TORONTO, March 22, 2011 /PRNewswire via COMTEX/ --
HarryWinston Diamond Corporation (TSX: HW) (NYSE: HWD) (the "Company") todayannounced its fourth quarter and year-end results for the period endingJanuary 31, 2011.
Fourth Quarter Highlights:
- Consolidated sales increased 61% to $215.4 million from
$133.7 million in the comparable quarter of the prior year.
- For the mining segment, rough diamond sales for the fourth quarter
were 30% higher at $82.7 million compared to $63.5 million for the
fourth quarter last year. This increase resulted primarily from a 23%
increase in the Company's achieved rough diamond prices.
- Rough diamond production during the calendar quarter from the Diavik
Diamond Mine was 1.54 million carats, compared to 1.53 million carats
for the fourth calendar quarter of last year (on a 100% basis).
- Luxury brand segment sales for the fourth quarter increased 89% to
$132.7 million from $70.2 million for the comparable quarter of the
prior year.
- Consolidated net earnings attributable to shareholders for the fourth
quarter were $9.9 million or
.12 per share compared to a
consolidated net loss attributable to shareholders of $3.4 million or
.04 per share in the fourth quarter of the prior year. Included in
consolidated net earnings attributable to shareholders for the
quarter was a net foreign exchange loss of $3.0 million or
.04 per
share primarily on future income tax liabilities compared to a net
foreign exchange loss of $2.0 million or
.03 per share in the
comparable quarter of the prior year.
Robert Gannicott, Chairman and ChiefExecutive Officer stated: "This past year we have seen rapid growth indiamond demand, which has had a positive effect on both segments of ourbusiness. New customers in emerging markets, especially Asia,have replaced demand from the traditional markets such as Americaduring the financial crisis. As recovery in America and development inthe BRIC economies continues, the outlook for rough diamond prices, ledby jewelry sales, is expected to be robust."
He continued, "Our operating earnings improved by $86 million versus the prior year as we swung decisively from loss to profitability on the back of strongly improved revenues."
Annual Results Highlights:
- Consolidated sales were $624.0 million for the year ended January
2011 compared to $412.9 million for the prior year, resulting in
earnings from operations of $64.5 million, compared to a loss from
operations of $22.0 million last year.
- For the mining segment, rough diamond sales increased 49% to
$279.2 million from $187.9 million in the prior year. The increase in
sales resulted from a 62% increase in the Company's achieved rough
diamond prices while the volume of carats sold during the year
decreased 8%. The increase in sales resulted in earnings from
operations for the year of $50.2 million compared to a loss from
operations of $6.3 million in the prior year.
- Rough diamond production for the calendar year 2010 was 6.5 million
carats compared to 5.5 million carats in the prior calendar year (on
a 100% basis). The lower production in the prior calendar year was a
planned response to the softness in the rough diamond market that
included a six-week summer shut-down.
- Luxury brand segment sales increased 53% to $344.8 million from
$225.0 million in the prior year. The increase in sales resulted in
earnings from operations for the year of $14.3 million compared to a
loss from operations of $15.7 million in the prior year.
- Harry Winston Diamond Corporation recorded consolidated net earnings
attributable to shareholders of $21.7 million or
.27 per share for
the year, compared to consolidated net loss attributable to
shareholders of $73.2 million or
.99 per share in the prior year.
Included in the consolidated net earnings attributable to
shareholders for the year was a net foreign exchange loss of
$14.4 million or
.18 per share primarily on future income tax
liabilities compared to net foreign exchange loss of $31.5 million or
.43 per share in the prior year.
- The prior year consolidated net loss attributable to shareholders
also included a non-cash dilution loss of $34.8 million or
.47 per
share as a result of the investment by Kinross Gold Corporation in
Harry Winston Diamond Limited Partnership, which holds the Company's
40% interest in the Diavik Diamond Mine.
Fourth Quarter and Fiscal 2011 Financial Summary
(US$ in millions except Earnings per Share amounts)
-------------------------------------------------------------------------
Three Three Twelve Twelve
months months months months
ended ended ended ended
Jan. 31, Jan. 31, Jan. 31, Jan. 31,
2011 2010 2011 2010
-------------------------------------------------------------------------
Sales 215.4 133.7 624.0 412.9
- Mining Segment 82.7 63.5 279.2 187.9
- Luxury Brand Segment 132.7 70.2 344.8 225.0
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Earnings (loss) from operations 20.4 (3.1) 64.5 (22.0)
- Mining Segment 15.2 1.6 50.2 (6.3)
- Luxury Brand Segment 5.2 (4.7) 14.3 (15.7)
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Net earnings (loss) attributable
to shareholders 9.9 (3.4) 21.7 (73.2)
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Earnings (loss) per share
.12 $(0.04)
.27 $(0.99)
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Mr. Gannicott commented on the Company's outlook, "Although the commercial impact of the human tragedy in Japan has yet to be measured, we are thankful that our personnel and retail salons there are all unharmed. Last year Japan was 11% of global diamond jewelry consumer demand and 18% of our own luxury brand sales.
For fiscal 2012 we expect a continued advance in luxury brandrevenues and earnings driven by demand. Mining revenues will advancewith higher diamond prices and improved ore mix. Mining costs willincrease as open pit tonnage is supplemented by underground production,but to a lesser extent than originally expected due to theimplementation of lower cost mining methods."
The Company is in the process of updating the mine plan which it expects to share publicly in the near future.
Mr. Gannicott concluded, "We believe our business makes the best useof positioning in both ends of the complex but rewarding diamondbusiness."
Conference Call and Webcast
Beginning at 8:30AM (ET) on Wednesday, March 23,the Company will host a conference call for analysts, investors andother interested parties. Listeners may access a live broadcast of theconference call on the Company's investor relations web site at https://investor.harrywinston.com or by dialing 800-510-9834 within North America or 617-614-3669 from international locations and entering passcode 83841709.
An online archive of the broadcast will be available by accessing the Company's investor relations web site at https://investor.harrywinston.com. A telephone replay of the call will be available one hour after the call through 11:00PM (ET) through Wednesday, April 6, 2011, by dialing 888-286-8010 within North America or 617-801-6888 from international locations and entering passcode 15226198.
New Investor Website
The Company is pleased to announce the launch of its newly redesigned investor website. We invite you to visit the new https://investor.harrywinston.com today.
About Harry Winston Diamond Corporation
Harry Winston Diamond Corporation is a diamond enterprise withpremium assets in the mining and retail segments of the diamondindustry. Harry Winston supplies rough diamonds to the global marketfrom its 40 percent ownership interest in the Diavik Diamond Mine. TheCompany's luxury brand segment is a premier diamond jeweler and luxurytimepiece retailer with salons in key locations, including New York, Paris, London, Beijing, Tokyo, Hong Kong and Beverly Hills.
The Company focuses on the two most profitable segments of thediamond industry, mining and retail, in which its expertise createsshareholder value. This unique business model provides key competitiveadvantages; rough diamond sales and polished diamond purchases providemarket intelligence that enhances the Company's overall performance.
For more information, please visit www.harrywinston.com. or for investor information, visit https://investor.harrywinston.com.
Highlights
(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
Fourth Quarter Results
Consolidated sales for the fourth quarter were $215.4 million compared to $133.7 million in the comparable quarter of the prior year, resulting in earnings from operations of $20.4 million compared to a loss from operations of $3.1 million in the comparable quarter of the prior year.
The mining segment recorded sales of $82.7 million, a 30% increase from $63.5 millionin the comparable quarter of the prior year. The increase in salesresulted primarily from a 23% increase in achieved rough diamond prices.The mining segment recorded earnings from operations of $15.2 million compared to $1.6 million in the comparable quarter of the prior year.
The luxury brand segment recorded sales of $132.7 million, an 89% increase from $70.2 million in the same period last year. The significant increase in sales resulted in earnings from operations for this segment of $5.2 million compared to a loss from operations of $4.7 million in the comparable quarter of the prior year.
The Company recorded fourth quarter consolidated net earnings attributable to shareholders of $9.9 million or
.12 per share compared to a consolidated net loss attributable to shareholders of $3.4 million or
.04per share in the fourth quarter of the prior year. Included inconsolidated net earnings attributable to shareholders for the quarterwas a net foreign exchange loss of $3.0 million or
.04 per share primarily on future income tax liabilities compared to a net foreign exchange loss of $2.0 million or
.03 per share in the comparable quarter of the prior year.
Annual Results
Consolidated sales were $624.0 million for the fiscal year compared to $412.9 million for the prior year, resulting in earnings from operations of $64.5 million compared to a loss from operations of $22.0 million last year.
The mining segment recorded sales of $279.2 million, a 49% increase from $187.9 millionin the prior year. The increase in sales resulted from a 62% increasein the Company's achieved rough diamond prices while the volume ofcarats sold during the year decreased 8%. The significant increase insales resulted in earnings from operations for the year of $50.2 million compared to a loss from operations of $6.3 million in the prior year.
The luxury brand segment recorded sales of $344.8 million and earnings from operations of $14.3 million for the year compared to sales of $225.0 million and a loss from operations of $15.7 million, respectively, in the prior year.
The Company recorded consolidated net earnings attributable to shareholders of $21.7 million or
.27 per share for the fiscal year ended January 31, 2011 compared to a consolidated net loss attributable to shareholders of $73.2 million or
.99per share in the prior year. Included in the consolidated net earningsattributable to shareholders for the year was a net foreign exchangeloss of $14.4 million or
.18 per share primarily on future income tax liabilities compared to a net foreign exchange loss of $31.5 million or
.43per share in the prior year. The prior year consolidated net lossattributable to shareholders also included a non-cash dilution loss of $34.8 million or
.47per share as a result of the investment by Kinross Gold Corporation inHarry Winston Diamond Limited Partnership, which holds the Company's 40%interest in the Diavik Diamond Mine.
Management's Discussion and Analysis
Prepared as of March 22, 2011 (ALL FIGURES ARE IN UNITED STATES
DOLLARS UNLESS OTHERWISE INDICATED)
The following is management's discussion and analysis ("MD&A") ofthe results of operations for Harry Winston Diamond Corporation ("HarryWinston Diamond Corporation", or the "Company") for the fiscal yearended January 31, 2011, and its financial position as at January 31, 2011.This MD&A is based on the Company's consolidated financialstatements prepared in accordance with generally accepted accountingprinciples in Canada ("Canadian GAAP")and should be read in conjunction with the consolidated financialstatements and notes. Unless otherwise specified, all financialinformation is presented in United States dollars. Unless otherwise indicated, all references to "year" refer to the fiscal year ended January 31.Unless otherwise indicated, references to "international" for theluxury brand segment (previously referred to as the retail segment)refer to Europe and Asia.
Certain comparative figures have been reclassified to conform to the current year's presentation.
Caution Regarding Forward-Looking Information
Certain information included in this MD&A may constitute forward-looking information within the meaning of Canadian and United Statessecurities laws. In some cases, forward-looking information can beidentified by the use of terms such as "may", "will", "should","expect", "plan", "anticipate", "foresee", "appears", "believe","intend", "estimate", "predict", "potential", "continue", "objective" orother similar expressions concerning matters that are not historicalfacts. Forward-looking information may relate to management's futureoutlook and anticipated events or results, and may include statements orinformation regarding plans, timelines and targets for construction,mining, development, production and exploration activities at the DiavikDiamond 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, estimatedreserves and resources at, and production from, the Diavik Diamond Mine,the number and timing of expected rough diamond sales, the demand forrough diamonds, expected diamond prices and expectations concerning thediamond industry and the demand for luxury goods, expected cost of salesand gross margin trends in the mining segment, targets for compoundannual growth rates of sales and operating income in the luxury brandsegment, plans for expansion of the retail salon network, and expectedsales trends and market conditions in the luxury brand segment. Actualresults may vary from the forward-looking information. See "Risks andUncertainties" on page 19 for material risk factors that could causeactual results to differ materially from the forward-lookinginformation.
Forward-looking information is based on certain factors andassumptions 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 luxurygoods. Specifically, in making statements regarding expected diamondprices and expectations concerning the diamond industry and expectedsales trends and market conditions in the luxury brand segment, theCompany has made assumptions regarding, among other things, continuingrecovery of world and US economic conditions and demand for luxurygoods. While the Company considers these assumptions to be reasonablebased on the information currently available to it, they may prove to beincorrect. See "Risks and Uncertainties" on page 19.
Forward-looking information is subject to certain factors, includingrisks and uncertainties, which could cause actual results to differmaterially from what we currently expect. These factors include, amongother things, the uncertain nature of mining activities, including risksassociated with underground construction and mining operations, risksassociated with joint venture operations, risks associated with theremote location of and harsh climate at the Diavik Diamond Mine site,risks associated with regulatory requirements, fluctuations in diamondprices and changes in US and world economic conditions, the risk offluctuations in the Canadian/US dollar exchange rate, cash flow andliquidity risks and the risks of competition in the luxury jewelrybusiness as well as changes in demand for high-end luxury goods, andrisks associated with the expected impact of the Company's transition toInternational Financial Reporting Standards. Please see page 19 of thisAnnual Report, as well as the Company's current Annual InformationForm, 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 onforward-looking information, which speaks only as of the date of thisMD&A, and should not rely upon this information as of any otherdate. Due to assumptions, risks and uncertainties, including theassumptions, risks and uncertainties identified above and elsewhere inthis MD&A, actual events may differ materially from currentexpectations. The Company uses forward-looking statements because itbelieves such statements provide useful information with respect to theexpected future operations and financial performance of the Company, andcautions readers that the information may not be appropriate for otherpurposes. While the Company may elect to, it is under no obligation anddoes not undertake to update or revise any forward-looking information,whether as a result of new information, future events or otherwise atany particular time, except as required by law. Additional informationconcerning factors that may cause actual results to materially differfrom those in such forward-looking statements is contained in theCompany's filings with Canadian and United States securities regulatory authorities and can be found at www.sedar.com and www.sec.gov, respectively.
Summary Discussion
Harry Winston Diamond Corporation is a diamond enterprise withpremium assets in the mining and luxury brand segments of the diamondindustry. The Company supplies rough diamonds to the global market fromits 40% ownership interest in the Diavik Diamond Mine, located in Canada'sNorthwest Territories.The Company's luxury brand segment is a premier diamond jeweler andluxury timepiece retailer with salons in key locations including New York, Paris, London, Beijing, Tokyo and Beverly Hills.
The Company's most significant asset is an ownership interest in theDiavik group of mineral claims. The Diavik Joint Venture (the "JointVenture") is an unincorporated joint arrangement between Diavik DiamondMines Inc. ("DDMI") (60%) and Harry Winston Diamond Limited Partnership("HWDLP") (40%) where HWDLP holds an undivided 40% ownership interest inthe assets, liabilities and expenses of the Diavik Diamond Mine. DDMIis the operator of the Diavik Diamond Mine. DDMI and HWDLP areheadquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England.
On August 25, 2010, Harry Winston Diamond Corporation reacquired from Kinross Gold Corporation ("Kinross") for $191.2 million(including transaction costs) its 9% indirect interest in the DiavikJoint Venture (the "Kinross Buy Back Transaction"), representing Kinross's direct 22.5% interest in HWDLP previously acquired in March 2009. The purchase price for Kinross's 22.5% interest in HWDLP was based on the market value of consideration on the closing date and was satisfied by the payment of $50.0 million in cash, the issuance to Kinross of approximately 7.1 million Harry Winston Diamond Corporation common shares from treasury with a market value of $69.7 million and the issuance to Kinross of a promissory note in the amount of $70.0 million, maturing on August 25, 2011.The note bears interest at a rate of 5% per annum and can be repaid incash or, subject to certain limitations, treasury common shares issuedby the Company. The issuance of such shares is expected to be subject toapproval by the Company's shareholders in most circumstances. With thistransaction, the Company's ownership interest in the Diavik JointVenture was increased back to 40%.
Market Commentary
The Diamond Market
Improved world economic conditions positively impacted the price ofrough diamonds throughout the fiscal year. The market price for roughdiamonds has increased approximately 45% over the prior year. Increasingdemand from the Far East and India wasbolstered by an improved US market. The demand for rough diamonds isoutpacing the increase in mine supply, inevitably leading to shortagesin the rough and polished market. This trend is expected to continue andto result in rising rough and polished diamond prices in fiscal 2012.
The Luxury Brand Jewelry Market
Consumer demand for luxury brands continued to strengthen in all markets, especially from China with its expanding economy, and from the Middle East and Russiaas a result of high energy prices. In the US, a relatively weak dollarand a strong rebound in the equity markets contributed to growth in thatmarket, particularly in the fourth quarter. The jewelry market in theUS experienced a strong holiday season as consumer confidence improvedwith the gradual recovery of the global economy throughout fiscal 2011.
