Harry Winston Diamond Corporation Reports Fiscal 2012 First Quarter Results
TORONTO, June 8, 2011 /PRNewswire/ - Harry Winston Diamond Corporation (TSX: HW) (NYSE:HWD) (the "Company") today announced its first quarter Fiscal 2012 results for the quarter ending April 30, 2011.
Robert Gannicott, Chairman and Chief Executive Officer stated, "This quarter's results reflect improving rough diamond prices combined with increasing sales and profit for the luxury brand segment. Both sides of our diamond business are performing well as we continue to achieve premium rough diamond prices and execute our luxury brand strategy. Our recently announced relationship with Diamond Asset Advisors in the creation of a polished diamond acquisition fund represents an innovative way for the Company to support its luxury brand growth objectives."
First Quarter Highlights:
- Consolidated sales were $143.9 million, an increase of 26% versus the
prior year (22% at constant exchange rates). Mining sales were
$62.0 million, an increase of 27% versus last year primarily due to
higher rough diamond pricing versus the comparable prior year period.
Luxury brand sales were $81.9 million, an increase of 26% versus the
prior year (20% at constant exchange rates), primarily driven by
stronger high jewelry sales in the United States and higher timepiece
sales.
- Rough diamond production for the calendar quarter ended March 31,
2011 was 0.5 million carats compared to 0.6 million carats in the
calendar quarter of the prior year.
- Consolidated EBITDA (earnings before interest taxes depreciation and
amortization) in the first quarter of Fiscal 2012 increased 51%
versus a year ago to $25.0 million showing strength in both segments
of the business. In the same period, Mining segment EBITDA increased
48.5% to $17.6 million and Luxury Brand segment EBITDA increased
57.3% to $7.3 million.
- Consolidated operating profit was $4.7 million or double the
operating profit of $2.3 million from a year ago, with mining
operating profits down $0.3 million and luxury brand profits up
$2.7 million versus the prior year. Operating profit benefited from
higher rough diamond prices and higher high-end jewelry and timepiece
sales.
- Consolidated net profit attributable to shareholders for the first
quarter was $3.6 million or $0.04 per share compared to net profit
attributable to shareholders of $2.1 million or $0.03 per share in
the comparable quarter of the prior year.
Fiscal 2012 First Quarter Financial Summary
(US$ in millions except Earnings per Share amounts)
-------------------------------------------------------------------------
Three Three
months months
ended ended
Apr. 30, Apr. 30,
2011 2010
-------------------------------------------------------------------------
Sales $143.9 $114.0
- Mining Segment 62.0 48.9
- Luxury Brand Segment 81.9 65.1
-------------------------------------------------------------------------
Operating profit 4.7 2.3
- Mining Segment 0.6 0.9
- Luxury Brand Segment 4.1 1.4
-------------------------------------------------------------------------
Net profit 3.6 2.9
-------------------------------------------------------------------------
Earnings per share $0.04 $0.03
-------------------------------------------------------------------------
Complete financial statements, MD&A and a discussion of risk factors are included in the accompanying release.
Transition to IFRS from Canadian GAAP
The Company has adopted International Financial Reporting Standards ("IFRS") for its first quarter Fiscal 2012 unaudited interim condensed consolidated financial statements. The Company previously reported its results under Canadian GAAP, and continues to report results in US Dollars.
The results of the Company's conversion to IFRS can be found in Fiscal 2012 First Quarter Report and should be read in conjunction with the Company's Fiscal 2011 Annual Report.
Annual Meeting and First Quarter Results Webcast
Beginning at 10:00AM (ET) on Thursday, June 9, 2011, the Company will hold its Annual Meeting of Shareholders at the St. Andrew's Club and Conference Center, 150 King Street West, 27th Floor in Toronto, Ontario. Interested parties unable to attend may listen to a webcast of the meeting and a review of the first quarter results on the Company's website at http://investor.harrywinston.com.
An online archive of the webcast will be available later that same day by accessing the Company's investor relations web site at http://investor.harrywinston.com.
About Harry Winston Diamond Corporation
Harry Winston Diamond Corporation is a diamond enterprise with premium assets in the mining and retail segments of the diamond industry. Harry Winston supplies rough diamonds to the global market from its 40 percent ownership interest in the Diavik Diamond Mine. The Company's luxury brand segment is a premier diamond jeweler and luxury timepiece retailer with salons in key locations, including New York, Paris, London, Beijing, Tokyo, Hong Kong and Beverly Hills.
The Company focuses on the two most profitable segments of the diamond industry, mining and retail, in which its expertise creates shareholder value. This unique business model provides key competitive advantages; rough diamond sales and polished diamond purchases provide market intelligence that enhances the Company's overall performance.
For more information, please visit www.harrywinston.com or for investor information, visit http://investor.harrywinston.com.
Highlights
(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
Consolidated sales were $143.9 million for the first quarter compared to $114.0 million for the comparable quarter of the prior year, resulting in a 24% increase in gross margin to $47.5 million and operating profit of $4.7 million, compared to operating profit of $2.3 million in the comparable quarter of the prior year.
The mining segment recorded sales of $62.0 million, a 27% increase from $48.9 million in the comparable quarter of the prior year. The increase in sales resulted primarily from a 34% increase in achieved rough diamond prices during the quarter. The mining segment recorded operating profit of $0.6 million compared to $0.9 million in the comparable quarter of the prior year. Cost of sales of $53.4 million included $16.4 million of depreciation and amortization.
The luxury brand segment recorded sales of $81.9 million, an increase of 26% from sales of $65.1 million in the comparable quarter of the prior year (20% at constant exchange rates). Operating profit was $4.1 million for the quarter compared to $1.4 million in the same quarter of the prior year.
The Company recorded a consolidated net profit attributable to shareholders of $3.6 million or $0.04 per share for the quarter, compared to a net profit attributable to shareholders of $2.1 million or $0.03 per share in the first quarter of the prior year.
Management's Discussion and Analysis
PREPARED AS OF JUNE 8, 2011 (ALL FIGURES ARE IN UNITED STATES
DOLLARS UNLESS OTHERWISE INDICATED)
The following is management's discussion and analysis ("MD&A") of the results of operations for Harry Winston Diamond Corporation ("Harry Winston Diamond Corporation", or the "Company") for the three months ended April 30, 2011, and its financial position as at April 30, 2011. This MD&A is based on the Company's unaudited interim condensed consolidated financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") and should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto for the three months ended April 30, 2011 and the audited consolidated financial statements of the Company and notes thereto for the year ended January 31, 2011 (prepared in accordance with generally accepted accounting principles in Canada ("Canadian GAAP" or "CDN GAAP")). Unless otherwise specified, all financial information is presented in United States dollars. Unless otherwise indicated, all references to "first quarter" refer to the three months ended April 30. Unless otherwise indicated, references to "international" for the luxury brand segment refer to Europe and Asia.
Certain comparative figures have been reclassified to conform to the current year's presentation.
Certain information included in this MD&A may constitute forward-looking information within the meaning of Canadian and United States securities laws. In some cases, forward-looking information can be identified by the use of terms such as "may", "will", "should", "expect", "plan", "anticipate", "foresee", "appears", "believe", "intend", "estimate", "predict", "potential", "continue", "objective" or other similar expressions concerning matters that are not historical facts. Forward-looking information may relate to management's future outlook and anticipated events or results, and may include statements or information regarding plans, timelines and targets for construction, mining, development, production and exploration activities at the Diavik Diamond Mine, future mining and processing at the Diavik Diamond Mine, projected capital expenditure requirements and the funding thereof, liquidity and working capital requirements and sources, estimated reserves and resources at, and production from, the Diavik Diamond Mine, the number and timing of expected rough diamond sales, the demand for rough diamonds, expected diamond prices and expectations concerning the diamond industry and the demand for luxury goods, expected cost of sales and gross margin trends in the mining segment, targets for compound annual growth rates of sales and operating income in the luxury brand segment, plans for expansion of the retail salon network, and expected sales trends and market conditions in the luxury brand segment. Actual results may vary from the forward-looking information. See "Risks and Uncertainties" on page 15 for material risk factors that could cause actual results to differ materially from the forward-looking information.
Forward-looking information is based on certain factors and assumptions regarding, among other things, mining, production, construction and exploration activities at the Diavik Diamond Mine, world and US economic conditions and the worldwide demand for luxury goods. Specifically, in making statements regarding expected diamond prices and expectations concerning the diamond industry and expected sales trends and market conditions in the luxury brand segment, the Company has made assumptions regarding, among other things, continuing recovery of world and US economic conditions, worldwide diamond production levels, and demand for luxury goods. While the Company considers these assumptions to be reasonable based on the information currently available to it, they may prove to be incorrect. See "Risks and Uncertainties" on page 15.
Forward-looking information is subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from what we currently expect. These factors include, among other things, the uncertain nature of mining activities, including risks associated with underground construction and mining operations, risks associated with joint venture operations, risks associated with the remote location of and harsh climate at the Diavik Diamond Mine site, risks associated with regulatory requirements, fluctuations in diamond prices and changes in US and world economic conditions, the risk of fluctuations in the Canadian/US dollar exchange rate, cash flow and liquidity risks, the risks of competition in the luxury jewelry business as well as changes in demand for high-end luxury goods, and risks associated with the impact of the Company's transition to IFRS. Please see page 15 of this Interim Report, as well as the Company's current Annual Information Form, available at www.sedar.com, for a discussion of these and other risks and uncertainties involved in the Company's operations.
Readers are cautioned not to place undue importance on forward-looking information, which speaks only as of the date of this MD&A, and should not rely upon this information as of any other date. Due to assumptions, risks and uncertainties, including the assumptions, risks and uncertainties identified above and elsewhere in this MD&A, actual events may differ materially from current expectations. The Company uses forward-looking statements because it believes such statements provide useful information with respect to the expected future operations and financial performance of the Company, and cautions readers that the information may not be appropriate for other purposes. While the Company may elect to, it is under no obligation and does not undertake to update or revise any forward-looking information, whether as a result of new information, future events or otherwise at any particular time, except as required by law. Additional information concerning factors that may cause actual results to materially differ from those in such forward-looking statements is contained in the Company's filings with Canadian and United States securities regulatory authorities and can be found at www.sedar.com and www.sec.gov, respectively.
Summary Discussion
Harry Winston Diamond Corporation is a diamond enterprise with premium assets in the mining and retailing segments of the diamond industry. The Company supplies rough diamonds to the global market from its 40% ownership interest in the Diavik Diamond Mine, located in Canada's Northwest Territories. The Company's luxury brand segment is a premier diamond jeweler and luxury timepiece retailer with salons in key locations including New York, Paris, London, Beijing, Tokyo, Hong Kong and Beverly Hills.
The Company's mining asset is an ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the "Joint Venture") is an unincorporated joint arrangement between Diavik Diamond Mines Inc. ("DDMI") (60%) and Harry Winston Diamond Limited Partnership ("HWDLP") (40%) where HWDLP holds an undivided 40% ownership interest in the assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is the operator of the Diavik Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England.
Market Commentary
The Diamond Market
Continued increase in demand pushed the price of rough diamonds to new highs in the first quarter of fiscal 2012. The market price for rough diamonds has increased approximately 34% over the comparable quarter of the prior year. The driving markets remained the Far East and India. In addition, continued resurgence from the US market increased demand for certain popular ranges of polished diamonds. The demand for rough diamonds continues to outpace the increase in mine supply, which is expected to lead to further price growth in fiscal 2012.
The Luxury Brand Jewelry Market
The luxury jewelry market continues to show positive growth over the comparable quarter of the prior year, supported by increasing global wealth led by China. The positive sales trend in the luxury jewelry market continued despite the challenges of the earthquake and tsunami in Japan in early March and the political upheaval in the Middle East and North Africa. Significant increases in diamond and raw materials costs have led many retailers to respond by increasing prices. A weak US dollar led to strong tourism into the United States, and resulted in increased consumer demand especially from Asian clients.
Condensed Consolidated Financial Results
The following is a summary of the Company's consolidated quarterly results for the eight quarters ended April 30, 2011 following the basis of presentation utilized in its IFRS and Canadian GAAP financial statements:
(expressed in thousands of United States dollars except per share amounts
and where otherwise noted)
(quarterly results are unaudited)
-------------------------------------------------------------------------
IFRS
-------------------------------------------------------------------------
2012 2011 2011 2011 2011
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $143,932 $215,358 $140,877 $153,728 $114,000
Cost of sales 96,452 141,391 84,765 85,798 75,711
-------------------------------------------------------------------------
Gross margin 47,480 73,967 56,112 67,930 38,289
Gross margin (%) 33.0% 34.3% 39.8% 44.2% 33.6%
Selling, general and
administrative
expenses 42,795 52,722 41,282 37,998 35,948
-------------------------------------------------------------------------
Operating profit (loss) 4,685 21,245 14,830 29,932 2,341
-------------------------------------------------------------------------
Finance expenses (3,983) (3,727) (3,835) (2,985) (2,880)
Exploration costs (212) (351) (212) (76) (27)
Finance and other
income 258 278 69 154 168
Insurance settlement - - - - -
Dilution loss - - - - -
Foreign exchange gain
(loss) (177) 1,392 135 1,043 (2,213)
-------------------------------------------------------------------------
Profit (loss) before
income taxes 571 18,837 10,987 28,068 (2,611)
Income tax expense
(recovery) (3,027) 5,261 (2,410) 10,877 (5,524)
-------------------------------------------------------------------------
Net profit (loss) $ 3,598 $ 13,576 $ 13,397 $ 17,191 $ 2,913
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributable to
shareholders $ 3,596 $ 13,569 $ 12,657 $ 13,043 $ 2,137
Attributable to
non-controlling
interest 2 7 740 4,148 776
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings (loss)
per share $ 0.04 $ 0.16 $ 0.15 $ 0.17 $ 0.03
Diluted earnings (loss)
per share $ 0.04 $ 0.16 $ 0.15 $ 0.17 $ 0.03
Cash dividends declared
per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Total assets(i) $ 1,666 $ 1,606 $ 1,584 $ 1,596 $ 1,522
Total long-term
liabilities(i) $ 605 $ 597 $ 588 $ 531 $ 449
-------------------------------------------------------------------------
Operating profit (loss) $ 4,685 $ 21,245 $ 14,830 $ 29,932 $ 2,341
Depreciation and
amortization(ii) 20,291 24,635 18,657 19,515 14,200
-------------------------------------------------------------------------
EBITDA(iii) $ 24,976 $ 45,880 $ 33,487 $ 49,447 $ 16,541
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CDN GAAP IFRS IFRS
-------------------------------------------------------------------------
Three Three
months months
ended ended
2010 2010 2010 April 30, April 30,
Q4 Q3 Q2 2011 2010
-------------------------------------------------------------------------
Sales $133,654 $ 74,828 $ 94,776 $143,932 $114,000
Cost of sales 96,257 45,227 66,294 96,452 75,711
-------------------------------------------------------------------------
Gross margin 37,397 29,601 28,482 47,480 38,289
Gross margin (%) 28.0% 39.6% 30.1% 33.0% 33.6%
Selling, general and
administrative
expenses 40,479 34,542 32,380 42,795 35,948
-------------------------------------------------------------------------
Operating profit (loss) (3,082) (4,941) (3,898) 4,685 2,341
-------------------------------------------------------------------------
Finance expenses (2,396) (2,448) (2,998) (3,983) (2,880)
Exploration costs - - - (212) (27)
Finance and other
income 129 99 83 258 168
Insurance settlement - 100 - - -
Dilution loss - - (539) - -
Foreign exchange gain
(loss) (1,978) 1,598 (25,274) (177) (2,213)
-------------------------------------------------------------------------
Profit (loss) before
income taxes (7,327) (5,592) (32,626) 571 (2,611)
Income tax expense
(recovery) (5,800) (4,221) (5,662) (3,027) (5,524)
-------------------------------------------------------------------------
Net profit (loss) $ (1,527) $ (1,371) $(26,964) $ 3,598 $ 2,913
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributable to
shareholders $ (3,358) $ (214) $(24,521) $ 3,596 $ 2,137
Attributable to
non-controlling
interest 1,831 (1,157) (2,443) 2 776
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings (loss)
per share $ (0.04) $ 0.00 $ (0.32) $ 0.04 $ 0.03
Diluted earnings (loss)
per share $ (0.04) $ 0.00 $ (0.32) $ 0.04 $ 0.03
Cash dividends declared
per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Total assets(i) $ 1,495 $ 1,535 $ 1,533 $ 1,666 $ 1,522
Total long-term
liabilities(i) $ 477 $ 506 $ 507 $ 605 $ 449
-------------------------------------------------------------------------
Operating profit (loss) $ (3,082) $ (4,941) $ (3,898) $ 4,685 $ 2,341
Depreciation and
amortization(ii) 18,258 11,208 16,971 20,291 14,200
-------------------------------------------------------------------------
EBITDA(iii) $ 15,176 $ 6,267 $ 13,073 $ 24,976 $ 16,541
-------------------------------------------------------------------------
(i) Total assets and total long-term liabilities are expressed in
millions of United States dollars.
