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Harry Winston Diamond Corporation Announces Second Quarter Fiscal 2010 Results
Consolidated sales were
The mining segment recorded sales of
The retail segment recorded a 40% decrease in sales to
Second Quarter Fiscal 2010 Financial Highlights
(US$ in millions except Earnings per Share amounts)
-------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2009 2008 2009 2008
-------------------------------------------------------------------------
Sales 94.8 186.1 204.4 342.2
-------------------------------------------------------------------------
Earnings from operations
(loss) (3.9) 73.4 (14.0) 113.0
-------------------------------------------------------------------------
Net earnings (loss) (24.5) 49.9 (69.6) 71.2
-------------------------------------------------------------------------
Earnings (loss) per share ($0.32) $0.81 ($0.97) $1.17
-------------------------------------------------------------------------
Conference Call and Webcast
Beginning at
An online archive of the broadcast will be available by accessing the Company's investor relations web site at http://investor.harrywinston.com. A telephone replay of the call will be available starting at noon through
About Harry Winston Diamond Corporation
Harry Winston Diamond Corporation is a specialist diamond enterprise with assets in the mining and retail segments of the diamond industry. Harry Winston supplies rough diamonds to the global market from its 40 percent ownership interest in the Diavik Diamond Mine (economic ownership of 31%).
The Company's retail division is a premier diamond jeweler and luxury timepiece retailer with salons in key locations, including
The Company focuses on the two most profitable segments of the diamond industry, mining and retail, in which its expertise creates shareholder value. This unique business model provides key competitive advantages; rough diamond sales and polished diamond purchases provide market intelligence that enhances the Company's overall performance.
For more information, please visit www.harrywinston.com.
2010 Second Quarter Report
HARRY WINSTON DIAMOND COPORATION
Six Months Ended July 31, 2009
Highlights
(All figures are in United States dollars unless otherwise indicated)
Harry Winston Diamond Corporation recorded a consolidated net loss of
Consolidated sales were
The mining segment recorded sales of
The retail segment recorded a 40% decrease in sales to
Management's Discussion and Analysis
Prepared as of September 9, 2009
(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
The following is management's discussion and analysis ("MD A") of the results of operations for Harry Winston Diamond Corporation ("Harry Winston Diamond Corporation", or the "Company") for the three and six months ended
Certain comparative figures have been reclassified to conform with 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
Forward-looking information is based on certain factors and assumptions regarding, among other things, mining, production, construction and exploration activities at the Diavik Diamond Mine, world and US economic conditions and the worldwide demand for luxury goods. Specifically, in making statements regarding expected diamond prices and expectations concerning the diamond industry and expected sales trends in the retail segment, the Company has made assumptions regarding, among other things, world and US economic conditions and demand for luxury goods. While the Company considers these assumptions to be reasonable based on the information currently available to it, they may prove to be incorrect. See "Risks and Uncertainties" on page 18.
Forward-looking information is subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from what we currently expect. These factors include, among other things, the uncertain nature of mining activities, including risks associated with underground construction and mining operations, risks associated with joint venture operations, risks associated with the remote location of and harsh climate at the Diavik Diamond Mine site, risks associated with regulatory requirements, fluctuations in diamond prices and changes in US and world economic conditions, the risk of fluctuations in the Canadian/US dollar exchange rate, cash flow and liquidity risks and the risks of competition in the luxury jewelry segment. Please see page 18 of this Interim Report, as well as the Company's Annual Report, available at www.sedar.com, for a discussion of these and other risks and uncertainties involved in the Company's operations.
Readers are cautioned not to place undue importance on forward-looking information, which speaks only as of the date of this Management's Discussion and Analysis, and should not rely upon this information as of any other date. Due to assumptions, risks and uncertainties, including the assumptions, risks and uncertainties identified above and elsewhere in this Management's Discussion and Analysis, actual events may differ materially from current expectations. The Company uses forward-looking statements because it believes such statements provide useful information with respect to the expected future operations and financial performance of the Company, and cautions readers that the information may not be appropriate for other purposes. While the Company may elect to, it is under no obligation and does not undertake to update or revise any forward-looking information, whether as a result of new information, future events or otherwise at any particular time, except as required by law. Additional information concerning factors that may cause actual results to materially differ from those in such forward-looking statements is contained in the Company's filings with Canadian and
Summary Discussion
Harry Winston Diamond Corporation is a specialist diamond company focusing on the mining and retail segments of the diamond industry. The Company supplies rough diamonds to the global market from production received from its 40% ownership interest in the Diavik Diamond Mine (economic interest of 31%), located off Lac de Gras in
The Company's most significant asset is an ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the "Joint Venture") is an unincorporated joint arrangement between Diavik Diamond Mines Inc. ("DDMI") (60%) and Harry Winston Diamond Limited Partnership ("HWDLP") (40%) where HWDLP holds an undivided 40% ownership interest in the assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is the operator of the Diavik Diamond Mine. DDMI and HWDLP are headquartered in
On
Market Commentary
The Diamond Market
The rough diamond market continued to build on the momentum that was evident at the end of the first quarter. Rough diamond prices increased substantially during the quarter with our own pricing ending at 50% above the low point in the first quarter. Polished diamond demand continued to be resilient in the Far East and a cautious but definite return of interest from US buyers has helped to revive the industry. Diamond polishers have been eager to purchase rough diamonds, which are still restricted in supply, leading to firmer prices in the quarter. Although it is anticipated that the improved market conditions will encourage some diamond producers to sell accumulated inventory, the increased supply is not expected to dampen rough diamond prices.
In the polished diamond market, the hiatus in both mining and diamond polishing has led to shortages in certain high-quality ranges. As the market heads into the busy holiday season, the shortages are anticipated to lead to further upward price movement.
The Retail Jewelry Market
Trading conditions in the luxury segment of the diamond jewelry market remain challenging. However, the Asian market is showing signs of recovery while the US and European markets appear to have reached bottom. Many industry peers are anticipating fourth quarter sales to improve over last year's disappointing holiday season.
(R) Harry Winston is a registered trademark of Harry Winston Inc.
Consolidated Financial Results
The following is a summary of the Company's consolidated quarterly results for the eight quarters ended
(expressed in thousands of United States dollars except per share amounts
and where otherwise noted)
(quarterly results are unaudited)
-------------------------------------------------------------------------
2010 2010 2009 2009 2009
Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Sales $ 94,776 $109,643 $118,399 $148,623 $186,119
Cost of sales 66,294 83,944 68,908 71,679 73,542
-------------------------------------------------------------------------
Gross margin 28,482 25,699 49,491 76,944 112,577
Gross margin (%) 30.1% 23.4% 41.8% 51.8% 60.5%
Selling, general and
administrative
expenses 32,380 35,749 39,399 33,998 39,194
-------------------------------------------------------------------------
Earnings (loss) from
operations (3,898) (10,050) 10,092 42,946 73,383
-------------------------------------------------------------------------
Interest and financing
expenses (2,998) (3,699) (4,960) (4,678) (5,366)
Other income 83 281 778 407 815
Insurance settlement - 3,250 17,240 - -
Dilution loss (539) (34,222) - - -
Impairment charge - - (93,780) - -
Foreign exchange gain
(loss) (25,274) (5,839) 4,649 48,982 5,301
-------------------------------------------------------------------------
Earnings (loss) before
income taxes (32,626) (50,279) (65,981) 87,657 74,133
Income taxes (recovery) (5,662) (3,120) 7,052 15,685 24,185
-------------------------------------------------------------------------
Earnings (loss) before
non-controlling
interest (26,964) (47,159) (73,033) 71,972 49,948
Non-controlling
interest (2,443) (2,075) (58) 81 1
-------------------------------------------------------------------------
Net earnings (loss) $(24,521) $(45,084) $(72,975) $ 71,891 $ 49,947
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings (loss)
per share $ (0.32) $ (0.68) $ (1.19) $ 1.17 $ 0.81
Diluted earnings
(loss) per share $ (0.32) $ (0.68) $ (1.19) $ 1.17 $ 0.81
Cash dividends declared
per share $ 0.00 $ 0.00 $ 0.05 $ 0.05 $ 0.05
Total assets(i) $ 1,533 $ 1,592 $ 1,567 $ 1,645 $ 1,637
Total long-term
liabilities(i) $ 507 $ 496 $ 550 $ 562 $ 617
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Six
months months
ended ended
2009 2008 2008 July 31, July 31,
Q1 Q4 Q3 2009 2008
-------------------------------------------------------------------------
Sales $156,079 $188,195 $176,478 $204,419 $342,198
Cost of sales 73,149 83,637 74,591 150,238 146,691
-------------------------------------------------------------------------
Gross margin 82,930 104,558 101,887 54,181 195,507
Gross margin (%) 53.1% 55.6% 57.7% 26.5% 57.1%
Selling, general and
administrative
expenses 43,285 45,494 35,539 68,129 82,479
-------------------------------------------------------------------------
Earnings (loss) from
operations 39,645 59,064 66,348 (13,948) 113,028
-------------------------------------------------------------------------
Interest and financing
expenses (5,453) (7,082) (7,422) (6,697) (10,819)
Other income 246 706 594 364 1,061
Insurance settlement - 13,488 - 3,250 -
Dilution loss - - - (34,761) -
Impairment charge - - - - -
Foreign exchange gain
(loss) 155 22,270 (40,584) (31,113) 5,456
-------------------------------------------------------------------------
Earnings (loss) before
income taxes 34,593 88,446 18,936 (82,905) 108,726
Income taxes (recovery) 13,336 (1,968) 26,197 (8,782) 37,521
-------------------------------------------------------------------------
Earnings (loss) before
non-controlling
interest 21,257 90,414 (7,261) (74,123) 71,205
Non-controlling
interest 1 (34) 90 (4,518) 2
-------------------------------------------------------------------------
Net earnings (loss) $ 21,256 $ 90,448 $ (7,351) $(69,605) $ 71,203
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings (loss)
per share $ 0.35 $ 1.55 $ (0.13) $ (0.97) $ 1.17
Diluted earnings
(loss) per share $ 0.35 $ 1.54 $ (0.13) $ (0.97) $ 1.17
Cash dividends declared
per share $ 0.05 $ 0.05 $ 0.25 $ 0.00 $ 0.10
Total assets(i) $ 1,591 $ 1,494 $ 1,433 $ 1,533 $ 1,637
Total long-term
liabilities(i) $ 634 $ 660 $ 530 $ 507 $ 617
-------------------------------------------------------------------------
(i) Total assets and total long-term liabilities are expressed in
millions of United States dollars.
