Harry Winston Diamond Corporation reports Second Quarter Results: Strong increase in sales and earnings
TORONTO, Sept. 1 /PRNewswire-FirstCall/ - Harry Winston Diamond Corporation (TSX:HW, NYSE:HWD) (the "Company") today announced its second quarter results for the period ending July 31, 2010.
Second Quarter Highlights:
- Consolidated sales increased 62% to $153.7 million from $94.8 million
in the comparable quarter of the prior year, resulting in earnings
from operations of $28.9 million, compared to a loss from operations
of $3.9 million for the same quarter of the prior year.
- Rough diamond sales rose 89% to $86.8 million from $46.0 million in
the comparable quarter of the prior year. The increase in sales was a
result of a combination of a 62% increase in rough diamond prices and
a 17% increase in volume of carats sold during the quarter.
- Retail sales increased 37% to $66.9 million from $48.8 million for
the same quarter of the prior year. Sales in Europe increased 40% to
$24.7 million, sales in Asia increased 40% to $22.6 million, and US
sales increased 31% to $19.6 million. Earnings from operations of
$2.3 million for the quarter compare favorably to a loss from
operations of $5.6 million, in the same quarter of the prior year.
- Rough diamond production for the three months ended June 30, 2010,
was 0.65 million carats compared to 0.57 million carats (on a 40%
basis), which was 14% higher than the comparable quarter of the prior
year. Production in the same quarter last year was unusually low, due
to the planned lower volume of ore mined that reflected the softness
in the rough diamond market last year.
- Consolidated net income for the second quarter was $16.5 million or
$0.22 per share compared to net loss of $24.5 million or $0.32 per
share in the second quarter of the prior year. Included in the
consolidated net income for the quarter was a net foreign exchange
gain of $3.3 million or $0.04 per share primarily on future income
tax liabilities compared to a net foreign exchange loss of
$25.3 million or $0.33 per share in the comparable quarter of the
prior year.
Robert Gannicott, Chairman and Chief Executive Officer said, "This quarter has demonstrated the continued recovery in the international diamond business and it has also shown additional improvement from our own business segments. Both mine production and rough diamond sales increased in parallel with the growth in retail sales from our network of international stores particularly at the high end. We expect further growth in retail sales supported by renewed marketing efforts as customers seek out true craftsmanship."
The Company is pleased to announce the appointment of David Carey to its Board of Directors. Mr. Carey currently serves as the president of Hearst Magazines. Prior to joining Hearst, Mr. Carey was group president at Condé Nast, where he served as a member of the company's executive committee and co-lead on all business development efforts, and in other positions at Condé Nast since 1995.
Fiscal 2011 Second Quarter Financial Summary
(US$ in millions except Earnings per Share amounts)
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Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2010 2009 2010 2009
-------------------------------------------------------------------------
Sales 153.7 94.8 267.7 204.4
- Mining Segment 86.8 46.0 135.7 103.6
- Retail Segment 66.9 48.8 132.0 100.8
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Earnings (loss) from operations 28.9 (3.9) 30.3 (13.9)
- Mining Segment 26.6 1.7 26.5 (3.3)
- Retail Segment 2.3 (5.6) 3.8 (10.6)
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Net Earnings (loss) 16.5 (24.5) 7.8 (69.6)
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Earnings (loss) per share $0.22 $(0.32) $0.10 $(0.97)
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Conference Call and Webcast
Beginning at 8:30AM (EDT) on Thursday, September 2, 2010, the Company will host a conference call for analysts, investors and other interested parties. Listeners may access a live broadcast of the conference call on the Company's investor relations web site at http://investor.harrywinston.com or by dialing 866-804-6927 within North America or 857-350-1673 from international locations and entering passcode 72158327.
An online archive of the broadcast will be available by accessing the Company's investor relations web site at http://investor.harrywinston.com. A telephone replay of the call will be available one hour after the call through 11:00PM (EDT), Thursday, September 16, 2010 by dialing 888-286-8010 within North America or 617-801-6888 from international locations and entering passcode 21456296.
About Harry Winston Diamond Corporation
Harry Winston Diamond Corporation is a specialist diamond enterprise with 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 retail division is a premier diamond jeweler and luxury timepiece retailer with salons in key locations, including New York, Paris, London, Beijing, Tokyo, and Beverly Hills.
The Company 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.
Highlights
(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
Consolidated sales were $153.7 million for the quarter compared to $94.8 million for the comparable quarter of the prior year, resulting in a 135% increase in gross margin and earnings from operations of $28.9 million, compared to a loss from operations of $3.9 million in the comparable quarter of the prior year.
The mining segment recorded sales of $86.8 million, an 89% increase from $46.0 million in the comparable quarter of the prior year. The increase in sales resulted from a combination of a higher volume of carats sold and an increase in rough diamond prices achieved during the quarter.
The retail segment recorded sales of $66.9 million, an increase of 37% from sales of $48.8 million in the comparable quarter of the prior year. Earnings from operations of $2.3 million for the quarter compare favorably to a loss from operations of $5.6 million, in the same quarter of the prior year.
The Company recorded consolidated net income of $16.5 million or $0.22 per share for the quarter, compared to a net loss of $24.5 million or $0.32 per share in the second quarter of the prior year. Included in consolidated net income for the quarter was a net foreign exchange gain of $3.3 million or $0.04 per share primarily on future income tax liabilities compared to a net foreign exchange loss of $25.3 million or $0.33 per share in the comparable quarter of the prior year.
Management's Discussion and Analysis
Prepared as of September 1, 2010
(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
The following is management's discussion and analysis ("MD&A") of the results of operations for Harry Winston Diamond Corporation ("Harry Winston Diamond Corporation", or the "Company") for the three and six months ended July 31, 2010 and its financial position as at July 31, 2010. This MD&A is based on the Company's consolidated financial statements prepared in accordance with generally accepted accounting principles in Canada ("Canadian GAAP") and should be read in conjunction with the unaudited consolidated financial statements and notes thereto for the three and six months ended July 31, 2010 and the audited consolidated financial statements of the Company and notes thereto for the year ended January 31, 2010. Unless otherwise specified, all financial information is presented in United States dollars. Unless otherwise indicated, all references to "second quarter" refer to the three months ended July 31, 2010 and all references to "international" for the retail segment refer to Europe and Asia.
Caution Regarding Forward-Looking Information
Certain information included in this MD&A may constitute forward-looking information within the meaning of Canadian and United States securities laws. In some cases, forward-looking information can be identified by the use of terms such as "may", "will", "should", "expect", "plan", "anticipate", "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, 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, and expected sales trends and market conditions in the retail 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 retail segment, the Company has made assumptions regarding, among other things, continuing recovery of world and US economic conditions and demand for luxury goods. While the Company considers these assumptions to be reasonable based on the information currently available to it, they may prove to be incorrect. See "Risks and Uncertainties" on page 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 and the risks of competition in the luxury jewelry segment as well as changes in demand for high end luxury goods. Please see page 15 of this Interim Report, as well as the Company's Annual Report, 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 specialist diamond company focusing on the mining and retail segments of the diamond industry. The Company supplies rough diamonds to the global market from production received from its 40% ownership interest in the Diavik Diamond Mine, located off Lac de Gras in Canada's Northwest Territories. The Company also owns Harry Winston Inc., the premier fine jewelry and watch retailer operating under the Harry Winston(R) brand.
The Company's most significant asset is an ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the "Joint Venture") is an unincorporated joint arrangement between Diavik Diamond Mines Inc. ("DDMI") (60%) and Harry Winston Diamond Limited Partnership ("HWDLP") (40%) where HWDLP holds an undivided 40% ownership interest in the assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is the operator of the Diavik Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England. As a result of the March 31, 2009 strategic investment by Kinross Gold Corporation ("Kinross") of Toronto, Canada, HWDLP was, at July 31, 2010, 77.5% owned by the Company and 22.5% owned by Kinross. Kinross's 22.5% ownership is reported in the consolidated financial statements as part of non-controlling interest and the Company's economic interest in the Diavik Diamond Mine was 31% at July 31, 2010.
On August 25, 2010, Harry Winston Diamond Corporation reacquired the 9% indirect interest in the Diavik Joint Venture from Kinross (the "Kinross Buy Back Transaction"), representing Kinross's direct 22.5% interest in HWDLP, for $220.0 million. The purchase price for Kinross's 22.5% interest in HWDLP was satisfied by the payment of $50.0 million in cash, the issuance to Kinross of approximately 7.1 million Harry Winston Diamond Corporation shares from treasury and the issuance to Kinross of a promissory note in the amount of $70.0 million, maturing on August 25, 2011. The note will bear interest at a rate of 5% per annum and can be repaid in cash or, subject to certain limitations, treasury common shares issued by the Company. The issuance of such shares is expected to be subject to approval by the Company's shareholders in most circumstances. With this transaction, the Company's ownership interest in the Diavik Joint Venture has now increased back to 40%.
Market Commentary
The Diamond Market
The rough diamond market maintained its strength in the second quarter. Shortages in rough diamond supply coupled with the improving world economy sustained higher prices in certain categories of rough diamonds. This resulted in an increase in polished diamond prices as the retail sector restocked.
The Retail Jewelry Market
The luxury jewelry market generated sales growth during the second quarter of fiscal 2011, confirming the positive trend that began during the fourth quarter of fiscal 2010. Consumer demand for luxury brands continues to strengthen globally especially from China, with its rapidly expanding population of high net worth individuals, and from the Middle East as a result of high energy prices. The US and European luxury markets, while showing some improvement, continue to be impacted by weak domestic economies.
(R) Harry Winston is a registered trademark of Harry Winston Inc.