(ii) Depreciation and amortization included in cost of sales and
selling, general and administrative expenses.
(iii) Earnings before interest, taxes, depreciation and amortization
("EBITDA"). See "Non-GAAP Measure" on page 14.
The comparability of quarter-over-quarter results is impacted by
seasonality for both the mining and luxury brand segments. Harry
Winston Diamond Corporation expects that the quarterly results for
its mining segment will continue to fluctuate depending on the
seasonality of production at the Diavik Diamond Mine, the number
of sales events conducted during the quarter, and the volume, size
and quality distribution of rough diamonds delivered from the
Diavik Diamond Mine in each quarter. The quarterly results for the
luxury brand segment are also seasonal, with generally higher
sales during the fourth quarter due to the holiday season. See
"Segmented Analysis" on page 8 for additional information.
Three Months Ended April 30, 2011 Compared to Three Months Ended April 30, 2010
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded a first quarter consolidated net profit attributable to shareholders of $3.6 million or $0.04 per share compared to a net profit attributable to shareholders of $2.1 million or $0.03 per share in the first quarter of the prior year.
CONSOLIDATED SALES
Sales for the first quarter totalled $143.9 million, consisting of rough diamond sales of $62.0 million and luxury brand segment sales of $81.9 million. This compares to sales of $114.0 million in the comparable quarter of the prior year (rough diamond sales of $48.9 million and luxury brand segment sales of $65.1 million). The Company held two rough diamond sales in the first quarter, consistent with the comparable quarter of the prior year. See "Segmented Analysis" on page 8 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's first quarter cost of sales was $96.5 million for a gross margin of 33.0% compared to a cost of sales of $75.7 million and a gross margin of 33.6% for the comparable quarter of the prior year. The Company's cost of sales includes costs associated with mining, rough diamond sorting and luxury brand sales activities. See "Segmented Analysis" on page 8 for additional information.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of selling, general and administrative ("SG&A") expenses include expenses for salaries and benefits, advertising and marketing, rent and building related costs. The Company incurred SG&A expenses of $42.8 million for the first quarter, compared to $35.9 million in the comparable quarter of the prior year.
Included in SG&A expenses for the first quarter was $8.0 million for the mining segment compared to $3.9 million for the comparable quarter of the prior year and $34.8 million for the luxury brand segment compared to $32.1 million for the comparable quarter of the prior year. The increase from the comparable quarter of the prior year for the mining segment was due to executive severance and a mark-to-market on stock-based compensation. For the luxury brand segment, the increase was due primarily to higher variable compensation expenses resulting from higher sales and increased rent and building related expenses. See "Segmented Analysis" on page 8 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax recovery of $3.0 million during the first quarter, compared to a net income tax recovery of $5.5 million in the comparable quarter of the prior year. The Company's combined federal and provincial statutory tax rate for the quarter is 27.9%. A number of items can significantly impact the Company's effective tax rate, including foreign currency exchange rate fluctuations, the Northwest Territories mining royalty, earnings subject to tax different than the statutory rate, and changes in valuation allowances. As a result, the Company's recorded tax provision can be significantly different than the expected tax provision calculated based on the statutory tax rate.
The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations. The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the first quarter, the Canadian dollar strengthened against the US dollar. As a result, the Company recorded an unrealized foreign exchange loss of $11.6 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange loss of $8.0 million in the comparable quarter of the prior year. The unrealized foreign exchange loss is recorded as part of the Company's deferred income tax recovery, and is not deductible for Canadian income tax purposes. During the first quarter, the Company also recognized a deferred income tax recovery of $12.5 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate translation of foreign currency non-monetary items. This compares to a deferred income tax recovery of $10.2 million recognized in the comparable quarter of the prior year. The recorded tax provision during the quarter also included a net income tax recovery of $1.9 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollars. This compares to a net income tax recovery of $1.7 million recognized in the comparable quarter of the prior year.
The Company also recorded a release of valuation allowance of $1.0 million during the quarter in relation to deductible temporary differences previously not recognized as deferred tax assets.
The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2031.
Due to the number of factors that can potentially impact the effective tax rate and the sensitivity of the tax provision to these factors, as discussed above, it is expected that the Company's effective tax rate will fluctuate in future periods.
CONSOLIDATED FINANCE EXPENSES
Finance expenses of $4.0 million were incurred during the first quarter compared to $2.9 million during the comparable quarter of the prior year. Finance expenses were impacted by increased debt levels primarily in the mining segment.
CONSOLIDATED EXPLORATION EXPENSE
Exploration expense of $0.2 million was incurred during the first quarter compared to $nil in the comparable quarter of the prior year.
CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.3 million was recorded during the quarter compared to $0.2 million in the comparable quarter of the prior year.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange loss of $0.2 million was recognized during the quarter compared to a net foreign exchange loss of $2.2 million in the comparable quarter of the prior year. The Company does not currently have any significant foreign exchange derivative instruments outstanding.
Segmented Analysis
The operating segments of the Company include mining and luxury brand segments.
Mining
The mining segment includes the production and sale of rough diamonds.
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
-------------------------------------------------------------------------
IFRS
-------------------------------------------------------------------------
2012 2011 2011 2011 2011
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 62,035 $ 82,697 $ 60,708 $ 86,827 $ 48,922
Cost of sales 53,443 61,822 45,039 54,408 44,143
-------------------------------------------------------------------------
Gross margin 8,592 20,875 15,669 32,419 4,779
Gross margin (%) 13.9% 25.2% 25.8% 37.3% 9.8%
Selling, general and
administrative
expenses 8,026 4,828 6,231 4,813 3,870
-------------------------------------------------------------------------
Operating profit (loss) $ 566 $ 16,047 $ 9,438 $ 27,606 $ 909
Depreciation and
amortization(i) 17,083 20,669 15,428 16,352 10,975
-------------------------------------------------------------------------
EBITDA(ii) $ 17,649 $ 36,716 $ 24,866 $ 43,958 $ 11,884
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CDN GAAP IFRS IFRS
-------------------------------------------------------------------------
Three Three
months months
ended ended
2010 2010 2010 April 30, April 30,
Q4 Q3 Q2 2011 2010
-------------------------------------------------------------------------
Sales $ 63,489 $ 20,765 $ 45,941 $ 62,035 $ 48,922
Cost of sales 57,027 20,319 40,049 53,443 44,143
-------------------------------------------------------------------------
Gross margin 6,462 446 5,892 8,592 4,779
Gross margin (%) 10.2% 2.1% 12.8% 13.9% 9.8%
Selling, general and
administrative
expenses 4,885 4,932 4,182 8,026 3,870
-------------------------------------------------------------------------
Operating profit (loss) $ 1,577 $ (4,486) $ 1,710 $ 566 $ 909
Depreciation and
amortization(i) 14,976 7,845 13,760 17,083 10,975
-------------------------------------------------------------------------
EBITDA(ii) $ 16,553 $ 3,359 $ 15,470 $ 17,649 $ 11,884
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) Depreciation and amortization included in cost of sales and
selling, general and administrative expenses.
(ii) Earnings before interest, taxes, depreciation and amortization
("EBITDA"). See "Non-GAAP Measure" on page 14.
Three Months Ended April 30, 2011 Compared to Three Months Ended April 30, 2010
MINING SALES
During the quarter the Company sold 0.5 million carats for a total of $62.0 million for an average price per carat of $132 compared to 0.5 million carats for a total of $48.9 million for an average price per carat of $105 in the comparable quarter of the prior year. The increase in the Company's achieved rough diamond prices was lower than the market price increase due to a shift in sales mix, with a lower proportion of carats sold from the higher value A-154 South ore and a higher proportion of carats sold from the lower value A-418 ore. The Company held two rough diamond sales in the first quarter, consistent with the comparable quarter of the prior year.
The Company expects that results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Diamond Mine, the number of sales events conducted during the quarter, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter.
MINING COST OF SALES AND GROSS MARGIN
The Company's first quarter cost of sales was $53.4 million resulting in a gross margin of 13.9% compared to a cost of sales of $44.1 million and a gross margin of 9.8% in the comparable quarter of the prior year. Cost of sales of $53.4 million included $16.4 million of depreciation and amortization. The mining gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices.
A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Diamond Mine. Cost of sales also includes sorting costs, which consist of the Company's cost of handling and sorting product in preparation for sales to third parties, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment increased by $4.2 million from the comparable quarter of the prior year due to executive severance and a mark-to-market on stock-based compensation.
MINING SEGMENT OPERATIONAL UPDATE
Ore production for the first calendar quarter consisted of 1.1 million carats produced from 0.36 million tonnes of ore from the A-418 kimberlite pipe, 0.2 million carats produced from 0.10 million tonnes of ore from the A-154 North kimberlite pipe, and 0.1 million carats produced from 0.02 million tonnes of ore from the A-154 South kimberlite pipe. Rough diamond production was 14% lower than the comparable calendar quarter of the prior year due primarily to maintenance at the processing plant and a shift in ore mix from the higher grade A-154 South open pit to the lower grade A-154 North underground and A-418 open pit. This shift in ore mix resulted in average grade decreasing to 2.8 carats per tonne in the first calendar quarter from 4.0 carats per tonne in the comparable quarter of the prior year.
HARRY WINSTON DIAMOND LIMITED PARTNERSHIP'S 40% SHARE OF DIAVIK DIAMOND MINE PRODUCTION
(reported on a one-month lag)
-------------------------------------------------------------------------
Three Three Twelve
months months months
ended ended ended
March 31, March 31, December 31,
2011 2010 2010
-------------------------------------------------------------------------
Diamonds recovered (000s carats) 540 625 2,599
Grade (carats/tonne) 2.80 4.03 3.15
-------------------------------------------------------------------------
Mining Segment Outlook
PRODUCTION
The approved mine plan and budget for calendar 2011 estimates Diavik Diamond Mine production of approximately 6.9 million carats from the mining of 2.0 million tonnes of ore and processing of 2.2 million tonnes of ore, with the increment delivered from stockpile. Open pit mining of approximately 1.4 million tonnes is expected to be exclusively from A-418, almost all of which is expected to be sourced from the lower-grade mud-rich ore type. Underground mining of approximately 0.6 million tonnes is expected to be primarily sourced equally from the A-154 South and A-154 North kimberlite pipes. The Company expects that in the second half of the year, the higher grade A-154 South will be mined using a recently approved higher velocity and lower cost mining method. This may lead to augmentation of the production plan to include more ore from this pipe.
Looking beyond calendar 2011, the objective is to fully utilize processing capacity with a combination of underground and open pit production. Current plans see A-21 development beginning in 2013, with production in 2015. In addition, exploration work has identified extensions at depth to the A-418 and A-154 North kimberlite pipes. The inclusion of these extensions into ore reserves will be largely dependent upon the costs of new underground mining techniques currently under review. The Company is in the process of updating the life-of-mine plan, which it expects to release publicly later this year.
PRICING
The rough diamond market continued to improve into the first quarter of fiscal 2012 and the Company anticipates that market conditions will remain favourable throughout the rest of the year. Based on Harry Winston Diamond Corporation's current rough diamond sales prices as of May 2011 and the current diamond recovery profile of the Diavik processing plant, the Company has modeled the approximate rough diamond price per carat for each of the Diavik ore types as follows:
Average price
per carat
Ore type (in US dollars)
-------------------------------------------------------------------------
A-154 South $ 165
A-154 North 215
A-418 A Type Ore 150
A-418 B Type Ore 105
-------------------------------------------------------------------------
COST OF SALES
The Company expects cost of sales in fiscal 2012 to be approximately $265 million. Included in this amount is depreciation and amortization of approximately $80 million at an assumed average Canadian/US dollar exchange rate of $1.00. This increase in cost of sales is expected to result primarily from an increase in the proportion of underground ore mined.
CAPITAL EXPENDITURES
During fiscal 2012, HWDLP's 40% share of the planned capital expenditures at the Diavik Diamond Mine is expected to be approximately $62 million at an assumed average Canadian/US dollar exchange rate of $1.00. During the first quarter, HWDLP's share of capital expenditures was $10.3 million.
EXPLORATION
The Company has additionally staked 226,000 hectares of mineral claims on the prospective geological trend to the southwest of the existing mine site and is starting a small but important basal till drilling program to assess the potential for new diamondiferous kimberlite pipes over the coming years.
Luxury Brand
The luxury brand segment includes sales from Harry Winston salons, which are located in prime markets around the world, including eight salons in the United States: New York, Beverly Hills, Bal Harbour, Honolulu, Las Vegas, Dallas, Chicago and Costa Mesa; five salons in Japan: Ginza, Roppongi Hills, Osaka, Omotesando and Nagoya; two salons in Europe: Paris and London; and four salons in Asia outside of Japan: Beijing, Taipei, Hong Kong and Singapore.