The comparability of quarter-over-quarter results is impacted by
seasonality for both the mining and retail segments. Harry Winston
Diamond Corporation expects that the quarterly results for its mining
segment will continue to fluctuate depending on the seasonality of
production at the Diavik Diamond Mine, the number of sales events
conducted during the quarter, and the volume, size and quality
distribution of rough diamonds delivered from the Diavik Diamond Mine
in each quarter. The quarterly results for the retail segment are
also seasonal, with generally higher sales during the fourth quarter
due to the holiday season. See "Segmented Analysis" on page 9 for
additional information.
Three Months Ended July 31, 2009 Compared to Three Months Ended July 31,
2008
CONSOLIDATED NET EARNINGS
The Company recorded a second quarter consolidated net loss of
CONSOLIDATED SALES
Sales for the second quarter totalled
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's second quarter cost of sales was
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. The Company incurred SG A expenses of
Included in SG A expenses for the second quarter are
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax recovery of
The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the second quarter, the Canadian dollar strengthened against the US dollar. As a result, the Company recorded an unrealized foreign exchange loss of
The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2029.
The Company has provided a table below summarizing the movement from the statutory to the effective income tax rate as a percentage of earnings before taxes:
Three Three
months months
ended ended
July 31, July 31,
2009 2008
-------------------------------------------------------------------------
Statutory income tax rate 30 % 31 %
Northwest Territories mining royalty (net of
income tax relief) (1)% 8 %
Impact of foreign exchange (15)% (4)%
Earnings subject to tax different than statutory
rate 8 % (4)%
Changes in valuation allowance - % 1 %
Impact of dilution loss (1)% - %
Impact of income allocated to non-controlling
interest (2)% - %
Assessments and adjustments (2)% - %
Other items - % 1 %
Effective income tax rate 17 % 33 %
-------------------------------------------------------------------------
CONSOLIDATED INTEREST AND FINANCING EXPENSES
Interest and financing expenses of
CONSOLIDATED OTHER INCOME
Other income of
CONSOLIDATED DILUTION LOSS
The Company recorded a further non-cash dilution loss of
CONSOLIDATED FOREIGN EXCHANGE LOSS
A net foreign exchange loss of
Six Months Ended July 31, 2009 Compared to Six Months Ended July 31, 2008
CONSOLIDATED NET EARNINGS
The Company recorded a consolidated net loss for the six months ended
CONSOLIDATED SALES
Sales for the six months ended
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's cost of sales for the six months ended
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company incurred SG A expenses of
Included in SG A expenses for the six months ended
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax recovery of
The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the six months ended
During the six months ended
The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2029.
The Company has provided a table below summarizing the movement from the statutory to the effective income tax rate as a percentage of earnings before taxes:
Six Six
months months
ended ended
July 31, July 31,
2009 2008
-------------------------------------------------------------------------
Statutory income tax rate 30 % 31 %
Northwest Territories mining royalty (net of
income tax relief) - % 10 %
Impact of foreign exchange (6)% (4)%
Earnings subject to tax different than
statutory rate 4 % (4)%
Changes in valuation allowance (1)% 1 %
Impact of dilution loss (13)% - %
Impact of income allocated to non-controlling
interest (2)% - %
Assessments and adjustments (1)% 1 %
Effective income tax rate 11 % 35 %
-------------------------------------------------------------------------
CONSOLIDATED INTEREST AND FINANCING EXPENSES
Interest and financing expenses of
CONSOLIDATED OTHER INCOME
Other income of
CONSOLIDATED INSURANCE SETTLEMENT
The Company received the remaining insurance settlement of
CONSOLIDATED DILUTION LOSS
During the six months ended
CONSOLIDATED FOREIGN EXCHANGE LOSS
A net foreign exchange loss of
Segmented Analysis
The operating segments of the Company include mining and retail segments.
Mining
The mining segment includes the production and sale of rough diamonds.
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
-------------------------------------------------------------------------
2010 2010 2009 2009 2009
Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Sales $ 45,941 $ 57,690 $ 51,100 $ 90,716 $105,014
Cost of sales 40,049 57,256 34,612 40,617 32,390
-------------------------------------------------------------------------
Gross margin 5,892 434 16,488 50,099 72,624
Gross margin (%) 12.8% 0.8% 32.3% 55.2% 69.2%
Selling, general and
administrative expenses 4,182 5,503 4,430 3,114 5,151
-------------------------------------------------------------------------
Earnings (loss) from
operations $ 1,710 $ (5,069) $ 12,058 $ 46,985 $ 67,473
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Six
months months
ended ended
2009 2008 2008 July 31, July 31,
Q1 Q4 Q3 2009 2008
-------------------------------------------------------------------------
Sales $ 81,393 $103,238 $122,711 $103,631 $186,407
Cost of sales 32,150 36,962 45,985 97,305 64,540
-------------------------------------------------------------------------
Gross margin 49,243 66,276 76,726 6,326 121,867
Gross margin (%) 60.5% 64.2% 62.5% 6.1% 65.4%
Selling, general and
administrative expenses 7,208 5,663 6,748 9,685 12,359
-------------------------------------------------------------------------
Earnings (loss) from
operations $ 42,035 $ 60,613 $ 69,978 $ (3,359) $109,508
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended July 31, 2009 Compared to Three Months Ended July 31,
2008
MINING SALES
Rough diamond sales for the quarter totalled
The Company held two primary rough diamond sales in the second quarter, consistent with the comparable quarter of the prior year. The Company expects that results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Diamond Mine, the number of primary and secondary sales events conducted at each sales location during the quarter, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter.
MINING COST OF SALES AND GROSS MARGIN
The Company's second quarter cost of sales was
A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Diamond Mine. Cost of sales also includes sorting costs, which consist of the Company's cost of handling and sorting product in preparation for sales to third parties, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG A expenses for the mining segment decreased by
Six Months Ended July 31, 2009 Compared to Six Months Ended July 31, 2008
MINING SALES
Rough diamond sales for the six months ended
The Company held four primary rough diamond sales during the six months ended
MINING COST OF SALES AND GROSS MARGIN
For the six months ended
A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Diamond Mine. Cost of sales also includes sorting costs, which consist of the Company's cost of handling and sorting product in preparation for sales to third parties, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG A expenses for the mining segment decreased by
Mining Segment Operational Update
Ore production for the second calendar quarter consisted of 0.7 million carats produced from 0.13 million tonnes of ore from the A-154 South kimberlite pipe and 0.8 million carats produced from 0.25 million tonnes of ore from the A-418 kimberlite pipe. Rough diamond production was significantly lower than the second calendar quarter from the prior year as a result of the plan to reduce mining activity to reflect the softness in the rough diamond market. Average grade increased slightly to 3.7 carats per tonne from 3.5 carats per tonne. The increase in average grade was primarily driven by a significant increase in the grade of the ore from the A-154 South kimberlite pipe.
During the second calendar quarter, open pit mining and processing of the A-154 South and A-418 kimberlite pipes continued. The Diavik Diamond Mine was subsequently shut down from
Work continued on the underground pump stations and associated pipelines as well as the related surface works, including commissioning of the new crusher plant, expanded water treatment and power generation plants. The underground mine is on track to commence operation in the first calendar quarter of 2010.
Harry Winston Diamond Limited Partnership's 40% Share of Diavik Diamond
Mine Production
(reported on a one-month lag)
-------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Diamonds recovered (000s carats) 568 1,009 1,282 1,723
Grade (carats/tonne) 3.73 3.52 3.97 3.74
-------------------------------------------------------------------------
Mining Segment Outlook
A mine plan and revised budget for calendar 2009 was approved in the first quarter of calendar 2009 by both Rio Tinto plc, the operator of the Diavik Diamond Mine, and the Company. The updated plan incorporates various production options that will enable the operation to adapt to changes in the diamond market. The plan allows for changes to carat production by varying the mix of ore that comes from the A-418 kimberlite pipe and the higher grade A-154 South pit. The plan incorporates a six-week summer shutdown and a contemplated second six-week shutdown at year end. A new mining technique is under consideration for the potential mining of the A-21 resource, and exploration work has identified extensions at depth to the A-418 and A-154 North kimberlite pipes.
The summer shutdown was
As a result of the summer shutdown, the Company expects to hold one primary rough diamond sale in the third quarter compared to three primary rough diamond sales in the comparable quarter of the prior year. The Company plans to hold three primary rough diamond sales in the fourth quarter (total fiscal 2010 rough diamond sales of eight) compared to two primary rough diamond sales in the fourth quarter of the prior year (total fiscal 2009 rough diamond sales of nine).
PRICING
The rough diamond market experienced a robust recovery during the second quarter and pricing improved significantly. The current tone in the market has encouraged diamond producers to sell-down inventory, but this has not led to lower prices. The Company believes that rough and polished diamond prices are now in balance. Further price increases will be led by recovering consumer demand.