Consolidated Financial Results
The following is a summary of the Company's consolidated quarterly results for the eight quarters ended July 31, 2010 following the basis of presentation utilized in its Canadian GAAP financial statements:
(expressed in thousands of United States dollars except per share
amounts and where otherwise noted)
(quarterly results are unaudited)
-------------------------------------------------------------------------
2011 2011 2010 2010 2010
Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Sales $153,728 $114,000 $133,654 $ 74,828 $ 94,776
Cost of sales 86,797 76,692 96,257 45,227 66,294
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Gross margin 66,931 37,308 37,397 29,601 28,482
Gross margin (%) 43.5% 32.7% 28.0% 39.6% 30.1%
Selling, general and
administrative
expenses 37,998 35,948 40,479 34,542 32,380
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Earnings (loss) from
operations 28,933 1,360 (3,082) (4,941) (3,898)
-------------------------------------------------------------------------
Interest and financing
expenses (2,483) (2,384) (2,396) (2,448) (2,998)
Other income 154 168 129 99 83
Insurance settlement - - - 100 -
Dilution loss - - - - (539)
Impairment charge - - - - -
Foreign exchange gain
(loss) 3,319 (11,792) (1,978) 1,598 (25,274)
-------------------------------------------------------------------------
Earnings (loss) before
income taxes 29,923 (12,648) (7,327) (5,592) (32,626)
Income taxes (recovery) 9,114 (3,879) (5,800) (4,221) (5,662)
-------------------------------------------------------------------------
Earnings (loss) before
non-controlling
interest 20,809 (8,769) (1,527) (1,371) (26,964)
Non-controlling
interest 4,319 (115) 1,831 (1,157) (2,443)
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Net earnings (loss) $ 16,490 $ (8,654) $ (3,358) $ (214) $(24,521)
-------------------------------------------------------------------------
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Basic earnings (loss)
per share $ 0.22 $ (0.11) $ (0.04) $ 0.00 $ (0.32)
Diluted earnings
(loss) per share $ 0.21 $ (0.11) $ (0.04) $ 0.00 $ (0.32)
Cash dividends
declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Total assets(i) $ 1,613 $ 1,539 $ 1,495 $ 1,535 $ 1,533
Total long-term
liabilities(i) $ 565 $ 487 $ 477 $ 506 $ 507
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Six Six
months months
ended ended
2010 2009 2009 July 31, July 31,
Q1 Q4 Q3 2010 2009
-------------------------------------------------------------------------
Sales $109,643 $118,399 $148,623 $267,728 $204,419
Cost of sales 83,944 68,908 71,679 163,489 150,238
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Gross margin 25,699 49,491 76,944 104,239 54,181
Gross margin (%) 23.4% 41.8% 51.8% 38.9% 26.5%
Selling, general and
administrative
expenses 35,749 39,399 33,998 73,946 68,129
-------------------------------------------------------------------------
Earnings (loss) from
operations (10,050) 10,092 42,946 30,293 (13,948)
-------------------------------------------------------------------------
Interest and financing
expenses (3,699) (4,960) (4,678) (4,867) (6,697)
Other income 281 778 407 322 364
Insurance settlement 3,250 17,240 - - 3,250
Dilution loss (34,222) - - - (34,761)
Impairment charge - (93,780) - - -
Foreign exchange gain
(loss) (5,839) 4,649 48,982 (8,473) (31,113)
-------------------------------------------------------------------------
Earnings (loss) before
income taxes (50,279) (65,981) 87,657 17,275 (82,905)
Income taxes (recovery) (3,120) 7,052 15,685 5,234 (8,782)
-------------------------------------------------------------------------
Earnings (loss) before
non-controlling
interest (47,159) (73,033) 71,972 12,041 (74,123)
Non-controlling
interest (2,075) (58) 81 4,204 (4,518)
-------------------------------------------------------------------------
Net earnings (loss) $(45,084) $(72,975) $ 71,891 $ 7,837 $(69,605)
-------------------------------------------------------------------------
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Basic earnings (loss)
per share $ (0.68) $ (1.19) $ 1.17 $ 0.10 $ (0.97)
Diluted earnings
(loss) per share $ (0.68) $ (1.19) $ 1.17 $ 0.10 $ (0.97)
Cash dividends
declared per share $ 0.00 $ 0.05 $ 0.05 $ 0.00 $ 0.00
Total assets(i) $ 1,592 $ 1,567 $ 1,645 $ 1,613 $ 1,533
Total long-term
liabilities(i) $ 496 $ 550 $ 562 $ 565 $ 507
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(i) Total assets and total long-term liabilities are expressed in
millions of United States dollars.
The comparability of quarter-over-quarter results is impacted by seasonality for both the mining and retail 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 retail segment are also seasonal, with generally higher sales during the fourth quarter due to the holiday season. See "Segmented Analysis" on page 9 for additional information.
Three Months Ended July 31, 2010 Compared to Three Months Ended July 31, 2009
CONSOLIDATED NET EARNINGS
The Company recorded second quarter consolidated net income of $16.5 million or $0.22 per share compared to a net loss of $24.5 million or $0.32 per share in the second quarter of the prior year. Included in consolidated net income for the quarter was a net foreign exchange gain of $3.3 million or $0.04 per share primarily on future income tax liabilities compared to a net foreign exchange loss of $25.3 million or $0.33 per share in the comparable quarter of the prior year.
CONSOLIDATED SALES
Sales for the second quarter totalled $153.7 million, consisting of rough diamond sales of $86.8 million and retail segment sales of $66.9 million. This compares to sales of $94.8 million in the comparable quarter of the prior year (rough diamond sales of $46.0 million and retail segment sales of $48.8 million). The Company held three rough diamond sales in the second quarter, one of which was a tender, compared to two in the comparable quarter of the prior year. See "Segmented Analysis" on page 9 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's second quarter cost of sales was $86.8 million for a gross margin of 43.5% compared to a cost of sales of $66.3 million and a gross margin of 30.1% for the comparable quarter of the prior year. The Company's cost of sales includes costs associated with mining, rough diamond sorting and retail sales activities. See "Segmented Analysis" on page 9 for additional information.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of selling, general and administrative ("SG&A") expenses include expenses for salaries and benefits, advertising and marketing, rent and building related costs. The Company incurred SG&A expenses of $38.0 million for the second quarter, compared to $32.4 million in the comparable quarter of the prior year.
Included in SG&A expenses for the second quarter are $4.8 million for the mining segment compared to $4.2 million for the comparable quarter of the prior year and $33.2 million for the retail segment compared to $28.2 million for the comparable quarter of the prior year. For the mining segment, the increase related primarily to the strengthening of the Canadian dollar and increased expenses associated with higher sales. For the retail segment, the increase was due primarily to higher advertising, marketing and selling expenses and higher salaries and benefits. In addition, SG&A expenses for the retail segment in the second quarter of the prior year were lower due to an adjustment to incentive based compensation. See "Segmented Analysis" on page 9 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $9.1 million during the second quarter, compared to a net income tax recovery of $5.7 million in the comparable quarter of the prior year. The Company's effective income tax rate for the quarter, excluding Harry Winston's retail segment, is 29%, which is based on a statutory income tax rate of 29% adjusted for various items including Northwest Territories mining royalty, impact of foreign exchange, earnings subject to tax different than the statutory rate and impact of income allocated to non-controlling interest.
The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the second quarter, the Canadian dollar weakened against the US dollar. As a result, the Company recorded an unrealized foreign exchange gain of $2.3 million on the revaluation of the Company's Canadian dollar denominated future income tax liability. This compares to an unrealized foreign exchange loss of $19.0 million in the comparable quarter of the previous year. The unrealized foreign exchange gain is not taxable for Canadian income tax purposes.
The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2031.
The Company has provided a table below summarizing the movement from the statutory to the effective income tax rate as a percentage of earnings before taxes:
Three months Three months
ended ended
July 31, July 31,
2010 2009
-------------------------------------------------------------------------
Statutory income tax rate 29% 30%
Northwest Territories mining royalty
(net of income tax relief) 9% (1)%
Impact of foreign exchange (4)% (15)%
Earnings subject to tax different than
statutory rate (1)% 8%
Changes in valuation allowance 1% -%
Impact of dilution loss -% (1)%
Impact of income allocated to
non-controlling interest (5)% (2)%
Assessments and adjustments -% (2)%
Other items 1% -%
Effective income tax rate 30% 17%
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CONSOLIDATED INTEREST AND FINANCING EXPENSES
Interest and financing expenses of $2.5 million were incurred during the second quarter compared to $3.0 million during the comparable quarter of the prior year. Interest and financing expenses were impacted by a reduction in debt levels and lower interest rates.
CONSOLIDATED OTHER INCOME
Other income of $0.2 million was recorded during the quarter compared to $0.1 million in the comparable quarter of the prior year.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of $3.3 million was recognized during the quarter compared to a net foreign exchange loss of $25.3 million in the comparable quarter of the prior year. The gain relates principally to the revaluation of the Company's Canadian dollar denominated long-term future income tax liability as a result of the weakening of the Canadian dollar against the US dollar at July 31, 2010. The Company's ongoing currency exposure relates primarily to expenses and obligations incurred in Canadian dollars, as well as the revaluation of certain Canadian monetary balance sheet amounts. The Company does not currently have any significant foreign exchange derivative instruments outstanding.
Six Months Ended July 31, 2010 Compared to Six Months Ended July 31, 2009
CONSOLIDATED NET EARNINGS
The Company recorded consolidated net income of $7.8 million or $0.10 per share for the six months ended July 31, 2010, compared to a net loss of $69.6 million or $0.97 per share for the six months ended July 31, 2009. Consolidated net income for the six months ended July 31, 2010, included a net foreign exchange loss of $8.5 million or $0.11 per share primarily on future income tax liabilities compared to a net foreign exchange loss of $31.1 million or $0.44 per share in the comparable period of the prior year. The consolidated net loss for the comparable period of the prior year also included a non-cash dilution loss of $34.8 million or $0.49 per share as a result of the investment by Kinross in HWDLP, which holds the Company's 40% interest in the Diavik Diamond Mine.