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
-------------------------------------------------------------------------
IFRS
-------------------------------------------------------------------------
2012 2011 2011 2011 2011
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 81,897 $132,661 $ 80,169 $ 66,901 $ 65,078
Cost of sales 43,009 79,569 39,726 31,390 31,568
-------------------------------------------------------------------------
Gross margin 38,888 53,092 40,443 35,511 33,510
Gross margin (%) 47.5% 40.0% 50.4% 53.1% 51.5%
Selling, general and
administrative
expenses 34,769 47,894 35,051 33,185 32,078
-------------------------------------------------------------------------
Operating profit (loss) $ 4,119 $ 5,198 $ 5,392 $ 2,326 $ 1,432
Depreciation and
amortization(i) 3,209 3,966 3,229 3,162 3,226
-------------------------------------------------------------------------
EBITDA(ii) $ 7,328 $ 9,164 $ 8,621 $ 5,488 $ 4,658
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CDN GAAP IFRS IFRS
-------------------------------------------------------------------------
Three Three
months months
ended ended
2010 2010 2010 April 30, April 30,
Q4 Q3 Q2 2011 2010
-------------------------------------------------------------------------
Sales $ 70,165 $ 54,063 $ 48,835 $ 81,897 $ 65,078
Cost of sales 39,230 24,908 26,245 43,009 31,568
-------------------------------------------------------------------------
Gross margin 30,935 29,155 22,590 38,888 33,510
Gross margin (%) 44.1% 53.9% 46.3% 47.5% 51.5%
Selling, general and
administrative
expenses 35,594 29,610 28,198 34,769 32,078
-------------------------------------------------------------------------
Operating profit (loss) $ (4,659) $ (455) $ (5,608) $ 4,119 $ 1,432
Depreciation and
amortization(i) 3,282 3,363 3,211 3,209 3,226
-------------------------------------------------------------------------
EBITDA(ii) $ (1,377) $ 2,908 $ (2,397) $ 7,328 $ 4,658
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) Depreciation and amortization included in cost of sales and
selling, general and administrative expenses.
(ii) Earnings before interest, taxes, depreciation and amortization
("EBITDA"). See "Non-GAAP Measure" on page 14.
Three Months Ended April 30, 2011 Compared to Three Months Ended April 30, 2010
LUXURY BRAND SALES
Sales for the first quarter were $81.9 million compared to $65.1 million for the comparable quarter of the prior year, an increase of 26% (20% at constant exchange rates). US sales increased 65% to $36.4 million, sales in Asia increased 6% to $24.9 million, and European sales increased 6% to $20.6 million.
LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the first quarter was $43.0 million compared to $31.6 million for the comparable quarter of the prior year. Gross margin for the quarter was $38.9 million or 47.5% compared to $33.5 million or 51.5% for the first quarter of the prior year. The decrease in gross margin resulted primarily from increases in raw material costs.
LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased to $34.8 million from $32.1 million in the comparable quarter of the prior year. The increase was due primarily to higher variable compensation expenses resulting from higher sales and increased rent and building related expenses. SG&A expenses include depreciation and amortization expense of $3.1 million consistent with the comparable quarter of the prior year.
LUXURY BRAND SEGMENT OPERATIONAL UPDATE
During the first quarter, the luxury brand segment generated sales of $81.9 million, an increase of 26% over the comparable quarter of the prior year. Sales growth was achieved across all geographic regions. The US market generated sales of $36.4 million, an increase of 65% over the comparable quarter of the prior year. Strong tourism and the continuing economic recovery contributed to the solid performance in the US. In Japan, sales of $14.1 million increased 8% over the comparable quarter of the prior year despite the impact of the earthquake and tsunami that occurred in early March. Asia excluding Japan had sales of $10.8 million, which were 2% higher than the comparable quarter of the prior year. In Europe, sales of $20.6 million were 6% higher than the comparable quarter of the prior year.
The introduction of new watch collections, including the Opus 11 and Midnight Collection, at the Baselworld watch fair in March was well received, generating strong sales orders and interest from watch and fashion journalists around the world.
Harry Winston Inc. currently operates a network of 19 luxury brand salons worldwide.
LUXURY BRAND SEGMENT OUTLOOK
The Company expects continued strong consumer demand for luxury jewelry and watch products throughout the remainder of the fiscal year. The introduction of new watch and jewelry collections, supported by increased advertising, is expected to contribute to further sales growth. Management's long-term financial objectives for the luxury brand segment over the next five years (fiscal 2012 to fiscal 2016) include compound annual revenue growth in the mid-teens, a gross margin target in the low 50% range, and an operating profit margin target in the low to mid-teens.
A key component of the luxury brand's growth strategy is the expansion of its current salon network and wholesale distribution channel. The growth target is to expand to approximately 35 directly operated salons, 15 partner salons, and 300 wholesale doors by fiscal 2016. In line with this strategy, the Company is planning to open two new salons in Shanghai, China, during the fourth quarter of fiscal 2012.
On May 19, 2011, the Company announced that it had entered into a business arrangement with Diamond Asset Advisors AG ("DAA"), who are in the process of establishing a polished diamond investment fund (the "Fund"). The Fund will be structured as a limited partnership with total funding of up to $250 million, offering institutional investors direct exposure to the wholesale market price of polished diamonds. Under the terms of the Company's arrangement with the Fund, the Company's expert diamond team will source diamonds for the Fund that have the same high-quality characteristics that the luxury brand segment uses in its jewelry and watches, with a portion of the diamonds coming from the Company's existing inventory. The Fund will purchase the diamonds and then consign them to the Company, who will act as custodian. The Company will use the consigned polished diamonds in the manufacturing of its jewelry and watches, paying the Fund when the jewelry or watch is sold. The price paid by the Fund to replace the sold polished diamonds will be used to determine the Fund's market value. This arrangement will increase the inventory available to the Company's expanding international salon network without additional demands on working capital. The Fund is expected to raise the first capital subscription of approximately $100 million from investors later this fiscal year, with the remaining $150 million expected to be raised over the following year, subject to market conditions.
Liquidity and Capital Resources
Working Capital
As at April 30, 2011, the Company had unrestricted cash and cash equivalents of $101.2 million compared to $108.7 million at January 31, 2011. The Company had cash on hand and balances with banks of $94.7 million and short-term investments of $6.5 million at April 30, 2011. During the quarter ended April 30, 2011, the Company reported a use of cash from operations of $18.0 million compared to a source of cash of $24.9 million in the comparable quarter of the prior year. The current quarter use of cash resulted primarily from the acquisition of inventory for both the mining and luxury brand segments.
Working capital increased to $352.7 million at April 30, 2011 from $328.6 million at January 31, 2011. During the quarter, the Company increased accounts receivable by $5.4 million, increased other current assets by $0.6 million, increased inventory and supplies by $62.4 million, increased trade and other payables by $ 27.6 million and decreased employee benefit plans by $0.4 million.
The Company's liquidity requirements fluctuate from quarter to quarter depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, seasonality of mine operating expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter, along with the seasonality of sales and salon expansion in the luxury brand segment. The Company's principal working capital needs include investments in inventory, other current assets, and trade and other payables and income taxes payable.
The Company assesses liquidity and capital resources on a consolidated basis. The Company's requirements are for cash operating expenses, working capital, contractual debt requirements and capital expenditures. The Company believes that it will generate sufficient liquidity to meet its anticipated requirements for the next twelve months.
Financing Activities
The mining segment maintains a senior secured revolving credit facility with Standard Chartered Bank that was increased from $100.0 million to $125.0 million on February 28, 2011. At April 30, 2011, $50.0 million was outstanding.
At April 30, 2011, $9.8 million was outstanding under the Company's revolving financing facility relating to its Belgian subsidiary, Harry Winston Diamond International N.V., compared to $nil at January 31, 2011.
During the quarter, the luxury brand subsidiary, Harry Winston Inc., increased the amount outstanding on its secured five-year revolving credit facility from $165.0 million to $172.0 million.
Investing Activities
During the quarter, the Company purchased property, plant and equipment of $13.8 million, of which $12.4 million was purchased for the mining segment and $1.4 million for the luxury brand segment.
Contractual Obligations
The Company has contractual payment obligations with respect to interest-bearing loans and borrowings and, through its participation in the Joint Venture, future site restoration costs at the Diavik Diamond Mine level. Additionally, at the Joint Venture level, contractual obligations exist with respect to operating purchase obligations, as administered by DDMI, the operator of the mine. In order to maintain its 40% ownership interest in the Diavik Diamond Mine, HWDLP is obligated to fund 40% of the Joint Venture's total expenditures on a monthly basis. HWDLP's current projected share of the planned capital expenditures at the Diavik Diamond Mine, which are not reflected in the table below, including capital expenditures for the calendar years 2011 to 2015, is approximately $140 million assuming a Canadian/US average exchange rate of $1.00 for the five years. The most significant contractual obligations for the ensuing five-year period can be summarized as follows:
CONTRACTUAL OBLIGATIONS
(expressed in
thousands of United Less than Year Year After
States dollars) Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Interest-bearing
loans and
borrowings (a)(b) $376,105 $113,316 $238,781 $ 4,997 $ 19,011
Environmental and
participation
agreements
incremental
commitments (c) 100,125 86,940 720 42 12,423
Operating lease
obligations (d) 245,880 25,941 41,879 40,046 138,014
-------------------------------------------------------------------------
Total contractual
obligations $722,110 $226,197 $281,380 $ 45,085 $169,448
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Interest-bearing loans and borrowings presented in the foregoing
table include current and long-term portions. The mining segment
maintains a senior secured revolving credit facility with Standard
Chartered Bank for $125.0 million. The facility has an initial
maturity date of June 24, 2013 with two one-year extensions at the
Company's option. There are no scheduled repayments required before
maturity. At April 30, 2011, $50.0 million was outstanding.
On August 25, 2010, the Company issued a promissory note in the
amount of $70.0 million, maturing on August 25, 2011, as part of the
consideration for reacquiring its 9% indirect interest in the Diavik
Joint Venture (the "Kinross Buy Back Transaction") from Kinross Gold
Corporation ("Kinross"). The note bears interest at a rate of 5% per
annum and can be repaid in cash or, subject to certain limitations,
treasury common shares issued by the Company. The issuance of such
shares is expected to be subject to approval by the Company's
shareholders in most circumstances.
The Company has available a $45.0 million revolving financing
facility (utilization in either US dollars or Euros) for inventory
and receivables funding in connection with marketing activities
through its Belgian subsidiary, Harry Winston Diamond International
N.V., and its Indian subsidiary, Harry Winston Diamond (India)
Private Limited. Borrowings under the Belgian facility bear interest
at the bank's base rate plus 1.5%. Borrowings under the Indian
facility bear an interest rate of 10.75%. At April 30, 2011,
$9.8 million and $nil were outstanding under this facility relating
to its Belgian subsidiary, Harry Winston Diamond International N.V.,
and its Indian subsidiary, Harry Winston Diamond (India) Private
Limited, respectively. The facility is guaranteed by Harry Winston
Diamond Corporation.
Harry Winston Inc. maintains a credit agreement with a syndicate of
banks for a $250.0 million five-year revolving credit facility, which
expires on March 31, 2013. There are no scheduled repayments required
before maturity. At April 30, 2011, $172.0 million had been drawn
against this secured credit facility.
Also included in long-term debt of Harry Winston Inc. is a 25-year
loan agreement for CHF 17.5 million ($19.9 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
($4.0 million) loan and a CHF 14.0 million ($15.9 million) loan. The
CHF 3.5 million loan bears interest at a rate of 3.15% and matures on
April 22, 2013. The CHF 14.0 million loan bears interest at a rate of
3.55% and matures on January 31, 2033. At April 30, 2011,
$17.9 million was outstanding. The bank has a secured interest in the
factory building.
Harry Winston S.A. has a CHF 0.1 million ($0.1 million) finance lease
for furniture located at the watch factory in Geneva, Switzerland.
The finance lease has an interest rate of 3.85% and matures on July
31, 2011. At April 30, 2011, $0.1 million was outstanding.
Harry Winston Japan, K.K. maintains unsecured credit agreements with
two banks, amounting to (Yen)1,260 million ($15.5 million). Harry
Winston Japan, K.K. also maintains a secured credit agreement
amounting to (Yen)575 million ($7.1 million). This facility is
secured by inventory owned by Harry Winston Japan, K.K.
The Company's first mortgage on real property has scheduled principal
payments of approximately $0.2 million quarterly, may be prepaid at
any time, and matures on September 1, 2018. On April 30, 2011,
$7.3 million was outstanding on the mortgage payable.
(b) Interest on loans and borrowings is calculated at various fixed and
floating rates. Projected interest payments on the current debt
outstanding were based on interest rates in effect at April 30, 2011,
and have been included under interest-bearing loans and borrowings
in the table above. Interest payments for the next twelve months are
approximated to be $9.4 million.
(c) The Joint Venture, under environmental and other agreements, must
provide funding for the Environmental Monitoring Advisory Board.
These agreements also state that the Joint Venture must provide
security deposits for the performance by the Joint Venture of its
reclamation and abandonment obligations under all environmental laws
and regulations. The operator of the Joint Venture has fulfilled such
obligations for the security deposits by posting letters of credit of
which HWDLP's share as at April 30, 2011 was $85.1 million based on
its 40% ownership interest in the Diavik Diamond Mine. There can be
no assurance that the operator will continue its practice of posting
letters of credit in fulfillment of this obligation, in which event
HWDLP would be required to post its proportionate share of such
security directly, which would result in additional constraints on
liquidity. The requirement to post security for the reclamation and
abandonment obligations may be reduced to the extent of amounts spent
by the Joint Venture on those activities. The Joint Venture has also
signed participation agreements with various native groups. These
agreements are expected to contribute to the social, economic and
cultural well-being of area Aboriginal bands. The actual cash outlay
for the Joint Venture's obligations under these agreements is not
anticipated to occur until later in the life of the Diavik Diamond
Mine.
(d) Operating lease obligations represent future minimum annual rentals
under non-cancellable operating leases for Harry Winston Inc. salons
and office space, and long-term leases for property, land, office
premises and a fuel tank farm for the Diavik Diamond Mine.
Non-GAAP Measure
In addition to discussing earnings measures in accordance with IFRS, the MD&A provides the following non-GAAP measure, which is also used by management to monitor and evaluate the performance of the Company and its business segments.
The term EBITDA (earnings before interest, taxes, depreciation and amortization) does not have a standardized meaning according to IFRS. The Company defines EBITDA as sales minus cost of sales and selling, general and administrative expenses, meaning it represents operating profit before depreciation and amortization.
EBITDA is a measure commonly reported and widely used by investors and analysts as an indicator of the Company's operating performance and ability to incur and service debt and as a valuation metric. EBITDA margin is defined as the ratio obtained by dividing EBITDA by sales.