PRODUCTION
In calendar 2009, it is estimated that 1.3 million tonnes of open pit ore will be mined, the majority of which will come from the A-418 kimberlite pipe, with the remaining production coming from the A-154 South open pit. Total carat production is expected to be between 5 and 6 million carats on a 100% basis.
The turmoil in the rough diamond market over the last year has required the Diavik Diamond Mine operating team to maintain a flexible and nimble approach to production planning. Since the market has improved substantially and consistently since the end of the first quarter, there is now a new plan under consideration for the balance of this calendar year and next year which would, if adopted, see a reversal of the winter shutdown and delivery of approximately 7.5 million carats during calendar 2010.
Looking beyond calendar 2010, the objective is to feed a 2 million tonne per year processing capability with a combination of underground and open pit production. As underground capacity ramps up to approximately 1.5 million tonnes per year, open pit production will synchronously decline to 0.5 million tonnes per year from the A-418 open pit until this pit is finally closed at the end of calendar 2012. The feasibility of mining the upper part of A-21 is now under review with the objective that it becomes the supplemental ore source to underground production beyond 2012.
To extend production beyond 2022 will be dependent on bringing resources and exploratory tonnages into reserves.
COST OF SALES
Cost of sales for the mining segment for fiscal 2009 included proceeds of an insurance settlement related to a Diavik Diamond Mine shovel fire and significant costs attributable to development activity versus production activity during the A-418 pre-production period. After adjusting for these factors, the Company expects cost of sales for the mining segment to increase in fiscal 2010 by an estimated 10% to approximately
CAPITAL EXPENDITURES
During the next three years, HWDLP's 40% share of the planned capital expenditure is expected to be approximately
Although underground development is substantially completed, limited production is not expected to commence until calendar 2010. Further development work that will allow for optimum production levels through the use of different mining methods is expected to be undertaken throughout calendar 2010 and 2011. The Company expects to contribute
- Retail
The retail segment includes sales from Harry Winston salons, which are located in prime markets around the world including eight salons in
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
-------------------------------------------------------------------------
2010 2010 2009 2009 2009
Q2 Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Sales $ 48,835 $ 51,953 $ 67,299 $ 57,907 $ 81,105
Cost of sales 26,245 26,688 34,296 31,062 41,152
-------------------------------------------------------------------------
Gross margin 22,590 25,265 33,003 26,845 39,953
Gross margin (%) 46.3% 48.6% 49.0% 46.4% 49.3%
Selling, general
and administrative
expenses 28,198 30,246 34,969 30,884 34,043
-------------------------------------------------------------------------
Earnings (loss)
from operations $ (5,608) $ (4,981) $ (1,966) $ (4,039) $ 5,910
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Six
months months
ended ended
2009 2008 2008 July 31, July 31,
Q1 Q4 Q3 2009 2008
-------------------------------------------------------------------------
Sales $ 74,686 $ 84,957 $ 53,767 $100,788 $155,791
Cost of sales 40,999 46,675 28,606 52,933 82,151
-------------------------------------------------------------------------
Gross margin 33,687 38,282 25,161 47,855 73,640
Gross margin (%) 45.1% 45.1% 46.8% 47.5% 47.3%
Selling, general
and administrative
expenses 36,077 39,831 28,791 58,444 70,120
-------------------------------------------------------------------------
Earnings (loss)
from operations $ (2,390) $ (1,549) $ (3,630) $(10,589) $ 3,520
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended July 31, 2009 Compared to Three Months Ended
July 31, 2008
RETAIL SALES
Sales for the second quarter were
RETAIL COST OF SALES AND GROSS MARGIN
Cost of sales for the retail segment or the second quarter was
RETAIL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG A expenses decreased to
Six Months Ended July 31, 2009 Compared to Six Months Ended July 31, 2008
RETAIL SALES
Sales for the six months ended
RETAIL COST OF SALES AND GROSS MARGIN
Cost of sales for the retail segment for the six months ended
RETAIL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG A expenses decreased to
Retail Segment Operational Update
During the second quarter, the retail segment recorded a 40% decline in sales compared with the comparable quarter of the prior year. The decline in sales was consistent throughout most regions except for the
Retail Segment Outlook
Harry Winston Inc. expects the economic environment to remain challenging over the remainder of the year. Many retailers are anticipating fourth quarter sales to improve over last year's disappointing holiday season. The retail segment will continue cost- reduction initiatives, strict controls over inventory purchasing and reductions in capital expenditures.
With the approach of the holiday season, Harry Winston Inc. is optimistic that its new collections of jewelry and watches will be well received by customers. The cost-reduction initiatives taken in response to the recession, coupled with the strength of the Harry Winston brand, are aimed at delivering a higher level of sustainable profitability for the retail segment during the anticipated economic recovery. The Company is committed to continue building the Harry Winston brand over the long term.
Liquidity and Capital Resources
Working Capital
As at
During the quarter ended
Working capital increased to
The Company's liquidity requirements fluctuate from quarter to quarter depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, seasonality of mine operating expenses, capital expenditure programs, the number of sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter, along with the seasonality of sales and salon expansion in the retail segment. The Company's principal working capital needs include investments in inventory, prepaid expenses and other current assets, and accounts payable and income taxes payable.
With the closing of the
Financing Activities
As at
Also included in long-term debt of the Company's retail operations is a 25-year loan agreement for
Harry Winston Japan, K.K. maintains secured and unsecured credit agreements with three banks amounting to (Yen)2,065 million (
At
Investing Activities
During the second quarter, the Company purchased capital assets of
Contractual Obligations
The Company has contractual payment obligations with respect to long-term debt and, through its participation in the Joint Venture, future site restoration costs at the Diavik Diamond Mine level. Additionally, at the Joint Venture level, contractual obligations exist with respect to operating purchase obligations, as administered by DDMI, the operator of the mine. In order to maintain its 40% ownership interest in the Diavik Diamond Mine, HWDLP is obligated to fund 40% of the Joint Venture's total expenditures on a monthly basis. HWDLP's current projected share of the planned capital expenditures at the Diavik Diamond Mine, which are not reflected in the table below, including capital expenditures for the calendar years 2009 to 2013, is approximately
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) $205,029 $ 8,513 $ 16,463 $162,865 $ 17,188
Environmental and
participation
agreements incremental
commitments (c) 88,041 73,127 2,970 1,150 10,794
Operating lease
obligations (d) 109,427 18,817 27,085 19,495 44,030
Capital lease
obligations (e) 1,027 687 340 - -
-------------------------------------------------------------------------
Total contractual
obligations $403,524 $101,144 $ 46,858 $183,510 $ 72,012
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Long-term debt presented in the foregoing table includes current and
long-term portions. Harry Winston Inc. maintains a credit agreement
with a syndicate of banks for a $250.0 million five-year revolving
credit facility. There are no scheduled repayments required before
maturity. At July 31, 2009, $151.1 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 ($16.1 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
($3.2 million) loan and a CHF 14.0 million ($12.9 million) loan. The
CHF 3.5 million loan bears interest at a rate of 3.9% and matures on
April 22, 2013 (extended from April 22, 2010). The CHF 14.0 million
loan bears interest at a rate of 3.55% and matures on January 31,
2033. At July 31, 2009, $15.3 million was outstanding on the loan
agreement compared to $14.7 million at January 31, 2009. The bank has
a secured interest in the factory building. In addition, the Company
has a demand credit facility of CHF 2.0 million ($1.8 million),
supported by a $2.0 million standby letter of credit. The demand
credit facility bears interest at a rate of 5.0% per annum. At July
31, 2009, $1.4 million was outstanding, compared to $0.5 million at
January 31, 2009.
Harry Winston Japan, K.K. maintains unsecured credit agreements with
two banks, each amounting to (Yen)1,490 million ($15.6 million). At
July 31, 2009, $15.6 million had been drawn against these facilities
and classified as bank advances. The credit facilities amounting to
$7.8 million, $2.6 million and $5.2 million, bear interest at 1.98%,
1.98% and 2.38%, respectively, and expired on August 31, 2009
(subsequently extended to September 30, 2009), October 30, 2009 and
June 28, 2010, respectively. Harry Winston Japan, K.K. also maintains
a secured credit agreement amounting to (Yen)575 million ($6.1
million) classified as bank advances. The facility is secured by
inventory owned by Harry Winston Japan, K.K., bears interest at 2.15%
and expires on December 18, 2009.
The Company's first mortgage on real property has scheduled principal
payments of approximately $0.1 million quarterly, and may be prepaid
at any time. On July 31, 2009, $7.4 million was outstanding on the
mortgage payable.
(b) Interest on long-term debt is calculated at various fixed and
floating rates. Projected interest payments on the current debt
outstanding were based on interest rates in effect at July 31, 2009,
and have been included under long-term debt in the table above.
Interest payments for the next 12 months are approximated to be $7.4
million.
(c) The Joint Venture, under environmental and other agreements, must
provide funding for the Environmental Monitoring Advisory Board.
These agreements also state the Joint Venture must provide security
deposits for the performance by the Joint Venture of its reclamation
and abandonment obligations under all environmental laws and
regulations. The operator of the Joint Venture has fulfilled such
obligations for the security deposits by posting letters of credit of
which HWDLP's share as at July 31, 2009 was $71.8 million based on
its 40% ownership interest in the Diavik Diamond Mine. There can be
no assurance that the operator will continue its practice of posting
letters of credit in fulfillment of this obligation, in which event
HWDLP would be required to post its proportionate share of such
security directly, which would result in additional constraints on
liquidity. The requirement to post security for the reclamation and
abandonment obligations may be reduced to the extent of amounts spent
by the Joint Venture on those activities. The Joint Venture has also
signed participation agreements with various native groups. These
agreements are expected to contribute to the social, economic and
cultural well-being of area Aboriginal bands. The actual cash outlay
for the Joint Venture's obligations under these agreements is not
anticipated to occur until later in the life of the Diavik Diamond
Mine.