Consolidated Financial Results
The following is a summary of the Company's consolidated quarterly results for the eight quarters ended January 31, 2011 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 2011 2011
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $215,358 $140,877 $153,728 $114,000
Cost of sales 142,242 85,831 86,797 76,692
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Gross margin 73,116 55,046 66,931 37,308
Gross margin (%) 34.0% 39.1% 43.5% 32.7%
Selling, general and
administrative expenses 52,698 41,306 37,998 35,948
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Earnings (loss) from operations 20,418 13,740 28,933 1,360
-------------------------------------------------------------------------
Interest and financing expenses (3,322) (3,338) (2,483) (2,384)
Other income 95 69 154 168
Insurance settlement - - - -
Dilution loss - - - -
Impairment charge - - - -
Foreign exchange gain (loss) (2,973) (2,960) 3,319 (11,792)
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Earnings (loss) before income
taxes 14,218 7,511 29,923 (12,648)
Income taxes (recovery) 4,316 2,833 9,114 (3,879)
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Net earnings (loss) $ 9,902 $ 4,678 $ 20,809 $ (8,769)
-------------------------------------------------------------------------
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Attributable to shareholders $ 9,895 $ 3,938 $ 16,490 $ (8,654)
Attributable to non-controlling
interest(i) 7 740 4,319 (115)
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Basic earnings (loss) per share $ 0.12 $ 0.05 $ 0.22 $ (0.11)
Diluted earnings (loss) per share $ 0.12 $ 0.05 $ 0.21 $ (0.11)
Cash dividends declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00
Total assets(ii) $ 1,618 $ 1,600 $ 1,613 $ 1,539
Total long-term liabilities(ii) $ 639 $ 631 $ 565 $ 487
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Earnings (loss) from operations $ 20,418 $ 13,740 $ 28,933 $ 1,360
Depreciation and
amortization(iii) 25,487 19,723 20,512 15,181
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EBITDA(iv) $ 45,905 $ 33,463 $ 49,445 $ 16,541
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2010 2010 2010 2010
Q4 Q3 Q2 Q1
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Sales $133,654 $ 74,828 $ 94,776 $109,643
Cost of sales 96,257 45,227 66,294 83,944
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Gross margin 37,397 29,601 28,482 25,699
Gross margin (%) 28.0% 39.6% 30.1% 23.4%
Selling, general and
administrative expenses 40,479 34,542 32,380 35,749
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Earnings (loss) from operations (3,082) (4,941) (3,898) (10,050)
-------------------------------------------------------------------------
Interest and financing expenses (2,396) (2,448) (2,998) (3,699)
Other income 129 99 83 281
Insurance settlement - 100 - 3,250
Dilution loss - - (539) (34,222)
Impairment charge - - - -
Foreign exchange gain (loss) (1,978) 1,598 (25,274) (5,839)
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Earnings (loss) before income
taxes (7,327) (5,592) (32,626) (50,279)
Income taxes (recovery) (5,800) (4,221) (5,662) (3,120)
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Net earnings (loss) $ (1,527) $ (1,371) $(26,964) $(47,159)
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Attributable to shareholders $ (3,358) $ (214) $(24,521) $(45,084)
Attributable to non-controlling
interest(i) 1,831 (1,157) (2,443) (2,075)
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Basic earnings (loss) per share $ (0.04) $ 0.00 $ (0.32) $ (0.68)
Diluted earnings (loss) per share $ (0.04) $ 0.00 $ (0.32) $ (0.68)
Cash dividends declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00
Total assets(ii) $ 1,495 $ 1,535 $ 1,533 $ 1,592
Total long-term liabilities(ii) $ 477 $ 506 $ 507 $ 496
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Earnings (loss) from operations $ (3,082) $ (4,941) $ (3,898) $(10,050)
Depreciation and
amortization(iii) 18,258 11,208 16,971 17,675
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EBITDA(iv) $ 15,176 $ 6,267 $ 13,073 $ 7,625
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2011 2010 2009
Total Total Total
---------------------------------------------------------------
Sales $623,963 $412,901 $609,220
Cost of sales 391,562 291,722 287,278
---------------------------------------------------------------
Gross margin 232,401 121,179 321,942
Gross margin (%) 37.2% 29.3% 52.8%
Selling, general and
administrative expenses 167,950 143,150 155,876
---------------------------------------------------------------
Earnings (loss) from operations 64,451 (21,971) 166,066
---------------------------------------------------------------
Interest and financing expenses (11,527) (11,541) (20,457)
Other income 486 592 2,246
Insurance settlement - 3,350 17,240
Dilution loss - (34,761) -
Impairment charge - - (93,780)
Foreign exchange gain (loss) (14,406) (31,493) 59,087
---------------------------------------------------------------
Earnings (loss) before income
taxes 39,004 (95,824) 130,402
Income taxes (recovery) 12,384 (18,803) 60,256
---------------------------------------------------------------
Net earnings (loss) $ 26,620 $(77,021) $ 70,146
---------------------------------------------------------------
---------------------------------------------------------------
Attributable to shareholders $ 21,669 $(73,176) $ 70,121
Attributable to non-controlling
interest(i) 4,951 (3,845) 25
---------------------------------------------------------------
---------------------------------------------------------------
Basic earnings (loss) per share $ 0.27 $ (0.99) $ 1.15
Diluted earnings (loss) per share $ 0.27 $ (0.99) $ 1.15
Cash dividends declared per share $ 0.00 $ 0.00 $ 0.20
Total assets(ii) $ 1,618 $ 1,495 $ 1,495
Total long-term liabilities(ii) $ 639 $ 477 $ 550
---------------------------------------------------------------
Earnings (loss) from operations $ 64,451 $(21,971) $166,066
Depreciation and
amortization(iii) 80,903 64,112 76,970
---------------------------------------------------------------
EBITDA(iv) $145,354 $ 42,141 $243,036
---------------------------------------------------------------
(i) Effective February 1, 2010, the Company early adopted Handbook
Section 1582, "Business Combinations", Handbook Section 1601,
"Consolidated Financial Statements", Handbook Section 1602, "Non-
Controlling Interests", and amendments to Handbook Section 3251,
"Equity", from the Canadian Institute of Chartered Accountants
("CICA"), which have been applied retrospectively. Under these
sections, non-controlling interest is reported as a component of
shareholders' equity. As a result, the prior year amounts for non-
controlling interest in the consolidated balance sheet have been
reclassified into shareholders' equity. In addition, non-
controlling interest of $4.2 million reported in the first two
quarters of fiscal 2011 as a reduction to earnings was reclassified
as a direct charge to retained earnings.
(ii) Total assets and total long-term liabilities are expressed in
millions of United States dollars.
(iii) Depreciation and amortization included in cost of sales and
selling, general and administrative expenses.
(iv) Earnings before interest, taxes, depreciation and amortization
("EBITDA"). See "Supplementary Measure" on page 17.
The comparability of quarter-over-quarter results is impacted by
seasonality for both the mining and luxury brand segments. Harry
Winston Diamond Corporation expects that the quarterly results for
its mining segment will continue to fluctuate depending on the
seasonality of production at the Diavik Diamond Mine, the number of
sales events conducted during the quarter, and the volume, size and
quality distribution of rough diamonds delivered from the Diavik
Diamond Mine in each quarter. The quarterly results for the luxury
brand segment are also seasonal, with generally higher sales during
the fourth quarter due to the holiday season. See "Segmented
Analysis" on page 10 for additional information.
Year Ended January 31, 2011 Compared to Year Ended January 31, 2010
CONSOLIDATED NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded consolidated net earnings attributable to shareholders of $21.7 million or
.27 per share for the fiscal year ended January 31, 2011 compared to a consolidated net loss attributable to shareholders of $73.2 million or
.99per share in the prior year. Included in the consolidated net earningsattributable to shareholders for the year was a net foreign exchangeloss of $14.4 million or
.18 per share primarily on future income tax liabilities compared to a net foreign exchange loss of $31.5 million or
.43per share in the prior year. The prior year consolidated net lossattributable to shareholders also included a non-cash dilution loss of $34.8 million or
.47per share as a result of the investment by Kinross Gold Corporation inHarry Winston Diamond Limited Partnership, which holds the Company's 40%interest in the Diavik Diamond Mine.
CONSOLIDATED SALES
The Company recorded sales for the fiscal year ended January 31, 2011 of $624.0 million compared to sales of $412.9 million for the prior year. On a segment basis, rough diamond sales accounted for $279.2 million of these sales compared to $187.9 millionfor the prior year. The Company completed nine rough diamond salesduring the fiscal year, one of which was a tender sale, compared toeight rough diamond sales in the prior year. Luxury brand segment saleswere $344.8 million compared to $225.0 million for the prior year. See "Segmented Analysis" on page 10 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company recorded cost of sales of $391.6 million for a gross margin of 37.2% during the fiscal year compared to $291.7 millionand a gross margin of 29.3% during the prior year. The Company's costof sales includes costs associated with mining, rough diamond sortingand luxury brand sales activities. See "Segmented Analysis" on page 10for 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, professional fees, rent and building related costs. TheCompany incurred SG&A expenses of $168.0 million for the fiscal year compared to $143.2 million in the prior year.
Included in SG&A expenses for the year are $19.8 million for the mining segment compared to $19.5 million for the prior year, and $148.2 million for the luxury brand segment compared to $123.6 millionfor the prior year. For the luxury brand segment, the increase was dueprimarily to higher advertising, marketing and selling expenses andhigher variable compensation expenses resulting from higher sales. See"Segmented Analysis" on page 10 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a tax expense of $12.4 million during the twelve months ended January 31, 2011, compared to a tax recovery of $18.8 millionin the comparable period of the prior year. The Company's effectiveincome tax rate for the year, excluding the luxury brand segment, is30%, which is based on a statutory income tax rate of 29% adjusted forvarious items including Northwest Territories mining royalty, impact of foreign exchange, and earnings subject to tax different than the statutory rate.
The Company's functional and reporting currency is US dollars;however, the calculation of income tax expense is based on income in thecurrency of the country of origin. As such, the Company is continuallysubject to foreign exchange fluctuations, particularly as the Canadiandollar moves against the US dollar. During the twelve months ended January 31, 2011, the Company recorded an unrealized foreign exchange loss of $14.8 millionon the revaluation of the Canadian denominated future income taxliability, as compared to an unrealized foreign exchange loss of $24.4 millionrecorded in the comparable period of the prior year. The unrealizedforeign exchange loss is not deductible for Canadian income taxpurposes.
The rate of income tax payable by Harry Winston Inc. varies byjurisdiction. Net operating losses are available in certainjurisdictions to offset future income taxes payable in suchjurisdictions. The net operating losses are scheduled to expire through2031.
The Company has provided a table below summarizing the movement fromthe statutory to the effective income tax rate as a percentage ofearnings before taxes:
Year ended Year ended
January 31, January 31,
2011 2010
-------------------------------------------------------------------------
Statutory income tax rate 29% 30%
Stock compensation 1% -%
Northwest Territories mining royalty
(net of income tax relief) 11% -%
Impact of foreign exchange 3% (3)%
Earnings subject to tax different than
statutory rate -% 5%
Changes in valuation allowance (1)% (2)%
Assessments and adjustments (6)% 3%
Tax effect on income allocated to
non-controlling interest (2)% (2)%
Tax effect on dilution loss -% (11)%
Other items (3)% -%
Effective income tax rate 32% 20%
-------------------------------------------------------------------------
CONSOLIDATED INTEREST AND FINANCING EXPENSES
Interest and financing expenses of $11.5 million were unchanged from the prior year.
CONSOLIDATED OTHER INCOME
Other income, which includes interest income on the Company's various bank balances, was
.5 million during the year compared to
.6 million in the prior year.
CONSOLIDATED INSURANCE SETTLEMENT
In the prior year, the Company received the remaining insurance settlement of $3.4 million pre-tax related to the December 2008 robbery at the Harry Winston Paris salon.
CONSOLIDATED DILUTION LOSS
In 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. On August 25, 2010, the Company reacquired from Kinross its interest in HWDLP.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange loss of $14.4 million was recognized during the fiscal year compared to a net foreign exchange loss of $31.5 millionin the prior year. The current year loss relates principally to therevaluation of the Company's Canadian dollar denominated long-termfuture income tax liability as a result of the strengthening of theCanadian dollar against the US dollar at January 31, 2011.The Company's ongoing currency exposure relates primarily to expensesand obligations incurred in Canadian dollars, as well as the revaluationof certain Canadian monetary balance sheet amounts. The Company doesnot currently have any significant foreign exchange derivativeinstruments outstanding.
Three Months Ended January 31, 2011 Compared to Three Months Ended January 31, 2010
CONSOLIDATED NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded fourth quarter consolidated net earnings attributable to shareholders of $9.9 million or
.12 per share compared to a consolidated net loss attributable to shareholders of $3.4 million or
.04per share in the fourth quarter of the prior year. Included inconsolidated net earnings attributable to shareholders for the quarterwas a net foreign exchange loss of $3.0 million or
.04 per share primarily on future income tax liabilities compared to a net foreign exchange loss of $2.0 million or
.03 per share in the comparable quarter of the prior year.
CONSOLIDATED SALES
Sales for the fourth quarter totalled $215.4 million, consisting of rough diamond sales of $82.7 million and luxury brand segment sales of $132.7 million. This compares to sales of $133.7 million in the comparable quarter of the prior year (rough diamond sales of $63.5 million and luxury brand segment sales of $70.2 million).The Company held two rough diamond sales in the fourth quarter comparedto three in the comparable quarter of the prior year. See "SegmentedAnalysis" on page 10 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's fourth quarter cost of sales was $142.2 million for a gross margin of 34.0% compared to a cost of sales of $96.3 millionand a gross margin of 28.0% for the comparable quarter of the prioryear. The Company's cost of sales includes costs associated with mining,rough diamond sorting and luxury brand sales activities. See "SegmentedAnalysis" on page 10 for additional information.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of SG&A expenses include expenses forsalaries and benefits, advertising, professional fees, rent and buildingrelated costs. The Company incurred SG&A expenses of $52.7 million for the fourth quarter compared to $40.5 million in the comparable quarter of the prior year.
Included in SG&A expenses for the fourth quarter are $4.8 million for the mining segment compared to $4.9 million for the comparable quarter of the prior year, and $47.9 million for the luxury brand segment compared to $35.6 millionfor the comparable quarter of the prior year. For the luxury brandsegment, the increase was due primarily to higher advertising, marketingand selling expenses and higher variable compensation expensesresulting from higher sales. See "Segmented Analysis" on page 10 foradditional information.
CONSOLIDATED INCOME TAXES
The Company recorded a tax expense of $4.3 million during the fourth quarter, compared to a tax recovery of $5.8 millionin the comparable quarter of the prior year. The Company's effectiveincome tax rate for the quarter, excluding the luxury brand segment, is19%, which is based on a statutory income tax rate of 29% adjusted forvarious items including Northwest Territories mining royalty, impact of foreign exchange, and earnings subject to tax different than the statutory rate.
The Company's functional and reporting currency is US dollars;however, the calculation of income tax expense is based on income in thecurrency of the country of origin. As such, the Company is continuallysubject to foreign exchange fluctuations, particularly as the Canadiandollar moves against the US dollar. During the fourth quarter of fiscal2011, the Canadian dollar strengthened against the US dollar. As aresult, the Company recorded a foreign exchange loss of $4.4 millionon the revaluation of the Company's Canadian dollar denominated futureincome tax liability. This compares to a foreign exchange loss of $2.2 millionin the comparable quarter of the previous year. The unrealized foreignexchange loss is not deductible for Canadian income tax purposes.
The rate of income tax payable by Harry Winston Inc. varies byjurisdiction. Net operating losses are available in certainjurisdictions to offset future income taxes payable in suchjurisdictions. The net operating losses are scheduled to expire through2031.
The Company has provided a table below summarizing the movement fromthe statutory to the effective income tax rate as a percentage ofearnings before taxes:
Three months Three months
ended ended
January 31, January 31,
2011 2010
-------------------------------------------------------------------------
Statutory income tax rate 29% 30%
Stock compensation 1% -%
Northwest Territories mining royalty
(net of income tax relief) 8% 3%
Impact of foreign exchange 3% 8%
Earnings subject to tax different than
statutory rate 2% (3)%
Changes in valuation allowance -% (12)%
Assessments and adjustments (4)% 53%
Other items (8)% -%
Effective income tax rate 31% 79%
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CONSOLIDATED INTEREST AND FINANCING EXPENSES
Interest and financing expenses of $3.3 million were incurred during the fourth quarter compared to $2.4 millionduring the comparable quarter of the prior year. Interest and financingexpenses were impacted primarily by an increase in debt levels in themining segment.
CONSOLIDATED OTHER INCOME
Other income of
.1 million was unchanged from the comparable quarter of the prior year.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange loss of $3.0 million was recognized during the quarter compared to a net foreign exchange loss of $2.0 millionin the comparable quarter of the prior year. The loss relatesprincipally to the revaluation of the Company's Canadian dollardenominated long-term future income tax liability as a result of thestrengthening of the Canadian dollar against the US dollar at January 31, 2011.The Company's ongoing currency exposure relates primarily to expensesand obligations incurred in Canadian dollars, as well as the revaluationof certain Canadian monetary balance sheet amounts. The Company doesnot currently have any significant foreign exchange derivativeinstruments outstanding.
Segmented Analysis
The operating segments of the Company are the mining and luxury brand segments.
Mining
The mining segment includes the production and sale of rough diamonds.
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
-------------------------------------------------------------------------
2011 2011 2011 2011
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 82,697 $ 60,708 $ 86,827 $ 48,922
Cost of sales 62,672 46,105 55,407 45,124
-------------------------------------------------------------------------
Gross margin 20,025 14,603 31,420 3,798
Gross margin (%) 24.2% 24.1% 36.2% 7.8%
Selling, general and
administrative expenses 4,805 6,255 4,813 3,870
-------------------------------------------------------------------------
Earnings (loss) from operations $ 15,220 $ 8,348 $ 26,607 $ (72)
Depreciation and amortization(i) 21,520 16,494 17,350 11,956
-------------------------------------------------------------------------
EBITDA(ii) $ 36,740 $ 24,842 $ 43,957 $ 11,884
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2010 2010 2010 2010
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 63,489 $ 20,765 $ 45,941 $ 57,690
Cost of sales 57,027 20,319 40,049 57,256
-------------------------------------------------------------------------
Gross margin 6,462 446 5,892 434
Gross margin (%) 10.2% 2.1% 12.8% 0.8%
Selling, general and
administrative expenses 4,885 4,932 4,182 5,503
-------------------------------------------------------------------------
Earnings (loss) from operations $ 1,577 $ (4,486) $ 1,710 $ (5,069)
Depreciation and amortization(i) 14,976 7,845 13,760 14,573
-------------------------------------------------------------------------
EBITDA(ii) $ 16,553 $ 3,359 $ 15,470 $ 9,504
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------------------------------------------------------------
2011 2010 2009
Total Total Total
---------------------------------------------------------------
Sales $279,154 $187,885 $328,223
Cost of sales 209,308 174,651 139,769
---------------------------------------------------------------
Gross margin 69,846 13,234 188,454
Gross margin (%) 25.0% 7.0% 57.4%
Selling, general and
administrative expenses 19,743 19,502 19,903
---------------------------------------------------------------
Earnings (loss) from operations $ 50,103 $ (6,268) $168,551
Depreciation and amortization(i) 67,320 51,154 64,374
---------------------------------------------------------------
EBITDA(ii) $117,423 $ 44,886 $232,925
---------------------------------------------------------------
---------------------------------------------------------------
(i) Depreciation and amortization included in cost of sales and selling,
general and administrative expenses.
(ii) Earnings before interest, taxes, depreciation and amortization
("EBITDA"). See "Supplementary Measure" on page 17.
Year Ended January 31, 2011 Compared to Year Ended January 31, 2010
MINING SALES
During the year the Company sold 2.6 million carats for a total of $279.2 million for an average price per carat of $106 compared to 2.9 million carats for a total of $187.9 million for an average price per carat of $65 in the prior year. 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 achievedrough diamond prices was 48%. The Company held nine rough diamond salesduring the fiscal year, one of which was a tender, compared to eight inthe prior year.
MINING COST OF SALES AND GROSS MARGIN
For the fiscal year ended January 31, 2011, cost of sales was $209.3 million, resulting in a gross margin of 25.0% compared to a cost of sales of $174.7 millionand a gross margin of 7.0% in the prior year. The gross margin rate inthe prior year was significantly impacted by lower carat productionspread across a largely fixed operating cost platform. Also included incost of sales for the prior year was $9.8 million related to goods carried in inventory at January 31, 2009, which were sold subsequent to year end.
A substantial portion of cost of sales is mining operating costs,which are incurred at the Diavik Diamond Mine. Cost of sales alsoincludes sorting costs, which consist of the Company's cost of handlingand sorting product in preparation for sales to third parties, andamortization and depreciation, the majority of which is recorded usingthe unit-of-production method over estimated proven and probablereserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment increased by
.2 million from the prior year.