CONSOLIDATED SALES
Sales for the six months ended July 31, 2010 totalled $267.7 million, consisting of rough diamond sales of $135.7 million and retail segment sales of $132.0 million. This compares to sales of $204.4 million for the six months ended July 31, 2009 (rough diamond sales of $103.6 million and retail segment sales of $100.8 million). See "Segmented Analysis" on page 9 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's cost of sales was $163.5 million for a gross margin of 38.9% compared to a cost of sales of $150.2 million and a gross margin of 26.5% for the comparable period of the prior year. The Company's cost of sales includes costs associated with mining, rough diamond sorting and retail sales activities. See "Segmented Analysis" on page 9 for additional information.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company incurred SG&A expenses of $73.9 million for the six months ended July 31, 2010, compared to $68.1 million for the six months ended July 31, 2009.
Included in SG&A expenses for the six months ended July 31, 2010 are $8.7 million for the mining segment compared to $9.7 million for the comparable period of the prior year and $65.3 million for the retail segment compared to $58.4 million for the comparable period of the prior year. In the first quarter of the prior year, the mining segment incurred transaction fees as a result of the Kinross investment. For the retail segment, the increase was due primarily to higher advertising, marketing and selling expenses and higher salaries and benefits. In addition, SG&A expenses for the retail segment in the comparable period of the prior year were lower due to an adjustment to incentive based compensation. See "Segmented Analysis" on page 9 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $5.2 million during the six months ended July 31, 2010, compared to a net income tax recovery of $8.8 million in the comparable period of the prior year. The Company's effective income tax rate for the six months ended July 31, 2010, excluding Harry Winston's retail segment, is 30%, which is based on a statutory income tax rate of 29% adjusted for various items including Northwest Territories mining royalty, impact of foreign exchange, earnings subject to tax different than the statutory rate and impact of income allocated to non-controlling interest.
The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the six months ended July 31, 2010, the Canadian dollar strengthened against the US dollar. As a result, the Company recorded an unrealized foreign exchange loss of $7.3 million on the revaluation of the Company's Canadian dollar denominated future income tax liability. This compares to an unrealized foreign exchange loss of $23.0 million in the comparable period of the prior year. The unrealized foreign exchange loss is not deductible for Canadian income tax purposes.
The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2031.
The Company has provided a table below summarizing the movement from the statutory to the effective income tax rate as a percentage of earnings before taxes:
Six months Six months
ended ended
July 31, July 31,
2010 2009
-------------------------------------------------------------------------
Statutory income tax rate 29% 30%
Stock compensation 1% -%
Northwest Territories mining royalty
(net of income tax relief) 14% -%
Impact of foreign exchange 1% (6)%
Earnings subject to tax different
than statutory rate (1)% 4%
Changes in valuation allowance 1% (1)%
Impact of dilution loss -% (13)%
Impact of income allocated to
non-controlling interest (8)% (2)%
Assessments and adjustments (10)% (1)%
Other items 3% -%
Effective income tax rate 30% 11%
-------------------------------------------------------------------------
CONSOLIDATED INTEREST AND FINANCING EXPENSES
Interest and financing expenses of $4.9 million were incurred during the six months ended July 31, 2010 compared to $6.7 million during the comparable period of the prior year. Interest and financing expenses were impacted by a reduction in debt levels and lower interest rates.
CONSOLIDATED OTHER INCOME
Other income of $0.3 million was recorded during the six months ended July 31, 2010 compared to $0.4 million in the comparable period of the prior year.
CONSOLIDATED INSURANCE SETTLEMENT
During the comparable period of the prior year, the Company received the remaining insurance settlement of $3.3 million related to the December 2008 robbery at the Harry Winston Paris salon.
CONSOLIDATED DILUTION LOSS
During the comparable period of the prior year, the Company recorded a non-cash dilution loss of $34.8 million as a result of the investment by Kinross in HWDLP, which holds the Company's 40% interest in the Diavik Diamond Mine.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange loss of $8.5 million was recognized during the six months ended July 31, 2010 compared to a net foreign exchange loss of $31.1 million in the comparable period of the prior year. The current year to date loss relates principally to the revaluation of the Company's Canadian dollar denominated long-term future income tax liability as a result of the strengthening of the Canadian dollar against the US dollar at July 31, 2010. The Company's ongoing currency exposure relates primarily to expenses and obligations incurred in Canadian dollars, as well as the revaluation of certain Canadian monetary balance sheet amounts. The Company does not currently have any significant foreign exchange derivative instruments outstanding.
Segmented Analysis
The operating segments of the Company include mining and retail segments.
Mining
The mining segment includes the production and sale of rough diamonds.
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
-------------------------------------------------------------------------
2011 2011 2010 2010 2010
Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Sales $ 86,827 $ 48,922 $ 63,489 $ 20,765 $ 45,941
Cost of sales 55,407 45,124 57,027 20,319 40,049
-------------------------------------------------------------------------
Gross margin 31,420 3,798 6,462 446 5,892
Gross margin (%) 36.2% 7.8% 10.2% 2.1% 12.8%
Selling, general and
administrative
expenses 4,813 3,870 4,885 4,932 4,182
-------------------------------------------------------------------------
Earnings (loss) from
operations $ 26,607 $ (72) $ 1,577 $ (4,486) $ 1,710
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Six
months months
ended ended
2010 2009 2009 July 31, July 31,
Q1 Q4 Q3 2010 2009
-------------------------------------------------------------------------
Sales $ 57,690 $ 51,100 $ 90,716 $135,749 $103,631
Cost of sales 57,256 34,612 40,617 100,531 97,305
-------------------------------------------------------------------------
Gross margin 434 16,488 50,099 35,218 6,326
Gross margin (%) 0.8% 32.3% 55.2% 25.9% 6.1%
Selling, general and
administrative
expenses 5,503 4,430 3,114 8,683 9,685
-------------------------------------------------------------------------
Earnings (loss) from
operations $ (5,069) $ 12,058 $ 46,985 $ 26,535 $ (3,359)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended July 31, 2010 Compared to Three Months Ended July 31, 2009
MINING SALES
Rough diamond sales for the quarter totalled $86.8 million compared to $46.0 million in the comparable quarter of the prior year. The increase in sales resulted from a combination of a 62% increase in rough diamond prices and a 17% increase in volume of carats sold. Rough diamond production was 14% higher than the comparable calendar quarter of the prior year. Rough diamond production was unusually low in the comparable quarter of the prior year primarily due to a planned lower volume of ore mined to reflect the softness in the rough diamond market last year. The Company held three rough diamond sales in the second quarter, one of which was a tender, compared to two in 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 at each sales location during the quarter, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter.
MINING COST OF SALES AND GROSS MARGIN
The Company's second quarter cost of sales was $55.4 million, resulting in a gross margin of 36.2% compared to a cost of sales of $40.0 million and a gross margin of 12.8% in the comparable quarter of the prior year. The higher cost of sales was due primarily to the cost of mining open pit synchronously with the high-cost development ore from underground mining. Mining gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices.
A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Diamond Mine. Cost of sales also includes sorting costs, which consist of the Company's cost of handling and sorting product in preparation for sales to third parties, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment increased by $0.6 million from the comparable quarter of the prior year. The increase related primarily to the strengthening of the Canadian dollar and increased expenses associated with higher sales.
Six Months Ended July 31, 2010 Compared to Six Months Ended July 31, 2009
MINING SALES
Rough diamond sales for the six months ended July 31, 2010 totalled $135.7 million compared to $103.6 million in the comparable period of the prior year. This increase resulted from higher achieved diamond prices. Sales in the first quarter of the prior year included 0.4 million carats carried in inventory at January 31, 2009 for revenue of $13.0 million. Excluding those carats sold, the increase in the Company's achieved rough diamond prices was 81%. Rough diamond production was consistent with the comparable period of the prior year.
The Company held five rough diamond sales during the six months ended July 31 2010, one of which was a tender. This compares to four rough diamond sales in the comparable period 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 at each sales location 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
For the six months ended July 31, 2010, cost of sales was $100.5 million, resulting in a gross margin of 25.9% compared to a cost of sales of $97.3 million and a gross margin of 6.1% in the comparable period of the prior year. Included in cost of sales in the first quarter of the prior year was $9.8 million related to goods carried in inventory at January 31, 2009 and an inventory write-down of $4.1 million. Excluding these factors, the higher cost of sales was due primarily to the cost of mining open pit synchronously with the high-cost development ore from underground mining. The mining gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices.
A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Diamond Mine. Cost of sales also includes sorting costs, which consist of the Company's cost of handling and sorting product in preparation for sales to third parties, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment decreased by $1.0 million from the comparable period of the prior year. In the comparable period of the prior year, the mining segment incurred transaction fees as a result of the Kinross investment.
Mining Segment Operational Update
Ore production for the second calendar quarter consisted of 1.1 million carats produced from 0.41 million tonnes of ore from the A-418 kimberlite pipe, 0.4 million carats produced from 0.07 million tonnes of ore from the A-154 South kimberlite pipe, and 0.1 million carats produced from 0.04 million tonnes of ore from underground mining in the A-154 North pipe. Rough diamond production was unusually low in the comparable quarter of the prior year primarily due to a planned lower volume of ore mined to reflect the softness in the rough diamond market last year. Average grade decreased to 3.1 carats per tonne in the second calendar quarter from 3.7 carats per tonne in the comparable quarter of the prior year. The decrease in average grade was driven by an increase in the proportion of ore sourced from the lower grade A-418 kimberlite pipe.
