TORONTO, April 5, 2012 /PRNewswire/ --
The key assumptions used in performing the trademark intangible test were as follows:
2012 2011 Royalty rate - watches 7% 7% Royalty rate - jewelry 3.5% 3% Terminal growth rate 3% 3% Discount rate 12% 12%
Other Non-Current Assets
2012 2011 February 1, 2010 Prepaid pricing discount(a), net of accumulated amortization of $10.3 million (2011 - $8.9 million) $ 1,680 $ 3,120 $ 4,560 Other assets 3,276 3,398 1,328 Refundable security deposits 9,209 8,003 9,741 $ 14,165 $ 14,521 $ 15,629
(a) Prepaid pricing discount represents funds paid to Tiffany & Co. by the Company to amend its rough diamond supply agreement. The amendment eliminated all pricing discounts on future sales. The payment has been deferred and is being amortized on a straight-line basis over the remaining life of the contract.
Trade and Other Payables
February 1, 2012 2011 2010 Trade and other payables $ 41,031 $ 54,732 $ 25,949 Accrued expenses 17,835 17,635 15,837 Customer deposits 14,070 38,752 9,175 Payables and accruals at the Diavik Joint Venture 31,745 28,432 24,932 $ 104,681 $ 139,551 $ 75,893
Employee Benefit Plans
The employee benefit obligation reflected in the consolidated balance sheet is as follows:
2012 2011 February 1, 2010 Defined benefit plan obligation - Harry Winston luxury brand segment (a) $ 11,381 $ 9,009 $ 7,104 Defined contribution plan obligation - Harry Winston luxury brand segment (b) 88 80 70 Deferred compensation plan obligation - Harry Winston luxury brand segment (b) - - 9,207 Post-retirement benefit plan - Diavik Diamond Mine (c) 289 - - RSU and DSU plans (note 17) 3,731 2,515 1,801 Total employee benefit plan obligation $ 15,489 $ 11,604 $ 18,182 2012 2011 February 1, 2010 Non-current $ 9,463 $ 7,287 $ 6,898 Current 6,026 4,317 11,284 Total employee benefit plan obligation $ 15,489 $ 11,604 $ 18,182
The amounts recognized in the consolidated income statement in respect of employee benefit plans are as follows:
2012 2011 Defined benefit pension plan - Harry Winston luxury brand segment (a) $ 2,074 $ 1,907 Defined contribution plan - Harry Winston luxury brand segment (b) 1,065 783 Defined contribution plan - Harry Winston mining segment (b) 207 218 Defined contribution plan - Diavik Diamond Mine (b) 2,081 1,061 Post-retirement benefit plan - Diavik Diamond Mine (c) 299 - RSU and DSU plans (note 17) 2,169 936 $ 7,595 $ 4,905 Cash settled share-based payment recovery 2,091 1,338 Total employee benefit plan expense $ 9,686 $ 6,243
Employee benefit plan expense has been included in the consolidated income statement as follows:
2012 2011 Cost of sales $ 3,135 $ 1,717 Selling, general and administrative expenses 6,551 4,526 $ 9,686 $ 6,243
(a)Defined benefit pension plan
The luxury brand segment sponsors three separate defined benefit pension plans covering employees in the United States, Japan and Switzerland. The principal pension plan is the Harry Winston Employee Retirement Plan for Harry Winston Inc. US employees. The benefits for the Harry Winston Inc. plan are based on years of service and the employee's compensation. In April 2001, Harry Winston Inc. amended its defined benefit pension plan. The amendment froze plan participation effective April 30, 2001. Harry Winston Inc.'s funding policy for the US plan is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974. Plan assets consist primarily of fixed income, equity and other short-term investments. The other two defined benefit pension plans are sponsored by luxury brand segment subsidiaries Harry Winston Japan, K.K. and Harry Winston S.A., which converted their previous pension plan arrangements into defined benefit plans effective February 1, 2007. Pension liabilities for these two non-US plans are funded in accordance with local laws and regulations.