Three Months Ended January 31, 2011 Compared to Three Months Ended January 31, 2010
MINING SALES
During the quarter the Company sold 0.8 million carats for a total of $82.7 million for an average price per carat of $110 compared to 0.7 million carats for a total of $63.5 million for an average price per carat of $89in the comparable quarter of the prior year. The increase in theCompany's achieved rough diamond prices was in line with the market. TheCompany held two rough diamond sales in the fourth quarter compared tothree in the comparable quarter of the prior year.
The Company expects that results for its mining segment will continueto fluctuate depending on the seasonality of production at the DiavikDiamond Mine, the number of sales events conducted at each saleslocation during the quarter, rough diamond prices and the volume, sizeand quality distribution of rough diamonds delivered from the DiavikDiamond Mine in each quarter.
MINING COST OF SALES AND GROSS MARGIN
The Company's fourth quarter cost of sales was $62.7 million resulting in a gross margin of 24.2% compared to a cost of sales of $57.0 millionand a gross margin of 10.2% in the comparable quarter of the prioryear. The increase in gross margin resulted primarily from an increasein achieved rough diamond prices. The mining gross margin is anticipatedto fluctuate between quarters due to variations in the specific mix ofproduct 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 alsoincludes sorting costs, which consist of the Company's cost of handlingand sorting product in preparation for sales to third parties, andamortization and depreciation, the majority of which is recorded usingthe unit-of-production method over estimated proven and probablereserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment decreased by
.1 million from the comparable quarter of the prior year.
Mining Segment Operational Update
Annual production at the Diavik Diamond Mine was 6.5 million carats,compared to a forecast of 6.9 million carats. The lower productionresulted from two factors. First, a reduction in ore processed toapproximately 2.1 million tonnes. Certain ore in the A-418 kimberlitepipe contains mud-rich material, which reduced processing capacity. RioTinto plc, the operator of the Diavik Diamond Mine, has mademodifications to the processing flow to remediate this issue. Second, alower grade resulted from a shift from underground ore mined from theA-154 South pipe to the lower-grade A-154 North underground and A-418open pit while a revised, more efficient underground mining method isreviewed. Production consisted of 2.3 million carats produced from 0.54million tonnes of ore from the A-154 South kimberlite pipe, 0.4 millioncarats produced from 0.18 million tonnes of ore from the A-154 Northkimberlite pipe and 3.8 million carats produced from 1.35 million tonnesof ore from the A-418 kimberlite pipe. Average grade decreased to 3.2carats per tonne for the year from 4.1 carats per tonne in the prioryear.
Ore production for the fourth calendar quarter consisted of 0.4million carats produced from 0.12 million tonnes of ore from the A-154South kimberlite pipe, 0.1 million carats produced from 0.05 milliontonnes of ore from the A-154 North kimberlite pipe and 1.0 millioncarats produced from 0.39 million tonnes of ore from the A-418kimberlite pipe. Average grade decreased to 2.8 carats per tonne in thefourth calendar quarter from 4.2 carats per tonne in the comparablequarter of the prior year. The decrease in average grade was drivenprimarily by an increase in the proportion of ore sourced from themud-rich 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 Twelve Twelve
months months months months
ended ended ended ended
December December December December
31, 31, 31, 31,
2010 2009 2010 2009
-------------------------------------------------------------------------
Diamonds recovered (000s carats) 617 612 2,599 2,226
Grade (carats/tonne) 2.77 4.19 3.15 4.09
-------------------------------------------------------------------------
Mining Segment Outlook
PRODUCTION
A mine plan and budget for calendar 2011 has been approved by RioTinto plc, the operator of the Diavik Diamond Mine, and the Company. Theplan for calendar 2011 foresees Diavik Diamond Mine production ofapproximately 6.9 million carats from the mining of 2.0 million tonnesof ore and processing of 2.2 million tonnes of ore, with the incrementdelivered from stockpile. Open pit mining of approximately 1.4 milliontonnes is expected to be exclusively from A-418, almost all of which isexpected to be sourced from the mud-rich ore type. Underground mining ofapproximately 0.6 million tonnes is expected to be primarily sourcedequally from the A-154 South and A-154 North kimberlite pipes. Shouldthe more efficient mining method be approved for A-154 South during theyear, the production plan may be augmented to include more ore from thispipe.
Looking beyond calendar 2011, the objective is to fully utilizeprocessing capacity with a combination of underground and open pitproduction. New mining techniques, with the potential to reduce unitcosts and increase mining velocity, are under consideration for theunderground ore reserves. Current plans see A-21 development beginningin 2013, with production in 2015. In addition, exploration work hasidentified extensions at depth to the A-418 and A-154 North kimberlitepipes. The inclusion of these extensions into ore reserves will belargely dependent upon the costs of new underground mining techniquescurrently under review.
PRICING
The rough diamond market improved substantially in fiscal 2011 andthe Company anticipates that market conditions will remain favourablethrough fiscal 2012. Strong demand growth from emerging markets, notablyChina, and from recovering developedmarkets is expected to lead to further increases in polished pricesduring the year, which will result in sustained increases in roughdiamond prices. Based on HWDC's current rough diamond sales prices as ofMarch 2011 and the current diamondrecovery profile of the Diavik processing plant, the Company has modeledthe approximate rough diamond price per carat for each of the Diavikore types as follows:
Average Price per Carat
Ore Type (in US dollars)
-------------------------------------------------------------------------
A-154 South $ 140
A-154 North 180
A-418 A Type Ore 130
A-418 B Type Ore 90
-------------------------------------------------------------------------
COST OF SALES
The Company expects cost of sales in fiscal 2012 to be approximately $265 million. Included in this amount is depreciation and amortization of approximately $80 million at an assumed average Canadian/US dollar exchange rate of $1.00. This increase in cost of sales is expected to result primarily from an increase in the proportion of underground ore mined.
CAPITAL EXPENDITURES
During fiscal 2011 and the fourth quarter, HWDLP's 40% share ofcapital expenditures at the Diavik Diamond Mine was approximately $40.2 million and $10.5 million,respectively. During fiscal 2012, HWDLP's 40% share of the plannedcapital expenditures at the Diavik Diamond Mine is expected to beapproximately $62 million at an assumed average Canadian/US dollar exchange rate of $1.00.
EXPLORATION
The Company has additionally staked 226,000 hectares of mineralclaims on the prospective geological trend to the southwest of theexisting mine site and is making plans for the exploration of this landover the coming years.
Luxury Brand
The luxury brand segment includes sales from Harry Winston salons,which are located in prime markets around the world, including eightsalons 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 2011 2011
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $132,661 $ 80,169 $ 66,901 $ 65,078
Cost of sales 79,569 39,726 31,390 31,568
-------------------------------------------------------------------------
Gross margin 53,092 40,443 35,511 33,510
Gross margin (%) 40.0% 50.4% 53.1% 51.5%
Selling, general and
administrative expenses 47,894 35,051 33,185 32,078
-------------------------------------------------------------------------
Earnings (loss) from operations $ 5,198 $ 5,392 $ 2,326 $ 1,432
Depreciation and amortization(i) 3,966 3,229 3,162 3,226
-------------------------------------------------------------------------
EBITDA(ii) $ 9,164 $ 8,621 $ 5,488 $ 4,658
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2010 2010 2010 2010
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 70,165 $ 54,063 $ 48,835 $ 51,953
Cost of sales 39,230 24,908 26,245 26,688
-------------------------------------------------------------------------
Gross margin 30,935 29,155 22,590 25,265
Gross margin (%) 44.1% 53.9% 46.3% 48.6%
Selling, general and
administrative expenses 35,594 29,610 28,198 30,246
-------------------------------------------------------------------------
Earnings (loss) from operations $ (4,659) $ (455) $ (5,608) $ (4,981)
Depreciation and amortization(i) 3,282 3,363 3,211 3,102
-------------------------------------------------------------------------
EBITDA(ii) $ (1,377) $ 2,908 $ (2,397) $ (1,879)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------------------------------------------------------------
2011 2010 2009
Total Total Total
---------------------------------------------------------------
Sales $344,809 $225,016 $280,997
Cost of sales 182,254 117,071 147,509
---------------------------------------------------------------
Gross margin 162,555 107,945 133,488
Gross margin (%) 47.1% 48.0% 47.5%
Selling, general and
administrative expenses 148,207 123,648 135,973
---------------------------------------------------------------
Earnings (loss) from operations $ 14,348 $(15,703) $ (2,485)
Depreciation and amortization(i) 13,583 12,958 12,596
---------------------------------------------------------------
EBITDA(ii) $ 27,931 $ (2,745) $ 10,111
---------------------------------------------------------------
---------------------------------------------------------------
(i) Depreciation and amortization included in cost of sales and selling,
general and administrative expenses.
(ii) Earnings before interest, taxes, depreciation and amortization
("EBITDA"). See "Supplementary Measure" on page 17.
Year Ended January 31, 2011 Compared to Year Ended January 31, 2010
LUXURY BRAND SALES
Sales for the fiscal year ended January 31, 2011 were $344.8 million compared to $225.0 million for the prior year, an increase of 53%. Sales in Asia increased 75% to $135.1 million, US sales increased 53% to $111.3 million and European sales increased 31% to $98.4 million.
LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the fiscal year was $182.3 million compared to $117.1 million for the prior year. Gross margin for the fiscal year was $162.6 million or 47.1% compared to $107.9 millionor 48.0% for the prior year. The decrease in gross margin resultedprimarily from a significant increase in high-value transactions, whichcarry lower-than-average gross margins.
LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased to $148.2 million from $123.6 millionin the prior year. The increase was due primarily to higheradvertising, marketing and selling expenses and higher variablecompensation expenses resulting from higher sales. SG&A expensesinclude depreciation and amortization expense of $13.3 million compared to $13.0 million in the prior year. As a percentage of sales, SG&A expenses were 43%, down from 55% last year.
Three Months Ended January 31, 2011 Compared to Three Months Ended January 31, 2010
LUXURY BRAND SALES
Sales for the fourth quarter were $132.7 million compared to $70.2 million for the comparable quarter of the prior year, an increase of 89%. Sales in Asia increased 138% to $64.0 million, US sales increased 79% to $47.1 million and European sales increased 27% to $21.6 million.
LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the fourth quarter was $79.6 million compared to $39.2 million for the comparable quarter of the prior year. Gross margin for the quarter was $53.1 million or 40.0% compared to $30.9 millionor 44.1% for the fourth quarter of the prior year. The decrease ingross margin resulted primarily from a significant increase inhigh-value transactions, which carry lower-than-average gross margins.
LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased to $47.9 million from $35.6 millionin the comparable quarter of the prior year. The increase was dueprimarily to higher advertising, marketing and selling expenses andhigher variable compensation expenses resulting from higher sales. Inaddition, SG&A expenses for the fourth quarter included $2.1 million of non-recurring expenses related to the relocation of the Las Vegas salon and repairs to the façade of the New York salon. SG&A expenses include depreciation and amortization expense of $3.9 million compared to $3.3 million in the comparable quarter of the prior year.
Luxury Brand Segment Operational Update
For the fiscal year, the luxury brand segment recorded sales of $344.8 million,an increase of 53% over the prior year. The luxury brand segmentexperienced strong sales increases across all geographic regions. The USmarket generated sales of $111.3 million,an increase of 53% over the prior year. Significant increases intourism as a result of the relatively weak US dollar and the resurgentequities market translated into strong sales growth in the US. Sales in Japan were $61.7 million, up 24% over the prior year. Asia outside of Japan had sales of $73.4 million, which were 169% higher than the prior year. Economic growth continues to be very strong in China, translating into increasing consumer demand for luxury goods. In Europe, sales of $98.4 million were 31% higher than the prior year.
During the fourth quarter, the luxury brand segment recorded sales of $132.7 million,an 89% increase in sales over the comparable quarter of the prior year.In November, the Company celebrated the 50th anniversary of the HopeDiamond donation by Harry Winston to the Smithsonian Institution in Washington, DC, with the Court of Jewels, a major exhibition of rare gemstones and jewelry in the New Yorkflagship salon. The event resulted in strong press coverage for thebrand. In addition, the Company launched a new advertising campaign tofurther support the brand. In December, the Las Vegas salon was relocated to a new concept salon at the CityCenter development.
Harry Winston Inc. currently operates a network of 19 luxury brand salons worldwide.
Luxury Brand Segment Outlook
For fiscal 2012, the luxury brand segment expects the strong growthin demand for luxury jewelry and watch products experienced duringfiscal 2011 to continue. Current world-wide economic conditions arefavourable for the luxury brand market although the degree to which therecent disaster in Japan and political upheavals in the Middle Eastcan be expected to negatively impact this environment remain to beseen. The Company's focus during the next year will include openingthree new salons, two of which will be located in Shanghai, China,increased investment in advertising, and the introduction of newjewelry collections and watch products. Harry Winston Inc. is wellpositioned to benefit from the continued improvement in the globaleconomy. The strength of the Harry Winston brand, global distributionnetwork of salons in prime locations and quality product offering haspositioned the Company to achieve continued increases in sales andoperating profit.
Management's long-term financial objectives over the next five years(to fiscal 2016) include compound annual revenue growth in the midteens, a gross margin target in the low 50% range, and an operatingprofit margin target in the low to mid teens.
A key component of the luxury brand's growth strategy is theexpansion of its current salon network and wholesale distributionchannel. The growth target is to expand to approximately 35 directlyoperated salons, 20 partner salons, and 300 wholesale doors by fiscal2016.
Liquidity and Capital Resources
Working Capital
As at January 31, 2011, the Company had unrestricted cash and cash equivalents of $108.7 million compared to $63.0 million at January 31, 2010. The Company had cash on hand and balances with banks of $108.0 million and short-term investments of
.7 million at January 31, 2011. During the year ended January 31, 2011, the Company generated $73.7 million in cash from operations compared to $44.2 million in the prior year.
Working capital increased to $337.1 million at January 31, 2011 from $284.5 million at January 31, 2010. During the fiscal year, the Company decreased accounts receivable by $1.0 million, increased prepaid expenses and other current assets by $2.0 million, increased inventory by $87.1 million, increased accounts payable and accrued liabilities by $54.6 million, and decreased income taxes payable by $41.3 million.
The Company's liquidity requirements fluctuate from quarter toquarter depending on, among other factors, the seasonality of productionat the Diavik Diamond Mine, seasonality of mine operating expenses,capital expenditure programs, the number of rough diamond sales eventsconducted during the quarter and the volume, size and qualitydistribution of rough diamonds delivered from the Diavik Diamond Mine ineach quarter, along with the seasonality of sales and salon expansionin the luxury brand segment. The Company's principal working capitalneeds include investments in inventory, prepaid expenses and othercurrent assets, and accounts payable and income taxes payable.
The Company assesses liquidity and capital resources on aconsolidated basis. The Company's requirements are for cash operatingexpenses, working capital, contractual debt requirements and capitalexpenditures. The Company believes that it will generate sufficientliquidity to meet its anticipated requirements for the next twelvemonths.
Financing Activities
On June 24, 2010, the Company announcedthat it had completed a mining segment senior secured revolving creditfacility with Standard Chartered Bank for $100.0 million. On February 28, 2011, the Company increased the facility by $25.0 million to $125.0 million. The facility has an initial maturity date of June 24, 2013with two one-year extensions at the Company's option. There are noscheduled repayments required before maturity. The facility is availableto the Company and Harry Winston Diamond Mines Ltd. for generalcorporate purposes. Borrowings bear an interest margin of 3.5%. TheCompany is required to comply with financial covenants at the miningsegment level customary for a financing of this nature, with change incontrol provisions at the Company and Diavik Diamond Mines level. At January 31, 2011, the Company had $50.0 millionoutstanding on this senior secured revolving credit facility, which wasused as a component of the financing for the Kinross Buy BackTransaction.
As at January 31, 2011, the Company's luxury brand subsidiary, Harry Winston Inc., had $165.0 million outstanding on its $250.0 million secured five-year revolving credit facility maturing on March 31, 2013, 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 luxury brands operations is a 25-year loan agreement for CHF 17.5 million ($18.4 million) used to finance the construction of the Company's watch factory in Geneva, Switzerland. At January 31, 2011, $16.7 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)1,880 million ($22.9 million). At January 31, 2011, $22.9 million had been drawn against these facilities and classified as bank advances compared to $22.5 million at January 31, 2010.
At January 31, 2011 and January 31, 2010,no amounts were outstanding under the Company's revolving financingfacility relating to its Belgian subsidiary, Harry Winston DiamondInternational N.V., or its Indian subsidiary, Harry Winston Diamond (India) Private Limited.
Investing Activities
On August 25, 2010, Harry Winston Diamond Corporation reacquired from Kinross for $191.2 million (including transaction costs) its 9% indirect interest in the Diavik Joint Venture, representing Kinross's direct 22.5% interest in HWDLP previously acquired in March 2009. The purchase price for Kinross's 22.5% interest in HWDLP was based on the market value of consideration on the closing date and was satisfied by the payment of $50.0 million in cash, the issuance to Kinross of approximately 7.1 million Harry Winston Diamond Corporation common shares from treasury with a market value of $69.7 million, and the issuance to Kinross of a promissory note in the amount of $70.0 million, maturing on August 25, 2011.The note bears interest at a rate of 5% per annum and can be repaid incash or, subject to certain limitations, treasury common shares issuedby the Company. The issuance of such shares is expected to be subject toapproval by the Company's shareholders in most circumstances. With thistransaction, the Company's ownership interest in the Diavik JointVenture was increased back to 40%.
During the fiscal year, the Company purchased capital assets of $49.1 million, of which $42.3 million were purchased for the mining segment and $6.8 million for the luxury brand segment.
Contractual Obligations
The Company has contractual payment obligations with respect tolong-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 existwith respect to operating purchase obligations, as administered by DDMI,the operator of the mine. In order to maintain its 40% ownershipinterest in the Diavik Diamond Mine, HWDLP is obligated to fund 40% ofthe Joint Venture's total expenditures on a monthly basis. HWDLP'scurrent projected share of the planned capital expenditures at theDiavik Diamond Mine, which are not reflected in the table below,including capital expenditures for the calendar years 2011 to 2015, isapproximately $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) $336,245 $ 80,456 $233,019 $ 4,685 $ 18,085
Environmental and
participation
agreements incremental
commitments(c) 94,615 82,156 680 4,798 6,981
Operating lease
obligations(d) 104,548 18,720 29,010 20,962 35,856
Capital lease
obligations(e) 87 87 - - -
-------------------------------------------------------------------------
Total contractual
obligations $535,495 $181,419 $262,709 $ 30,445 $ 60,922
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Long-term debt presented in the foregoing table includes current and
long-term portions. The mining segment maintains a senior secured
revolving credit facility with Standard Chartered Bank for
$100.0 million. On February 28, 2011, the Company increased the
facility by $25.0 million to $125.0 million. The facility has an
initial maturity date of June 24, 2013 with two one-year extensions
at the Company's option. There are no scheduled repayments required
before maturity. At January 31, 2011, $50.0 million was outstanding.