HARRY WINSTON DIAMOND LIMITED PARTNERSHIP'S 40% SHARE OF DIAVIK DIAMOND
MINE PRODUCTION
(reported on a one-month lag)
-------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Diamonds recovered
(000s carats) 645 568 1,270 1,282
Grade (carats/tonne) 3.09 3.73 3.48 3.97
-------------------------------------------------------------------------
Mining Segment Outlook
PRODUCTION
In calendar 2010, open pit mining from the A-418 kimberlite pipe supplemented by the A-154 South kimberlite pipe is expected to be the primary source of ore. Underground ore is expected to be sourced from the A-154 South and A-154 North kimberlite pipes. Total open pit ore mined is expected to be 1.8 million tonnes, and total underground ore mined is expected to be 0.5 million tonnes, compared to the 1.4 million tonnes and 0.7 million tonnes, respectively, previously reported. Total production is expected to remain unchanged at approximately 7.8 million carats as a result of changes in ore mix.
Looking beyond calendar 2010, the objective is to fully utilize processing capacity with a combination of underground and open pit production. As underground capacity ramps up, open pit production from the A-418 kimberlite pipe will synchronously decline. New mining techniques, with the potential to reduce unit cost and increase mining velocity, are under consideration for the underground ore reserves and the A-21 resource. 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.
PRICING
The recovery in the rough diamond market that commenced in the latter half of last year is being sustained. The Company anticipates that market conditions will remain favourable for the remainder of the year.
The Company plans to hold two rough diamond sales in the third quarter and three rough diamond sales in the fourth quarter, for a total of ten rough diamond sales in fiscal 2011.
COST OF SALES
The Company expects cost of sales in fiscal 2011 to be approximately $240 million at an assumed average Canadian/US dollar exchange rate of $1.00 due primarily to the cost of mining open pit synchronously with the high-cost development ore from underground mining. Included in cost of sales is depreciation and amortization of approximately $80 million. The Company expects that the cost of sales will decline as the ore from underground is delivered from production areas rather than development headings and open pit waste stripping ends.
CAPITAL EXPENDITURES
During fiscal 2011, HWDLP's 40% share of the planned capital expenditures is expected to be approximately $56 million at an assumed average Canadian/US dollar exchange rate of $1.00, of which $26 million relates to the underground. During the second quarter, HWDLP's share of capital expenditures was $10.8 million, of which $3.4 million related to the underground.
Retail
The retail 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)
-------------------------------------------------------------------------
2011 2011 2010 2010 2010
Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Sales $ 66,901 $ 65,078 $ 70,165 $ 54,063 $ 48,835
Cost of sales 31,390 31,568 39,230 24,908 26,245
-------------------------------------------------------------------------
Gross margin 35,511 33,510 30,935 29,155 22,590
Gross margin (%) 53.1% 51.5% 44.1% 53.9% 46.3%
Selling, general and
administrative
expenses 33,185 32,078 35,594 29,610 28,198
-------------------------------------------------------------------------
Earnings (loss) from
operations $ 2,326 $ 1,432 $ (4,659) $ (455) $ (5,608)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Six
months months
ended ended
2010 2009 2009 July 31, July 31,
Q1 Q4 Q3 2010 2009
-------------------------------------------------------------------------
Sales $ 51,953 $ 67,299 $ 57,907 $131,979 $100,788
Cost of sales 26,688 34,296 31,062 62,958 52,933
-------------------------------------------------------------------------
Gross margin 25,265 33,003 26,845 69,021 47,855
Gross margin (%) 48.6% 49.0% 46.4% 52.3% 47.5%
Selling, general and
administrative
expenses 30,246 34,969 30,884 65,263 58,444
-------------------------------------------------------------------------
Earnings (loss) from
operations $ (4,981) $ (1,966) $ (4,039) $ 3,758 $(10,589)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended July 31, 2010 Compared to Three Months Ended July 31, 2009
RETAIL SALES
Sales for the second quarter were $66.9 million compared to $48.8 million for the comparable quarter of the prior year, an increase of 37%. Sales in Europe increased 40% to $24.7 million, Asian sales increased 40% to $22.6 million and US sales increased 31% to $19.6 million.
RETAIL COST OF SALES AND GROSS MARGIN
Cost of sales for the retail segment for the second quarter was $31.4 million compared to $26.2 million for the comparable quarter of the prior year. Gross margin for the quarter was $35.5 million or 53.1% compared to $22.6 million or 46.3% for the second quarter of the prior year. The increase in gross margin resulted primarily from a more balanced product mix in salon sales and a greater proportion of higher margin watch sales.
RETAIL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased to $33.2 million from $28.2 million in the comparable quarter of the prior year. The increase was due primarily to higher advertising, marketing and selling expenses and higher salaries and benefits. In addition, SG&A expenses in the second quarter of the prior year were lower due to an adjustment to incentive based compensation. SG&A expenses include depreciation and amortization expense of $3.1 million consistent with the comparable quarter of the prior year.
Six Months Ended July 31, 2010 Compared to Six Months Ended July 31, 2009
RETAIL SALES
Sales for the six months ended July 31, 2010 were $132.0 million compared to $100.8 million for the comparable period of the prior year, an increase of 31%. Sales in Asia increased 54% to $46.2 million, US sales increased 23% to $41.7 million and European sales increased 19% to $44.1 million.
RETAIL COST OF SALES AND GROSS MARGIN
Cost of sales for the retail segment for the six months ended July 31, 2010 was $63.0 million compared to $52.9 million for the comparable period of the prior year. Gross margin for the six months ended July 31, 2010 was $69.0 million or 52.3% compared to $47.9 million or 47.5% for the comparable period of the prior year. The increase in gross margin resulted primarily from a more balanced product mix in salon sales and higher margins from watch sales.
RETAIL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased to $65.3 million from $58.4 million in the comparable period of the prior year. The increase was due primarily to higher advertising, marketing and selling expenses and higher salaries and benefits. In addition, SG&A expenses in the comparable period of the prior year were lower due to an adjustment to incentive based compensation. SG&A expenses include depreciation and amortization expense of $6.2 million consistent with the comparable quarter of the prior year.
Retail Segment Outlook
The strength of the Harry Winston brand combined with its global distribution network and high quality products provides the retail segment with a solid platform to benefit from the continuing global economic recovery. Harry Winston Inc. is optimistic there are opportunities for expansion of the brand in developing countries as well as in the core markets in the US, Europe and Japan. The strong results achieved during the first half of the fiscal year attest to the strength of the brand. The Company expects the rate of sales growth for the year to be in the range of 20% to 25%.
Liquidity and Capital Resources
Working Capital
As at July 31, 2010, the Company had unrestricted cash and cash equivalents of $125.0 million, compared to $63.0 million at January 31, 2010. The Company had cash on hand and balances with banks of $123.4 million and short-term investments of $1.6 million at July 31, 2010. During the quarter ended July 31, 2010, the Company generated $0.2 million in cash from operations, compared to a use of cash from operations of $20.0 million in the comparable quarter of the prior year.
Working capital increased to $386.2 million at July 31, 2010 from $284.5 million at January 31, 2010. During the quarter, the Company increased inventory by $33.2 million, increased accounts payable and accrued liabilities by $8.2 million, increased accounts receivable by $1.8 million, increased prepaid expenses and other current assets by $4.4 million, and decreased income taxes payable by $14.0 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 retail 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.
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
On June 24, 2010, the Company announced that it has completed a mining segment senior secured revolving credit facility with Standard Chartered Bank for $100.0 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. The facility is available to the Company and Harry Winston Diamond Mines Ltd. for general corporate purposes. Borrowings bear an interest margin of 3.5%. The Company is required to comply with financial covenants at the mining segment level customary for a financing of this nature, with change in control provisions at the Company and Diavik Diamond Mines level. At July 31, 2010, the Company had $50.0 million outstanding on its mining segment senior secured revolving credit facility. This amount was drawn in anticipation of closing the Kinross Buy Back Transaction.
As at July 31, 2010, the Company's retail subsidiary, Harry Winston Inc. had $160.5 million outstanding on its $250.0 million secured five-year revolving credit facility, which is used to fund salon inventory and capital expenditure requirements. This compares to $140.0 million outstanding at January 31, 2010.
Also included in long-term debt of the Company's retail operations is a 25-year loan agreement for CHF 17.5 million ($16.6 million) used to finance the construction of the Company's watch factory in Geneva, Switzerland. At July 31, 2010, $15.4 million was outstanding compared to $15.5 million at January 31, 2010. The bank has a secured interest in the factory building.
Harry Winston Japan, K.K. maintains secured and unsecured credit agreements with three banks amounting to (Yen)1,970 million ($22.8 million). At July 31, 2010, $22.8 million had been drawn against these facilities and classified as bank advances compared to $22.5 million at January 31, 2010.
At July 31, 2010, $nil million and $1.2 million were drawn under the Company's revolving financing facility relating to its Belgian subsidiary, Harry Winston Diamond International N.V., and its Indian subsidiary, Harry Winston Diamond (India) Private Limited, respectively. At January 31, 2010, no amounts were outstanding under the Company's revolving financing facilities relating to either Harry Winston Diamond International N.V., or Harry Winston Diamond (India) Private Limited.
Investing Activities
During the second quarter, the Company incurred $11.7 million relating to capital assets, of which $10.8 million related to the mining segment and $0.9 million to the retail segment.
Contractual Obligations
The Company has contractual payment obligations with respect to long-term debt 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 2010 to 2014, is approximately $170 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 States Less than Year Year After
dollars) Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Long-term debt
(a)(b) $265,980 $ 10,896 $232,937 $ 4,430 $ 17,717
Environmental and
participation
agreements
incremental
commitments(c) 93,271 78,679 1,945 4,720 7,927
Operating lease
obligations(d) 104,266 18,311 27,598 19,437 38,920
Capital lease
obligations(e) 223 223 - - -
-------------------------------------------------------------------------
Total contractual
obligations $463,740 $108,109 $262,480 $ 28,587 $ 64,564
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Long-term debt presented in the foregoing table includes current and
long-term portions. Harry Winston Inc. maintains a credit agreement
with a syndicate of banks for a $250.0 million five-year revolving
credit facility. There are no scheduled repayments required before
maturity. At July 31, 2010, $160.5 million had been drawn against
this secured credit facility, which expires on March 31, 2013.