CONSOLIDATED
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
------------------------------------------------------------------------
IFRS
-------------------------------------------------------------------------
2012 2011 2011 2011 2011
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Operating profit (loss) $ 4,685 $ 21,245 $ 14,830 $ 29,932 $ 2,341
Depreciation and
amortization 20,291 24,635 18,657 19,515 14,200
-------------------------------------------------------------------------
EBITDA $ 24,976 $ 45,880 $ 33,487 $ 49,447 $ 16,541
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CDN GAAP IFRS IFRS
-------------------------------------------------------------------------
Three Three
months months
ended ended
2010 2010 2010 April 30, April 30,
Q4 Q3 Q2 2011 2010
-------------------------------------------------------------------------
Operating profit (loss) $ (3,082) $ (4,941) $ (3,898) $ 4,685 $ 2,341
Depreciation and
amortization 18,258 11,208 16,971 20,291 14,200
-------------------------------------------------------------------------
EBITDA $ 15,176 $ 6,267 $ 13,073 $ 24,976 $ 16,541
-------------------------------------------------------------------------
MINING SEGMENT
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
-------------------------------------------------------------------------
IFRS
-------------------------------------------------------------------------
2012 2011 2011 2011 2011
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Operating profit (loss) $ 566 $ 16,047 $ 9,438 $ 27,606 $ 909
Depreciation and
amortization 17,083 20,669 15,428 16,352 10,975
-------------------------------------------------------------------------
EBITDA $ 17,649 $ 36,716 $ 24,866 $ 43,958 $ 11,884
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CDN GAAP IFRS IFRS
-------------------------------------------------------------------------
Three Three
months months
ended ended
2010 2010 2010 April 30, April 30,
Q4 Q3 Q2 2011 2010
-------------------------------------------------------------------------
Operating profit (loss) $ 1,577 $ (4,486) $ 1,710 $ 566 $ 909
Depreciation and
amortization 14,976 7,845 13,760 17,083 10,975
-------------------------------------------------------------------------
EBITDA $ 16,553 $ 3,359 $ 15,470 $ 17,649 $ 11,884
-------------------------------------------------------------------------
LUXURY BRAND SEGMENT
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
-------------------------------------------------------------------------
IFRS
-------------------------------------------------------------------------
2012 2011 2011 2011 2011
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Operating profit (loss) $ 4,119 $ 5,198 $ 5,392 $ 2,326 $ 1,432
Depreciation and
amortization 3,209 3,966 3,229 3,162 3,226
-------------------------------------------------------------------------
EBITDA $ 7,328 $ 9,164 $ 8,621 $ 5,488 $ 4,658
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CDN GAAP IFRS IFRS
-------------------------------------------------------------------------
Three Three
months months
ended ended
2010 2010 2010 April 30, April 30,
Q4 Q3 Q2 2011 2010
-------------------------------------------------------------------------
Operating profit (loss) $ (4,659) $ (455) $ (5,608) $ 4,119 $ 1,432
Depreciation and
amortization 3,282 3,363 3,211 3,209 3,226
-------------------------------------------------------------------------
EBITDA $ (1,377) $ 2,908 $ (2,397) $ 7,328 $ 4,658
-------------------------------------------------------------------------
Risks and Uncertainties
Harry Winston Diamond Corporation is subject to a number of risks and uncertainties as a result of its operations. In addition to the other information contained in this MD&A and the Company's other publicly filed disclosure documents, readers should give careful consideration to the following risks, each of which could have a material adverse effect on the Company's business prospects or financial condition.
Nature of Mining
The operation of the Diavik Diamond Mine is subject to risks inherent in the mining industry, including variations in grade and other geological differences, unexpected problems associated with required water retention dikes, water quality, surface and underground conditions, processing problems, equipment performance, accidents, labour disputes, risks relating to the physical security of the diamonds, force majeure risks and natural disasters. Particularly with underground mining operations, inherent risks include variations in rock structure and strength as it impacts on mining method selection and performance, de-watering and water handling requirements, achieving the required paste backfill strengths, and unexpected local ground conditions. Hazards, such as unusual or unexpected rock formations, rock bursts, pressures, collapses, flooding or other conditions, may be encountered during mining. Such risks could result in personal injury or fatality; damage to or destruction of mining properties, processing facilities or equipment; environmental damage; delays, suspensions or permanent reductions in mining production; monetary losses; and possible legal liability.
The Diavik Diamond Mine, because of its remote northern location and access only by winter road or by air, is subject to special climate and transportation risks. These risks include the inability to operate or to operate efficiently during periods of extreme cold, the unavailability of materials and equipment, and increased transportation costs due to the late opening and/or early closure of the winter road. Such factors can add to the cost of mine development, production and operation and/or impair production and mining activities, thereby affecting the Company's profitability.
Nature of Joint Arrangement with DDMI
HWDLP holds an undivided 40% interest in the assets, liabilities and expenses of the Diavik Diamond Mine and the Diavik group of mineral claims. The Diavik Diamond Mine and the exploration and development of the Diavik group of mineral claims is a joint arrangement between DDMI (60%) and HWDLP (40%), and is subject to the risks normally associated with the conduct of joint ventures and similar joint arrangements. These risks include the inability to exert influence over strategic decisions made in respect of the Diavik Diamond Mine and the Diavik group of mineral claims. By virtue of DDMI's 60% interest in the Diavik Diamond Mine, it has a controlling vote in virtually all Joint Venture management decisions respecting the development and operation of the Diavik Diamond Mine and the development of the Diavik group of mineral claims. Accordingly, DDMI is able to determine the timing and scope of future project capital expenditures, and therefore is able to impose capital expenditure requirements on HWDLP that the Company may not have sufficient cash to meet. A failure to meet capital expenditure requirements imposed by DDMI could result in HWDLP's interest in the Diavik Diamond Mine and the Diavik group of mineral claims being diluted.
Diamond Prices and Demand for Diamonds
The profitability of the Company is dependent upon production from the Diavik Diamond Mine and on the results of the operations of its luxury brand operations. Each, in turn, is dependent in significant part upon the worldwide demand for and price of diamonds. Diamond prices fluctuate and are affected by numerous factors beyond the control of the Company, including worldwide economic trends, particularly in the US, Japan, China and India, worldwide levels of diamond discovery and production, and the level of demand for, and discretionary spending on, luxury goods such as diamonds and jewelry. Low or negative growth in the worldwide economy, renewed or additional credit market disruptions, natural disasters or the occurrence of further terrorist attacks or similar activities creating disruptions in economic growth could result in decreased demand for luxury goods such as diamonds and jewelry, thereby negatively affecting the price of diamonds and jewelry. Similarly, a substantial increase in the worldwide level of diamond production or in diamonds available for sale through recommencement of suspended mining activity or the release of stocks held back during recent periods of low demand could also negatively affect the price of diamonds. In each case, such developments could have a material adverse effect on the Company's results of operations.
Cash Flow and Liquidity
The Company's liquidity requirements fluctuate from quarter to quarter and year to year depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, seasonality of mine operating expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter, along with the seasonality of sales and salon refurbishment and expansion in the luxury brand segment. The Company's principal working capital needs include investments in inventory, prepaid expenses and other current assets, and accounts payable and income taxes payable. Pursuant to the August 25, 2010 Kinross agreement, a promissory note (the "Kinross Note") in the amount of $70.0 million was issued by the Company. The promissory note bears interest at a rate of 5% per annum with a maturity date of August 25, 2011 and can be paid in cash or, subject to certain limitations, in treasury common shares issued by the Company to Kinross. The issuance of such shares is expected to be subject to approval by the Company's shareholders in most circumstances. The Kinross Note is a significant short-term financial obligation. 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 European Union or otherwise, the recent disaster in Japan and political upheavals in the Middle East, could cause the Company to experience further revenue declines across both of its business segments due to deteriorated consumer confidence and spending, and a decrease in the availability of credit, which could have a material adverse effect on the Company's business prospects or financial condition. The Company monitors economic developments in the markets in which it operates and uses this information in its continuous strategic and operational planning in an effort to adjust its business in response to changing economic conditions.
Currency Risk
Currency fluctuations may affect the Company's financial performance. Diamonds are sold throughout the world based principally on the US dollar price, and although the Company reports its financial results in US dollars, a majority of the costs and expenses of the Diavik Diamond Mine are incurred in Canadian dollars. Further, the Company has a significant deferred income tax liability that has been incurred and will be payable in Canadian dollars. The Company's currency exposure relates primarily to expenses and obligations incurred by it in Canadian dollars and, secondarily, to revenues of Harry Winston Inc. in currencies other than the US dollar. The appreciation of the Canadian dollar against the US dollar, and the depreciation of other currencies against the US dollar, therefore, will increase the expenses of the Diavik Diamond Mine and the amount of the Company's Canadian dollar liabilities relative to the revenue the Company will receive from diamond sales, and will decrease the US dollar revenues received by Harry Winston Inc. From time to time, the Company may use a limited number of derivative financial instruments to manage its foreign currency exposure.
Licences and Permits
The operation of the Diavik Diamond Mine and exploration on the Diavik property requires licences and permits from the Canadian government. The Diavik Diamond Mine Type "A" Water Licence was renewed by the regional Wek'eezhii Land and Water Board to October 31, 2015. While the Company anticipates that DDMI, the operator of the Diavik Diamond Mine, will be able to renew this licence and other necessary permits in the future, there can be no guarantee that DDMI will be able to do so or obtain or maintain all other necessary licences and permits that may be required to maintain the operation of the Diavik Diamond Mine or to further explore and develop the Diavik property.
Regulatory and Environmental Risks
The operation of the Diavik Diamond Mine, exploration activities at the Diavik Project and the manufacturing of jewelry and watches are subject to various laws and regulations governing the protection of the environment, exploration, development, production, taxes, labour standards, occupational health, waste disposal, mine safety, manufacturing safety and other matters. New laws and regulations, amendments to existing laws and regulations, or more stringent implementation or changes in enforcement policies under existing laws and regulations could have a material adverse effect on the Company by increasing costs and/or causing a reduction in levels of production from the Diavik Diamond Mine and in the manufacture of jewelry and watches. As well, as the Company's international operations expand, it or its subsidiaries become subject to laws and regulatory regimes that could differ materially from those under which they operate in Canada and the US.
Mining and manufacturing are subject to potential risks and liabilities associated with pollution of the environment and the disposal of waste products occurring as a result of mining and manufacturing operations. To the extent that the Company's operations are subject to uninsured environmental liabilities, the payment of such liabilities could have a material adverse effect on the Company.
Climate Change
Canada ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change in late 2002 and the Kyoto Protocol came into effect in Canada in February 2005. The Canadian government has established a number of policy measures in order to meet its emission reduction guidelines. While the impact of these measures cannot be quantified at this time, the likely effect will be to increase costs for fossil fuels, electricity and transportation; restrict industrial emission levels; impose added costs for emissions in excess of permitted levels; and increase costs for monitoring and reporting. Compliance with these initiatives could have a material adverse effect on the Company's results of operations.
Resource and Reserve Estimates
The Company's figures for mineral resources and ore reserves on the Diavik group of mineral claims are estimates, and no assurance can be given that the anticipated carats will be recovered. The estimation of reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production and the timing of future expenditures, all of which are subject to numerous uncertainties and various interpretations. The Company expects that its estimates of reserves will change to reflect updated information as well as to reflect depletion due to production. Reserve estimates may be revised upward or downward based on the results of current and future drilling, testing or production levels, and on changes in mine design. In addition, market fluctuations in the price of diamonds or increases in the costs to recover diamonds from the Diavik Diamond Mine may render the mining of ore reserves uneconomical.
Mineral resources that are not mineral reserves do not have demonstrated economic viability. Due to the uncertainty that may attach to inferred mineral resources, there is no assurance that mineral resources at the Diavik property will be upgraded to proven and probable ore reserves.
Insurance
The Company's business is subject to a number of risks and hazards, including adverse environmental conditions, industrial accidents, labour disputes, unusual or unexpected geological conditions, risks relating to the physical security of diamonds and jewelry held as inventory or in transit, changes in the regulatory environment and natural phenomena such as inclement weather conditions. Such occurrences could result in damage to the Diavik Diamond Mine, personal injury or death, environmental damage to the Diavik property, delays in mining, the closing of Harry Winston Inc.'s manufacturing facilities or salons, monetary losses and possible legal liability. Although insurance is maintained to protect against certain risks in connection with the Diavik Diamond Mine and the Company's operations, the insurance in place will not cover all potential risks. It may not be possible to maintain insurance to cover insurable risks at economically feasible premiums.
Fuel Costs
The Diavik Diamond Mine's expected fuel needs are purchased periodically during the year for storage, and transported to the mine site by way of the winter road. These costs will increase if transportation by air freight is required due to a shortened "winter road season" or unexpectedly high fuel usage.
The cost of the fuel purchased is based on the then prevailing price and expensed into operating costs on a usage basis. The Diavik Diamond Mine currently has no hedges for its future anticipated fuel consumption.
Reliance on Skilled Employees
Production at the Diavik Diamond Mine is dependent upon the efforts of certain skilled employees of DDMI. The loss of these employees or the inability of DDMI to attract and retain additional skilled employees may adversely affect the level of diamond production from the Diavik Diamond Mine.
The Company's success in marketing rough diamonds and operating the business of Harry Winston Inc. is dependent on the services of key executives and skilled employees, as well as the continuance of key relationships with certain third parties, such as diamantaires. The loss of these persons or the Company's inability to attract and retain additional skilled employees or to establish and maintain relationships with required third parties may adversely affect its business and future operations in marketing diamonds and operating its luxury brand segment.
Expansion and Refurbishment of the Existing Salon Network
A key component of the Company's luxury brand strategy in recent years has been the expansion of its salon network. The Company currently expects to expand its retail salon network to 35 salons (in total) worldwide by 2016. An additional objective of the Company is to achieve compound annual growth rate in sales in the mid-teens in the luxury brand segment and an operating profit in the low to mid-teens in the luxury brand segment, in each case over the five-year period from fiscal 2012 to 2016. Although the Company considers these objectives to be reasonable, they are subject to a number of risks and uncertainties, and there can be no assurance that these objectives will be realized. This strategy requires the Company to make ongoing capital expenditures to build and open new salons, to refurbish existing salons from time to time, and to incur additional operating expenses in order to operate the new salons. To date, much of this expansion has been financed by Harry Winston Inc. through borrowings. The successful expansion of the Company's global salon network, and achieving an increase in sales and in operating profit, will depend on a variety of factors, including worldwide economic conditions, market demand for luxury goods, the strength of the Harry Winston brand and the availability of sufficient funding. There can be no assurance that the expansion of the salon network will continue or that the current expansion will prove successful in increasing annual sales or earnings from the luxury brand segment, and the increased debt levels resulting from this expansion could negatively impact the Company's liquidity and its results from operations in the absence of increased sales and earnings.