On August 25, 2010, the Company issued a promissory note in the
amount of $70.0 million, maturing on August 25, 2011, as part of the
consideration for Kinross Buy Back Transaction. The note bears
interest at a rate of 5% per annum and can be repaid in cash or,
subject to certain limitations, treasury common shares issued by the
Company. The issuance of such shares is expected to be subject to
approval by the Company's shareholders in most circumstances.
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 January 31,
2011, $165.0 million had been drawn against this secured credit
facility, which expires on March 31, 2013.
Also included in long-term debt of Harry Winston Inc. is a 25-year
loan agreement for CHF 17.5 million ($18.4 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
($3.7 million) loan and a CHF 14.0 million ($14.7 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 January 31, 2011,
$16.7 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
.2 million quarterly, and may be prepaid
at any time. On January 31, 2011, $7.0 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 January 31,
2011, and have been included under long-term debt in the table above.
Interest payments for the next twelve months are approximated to be
$9.1 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 January 31, 2011 was $80.4 million based on
its 40% ownership interest in the Diavik Diamond Mine. There can be
no assurance that the operator will continue its practice of posting
letters of credit in fulfillment of this obligation, in which event
HWDLP would be required to post its proportionate share of such
security directly, which would result in additional constraints on
liquidity. The requirement to post security for the reclamation and
abandonment obligations may be reduced to the extent of amounts spent
by the Joint Venture on those activities. The Joint Venture has also
signed participation agreements with various native groups. These
agreements are expected to contribute to the social, economic and
cultural well-being of area Aboriginal bands. The actual cash outlay
for the Joint Venture's obligations under these agreements is not
anticipated to occur until later in the life of the Diavik Diamond
Mine.
(d) Operating lease obligations represent future minimum annual rentals
under non-cancellable operating leases for Harry Winston Inc. salons
and office space, and long-term leases for property, land, office
premises and a fuel tank farm for the Diavik Diamond Mine.
(e) Capital lease obligations represent future minimum annual rentals
under non-cancellable capital leases for Harry Winston Inc. luxury
brand exhibit space.
Supplementary Measure
In addition to discussing earnings measures in accordance withCanadian GAAP, the MD&A provides the following supplementarymeasure, which is also used by management to monitor and evaluate theperformance of the Company and its business segments.
The term EBITDA (earnings before interest, taxes, depreciation andamortization) does not have a standardized meaning according to CanadianGAAP. The Company defines EBITDA as sales minus cost of sales andselling, general and administrative expenses, meaning it representsearnings from operations before depreciation and amortization.
EBITDA is a measure commonly reported and widely used by investorsand analysts as an indicator of the Company's operating performance andability to incur and service debt and as a valuation metric. EBITDAmargin is defined as the ratio obtained by dividing EBITDA by sales.
CONSOLIDATED
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
-------------------------------------------------------------------------
2011 2011 2011 2011
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Earnings (loss) from operations $ 20,418 $ 13,740 $ 28,933 $ 1,360
Depreciation and amortization 25,487 19,723 20,512 15,181
-------------------------------------------------------------------------
EBITDA $ 45,905 $ 33,463 $ 49,445 $ 16,541
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2010 2010 2010 2010
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Earnings (loss) from operations $ (3,082) $ (4,941) $ (3,898) $(10,050)
Depreciation and amortization 18,258 11,208 16,971 17,675
-------------------------------------------------------------------------
EBITDA $ 15,176 $ 6,267 $ 13,073 $ 7,625
-------------------------------------------------------------------------
---------------------------------------------------------------
2011 2010 2009
Total Total Total
---------------------------------------------------------------
Earnings (loss) from operations $ 64,451 $(21,971) $166,066
Depreciation and amortization 80,903 64,112 76,970
---------------------------------------------------------------
EBITDA $145,354 $ 42,141 $243,036
---------------------------------------------------------------
MINING SEGMENT
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
-------------------------------------------------------------------------
2011 2011 2011 2011
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Earnings (loss) from operations $ 15,220 $ 8,348 $ 26,607 $ (72)
Depreciation and amortization 21,520 16,494 17,350 11,956
-------------------------------------------------------------------------
EBITDA $ 36,740 $ 24,842 $ 43,957 $ 11,884
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2010 2010 2010 2010
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Earnings (loss) from operations $ 1,577 $ (4,486) $ 1,710 $ (5,069)
Depreciation and amortization 14,976 7,845 13,760 14,573
-------------------------------------------------------------------------
EBITDA $ 16,553 $ 3,359 $ 15,470 $ 9,504
-------------------------------------------------------------------------
---------------------------------------------------------------
2011 2010 2009
Total Total Total
---------------------------------------------------------------
Earnings (loss) from operations $ 50,103 $ (6,268) $168,551
Depreciation and amortization 67,320 51,154 64,374
---------------------------------------------------------------
EBITDA $117,423 $ 44,886 $232,925
---------------------------------------------------------------
LUXURY BRAND SEGMENT
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
-------------------------------------------------------------------------
2011 2011 2011 2011
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Earnings (loss) from operations $ 5,198 $ 5,392 $ 2,326 $ 1,432
Depreciation and amortization 3,966 3,229 3,162 3,226
-------------------------------------------------------------------------
EBITDA $ 9,164 $ 8,621 $ 5,488 $ 4,658
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2010 2010 2010 2010
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Earnings (loss) from operations $ (4,659) $ (455) $ (5,608) $ (4,981)
Depreciation and amortization 3,282 3,363 3,211 3,102
-------------------------------------------------------------------------
EBITDA $ (1,377) $ 2,908 $ (2,397) $ (1,879)
-------------------------------------------------------------------------
---------------------------------------------------------------
2011 2010 2009
Total Total Total
---------------------------------------------------------------
Earnings (loss) from operations $ 14,348 $(15,703) $ (2,485)
Depreciation and amortization 13,583 12,958 12,596
---------------------------------------------------------------
EBITDA $ 27,931 $ (2,745) $ 10,111
---------------------------------------------------------------
Disclosure Controls and Procedures
The Company has designed a system of disclosure controls andprocedures to provide reasonable assurance that material informationrelating to Harry Winston Diamond Corporation, including itsconsolidated subsidiaries, is made known to the management of theCompany by others within those entities, particularly during the periodin which the Company's annual filings are being prepared. In designingand evaluating the disclosure controls and procedures, the management ofthe Company recognized that any controls and procedures, no matter howwell designed and operated, can provide only reasonable assurance ofachieving the desired control objectives. The management of HarryWinston Diamond Corporation was required to apply its judgment inevaluating the cost-benefit relationship of possible controls andprocedures. The result of the inherent limitations in all controlsystems means no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, have beendetected.
The management of Harry Winston Diamond Corporation has evaluated theeffectiveness of the design and operation of its disclosure controlsand procedures as of the end of the period covered by the Annual Report.Based on that evaluation, management has concluded that thesedisclosure controls and procedures, as defined in Canada by Multilateral Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings, and in the United States by Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), are effective as of January 31, 2011,to ensure that information required to be disclosed in reports that theCompany will file or submit under Canadian securities legislation andthe Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in those rules and forms.
Internal Control over Financial Reporting
The certifying officers of Harry Winston Diamond Corporation havedesigned a system of internal control over financial reporting toprovide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements in accordance withCanadian GAAP and the requirements of the Securities and ExchangeCommission in the United States, asapplicable. Management is responsible for establishing and maintainingadequate internal control over financial reporting for the Company,including its consolidated subsidiaries.
Management has evaluated the effectiveness of internal control overfinancial reporting using the framework and criteria established in theInternal Control - Integrated Framework, issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based on thisevaluation, management has concluded that internal control overfinancial reporting was effective as of January 31, 2011.
Changes in Internal Control over Financial Reporting
During the fourth quarter of fiscal 2011, there were no changes inthe Company's internal control over financial reporting that materiallyaffected, or are reasonably likely to materially affect, the Company'sinternal control over financial reporting.
Critical Accounting Estimates
Management is often required to make judgments, assumptions andestimates in the application of Canadian GAAP that have a significantimpact on the financial results of the Company. Certain policies aremore significant than others and are, therefore, considered criticalaccounting policies. Accounting policies are considered critical if theyrely on a substantial amount of judgment (use of estimates) in theirapplication, or if they result from a choice between accountingalternatives and that choice has a material impact on the Company'sreported results or financial position. The following discussionoutlines the accounting policies and practices that are critical todetermining Harry Winston Diamond Corporation's financial results.
Use of Estimates
The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements, and the reported amounts of earnings, revenues andexpenses during the reporting year. Significant areas requiring the useof management estimates relate to the determination of impairment ofcapital assets, intangible assets, goodwill and deferred mineralproperty costs, estimation of future site restoration costs and futureincome taxes. Financial results as determined by actual events coulddiffer from those estimated.
The most significant estimates relate to the valuation of deferredmineral property costs and future site restoration costs. Managementmakes significant estimates related to the measurement of reclamationobligations and the timing of the related cash flows and future incometax liabilities. Such timing and measurement uncertainty could have amaterial effect on the reported results of operations and the financialposition of the Company.
Actual results could differ materially from those estimates in the near term.
Deferred Mineral Property Costs and Mineral Reserves
Harry Winston Diamond Corporation capitalizes all direct developmentand pre-production costs relating to mineral properties and amortizessuch costs on a unit-of-production basis upon commencement of commercialproduction relating to the underlying property. Deferred mineralproperty costs are amortized based on estimated proven and probablereserves at the property.
On an ongoing basis, the Company evaluates deferred costs relating toeach property to ensure that the estimated recoverable amount exceedsthe carrying value. Based on the Diavik Diamond Mine's latest projectedopen pit and underground life from the mine plan and diamond prices fromthe Diavik Project feasibility study, there is no requirement to writedown deferred mineral property costs.
The estimation of reserves is a subjective process. Forecasts arebased on engineering data, projected future rates of production and thetiming of future expenditures, all of which are subject to numerousuncertainties and various interpretations. The Company expects that itsestimates of reserves will change to reflect updated information.Reserve estimates can be revised upward or downward based on the resultsof future drilling, testing or production levels, and diamond prices.Changes in reserve estimates can impact the evaluation of netrecoverable deferred costs.
Future Site Restoration Costs
The Company has obligations for future site restoration costs. TheCompany records the fair value of an asset retirement obligation as aliability in the period in which it incurs a legal obligation associatedwith the retirement of tangible long-lived assets that result from theacquisition, construction, development and/or normal use of the assets.The fair value of the liability is added to the carrying amount of theassociated asset and this additional carrying amount is depreciated overthe life of the asset. Subsequent to the initial measurement of theasset retirement obligation, the obligation is adjusted at the end ofeach period to reflect the passage of time and changes in the estimatedfuture cash flows underlying the obligation. If the obligation issettled for other than the carrying amount of the liability, the Companywill recognize a gain or loss on settlement. As at January 31, 2011,estimates of all legal obligations at the Joint Venture level have beenincluded in the consolidated financial statements of the Company.Processes to track and monitor these obligations are carried out at theJoint Venture level.
Intangible Assets
Certain of the Company's intangible assets are recorded at fair valueupon acquisition and have an indefinite useful life. The Companyassesses impairment of such intangible assets by determining whether thecarrying value exceeds the fair value. If the fair value is determinedto be less than the net book value, the excess of the net book valueover the fair value is charged to earnings in the year in which suchimpairment is determined by management. These approaches involvesignificant management judgment and, as a result, are subject to change.
Risks and Uncertainties
Harry Winston Diamond Corporation is subject to a number of risks anduncertainties as a result of its operations. In addition to the otherinformation contained in this MD&A and the Company's other publiclyfiled disclosure documents, readers should give careful consideration tothe following risks, each of which could have a material adverse effecton the Company's business prospects or financial condition.
Nature of Mining
The operation of the Diavik Diamond Mine is subject to risks inherentin the mining industry, including variations in grade and othergeological differences, unexpected problems associated with requiredwater retention dikes, water quality, surface and undergroundconditions, processing problems, equipment performance, accidents,labour disputes, risks relating to the physical security of thediamonds, force majeure risks and natural disasters. Particularly withunderground mining operations, inherent risks include variations in rockstructure and strength as it impacts on mining method selection andperformance, de-watering and water handling requirements, achieving therequired paste backfill strengths, and unexpected local groundconditions. Hazards, such as unusual or unexpected rock formations, rockbursts, pressures, collapses, flooding or other conditions, may beencountered during mining. Such risks could result in personal injury orfatality; damage to or destruction of mining properties, processingfacilities or equipment; environmental damage; delays, suspensions orpermanent reductions in mining production; monetary losses; and possiblelegal liability.
The Diavik Diamond Mine, because of its remote northern location andaccess only by winter road or by air, is subject to special climate andtransportation risks. These risks include the inability to operate or tooperate efficiently during periods of extreme cold, the unavailabilityof materials and equipment, and increased transportation costs due tothe late opening and/or early closure of the winter road. Such factorscan add to the cost of mine development, production and operation and/orimpair production and mining activities, thereby affecting theCompany's profitability.
Nature of Joint Arrangement with DDMI
HWDLP holds an undivided 40% interest in the assets, liabilities andexpenses of the Diavik Diamond Mine and the Diavik group of mineralclaims. The Diavik Diamond Mine and the exploration and development ofthe Diavik group of mineral claims is a joint arrangement between DDMI(60%) and HWDLP (40%), and is subject to the risks normally associatedwith the conduct of joint ventures and similar joint arrangements. Theserisks include the inability to exert influence over strategic decisionsmade in respect of the Diavik Diamond Mine and the Diavik group ofmineral claims. By virtue of DDMI's 60% interest in the Diavik DiamondMine, it has a controlling vote in virtually all Joint Venturemanagement decisions respecting the development and operation of theDiavik Diamond Mine and the development of the Diavik group of mineralclaims. Accordingly, DDMI is able to determine the timing and scope offuture project capital expenditures, and therefore is able to imposecapital expenditure requirements on HWDLP that the Company may not havesufficient cash to meet. A failure to meet capital expenditurerequirements imposed by DDMI could result in HWDLP's interest in theDiavik Diamond Mine and the Diavik group of mineral claims beingdiluted.
Diamond Prices and Demand for Diamonds
The profitability of the Company is dependent upon production fromthe Diavik Diamond Mine and on the results of the operations of itsluxury brand operations. Each, in turn, is dependent in significant partupon the worldwide demand for and price of diamonds. Diamond pricesfluctuate and are affected by numerous factors beyond the control of theCompany, including worldwide economic trends, particularly in the US, Japan, China and India,worldwide levels of diamond discovery and production, and the level ofdemand for, and discretionary spending on, luxury goods such as diamondsand jewelry. Low or negative growth in the worldwide economy, renewedor additional credit market disruptions or the occurrence of furtherterrorist attacks or similar activities creating disruptions in economicgrowth could result in decreased demand for luxury goods such asdiamonds and jewelry, thereby negatively affecting the price of diamondsand jewelry. Similarly, a substantial increase in the worldwide levelof diamond production or in diamonds available for sale throughrecommencement of suspended mining activity or the release of stocksheld back during recent periods of low demand could also negativelyaffect the price of diamonds. In each case, such developments could havea material adverse effect on the Company's results of operations.
Cash Flow and Liquidity
The Company's liquidity requirements fluctuate from quarter toquarter and year to year depending on, among other factors, theseasonality of production at the Diavik Diamond Mine, seasonality ofmine operating expenses, capital expenditure programs, the number ofrough diamond sales events conducted during the quarter and the volume,size and quality distribution of rough diamonds delivered from theDiavik Diamond Mine in each quarter, along with the seasonality of salesand salon refurbishment and expansion in the luxury brand segment. TheCompany's principal working capital needs include investments ininventory, prepaid expenses and other current assets, and accountspayable and income taxes payable. On August 25, 2010,the Company completed the Kinross Buy Back Transaction, reacquiring the22.5% interest in HWDLP that had been previously acquired by Kinross in March 2009. Pursuant to this agreement, Kinross received $50.0 million in cash, a promissory note (the "Kinross Note") in the amount of $70.0 million,plus the issuance of approximately 7.1 million treasury common sharesof the Company. The promissory note bears interest at a rate of 5% perannum with a maturity date of August 25, 2011 and can be paid in cash or, subject to certain limitations, in treasury common shares issued by the Company to Kinross.The issuance of such shares is expected to be subject to approval bythe Company's shareholders in most circumstances. The Kinross Note is asignificant short-term financial obligation. There can be no assurancethat the Company will be able to meet each or all of its liquidityrequirements. A failure by the Company to meet its liquidityrequirements could result in the Company failing to meet its planneddevelopment objectives, or in the Company being in default of acontractual obligation, each of which could have a material adverseeffect on the Company's business prospects or financial condition.
Economic Environment
The Company's financial results are tied to the global economicconditions and their impact on levels of consumer confidence andconsumer spending. The global markets have experienced the impact of asignificant US and international economic downturn since the fall of2008. This has restricted the Company's growth opportunities bothdomestically and internationally, and a return to a recession or weakrecovery, due to recent disruptions in financial markets in the EuropeanUnion or otherwise and the recent disaster in Japan and political upheavals in the Middle East,could cause the Company to experience further revenue declines acrossboth of its business segments due to deteriorated consumer confidenceand spending, and a decrease in the availability of credit, which couldhave a material adverse effect on the Company's business prospects orfinancial condition. The Company monitors economic developments in themarkets in which it operates and uses this information in its continuousstrategic and operational planning in an effort to adjust its businessin response to changing economic conditions.
Currency Risk
Currency fluctuations may affect the Company's financial performance.Diamonds are sold throughout the world based principally on the USdollar price, and although the Company reports its financial results inUS dollars, a majority of the costs and expenses of the Diavik DiamondMine are incurred in Canadian dollars. Further, the Company has asignificant future income tax liability that has been incurred and willbe payable in Canadian dollars. The Company's currency exposure relatesprimarily to expenses and obligations incurred by it in Canadian dollarsand, secondarily, to revenues of Harry Winston Inc. in currencies otherthan the US dollar. The appreciation of the Canadian dollar against theUS dollar, and the depreciation of such other currencies, such as theEuro, which has shown significant recent volatility, against the USdollar, therefore, will increase the expenses of the Diavik Diamond Mineand the amount of the Company's Canadian dollar liabilities relative tothe revenue the Company will receive from diamond sales, and willdecrease the US dollar revenues received by Harry Winston Inc. From timeto time, the Company may use a limited number of derivative financialinstruments to manage its foreign currency exposure.