The mining segment maintains a senior secured revolving credit
facility with Standard Chartered Bank for $100.0 million. The
facility has an initial maturity date of June 24, 2013 with two
one-year extensions at the Company's option. There are no scheduled
repayments required before maturity. At July 31, 2010, $50.0 million
was outstanding.
Also included in long-term debt of Harry Winston Inc. is a 25-year
loan agreement for CHF 17.5 million ($16.6 million) used to finance
the construction of the Company's watch factory in Geneva,
Switzerland. The loan agreement is comprised of a CHF 3.5 million
($3.3 million) loan and a CHF 14.0 million ($13.3 million) loan. The
CHF 3.5 million loan bears interest at a rate of 3.15% and matures on
April 22, 2013. The CHF 14.0 million loan bears interest at a rate of
3.55% and matures on January 31, 2033. At July 31, 2010,
$15.4 million was outstanding on the loan agreement compared to
$15.5 million at January 31, 2010. The bank has a secured interest in
the factory building.
The Company's first mortgage on real property has scheduled principal
payments of approximately $0.2 million quarterly, and may be prepaid
at any time. On July 31, 2010, $7.2 million was outstanding on the
mortgage payable.
(b) Interest on long-term debt is calculated at various fixed and
floating rates. Projected interest payments on the current debt
outstanding were based on interest rates in effect at July 31, 2010,
and have been included under long-term debt in the table above.
Interest payments for the next twelve months are approximated to be
$9.7 million.
(c) The Joint Venture, under environmental and other agreements, must
provide funding for the Environmental Monitoring Advisory Board.
These agreements also state that the Joint Venture must provide
security deposits for the performance by the Joint Venture of its
reclamation and abandonment obligations under all environmental laws
and regulations. The operator of the Joint Venture has fulfilled such
obligations for the security deposits by posting letters of credit of
which HWDLP's share as at July 31, 2010 was $77.2 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 salons and
office space, and long-term leases for property, land, office
premises and a fuel tank farm for the Diavik Diamond Mine.
(e) Capital lease obligations represent future minimum annual rentals
under non-cancellable capital leases for Harry Winston Inc. retail
exhibit space.
Subsequent Event
On August 25, 2010, Harry Winston Diamond Corporation reacquired the 9% indirect interest in the Diavik Joint Venture from Kinross, representing Kinross's direct 22.5% interest in HWDLP, for $220.0 million. The purchase price for Kinross's 22.5% interest in HWDLP was satisfied by the payment of $50.0 million in cash, the issuance to Kinross of approximately 7.1 million Harry Winston Diamond Corporation shares from treasury and the issuance to Kinross of a promissory note in the amount of $70.0 million, maturing on August 25, 2011. The note will bear interest at a rate of 5% per annum and can be repaid in cash or, subject to certain limitations, treasury common shares issued by the Company. The issuance of such shares is expected to be subject to approval by the Company's shareholders in most circumstances. With this transaction, the Company's ownership interest in the Diavik Joint Venture has now increased back to 40%.
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. HWDLP was, at July 31, 2010, owned 77.5% by the Company and 22.5% by Kinross. 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 retail 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 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 retail 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. The Kinross Note (described below) is also 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 environment. 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, could cause the Company to experience further revenue declines across both of its business segments, and a decrease in the availability of credit, which could have a material adverse effect on the Company's business prospects or financial condition.
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 future 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 such other currencies, such as the Euro, which has shown significant volatility in recent weeks 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 which 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, 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 retail segment.
Expansion and Refurbishment of the Existing Salon Network
A key component of the Company's retail strategy in recent years has been the expansion of its salon network. 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. 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 retail 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 Jewelry Segment
The Company is exposed to competition in the retail diamond 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.
Agreement with Kinross
On August 25, 2010, the Company completed the Kinross Buy Back Transaction, reacquiring the 22.5% interest in HWDLP that had been previously acquired by Kinross in March 2009. Pursuant to this agreement, the Company has issued to Kinross a promissory note (the "Kinross Note") in the amount of $70.0 million due and repayable on the first anniversary of the date of issue. The Kinross Note can, subject to certain limitations, be paid in treasury shares. The issuance of such shares is subject to approval by the Company's shareholders.
Critical Accounting Estimates
Management is often required to make judgments, assumptions and estimates in the application of Canadian GAAP 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.
Recently Issued Accounting Standards
International Financial Reporting Standards
In February 2008, the Canadian Accounting Standards Board confirmed that publicly accountable enterprises will be required to adopt International Financial Reporting Standards ("IFRS") in place of Canadian GAAP for financial periods beginning on or after January 1, 2011. Accordingly, commencing February 1, 2011, the Company will convert to IFRS and prepare its first financial statements in accordance with IFRS for the three-month period ended April 30, 2011, with comparative information also prepared under IFRS.
The conversion project from Canadian GAAP to IFRS is led by finance management, and includes representatives from various areas of the Company as necessary to plan for and achieve a smooth transition. The Company has engaged the services of a third party expert advisor to assist. Regular progress reporting to senior management and to the Audit Committee on the status of the IFRS conversion project is in place. The conversion project consists of three phases:
Assessment Phase - This phase involves a review of accounting differences
between Canadian GAAP and IFRS; an evaluation of First Time Adoption of
International Financial Reporting Standards ("IFRS 1") exemptions for
first time IFRS adopters; and a high-level impact assessment on systems
and business processes. This phase was completed during the third quarter
of fiscal 2010.
Design Phase - This phase involves prioritizing and resolving accounting
treatment issues; quantifying the impact of converting to IFRS; reviewing
and approving accounting policy choices; performing a detailed impact
assessment on systems and processes; designing system and business
process changes; developing IFRS training material; and drafting IFRS
financial statement content. The Company expects to complete the design
phase activities during the third quarter of fiscal 2011.
Implementation Phase - This phase involves changes to systems and
business processes; determining the opening IFRS transition balance
sheet; dual accounting under both Canadian GAAP and IFRS; and preparing
detailed reconciliations of Canadian GAAP to IFRS financial statements.
The Company is currently progressing through the implementation phase of
its conversion project and expects completion by the end of this fiscal
year January 31, 2011.
EXPECTED ACCOUNTING DIFFERENCES BETWEEN CANADIAN GAAP AND IFRS
The Company has identified the following major areas where the accounting differences between Canadian GAAP and existing IFRS may have an impact on the Company's consolidated financial statements. The accounting differences described below should not be regarded as a complete list of areas that may be impacted by the transition to IFRS.
Property, plant and equipment - Separate accounting for components of
property, plant and equipment is broader and more vigorously applied
under IFRS. Costs are allocated to significant parts of an asset if the
useful lives differ, and each part is then separately depreciated.
Exploration and evaluation - Exploration for and Evaluation of Mineral
Resources ("IFRS 6"), allows an entity to either develop a new accounting
policy for exploration and evaluation expenditures consistent with IFRS
requirements or continue to follow the Company's existing policy.
Income taxes - Existing IFRS requires the recognition of deferred taxes
in situations not required under Canadian GAAP. Specifically, a deferred
tax liability (asset) is recognized for exchange gains and losses
relating to foreign non-monetary assets and liabilities that are
remeasured into the functional currency using historical exchange rates.
Similar timing differences are also recognized for the differences in tax
bases between jurisdictions as a result of intra-group transfer of
assets.
Asset impairment - Under IFRS, assets are tested for impairment either
individually or within cash generating units. This approach reflects the
smallest group of assets capable of generating largely independent cash
inflows, which may differ from asset groups under Canadian GAAP.
Impairment charges relating to long-lived assets may be more frequent
under IFRS as the cash flow test for recoverability is based on a one-
step discounted cash flow approach. Impairment under IFRS is recognized
if the carrying amount exceeds the higher of fair value less cost to
sell, or value in use. Reversal of impairment charges is required under
IFRS if the circumstances leading to the impairment have changed.
The Company also anticipates a significant increase in disclosure within its consolidated financial statements resulting from the adoption of IFRS.
In a recent announcement, the International Accounting Standards Board updated its estimated publication dates for new or amended IFRS to late 2010 and 2011. It now seems likely that there will be a relatively stable platform of IFRS during the Company's transition year ending January 31, 2011. The Company will continue to monitor these international accounting developments.
At this time, the impact of the IFRS conversion project on the Company's financial position and results of operations is not reasonably determinable or estimable.
FIRST TIME ADOPTION OF IFRS
IFRS 1 provides mandatory guidance that generally requires full retrospective application of IFRS and interpretations from the date of transition, February 1, 2010. All material accounting differences between Canadian GAAP and IFRS will be eliminated generally through opening retained earnings at the date of transition. However, IFRS 1 allows certain optional exemptions in the application of particular standards to prior periods in order to assist companies with the transition process. The following are the significant optional exemptions available under IFRS 1 that the Company is considering to apply in preparing its opening balance sheet in accordance with IFRS; other available exemptions continue to be evaluated:
Business combinations - IFRS 1 allows the Company to elect not to apply
Business Combinations ("IFRS 3 (Revised)") retrospectively to past
acquisitions. This standard may be applied prospectively from the date of
the opening balance sheet.
Cumulative translation differences - Retrospective application IFRS would
require the Company to determine cumulative currency translation
differences in accordance with the Effects of Changes in Foreign Exchange
Rates ("IAS 21") from the date a subsidiary or associate was formed or
acquired. This exemption permits the Company to reset existing cumulative
translation differences to zero at transition date.
Borrowing costs - This exemption allows the Company to adopt Borrowing
Costs ("IAS 23"), which requires the capitalization of borrowing costs on
all qualifying assets, prospectively from the date of the opening IFRS
balance sheet. The alternative to this exemption requires the Company to
retrospectively restate borrowing costs in accordance with IFRS
requirements, in addition to capitalizing borrowing costs from the date
of transition.
For the transition year, which commenced February 1, 2010, the Company will continue to report under Canadian GAAP and will be required to capture comparable IFRS financial information.