(d) Operating lease obligations represent future minimum annual rentals
under non-cancellable operating leases for Harry Winston salons,
office space and long-term leases for property, land, office premises
and a fuel tank farm at the Diavik Diamond Mine. Harry Winston Inc.'s
New York salon lease expires on December 17, 2010 with an option to
renew.
(e) Capital lease obligations represent future minimum annual rentals
under non-cancellable capital leases for Harry Winston Inc. retail
exhibit space.
Dividend
On
Risks and Uncertainties
Harry Winston Diamond Corporation is subject to a number of risks and uncertainties as a result of its operations. In addition to the other information contained in this Management's Discussion and Analysis and the Company's other publicly filed disclosure documents, readers should give careful consideration to the following risks, each of which could have a material adverse effect on the Company's business prospects or financial condition:
Nature of Mining
The operation of the Diavik Diamond Mine is subject to risks inherent in the mining industry, including variations in grade and other geological differences, unexpected problems associated with required water retention dikes, water quality, surface and underground conditions, processing problems, equipment performance, accidents, labour disputes, risks relating to the physical security of the diamonds, force majeure risks and natural disasters. Particularly with underground mining operations, inherent risks include variations in rock structure and strength as it impacts on mining method selection and performance, de-watering and water handling requirements, achieving the required paste backfill strengths and unexpected local ground conditions. Hazards, such as unusual or unexpected rock formations, rock bursts, pressures, collapses, flooding or other conditions, may be encountered during mining. Such risks could result in personal injury or fatality; damage to or destruction of mining properties, processing facilities or equipment; environmental damage; delays, suspensions or permanent reductions in mining production; monetary losses; and possible legal liability.
The Diavik Diamond Mine, because of its remote northern location and access only by winter road or by air, is subject to special climate and transportation risks. These risks include the inability to operate or to operate efficiently during periods of extreme cold, the unavailability of materials and equipment, and increased transportation costs due to the late opening and/or early closure of the winter road. Such factors can add to the cost of mine development, production and operation and/or impair production and mining activities, thereby affecting the Company's profitability.
Nature of Joint Arrangement with DDMI
Harry Winston Diamond Limited Partnership holds an undivided 40% interest in the assets, liabilities and expenses of the Diavik Diamond Mine and the Diavik group of mineral claims. Harry Winston Diamond Limited Partnership is owned 77.5% by the Company and 22.5% by Kinross Gold Corporation. The Diavik Diamond Mine and the exploration and development of the Diavik group of mineral claims is a joint arrangement between DDMI (60%) and HWDLP (40%), and is subject to the risks normally associated with the conduct of joint ventures and similar joint arrangements. These risks include the inability to exert influence over strategic decisions made in respect of the Diavik Diamond Mine and the Diavik group of mineral claims. By virtue of DDMI's 60% interest in the Diavik Diamond Mine, it has a controlling vote in virtually all Joint Venture management decisions respecting the development and operation of the Diavik Diamond Mine and the development of the Diavik group of mineral claims. Accordingly, DDMI is able to determine the timing and scope of future project capital expenditures, and therefore is able to impose capital expenditure requirements on HWDLP that the Company may not have sufficient cash to meet. A failure to meet capital expenditure requirements imposed by DDMI could result in HWDLP's interest in the Diavik Diamond Mine and the Diavik group of mineral claims being diluted.
Agreement with
Under the amended partnership agreement of HWDLP, the general partner is entitled to request that the partners in the partnership advance funds to the partnership pro rata based on their holdings of partnership units for the purpose of satisfying the partnership's obligations under various contractual commitments, including those deriving from the joint arrangement between DDMI and the partnership. The partners may unanimously determine to fund any cash call by way of a loan rather than equity contribution. If a partner fails to contribute its proportion of funds with respect to a cash call, the non-defaulting partner or partners will have the option, but not the obligation, to fund the defaulting partner's portion of the cash call by way of equity contribution or loan or a combination of the two; provided that if any equity contribution is made, the non-defaulting partner's interest in the partnership will be increased proportionately through the issuance of additional partnership units.
As DDMI, under the joint arrangement between DDMI and the partnership, is able to determine the timing and scope of future project capital expenditures and to impose capital expenditure requirements on the Company that the Company may not have sufficient cash to meet, the Company's interest in HWDLP could be diluted under the amended partnership agreement as a result of a failure by the Company to meet cash call requirements imposed by the amended partnership agreement.
Diamond Prices and Demand for Diamonds
The profitability of the Company is dependent upon production from the Diavik Diamond Mine and on the results of the operations of its retail operations. Each in turn is dependent in significant part upon the worldwide demand for and price of diamonds. Diamond prices fluctuate and are affected by numerous factors beyond the control of the Company, including worldwide economic trends, particularly in the US,
Cash Flow and Liquidity
The Company's liquidity requirements fluctuate from quarter to quarter depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, seasonality of mine operating expenses, capital expenditure programs, the number of sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter, along with the seasonality of sales and salon expansion in the retail segment. The Company's principal working capital needs include investments in inventory, prepaid expenses and other current assets, and accounts payable and income taxes payable. There can be no assurance that the Company will be able to meet each or all of its liquidity requirements. A failure by the Company to meet its liquidity requirements could result in the Company failing to meet its planned development objectives, or in the Company being in default of a contractual obligation, each of which could have a material adverse effect on the Company's business prospects or financial condition.
Economic Environment
The Company's financial results are tied to the global economic environment. The global markets are experiencing the impact of a significant US and international economic downturn. This could restrict the Company's growth opportunities both domestically and internationally. Should economic conditions not improve or further deteriorate, the Company could experience revenue pressure across both its business segments and a decrease in the availability of credit, which could have a material adverse effect on the Company's business prospects or financial condition.
Currency Risk
Currency fluctuations may affect the Company's financial performance. Diamonds are sold throughout the world based principally on the US dollar price, and although the Company reports its financial results in US dollars, a majority of the costs and expenses of the Diavik Diamond Mine are incurred in Canadian dollars. Further, the Company has a significant future income tax liability that has been incurred and will be payable in Canadian dollars. The Company's currency exposure relates primarily to expenses and obligations incurred by it in Canadian dollars and, secondarily, to revenues of Harry Winston Inc. in currencies other than the US dollar. The appreciation of the Canadian dollar against the US dollar, and the depreciation of such other currencies against the US dollar, therefore, will increase the expenses of the Diavik Diamond Mine and the amount of the Company's Canadian dollar liabilities relative to the revenue the Company will receive from diamond sales, and will decrease the US dollar revenues received by Harry Winston Inc. From time to time, the Company may use a limited number of derivative financial instruments to manage its foreign currency exposure.
Licenses and Permits
The operation of the Diavik Diamond Mine and exploration on the Diavik property requires licenses and permits from the Canadian government. The Diavik Diamond Mine Type "A" Water License was renewed by the regional Wek'eezhii Land and Water Board to
Regulatory and Environmental Risks
The operation of the Diavik Diamond Mine, exploration activities at the Diavik Project and the manufacturing of jewelry and watches are subject to various laws and regulations governing the protection of the environment, exploration, development, production, taxes, labour standards, occupational health, waste disposal, mine safety, manufacturing safety and other matters. New laws and regulations, amendments to existing laws and regulations, or more stringent implementation or changes in enforcement policies under existing laws and regulations could have a material adverse impact on the Company by increasing costs and/or causing a reduction in levels of production from the Diavik Diamond Mine and in the manufacture of jewelry and watches. As well, as the Company's international operations expand, it or its subsidiaries become subject to laws and regulatory regimes which differ materially from those under which they operate in
Mining and manufacturing are subject to potential risks and liabilities associated with pollution of the environment and the disposal of waste products occurring as a result of mining and manufacturing operations. To the extent that the Company's operations are subject to uninsured environmental liabilities, the payment of such liabilities could have a material adverse effect on the Company.
Climate Change
Resource and Reserve Estimates
The Company's figures for mineral resources and ore reserves on the Diavik group of mineral claims are estimates, and no assurance can be given that the anticipated carats will be recovered. The estimation of reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production and the timing of future expenditures, all of which are subject to numerous uncertainties and various interpretations. The Company expects that its estimates of reserves will change to reflect updated information. Reserve estimates may be revised upward or downward based on the results of current and future drilling, testing or production levels and on changes in mine design. In addition, market fluctuations in the price of diamonds or increases in the costs to recover diamonds from the Diavik Diamond Mine may render the mining of ore reserves uneconomical.
Mineral resources that are not mineral reserves do not have demonstrated economic viability. Due to the uncertainty that may attach to inferred mineral resources, there is no assurance that mineral resources at the Diavik property will be upgraded to proven and probable ore reserves.
Insurance
The Company's business is subject to a number of risks and hazards, including adverse environmental conditions, industrial accidents, labour disputes, unusual or unexpected geological conditions, risks relating to the physical security of diamonds and jewelry held as inventory or in transit, changes in the regulatory environment and natural phenomena such as inclement weather conditions. Such occurrences could result in damage to the Diavik Diamond Mine, personal injury or death, environmental damage to the Diavik property, delays in mining, closing of Harry Winston Inc.'s manufacturing facilities or salons, monetary losses and possible legal liability. Although insurance is maintained to protect against certain risks in connection with the Diavik Diamond Mine and the Company's operations, the insurance in place will not cover all potential risks. It may not be possible to maintain insurance to cover insurable risks at economically feasible premiums.