Competition in the Luxury Brand Segment
The Company is exposed to competition in the luxury brand market from other luxury goods, diamond, jewelry and watch retailers. The ability of Harry Winston Inc. to successfully compete with such luxury goods, diamond, jewelry and watch retailers is dependent upon a number of factors, including the ability to source high-end polished diamonds and protect and promote its distinctive brand name and reputation. If Harry Winston Inc. is unable to successfully compete in the luxury jewelry segment, then the Company's results of operations will be adversely affected.
Changes in Disclosure Controls and Procedures and Internal Control over Financial Reporting
During the first quarter of fiscal 2012, there were no changes in the Company's disclosure controls and procedures or internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's disclosure controls and procedures or internal control over financial reporting.
Critical Accounting Estimates
Management is often required to make judgments, assumptions and estimates in the application of IFRS that have a significant impact on the financial results of the Company. Certain policies are more significant than others and are, therefore, considered critical accounting policies. Accounting policies are considered critical if they rely on a substantial amount of judgment (use of estimates) in their application or if they result from a choice between accounting alternatives and that choice has a material impact on the Company's reported results or financial position. 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 condensed consolidated interim 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 interim condensed 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.
Changes in Accounting Policies
International Financial Reporting Standards
Commencing February 1, 2011, the Company converted to IFRS and has prepared its first unaudited interim condensed consolidated financial statements in accordance with International Accounting Standard ("IAS") 34, "Interim Financial Reporting", for the three-month period ended April 30, 2011, with comparative information also presented under IFRS.
The Company's unaudited interim condensed consolidated financial statements for the first quarter of fiscal 2012 include reconciliations from the previous Canadian GAAP reporting to IFRS for the opening balance sheet as at February 1, 2010, the balance sheets as at April 30, 2010 and January 31, 2011 and the income statement and statement of comprehensive income for the three months ended April 30, 2010 and the fiscal year ended January 31, 2011.
Significant accounting policies under IFRS are disclosed in the unaudited interim condensed consolidated financial statements for the first quarter of 2012, and resulting accounting changes are highlighted in the reconciliations from previous Canadian GAAP reporting. The exemptions from full retrospective application elected by the Company in accordance with IFRS 1, "First time adoption of International Financial Reporting Standards", are also disclosed in our unaudited interim condensed consolidated financial statements for the first quarter of 2012.
Overall, the conversion from Canadian GAAP to IFRS has resulted in an increase in net profit attributable to shareholders for the three months ended April 30, 2010 and for the fiscal year ended January 31, 2011, from $(0.11) per share to $0.03 per share and from $0.27 per share to $0.52 per share, respectively. Substantially all of the adjustments under IFRS relate to the mining segment. The most significant component of this earnings per share change is attributable to new deferred income taxes recognized for temporary differences, arising from the difference between the historical exchange rate and the current exchange rate translation of foreign currency non-monetary items. Under Canadian GAAP, these temporary differences were not accounted for. The cost of the mining assets owned by the Diavik Joint Venture are denominated in Canadian dollars, which has resulted in additional deferred income taxes recognized by the Company under IFRS.
There were no material changes in internal control over financial reporting resulting from the adoption and implementation of IFRS. Approval and sign-off of all IFRS accounting changes has taken place within the Company's existing control framework.
The International Accounting Standards Board ("IASB") has issued a new standard, IFRS 9, "Financial Instruments" ("IFRS 9"), which will ultimately replace IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"). IFRS 9 provides guidance on the classification and measurement of financial assets and financial liabilities. This standard becomes effective for the Company's fiscal year-end beginning February 1, 2013. The Company is currently assessing the impact of the new standard on its financial statements.
IFRS 11, "Joint Arrangements" ("IFRS 11"), was issued by the IASB on May 12, 2011 and will replace IAS 31, "Interest in Joint Ventures". The new standard will apply to the accounting for interests in joint arrangements where there is joint control. Under IFRS 11, joint arrangements are classified as either joint ventures or joint operations. The structure of the joint arrangement will no longer be the most significant factor in determining whether a joint arrangement is either a joint venture or a joint operation. Proportionate consolidations will no longer be allowed and will be replaced by equity accounting. IFRS 11 is effective for the Company's fiscal year-end beginning February 1, 2013, with early adoption permitted. The Company is currently assessing the impact of IFRS 11 on its results of operations and financial position.
IFRS 13, "Fair Value Measurement" ("IFRS 13"), was also issued by the IASB on May 12, 2011. The new standard makes IFRS consistent with generally accepted accounting principles in the United States ("US GAAP") on measuring fair value and related fair value disclosures. The new standard creates a single source of guidance for fair value measurements. IFRS 13 is effective for the Company's fiscal year-end beginning February 1, 2013, with early adoption permitted. The Company is assessing the impact of IFRS 13 on its consolidated financial statements.
Outstanding Share Information
As at May 31, 2011
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Authorized Unlimited
Issued and outstanding shares 84,727,131
Options outstanding 2,651,049
Fully diluted 87,378,180
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Additional Information
Additional information relating to the Company, including the Company's most recently filed Annual Information Form, can be found on SEDAR at www.sedar.com, and is also available on the Company's website at http://investor.harrywinston.com.
Condensed Consolidated Balance Sheets
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
February 1,
2010
April 30, January 31, (Transition
2011 2011 Date)
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ASSETS
Current assets
Cash and cash
equivalents (note 4) $ 101,214 $ 108,693 $ 62,969
Accounts receivable 28,292 22,788 23,598
Inventory and supplies (note 5) 465,607 403,212 311,188
Other current assets 39,205 38,662 36,644
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634,318 573,355 434,399
Property, plant and
equipment - Mining 761,955 764,093 783,432
Property, plant and
equipment - Luxury brand 62,006 61,019 62,277
Intangible assets, net (note 7) 127,755 127,894 129,213
Other non-current assets 16,391 16,626 15,629
Deferred income tax assets 63,620 62,693 53,179
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Total assets $ 1,666,045 $ 1,605,680 $ 1,478,129
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LIABILITIES AND EQUITY
Current liabilities
Trade and other payables $ 166,777 $ 136,490 $ 73,405
Income taxes payable 3,994 6,660 46,297
Employee benefit plans (note 8) 6,947 7,378 13,774
Promissory note (note 9) 70,000 70,000 -
Current portion of interest
bearing loans and
borrowings (note 9) 33,884 24,215 23,829
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281,602 244,743 157,305
Interest bearing loans and
borrowings (note 9) 245,751 237,621 161,691
Deferred income tax liabilities 300,985 301,980 238,385
Employee benefit plans (note 8) 7,483 7,287 6,898
Provisions 50,946 50,130 43,691
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Total liabilities 886,767 841,761 607,970
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Equity
Share capital (note 10) 507,207 502,129 426,593
Contributed surplus 15,670 16,233 17,730
Retained earnings 241,263 237,667 250,070
Accumulated other comprehensive
income 14,870 7,624 (2,571)
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Total shareholders' equity 779,010 763,653 691,822
Non-controlling interest 268 266 178,337
-------------------------------------------------------------------------
Total equity 779,278 763,919 870,159
-------------------------------------------------------------------------
Total Liabilities and Equity $ 1,666,045 $ 1,605,680 $ 1,478,129
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and guarantees (note 11)
The accompanying notes are an integral part of these unaudited interim
condensed consolidated financial statements.
Condensed Consolidated Income Statements
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE
AMOUNTS) (UNAUDITED)
Three months Three months
ended ended
April 30, April 30,
2011 2010
-------------------------------------------------------------------------
Sales $ 143,932 $ 114,000
Cost of sales 96,452 75,711
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Gross margin 47,480 38,289
Selling, general and administrative expenses 42,795 35,948
-------------------------------------------------------------------------
Operating profit 4,685 2,341
Finance expenses (3,983) (2,880)
Exploration costs (212) (27)
Finance and other income 258 168
Foreign exchange loss (177) (2,213)
-------------------------------------------------------------------------
Profit (loss) before income taxes 571 (2,611)
Net income tax recovery (3,027) (5,524)
-------------------------------------------------------------------------
Net profit $ 3,598 $ 2,913
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributable to shareholders $ 3,596 $ 2,137
Attributable to non-controlling interest $ 2 $ 776
-------------------------------------------------------------------------
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Earnings per share
Basic $ 0.04 $ 0.03
Diluted $ 0.04 $ 0.03
-------------------------------------------------------------------------
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Weighted average number of shares outstanding 84,291,797 76,631,115
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The accompanying notes are an integral part of these unaudited interim
condensed consolidated financial statements.
Condensed Consolidated Statements of Comprehensive Income
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Three months Three months
ended ended
April 30, April 30,
2011 2010
-------------------------------------------------------------------------
Net profit $ 3,598 $ 2,913
Other comprehensive income (loss)
Net gain (loss) on translation of net foreign
operations (net of tax of nil) 7,246 (1,753)
Change in fair value of derivative financial
instrument (net of tax of $0.1 million) - 158
Actuarial loss on employee benefit
plans (net of tax of nil) - (636)
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Other comprehensive income (loss), net of tax 7,246 (2,231)
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Total comprehensive income $ 10,844 $ 682
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributable to shareholders $ 10,842 $ (94)
Attributable to non-controlling interest $ 2 $ 776
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
condensed consolidated financial statements.
Condensed Consolidated Statements of Changes in Shareholders' Equity
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Three months Three months
ended ended
April 30, April 30,
2011 2010
-------------------------------------------------------------------------
Common shares:
Balance at beginning of period $ 502,129 $ 426,593
Issued during the period 3,918 160
Transfer from contributed surplus on
exercise of options 1,160 -
-------------------------------------------------------------------------
Balance at end of period 507,207 426,753
-------------------------------------------------------------------------
Contributed surplus:
Balance at beginning of period 16,233 17,730
Stock-based compensation expense 597 187
Transfer from contributed surplus on
exercise of options (1,160) -
-------------------------------------------------------------------------
Balance at end of period 15,670 17,917
-------------------------------------------------------------------------
Retained earnings:
Balance at beginning of period 237,667 250,070
Net profit attributable to common shareholders 3,596 2,137
-------------------------------------------------------------------------
Balance at end of period 241,263 252,207
-------------------------------------------------------------------------
Accumulated other comprehensive income:
Balance at beginning of period 7,624 (2,571)
Other comprehensive income (loss)
Net gain (loss) on translation of net foreign
operations (net of tax of nil) 7,246 (1,753)
Change in fair value of derivative financial
instruments (net of tax of $0.1 million) - 158
Actuarial loss on employee benefit
plans (net of tax of nil) - (636)
-------------------------------------------------------------------------
Balance at end of period 14,870 (4,802)
-------------------------------------------------------------------------
NON-CONTROLLING INTEREST:
Balance at beginning of period 266 178,337
Non-controlling interest 2 776
-------------------------------------------------------------------------
Balance at end of period 268 179,113
-------------------------------------------------------------------------
Total Shareholders' Equity $ 779,278 $ 871,188
-------------------------------------------------------------------------
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The accompanying notes are an integral part of these unaudited interim
condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Three months Three months
ended ended
April 30, April 30,
2011 2010
-------------------------------------------------------------------------
Cash provided by (used in)
OPERATING
Net profit $ 3,598 $ 2,913
Amortization and accretion 20,291 14,200
Deferred income tax recovery (2,648) (6,039)
Current income tax expense (recovery) (379) 515
Finance expenses 3,983 2,880
Stock-based compensation 597 187
Foreign exchange loss 533 2,970
Loss on disposal of assets - 243
Income tax paid (2,711) (1,445)
Change in non-cash operating working capital,
excluding taxes and finance expenses (41,215) 8,500
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Cash provided from operating activities (17,951) 24,924
-------------------------------------------------------------------------
FINANCING
Decrease in interest bearing loans and borrowings (174) (52)
Increase in revolving credit 17,885 25,426
Decrease in revolving credit (317) (12,033)
Interest paid (1,508) (1,823)
Issue of common shares, net of issue costs 3,918 160
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Cash provided from financing activities 19,804 11,678
-------------------------------------------------------------------------
INVESTING
Property, plant and equipment - Mining (12,436) (9,297)
Property, plant and equipment - Luxury brand (1,388) (206)
Other non-current assets (396) 294
-------------------------------------------------------------------------
Cash used in investing activities (14,220) (9,209)
-------------------------------------------------------------------------
Foreign exchange effect on cash balances 4,888 (488)
Increase (decrease) in cash and cash equivalents (7,479) 26,905
Cash and cash equivalents, beginning of
period 108,693 62,969
-------------------------------------------------------------------------
Cash and cash equivalents, end of
period $ 101,214 $ 89,874
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Change in non-cash operating working
capital, excluding taxes and finance expenses
Accounts receivable (5,381) (592)
Inventory and supplies (62,395) (24,974)
Other current assets (556) 7,444
Trade and other payables 27,554 26,679
Employee benefit plans (437) (57)
-------------------------------------------------------------------------
$ (41,215) $ 8,500
-------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited interim
condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
APRIL 30, 2011 WITH COMPARATIVE FIGURES
(TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT AS
OTHERWISE NOTED)
NOTE 1:
Nature of Operations
Harry Winston Diamond Corporation (the "Company") is a diamond enterprise
with assets in the mining and luxury brand segments of the diamond
industry.
The Company's mining asset is an ownership interest in the Diavik group
of mineral claims. The Diavik Joint Venture (the "Joint Venture") is an
unincorporated joint arrangement between Diavik Diamond Mines Inc.
("DDMI") (60%) and Harry Winston Diamond Limited Partnership ("HWDLP")
(40%) where HWDLP holds an undivided 40% ownership interest in the
assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is the
operator of the Diavik Diamond Mine. DDMI and HWDLP are headquartered in
Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc
of London, England, and Harry Winston Diamond Limited Partnership is a
wholly owned subsidiary of Harry Winston Diamond Corporation of Toronto,
Canada.
The Company also owns Harry Winston Inc., the premier fine jewelry and
watch retailer with select locations throughout the world. Its head
office is located in New York City, United States.
Certain comparative figures have been reclassified to conform with
current year's presentation.
The Company is incorporated and domiciled in Canada and its shares are
publicly traded on the Toronto Stock Exchange and the New York Stock
Exchange. The address of its registered office is Toronto, Ontario.
These unaudited interim condensed consolidated financial statements have
been approved for issue by the Audit Committee on June 8, 2011.
Note 2:
Basis of Preparation
(a) Statement of compliance
These unaudited interim condensed consolidated financial statements
have been prepared in accordance with International Financial
Reporting Standards ("IFRS") International Accounting Standard
("IAS") 34, "Interim Financial Reporting". These are the Company's
first unaudited interim condensed consolidated financial statements
reported under IFRS, and IFRS 1, "First-time Adoption of
International Financial Reporting Standards", has been applied.
These unaudited interim condensed consolidated financial statements
do not include all disclosures required by IFRS for annual
consolidated financial statements and accordingly should be read in
conjunction with the Company's audited consolidated financial
statements for the year ended January 31, 2011 presented under
generally accepted accounting principles in Canada (''Canadian
GAAP'') and in conjunction with the IFRS transition disclosures in
Note 15 to these interim statements.