Outstanding Share Information
As at July 31, 2010
-------------------------------------------------------------------------
Authorized Unlimited
Issued and outstanding shares 76,657,843
Options outstanding 2,927,479
Fully diluted 79,585,322
-------------------------------------------------------------------------
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.
Consolidated Balance Sheets
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
July 31, January 31,
2010 2010
(unaudited)
-------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents (note 3) $ 124,974 $ 62,969
Accounts receivable 26,118 23,520
Inventory and supplies (note 4) 375,835 311,188
Prepaid expenses and other current assets 41,072 44,220
-------------------------------------------------------------------------
567,999 441,897
Mining capital assets 791,163 802,984
Retail capital assets 58,348 62,277
Intangible assets, net (note 6) 128,519 129,213
Other assets 18,149 15,629
Future income tax asset 48,511 42,805
-------------------------------------------------------------------------
$ 1,612,689 $ 1,494,805
-------------------------
-------------------------
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued
liabilities (note 7) $ 124,113 $ 87,448
Income taxes payable 32,508 46,297
Bank advances (note 8) 23,995 22,485
Current portion of long-term debt (note 8) 1,211 1,154
-------------------------------------------------------------------------
181,827 157,384
Long-term debt (note 8) 231,884 161,538
Future income tax liability 287,831 271,822
Other long-term liability 3,158 2,201
Future site restoration costs 42,383 41,275
Non-controlling interest (note 1) 172,121 177,816
Shareholders' Equity
Share capital (note 9) 426,842 426,593
Contributed surplus 18,078 17,730
Retained earnings 217,837 210,001
Accumulated other comprehensive income (note 7) 30,728 28,445
-------------------------------------------------------------------------
693,485 682,769
Commitments and guarantees (note 10)
-------------------------------------------------------------------------
$ 1,612,689 $ 1,494,805
-------------------------
-------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Earnings
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS,
EXCEPT PER SHARE AMOUNTS)(UNAUDITED)
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2010 2009 2010 2009
-------------------------------------------------------------------------
Sales $ 153,728 $ 94,776 $ 267,728 $ 204,419
Cost of sales 86,797 66,294 163,489 150,238
-------------------------------------------------------------------------
Gross margin 66,931 28,482 104,239 54,181
Selling, general and
administrative
expenses 37,998 32,380 73,946 68,129
-------------------------------------------------------------------------
Earnings (loss) from
operations 28,933 (3,898) 30,293 (13,948)
-------------------------------------------------------------------------
Interest and financing
expenses (2,483) (2,998) (4,867) (6,697)
Other income 154 83 322 364
Insurance settlement
(note 13) - - - 3,250
Dilution loss (note 14) - (539) - (34,761)
Foreign exchange gain
(loss) 3,319 (25,274) (8,473) (31,113)
-------------------------------------------------------------------------
Earnings (loss) before
income taxes 29,923 (32,626) 17,275 (82,905)
Income tax expense -
Current 1,797 2,019 2,311 1,194
Income tax -
Future 7,317 (7,681) 2,923 (9,976)
-------------------------------------------------------------------------
Earnings (loss)
before non-controlling
interest 20,809 (26,964) 12,041 (74,123)
Non-controlling
interest (note 1) 4,319 (2,443) 4,204 (4,518)
-------------------------------------------------------------------------
Net earnings (loss) $ 16,490 $ (24,521) $ 7,837 $ (69,605)
---------------------------------------------------
---------------------------------------------------
Earnings (loss) per
share
Basic $ 0.22 $ (0.32) $ 0.10 $ (0.97)
---------------------------------------------------
---------------------------------------------------
Fully diluted $ 0.21 $ (0.32) $ 0.10 $ (0.97)
---------------------------------------------------
---------------------------------------------------
Weighted average
number of shares
outstanding 76,639,693 76,579,975 76,635,651 71,509,367
---------------------------------------------------
---------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)(UNAUDITED)
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2010 2009 2010 2009
-------------------------------------------------------------------------
Net earnings (loss) $ 16,490 $ (24,521) $ 7,837 $ (69,605)
Other comprehensive
income
Net gain (loss) on
translation of net
foreign operations
(net of tax of nil) 3,783 3,693 2,030 3,779
Change in fair value
of derivative
financial
instruments
designated as cash
flow hedges (net of
tax of $0.1 million
for the three
months and $0.2
million for the six
months ended
July 31, 2010) 95 - 253 -
-------------------------------------------------------------------------
Total comprehensive
income (loss) $ 20,368 $ (20,828) $ 10,120 $ (65,826)
---------------------------------------------------
---------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)(UNAUDITED)
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2010 2009 2010 2009
-------------------------------------------------------------------------
COMMON SHARES:
Balance at beginning
of period $ 426,753 $ 426,299 $ 426,593 $ 381,541
Issued during the
period 89 (18) 249 44,740
-------------------------------------------------------------------------
Balance at end of
period 426,842 426,281 426,842 426,281
-------------------------------------------------------------------------
CONTRIBUTED SURPLUS:
Balance at beginning
of period 17,917 17,154 17,730 16,079
Stock option expense 161 203 348 1,278
-------------------------------------------------------------------------
Balance at end of
period 18,078 17,357 18,078 17,357
-------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning
of period 201,347 238,093 210,000 283,177
Net earnings (loss) 16,490 (24,521) 7,837 (69,605)
-------------------------------------------------------------------------
Balance at end of
period 217,837 213,572 217,837 213,572
-------------------------------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME:
Balance at beginning
of period 26,850 22,128 28,445 22,042
Other comprehensive
income
Net gain (loss) on
translation of net
foreign operations
(net of tax of nil) 3,783 3,693 2,030 3,779
Change in fair value
of derivative
financial instruments
designated as cash
flow hedges (net of
tax of $0.1 million
for the three months
and $0.2 million for
the six months ended
July 31, 2010) 95 - 253 -
-------------------------------------------------------------------------
Balance at end of
period 30,728 25,821 30,728 25,821
-------------------------------------------------------------------------
Total Shareholders'
Equity $ 693,485 $ 683,031 $ 693,485 $ 683,031
---------------------------------------------------
---------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)(UNAUDITED)
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2010 2009 2010 2009
-------------------------------------------------------------------------
Cash provided by
(used in):
Operating
Net earnings (loss) $ 16,490 $ (24,521) $ 7,837 $ (69,605)
Items not involving
cash:
Amortization and
accretion 19,692 16,971 40,977 34,646
Future income taxes 7,317 (7,681) 2,923 (9,976)
Stock-based
compensation and
pension expense 932 225 1,306 1,290
Foreign exchange
loss (gain) (3,465) 24,604 9,084 31,098
Loss on disposal
of assets - - 243 -
Non-controlling
interest 4,319 (2,443) 4,204 (4,518)
Dilution loss - 539 - 34,761
Change in non-cash
operating working
capital (45,094) (27,729) (43,157) 1,066
-------------------------------------------------------------------------
191 (20,035) 23,417 18,762
-------------------------------------------------------------------------
Financing
Decrease in long-term
debt (154) (74) (273) (122)
Increase (decrease)
in revolving credit 58,531 (12,929) 71,924 (51,845)
Repayment of mining
segment senior secured
term and revolving
credit facilities - - - (74,160)
Distribution to Kinross (9,900) (6,750) (9,900) (6,750)
Issue of common shares,
net of issue costs 89 (18) 249 44,740
-------------------------------------------------------------------------
48,566 (19,771) 62,000 (88,137)
-------------------------------------------------------------------------
Investing
Subscription of
partnership units - (696) - 125,095
Cash collateral and
cash reserve - (28) - 29,857
Mining capital assets (10,787) (14,673) (20,111) (36,802)
Retail capital assets (892) (1,128) (1,097) (1,567)
Other assets (3,754) (525) (3,460) (307)
-------------------------------------------------------------------------
(15,433) (17,050) (24,668) 116,276
-------------------------------------------------------------------------
Foreign exchange effect
on cash balances 1,777 2,762 1,256 4,267
Increase (decrease) in
cash and cash
equivalents 35,101 (54,094) 62,005 51,168
Cash and cash
equivalents,
beginning of period
(note 3) 89,873 121,997 62,969 16,735
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period (note 3) $ 124,974 $ 67,903 $ 124,974 $ 67,903
---------------------------------------------------
---------------------------------------------------
Change in non-cash
operating working
capital
Accounts receivable (1,770) (863) (2,440) 49,173
Prepaid expenses and
other current assets (4,367) (835) 3,155 (4,936)
Inventory and supplies (33,157) 18,345 (64,647) 25,121
Accounts payable and
accrued liabilities 8,199 (18,911) 35,973 (31,018)
Income taxes payable (13,999) (25,465) (15,198) (37,274)
-------------------------------------------------------------------------
$ (45,094) $ (27,729) $ (43,157) $ 1,066
-------------------------------------------------------------------------
Supplemental cash
flow information
Cash taxes paid $ 17,125 $ 25,662 $ 18,569 $ 36,478
Cash interest paid $ 2,188 $ 2,392 $ 4,008 $ 6,139
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
JULY 31, 2010 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 specialist diamond company focusing on the mining and retail segments of the diamond industry.
The Company's most significant asset is an ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the "Joint Venture") is an unincorporated joint arrangement between Diavik Diamond Mines Inc. ("DDMI") (60%) and Harry Winston Diamond Limited Partnership ("HWDLP") (40%) where HWDLP holds an undivided 40% ownership interest in the assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is the operator of the Diavik Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England. As a result of the March 31, 2009 strategic investment by Kinross Gold Corporation ("Kinross") of Toronto, Canada, HWDLP was, at July 31, 2010, 77.5% owned by the Company and 22.5% owned by Kinross. Kinross's 22.5% ownership is reported in the consolidated financial statements as part of non-controlling interest and the Company's economic interest in the Diavik Diamond Mine was 31% at July 31, 2010.