Fuel Costs
The Diavik Diamond Mine's expected fuel needs are purchased periodically during the year for storage, and transported to the mine site by way of the winter road. These costs will increase if transportation by air freight is required due to a shortened "winter road season" or unexpectedly high fuel usage.
The cost of the fuel purchased is based on the then prevailing price and expensed into operating costs on a usage basis. The Diavik Diamond Mine currently has no hedges for its future anticipated fuel consumption.
Reliance on Skilled Employees
Production at the Diavik Diamond Mine is dependent upon the efforts of certain skilled employees of DDMI. The loss of these employees or the inability of DDMI to attract and retain additional skilled employees may adversely affect the level of diamond production from the Diavik Diamond Mine.
The Company's success at marketing rough diamonds and in operating the business of Harry Winston Inc. is dependent on the services of key executives and skilled employees, as well as the continuance of key relationships with certain third parties, such as diamantaires. The loss of these persons or the Company's inability to attract and retain additional skilled employees or to establish and maintain relationships with required third parties may adversely affect its business and future operations in marketing diamonds and in operating its retail segment.
Expansion of the Existing Salon Network
A key component of the Company's retail strategy is the expansion of its salon network. This strategy requires the Company to make ongoing capital expenditures to build and open new salons, to refurbish existing salons from time to time, and to incur additional operating expenses in order to operate the new salons. To date, much of this expansion has been financed through borrowings by Harry Winston Inc. There can be no assurance that the expansion of the salon network will prove successful in increasing annual sales or earnings from the retail segment, and the increased debt levels resulting from this expansion could negatively impact the Company's liquidity and its results from operations in the absence of increased sales and earnings.
Competition in the Luxury Jewelry Segment
The Company is exposed to competition in the retail diamond market from other luxury goods, diamond, jewelry and watch retailers. The ability of Harry Winston Inc. to successfully compete with such luxury goods, diamond, jewelry and watch retailers is dependent upon a number of factors, including the ability to source high-end polished diamonds and protect and promote its distinctive brand name and reputation. If Harry Winston Inc. is unable to successfully compete in the luxury jewelry segment, then the Company's results of operations will be adversely affected.
Critical Accounting Estimates
Management is often required to make judgments, assumptions and estimates in the application of Canadian generally accepted accounting principles that have a significant impact on the financial results of the Company. Certain policies are more significant than others and are, therefore, considered critical accounting policies. Accounting policies are considered critical if they rely on a substantial amount of judgment (use of estimates) in their application or if they result from a choice between accounting alternatives and that choice has a material impact on the Company's reported results or financial position. There have been no changes to the Company's critical accounting policies or estimates from those disclosed in the Company's MD A for its fiscal year ended
Changes in Accounting Policies
Goodwill and Intangibles Assets
On
Recently Issued Accounting Standards
Credit Risk and the Fair Value of Financial Assets and Liabilities
In
Mining Exploration Costs
In
Financial Instruments
In
International Financial Reporting Standards ("IFRS")
In
The conversion project from Canadian GAAP to IFRS is led by finance management, and includes representatives from various areas of the Company as necessary to plan for and achieve a smooth transition. The Company has engaged the services of a third party expert advisor to assist. Regular progress reporting to senior management and to the Audit Committee on the status of the IFRS conversion project is in place. The conversion project consists of three phases:
Assessment Phase - This phase involves a review of accounting
differences between Canadian GAAP and IFRS; an evaluation of IFRS 1
exemptions for first time IFRS adopters; and a high-level impact
assessment on systems and business processes.
Design Phase - This phase involves prioritizing and resolving
accounting treatment issues; quantifying the impact of converting to
IFRS; reviewing and approving accounting policy choices; performing a
detailed impact assessment on systems and processes; designing system
and business process changes; developing IFRS training material; and
drafting IFRS financial statement content.
Implementation Phase - This phase involves changes to systems and
business processes; determining the opening IFRS transition balance
sheet; dual accounting under both Canadian GAAP and IFRS; and
preparing detailed reconciliations of Canadian GAAP to IFRS financial
statements.
Although the Company's IFRS conversion project consists of three sequential phases, certain aspects of each phase sometimes occur concurrently, resulting in the analysis of certain areas being further developed than in other areas.
EXPECTED ACCOUNTING DIFFERENCES BETWEEN CANADIAN GAAP IFRS
At
Property, plant and equipment - Separate accounting for components of
property, plant and equipment is more vigorously applied and broader
under IFRS. Costs are allocated to significant parts of an asset if the
useful lives differ, and each part is then separately depreciated.
Exploration and evaluation - IFRS 6, "Exploration for and Evaluation of
Mineral Resources", allows an entity to either develop a new accounting
policy for exploration and evaluation expenditures consistent with IFRS
requirements or continue to follow the Company's existing policy.
Income taxes - Existing IFRS requires the recognition of deferred taxes
in situations not required under Canadian GAAP. Specifically, a
deferred tax liability (asset) is recognized for exchange gains and
losses relating to foreign non-monetary assets and liabilities that are
remeasured into the functional currency using historical exchange
rates. Similar timing differences are also recognized for the
difference in tax bases between jurisdictions as a result of intra-
group transfer of assets.
Asset impairment - Under IFRS, assets are tested for impairment either
individually or within cash generating units. This approach reflects
the smallest group of assets capable of generating largely independent
cash inflows, which may differ from asset groups under Canadian GAAP.
Impairment charges relating to long-lived assets may be more frequent
under IFRS as the cash flow test for recoverability is based on a one
step discounted cash flow approach. Impairment under IFRS is recognized
if the carrying amount exceeds the higher of fair value less cost to
sell, or value in use. Reversal of impairment charges is required under
IFRS if the circumstances leading to the impairment have changed.
In addition, the International Accounting Standards Board has a number of ongoing projects that could result in the issuance of new IFRS that could affect the ultimate differences between Canadian GAAP and IFRS. In particular, we expect that there may be revised IFRS issued and in effect in relation to joint arrangements and income taxes. The Company is monitoring these international accounting developments.
The Company also anticipates a significant increase in disclosure within its consolidated financial statements resulting from the adoption of IFRS and is continuing to assess the level of disclosure required.
FIRST TIME ADOPTION OF IFRS
IFRS 1, "First Time Adoption of International Financial Reporting Standards" ("IFRS 1"), provides mandatory guidance that generally requires full retrospective application of the IFRS and interpretations from the date of transition,
At this time, the impact on the Company's financial position and results of operations is not reasonably determinable or estimable for any of the IFRS conversion areas identified. From the perspective of the Company's systems and controls, no significant impact has currently been identified from management's high-level impact assessment on systems and business processes carried out to date.
Outstanding Share Information
As at
-------------------------------------------------------------------------
Authorized Unlimited
Issued and outstanding shares 76,588,592
Options outstanding 3,234,179
Fully diluted 79,822,771
-------------------------------------------------------------------------
Additional Information
Additional information relating to the Company, including the Company's most recently filed annual information form, can be found on SEDAR at www.sedar.com, and is also available on the Company's website at http://investor.harrywinston.com.