The preparation of these first interim condensed 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 Canadian GAAP. Canadian GAAP
differs in some areas from IFRS. The accounting policies set out
below have been applied consistently to all periods presented in
these unaudited interim condensed consolidated financial statements.
They have also been applied in preparing an opening IFRS balance
sheet at February 1, 2010 for the purpose of transition to IFRS. IFRS
1 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 certain key exemptions as permitted under
IFRS 1. An explanation of how the transition to IFRS has affected the
reported financial position and financial performance of
the Company is contained in Note 15. This note includes
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.
(b) Basis of measurement
These unaudited interim condensed consolidated financial statements
have been prepared on the historical cost basis except for the
following:
- financial instruments held for trading are measured at fair value
through profit and loss
- liabilities for RSU and DSU plans are measured at fair value
(c) Currency of presentation
These condensed consolidated interim financial statements are
expressed in United States dollars, consistent with the predominant
functional currency of the Company's operations. All financial
information presented in United States dollars has been rounded to
the nearest thousand.
Note 3:
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 unaudited interim condensed consolidated financial statements
comprise the financial statements of the Company and its subsidiaries
as at April 30, 2011. 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 DDMI
The Diavik Joint Venture is an unincorporated joint arrangement.
HWDLP owns an undivided 40% ownership interest in the assets,
liabilities and expenses of the Joint Venture. The Company records
its proportionate 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) 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.
(e) 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.
(f) 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.
(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.
(ii) Production phase stripping costs
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.
(g) 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.
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 Harry Winston trademark is the
premier luxury jewelry brand in the world with an established
reputation and style that differentiates the Company from its
competitors and justifies its leading position in the marketplace.
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 reflect 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.
(h) Other non-current assets
Other non-current assets include depreciable assets amortized over a
period not exceeding ten years.
(i) 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. The Company may also have a
limited number of embedded derivatives relating to the Diavik Diamond
Mine. Derivatives embedded in non-derivative host contracts are
recognized separately unless closely related to the host contract.
The Company does not use derivatives for trading or speculative
purposes.
(j) 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.
(k) 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.
(l) 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 utilised. 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.
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.
(m) 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 Unit Plans
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. The
liabilities for the RSU and DSU Plans are remeasured at each
reporting date 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.
(n) 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.
(o) 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 CEO to make decisions about resources to
be allocated to the segment and to assess its performance, and for
which discrete financial information is available.
(p) 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.
(q) 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.
(r) 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.
(s) Use of estimates, judgments and assumptions
The preparation of the interim condensed 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 interim condensed
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 condensed consolidated interim
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 interim condensed 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.
(t) Standards issued but not yet effective
The following standards and interpretations have been issued but are
not yet effective and have not been early adopted in these financial
statements. These standards may result in consequential changes to
the accounting policies and other note disclosures.
(i) Fair Value Measurement Guidelines
(ii) IAS 1 (Revised) - Presentation of Financial Statements
(iii) IAS17 (Replacement) - Leases
(iv) IAS 32 (Replacement) - Liabilities and Equity
(v) IAS 19 (Replacement) - Employee Benefits and Pensions
(vi) IAS 11 and IAS 18 (Replacement) - Revenue Recognition
(vii) Improvements to IFRSs
The International Accounting Standards Board ("IASB") has issued a
new standard, IFRS 9, "Financial Instruments" ("IFRS 9"), which will
ultimately replace IAS 39, "Financial Instruments: Recognition and
Measurement" ("IAS 39"). IFRS 9 provides guidance on the
classification and measurement of financial assets and financial
liabilities. This standard becomes effective for the Company's fiscal
year-end beginning February 1, 2013. The Company is currently
assessing the impact of the new standard on its financial statements.
IFRS 11, "Joint Arrangements" ("IFRS 11") was issued by the IASB on
May 12, 2011 and will replace IAS 31, "Interest in Joint Ventures".
The new standard will apply to the accounting for interests in joint
arrangements where there is joint control. Under IFRS 11, joint
arrangements are classified as either joint ventures or joint
operations. The structure of the joint arrangement will no longer be
the most significant factor in determining whether a joint
arrangement is either a joint venture or a joint operation.
Proportionate consolidations will no longer be allowed and will be
replaced by equity accounting. IFRS 11 is effective for the Company's
fiscal year-end beginning February 1, 2013, with early adoption
permitted. The Company is currently assessing the impact of IFRS 11
on its results of operations and financial position.
IFRS 13, "Fair Value Measurement" ("IFRS 13") was also issued by the
IASB on May 12, 2011. The new standard makes IFRS consistent with
generally accepted accounting principles in the United States ("US
GAAP") on measuring fair value and related fair value disclosures.
The new standard creates a single source of guidance for fair value
measurements. IFRS 13 is effective for the Company's fiscal year-end
beginning February 1, 2013, with early adoption permitted. The
Company is assessing the impact of IFRS 13 on its consolidated
financial statements.
Note 4:
Cash Resources
April 30, January 31,
2011 2011
-------------------------------------------------------------------------
Cash on hand and balances with banks $ 94,709 $ 107,993
Short-term investments(a) 6,505 700
-------------------------------------------------------------------------
Total cash resources $ 101,214 $ 108,693
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Short-term investments are held in overnight deposits and money
market instruments with a maturity of 30 days.
Note 5:
Inventory and Supplies
April 30, January 31,
2011 2011
-------------------------------------------------------------------------
Luxury brand raw materials and
work-in-progress $ 104,790 $ 80,013
Luxury brand merchandise inventory 236,423 226,358
Mining rough diamond inventory 47,118 30,451
Mining supplies inventory 77,276 66,390
-------------------------------------------------------------------------
Total inventory and supplies $ 465,607 $ 403,212
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total inventory and supplies is net of a provision for obsolescence of
$1.9 million ($2.9 million at January 31, 2011).
Note 6:
Diavik Joint Venture
The following represents HWDLP's 40% proportionate interest in the Joint
Venture as at March 31, 2011 and December 31, 2010:
April 30, January 31,
2011 2011
-------------------------------------------------------------------------
Current assets $ 107,451 $ 92,487
Non-current assets 711,474 714,386
Current liabilities 45,708 31,493
Non-current liabilities and participant's
account 773,217 775,380
-------------------------------------------------------------------------
April 30, April 30,
2011 2010
-------------------------------------------------------------------------
Expenses net of interest income(a)(b) $ 60,883 $ 52,647
Cash flows resulting from (used in)
operating activities (43,024) (31,127)
Cash flows resulting from financing activities 53,983 37,275
Cash flows resulting from (used in) investing
activities (12,177) (6,533)
-------------------------------------------------------------------------
(a) The Joint Venture only earns interest income.
(b) Expenses net of interest income for the three months ended April 30,
2011 of $0.1 million (three months ended April 30, 2010 of $0.1
million)
HWDLP is contingently liable for DDMI's portion of the liabilities of the
Joint Venture, and to the extent HWDLP's participating interest has
increased because of the failure of DDMI to make a cash contribution when
required, HWDLP would have access to an increased portion of the assets
of the Joint Venture to settle these liabilities.
Note 7:
Intangible Assets
Amortization Accumulated April 30, January 31,
period Cost amortization 2011 net 2011 net
-------------------------------------------------------------------------
Trademark indefinite $ 112,995 $ - $ 112,995 $ 112,995
life
Drawings indefinite 12,365 - 12,365 12,365
life
Wholesale
distribution
network 120 months 5,575 (3,180) 2,395 2,534
-------------------------------------------------------------------------
Intangible
assets $ 130,935 $ (3,180) $ 127,755 $ 127,894
-------------------------------------------------------------------------
Amortization expense for the three months ended April 30, 2011 was $0.1
million ($0.3 million for the three months ended April 30, 2010). The
Company completed a valuation of its trademark and drawings as of January
31, 2011 and concluded that there was no impairment of these assets.
Note 8:
Employee Benefit Plans
The employee benefit obligation reflected in the consolidated balance
sheet is as follows:
April 30, January 31,
2011 2011
-------------------------------------------------------------------------
Defined benefit plan obligation
- Harry Winston luxury brand segment $ 9,724 $ 9,009
Defined contribution plan obligation
- Harry Winston luxury brand segment 320 80
Defined contribution plan obligation
- Harry Winston mining segment 68 -
Defined contribution plan obligation
- Diavik Diamond Mine 1,064 3,061
RSU and DSU plans (note 10) 3,254 2,515
-------------------------------------------------------------------------
Total employee benefit plan obligation $ 14,430 $ 14,665
-------------------------------------------------------------------------
-------------------------------------------------------------------------
April 30, January 31,
2011 2011
-------------------------------------------------------------------------
Non-current $ 7,483 $ 7,287
Current 6,947 7,378
-------------------------------------------------------------------------
Total employee benefit plan obligation $ 14,430 $ 14,665
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The amounts recognized in the consolidated income statement in respect of
employee benefit plans are as follows:
April 30, April 30,
2011 2010
-------------------------------------------------------------------------
Defined benefit pension plan - Harry Winston
luxury brand segment $ 631 $ 409
Defined contribution plan - Harry Winston
luxury brand segment 240 210
Defined contribution plan - Harry Winston
mining segment 72 54
Defined contribution plan - Diavik Diamond
Mine 650 212
RSU and DSU plans (note 10) 1,535 322
-------------------------------------------------------------------------
$ 3,128 $ 1,207
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 9:
Interest-Bearing Loans and Borrowings
April 30, January 31,
2011 2011
-------------------------------------------------------------------------
Mining segment credit facilities $ 50,000 $ 50,000
Mining segment promissory note 70,000 70,000
Harry Winston Inc. credit facilities 189,890 181,715
First mortgage on real property 7,279 7,048
Bank advances 32,389 22,902
Finance leases 77 171
-------------------------------------------------------------------------
Total interest-bearing loans and borrowings 349,635 331,836
-------------------------------------------------------------------------
Less current portion (103,884) (94,215)
-------------------------------------------------------------------------
$ 245,751 $ 237,621
---------------------------
---------------------------
Carrying Face
Nominal amount at value at
interest Date of April 30, April 30,
Currency rate maturity 2011 2011 Borrower
-------------------------------------------------------------------------
Secured Harry Winston
bank March 31, $172.0 $172.0 Inc.
loan US 3.75% 2013 million million
-------------------------------------------------------------------------
Secured Harry Winston
bank April 22, $3.8 $3.8 S.A.
loan CHF 3.15% 2013 million million
-------------------------------------------------------------------------
Secured Harry Winston
bank January $14.1 $14.1 S.A.
loan CHF 3.55% 31, 2033 million million
-------------------------------------------------------------------------
Secured Harry Winston
bank June 24, $50.0 $50.0 Diamond
loan US 4.41% 2013 million million Corporation
and Harry
Winston
Diamond Mines
Ltd.
-------------------------------------------------------------------------
First 6019838
mortgage Canada Inc.
on real September $7.3 $7.3
property CDN 7.98% 1, 2018 million million
-------------------------------------------------------------------------
Promissory August 25, $70.0 $70.0 Harry Winston
note US 5.00% 2011 million million Diamond
Corporation
-------------------------------------------------------------------------
Secured Harry Winston
bank Due on $9.8 $9.8 Diamond
advance US 4.55% demand million million International
N.V.
N/A $nil $nil Harry Winston
Diamond
(India)
Private
Limited
-------------------------------------------------------------------------
Secured
bank May 20, $7.1 $7.1 Harry Winston
advance YEN 2.25% 2011 million million Japan, K.K.
-------------------------------------------------------------------------
Unsecured
bank May 20, $7.7 $7.7 Harry Winston
advance YEN 2.98% 2011 million million Japan, K.K.
-------------------------------------------------------------------------
Unsecured
bank May 31, $7.8 $7.8 Harry Winston
advance YEN 2.98% 2011 million million Japan, K.K.
-------------------------------------------------------------------------
Finance July 31, $0.1 $0.1 Harry Winston
leases CHF 3.85% 2011 million million S.A.
-------------------------------------------------------------------------
On February 28, 2011, the Company increased the mining segment senior
secured revolving credit facility with Standard Chartered Bank by $25.0
million to $125.0 million.
On August 25, 2010, the Company issued a promissory note in the amount of
$70.0 million, maturing on August 25, 2011, as part of the consideration
for reacquiring its 9% indirect interest in the Diavik Joint Venture (the
"Kinross Buy Back Transaction") from Kinross Gold Corporation
("Kinross"). The note bears interest at a rate of 5% per annum and can be
repaid in cash or, subject to certain limitations, treasury common shares
issued by the Company. The issuance of such shares is expected to be
subject to approval by the Company's shareholders in most circumstances.
Note 10:
Share Capital
(a) Authorized
Unlimited common shares without par value.
(b) Issued
Number of shares Amount
-------------------------------------------------------------------------
Balance, January 31, 2011 84,159,851 $ 502,129
Shares issued for:
Exercise of options 360,280 3,918
Transfer from contributed surplus on
exercise of options - 1,160
-------------------------------------------------------------------------
Balance, April 30, 2011 84,520,131 $ 507,207
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c) RSU and DSU Plans
RSU Number of units
-------------------------------------------------------------------------
Balance, January 31, 2011 155,946
Awards and payouts during the year (net)
RSU awards 66,991
RSU payouts (46,963)
-------------------------------------------------------------------------
Balance, April 30, 2011 175,974
-------------------------------------------------------------------------
-------------------------------------------------------------------------
DSU Number of units
-------------------------------------------------------------------------
Balance, January 31, 2011 193,214
Awards and payouts during the year (net)
DSU awards 10,186
DSU payouts (17,127)
-------------------------------------------------------------------------
Balance, April 30, 2011 186,273
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the first quarter, the Company granted 66,991 RSUs (net of
forfeitures) and 10,186 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 in
fiscal 2012 vest one-third on March 31, 2012, 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 the
vesting period.
Note 11:
Commitments and Guarantees
(a) Environmental agreements
Through negotiations of environmental and other agreements, the Joint
Venture must provide funding for the Environmental Monitoring
Advisory Board. HWDLP anticipates its share of this funding
requirement will be approximately $0.2 million for calendar 2011.
Further funding will be required in future years; however, specific
amounts have not yet been determined. These agreements also state
that the Joint Venture must provide security deposits for the
performance by the Joint Venture of its reclamation and abandonment
obligations under all environmental laws and regulations. HWDLP's
share of the letters of credit outstanding posted by the operator of
the Joint Venture with respect to the environmental agreements as at
April 30, 2011, was $85.1 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 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 April 30, 2011 was $1.8 million.
