)(i) 14,763
Revaluation of deferred income
tax liabilities See (g)(ii) (2,293)
Net increase in deferred income
tax recovery $ (4,304)
Proven Probable
Open pit and underground Millions Carats Millions Millions
mining of tonnes per tonne of carats of tonnes
A-154 South
Open Pit - - - -
Underground 1.6 4.0 6.3 1.4
Total A-154
South 1.6 4.0 6.3 1.4
A-154 North
Open Pit - - - -
Underground 3.1 2.3 7.1 4.9
Total A-154
North 3.1 2.3 7.1 4.9
A-418
Open Pit 0.7 4.0 2.8 0.6
Underground - - - 6.7
Total A-418 0.7 4.0 2.8 7.3
Total
Open Pit 0.7 4.0 2.8 0.6
Underground 4.7 2.8 13.3 12.9
Total Reserves 5.4 3.0 16.1 13.5
Note: Totals may not add up due to rounding.
Additional Indicated and Inferred Resources
TABLE CONT'D
Proven
and
Probable probable
Open pit and
underground Carats Millions Millions Carats Millions
mining per tonne of carats of tonnes per tonne of carats
A-154 South
Open Pit - - - - -
Underground 3.4 4.7 2.9 3.7 10.9
Total A-154
South 3.4 4.7 2.9 3.7 10.9
A-154 North
Open Pit - - - - -
Underground 2.2 10.7 8.0 2.2 17.8
Total A-154
North 2.2 10.7 8.0 2.2 17.8
A-418
Open Pit 3.8 2.3 1.3 3.9 5.0
Underground 3.8 25.1 6.7 3.8 25.1
Total A-418 3.8 27.4 8.0 3.8 30.2
Total
Open Pit 3.8 2.3 1.3 3.9 5.0
Underground 3.1 40.5 17.6 3.1 53.8
Total
Reserves 3.2 42.8 18.9 3.1 58.9
Measured Resources
Millions Carats Millions Millions
Kimberlite pipe of tonnes per tonne of carats of tonnes
A-154 South - - - -
A-154 North - - - -
A-418 - - - -
A-21 3.6 2.8 10.0 0.4
Total 3.6 2.8 10.0 0.4
TABLE CONT'D
Inferred
Indicated Resources Resources
Carats Millions Millions Carats Millions
Kimberlite pipe per tonne of carats of tonnes per tonne of carats
A-154 South - - 0.04 3.5 0.1
A-154 North - - 2.2 2.4 5.3
A-418 - - 0.3 2.7 0.8
A-21 2.6 1.0 0.8 3.0 2.3
Total 2.6 1.0 3.3 2.6 8.5
Note: Totals may not add up due to rounding.
Cautionary Note to United States Investors Concerning Disclosure of Mineral Reserves and Resources: The Company is organized under the laws of Canada. The mineral reserves and resources described herein are estimates, and have been prepared in compliance with NI 43-101. The definitions of proven and probable reserves used in NI-43-101 differ from the definitions in the United States Securities and Exchange Commission ('SEC') Industry Guide 7. In addition, the terms 'mineral resource', 'measured mineral resource', 'indicated mineral resource' and 'inferred mineral resource' are defined in and required to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7, and normally are not permitted to be used in reports and registration statements filed with the SEC. Accordingly, information contained in this financial report [or this MD&A] containing descriptions of the Diavik Diamond Mine's mineral deposits may not be comparable to similar information made public by US companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder. United States investors are cautioned not to assume that all or any part of Measured or Indicated Mineral Resources will ever be converted into Mineral Reserves. United States investors are also cautioned not to assume that all or any part of an Inferred Mineral Resource exists, or is economically or legally mineable.
The above mineral reserve and mineral resource statement was prepared by Diavik Diamond Mines Inc., operator of the Diavik Diamond Mine, under the supervision of Calvin Yip, P.Eng., Principal Advisor, Strategic Planning of Diavik Diamond Mines Inc., a Qualified Person within the meaning of National Instrument 43-101 of the Canadian Securities Administrators. For further details and information concerning Harry Winston Diamond Corporation's Mineral Reserves and Resources, readers should reference Harry Winston Diamond Corporation's Annual Information Form available through http://www.sedar.com and http://investor.harrywinston.com.
For further information:
Mr. Richard Chetwode, Vice President, Corporate Development - +44(0)7720-970-762 or rchetwode@harrywinston.com Ms. Laura Kiernan, Director, Investor Relations - +1-(212)315-7934 or lkiernan@harrywinston.com Ms. Kelley Stamm, Manager, Investor Relations - +1-(416)205-4380 or kstamm@harrywinston.com
Harry Winston Diamond Corporation