Consolidated Balance Sheets
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
July 31, January 31,
2009 2009
(unaudited)
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 3) $ 67,903 $ 16,735
Cash collateral and cash reserves (note 3) 288 30,145
Accounts receivable (note 13) 18,031 66,980
Inventory and supplies (note 4) 321,113 346,235
Prepaid expenses and other current assets 52,416 48,130
-------------------------------------------------------------------------
459,751 508,225
Mining capital assets 812,914 800,358
Retail capital assets 65,304 68,258
Intangible assets, net (note 6) 129,929 130,752
Other assets 15,082 15,644
Future income tax asset 50,038 43,338
-------------------------------------------------------------------------
$ 1,533,018 $ 1,566,575
---------------------------
---------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 90,542 $ 118,390
Income taxes payable 47,656 76,987
Bank advances 23,883 42,621
Current portion of long-term debt (note 7) 1,109 75,097
-------------------------------------------------------------------------
163,190 313,095
Long-term debt (note 7) 173,065 205,625
Future income tax liability 291,601 303,284
Other long-term liability 1,958 1,946
Future site restoration costs 40,105 39,506
Non-controlling interest (note 1) 180,068 280
Shareholders' Equity:
Share capital (note 8) 426,281 381,541
Contributed surplus 17,357 16,079
Retained earnings 213,572 283,177
Accumulated other comprehensive income 25,821 22,042
-------------------------------------------------------------------------
683,031 702,839
Commitments and guarantees (note 9)
-------------------------------------------------------------------------
$ 1,533,018 $ 1,566,575
---------------------------
---------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Earnings
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS,
EXCEPT PER SHARE AMOUNTS)
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2009 2008 2009 2008
-------------------------------------------------------------------------
Sales $ 94,776 $ 186,119 $ 204,419 $ 342,198
Cost of sales 66,294 73,542 150,238 146,691
-------------------------------------------------------------------------
Gross margin 28,482 112,577 54,181 195,507
Selling, general and
administrative
expenses 32,380 39,194 68,129 82,479
-------------------------------------------------------------------------
Earnings (loss) from
operations (3,898) 73,383 (13,948) 113,028
-------------------------------------------------------------------------
Interest and financing
expenses (2,998) (5,366) (6,697) (10,819)
Other income 83 815 364 1,061
Insurance settlement
(note 13) - - 3,250 -
Dilution loss (note 14) (539) - (34,761) -
Foreign exchange
gain (loss) (25,274) 5,301 (31,113) 5,456
-------------------------------------------------------------------------
Earnings (loss) before
income taxes (32,626) 74,133 (82,905) 108,726
Income tax expense
- Current 2,019 27,589 1,194 49,089
Income tax recovery
- Future (7,681) (3,404) (9,976) (11,568)
-------------------------------------------------------------------------
Earnings (loss) before
non-controlling
interest (26,964) 49,948 (74,123) 71,205
Non-controlling
interest (note 1) (2,443) 1 (4,518) 2
-------------------------------------------------------------------------
Net earnings (loss) $ (24,521) $ 49,947 $ (69,605) $ 71,203
---------------------------------------------------
---------------------------------------------------
Earnings (loss) per
share
Basic $ (0.32) $ 0.81 $ (0.97) $ 1.17
---------------------------------------------------
---------------------------------------------------
Fully diluted $ (0.32) $ 0.81 $ (0.97) $ 1.17
---------------------------------------------------
---------------------------------------------------
Weighted average
number of shares
outstanding 76,579,975 61,372,091 71,509,367 60,655,424
---------------------------------------------------
---------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2009 2008 2009 2008
-------------------------------------------------------------------------
Net earnings (loss) $ (24,521) $ 49,947 $ (69,605) $ 71,203
Other comprehensive
income
Net gain (loss) on
translation of net
foreign operations
(net of tax - nil) 3,693 (654) 3,779 1,935
-------------------------------------------------------------------------
Total comprehensive
income (loss) $ (20,828) $ 49,293 $ (65,826) $ 73,138
---------------------------------------------------
---------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2009 2008 2009 2008
-------------------------------------------------------------------------
COMMON SHARES:
Balance at beginning
of period $ 426,299 $ 381,541 $ 381,541 $ 305,502
Issued during the
period (18) - 44,740 76,039
-------------------------------------------------------------------------
Balance at end of
period 426,281 381,541 426,281 381,541
-------------------------------------------------------------------------
CONTRIBUTED SURPLUS:
Balance at beginning
of period 17,154 15,769 16,079 15,614
Stock option expense 203 137 1,278 292
-------------------------------------------------------------------------
Balance at end
of period 17,357 15,906 17,357 15,906
-------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning
of period 238,093 243,521 283,177 225,334
Net earnings (loss) (24,521) 49,947 (69,605) 71,203
Dividends paid - (3,070) - (6,139)
-------------------------------------------------------------------------
Balance at end
of period 213,572 290,398 213,572 290,398
-------------------------------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME:
Balance at beginning
of period 22,128 27,801 22,042 25,212
Other comprehensive
income
Net gain (loss) on
translation of net
foreign operations
(net of tax - nil) 3,693 (654) 3,779 1,935
-------------------------------------------------------------------------
Balance at end of period 25,821 27,147 25,821 27,147
-------------------------------------------------------------------------
Total Shareholders'
Equity $ 683,031 $ 714,992 $ 683,031 $ 714,992
---------------------------------------------------
---------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2009 2008 2009 2008
-------------------------------------------------------------------------
Cash provided by
(used in):
Operating
Net earnings (loss) $ (24,521) $ 49,947 $ (69,605) $ 71,203
Items not involving
cash:
Amortization and
accretion 16,971 16,778 34,646 30,733
Future income
tax recovery (7,681) (3,404) (9,976) (11,568)
Stock-based
compensation and
pension expense 225 222 1,290 579
Foreign exchange
loss (gain) 24,604 (5,677) 31,098 (6,251)
Loss on disposal
of assets - 19 - 489
Non-controlling
interest (2,443) 1 (4,518) 2
Dilution loss 539 - 34,761 -
Change in non-cash
operating working
capital (27,729) (11,679) 1,066 (4,671)
-------------------------------------------------------------------------
(20,035) 46,207 18,762 80,516
-------------------------------------------------------------------------
Financing
Decrease in
long-term debt (74) (14,691) (122) (27,168)
Increase (decrease)
in revolving credit (12,929) 25,235 (51,845) 180,425
Repayment of mining
segment senior
secured term and
revolving credit
facilities - - (74,160) -
Repayment of Harry
Winston Inc. 2008
revolving credit
facility - - - (159,109)
Distribution to Kinross (6,750) - (6,750) -
Dividends paid - (3,070) - (6,139)
Issue of common shares,
net of issue costs (18) - 44,740 76,039
-------------------------------------------------------------------------
(19,771) 7,474 (88,137) 64,048
-------------------------------------------------------------------------
Investing
Subscription of
partnership units (696) - 125,095 -
Cash collateral and
cash reserve (28) 8,635 29,857 312
Mining capital assets (14,673) (63,284) (36,802) (129,908)
Retail capital assets (1,128) (4,413) (1,567) (7,656)
Other assets (525) - (307) (1)
-------------------------------------------------------------------------
(17,050) (59,062) 116,276 (137,253)
-------------------------------------------------------------------------
Foreign exchange effect
on cash balances 2,762 (77) 4,267 (621)
Increase (decrease) in
cash and cash
equivalents (54,094) (5,458) 51,168 6,690
Cash and cash
equivalents, beginning
of period (note 3) 121,997 61,776 16,735 49,628
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period (note 3) $ 67,903 $ 56,318 $ 67,903 $ 56,318
---------------------------------------------------
---------------------------------------------------
Change in non-cash
operating working
capital
Accounts receivable (863) (6,459) 49,173 (4,727)
Prepaid expenses and
other current assets (835) 5,969 (4,936) 1,534
Inventory and supplies 18,345 (4,409) 25,121 (22,986)
Accounts payable and
accrued liabilities (18,911) (3,864) (31,018) 14,835
Income taxes payable (25,465) (2,916) (37,274) 6,673
-------------------------------------------------------------------------
$ (27,729) $ (11,679) $ 1,066 $ (4,671)
-------------------------------------------------------------------------
Supplemental cash
flow information
Cash taxes paid $ 25,662 $ 30,373 $ 36,478 $ 42,568
Cash interest paid $ 2,392 $ 4,390 $ 6,139 $ 8,798
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
JULY 31, 2009 WITH COMPARATIVE FIGURES
(TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT
AS OTHERWISE NOTED)
NOTE 1:
Nature of Operations
Harry Winston Diamond Corporation (the "Company") is a specialist diamond
company focusing on the mining and retail segments of the diamond
industry.
The Company's most significant asset is an ownership interest in the
Diavik group of mineral claims. The Diavik Joint Venture (the "Joint
Venture") is an unincorporated joint arrangement between Diavik Diamond
Mines Inc. ("DDMI") (60%) and Harry Winston Diamond Limited Partnership
("HWDLP") (40%) where HWDLP holds an undivided 40% ownership interest in
the assets, liabilities and expenses. DDMI is the operator of the Diavik
Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife, Canada.
DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England. As
a result of the strategic investment by Kinross Gold Corporation
("Kinross") of Toronto, Canada, described below, HWDLP is 77.5% owned by
the Company and 22.5% owned by Kinross. Kinross's 22.5% ownership is
reported in the consolidated financial statements as part of non-
controlling interest.
On March 31, 2009, Kinross made a net investment of $150.0 million to
acquire an indirect interest in the Diavik Diamond Mine and a direct
equity stake in the Company. Kinross subscribed for 15.2 million of the
Company's treasury shares at a price of $3.00 per share, being
approximately 19.9% of the Company's issued equity post the transaction.
Kinross also subscribed for new partnership units representing a 22.5%
interest in HWDLP, for a net effective subscription value of $103.7
million. With the closing of the Kinross transaction, the Company's
economic interest in the Diavik Diamond Mine is 31%.
The Company also owns a 100% interest in Harry Winston Inc., the premier
fine jewelry and watch retailer. The results of Harry Winston Inc.,
located in New York City, US, are consolidated in the financial
statements of the Company.
Certain comparative figures have been reclassified to conform with the
current year's presentation.
NOTE 2:
Significant Accounting Policies
The interim consolidated financial statements are prepared by management
in accordance with accounting principles generally accepted in Canada.
The interim consolidated financial statements include the accounts of the
Company and all of its subsidiaries as well as its proportionate interest
in the assets, liabilities and expenses of joint arrangements.
Intercompany transactions and balances have been eliminated.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto in the Company's Annual Report for the year ended January 31,
2009, since these interim financial statements do not include all
disclosures required by Canadian generally accepted accounting principles
("GAAP"). Excluding adoption of the new accounting standards described
below, these statements have been prepared following the same accounting
policies and methods of computation as the consolidated financial
statements for the year ended January 31, 2009.
Adoption of New Accounting Standards and Developments
GOODWILL AND INTANGIBLE ASSETS
On February 1, 2008, the CICA issued Handbook Section 3064, "Goodwill and
Intangible Assets". This Section establishes revised standards for the
recognition, measurement, presentation and disclosure of goodwill and
intangible assets. The Company adopted the new standard effective
February 1, 2009. This standard has had no material impact on the
consolidated financial statements.
Recently Issued Accounting Standards
CREDIT RISK AND THE FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
In January 2009, the CICA issued EIC-173, "Credit Risk and the Fair Value
of Financial Assets and Liabilities". This abstract requires companies to
take each counterparty's credit risk into account when measuring the fair
value of financial assets and liabilities, including derivatives. The
Company applied this EIC for the quarter ended April 30, 2009. This
abstract has had no material impact on the consolidated financial
statements.
MINING EXPLORATION COSTS
In March 2009, the CICA issued EIC-174, "Mining Exploration Costs", which
provides guidance on the capitalization of exploration costs related to
mining properties and the subsequent impairment review of capitalized
exploration costs. The Company applied this EIC for the quarter ended
April 30, 2009. This abstract has had no material impact on the
consolidated financial statements.