(c) Commitments
Commitments include the cumulative maximum funding commitments
secured by letters of credit of the Joint Venture's environmental and
participation agreements at HWDLP's 40% ownership interest, before
any reduction of future reclamation activities; and future minimum
annual rentals under non-cancellable operating and capital leases for
luxury brand salons and corporate office space, and long-term leases
for property, land, office premises and a fuel tank farm at the
Diavik Diamond Mine; and are as follows:
2012 $ 112,960
2013 109,581
2014 107,561
2015 112,983
2016 107,502
Thereafter 238,139
---------------------------------------------------------------------
Note 12:
Capital Management
The Company's capital includes cash and cash equivalents, short-term
debt, long-term debt and equity, which includes issued common shares,
contributed surplus and retained earnings.
The Company's primary objective with respect to its capital management is
to ensure that it has sufficient cash resources to maintain its ongoing
operations, to provide returns to shareholders and benefits for other
stakeholders, and to pursue growth opportunities. To meet these needs,
the Company may from time to time raise additional funds through
borrowing and/or the issuance of equity or debt or by securing strategic
partners, upon approval by the Board of Directors. The Board of Directors
reviews and approves any material transactions out of the ordinary course
of business, including proposals on acquisitions or other major
investments or divestitures, as well as annual capital and operating
budgets.
The Company assesses liquidity and capital resources on a consolidated
basis. The Company's requirements are for cash operating expenses,
working capital, contractual debt requirements and capital expenditures.
The Company believes that it will generate sufficient liquidity to meet
its anticipated requirements for the next twelve months.
Note 13:
Financial Instruments
The Company has various financial instruments comprising cash and cash
equivalents, cash collateral and cash reserves, accounts receivable,
accounts payable and accrued liabilities, bank advances, promissory note
and long-term debt.
Cash and cash equivalents consist of cash on hand and balances with banks
and short-term investments held in overnight deposits with a maturity on
acquisition of less than 90 days. Cash and cash equivalents, which are
designated as held-for-trading, are carried at fair value based on quoted
market prices and are classified within Level 1 of the fair value
hierarchy established by the International Accounting Standards Board.
The fair value of accounts receivable is determined by the amount of cash
anticipated to be received in the normal course of business from the
financial asset.
The promissory note is short term in nature; hence the fair value of this
instrument at April 30, 2011 is considered to approximate its carrying
value.
The Company's interest-bearing loans and borrowings are fully secured;
hence the fair values of these instruments at April 30, 2011 are
considered to approximate their carrying value.
The carrying values of these financial instruments are as follows:
April 30, 2011 January 31, 2011
-------------------------------------------------------------------------
Estimated Carrying Estimated Carrying
fair value value fair value value
-------------------------------------------------------------------------
Financial Assets
Cash and cash
equivalents $ 101,214 $ 101,214 $ 108,693 $ 108,693
Accounts
receivable 28,292 28,292 22,788 22,788
-------------------------------------------------------------------------
$ 129,506 $ 129,506 $ 131,481 $ 131,481
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financial
Liabilities
Trade and other
payables $ 166,777 $ 166,777 $ 136,490 $ 136,490
Bank advances 32,389 32,389 22,902 22,902
Promissory note 70,000 70,000 70,000 70,000
Interest-bearing
loans and
borrowings 247,246 247,246 238,934 238,934
-------------------------------------------------------------------------
$ 516,412 $ 516,412 $ 468,326 $ 468,326
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 14:
Segmented Information
The Company operates in two segments within the diamond industry, mining
and luxury brand, for the three months ended April 30, 2011.
The mining segment consists of the Company's rough diamond business. This
business includes the 40% ownership interest in the Diavik group of
mineral claims and the sale of rough diamonds.
The luxury brand segment consists of the Company's ownership in Harry
Winston Inc. This segment consists of the marketing of fine jewelry and
watches on a worldwide basis.
For the three months ended
April 30, 2011 Mining Luxury brand Total
-------------------------------------------------------------------------
Sales
Canada (a) $ 62,035 $ - $ 62,035
United States - 36,394 36,394
Europe - 20,588 20,588
Asia - 24,915 24,915
-------------------------------------------------------------------------
Total sales 62,035 81,897 143,932
-------------------------------------------------------------------------
Cost of sales
Depreciation and amortization 16,430 80 16,510
All other costs 37,013 42,929 79,942
-------------------------------------------------------------------------
Total cost of sales 53,443 43,009 96,452
-------------------------------------------------------------------------
Gross margin 8,592 38,888 47,480
Gross margin (%) 13.9% 47.5% 33.0%
Selling, general and
administrative expenses
Selling and related expenses 648 26,321 26,969
Administrative expenses 7,378 8,448 15,826
-------------------------------------------------------------------------
Total other operating expenses 8,026 34,769 42,795
-------------------------------------------------------------------------
Operating profit 566 4,119 4,685
Finance expense (2,693) (1,290) (3,983)
Exploration costs (212) - (212)
Finance and other income 77 181 258
Foreign exchange gain (loss) (977) 800 (177)
-------------------------------------------------------------------------
Segmented profit (loss) before
income taxes $ (3,239) $ 3,810 $ 571
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segmented assets as at
April 30, 2011
Canada $ 971,628 $ - $ 971,628
United States - 455,639 459,521
Other foreign countries 36,411 202,367 234,896
-------------------------------------------------------------------------
$ 1,008,039 $ 658,006 $ 1,666,045
-------------------------------------------------------------------------
Capital expenditures $ 12,436 $ 1,388 $ 13,824
Other significant non-cash
items:
Deferred income tax expense
(recovery) $ (4,555) $ 1,907 $ (2,648)
(a) Sales to four significant customers in the mining segment totalled
$12.3 million for the three months ended April 30, 2011.
For the three months ended
April 30, 2010 Mining Luxury brand Total
-------------------------------------------------------------------------
Sales
Canada (a) $ 48,922 $ - $ 48,922
United States - 22,040 22,040
Europe - 19,434 19,434
Asia - 23,604 23,604
-------------------------------------------------------------------------
Total sales 48,922 65,078 114,000
-------------------------------------------------------------------------
Cost of sales
Depreciation and amortization 10,346 80 10,426
All other costs 33,797 31,488 65,285
-------------------------------------------------------------------------
Total cost of sales 44,143 31,568 75,711
-------------------------------------------------------------------------
Gross margin 4,779 33,510 38,289
Gross margin (%) 9.8% 51.5% 33.6%
Selling, general and
administrative expenses
Selling and related expenses 566 21,434 22,000
Administrative expenses 3,304 10,644 13,948
-------------------------------------------------------------------------
Total other operating expenses 3,870 32,078 35,948
-------------------------------------------------------------------------
Operating profit 909 1,432 2,341
Finance expense (1,313) (1,567) (2,880)
Exploration costs (27) - (27)
Finance and other income 72 96 168
Foreign exchange gain (loss) (2,395) 182 (2,213)
-------------------------------------------------------------------------
Segmented profit (loss) before
income taxes $ (2,754) $ 143 $ (2,611)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Segmented assets as at
April 30, 2010
Canada $ 949,308 $ - $ 949,308
United States - 378,649 378,649
Other foreign countries 30,526 163,404 193,930
-------------------------------------------------------------------------
$ 979,834 $ 542,053 $ 1,521,887
-------------------------------------------------------------------------
Capital expenditures $ 9,297 $ 206 $ 9,503
Other significant non-cash
items:
Deferred income tax expense
(recovery) $ (6,673) $ 634 $ (6,039)
(a) Sales to four significant customers in the mining segment totalled
$14.0 million for the three months ended April 30, 2010.
Note 15:
Explanation of Transition to IFRS
As stated in Note 2(a), these are the Company's first consolidated
interim financial statements prepared in accordance with IFRS.
The accounting policies in Note 3 have been applied in preparing: the
interim financial statements for the three months ended April 30, 2011,
the comparative information presented in these interim financial
statements for both the three months ended April 30, 2010 and 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). In preparing the
Company's opening IFRS balance sheet, the Company has adjusted amounts
reported previously in financial statements prepared in accordance with
Canadian GAAP. An explanation of how the transition from Canadian GAAP to
IFRS has affected the Company's financial position and financial
performance is set out in the following tables and the notes that
accompany the tables.
Explanation of Transition to IFRS: Reconciliation of Equity
(in thousands of
United States
dollars) February 1, 2010
(unaudited)
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 (7,576) 36,644
-------------------------------------------------------------------------
441,897 (7,498) 434,399
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 15,629 - 15,629
Deferred income tax
assets (a) 42,805 10,374 53,179
-------------------------------------------------------------------------
Total assets $ 1,494,805 $ (16,676) $ 1,478,129
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND EQUITY
Current liabilities:
Trade and other
payables (d) $ 87,448 $ (14,043) $ 73,405
Employee benefit
plans (d) - 13,774 13,774
Income taxes
payable 46,297 - 46,297
Bank advances (d) 22,485 (22,485) -
Promissory note - - -
Interest-bearing
loans and
borrowings (d) 1,154 22,675 23,829
-------------------------------------------------------------------------
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 (33,437) 238,385
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total liabilities 634,220 (26,250) 607,970
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Equity:
Share capital 426,593 - 426,593
Contributed
surplus 17,730 - 17,730
Retained earnings (h) 210,001 40,069 250,070
Accumulated other
comprehensive
income (i) 28,445 (31,016) (2,571)
-------------------------------------------------------------------------
Total shareholders'
equity 682,769 9,053 691,822
Non-controlling
interest (j) 177,816 521 178,337
-------------------------------------------------------------------------
Total equity 860,585 9,574 870,159
Total liabilities
and equity $ 1,494,805 $ (16,676) $ 1,478,129
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in thousands of
United States
dollars) April 30, 2010
(unaudited)
Effect of
Canadian Transition
GAAP to IFRS IFRS
-----------------------------------------------------------
ASSETS
Current assets:
Cash and cash
equivalents $ 89,874 $ - $ 89,874
Accounts
receivable 24,379 - 24,379
Inventory and
supplies 342,678 - 342,678
Other current
assets 37,217 (8,029) 29,188
------------------- ---------------------------------------
494,148 (8,029) 486,119
Property, plant and
equipment - Mining 796,159 (19,093) 777,066
Property, plant and
equipment - Luxury
brand 58,095 - 58,095
Intangible assets,
net 128,866 - 128,866
Other non-current
assets 14,905 - 14,905
Deferred income tax
assets 46,346 10,490 56,836
------------------- ---------------------------------------
Total assets $ 1,538,519 $ (16,632) $ 1,521,887
------------------- ---------------------------------------
------------------- ---------------------------------------
LIABILITIES AND
EQUITY
Current liabilities:
Trade and other
payables $ 116,523 $ (13,344) $ 103,179
Employee benefit
plans - 13,717 13,717
Income taxes
payable 47,226 - 47,226
Bank advances 36,521 (36,521) -
Promissory note - - -
Interest-bearing
loans and
borrowings 1,181 36,815 37,996
------------------- ---------------------------------------
201,451 667 202,118
Interest-bearing
loans and
borrowings 161,094 148 161,242
Employee benefit
plans 2,388 4,588 6,976
Provisions 41,881 2,416 44,297
Deferred income
tax liabilities 281,137 (45,071) 236,066
------------------- ---------------------------------------
------------------- ---------------------------------------
Total liabilities 687,951 (37,252) 650,699
------------------- ---------------------------------------
------------------- ---------------------------------------
Equity:
Share capital 426,753 - 426,753
Contributed
surplus 17,917 - 17,917
Retained earnings 201,347 50,860 252,207
Accumulated other
comprehensive
income 26,850 (31,652) (4,802)
------------------- ---------------------------------------
Total shareholders'
equity 672,867 19,208 692,075
Non-controlling
interest 177,701 1,412 179,113
------------------- ---------------------------------------
Total equity 850,568 20,620 871,188
Total liabilities
and equity $ 1,538,519 $ (16,632) $ 1,521,887
------------------- ---------------------------------------
------------------- ---------------------------------------
(in thousands of
United States
dollars) January 31, 2011
(unaudited)
Effect of
Canadian Transition
GAAP to IFRS IFRS
-----------------------------------------------------------
ASSETS
Current assets:
Cash and cash
equivalents $ 108,693 $ - $ 108,693
Accounts
receivable 22,723 65 22,788
Inventory and
supplies 403,212 - 403,212
Other current
assets 45,681 (7,019) 38,662
------------------- ---------------------------------------
580,309 (6,954) 573,355
Property, plant and
equipment - Mining 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 16,626 - 16,626
Deferred income tax
assets 53,857 8,836 62,693
------------------- ---------------------------------------
Total assets $ 1,617,512 $ (11,832) $ 1,605,680
------------------- ---------------------------------------
------------------- ---------------------------------------
LIABILITIES AND
EQUITY
Current liabilities:
Trade and other
payables $ 142,339 $ (5,849) $ 136,490
Employee benefit
plans - 7,378 7,378
Income taxes
payable 6,660 - 6,660
Bank advances 22,902 (22,902) -
Promissory note 70,000 - 70,000
Interest-bearing
loans and
borrowings 1,313 22,902 24,215
------------------- ---------------------------------------
243,214 1,529 244,743
Interest-bearing
loans and
borrowings 237,450 171 237,621
Employee benefit
plans 3,001 4,286 7,287
Provisions 43,390 6,740 50,130
Deferred income
tax liabilities 355,531 (53,551) 301,980
------------------- ---------------------------------------
------------------- ---------------------------------------
Total liabilities 882,586 (40,825) 841,761
------------------- ---------------------------------------
------------------- ---------------------------------------
Equity:
Share capital 502,129 - 502,129
Contributed
surplus 16,233 - 16,233
Retained earnings 176,620 61,047 237,667
Accumulated other
comprehensive
income 39,678 (32,054) 7,624
------------------- ---------------------------------------
Total shareholders'
equity 734,660 28,993 763,653
Non-controlling
interest 266 - 266
------------------- ---------------------------------------
Total equity 734,926 28,993 763,919
Total liabilities
and equity $ 1,617,512 $ (11,832) $ 1,605,680
------------------- ---------------------------------------
------------------- ---------------------------------------
Explanation of Transition to IFRS: Reconciliation of Profit
(in thousands of
United States dollars) For the quarter ended April 30, 2010
(unaudited)
Effect of
Canadian Transition
Ref. GAAP to IFRS IFRS
-------------------------------------------------------------------------
Sales $ 114,000 $ - $ 114,000
Cost of sales (k) 76,692 (981) 75,711
-------------------------------------------------------------------------
Gross margin 37,308 981 38,289
Selling, general and
administrative
expenses 35,948 - 35,948
-------------------------------------------------------------------------
Operating profit 1,360 981 2,341
Finance expenses (l) (2,384) (496) (2,880)
Exploration costs (m) - (27) (27)
Finance and other
income 168 - 168
Foreign exchange
gain (loss) (n) (11,792) 9,579 (2,213)
-------------------------------------------------------------------------
Profit (loss) before
income taxes (12,648) 10,037 (2,611)
Current income tax
expense (recovery) 515 - 515
Deferred income tax
expense (recovery) (o) (4,394) (1,645) (6,039)
-------------------------------------------------------------------------
Net profit (loss) $ (8,769) $ 11,682 $ 2,913
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributable to:
Shareholders $ (8,654) $ 10,791 $ 2,137
Non-controlling
interest (115) 891 776
-------------------------------------------------------------------------
Net profit (loss) $ (8,769) $ 11,682 $ 2,913
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss)
per share
Basic $ (0.11) $ 0.14 $ 0.03
Fully diluted $ (0.11) $ 0.14 $ 0.03
Weighted average
number of share
outstanding 76,631,115 76,631,115 76,631,115
-------------------------------------------------------------------------
(in thousands of For the fiscal year ended
United States dollars) January 31, 2011
(unaudited)
Effect of
Canadian Transition
GAAP to IFRS IFRS
-----------------------------------------------------------
Sales $ 623,963 $ - $ 623,963
Cost of sales 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 (11,527) (1,900) (13,427)
Exploration costs - (666) (666)
Finance and other
income 486 183 669
Foreign exchange
gain (loss) (14,406) 14,763 357
------------------- ---------------------------------------
Profit (loss) before
income taxes 39,004 16,277 55,281
Current income tax
expense (recovery) (8,737) - (8,737)
Deferred income tax
expense (recovery) 21,121 (4,180) 16,941
------------------- ---------------------------------------
Net profit (loss) $ 26,620 $ 20,457 $ 47,077
------------------- ---------------------------------------
------------------- ---------------------------------------
Attributable to:
Shareholders $ 21,669 $ 19,737 $ 41,406
Non-controlling
interest 4,951 720 5,671
------------------- ---------------------------------------
Net profit (loss) $ 26,620 $ 20,457 $ 47,077
------------------- ---------------------------------------
------------------- ---------------------------------------
Earnings (loss)
per share
Basic $ 0.27 $ 0.25 $ 0.52
Fully diluted $ 0.27 $ 0.24 $ 0.51
Weighted average
number of share
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) For the quarter ended April 30, 2010
(unaudited)
Effect of
Canadian Transition
Ref. GAAP to IFRS IFRS
-------------------------------------------------------------------------
Net profit (loss) -
as above $ (8,769) $ 11,682 $ 2,913
Other comprehensive
income
Net gain(loss) on
translation of
net foreign
operations (1,753) - (1,753)
Change in fair
value of
derivative
financial
instrument 158 - 158
Actuarial loss on
employee benefit
plans (e)(i) - (636) (636)
-------------------------------------------------------------------------
Total comprehensive
income (loss) $ (10,364) $ 11,046 $ 682
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Attributable to:
Shareholders $ (10,249) $ 10,155 $ (94)
Non-controlling
interest (115) 891 776
-------------------------------------------------------------------------
Total comprehensive
income (loss) $ (10,364) $ 11,046 $ 682
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in thousands of For the fiscal year ended
United States dollars) January 31, 2011
(unaudited)
Effect of
Canadian Transition
GAAP to IFRS IFRS
-----------------------------------------------------------
Net profit (loss) -
as above $ 26,620 $ 20,457 $ 47,077
Other comprehensive
income
Net gain(loss) on
translation of
net foreign
operations 10,879 - 10,879
Change in fair
value of
derivative
financial
instrument 354 - 354
Actuarial loss on
employee benefit
plans - (1,038) (1,038)
------------------- ---------------------------------------
Total comprehensive
income (loss) $ 37,853 $ 19,419 $ 57,272
------------------- ---------------------------------------
------------------- ---------------------------------------
Attributable to:
Shareholders $ 32,902 $ 18,699 $ 51,601
Non-controlling
interest 4,951 720 5,671
------------------- ---------------------------------------
Total comprehensive
income (loss) $ 37,853 $ 19,419 $ 57,272
------------------- ---------------------------------------
------------------- ---------------------------------------
References to the reconciliation of equity and profit
(a) Reclassification of assets
To conform to IFRS presentation requirements, certain asset balances
have been reclassified to current or non-current asset accounts.