(i) INFORMATION ABOUT HARRY WINSTON INC.'S US DEFINED BENEFIT PLAN IS AS FOLLOWS:
2012 2011 ACCRUED BENEFIT OBLIGATION Balance, beginning of year $ 24,643 $ 20,700 Service costs 1,788 1,646 Interest cost 904 857 Employee contributions 496 372 Actuarial gain 904 1,825 Other net expenses (411) (387) Benefits paid (1,544) (1,617) Foreign exchange 690 1,247 Balance, end of year 27,460 24,643 PLAN ASSETS Fair value, beginning of year 15,656 13,728 Actual return on plan assets (109) 1,355 Employee and employer contributions 1,968 1,556 Other net expenses (411) (387) Benefits paid (1,112) (1,363) Foreign exchange 87 745 Fair value, end of year 16,079 15,634 Funded status - plan deficit $ (11,381) $ (9,009)
The following table provides the components of the net periodic pension costs for the three plans for the years ended January 31:
2012 2011 Service cost $ (1,788) $ (1,646) Interest cost (904) (857) Expected return on plan assets 618 663 Amortization of prior service cost - (67) Total $ (2,074) $ (1,907)
(ii) PLAN ASSETS
US plan assets represented approximately 47% of total luxury brand segment plan assets at January 31, 2012. The net unfunded status of the luxury brand segment plans of $11.4 million is comprised of $4.2 million attributed to the US-based Harry Winston Inc. plan, $5.2 million attributed to the Harry Winston Japan, K.K. plan, and $2.0 million attributed to the Harry Winston S.A. plan. The Harry Winston Japan, K.K. plan is non-funded with a benefit obligation of $5.2 million.
The asset allocation of luxury brand pension assets at January 31 was as follows:
2012 2011 ASSET CATEGORY Cash equivalents 1% 1% Equity securities 52% 57% Fixed income securities 34% 36% Other 13% 6% Total 100% 100%
(iii) THE SIGNIFICANT ASSUMPTIONS USED FOR HARRY WINSTON INC.'S US PLAN ARE AS FOLLOWS:
2012 2011 ACCRUED BENEFIT OBLIGATION Discount rate - HW Inc. 4.84% 5.24% Expected long-term rate of return - HW Inc. 7.50% 7.50% Discount rate - Harry Winston Japan, K.K. 1.46% 1.58% Expected long-term rate of return - Harry Winston Japan, K.K. -% -% Discount rate - Harry Winston S.A. 2.50% 2.75% Expected long-term rate of return - Harry Winston S.A. 3.50% 3.75% BENEFIT COSTS FOR THE YEAR Discount rate - HW Inc. 5.24% 5.56% Expected long-term rate of return on plan assets - HW Inc. 7.50% 7.50% Rate of compensation increase - HW Inc. -% -% Discount rate - Harry Winston Japan, K.K. 1.58% 1.84% Expected long-term rate of return on plan assets - Harry Winston Japan, K.K. -% -% Rate of compensation increase - Harry Winston Japan, K.K. 4.21% 4.36% Discount rate - Harry Winston S.A. 2.50% 2.75% Expected long-term rate of return on plan assets - Harry Winston S.A. 3.50% 3.75% Rate of compensation increase - Harry Winston S.A. 3.00% 3.00%
(b)Defined contribution plan
Harry Winston Inc. has a defined contribution 401(k) plan covering substantially all employees in the United States. For the fiscal years ended January 31, 2012 and 2011, Harry Winston Inc. elected to increase the employer-matching contribution to 100% of the first 6% of the employee's salary from 50% in fiscal 2007 and prior. Employees must meet minimum service requirements and be employed on December 31 of each year in order to receive this matching contribution.
The Joint Venture sponsors a defined contribution plan whereby the employer contributes 6% of the employee's salary.
Harry Winston Diamond Corporation sponsors a defined contribution plan for Canadian employees whereby the employer contributes to a maximum of 6% of the employee's salary to the maximum contribution limit under Canada's Income Tax Act. The total defined contribution plan liability at January 31, 2012 was $0.1 million ($0.1 million at January 31, 2011).
(c)Post-retirement benefit plan
The Joint Venture provides non-pension post-retirement benefits to retired employees. The post-retirement benefit plan liability was $0.3 million at January 31, 2012 ($nil at January 31, 2011).
The deferred income tax asset of the Company is $77.2 million, of which $50.4 million relates to the luxury brand segment. Included in the deferred tax asset is $36.9 million that has been recorded to recognize the benefit of $125.0 million of net operating losses that the Company has available for carry forward to shelter income taxes for future years. Certain net operating losses are scheduled to expire between 2013 and 2032.
The deferred income tax liability of the Company is $325.0 million of which $100.6 million relates to the luxury brand segment. The luxury brand segment deferred income tax liabilities include $52.1 million from a previous purchase price allocation. The Company's deferred income tax asset and liability accounts are revalued to take into consideration the change in the Canadian dollar compared to the US dollar and the unrealized foreign exchange gain or loss is recorded as part of deferred tax expenses for each year.