Licences and Permits
The operation of the Diavik Diamond Mine and exploration on theDiavik property requires licences and permits from the Canadiangovernment. The Diavik Diamond Mine Type "A" Water Licence was renewedby the regional Wek'eezhii Land and Water Board to October 31, 2015.While the Company anticipates that DDMI, the operator of the DiavikDiamond Mine, will be able to renew this licence and other necessarypermits in the future, there can be no guarantee that DDMI will be ableto do so or obtain or maintain all other necessary licences and permitsthat may be required to maintain the operation of the Diavik DiamondMine or to further explore and develop the Diavik property.
Regulatory and Environmental Risks
The operation of the Diavik Diamond Mine, exploration activities atthe Diavik Project and the manufacturing of jewelry and watches aresubject to various laws and regulations governing the protection of theenvironment, exploration, development, production, taxes, labourstandards, occupational health, waste disposal, mine safety,manufacturing safety and other matters. New laws and regulations,amendments to existing laws and regulations, or more stringentimplementation or changes in enforcement policies under existing lawsand regulations could have a material adverse effect on the Company byincreasing costs and/or causing a reduction in levels of production fromthe Diavik Diamond Mine and in the manufacture of jewelry and watches.As well, as the Company's international operations expand, it or itssubsidiaries become subject to laws and regulatory regimes that coulddiffer materially from those under which they operate in Canada and the US.
Mining and manufacturing are subject to potential risks andliabilities associated with pollution of the environment and thedisposal of waste products occurring as a result of mining andmanufacturing operations. To the extent that the Company's operationsare subject to uninsured environmental liabilities, the payment of suchliabilities could have a material adverse effect on the Company.
Climate Change
Canada ratified the Kyoto Protocolto the United Nations Framework Convention on Climate Change in late2002 and the Kyoto Protocol came into effect in Canada in February 2005.The Canadian government has established a number of policy measures inorder to meet its emission reduction guidelines. While the impact ofthese measures cannot be quantified at this time, the likely effect willbe to increase costs for fossil fuels, electricity and transportation;restrict industrial emission levels; impose added costs for emissions inexcess of permitted levels; and increase costs for monitoring andreporting. Compliance with these initiatives could have a materialadverse effect on the Company's results of operations.
Resource and Reserve Estimates
The Company's figures for mineral resources and ore reserves on theDiavik group of mineral claims are estimates, and no assurance can begiven that the anticipated carats will be recovered. The estimation ofreserves is a subjective process. Forecasts are based on engineeringdata, projected future rates of production and the timing of futureexpenditures, all of which are subject to numerous uncertainties andvarious interpretations. The Company expects that its estimates ofreserves will change to reflect updated information as well as toreflect depletion due to production. Reserve estimates may be revisedupward or downward based on the results of current and future drilling,testing or production levels, and on changes in mine design. Inaddition, market fluctuations in the price of diamonds or increases inthe costs to recover diamonds from the Diavik Diamond Mine may renderthe mining of ore reserves uneconomical.
Mineral resources that are not mineral reserves do not havedemonstrated economic viability. Due to the uncertainty that may attachto inferred mineral resources, there is no assurance that mineralresources at the Diavik property will be upgraded to proven and probableore reserves.
Insurance
The Company's business is subject to a number of risks and hazards,including adverse environmental conditions, industrial accidents, labourdisputes, unusual or unexpected geological conditions, risks relatingto the physical security of diamonds and jewelry held as inventory or intransit, changes in the regulatory environment and natural phenomenasuch as inclement weather conditions. Such occurrences could result indamage to the Diavik Diamond Mine, personal injury or death,environmental damage to the Diavik property, delays in mining, theclosing of Harry Winston Inc.'s manufacturing facilities or salons,monetary losses and possible legal liability. Although insurance ismaintained to protect against certain risks in connection with theDiavik Diamond Mine and the Company's operations, the insurance in placewill not cover all potential risks. It may not be possible to maintaininsurance to cover insurable risks at economically feasible premiums.
Fuel Costs
The Diavik Diamond Mine's expected fuel needs are purchasedperiodically during the year for storage, and transported to the minesite by way of the winter road. These costs will increase iftransportation by air freight is required due to a shortened "winterroad season" or unexpectedly high fuel usage.
The cost of the fuel purchased is based on the then prevailing priceand expensed into operating costs on a usage basis. The Diavik DiamondMine currently has no hedges for its future anticipated fuelconsumption.
Reliance on Skilled Employees
Production at the Diavik Diamond Mine is dependent upon the effortsof certain skilled employees of DDMI. The loss of these employees or theinability of DDMI to attract and retain additional skilled employeesmay adversely affect the level of diamond production from the DiavikDiamond Mine.
The Company's success in marketing rough diamonds and operating thebusiness of Harry Winston Inc. is dependent on the services of keyexecutives and skilled employees, as well as the continuance of keyrelationships with certain third parties, such as diamantaires. The lossof these persons or the Company's inability to attract and retainadditional skilled employees or to establish and maintain relationshipswith required third parties may adversely affect its business and futureoperations in marketing diamonds and operating its luxury brandsegment.
Expansion and Refurbishment of the Existing Salon Network
A key component of the Company's luxury brand strategy in recentyears has been the expansion of its salon network. The Company currentlyexpects to expand its retail salon network to 35 salons (in total)world-wide by 2016. An additional objective of the Company is to achievecompound annual growth rate in sales in the mid teens in the luxurybrand segment and an operating profit in the low to mid teens in theluxury brand segment, in each case over the five-year period from fiscal2012 to 2016. Although the Company considers these objectives to bereasonable, they are subject to a number of risks and uncertainties, andthere can be no assurance that these objectives will be realized. Thisstrategy requires the Company to make ongoing capital expenditures tobuild and open new salons, to refurbish existing salons from time totime, and to incur additional operating expenses in order to operate thenew salons. To date, much of this expansion has been financed by HarryWinston Inc. through borrowings. The successful expansion of theCompany's global salon network, and achieving an increase in sales andin operating profit, will depend on a variety of factors, includingworld-wide economic conditions, market demand for luxury goods, thestrength of the Harry Winston brand and the availability of sufficientfunding. There can be no assurance that the expansion of the salonnetwork will continue or that the current expansion will provesuccessful in increasing annual sales or earnings from the luxury brandsegment, and the increased debt levels resulting from this expansioncould negatively impact the Company's liquidity and its results fromoperations in the absence of increased sales and earnings.
Competition in the Luxury Brand Segment
The Company is exposed to competition in the luxury brand market fromother luxury goods, diamond, jewelry and watch retailers. The abilityof Harry Winston Inc. to successfully compete with such luxury goods,diamond, jewelry and watch retailers is dependent upon a number offactors, including the ability to source high-end polished diamonds andprotect and promote its distinctive brand name and reputation. If HarryWinston Inc. is unable to successfully compete in the luxury jewelrysegment, then the Company's results of operations will be adverselyaffected.
Changes in Accounting Policies
Business Combinations and Non-Controlling Interests
Effective February 1, 2010, the Companyearly adopted Handbook Section 1582, "Business Combinations", HandbookSection, 1601 "Consolidated Financial Statements", Handbook Section1602, "Non-Controlling Interests", and amendments to Handbook Section3251, "Equity", from the Canadian Institute of Chartered Accountants("CICA"), which have been applied retrospectively. Under these sections,non-controlling interest is reported as a component of shareholders'equity. As a result, the prior year amounts for non-controlling interestin the consolidated balance sheet have been reclassified intoshareholders' equity.
Outstanding Share Information
As at January 31, 2011
-------------------------------------------------------------------------
Authorized Unlimited
Issued and outstanding shares 84,159,851
Options outstanding 2,868,329
Fully diluted 87,028,180
-------------------------------------------------------------------------
Additional Information
Additional information relating to the Company, including theCompany's most recently filed Annual Information Form, can be found onSEDAR at www.sedar.com, and is also available on the Company's website at https://investor.harrywinston.com.
Consolidated Balance Sheets
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
As at January 31, 2011 2010
-------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents (note 3) $ 108,693 $ 62,969
Accounts receivable 22,723 23,520
Inventory and supplies (note 4) 403,212 311,188
Prepaid expenses and other current assets 45,681 44,220
-------------------------------------------------------------------------
580,309 441,897
Mining capital assets (note 5) 777,807 802,984
Luxury brand capital assets (note 5) 61,019 62,277
Intangible assets, net (note 7) 127,894 129,213
Other assets (note 8) 16,626 15,629
Future income tax asset (note 10) 53,857 42,805
-------------------------------------------------------------------------
$ 1,617,512 $ 1,494,805
--------------------------
--------------------------
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 142,339 $ 87,448
Income taxes payable 6,660 46,297
Bank advances (note 9(d)) 22,902 22,485
Promissory note (note 9) 70,000 -
Current portion of long-term debt (note 9) 1,313 1,154
-------------------------------------------------------------------------
243,214 157,384
Long-term debt (note 9) 237,450 161,538
Future income tax liability (note 10) 355,531 271,822
Other long-term liability 3,001 2,201
Future site restoration costs (note 11) 43,390 41,275
Shareholders' equity
Share capital (note 12) 502,129 426,593
Contributed surplus 16,233 17,730
Retained earnings 176,620 210,001
Accumulated other comprehensive income 39,678 28,445
-------------------------------------------------------------------------
734,660 682,769
Non-controlling interest 266 177,816
-------------------------------------------------------------------------
734,926 860,585
Commitments and guarantees (note 14)
-------------------------------------------------------------------------
$ 1,617,512 $ 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)
Years ended January 31, 2011 2010
-------------------------------------------------------------------------
Sales $ 623,963 $ 412,901
Cost of sales 391,562 291,722
-------------------------------------------------------------------------
Gross margin 232,401 121,179
Selling, general and administrative expenses 167,950 143,150
-------------------------------------------------------------------------
Earnings (loss) from operations 64,451 (21,971)
-------------------------------------------------------------------------
Interest and financing expenses (11,527) (11,541)
Other income 486 592
Insurance settlement - 3,350
Dilution loss (note 19) - (34,761)
Foreign exchange loss (14,406) (31,493)
-------------------------------------------------------------------------
Earnings (loss) before income taxes 39,004 (95,824)
Income tax expense (recovery) - Current (note 10) (8,737) 4,586
Income tax expense (recovery) - Future (note 10) 21,121 (23,389)
-------------------------------------------------------------------------
Net earnings (loss) $ 26,620 $ (77,021)
--------------------------
--------------------------
Attributable to shareholders $ 21,669 $ (73,176)
Attributable to non-controlling interest $ 4,951 $ (3,845)
--------------------------
--------------------------
Earnings (loss) per share (note 13)
Basic $ 0.27 $ (0.99)
--------------------------
--------------------------
Fully diluted $ 0.27 $ (0.99)
--------------------------
--------------------------
Weighted average number of shares outstanding 79,858,018 74,048,981
--------------------------
--------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Years ended January 31, 2011 2010
-------------------------------------------------------------------------
Net earnings (loss) $ 26,620 $ (77,021)
Other comprehensive income (loss)
Net gain on translation of net foreign
operations (net of tax of $nil) 10,879 6,757
Termination of derivative financial
instruments designated as cash flow hedges
(net of tax of
.2 million; 2009 -
net of tax of $nil) 354 (354)
-------------------------------------------------------------------------
Total comprehensive income (loss) $ 37,853 $ (70,618)
--------------------------
--------------------------
Attributable to shareholders $ 32,902 $ (66,773)
Attributable to non-controlling interest $ 4,951 $ (3,845)
--------------------------
--------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Years ended January 31, 2011 2010
-------------------------------------------------------------------------
COMMON SHARES:
Balance at beginning of year $ 426,593 $ 381,541
Issued during the year 72,701 45,052
Transfer from contributed surplus on
exercise of options 2,835 -
-------------------------------------------------------------------------
Balance at end of year 502,129 426,593
-------------------------------------------------------------------------
CONTRIBUTED SURPLUS:
Balance at beginning of year 17,730 16,079
Stock option expense 1,338 1,651
Transfer from contributed surplus on
exercise of options (2,835) -
-------------------------------------------------------------------------
Balance at end of year 16,233 17,730
-------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 210,001 283,177
Net earnings (loss) 21,669 (73,176)
Reacquisition of partnership units
(including transaction costs) (55,050) -
-------------------------------------------------------------------------
Balance at end of year 176,620 210,001
-------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year 28,445 22,042
Other comprehensive income
Net gain on translation of net foreign
operations (net of tax of $nil) 10,879 6,757
Termination of derivative financial
instruments designated as cash flow hedges
(net of tax of
.2 million; 2009 -
net of tax of $nil) 354 (354)
-------------------------------------------------------------------------
Balance at end of year 39,678 28,445
-------------------------------------------------------------------------
NON-CONTROLLING INTEREST:
Balance at beginning of year 177,816 280
Arising on investment by Kinross - 191,056
Non-controlling interest 4,951 (3,845)
Distribution to Kinross (9,900) (9,675)
Reacquisition of Kinross interest (172,601) -
-------------------------------------------------------------------------
Balance at end of year 266 177,816
-------------------------------------------------------------------------
Total shareholders' equity $ 734,926 $ 860,585
--------------------------
--------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Years ended January 31, 2011 2010
-------------------------------------------------------------------------
Cash provided by (used in):
Operating
Net earnings (loss) $ 26,620 $ (77,021)
Items not involving cash
Depreciation and amortization 80,903 64,112
Future income tax expense (recovery) 21,121 (23,389)
Stock-based compensation 1,338 1,651
Foreign exchange loss 16,564 31,454
Loss on disposal of assets 237 -
Other non cash items 1,633 255
Dilution loss - 34,761
Change in non-cash operating working capital (74,728) 12,386
-------------------------------------------------------------------------
73,688 44,209
-------------------------------------------------------------------------
Financing
Decrease in long-term debt (628) (404)
Increase (decrease) in revolving credit 76,645 (64,497)
Repayment of mining segment senior secured
term and revolving credit facilities - (74,160)
Distribution to Kinross (9,900) (9,675)
Issue of common shares, net of issue costs 2,964 44,740
-------------------------------------------------------------------------
69,081 (103,996)
-------------------------------------------------------------------------
Investing
Subscription of partnership units - 125,095
Reacquisition of partnership units (51,450) -
Cash collateral and cash reserves - 30,145
Mining capital assets (42,343) (50,856)
Luxury brand capital assets (6,751) (3,033)
Other assets (3,230) (992)
-------------------------------------------------------------------------
(103,774) 100,359
-------------------------------------------------------------------------
Foreign exchange effect on cash balances 6,729 5,662
Increase in cash and cash equivalents 45,724 46,234
Cash and cash equivalents, beginning of year 62,969 16,735
-------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 108,693 $ 62,969
--------------------------
--------------------------
Change in non-cash operating working capital
Accounts receivable $ 1,029 $ 43,720
Prepaid expenses and other current assets (1,945) 1,823
Inventory and supplies (87,066) 38,974
Accounts payable and accrued liabilities 54,596 (33,277)
Income taxes payable (41,342) (38,854)
-------------------------------------------------------------------------
(74,728) 12,386
-------------------------------------------------------------------------
Supplemental cash flow information
Cash taxes paid 31,651 43,925
Cash interest paid 8,958 10,827
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
YEARS ENDED JANUARY 31, 2011 AND 2010
(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 diamondenterprise with premium assets in the mining and luxury brand segmentsof the diamond industry.
The Company's most significant asset is an ownership interest in theDiavik group of mineral claims. The Diavik Joint Venture (the "JointVenture") is an unincorporated joint arrangement between Diavik DiamondMines Inc. ("DDMI") (60%) and Harry Winston Diamond Limited Partnership("HWDLP") (40%) where HWDLP holds an undivided 40% ownership interest inthe assets, liabilities and expenses of the Diavik Diamond Mine. DDMIis the operator of the Diavik Diamond Mine. DDMI and HWDLP areheadquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England.
On August 25, 2010, Harry Winston Diamond Corporation reacquired from Kinross Gold Corporation ("Kinross") for $191.2 million(including transaction costs) its 9% indirect interest in the DiavikJoint Venture (the "Kinross Buy Back Transaction"), representing Kinross's direct 22.5% interest in HWDLP previously acquired in March 2009. The purchase price for Kinross's 22.5% interest in HWDLP was based on the market value of consideration on the closing date and was satisfied by the payment of $50.0 million in cash, the issuance to Kinross of approximately 7.1 million Harry Winston Diamond Corporation common shares from treasury with a market value of $69.7 million and the issuance to Kinross of a promissory note in the amount of $70.0 million, maturing on August 25, 2011.The note bears interest at a rate of 5% per annum and can be repaid incash or, subject to certain limitations, treasury common shares issuedby the Company. The issuance of such shares is expected to be subject toapproval by the Company's shareholders in most circumstances. With thistransaction, the Company's ownership interest in the Diavik JointVenture was increased back to 40%.
The Company also owns Harry Winston Inc., the premier fine jewelryand watch retailer. The results of Harry Winston Inc., located in New York City, US, are consolidated in the financial statements of the Company.
Certain comparative figures have been reclassified to conform with the current year's presentation.
NOTE 2:
Significant Accounting Policies
The consolidated financial statements are prepared by management in accordance with accounting principles generally accepted in Canada. The principal accounting policies presently followed by the Company are summarized as follows:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of theCompany and all of its subsidiaries as well as its proportionate shareof unincorporated joint arrangements.
SUBSIDIARIES
A subsidiary is an entity that is controlled by the Company. Theconsolidated financial statements include all the assets, liabilities,revenues, expenses and cash flows of the Company and its subsidiariesafter eliminating intercompany balances and transactions. For partlyowned subsidiaries, the net assets and net earnings attributable tonon-controlling shareholders are presented as non-controlling interestson the consolidated balance sheets and consolidated statements ofearnings.
JOINT ARRANGEMENTS THAT ARE NOT ENTITIES ("JOINT ARRANGEMENTS")
The Diavik Joint Venture is an unincorporated joint arrangement.HWDLP owns an undivided 40% ownership interest in the assets,liabilities and expenses of the Joint Venture. The Company records itsproportionate interest in the assets, liabilities and expenses of theJoint Venture in its consolidated financial statements with a one-monthlag. The accounting policies described below include those of the JointVenture. With the closing of the Kinross Buy Back Transaction, theCompany's economic interest in the Diavik Diamond Mine was increasedback to 40%.
(b) Measurement Uncertainty
The preparation of financial statements in conformity with generallyaccepted accounting principles ("GAAP") requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at thedate of the financial statements, and the reported amounts of earnings,revenues and expenses during the reporting year. Significant areasrequiring the use of management estimates relate to the determination ofimpairment of capital assets, intangible assets, goodwill and deferredmineral property costs, estimation of future site restoration costs andfuture income taxes. Financial results as determined by actual eventscould differ from those estimated.