FINANCIAL INSTRUMENTS
In June 2009, the CICA amended Handbook Section 3862, "Financial
Instruments - Disclosures", to enhance disclosure requirements for fair
value measurement of financial instruments and liquidity risk. The
changes are effective for annual financial statements relating to fiscal
years ending after September 30, 2009. The Company is currently assessing
the impact of this amendment on the consolidated financial statements.
NOTE 3:
Cash Resources
July 31, January 31,
2009 2009
-------------------------------------------------------------------------
Cash on hand and balances with banks $ 65,024 $ 14,118
Short-term investments(a) 2,879 2,617
-------------------------------------------------------------------------
Total cash and cash equivalents 67,903 16,735
Cash collateral and cash reserves 288 30,145
-------------------------------------------------------------------------
Total cash resources $ 68,191 $ 46,880
----------------------------
----------------------------
(a) Short-term investments are held in overnight deposits.
Total cash resources were impacted by the $150.0 million net investment
by Kinross and the subsequent repayment of the mining segment's senior
secured term and revolving credit facilities on March 31, 2009.
NOTE 4:
Inventory and Supplies
July 31, January 31,
2009 2009
-------------------------------------------------------------------------
Rough diamond inventory $ 13,145 $ 31,872
Merchandise inventory 232,068 240,419
Supplies inventory 75,900 73,944
-------------------------------------------------------------------------
Total inventory and supplies $ 321,113 $ 346,235
----------------------------
----------------------------
During the six months ended July 31, 2009, the Company recorded a write-
down of $4.1 million on rough diamond inventory (nil for the three months
ended July 31, 2009), which was recorded in cost of sales.
NOTE 5:
Diavik Joint Venture
The following represents Harry Winston Diamond Limited Partnership's 40%
proportionate interest in the Joint Venture as at June 30, 2009 and
December 31, 2008:
July 31, January 31,
2009 2009
-------------------------------------------------------------------------
Current assets $ 111,557 $ 105,612
Long-term assets 769,384 754,886
Current liabilities 34,140 38,808
Long-term liabilities and participant's
account 846,801 821,690
-------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
2009 2008 2009 2008
-------------------------------------------------------------------------
Expenses net of interest
income of $0.1 million
(2008 - interest income of
$0.1 million)(a)(b) 40,672 43,671 82,568 77,630
Cash flows resulting from
(used in) operating
activities (38,608) (33,830) (58,014) (61,221)
Cash flows resulting from
financing activities 48,577 86,377 95,596 175,501
Cash flows resulting from
(used in) investing
activities (15,951) (50,181) (39,242) (114,973)
-------------------------------------------------------------------------
(a) The Joint Venture only earns interest income.
(b) Expenses net of interest income for the six months ended July 31,
2009 of $0.3 million (six months ended July 31, 2008 of
$0.2 million).
The Company is contingently liable for the other participant's portion of
the liabilities of the Joint Venture, and to the extent the Company's
participating interest has increased because of the failure of the other
participant to make a cash contribution when required, the Company would
have access to an increased portion of the assets of the Joint Venture to
settle these liabilities.
NOTE 6:
Intangible Assets
Amortization Accumulated July 31, January 31,
period Cost amortization 2009 net 2009 net
-------------------------------------------------------------------------
Trademark indefinite life $ 112,995 $ - $ 112,995 $ 112,995
Drawings indefinite life 12,365 - 12,365 12,365
Wholesale
distri-
bution
network 120 months 5,575 2,205 3,370 3,649
Store
leases 65 to 105 months 5,639 4,440 1,199 1,743
-------------------------------------------------------------------------
Intangible
assets $ 136,574 $ 6,645 $ 129,929 $ 130,752
--------------------------------------------
--------------------------------------------
Amortization expense for the six months ended July 31, 2009 was $0.8
million ($1.1 million for the six months ended July 31, 2008).
NOTE 7:
Long-Term Debt
July 31, January 31,
2009 2009
-------------------------------------------------------------------------
Mining segment credit facilities $ - $ 74,107
Harry Winston Inc. credit facilities 166,740 199,846
First mortgage on real property 7,434 6,769
-------------------------------------------------------------------------
Total long-term debt 174,174 280,722
-------------------------------------------------------------------------
Less current portion (1,109) (75,097)
-------------------------------------------------------------------------
$ 173,065 $ 205,625
---------------------------
---------------------------
On March 31, 2009, with the closing of the Kinross transaction, the
Company repaid all amounts outstanding on the mining segment's senior
secured term and revolving credit facilities.
NOTE 8:
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 44,685
Cash on exercise of options 16,500 55
-------------------------------------------------------------------------
Balance, July 31, 2009 76,588,592 $ 426,281
---------------------------
---------------------------
(c) Stock Options
During the six months ended July 31, 2009, the Company issued 1,674,000
stock options to officer and employees of the Company and its affiliates.
These options vested 50% immediately; 25% will vest on the first
anniversary date and the remaining 25% will vest on the second
anniversary date of the date of grant. The maximum term of these options
is 10 years. The Company estimated the fair value of the options granted
using the Black-Scholes option pricing model. Compensation expense for
stock options was $1.3 million for the six months ended July 31, 2009
($0.3 for the six months ended July 31, 2008) and is presented as a
component of selling, general and administrative expenses. The Company
used historical exercise data to determine the expected term of the
options granted.
(d) RSU and DSU Plans
RSU Number of units
-------------------------------------------------------------------------
Balance, January 31, 2009 108,599
AWARDS AND PAYOUTS DURING THE PERIOD (NET):
RSU awards 11,500
RSU payouts (50,369)
-------------------------------------------------------------------------
Balance, July 31, 2009 69,730
----------
----------
DSU Number of units
-------------------------------------------------------------------------
Balance, January 31, 2009 128,988
AWARDS AND PAYOUTS DURING THE PERIOD (NET):
DSU awards 44,714
DSU payouts -
-------------------------------------------------------------------------
Balance, July 31, 2009 173,702
----------
----------
Three Three Six Six
months months months months
ended ended ended ended
Expense (recovery) for July 31, July 31, July 31, July 31,
the period 2009 2008 2009 2008
-------------------------------------------------------------------------
RSU $ 77 $ (174) $ 17 $ 335
DSU 290 (330) 416 237
-------------------------------------------------------------------------
$ 367 $ (504) $ 433 $ 572
-------------------------------------------
-------------------------------------------
During the six months ended July 31, 2009, the Company granted 11,500
RSUs and 44,714 DSUs under an employee and director incentive
compensation program, respectively. The RSU and DSU Plans are full value
phantom shares that mirror the value of Harry Winston Diamond
Corporation's publicly traded common shares.
Grants under the RSU Plan are on a discretionary basis to employees of
the Company subject to Board of Director approval or in accordance with
employment contracts. Each RSU grant vests on the third anniversary of
the grant date, subject to special rules for death and disability. The
Company anticipates paying out cash on maturity of RSUs and DSUs.
Only non-executive directors of the Company are eligible for grants under
the DSU Plan. Each DSU grant vests immediately on the grant date.
The expenses related to the RSUs and DSUs are accrued based on the price
of Harry Winston Diamond Corporation's common shares at the end of the
period and on the probability of vesting. This expense is recognized on a
straight-line basis over the term of the grant.
NOTE 9:
Commitments and Guarantees
(a) Environmental Agreement
Through negotiations of environmental and other agreements, the Joint
Venture must provide funding for the Environmental Monitoring Advisory
Board. HWDLP's share of this funding requirement is $0.2 million for
calendar 2009. Further funding will be required in future years; however,
specific amounts have not yet been determined. These agreements also
state the Joint Venture must provide security deposits for the
performance by the Joint Venture of its reclamation and abandonment
obligations under all environmental laws and regulations. HWDLP's share
of the letters of credit outstanding posted by the operator of the Joint
Venture with respect to the environmental agreements as at July 31, 2009
was $71.8 million. The agreement specifically provides that these funding
requirements will be reduced by amounts incurred by the Joint Venture on
reclamation and abandonment activities.
(b) Participation Agreements
The Joint Venture has signed participation agreements with various native
groups. These agreements are expected to contribute to the social,
economic and cultural well-being of the Aboriginal bands. The agreements
are each for an initial term of 12 years and shall be automatically
renewed on terms to be agreed for successive periods of six years
thereafter until termination. The agreements terminate in the event the
mine permanently ceases to operate.
(c) Commitments
Commitments include the cumulative maximum funding commitments secured by
letters of credit of the Joint Venture's environmental and participation
agreements at Harry Winston Diamond Limited Partnership's 40% ownership
interest, before any reduction of future reclamation activities, and
future minimum annual rentals under non-cancellable operating and capital
leases for retail salons, corporate office space, and long-term leases
for property, land, office premises and a fuel tank farm at the Diavik
Diamond Mine and are as follows:
2010 $ 92,631
2011 89,803
2012 88,702
2013 86,674
2014 86,908
Thereafter 132,071
-------------------------------------------
NOTE 10:
Employee Benefit Plans
Three Three Six Six
months months months months
ended ended ended ended
July 31, July 31, July 31, July 31,
Expenses for the period 2009 2008 2009 2008
-------------------------------------------------------------------------
Defined benefit pension plan
- Harry Winston retail segment $ 454 $ 403 $ 958 $ 814
Defined contribution plan
- Harry Winston retail segment 210 235 420 469
Defined contribution plan
- Harry Winston mining segment 101 - 101 -
Defined contribution plan
- Diavik Diamond Mine 223 285 401 497
-------------------------------------------------------------------------
$ 988 $ 923 $ 1,880 $ 1,780
---------------------------------------
---------------------------------------
NOTE 11:
Capital Management
As part of the Kinross investment, the Company and Kinross have agreed to
certain provisions regarding capital management for a period of two years
following closing subject to earlier termination in specified
circumstances. During this period, without Kinross' consent not to be
unreasonably withheld, the Company has agreed not to incur indebtedness
in excess of a specified amount, subject to an exception for indebtedness
incurred to finance an acquisition by the Company. In addition, the
Company has agreed not to pay dividends and to limit the amount of
funding it will provide to the retail segment. The capital management
provisions do not in any way limit the Company's ability to issue equity
or equity-linked securities subject to compliance with Kinross' pro rata
participation right in such equity issuances.