(b) Other current assets
February 1, April 30, January 31,
Ref. 2010 2010 2011
---------------------------------------------------------------------
Reclassification
of assets See (a) $ (10,452) $ (10,490) $ (8,901)
Deferred tax impact
on intra-group
transfer of assets (i) 2,876 2,461 1,882
---------------------------------------------------------------------
Net decrease in
other current
assets $ (7,576) $ (8,029) $ (7,019)
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) Under IFRS, deferred taxes are recognized for the difference in tax
bases between jurisdictions as a result of an intra-group transfer of
assets. The deferred tax component under IFRS is computed using the
tax rate applicable to the purchaser, whereas the seller's tax rate
was applied under Canadian GAAP. On transition to IFRS at February 1,
2010, deferred income tax asset increased by $2.9 million along with
a corresponding increase in retained earnings.
During the three months ended April 30, 2010, the accounting under
IFRS resulted in a reduction of $0.4 million in both deferred income
tax asset and deferred income tax recovery.
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
February 1, April 30, January 31,
Ref. 2010 2010 2011
---------------------------------------------------------------------
Derecognition of
exploration costs
capitalized (i) $ (18,632) $ (18,173) $ (17,072)
Remeasurement of
the asset
retirement
obligation See (f)(i) (920) (920) 3,358
---------------------------------------------------------------------
Total decrease in
property, plant
and equipment
- Mining $ (19,552) $ (19,093) $ (13,714)
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) Under Canadian GAAP, the Company's policy on exploration expenditures
incurred is to capitalize and to amortize using the units-of-
production method. For IFRS purposes, the Company's accounting policy
on exploration expenditures is to expense unless the exploration
activity relates to proven and probable reserves. 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 by $5.5
million, $0.9 million, and $12.2 million, respectively.
For the three months ended April 30, 2010, the accounting under IFRS
increased mining capital assets by $0.5 million, decreased cost of
goods sold by approximately $0.5 million, and increased exploration
costs nominally reflecting the net impact of reversing Canadian GAAP
depreciation on capitalized exploration costs, partially offset by
the expensing of exploration costs incurred in the quarter. Nominal
changes were also made to deferred income tax liabilities, non-
controlling interest and deferred income tax recovery.
For the fiscal year ended January 31, 2011, the accounting under IFRS
increased mining capital assets, 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.
(d) Reclassification of liabilities
To conform to IFRS presentation requirements, various liability
balances have been reclassified.
(e) Employee benefit plans
Ref. February 1, April 30, January 31,
2010 2010 2011
---------------------------------------------------------------------
Retrospective
application
of IAS 19 employee
benefits (i) $ 4,771 $ 5,402 $ 5,986
Reclassification of
liabilities See (d) (74) (814) (1,700)
---------------------------------------------------------------------
Net increase in
employee benefit
plans $ 4,697 $ 4,588 $ 4,286
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) Under Canadian GAAP, actuarial gains or losses for defined
benefit plans that exceeded the corridor threshold (10% of the
greater of the obligation and fair value of plan assets at the
beginning of the period) were recognized over the remaining
average service life of active employees. For IFRS purposes, the
Company's accounting policy is to recognize its actuarial gains
and losses immediately in other comprehensive income, and has
retrospectively applied this approach at the date of transition.
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 liabilities.
For the three months ended April 30, 2010, the accounting under
IFRS resulted in a $0.6 million increase to the defined benefit
plan obligation and a corresponding charge to other comprehensive
income, reflecting the recognition of actuarial losses in the
quarter. A nominal change was made to deferred income tax
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
Ref. February 1, April 30, January 31,
2010 2010 2011
---------------------------------------------------------------------
Remeasurement of the
asset retirement
obligation (i) $ 2,416 $ 2,416 $ 6,740
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) The Company has elected to utilize the IFRS 1 optional exemption
relating to "Changes in decommissioning, restoration and similar
liabilities" in preparing its opening balance sheet under IFRS.
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 million, $1.0 million, $0.2 million and $2.1 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
Ref. February 1, April 30, January 31,
2010 2010 2011
---------------------------------------------------------------------
Recognition of new
deferred tax
balances (i) $ (24,376) $ (34,542) $ (42,637)
Derecognition of
exploration costs
capitalized See (c)(i) (5,521) (5,369) (4,887)
Retrospective
application of IAS
19 employee
benefits See (e)(i) (2,555) (2,550) (2,732)
Remeasurement of
the asset
retirement
obligation See (f)(i) (985) (985) (1,002)
Revaluation of
deferred income
tax liabilities (ii) - (1,625) (2,293)
---------------------------------------------------------------------
Total decrease in
deferred income
tax liabilities $ (33,437) $ (45,071) $ (53,551)
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) Under IFRS, in the determination of temporary differences, the
carrying value of non-monetary assets and liabilities is
translated into the functional currency at the historical rate
and compared to its tax value translated into the functional
currency at the current rate. The resulting temporary difference
(measured in the functional currency) is then multiplied by the
appropriate tax rate to determine the related deferred tax
balance.
Under Canadian GAAP, in the determination of temporary
differences related to non-monetary assets and liabilities, the
temporary differences computed in local currency are multiplied
by the appropriate tax rate. The resulting future income tax
amount is then translated into the Company's functional currency
if it is different from the local currency.
On transition, the accounting under IFRS related to the
determination of temporary differences of foreign currency
non-monetary assets and liabilities 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.
For the three months ended April 30, 2010, the accounting under
IFRS resulted in a $10.2 million decrease in deferred income tax
liabilities and a $10.2 million increase in deferred income tax
recovery. Net profit attributable to non-controlling interest
also increased by $0.7 million.
For the fiscal year ended January 31, 2011, the accounting under
IFRS resulted in a $18.3 million decrease in deferred income tax
liabilities and a $18.3 million increase in deferred income tax
recovery. Net profit attributable to non-controlling interest
also increased by $0.5 million.
(ii) For the three months ended April 30, 2010, the above IFRS
adjustments to deferred income tax liabilities required a
revaluation of the account balance resulting in a $1.6 million
reduction in deferred income tax liabilities and a corresponding
increase in deferred income tax recovery. Net profit attributable
to non-controlling interest also increased by $0.1 million.
For the full 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 non-controlling interest.
(h) Retained earnings
The effect of all IFRS adjustments has increased (decreased) retained
earnings as follows:
Ref. February 1, April 30, January 31,
2010 2010 2011
---------------------------------------------------------------------
Reset of cumulative
translation
differences See (i)(i) $ 28,800 $ 28,800 $ 28,800
Recognition of new
deferred tax
balances See (g)(i) 22,788 32,263 40,580
Derecognition of
exploration costs
capitalized See (c)(i) (12,243) (12,030) (11,496)
Deferred tax impact
on intra-group
transfer of
assets See (b)(i) 2,876 2,461 1,882
Remeasurement of
the asset
retirement
obligation See (f)(i) (2,152) (2,152) (2,181)
Revaluation of
deferred income
tax liabilities See (g)(ii) - 1,518 2,221
Reacquisition of
partnership units See (i)(i) - - 1,241
---------------------------------------------------------------------
Net increase in
retained earnings $ 40,069 $ 50,860 $ 61,047
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) Accumulated other comprehensive income
Ref. February 1, April 30, January 31,
2010 2010 2011
---------------------------------------------------------------------
Reset of cumulative
translation
differences (i) $ (28,800) $ (28,800) $ (28,800)
Retrospective
application of IAS
19 employee
benefits See (e)(i) (2,216) (2,852) (3,254)
---------------------------------------------------------------------
Total decrease in
accumulated other
comprehensive income $ (31,016) $ (31,652) $ (32,054)
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) The Company has elected to utilize the IFRS 1 optional exemption
relating to "Cumulative translation differences" in preparing its
opening balance sheet under IFRS. Through application of this
exemption on transition date, existing cumulative translation
differences have been reset to zero and retained earnings has
been increased by $28.8 million.
(j) Non-controlling interest
Ref. February 1, April 30, January 31,
2010 2010 2011
---------------------------------------------------------------------
Derecognition of
exploration costs
capitalized See (c)(i) (868) (775) (689)
Remeasurement of
the asset
retirement
obligation See (f)(i) (199) (199) (199)
Recognition of new
deferred tax
balances See (g)(i) 1,588 2,279 2,057
Revaluation of
deferred income
tax liabilities See (g)(ii) - 107 72
Reacquisition of
partnership units (i) - - (1,241)
---------------------------------------------------------------------
Net change in
non-controlling
interest $ 521 $ 1,412 $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) 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 to non-controlling interest.
(k) Cost of sales
Ref. April 30, January 31,
2010 2011
---------------------------------------------------------------------
Reclassification of accretion
expense (i) $ (496) $ (2,004)
Derecognition of exploration
costs capitalized See (c)(i) (485) (2,043)
Remeasurement of the asset
retirement obligation See (f)(i) - 150
---------------------------------------------------------------------
Decrease in cost of sales $ (981) $ (3,897)
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) In accordance with IFRIC 1, "Changes in Existing Decommissioning,
Restoration and Similar Liabilities", accretion expense is
treated as interest expense whereas under Canadian GAAP it had
been recorded as a component of cost of sales.
(l) Finance expenses
Ref. April 30, January 31,
2010 2011
---------------------------------------------------------------------
Reclassification of accretion
expense See (k)(i) $ (496) $ (2,004)
Remeasurement of the asset
retirement obligation See (f)(i) - 104
---------------------------------------------------------------------
Increase in finance expenses $ (496) $ (1,900)
---------------------------------------------------------------------
---------------------------------------------------------------------
(m) Exploration costs
Ref. April 30, January 31,
2010 2011
---------------------------------------------------------------------
Derecognition of exploration
costs capitalized See (c)(i) $ (27) $ (483)
Reclassification of exploration
costs - (183)
---------------------------------------------------------------------
Increase in exploration costs $ (27) $ (666)
---------------------------------------------------------------------
---------------------------------------------------------------------
(n) Decrease in foreign exchange loss
Ref. April 30, January 31,
2010 2011
---------------------------------------------------------------------
Reclassification of foreign
exchange loss (i) $ 9,579 $ 14,763
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) Under Canadian GAAP, the foreign exchange difference from the
translation of deferred taxes was presented within the foreign
exchange gain/loss account. For IFRS reporting purposes, these
foreign exchange differences have been reclassified to deferred
income tax recovery/expense.
(o) Deferred income tax expense (recovery)
Ref. April 30, January 31,
2010 2011
---------------------------------------------------------------------
Derecognition of exploration
costs capitalized See (c)(i) $ 152 $ 634
Recognition of new deferred
income tax liability balances See (g)(i) (10,166) (18,261)
Deferred tax impact on
intra-group transfer of assets See (b)(i) 415 994
Remeasurement of the asset
retirement obligation See (f)(i) - (17)
Reclassification of foreign
exchange loss See (n)(i) 9,579 14,763
Revaluation of deferred income
tax liabilities See (g)(ii) (1,625) (2,293)
---------------------------------------------------------------------
Total increase in deferred
income tax recovery $ (1,645) $ (4,180)
---------------------------------------------------------------------
---------------------------------------------------------------------
SOURCE Harry Winston Diamond Corporation
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