(c) Revenue Recognition
Revenue from rough diamond sales is recognized upon delivery ofmerchandise when the customer takes ownership and assumes risk of loss,persuasive evidence that an arrangement exists, the Company's price tothe customer is fixed or determinable and collection of the resultingreceivable is reasonably assured.
Revenue from fine jewelry and watch sales is recognized upon deliveryof merchandise when the customer takes ownership and assumes risk ofloss, collection of the relevant receivable is probable, persuasiveevidence of an arrangement exists and the sales price is fixed ordeterminable. Sales are reported net of returns.
(d) Cash Resources
Cash and cash equivalents, and cash collateral and cash reserves,consist of cash on hand, balances with banks and short-term money marketinstruments (with a maturity on acquisition of less than 90 days), andare carried at fair value.
(e) Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount andgenerally do not bear interest. The allowance for doubtful accounts isthe Company's best estimate of the amount of probable credit losses inthe existing accounts receivable. The Company reviews its allowance fordoubtful accounts monthly. Account balances are written off against theallowance after all means of collection have been exhausted and thepotential for recovery is considered remote.
(f) Inventory
Rough diamond inventory is recorded at the lower of cost or netrealizable value. Cost is determined on an average cost basis, includingproduction costs and value-added processing activity.
Merchandise inventory is recorded at the lower of cost or netrealizable value and includes fine jewelry and watches. Included inmerchandise inventory are production costs such as material, labour andoverhead costs.
Supplies inventory is recorded at the lower of cost or net realizablevalue. Supplies inventory includes consumables and spare parts to bemaintained at the Diavik Diamond Mine site and at the Company's sortingand distribution facility locations, and raw materials used in themanufacturing of luxury brand merchandise inventory.
(g) Deferred Mineral Property Costs
All direct costs relating to mineral properties, including mineralclaim acquisition costs, exploration and development expenditures in thepre-production stage, ongoing property exploration expenditures,pre-production operating costs net of any recoveries, interest, andamortization, are capitalized and accumulated on a property-by-propertybasis.
The costs of deferred mineral properties from which there isproduction are amortized using the unit-of-production method based oncarats of diamonds recovered during the period relative to estimatedproven and probable ore reserves. The Company does not include estimatesof indicated or inferred resources in its calculation of ore reserves.
General exploration expenditures that do not relate to specific resource properties are expensed in the period incurred.
On an ongoing basis, the Company evaluates each property based onresults to date to determine the nature of exploration and developmentactivities that are warranted in the future. If there is little prospectof the Joint Venture continuing to explore or develop a property, thedeferred costs related to that property are written down to theestimated fair value.
(h) Capital Assets
Capital assets are stated at cost less accumulated depreciation andamortization. Depreciation and amortization are provided using theunit-of-production method or straight-line method as appropriate. Theunit-of-production method is applied to a substantial portion of DiavikDiamond Mine capital assets and, depending on the asset, is based oncarats of diamonds recovered during the period relative to the estimatedproven and probable ore reserves of the ore deposit being mined, or tothe total ore deposit. The Company does not include estimates ofindicated or inferred resources in its calculation of ore reserves.Other capital assets are depreciated using the straight-line method overthe estimated useful lives of the related assets, which are as follows:
Asset Estimated useful life (years)
-------------------------------------------------------------------------
Buildings 10-40
Machinery and mobile equipment 3-10
Computer equipment and software 3
Furniture and equipment 2-10
Leasehold and building improvements Up to 20
-------------------------------------------------------------------------
Amortization for mine related assets was charged to deferred mineral property costs during the pre-commercial production stage.
Maintenance and repair costs are charged to earnings while expenditures for major renewals and improvements are capitalized.
The recoverability of the amounts shown for the Diavik Diamond Minecapital assets is dependent upon the continued existence of economicallyrecoverable reserves, upon maintaining title and beneficial interest inthe property, and upon future profitable production or proceeds fromdisposition of the diamond properties. The amounts representing DiavikDiamond Mine capital assets do not necessarily represent present orfuture values.
Upon the disposition of capital assets, the accumulated amortizationis deducted from the original cost and any gain or loss is reflected incurrent earnings.
(i) Intangible Assets
Intangible assets acquired individually or as part of a group ofother assets are initially recognized and measured at cost. The cost of agroup of intangible assets acquired in a transaction, including thoseacquired in a business combination that meet the specified criteria forrecognition apart from goodwill, is allocated to the individual assetsacquired based on their fair values at acquisition.
Intangible assets with finite useful lives are amortized on a straight-line basis over their useful lives as follows:
Asset Estimated useful life (years)
-------------------------------------------------------------------------
Wholesale distribution network 10
Store leases Up to 9
-------------------------------------------------------------------------
The amortization methods and estimated useful lives of intangible assets are reviewed annually.
Intangible assets with indefinite useful lives are not amortized andare tested for impairment annually, or more frequently if events orchanges in circumstances indicate that the asset might be impaired. Theimpairment test compares the carrying amount of the intangible assetwith its fair value, and an impairment loss is recognized in earningsfor the excess, if any.
(j) Other Assets
Other assets include depreciable assets amortized over a period not exceeding ten years.
(k) Future Site Restoration Costs
The Company records the fair value of any asset retirement obligationas a long-term liability in the year in which the related environmentaldisturbance occurs, based on the net present value of the estimatedfuture costs. The fair value of the liability is added to the carryingamount of the deferred mineral property and this additional carryingamount is amortized over the life of the asset based on units ofproduction. The obligation is adjusted periodically to reflect thepassage of time and changes in the estimated future cash flowsunderlying the obligation. If the obligation is settled for other thanthe carrying amount of the liability, the Company will recognize a gainor loss on settlement.
(l) Foreign Currency Translation
The functional currency of the Company is the US dollar. At year end,monetary assets and liabilities denominated in foreign currencies aretranslated to US dollars at exchange rates in effect at the balancesheet date and non-monetary assets and liabilities are translated atrates of exchange in effect when the assets were acquired or obligationswere incurred. Revenues and expenses are translated at rates in effectat the time of the transactions. Foreign exchange gains and losses areincluded in earnings.
For certain subsidiaries of the Company where the functional currencyis not the US dollar, the assets and liabilities of these subsidiariesare translated at the rate of exchange in effect at the balance sheetdate. Revenues and expenses are translated at the rate of exchange ineffect at the time of the transactions. Foreign exchange gains andlosses are accumulated in other comprehensive income under shareholders'equity.
(m) Income and Mining Taxes
The Company accounts for income taxes under the asset and liabilitymethod. Under this method, future tax assets and liabilities arerecognized for future tax consequences attributable to differencesbetween the financial statement carrying value and the tax basis ofassets and liabilities.
Future tax assets and liabilities are measured using enacted orsubstantively enacted tax rates expected to apply to taxable income inthe years in which those temporary differences are expected to berecovered or settled. A reduction in respect of the benefit of a futuretax asset (a valuation allowance) is recorded against any future taxasset if it is not likely to be realized. The effect on future taxassets and liabilities of a change in tax rates is recognized inearnings in the year during which the change in tax rates is consideredto be substantively enacted.
(n) Stock-Based Compensation
The Company applies the fair value method to all grants of stock options.
The fair value of options granted is estimated at the date of grantusing a Black-Scholes option pricing model incorporating assumptionsregarding risk-free interest rates, dividend yield, volatility factor ofthe expected market price of the Company's stock, and a weightedaverage expected life of the options. The estimated fair value of theoptions is recorded as an expense on a straight-line basis over thevesting period, with an offsetting credit to shareholders' equity. Anyconsideration received on amounts attributable to stock options iscredited to share capital.
(o) Restricted and Deferred Share Unit Plans
The Restricted and Deferred Share Unit ("RSU" and "DSU") Plans arefull value phantom shares that mirror the value of Harry Winston DiamondCorporation's publicly traded common shares. Grants under the RSU Planare on a discretionary basis to employees of the Company subject toBoard of Director approval. Under the prior RSU Plan, each RSU grantvests on the third anniversary of the grant date. Under the 2010 RSUPlan, each RSU grant vests equally over a three-year period. Vestingunder both RSU Plans is subject to special rules for death, disabilityand change in control. Grants under the DSU Plan are awarded tonon-executive directors of the Company. Each DSU grant vests immediatelyon the grant date. The expenses related to the RSUs and DSUs areaccrued based on the price of Harry Winston Diamond Corporation's commonshares at the end of the period and on the probability of vesting. Thisexpense is recognized on a straight-line basis over the vesting period.
(p) Post Retirement Benefits
The expected costs of post retirement benefits under defined benefitarrangements are charged to earnings over the service lives of employeesentitled to those benefits. Variations from the regular cost are spreadon a straight-line basis over the expected average remaining servicelives of relevant current employees. The plan assets and liabilities arevalued annually by qualified actuaries.
(q) Financial Instruments
From time to time, the Company may use a limited number of derivativefinancial instruments to manage its foreign currency and interest rateexposure. For a derivative to qualify as a hedge at inception andthroughout the hedged period, the Company formally documents the natureand relationships between the hedging instruments and hedged items, aswell as its risk-management objectives, strategies for undertaking thevarious hedge transactions and method of assessing hedge effectiveness.Financial instruments qualifying for hedge accounting must maintain aspecified level of effectiveness between the hedge instrument and theitem being hedged, both at inception and throughout the hedged period.Gains and losses resulting from any ineffectiveness in a hedgingrelationship must be recognized immediately in net earnings. The Companymay also have a limited number of embedded derivatives relating to theDiavik Diamond Mine. Derivatives embedded in non-derivative hostcontracts are recognized separately unless closely related to the hostcontract. The Company does not use derivatives for trading orspeculative purposes.
(r) Basic and Diluted Earnings per Share
Basic earnings per share are calculated by dividing net earnings(loss) by the weighted average number of shares outstanding during theyear.
Diluted earnings per share are determined using the treasury stockmethod to calculate the dilutive effect of options and warrants. Thetreasury stock method assumes that the exercise of any "in-the-money"options with the option proceeds would be used to purchase common sharesat the average market value for the year. Options with an exerciseprice higher than the average market value for the year are not includedin the calculation of diluted earnings per share as such options arenot dilutive.
(s) Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment andpurchased intangibles subject to amortization, are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability ofassets to be held and used is measured by a comparison of the carryingamount of an asset to estimated undiscounted future cash flows expectedto be generated by the asset. If the carrying amount of an asset exceedsits estimated future cash flows, an impairment charge is recognized inthe amount by which the carrying amount of the asset exceeds the fairvalue of the asset. Assets to be disposed of by sale would be separatelypresented in the balance sheet and reported at the lower of thecarrying amount or fair value less costs to sell, and are no longerdepreciated. The assets and liabilities of a disposed group classifiedas held for sale would be presented separately in the appropriate assetand liability sections of the balance sheet.
(t) Adoption of New Accounting Standards and Developments
Business Combinations and Non-Controlling Interests
Effective February 1, 2010, the Companyearly adopted Handbook Section 1582, "Business Combinations", HandbookSection 1601, "Consolidated Financial Statements", Handbook Section1602, "Non-Controlling Interests", and amendments to Handbook Section3251, "Equity", from the Canadian Institute of Chartered Accountants,which have been applied retrospectively. Under these sections,non-controlling interest is reported as a component of shareholders'equity. As a result, the prior year amounts for non-controlling interestin the consolidated balance sheet have been reclassified intoshareholders' equity.
NOTE 3:
Cash Resources
2011 2010
-------------------------------------------------------------------------
Cash on hand and balances with banks $ 107,993 $ 61,449
Short-term investments(a) 700 1,520
-------------------------------------------------------------------------
Total cash resources $ 108,693 $ 62,969
--------------------------
--------------------------
(a) Short-term investments are held in overnight deposits and money
market instruments with a maturity of 30 days.
NOTE 4:
Inventory and Supplies
2011 2010
-------------------------------------------------------------------------
Merchandise inventory $ 258,035 $ 176,114
Rough diamond inventory 28,678 23,365
Supplies inventory 116,499 111,709
-------------------------------------------------------------------------
Total inventory and supplies $ 403,212 $ 311,188
--------------------------
--------------------------
NOTE 5:
Capital Assets
2011
-------------------------------------------------------------------------
Accumulated Net
Cost amortization book value
-------------------------------------------------------------------------
MINING
Deferred mineral property costs(a) $ 284,546 $ 146,869 $ 137,677
Diavik equipment and leaseholds(b) 850,650 239,934 610,716
Furniture, equipment and other(c) 7,926 5,676 2,250
Real property - land and
building(d) 35,227 8,063 27,164
-------------------------------------------------------------------------
$ 1,178,349 $ 400,542 $ 777,807
---------------------------------------
---------------------------------------
LUXURY BRAND
Furniture, equipment and other(c) $ 65,158 $ 28,615 $ 36,543
Real property - land and
building(d) 55,201 30,725 24,476
-------------------------------------------------------------------------
$ 120,359 $ 59,340 $ 61,019
---------------------------------------
---------------------------------------
2010
-------------------------------------------------------------------------
Accumulated Net
Cost amortization book value
-------------------------------------------------------------------------
MINING
Deferred mineral property costs(a) $ 284,321 $ 128,574 $ 155,747
Diavik equipment and leaseholds(b) 815,858 196,816 619,042
Furniture, equipment and other(c) 7,742 5,319 2,423
Real property - land and
building(d) 32,468 6,696 25,772
-------------------------------------------------------------------------
$ 1,140,389 $ 337,405 $ 802,984
---------------------------------------
---------------------------------------
LUXURY BRAND
Furniture, equipment and other(c) $ 29,278 $ 18,139 $ 11,139
Real property - land and
building(d) 77,485 26,347 51,138
-------------------------------------------------------------------------
$ 106,763 $ 44,486 $ 62,277
---------------------------------------
---------------------------------------
(a) The Company holds a 40% ownership interest in the Diavik group of
mineral claims, which contains commercially mineable diamond
reserves. DDMI, a subsidiary of Rio Tinto plc, is the operator of the
Joint Venture and holds the remaining 60% interest. The claims are
subject to private royalties, which are in the aggregate 2% of the
value of production.
(b) Diavik equipment and leaseholds are project related assets at the
Joint Venture level.
(c) Furniture, equipment and other includes equipment located at the
Company's diamond sorting facility and at Harry Winston Inc. salons.
(d) Real property is comprised of land and a building that houses the
corporate activities of the Company, and various leasehold
improvements to Harry Winston Inc. salons and corporate offices.
Depreciation expense for 2011 was $81.0 million (2010 - $60.9 million).
NOTE 6:
Diavik Joint Venture
The following represents HWDLP's 40% proportionate interest in the Joint Venture as at December 31, 2010 and 2009:
2011 2010
-------------------------------------------------------------------------
Current assets $ 92,487 $ 97,660
Long-term assets 739,470 760,680
Current liabilities 31,493 27,422
Long-term liabilities and participants' account 800,464 830,918
-------------------------------------------------------------------------
Years ended 2011 2010
-------------------------------------------------------------------------
Expenses net of interest income of
.1 million
(2010 - interest income of
.3 million)(a) $ 205,541 $ 171,159
Cash flows resulting from (used in) operating
activities (129,851) (104,394)
Cash flows resulting from financing activities 168,045 167,629
Cash flows resulting from (used in) investing
activities (40,105) (64,180)
-------------------------------------------------------------------------
(a) The Joint Venture only earns interest income.
HWDLP is contingently liable for DDMI's portion of the liabilities ofthe Joint Venture, and to the extent HWDLP's participating interest hasincreased due to the failure of DDMI to make a cash contribution whenrequired, HWDLP would have access to an increased portion of the assetsof the Joint Venture to settle these liabilities.
NOTE 7:
Intangible Assets
Accumulated
Amortization amorti-
period Cost zation 2011 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 (3,041) 2,534 3,092
Store leases 65-105 months 5,639 (5,639) - 761
-------------------------------------------------------------------------
Intangible
assets $ 136,574 $ (8,680) $ 127,894 $ 129,213
--------------------------------------------
--------------------------------------------
Amortization expense for 2011 was $1.3 million (2010 - $1.5 million). The Company completed a valuation of its trademark and drawings as of January 31, 2011 and concluded that there was no impairment of these assets.
NOTE 8:
Other Assets
2011 2010
-------------------------------------------------------------------------
Prepaid pricing discount(a), net of accumulated
amortization of $8.9 million (2010 -
$7.4 million) $ 3,120 $ 4,560
Other assets 5,503 1,328
Refundable security deposits 8,003 9,741
-------------------------------------------------------------------------
$ 16,626 $ 15,629
--------------------------
--------------------------
(a) Prepaid pricing discount represents funds paid to Tiffany & Co. by
the Company to amend its rough diamond supply agreement. The
amendment eliminated all pricing discounts on future sales. The
payment has been deferred and is being amortized on a straight-line
basis over the remaining life of the contract.
NOTE 9:
Long-Term Debt
2011 2010
-------------------------------------------------------------------------
Mining segment credit facilities(a)(i) $ 50,000 $ -
Mining segment promissory note(a)(ii) 70,000 -
Harry Winston Inc. credit facilities(b) 181,715 155,486
First mortgage on real propert(a)(iii) 7,048 7,206
-------------------------------------------------------------------------
Total long-term debt 308,763 162,692
-------------------------------------------------------------------------
Less current portion (71,313) (1,154)
-------------------------------------------------------------------------
$ 237,450 $ 161,538
--------------------------
--------------------------
Carrying
Nominal Amount
interest Date of at January 31,
Currency rate maturity 2011 Borrower
-------------------------------------------------------------------------
Secured bank March 31, Harry Winston
loan(b)(i) US 2.05% 2013 $165.0 million Inc.
-------------------------------------------------------------------------
Secured bank April 22, Harry Winston
loan(b)(ii) CHF 3.15% 2013 $3.7 million S.A.
-------------------------------------------------------------------------
Secured bank January 31, Harry Winston
loan(b)(ii) CHF 3.55% 2033 $13.0 million S.A.
-------------------------------------------------------------------------
Secured bank June 24, Harry Winston
loan(a)(i) US 4.19% 2013 $50.0 million Diamond
Corporation
and Harry
Winston
Diamond Mines
Ltd.
-------------------------------------------------------------------------
First mortgage 6019838 Canada
on real Inc.
property September 1,
(a)(iii) CDN 7.98% 2018 $7.0 million
-------------------------------------------------------------------------
Promissory August 25, Harry Winston
note(a)(ii) US 5.00% 2011 $70.0 million Diamond
Corporation
-------------------------------------------------------------------------
Secured bank Due on Harry Winston
advance(d) US N/A demand $nil Diamond
International
N.V. and
Harry Winston
Diamond
(India)
Private
Limited
-------------------------------------------------------------------------
Secured bank March 22, Harry Winston
advance(d) YEN 2.25% 2011 $7.0 million Japan, K.K.