NOTE 12:
Financial Instruments
The Company has various financial instruments comprising cash and cash
equivalents, cash collateral and cash reserves, accounts receivable,
accounts payable and accrued liabilities, bank advances and long-term
debt.
Cash and cash equivalents consist of cash on hand and balances with banks
and short-term investments held in overnight deposits with a maturity on
acquisition of less than 90 days. Cash and cash equivalents are
designated as held-for-trading and are carried at fair value.
The fair value of accounts receivable is determined by the amount of cash
anticipated to be received in the normal course of business from the
financial asset.
The Company's long-term debt is fully secured; hence the fair value of
this instrument at July 31, 2009 is considered to approximate its
carrying value.
The carrying values of these financial instruments are as follows:
July 31, 2009 January 31, 2009
-------------------------------------------------------------------------
Estimated Carrying Estimated Carrying
fair value value fair value value
-------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash
equivalents $ 67,903 $ 67,903 $ 16,735 $ 16,735
Cash collateral and
cash reserves 288 288 30,145 30,145
Accounts receivable 18,031 18,031 66,980 66,980
-------------------------------------------------------------------------
$ 86,222 $ 86,222 $ 113,860 $ 113,860
----------------------------------------------
----------------------------------------------
FINANCIAL LIABILITIES:
Accounts payable and
accrued liabilities $ 90,542 $ 90,542 $ 118,390 $ 118,390
Bank advances 23,883 23,883 42,621 42,621
Long-term debt 174,174 174,174 280,722 280,722
-------------------------------------------------------------------------
$ 288,599 $ 288,599 $ 441,733 $ 441,733
----------------------------------------------
----------------------------------------------
NOTE 13:
Insurance Settlement
In December 2008, approximately $31.7 million in Company-owned and
consigned retail inventory at cost was stolen during a second robbery at
the Harry Winston Paris salon. Included in accounts receivable at January
31, 2009 is a $48.4 million receivable relating to the insurance
settlement that was received in February 2009. The $3.3 million balance
of the insurance claim was also received during the first quarter.
NOTE 14:
Dilution Loss
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 15:
Segmented Information
The Company operates in two segments within the diamond industry, mining
and retail, for the three months ended July 31, 2009.
The mining segment consists of the Company's rough diamond business. This
business includes the 40% ownership interest in the Diavik group of
mineral claims and the sale of rough diamonds in the market-place.
The retail segment consists of the Company's ownership in Harry Winston
Inc. This segment consists of the marketing of fine jewelry and watches
on a worldwide basis.
For the three months ended
July 31, 2009 Mining Retail Total
-------------------------------------------------------------------------
Revenue
Canada $ 45,941 $ - $ 45,941
United States - 15,035 15,035
Europe - 17,688 17,688
Asia - 16,112 16,112
Cost of sales 40,049 26,245 66,294
-------------------------------------------------------------------------
Gross margin 5,892 22,590 28,482
Gross margin (%) 12.8% 46.3% 30.1%
Selling, general and
administrative expenses 4,182 28,198 32,380
-------------------------------------------------------------------------
Earnings (loss) from operations 1,710 (5,608) (3,898)
-------------------------------------------------------------------------
Interest and financing expenses (869) (2,129) (2,998)
Other income 79 4 83
Dilution loss (539) - (539)
Foreign exchange gain (loss) (26,525) 1,251 (25,274)
-------------------------------------------------------------------------
Segmented loss before income taxes $ (26,144) $ (6,482) $ (32,626)
------------------------------------
------------------------------------
Segmented assets as at July 31, 2009
Canada $ 995,011 $ - $ 995,011
United States - 365,424 365,424
Other foreign countries 13,899 158,684 172,583
-------------------------------------------------------------------------
$1,008,910 $ 524,108 $1,533,018
-------------------------------------------------------------------------
Capital expenditures $ 14,673 $ 1,128 $ 15,801
OTHER SIGNIFICANT NON-CASH ITEMS:
Income tax recovery $ (4,226) $ (3,455) $ (7,681)
Amortization and accretion $ 13,760 $ 3,211 $ 16,971
-------------------------------------------------------------------------
Sales to three significant customers in the mining segment totalled $13.8
million for the three months ended July 31, 2009 ($12.2 million for the
three months ended July 31, 2008).
For the three months ended
July 31, 2008 Mining Retail Total
-------------------------------------------------------------------------
Revenue
Canada $ 105,014 $ - $ 105,014
United States - 28,984 28,984
Europe - 31,636 31,636
Asia - 20,485 20,485
Cost of sales 32,390 41,152 73,542
-------------------------------------------------------------------------
Gross margin 72,624 39,953 112,577
Gross margin (%) 69.2% 49.3% 60.5%
Selling, general and
administrative expenses 5,151 34,043 39,194
-------------------------------------------------------------------------
Earnings from operations 67,473 5,910 73,383
-------------------------------------------------------------------------
Interest and financing expenses (2,648) (2,718) (5,366)
Other income (expense) 816 (1) 815
Foreign exchange gain 5,187 114 5,301
-------------------------------------------------------------------------
Segmented earnings before
income taxes $ 70,828 $ 3,305 $ 74,133
------------------------------------
------------------------------------
Segmented assets as at July 31, 2008
Canada $ 969,164 $ - $ 969,164
United States - 464,792 464,792
Other foreign countries 35,200 167,361 202,561
-------------------------------------------------------------------------
$1,004,364 $ 632,153 $1,636,517
-------------------------------------------------------------------------
Goodwill as at July 31, 2008 $ - $ 93,780 $ 93,780
Capital expenditures $ 63,284 $ 4,413 $ 67,697
OTHER SIGNIFICANT NON-CASH ITEMS:
Income tax recovery $ (3,111) $ (293) $ (3,404)
Amortization and accretion $ 13,689 $ 3,089 $ 16,778
-------------------------------------------------------------------------
For the six months ended
July 31, 2009 Mining Retail Total
-------------------------------------------------------------------------
Revenue
Canada $ 103,631 $ - $ 103,631
United States - 33,810 33,810
Europe - 37,013 37,013
Asia - 29,965 29,965
Cost of sales 97,305 52,933 150,238
-------------------------------------------------------------------------
Gross margin 6,326 47,855 54,181
Gross margin (%) 6.1% 47.5% 26.5%
Selling, general and administrative
expenses 9,685 58,444 68,129
-------------------------------------------------------------------------
Loss from operations (3,359) (10,589) (13,948)
-------------------------------------------------------------------------
Interest and financing expenses (2,413) (4,284) (6,697)
Other income 340 24 364
Insurance settlement - 3,250 3,250
Dilution loss (34,761) - (34,761)
Foreign exchange gain (loss) (32,596) 1,483 (31,113)
-------------------------------------------------------------------------
Segmented loss before income taxes $ (72,789) $ (10,116) $ (82,905)
------------------------------------
------------------------------------
Segmented assets as at July 31, 2009
Canada $ 995,011 $ - $ 995,011
United States - 365,424 365,424
Other foreign countries 13,899 158,684 172,583
-------------------------------------------------------------------------
$1,008,910 $ 524,108 $1,533,018
-------------------------------------------------------------------------
Capital expenditures $ 36,802 $ 1,567 $ 38,369
OTHER SIGNIFICANT NON-CASH ITEMS:
Income tax recovery $ (4,853) $ (5,123) $ (9,976)
Amortization and accretion $ 28,333 $ 6,313 $ 34,646
-------------------------------------------------------------------------
Sales to three significant customers in the mining segment totalled
$47.9 million for the six months ended July 31, 2009 ($21.3 million for
the six months ended July 31, 2008 for the same three significant
customers).
For the six months ended
July 31, 2008 Mining Retail Total
-------------------------------------------------------------------------
Revenue
Canada $ 186,407 $ - $ 186,407
United States - 53,910 53,910
Europe - 63,266 63,266
Asia - 38,615 38,615
Cost of sales 64,540 82,151 146,691
-------------------------------------------------------------------------
Gross margin 121,867 73,640 195,507
Gross margin (%) 65.4% 47.3% 57.1%
Selling, general and
administrative expenses 12,359 70,120 82,479
-------------------------------------------------------------------------
Earnings from operations 109,508 3,520 113,028
-------------------------------------------------------------------------
Interest and financing expenses (5,127) (5,692) (10,819)
Other income (expense) 1,448 (387) 1,061
Foreign exchange gain 5,261 195 5,456
-------------------------------------------------------------------------
Segmented earnings (loss) before
income taxes $ 111,090 $ (2,364) $ 108,726
------------------------------------------
------------------------------------------
Segmented assets as at
July 31, 2008
Canada $ 969,164 $ - $ 969,164
United States - 464,792 464,792
Other foreign countries 35,200 167,361 202,561
-------------------------------------------------------------------------
$1,004,364 $ 632,153 $1,636,517
-------------------------------------------------------------------------
Goodwill as at July 31, 2008 $ - $ 93,780 $ 93,780
Capital expenditures $ 129,908 $ 7,656 $ 137,564
OTHER SIGNIFICANT NON-CASH
ITEMS:
Income tax recovery $ (9,739) $ (1,829) $ (11,568)
Amortization and accretion $ 24,428 $ 6,305 $ 30,733
-------------------------------------------------------------------------
SOURCE Harry Winston Diamond Corporation