On August 25, 2010, Harry Winston Diamond Corporation reacquired the 9% indirect interest in the Diavik Joint Venture from Kinross (the "Kinross Buy Back Transaction"), representing Kinross's direct 22.5% interest in HWDLP, for $220.0 million. The purchase price for Kinross's 22.5% interest in HWDLP was satisfied by the payment of $50.0 million in cash, the issuance to Kinross of approximately 7.1 million Harry Winston Diamond Corporation shares from treasury and the issuance to Kinross of a promissory note in the amount of $70.0 million, maturing on August 25, 2011. The note will bear interest at a rate of 5% per annum and can be repaid in cash or, subject to certain limitations, treasury common shares issued by the Company. The issuance of such shares is expected to be subject to approval by the Company's shareholders in most circumstances. With this transaction, the Company's ownership interest in the Diavik Joint Venture has now increased back to 40%.
The Company also owns Harry Winston Inc., the premier fine jewelry and watch retailer. The results of Harry Winston Inc., located in New York City, US, are consolidated in the financial statements of the Company.
NOTE 2:
Significant Accounting Policies
The interim consolidated financial statements are prepared by management in accordance with accounting principles generally accepted in Canada. The interim consolidated financial statements include the accounts of the Company and all of its subsidiaries as well as its proportionate interest in the assets, liabilities and expenses of joint arrangements. Intercompany transactions and balances have been eliminated.
The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in the Company's Annual Report for the year ended January 31, 2010, since these interim financial statements do not include all disclosures required by Canadian generally accepted accounting principles ("GAAP"). These statements have been prepared following the same accounting policies and methods of computation as the consolidated financial statements for the year ended January 31, 2010.
NOTE 3:
Cash Resources
July 31, January 31,
2010 2010
-------------------------------------------------------------------------
Cash on hand and balances with banks $ 123,390 $ 61,449
Short-term investments(a) 1,584 1,520
-------------------------------------------------------------------------
Total cash and cash equivalents 124,974 62,969
-------------------------------------------------------------------------
Total cash resources $ 124,974 $ 62,969
-------------------------
-------------------------
(a) Short-term investments are held in overnight deposits.
NOTE 4:
Inventory and Supplies
July 31, January 31,
2010 2010
-------------------------------------------------------------------------
Merchandise inventory $ 237,492 $ 176,114
Rough diamond inventory 27,153 23,365
Supplies inventory 111,190 111,709
-------------------------------------------------------------------------
Total inventory and supplies $ 375,835 $ 311,188
-------------------------
-------------------------
NOTE 5:
Diavik Joint Venture
The following represents HWDLP's 40% proportionate interest in the Joint Venture as at June 30, 2010 and December 31, 2009:
July 31, January 31,
2010 2010
-------------------------------------------------------------------------
Current assets $ 90,183 $ 97,660
Long-term assets 752,072 760,680
Current liabilities 32,973 27,422
Long-term liabilities and participant's account 809,282 830,918
-------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2010 2009 2010 2009
-------------------------------------------------------------------------
Expenses net of
interest income of
$nil (2009 - interest
income of $0.1
million)(a)(b) 42,818 40,672 95,465 82,568
Cash flows resulting
from (used in)
operating activities (22,188) (38,608) (53,315) (58,014)
Cash flows resulting
from financing
activities 34,644 48,577 71,919 95,596
Cash flows resulting
from (used in)
investing activities (12,456) (15,951) (18,989) (39,242)
-------------------------------------------------------------------------
(a) The Joint Venture only earns interest income.
(b) Expenses net of interest income for the six months ended July 31,
2010 of $0.1 million (six months ended July 31, 2009 of $0.3 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 6:
Intangible Assets
Accumu-
lated
Amortization amorti- July 31, January 31,
period Cost zation 2010 net 2010 net
-------------------------------------------------------------------------
Trademark indefinite life $112,995 $ - $112,995 $112,995
Drawings indefinite life 12,365 - 12,365 12,365
Wholesale
distribution
network 120 months 5,575 (2,762) 2,813 3,092
Store leases 65 to 105 months 5,639 (5,293) 346 761
-------------------------------------------------------------------------
Intangible
assets $136,574 $ (8,055) $128,519 $129,213
-----------------------------------------
-----------------------------------------
Amortization expense for the six months ended July 31, 2010 was $0.7 million ($0.8 million for the six months ended July 31, 2009).
NOTE 7:
Derivative Financial Instruments
On October 1, 2009, the Company executed an interest rate cash flow hedge on Harry Winston Inc.'s five-year revolving credit facility in the form of a swap to mitigate the Company's exposure to variability in cash flows for the future interest payments on a designated portion of borrowings on the facility. The interest rate swap qualifies as a hedge for accounting purposes. Accordingly, the fair value of the derivative is recorded as an asset or liability on the consolidated balance sheets and the effective portion of the change in the derivative's fair value at the end of each period is recorded in other comprehensive income. Any gain or loss in fair value relating to the ineffective portion of the hedging relationship is recorded in current earnings. For the quarter ended July 31, 2010, the Company recorded an other comprehensive gain of $0.1 million (net of income taxes of $0.1 million). No gain or loss was recorded in earnings as a result of hedge ineffectiveness.
July 31, 2010
-------------------------------------------------------------------------
Interest rates
------------------
Notional
principal Receive Pay
-------------------------------------------------------------------------
Interest
rate
swap 1 year: receive variable - pay fixed $140,000 1-month 3.19%
LIBOR
-------------------------------------------------------------------------
NOTE 8:
Long-Term Debt
July 31, January 31,
2010 2010
-------------------------------------------------------------------------
Retail segment credit facilities $ 175,910 $ 155,486
Mining segment credit facility 50,000 -
First mortgage on real property 7,185 7,206
-------------------------------------------------------------------------
Total long-term debt 233,095 162,692
-------------------------------------------------------------------------
Less current portion (1,211) (1,154)
-------------------------------------------------------------------------
$ 231,884 $ 161,538
-------------------------
-------------------------
Carrying
Nominal Amount at
interest Date of July 31,
Currency rate maturity 2010 Borrower
-------------------------------------------------------------------------
Secured bank US 4.00% March 31, $160.5 Harry Winston Inc.
loan 2013 million
-------------------------------------------------------------------------
Secured bank CHF 3.15% April 22, $3.3 Harry Winston S.A.
loan 2013 million
-------------------------------------------------------------------------
Secured bank CHF 3.55% January 31, $12.1 Harry Winston S.A.
loan 2033 million
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Secured bank US 4.19% June 24, $50.0 Harry Winston
loan 2013 million Diamond Corporation
and Harry Winston
Diamond Mines Ltd.
-------------------------------------------------------------------------
First mortgage
on real CDN 7.98% September 1, $7.2 6019838
property 2018 million Canada Inc.
-------------------------------------------------------------------------
Secured bank US N/A Due on $nil Harry Winston
advance demand million Diamond
International N.V.
10.50% $1.2 Harry Winston
million Diamond (India)
Private Limited
-------------------------------------------------------------------------
Secured bank YEN 2.25% December 20, $6.6 Harry Winston
advance 2010 million Japan, K.K.
-------------------------------------------------------------------------
Unsecured YEN 2.98% August 27, $8.3 Harry Winston
bank advance 2010 million Japan, K.K.
-------------------------------------------------------------------------
Unsecured YEN 2.98% August 31, $7.9 Harry Winston
bank advance 2010 million Japan, K.K.
-------------------------------------------------------------------------
On June 24, 2010, the Company announced that it has completed a mining segment senior secured revolving credit facility with Standard Chartered Bank for $100.0 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. The facility is available to the Company and Harry Winston Diamond Mines Ltd. for general corporate purposes. Borrowings bear an interest margin of 3.5%. The Company is required to comply with financial covenants at the mining segment level customary for a financing of this nature, with change in control provisions at the Company and Diavik Diamond Mines level. At July 31, 2010, the Company had $50.0 million outstanding on its mining segment senior secured revolving credit facility. This amount was drawn in anticipation of closing the Kinross Buy Back Transaction.
NOTE 9:
Share Capital
(a) Authorized
Unlimited common shares without par value.
(b) Issued
Number of shares Amount
---------------------------------------------------------------------
Balance, January 31, 2010 76,588,593 $ 426,593
SHARES ISSUED FOR:
Exercise of options 69,250 249
---------------------------------------------------------------------
Balance, July 31, 2010 76,657,843 $ 426,842
-------------------------
-------------------------
(c) RSU and DSU Plans
RSU Number of units
---------------------------------------------------------------------
Balance, January 31, 2010 45,880
AWARDS AND PAYOUTS DURING THE YEAR (NET)
RSU awards -
RSU payouts (30,685)
---------------------------------------------------------------------
Balance, July 31, 2010 15,195
----------------
----------------
DSU Number of units
---------------------------------------------------------------------
Balance, January 31, 2010 159,475
AWARDS AND PAYOUTS DURING THE YEAR (NET)
DSU awards 15,255
DSU payouts -
---------------------------------------------------------------------
Balance, July 31, 2010 174,730
----------------
----------------
Three Three Six Six
months months months months
ended ended ended ended
Expense (recovery) July 31, July 31, July 31, July 31,
for the period 2010 2009 2010 2009
---------------------------------------------------------------------
RSU $ 26 $ 77 $ 46 $ 17
DSU 344 290 646 416
---------------------------------------------------------------------
$ 370 $ 367 $ 692 $ 433
---------------------------------------------------
---------------------------------------------------
During the six months ended July 31, 2010, the Company granted nil RSUs (net of forfeitures) and 15,255 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 Director approval or in accordance with contractual commitments. Each RSU grant vests on the third anniversary of the grant date, subject to special rules for death and disability. The Company anticipates paying out cash on maturity of RSUs and 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 the price of Harry Winston Diamond Corporation's common shares at the end of the period and on the probability of vesting. This expense is recognized on a straight-line basis over the term of the grant.