-------------------------------------------------------------------------
Unsecured bank February 24, Harry Winston
advance(d) YEN 2.98% 2011 $7.9 million Japan, K.K.
-------------------------------------------------------------------------
Unsecured bank February 28, Harry Winston
advance(d) YEN 2.98% 2011 $8.0 million Japan, K.K.
-------------------------------------------------------------------------
(a) MINING SEGMENT CREDIT FACILITIES
(i) 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. On February 28,
2011, the Company increased the facility by $25.0 million to
$125.0 million. The facility has an initial maturity date of
June 24, 2013 with two one-year extensions at the Company's
option. There are no scheduled repayments required before
maturity. 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 January 31, 2011, the Company had $50.0 million
outstanding on its mining segment senior secured revolving
credit facility, which was used to fund the Kinross Buy Back
Transaction.
(ii) On August 25, 2010, the Company issued a promissory note in the
amount of $70.0 million, maturing on August 25, 2011, as part
of the Kinross Buy Back Transaction. The note 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.
(iii) The Company's first mortgage on real property has scheduled
principal payments of approximately
.2 million quarterly, and
may be prepaid at any time.
(b) LUXURY BRAND SEGMENT CREDIT FACILITIES
(i) Harry Winston Inc. maintains a credit agreement with a
syndicate of banks for a $250.0 million five-year revolving
credit facility. In addition, Harry Winston Inc. may increase
the credit facility by an additional $50.0 million to $300.0
million during the term of the facility. There are no scheduled
repayments required before maturity on March 31, 2013. The
credit facility is supported by a $20.0 million limited
guarantee provided by Harry Winston Diamond Corporation. The
amount available under this facility is subject to a borrowing
base formula based on certain assets of Harry Winston Inc.
The credit agreement contains affirmative and negative non-
financial and financial covenants, which apply to the luxury
brand segment. These provisions include consolidated minimum
tangible net worth, minimum coverage of fixed charges, leverage
ratio and limitations on capital expenditures and certain
investments. The credit agreement also includes a change of
control provision, which would result in the entire unpaid
principal and all accrued interest of the facility becoming due
immediately upon change of control, as defined. Any material
adverse change, as defined, in the luxury brand segment's
business, assets, liabilities, consolidated financial position
or consolidated results of operations constitutes default under
the agreement.
The luxury brand segment has pledged 100% of Harry Winston
Inc.'s common stock and 66 2/3% of the common stock of its
foreign subsidiaries to the bank to secure the loan. Inventory
and accounts receivable of Harry Winston Inc. are pledged as
collateral to secure the borrowings of Harry Winston Inc. In
addition, an assignment of proceeds on insurance covering
security collateral was made.
Loans under the credit facility can be either fixed rate loans
or revolving line of credit loans. The fixed rate loans will
bear interest within a range of 1.50% to 2.25% above LIBOR,
based upon a pricing grid determined by the fixed charge
coverage ratio. Interest under this option will be determined
for periods of either one, two, three or six months. The
revolving line of credit loans will bear interest within a
range of 0.50% to 0.75% above the bank's prime rate based upon
a pricing grid determined by the fixed charge coverage ratio as
well.
(ii) Harry Winston S.A. maintains a 25-year loan agreement for CHF
17.5 million ($18.4 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 ($3.7 million) loan
and a CHF 14.0 million ($14.7 million) loan. The bank has a
secured interest in the factory building.
(c) REQUIRED PRINCIPAL REPAYMENTS
2012 $ 71,313
2013 1,370
2014 220,113
2015 1,498
2016 1,570
Thereafter 12,899
-------------------------------------------------------------------------
(d) BANK ADVANCES
The Company has available a $45.0 million (utilization in either US
dollars or Euros) revolving financing facility for inventory and
receivables funding in connection with marketing activities through
its Belgian subsidiary, Harry Winston Diamond International N.V., and
its Indian subsidiary, Harry Winston Diamond (India) Private Limited.
Borrowings under the Belgian facility bear interest at the bank's
base rate plus 1.5%. Borrowings under the Indian facility bear an
interest rate of 10.5%. At January 31, 2011, no amounts were drawn
under the Company's revolving financing facility relating to Harry
Winston Diamond International N.V. or Harry Winston Diamond (India)
Private Limited. The facility is guaranteed by Harry Winston Diamond
Corporation.
Harry Winston Japan, K.K. maintains unsecured credit agreements with
two banks, each amounting to (Yen)1,305 million ($15.9 million).
Harry Winston Japan, K.K. also maintains a secured credit agreement
amounting to (Yen)575 million ($7.0 million) classified as bank
advances. This facility is secured by inventory owned by Harry
Winston Japan, K.K.
NOTE 10:
Income Tax
The future income tax asset of the Company is $53.9 million, of which $34.0 million relates to the luxury brand segment. Included in the future tax asset is $26.6 million that has been recorded to recognize the benefit of $87.3 millionof net operating losses that Harry Winston Inc. and its subsidiarieshave available for carry forward to shelter income taxes for futureyears. Certain net operating losses are scheduled to expire between 2014and 2031.
The future income tax liability of the Company is $355.5 million, of which $84.7 million relates to the luxury brand segment. Harry Winston Inc.'s future income tax liabilities include $55.1 millionfrom the purchase price allocation. The Company's future income taxasset and liability accounts are revalued to take into consideration thechange in the Canadian dollar compared to the US dollar and theunrealized foreign exchange gain or loss is recorded in net earnings foreach year.
(a) The income tax provision consists of the following:
2011 2010
-------------------------------------------------------------------------
Current expense (recovery) $ (8,737) $ 4,586
Future expense (recovery) 21,121 (23,389)
-------------------------------------------------------------------------
$ 12,384 $ (18,803)
--------------------------
--------------------------
(b) The tax effects of temporary differences that give rise to significant portions of the future tax assets and liabilities at January 31, 2011 and 2010 are as follows:
2011 2010
-------------------------------------------------------------------------
FUTURE INCOME TAX ASSETS
Net operating loss carryforwards $ 32,167 $ 27,466
Capital assets 3,447 2,499
Future site restoration costs 16,777 12,471
Luxury brand inventory 184 1,525
Other future income tax assets 7,094 5,468
-------------------------------------------------------------------------
Gross future income tax assets 59,669 49,429
Valuation allowance (5,812) (6,624)
-------------------------------------------------------------------------
Future income tax assets 53,857 42,805
FUTURE INCOME TAX LIABILITIES
Deferred mineral property costs (52,180) (47,398)
Capital assets (188,787) (140,118)
Future site restoration costs (7,921) (6,894)
Luxury brand inventory (26,741) (15,995)
Intangible assets (55,097) (55,542)
Other future income tax liabilities (24,805) (5,875)
-------------------------------------------------------------------------
Future income tax liabilities (355,531) (271,822)
-------------------------------------------------------------------------
Future income tax liability, net $ (301,674) $ (229,017)
--------------------------
--------------------------
(c) The difference between the amount of the reported consolidatedincome tax provision and the amount calculated by multiplying theearnings (loss) before income taxes by the statutory tax rate of 29%(2010 - 30%) is a result of the following:
2011 2010
-------------------------------------------------------------------------
Expected income tax expense (recovery) $ 11,311 $ (28,747)
Non-deductible items 1,871 14,990
Northwest Territories mining royalty (net of
income tax relief) 4,265 (137)
Earnings subject to tax different than
statutory rate 45 (4,767)
Assessments and adjustments (2,254) (2,743)
Change in valuation allowance (529) 1,666
Other (2,325) 935
-------------------------------------------------------------------------
Recorded income tax expense (recovery) $ 12,384 $ (18,803)
--------------------------
--------------------------
(d) The Company has net operating loss carryforwards for Canadian income tax purposes of approximately $1.2 million. Harry Winston Inc. has net operating loss carryforwards for US income tax purposes of $71.2 million and $16.0 million for other foreign jurisdiction tax purposes.
NOTE 11:
Future Site Restoration Costs
2011 2010
-------------------------------------------------------------------------
At February 1, 2010 and 2009 $ 41,275 $ 39,506
Revision of previous estimates 111 -
Accretion of provision 2,004 1,769
-------------------------------------------------------------------------
At January 31, 2011 and 2010 $ 43,390 $ 41,275
--------------------------
--------------------------
The Joint Venture has an obligation under various agreements (note14) to reclaim and restore the lands disturbed by its mining operations.
The Company's share of the total undiscounted amount of the futurecash flows that will be required to settle the obligation incurred at January 31, 2011 is estimated to be $85.9 million, of which approximately $24.1 millionis expected to occur at the end of the mine life. The anticipated cashflows relating to the obligation at the time of the obligation have beendiscounted at a credit adjusted interest rate of 4.96%.
NOTE 12:
Share Capital
(a) Authorized
Unlimited common shares without par value.
(b) Issued
Number of shares Amount
-------------------------------------------------------------------------
Balance, January 31, 2009 61,372,092 $ 381,541
Shares issued for:
Cash 15,200,000 44,997
Exercise of options 16,501 55
-------------------------------------------------------------------------
Balance, January 31, 2010 76,588,593 426,593
Shares issued for:
Cash 7,142,857 69,737
Exercise of options 428,401 5,799
-------------------------------------------------------------------------
Balance, January 31, 2011 84,159,851 $ 502,129
--------------------------
--------------------------
(c) Stock Options
Under the Employee Stock Option Plan, amended and approved by the shareholders on June 4, 2008,the Company may grant options for up to 6,000,000 shares of commonstock. Options may be granted to any director, officer, employee orconsultant of the Company or any of its affiliates. Options granted todirectors vest immediately and options granted to officers, employees orconsultants vest over three to four years. The maximum term of anoption is ten years. The number of shares reserved for issuance to anyone optionee pursuant to options cannot exceed 2% of the issued andoutstanding common shares of the Company at the date of grant of suchoptions.
The exercise price of each option cannot be less than the fair marketvalue of the shares on the last trading day preceding the date ofgrant.
The Company's shares are primarily traded on a Canadian dollar basedexchange, and accordingly stock option information is presented inCanadian dollars, with conversion to US dollars at the average exchangerate for the year.
Compensation expense for stock options was $1.3 million for fiscal 2011 (2010 - $1.7 million)and is presented as a component of both cost of sales and selling,general and administrative expenses. The amount credited to sharecapital for the exercise of the options is the sum of (a) the cashproceeds received and (b) the amount debited to contributed surplus uponexercise of stock options by optionees (2011 - $2.8 million; 2010 - $nil).
Changes in share options outstanding are as follows:
2011 2010
-------------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Options price Options price
-------------------------------------------------------------------------
000s CDN $ US $ 000s CDN $ US $
-------------------------------------------------------------------------
Outstanding,
beginning of
year 3,234 $ 12.89 $ 7.61 1,604 $ 22.45 $ 18.30
Granted 300 12.35 11.78 1,674 3.78 3.05
Exercised (428) 7.14 6.92 (17) 3.78 3.34
Expired (238) 26.34 25.79 (27) 21.61 17.73
-------------------------------------------------------------------------
2,868 $ 12.58 $ 12.26 3,234 $ 12.89 $ 7.61
---------------------------------------------------------
---------------------------------------------------------
The following summarizes information about stock options outstanding at January 31, 2011:
Options outstanding Options exercisable
-------------------------------------------------------------------------
Weighted
average Weighted Weighted
remaining average Number average
Range of Number contract- exercise exer- exercise
exercise prices outstanding ual life price cisable price
CDN $ 000s in years CDN $ 000s CDN $
-------------------------------------------------------------------------
$3.78-$3.78 1,443 8.2 $ 3.78 1,056 $ 3.78
12.35-12.45 587 4.9 12.40 287 12.45
23.35-29.25 702 2.4 25.26 677 25.25
41.45-41.95 136 3.2 41.45 136 41.45
-------------------------------------------------------------------------
2,868 $ 12.58 2,156 $ 14.05
-----------------------------------------------
-----------------------------------------------
(d) Stock-Based Compensation
The Company applies the fair value method to all grants of stock options.
The fair value of options granted during the year ended January 31, 2011 and 2010 was estimated using a Black-Scholes option pricing model with the following weighted average assumptions.
2011 2010
-------------------------------------------------------------------------
Risk-free interest rate 2.13% 1.00%
Dividend yield 0.00% 0.00%
Volatility factor 50.00% 51.00%
Expected life of the options 5.9 years 5.5 years
Average fair value per option, CDN $ 5.90 $ 1.45
Average fair value per option, US $ 5.63 $ 1.17
-------------------------------------------------------------------------
(e) RSU and DSU Plans
RSU Number of units
-------------------------------------------------------------------------
Balance, January 31, 2009 108,599
AWARDS AND PAYOUTS DURING THE YEAR (NET)
RSU awards 11,895
RSU payouts (74,614)
-------------------------------------------------------------------------
Balance, January 31, 2010 45,880
AWARDS AND PAYOUTS DURING THE YEAR (NET)
RSU awards 145,880
RSU payouts (35,814)
-------------------------------------------------------------------------
Balance, January 31, 2011 155,946
------------
------------
DSU Number of units
-------------------------------------------------------------------------
Balance, January 31, 2009 128,988
AWARDS AND PAYOUTS DURING THE YEAR (NET)
DSU awards 73,521
DSU payouts (43,034)
-------------------------------------------------------------------------
Balance, January 31, 2010 159,475
AWARDS AND PAYOUTS DURING THE YEAR (NET)
DSU awards 33,739
DSU payouts -
-------------------------------------------------------------------------
Balance, January 31, 2011 193,214
------------
------------
During the fiscal year, the Company granted 145,880 RSUs (net offorfeitures) and 33,739 DSUs under an employee and director incentivecompensation program, respectively. The RSU and DSU Plans are full valuephantom shares that mirror the value of Harry Winston DiamondCorporation's publicly traded common shares.
Grants under the RSU Plan are on a discretionary basis to employeesof the Company subject to Board of Director approval or in accordancewith contractual commitments. The RSUs granted in fiscal 2011 vestone-third on March 31, 2011, and one-thirdon each anniversary thereafter. Prior RSU grants vest on the thirdanniversary of the grant date. The vesting of grants of RSUs is subjectto special rules for a change in control, death and disability. TheCompany shall pay out cash on the respective vesting dates of RSUs andredemption dates of DSUs.
Only non-executive directors of the Company are eligible for grantsunder the DSU Plan. Each DSU grant vests immediately on the grant date.
The expenses related to the RSUs and DSUs are accrued based on theprice of Harry Winston Diamond Corporation's common shares at the end ofthe period and on the probability of vesting. This expense isrecognized on a straight-line basis over the vesting period. The Companyrecognized an expense of $1.0 million (2010 - $1.5 million) for the year ended January 31, 2011.
NOTE 13:
Earnings per Share
The following table presents the calculation of diluted earnings per share:
2011 2010
-------------------------------------------------------------------------
NUMERATOR
Net earnings (loss) for the year attributable
to shareholders $ 21,669 $ (73,176)
--------------------------
--------------------------
DENOMINATOR (000S SHARES)
Weighted average number of shares outstanding $ 79,858 $ 74,049
Dilutive effect of employee stock options 1,083 662
-------------------------------------------------------------------------
$ 80,941 $ 74,711
--------------------------
--------------------------
NOTE 14:
Commitments and Guarantees
(a) Environmental Agreement
Through negotiations of environmental and other agreements, the JointVenture must provide funding for the Environmental Monitoring AdvisoryBoard. HWDLP's share of this funding requirement was
.2 millionfor calendar 2010. Further funding will be required in future years;however, specific amounts have not yet been determined. These agreementsalso state that the Joint Venture must provide security deposits forthe performance by the Joint Venture of its reclamation and abandonmentobligations under all environmental laws and regulations. HWDLP's shareof the letters of credit outstanding, posted by the operator of theJoint Venture with respect to the environmental agreements as at January 31, 2011, was $80.4 million.The agreement specifically provides that these funding requirementswill be reduced by amounts incurred by the Joint Venture on reclamationand abandonment activities.
(b) Participation Agreements
The Joint Venture has signed participation agreements with variousnative groups. These agreements are expected to contribute to thesocial, economic and cultural well-being of the Aboriginal bands. Theagreements are each for an initial term of twelve years and will beautomatically renewed on terms to be agreed upon for successive periodsof six years thereafter until termination. The agreements terminate inthe event that the mine permanently ceases to operate.
(c) Commitments
Commitments include the cumulative maximum funding commitmentssecured by letters of credit of the Joint Venture's environmental andparticipation agreements at HWDLP's 40% ownership interest, before anyreduction of future reclamation activities; and future minimum annualrentals under non-cancellable operating and capital leases for luxurybrand salons and corporate office space, and long-term leases forproperty, land, office premises and a fuel tank farm at the DiavikDiamond Mine; and are as follows:
2012 $ 100,963
2013 99,037
2014 95,592
2015 99,183
2016 97,047
Thereafter 130,471
-------------------------------------------------------------------------
NOTE 15:
Employee Benefit Plans
Expenses for the year 2011 2010
-------------------------------------------------------------------------
Defined benefit pension plan - luxury brand
segment(a) $ 1,907 $ 2,184
Defined contribution plan - luxury brand
segment(b) 783 727
Defined contribution plan - mining segment(b) 218 200
Defined contribution plan - Diavik Diamond
Mine(b) 1,061 794
-------------------------------------------------------------------------
$ 3,969 $ 3,905
--------------------------
--------------------------
(a) Defined Benefit Pension Plan
The luxury brand segment sponsors three separate defined benefit pension plans covering employees in the United States, Japan and Switzerland.The principal pension plan is the Harry Winston Employee RetirementPlan for Harry Winston Inc. US employees. The benefits for the HarryWinston Inc. plan are based on years of service and the employee'scompensation. In April 2001, Harry Winston Inc. amended its defined benefit pension plan. The amendment froze plan participation effective April 30, 2001.Harry Winston Inc.'s funding policy for the US plan is to contributeamounts to the plan sufficient to meet the minimum funding requirementsset forth in the Employee Retirement Income Security Act of 1974. Planassets consist primarily of fixed income, equity and other short-terminvestments. The other two defined benefit pension plans are sponsoredby luxury brand segment subsidiaries Harry Winston Japan, K.K. and HarryWinston S.A., which converted their previous pension plan arrangementsinto defined benefit plans effective February 1, 2007. Pension liabilities for these two non-US plans are funded in accordance with local laws and regulations.
(i) INFORMATION ABOUT HARRY WINSTON INC.'S US DEFINED BENEFIT PLAN IS AS FOLLOWS:
2011 2010
-------------------------------------------------------------------------
ACCRUED BENEFIT OBLIGATION
Balance, beginning of year $ 8,960 $ 8,043
Interest cost 623 672
Actuarial gain 806 1,075
Effects of changes in assumptions - -
Benefits paid (856) (830)
-------------------------------------------------------------------------
Balance, end of year 9,533 8,960
-------------------------------------------------------------------------
PLAN ASSETS
Fair value, beginning of year 7,852 7,220
Actual return on plan assets 1,235 1,462
Employer contributions 136 -
Benefits paid (856) (830)
-------------------------------------------------------------------------
Fair value, end of year 8,367 7,852
-------------------------------------------------------------------------
Funded status - plan deficit (included in
accrued liabilities) $ 1,166 $ (1,108)
--------------------------
--------------------------
US plan assets represented approximately 56% of total luxury brand segment plan assets at January 31, 2011. The unfunded status of the luxury brand segment plans are comprised of $1.2 million attributed to the US-based Harry Winston Inc. plan, as reported in the table above, and $2.1 millionattributed to the Harry Winston Japan, K.K. plan. The Harry WinstonJapan, K.K. plan is non-funded with a benefit obligation of $2.1 million. The Harry Winston S.A. plan was fully funded at January 31, 2011 with a benefit obligation of $7.0 million offset by plan assets of $7.3 million.
The following table provides the components of the net periodic pension costs for the three plans for the years ended January 31:
2011 2010
-------------------------------------------------------------------------
Service cost $ (1,643) $ (1,560)
Interest cost (857) (865)
Expected return on plan assets 791 692
Amortization of net actuarial gain (loss) (131) (189)
Amortization of prior service cost (67) (62)
-------------------------------------------------------------------------
Total $ (1,907) $ (1,984)
--------------------------
--------------------------
(ii) PLAN ASSETS
The asset allocation of Harry Winston Inc.'s US pension benefits at January 31 was as follows:
2011 2010
-------------------------------------------------------------------------
ASSET CATEGORY
Cash equivalents 2% 2%
Equity securities 70% 67%
Fixed income securities 26% 29%
Other 2% 2%
-------------------------------------------------------------------------
Total 100% 100%
--------------------------
--------------------------
(iii) THE SIGNIFICANT ASSUMPTIONS USED FOR HARRY WINSTON INC.'S US PLAN ARE AS FOLLOWS:
2011 2010
-------------------------------------------------------------------------
ACCRUED BENEFIT OBLIGATION
Discount rate 5.24% 5.56%
Expected long-term rate of return 7.50% 7.50%
-------------------------------------------------------------------------
BENEFIT COSTS FOR THE YEAR
Discount rate 5.56% 6.53%
Expected long-term rate of return on plan assets 7.50% 7.50%
Rate of compensation increase 0.00% 0.00%
-------------------------------------------------------------------------
Harry Winston Inc.'s overall expected long-term rate of return onassets is 7.50%. The expected long-term rate of return is based on theportfolio as a whole and not on the sum of the returns on individualasset categories. The return is based exclusively on historical returns,without adjustments. Harry Winston S.A.'s overall expected long-termrate of return on assets is 3.75%. Long-term rate of return for HarryWinston Japan, K.K. plan assets is not applicable due to the unfundedstatus of the plan.
The weighted average assumptions used to determine the benefitobligations for Harry Winston Japan, K.K. and Harry Winston S.A. at January 31, 2011 are a discount rate and expected long-term rate of return of 1.58% and 0.00%, and 2.75% and 3.75%, respectively.
The weighted average assumptions used to determine the benefit costs for Harry Winston Japan, K.K. and Harry Winston S.A. at January 31, 2011are a discount rate, expected long-term rate of return, and rate ofcompensation increase of 1.84%, 0.00% and 4.36%, and 2.75%, 3.75% and3.00%, respectively.
(b) Defined Contribution Plan
Harry Winston Inc. has a defined contribution 401(k) plan covering substantially all employees in the United States. For the fiscal years ended January 31, 2011and 2010, Harry Winston Inc. elected to increase the employer-matchingcontribution to 100% of the first 6% of the employee's salary from 50%in fiscal 2007 and prior. Employees must meet minimum servicerequirements and be employed on December 31 of each year in order to receive this matching contribution.
The Joint Venture sponsors a defined contribution plan whereby the employer contributes 6% of the employee's salary.
Harry Winston Diamond Corporation sponsors a defined contributionplan for Canadian employees whereby the employer contributes to amaximum of 6% of the employee's salary to the maximum contribution limitunder Canada's Income Tax Act.
(c) Deferred Compensation Plan
At January 31, 2010, Harry Winston Inc. had a liability of $9.2 million relating to deferred compensation plans for a key executive whose employment with Harry Winston Inc. terminated on December 31, 2009. The $9.2 million was paid to the executive during fiscal 2011.
NOTE 16:
Capital Management
The Company's capital includes cash and cash equivalents, short-termdebt, long-term debt and equity, which includes issued common shares,contributed surplus and retained earnings.
The Company's primary objective with respect to its capitalmanagement is to ensure that it has sufficient cash resources tomaintain its ongoing operations, to provide returns to shareholders andbenefits for other stakeholders, and to pursue growth opportunities. Tomeet these needs, the Company may from time to time raise additionalfunds through borrowing and/or the issuance of equity or debt or bysecuring strategic partners, upon approval by the Board of Directors.The Board of Directors reviews and approves any material transactionsout of the ordinary course of business, including proposals onacquisitions or other major investments or divestitures, as well asannual capital and operating budgets.
The Company assesses liquidity and capital resources on aconsolidated basis. The Company's requirements are for cash operatingexpenses, working capital, contractual debt requirements and capitalexpenditures. The Company believes that it will generate sufficientliquidity to meet its anticipated requirements for the next twelvemonths.
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 2009Kinross investment no longer apply.
NOTE 17:
Financial Instruments
The Company has various financial instruments comprising cash andcash equivalents, accounts receivable, accounts payable and accruedliabilities, bank advances and long-term debt.
Cash and cash equivalents consist of cash on hand and balances withbanks and short-term investments held in overnight deposits with amaturity on acquisition of less than 90 days. Cash and cash equivalents,which are designated as held-for-trading, are carried at fair valuebased on quoted market prices and classified within Level 1 of the fairvalue hierarchy established by CICA Handbook Section 3862.
The fair value of accounts receivable is determined by the amount ofcash anticipated to be received in the normal course of business fromthe financial asset.
The Company's long-term debt is fully secured; therefore, the fair value of this instrument at January 31, 2011 is considered to approximate its carrying value.
The carrying values of these financial instruments are as follows:
January 31, 2011 January 31, 2010
-------------------------------------------------------------------------
Estimated Estimated
fair Carrying fair Carrying
value value value value
-------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and cash equivalents $108,693 $108,693 $ 62,969 $ 62,969
Accounts receivable 22,723 22,723 23,520 23,520
-------------------------------------------------------------------------
$131,416 $131,416 $ 86,489 $ 86,489
----------------------------------------
----------------------------------------
FINANCIAL LIABILITIES
Accounts payable and
accrued liabilities $142,339 $142,339 $ 87,448 $ 87,448
Bank advances 22,902 22,902 22,485 22,485
Promissory note 70,000 70,000 - -
Long-term debt 238,763 238,763 162,692 162,692
-------------------------------------------------------------------------
$474,004 $474,004 $272,625 $272,625
----------------------------------------
----------------------------------------
NOTE 18:
Financial Risk Exposure and Risk Management
The Company is exposed, in varying degrees, to a variety offinancial-instrument-related risks by virtue of its activities. TheCompany's overall financial risk-management program focuses on thepreservation of capital and protecting current and future Company assetsand cash flows by minimizing exposure to risks posed by theuncertainties and volatilities of financial markets.
The Company's Audit Committee has responsibility to review anddiscuss significant financial risks or exposures and to assess the stepsmanagement has taken to monitor, control, report and mitigate suchrisks to the Company.
Financial risk management is carried out by the Finance department,which identifies and evaluates financial risks and establishes controlsand procedures to ensure financial risks are mitigated.
The types of risk exposure and the way in which such exposures are managed are as follows:
i) Currency Risk
The Company's sales are predominately denominated in US dollars. Asthe Company operates in an international environment, some of theCompany's financial instruments and transactions are denominated incurrencies other than the US dollar. The results of the Company'soperations are subject to currency transaction risk and currencytranslation risk. The operating results and financial position of theCompany are reported in US dollars in the Company's consolidatedfinancial statements.
The Company's primary foreign exchange exposure impacting pre-tax earnings arises from the following sources:
Net Canadian dollar denominated monetary assets and liabilities - The
most significant exposure relates to the Company's Canadian dollar future
income tax liability. 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. The weakening/strengthening
of the Canadian dollar versus the US dollar results in an unrealized
foreign exchange gain/loss on the revaluation of the Canadian dollar
denominated future income tax liability.
Committed or anticipated foreign currency denominated transactions,
primarily Canadian dollar costs at the Diavik Diamond Mine.
Based on the Company's net exposure to Canadian dollar monetary assets and liabilities at January 31, 2011, a one-cent change in the exchange rate would have impacted pre-tax net earnings for the year by $2.7 million.
ii) Interest Rate Risk
Interest rate risk is the risk borne by an interest-bearing asset orliability as a result of fluctuations in interest rates. Financialassets and financial liabilities with variable interest rates expose theCompany to cash flow interest rate risk. The Company's most significantinterest rate risk arises from its various credit facilities, whichbear variable interest based on LIBOR. Based on the Company'sLIBOR-based credit facilities at January 31, 2011, a 100 basis point change in LIBOR would have impacted pre-tax net earnings for the year by $1.9 million.
iii) Concentration of Credit Risk
Credit risk is the risk of a financial loss to the Company if acustomer or counterparty to a financial instrument fails to meet itscontractual obligation.
Financial instruments that potentially subject the Company to creditrisk consist of trade receivables from luxury brand segment clients.While economic factors can affect credit risk, the Company manages riskby providing credit terms on a case-by-case basis only after a review ofthe client's financial position and credit history. The Company has notexperienced significant losses in the past from its customers.
The Company's exposure to credit risk in the mining segment isminimized by its sales policy, which requires receipt of cash prior tothe delivery of rough diamonds to its customers.
The Company manages credit risk, in respect of short-terminvestments, by maintaining bank accounts with Tier 1 banks andinvesting only in term deposits or banker's acceptances with highlyrated financial institutions that are capable of prompt liquidation. TheCompany monitors and manages its concentration of counterparty creditrisk on an ongoing basis.
At January 31, 2011, the Company'smaximum counterparty credit exposure consists of the carrying amount ofcash and cash equivalents and accounts receivable, which approximatesfair value.
iv) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due.
The Company manages its liquidity by ensuring that there issufficient capital to meet short-term and long-term businessrequirements, after taking into account cash flows from operations andthe Company's holdings of cash and cash equivalents. The Company alsostrives to maintain sufficient financial liquidity at all times in orderto participate in investment opportunities as they arise, as well as towithstand sudden adverse changes in economic circumstances. The Companyassesses liquidity and capital resources on a consolidated basis.Management forecasts cash flows for its current and subsequent fiscalyears to predict future financing requirements. Future requirements aremet through a combination of committed credit facilities and access tocapital markets.
At January 31, 2011, the Company had $108.7 million of cash and cash equivalents and $96.0 million available under credit facilities.
The following table summarizes the aggregate amount of contractual future cash outflows for the Company's financial liabilities:
Less than Year Year After
Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Accounts payable and
accrued liabilities $142,339 $142,339 $ - $ - $ -
Income taxes payable 6,660 6,660 - - -
Bank advances 22,902 22,902 - - -
Long-term debt(a) 336,245 80,456 233,019 4,685 18,085
Environmental and
participation
agreements incremental
commitments 94,615 82,156 680 4,798 6,981
Operating lease
obligations 104,548 18,720 29,010 20,962 35,856
Capital lease
obligations 87 87 - - -
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(a) Includes projected interest payments on the current debt outstanding
based on interest rates in effect at January 31, 2011.
NOTE 19:
Dilution Loss
In fiscal 2010, the Company recorded a non-cash dilution loss of $34.8 million with respect to the investment by Kinross of an indirect interest in the Diavik Diamond Mine.
NOTE 20:
Segmented Information
The Company operated in the mining and luxury brand segments of the diamond industry for the year ended January 31, 2011.
The mining segment consists of the Company's rough diamond business.This business includes the 40% ownership interest in the Diavik group ofmineral claims and the sale of rough diamonds in the market-place.
The luxury brand segment consists of the Company's ownership in HarryWinston Inc. This segment consists of the marketing of fine jewelry andwatches on a worldwide basis.
Luxury
For the year ended January 31, 2011 Mining Brand Total
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Sales
Canada $ 279,154 $ - $ 279,154
United States - 111,289 111,289
Europe - 98,403 98,403
Asia - 135,117 135,117
Cost of sales 209,308 182,254 391,562
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Gross margin 69,846 162,555 232,401
Gross margin (%) 25.0% 47.1% 37.2%
Selling, general and administrative
expenses 19,743 148,207 167,950
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Earnings from operations 50,103 14,348 64,451
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Interest and financing expenses (5,236) (6,291) (11,527)
Other income 97 389 486
Foreign exchange gain (loss) (16,407) 2,001 (14,406)
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Segmented earnings before income
taxes $ 28,557 $ 10,447 $ 39,004
---------------------------------------
---------------------------------------
Segmented assets as at January 31,
2011
Canada $ 970,342 $ - $ 970,342
United States - 440,307 440,307
Other foreign countries 25,413 181,450 206,863
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995,755 621,757 1,617,512
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Capital expenditures 42,343 6,751 49,094
Other significant non-cash items
Income tax expense 17,558 3,563 21,121
Depreciation and amortization 67,320 13,583 80,903
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Sales to four significant customers in the mining segment totalled $53.4 million (2010 - $68.7 million) for the twelve months ended January 31, 2011.
Luxury
For the year ended January 31, 2010 Mining Brand Total
-------------------------------------------------------------------------
Sales
Canada $ 187,885 $ - $ 187,885
United States - 72,897 72,897
Europe - 75,078 75,078
Asia - 77,041 77,041
Cost of sales 174,651 117,071 291,722
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Gross margin 13,234 107,945 121,179
Gross margin (%) 7.0% 48.0% 29.3%
Selling, general and administrative
expenses 19,502 123,648 143,150
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Loss from operations (6,268) (15,703) (21,971)
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Interest and financing expenses (3,853) (7,688) (11,541)
Other income 546 46 592
Insurance settlement - 3,350 3,350
Dilution loss (34,761) - (34,761)
Foreign exchange gain (loss) (34,020) 2,527 (31,493)
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Segmented loss before income taxes $ (78,356) $ (17,468) $ (95,824)
---------------------------------------
---------------------------------------
Segmented assets as at January 31,
2010
Canada $ 952,663 $ - $ 952,663
United States - 361,598 361,598
Other foreign countries 19,894 160,650 180,544
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972,557 522,248 1,494,805
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Capital expenditures 50,856 3,033 53,889
OTHER SIGNIFICANT NON-CASH ITEMS
Income tax recovery (15,774) (7,615) (23,389)
Depreciation and amortization 51,154 12,958 64,112
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Diavik Diamond Mine Mineral Reserve
and Mineral Resource Statement
AS OF DECEMBER 31, 2010
Proven and Probable Reserves
Proven Probable
-------------------------------------------------------------------------
Open pit and Millions Carats Millions Millions Carats Millions
underground of per of of per of
mining tonnes tonne carats tonnes tonne carats
-------------------------------------------------------------------------
A-154 South
Open Pit - - - - - -
Underground 1.7 3.9 6.9 1.4 3.4 4.8
-------------------------------------------------------------------------
Total A-154
South 1.7 3.9 6.9 1.4 3.4 4.8
-------------------------------------------------------------------------
A-154 North
Open Pit - - - - - -
Underground 3.6 2.2 7.8 5.1 2.1 10.8
-------------------------------------------------------------------------
Total A-154
North 3.6 2.2 7.8 5.1 2.1 10.8
-------------------------------------------------------------------------
A-418
Open Pit 1.9 3.1 5.9 - - -
Underground 0.3 4.0 1.2 4.0 3.9 15.5
-------------------------------------------------------------------------
Total A-418 2.2 3.2 7.1 4.0 3.9 15.5
-------------------------------------------------------------------------
Total
Open Pit 1.9 3.1 5.9 - - -
Underground 5.6 2.8 15.9 10.5 3.0 31.2
-------------------------------------------------------------------------
Total Reserves 7.5 2.9 21.7 10.5 3.0 31.2
-------------------------------------------------------
-------------------------------------------------------
Proven and Probable
-------------------------------------------
Open pit and Millions Carats Millions
underground of per of
mining tonnes tonne carats
-------------------------------------------
A-154 South
Open Pit - - -
Underground 3.1 3.7 11.7
-------------------------------------------
Total A-154
South 3.1 3.7 11.7
-------------------------------------------
A-154 North
Open Pit - - -
Underground 8.7 2.1 18.6
-------------------------------------------
Total A-154
North 8.7 2.1 18.6
-------------------------------------------
A-418
Open Pit 1.9 3.1 5.9
Underground 4.3 3.9 16.7
-------------------------------------------
Total A-418 6.2 3.7 22.6
-------------------------------------------
Total
Open Pit 1.9 3.1 5.9
Underground 16.1 2.9 47.0
-------------------------------------------
Total Reserves 18.0 2.9 52.9
--------------------------
--------------------------
Note: Totals may not add up due to rounding.
Additional Indicated and Inferred Resources
Measured Resources Indicated Resources
-------------------------------------------------------------------------
Millions Carats Millions Millions Carats Millions
Kimberlite of per of of per of
pipe tonnes tonne carats tonnes tonne carats
-------------------------------------------------------------------------
A-154 South - - - - - -
A-154 North - - - - - -
A-418 - - - - - -
A-21 3.6 2.8 10.0 0.4 2.6 1.0
-------------------------------------------------------------------------
Total 3.6 2.8 10.0 0.4 2.6 1.0
--------------------------------------------------------
--------------------------------------------------------
Inferred Resources
-------------------------------------------
Millions Carats Millions
Kimberlite of per of
pipe tonnes tonne carats
-------------------------------------------
A-154 South 0.04 3.5 0.1
A-154 North 2.1 2.4 5.0
A-418 0.7 4.4 3.2
A-21 0.8 3.0 2.3
-------------------------------------------
Total 3.6 3.0 10.6
--------------------------
--------------------------
Note: Totals may not add up due to rounding.
The above mineral reserve and mineral resource statement was preparedby Diavik Diamond Mines Inc., operator of the Diavik Diamond Mine,under the supervision of Calvin Yip,P.Eng., Principal Advisor, Strategic Planning of Diavik Diamond MinesInc., a Qualified Person within the meaning of National Instrument43-101 of the Canadian Securities Administrators.
For further details and information concerning Harry Winston DiamondCorporation's Mineral Reserves and Resources, readers should referenceHarry Winston Diamond Corporation's Annual Information Form availablethrough www.sedar.com and https://investor.harrywinston.com.
SOURCE Harry Winston Diamond Corporation