NOTE 10:
Commitments and Guarantees
(a) Environmental Agreement
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 2010. Further funding will be required in future years; however, specific amounts have not yet been determined. These agreements also state that the Joint Venture must provide security deposits for the performance by the Joint Venture of its reclamation and abandonment obligations under all environmental laws and regulations. HWDLP's share of the letters of credit outstanding posted by the operator of the Joint Venture with respect to the environmental agreements as at July 31, 2010, was $77.2 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.
(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 retail salons, 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:
2011 $ 97,213
2012 95,810
2013 92,257
2014 104,643
2015 94,818
Thereafter 132,190
-------------------------------------------------------------------------
NOTE 11:
Employee Benefit Plans
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
Expenses for the period 2010 2009 2010 2009
-------------------------------------------------------------------------
Defined benefit
pension plan - Harry
Winston retail
segment $ 598 $ 454 $ 1,008 $ 958
Defined contribution
plan - Harry Winston
retail segment 210 210 420 420
Defined contribution
plan - Harry Winston
mining segment 52 101 106 101
Defined contribution
plan - Diavik Diamond
Mine 338 223 550 401
-------------------------------------------------------------------------
$ 1,198 $ 988 $ 2,084 $ 1,880
---------------------------------------------------
---------------------------------------------------
NOTE 12:
Capital Management
With the completion of the sale by Kinross of its 15.2 million common shares of the Company as of July 31, 2010, the capital management provisions imposed on the Company as part of the March 2009 Kinross investment no longer apply.
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 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 CICA Handbook Section 3862.
The fair value of accounts receivable is determined by the amount of cash anticipated to be received in the normal course of business from the financial asset.
The Company's long-term debt is fully secured; hence the fair value of this instrument at July 31, 2010 is considered to approximate its carrying value.
The fair value of derivative financial instruments included in accounts payable and accrued liabilities is determined using standard valuation techniques with observable market information and is classified within Level 2 of the fair value hierarchy established by CICA Handbook Section 3862.
The carrying values of these financial instruments are as follows:
July 31, 2010 January 31, 2010
-------------------------------------------------------------------------
Estimated Carrying Estimated Carrying
fair value value fair value value
-------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and cash
equivalents $ 124,974 $ 124,974 $ 62,969 $ 62,969
Accounts receivable 26,118 26,118 23,520 23,520
-------------------------------------------------------------------------
$ 151,092 $ 151,092 $ 86,489 $ 86,489
---------------------------------------------------
---------------------------------------------------
FINANCIAL LIABILITIES
Accounts payable
and accrued
liabilities $ 124,113 $ 124,113 $ 87,448 $ 87,448
Bank advances 23,995 23,995 22,485 22,485
Long-term debt 233,095 233,095 162,692 162,692
-------------------------------------------------------------------------
$ 381,203 $ 381,203 $ 272,625 $ 272,625
---------------------------------------------------
---------------------------------------------------
NOTE 14:
Dilution Loss
The Company recorded a non-cash dilution loss of $34.8 million in the prior year with respect to the investment by Kinross of an indirect interest in the Diavik Diamond Mine.
Note 15:
Segmented Information
The Company operates in two segments within the diamond industry, mining and retail, for the three and six months ended July 31, 2010.
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 in the market-place.
The retail segment consists of the Company's ownership in Harry Winston Inc. This segment consists of the marketing of fine jewelry and watches on a worldwide basis.
For the three months ended
July 31, 2010 Mining Retail Total
-------------------------------------------------------------------------
Sales
Canada $ 86,827 $ - $ 86,827
United States - 19,640 19,640
Europe - 24,704 24,704
Asia - 22,557 22,557
Cost of sales 55,407 31,390 86,797
-------------------------------------------------------------------------
Gross margin 31,420 35,511 66,931
Gross margin (%) 36.2% 53.1% 43.5%
Selling, general and
administrative expenses 4,813 33,185 37,998
-------------------------------------------------------------------------
Earnings from operations 26,607 2,326 28,933
-------------------------------------------------------------------------
Interest and financing expenses (839) (1,644) (2,483)
Other income 42 112 154
Foreign exchange gain 3,174 145 3,319
-------------------------------------------------------------------------
Segmented earnings before
income taxes $ 28,984 $ 939 $ 29,923
--------------------------------------
--------------------------------------
Segmented assets as at
July 31, 2010
Canada $ 1,019,832 $ - $ 1,019,832
United States - 413,161 413,161
Other foreign countries 13,596 166,100 179,696
-------------------------------------------------------------------------
$ 1,033,428 $ 579,261 $ 1,612,689
-------------------------------------------------------------------------
Capital expenditures $ 10,787 $ 892 $ 11,679
OTHER SIGNIFICANT NON-CASH ITEMS
Income tax expense (recovery) $ 7,539 $ (222) $ 7,317
Amortization and accretion $ 16,610 $ 3,082 $ 19,692
-------------------------------------------------------------------------
Sales to four significant customers in the mining segment totalled $18.1 million for the three months ended July 31, 2010 ($15.2 million for the three months ended July 31, 2009 for the same four significant customers).
For the three months ended
July 31, 2009 Mining Retail Total
-------------------------------------------------------------------------
Revenue
Canada $ 45,941 $ - $ 45,941
United States - 15,035 15,035
Europe - 17,688 17,688
Asia - 16,112 16,112
Cost of sales 40,049 26,245 66,294
-------------------------------------------------------------------------
Gross margin 5,892 22,590 28,482
Gross margin (%) 12.8% 46.3% 30.1%
Selling, general and
administrative expenses 4,182 28,198 32,380
-------------------------------------------------------------------------
Earnings (loss) from operations 1,710 (5,608) (3,898)
-------------------------------------------------------------------------
Interest and financing expenses (869) (2,129) (2,998)
Other income 79 4 83
Dilution loss (539) - (539)
Foreign exchange gain (loss) (26,525) 1,251 (25,274)
-------------------------------------------------------------------------
Segmented loss before income taxes $ (26,144) $ (6,482) $ (32,626)
--------------------------------------
--------------------------------------
Segmented assets as at
July 31, 2009
Canada $ 995,011 $ - $ 995,011
United States - 365,424 365,424
Other foreign countries 13,899 158,684 172,583
-------------------------------------------------------------------------
$ 1,008,910 $ 524,108 $ 1,533,018
-------------------------------------------------------------------------
Capital expenditures $ 14,673 $ 1,128 $ 15,801
OTHER SIGNIFICANT NON-CASH ITEMS:
Income tax recovery $ (4,226) $ (3,455) $ (7,681)
Amortization and accretion $ 13,760 $ 3,211 $ 16,971
-------------------------------------------------------------------------
For the six months ended
July 31, 2010 Mining Retail Total
-------------------------------------------------------------------------
Sales
Canada $ 135,749 $ - $ 135,749
United States - 41,680 41,680
Europe - 44,138 44,138
Asia - 46,161 46,161
Cost of sales 100,531 62,958 163,489
-------------------------------------------------------------------------
Gross margin 35,218 69,021 104,239
Gross margin (%) 25.9% 52.3% 38.9%
Selling, general and
administrative expenses 8,683 65,263 73,946
-------------------------------------------------------------------------
Earnings from operations 26,535 3,758 30,293
-------------------------------------------------------------------------
Interest and financing expenses (1,656) (3,211) (4,867)
Other income 114 208 322
Foreign exchange gain (loss) (8,800) 327 (8,473)
-------------------------------------------------------------------------
Segmented earnings before
income taxes $ 16,193 $ 1,082 $ 17,275
--------------------------------------
--------------------------------------
Segmented assets as at July 31,
2010
Canada $ 1,019,832 $ - $ 1,019,832
United States - 413,161 413,161
Other foreign countries 13,596 166,100 179,696
-------------------------------------------------------------------------
$ 1,033,428 $ 579,261 $ 1,612,689
-------------------------------------------------------------------------
Capital expenditures $ 20,111 $ 1,097 $ 21,208
OTHER SIGNIFICANT NON-CASH ITEMS
Income tax expense (recovery) $ 3,055 $ (132) $ 2,923
Amortization and accretion $ 34,749 $ 6,228 $ 40,977
-------------------------------------------------------------------------
Sales to four significant customers in the mining segment totalled $32.1 million for the six months ended July 31, 2010 ($50.1 million for the six months ended July 31, 2009 for the same four significant customers).
For the six months ended
July 31, 2009 Mining Retail Total
-------------------------------------------------------------------------
Revenue
Canada $ 103,631 $ - $ 103,631
United States - 33,810 33,810
Europe - 37,013 37,013
Asia - 29,965 29,965
Cost of sales 97,305 52,933 150,238
-------------------------------------------------------------------------
Gross margin 6,326 47,855 54,181
Gross margin (%) 6.1% 47.5% 26.5%
Selling, general and
administrative expenses 9,685 58,444 68,129
-------------------------------------------------------------------------
Loss from operations (3,359) (10,589) (13,948)
-------------------------------------------------------------------------
Interest and financing expenses (2,413) (4,284) (6,697)
Other income 340 24 364
Insurance settlement - 3,250 3,250
Dilution loss (34,761) - (34,761)
Foreign exchange gain (loss) (32,596) 1,483 (31,113)
-------------------------------------------------------------------------
Segmented loss before income
taxes $ (72,789) $ (10,116) $ (82,905)
--------------------------------------
--------------------------------------
Segmented assets as at July 31,
2009
Canada $ 995,011 $ - $ 995,011
United States - 365,424 365,424
Other foreign countries 13,899 158,684 172,583
-------------------------------------------------------------------------
$ 1,008,910 $ 524,108 $ 1,533,018
-------------------------------------------------------------------------
Capital expenditures $ 36,802 $ 1,567 $ 38,369
OTHER SIGNIFICANT NON-CASH ITEMS:
Income tax recovery $ (4,853) $ (5,123) $ (9,976)
Amortization and accretion $ 28,333 $ 6,313 $ 34,646
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SOURCE Harry Winston Diamond Corporation
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