(a) The income tax provision consists of the following:
2012 2011 CURRENT TAX EXPENSE Current period $ 18,326 $ (8,616) Adjustment for prior period (3,016) (121) Total current tax expense 15,310 (8,737) DEFERRRED TAX EXPENSE Origination and reversal of temporary differences (45) 17,315 Change in unrecognized deductible temporary differences (525) (718) Current year losses for which no deferred tax asset was recognized 1,489 894 Recognition of previously unrecognized tax losses (2,007) (674) Total deferred tax expense (1,088) 16,817 Total income tax expenses $ 14,222 $ 8,080
(b) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at January 31, 2012 and 2011 are as follows:
2012 2011 DEFERRED INCOME TAX ASSETS: Net operating loss carryforwards $ 36,935 $ 27,046 Property, plant and equipment 4,625 3,449 Future site restoration costs 23,161 16,450 Luxury brand inventory 6,211 6,169 Deferred mineral property costs 251 283 Other deferred income tax assets 5,977 6,641 Deferred income tax assets 77,160 60,038 DEFERRED INCOME TAX LIABILITIES: Deferred mineral property costs (29,339) (31,781) Property, plant and equipment (160,616) (159,936) Future site restoration costs (12,078) (7,059) Luxury brand inventory (47,927) (34,630) Intangible assets (52,081) (52,365) Other deferred income tax liabilities (22,994) (24,097) Deferred income tax liabilities (325,035) (309,868) Deferred income tax liabilities, net $ (247,875) $ (249,830)
Movement in net deferred tax liabilities:
2012 2011 Balance at the beginning of the year $ (249,831) $ (195,902) Recognized in profit (loss) 1,088 (16,817) Recognized in accumulated other comprehensive income 606 (647) Acquired on business combination - (36,464) Other 262 - Balance at the end of the year $ (247,875) $ (249,830)
(c) Unrecognized deferred tax assets and liabilities:
Deferred tax assets have not been recognized in respect of the following items:
2012 2011 Tax losses $ 6,460 $ 5,121 Deductible temporary differences 166 691 Total $ 6,626 $ 5,812
The tax losses not recognized expire as per the amount and years noted below. The deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Company can utilize the benefits therefrom.
The following table summarizes the Company's non-capital losses as at January 31, 2012 that may be applied against future taxable profit:
Jurisdiction Type Amount Expiry Date Luxemburg Net operating losses $ 1,918 No expiry France Net operating losses 5,837 No expiry United Kingdom Net operating losses 9,021 No expiry China Net operating losses 5,840 2013 - 2017 Taiwan Net operating losses 952 2022 Singapore Net operating losses 521 No expiry
The deductible temporary differences associated with investments in subsidiaries and joint ventures, for which a deferred tax asset has not been recognized, aggregate to $67.2 million (2011 - $71.2 million).
(d) The difference between the amount of the reported consolidated income tax provision and the amount computed by multiplying the earnings (loss) before income taxes by the statutory tax rate of 28% (2011 - 29%) is a result of the following:
2012 2011 Expected income tax expense $ 11,106 $ 16,030 Non-deductible (non-taxable) items 592 133 Impact of foreign exchange 1,153 (8,278) Northwest Territories mining royalty (net of income tax relief) 3,242 4,265 Earnings subject to tax different than statutory rate 1,687 918 Assessments and adjustments (2,622) (2,254) Current year losses for which no deferred tax asset was recognized 1,489 894 Recognition of previously unrecognized tax losses (2,007) (674) Change in unrecognized temporary differences (525) (718) Other 107 (2,236) Recorded income tax expense (recovery) $ 14,222 $ 8,080
(e) The mining segment has net operating loss carryforwards for Canadian income tax purposes of approximately $1.2 million and $1.9 million for other foreign jurisdictions' tax purposes. The luxury brand segment has net operating loss carryforwards for US income tax purposes of $95.7 million and $26.2 million for other foreign jurisdictions' tax purposes.
Interest-Bearing Loans and Borrowings
2012 2011 Mining segment credit facilities $ 48,460 $ 47,895 Mining segment promissory note - 70,000 Harry Winston Inc. credit facilities 217,071 181,715 First mortgage on real property 6,342 7,048 Bank advances 27,850 22,902 Finance leases - 171 Total interest-bearing loans and borrowings 299,723 329,731 Less current portion (29,238) (94,215) $ 270,485 $ 235,516 Nominal interest Currency rate Date of maturity Secured bank loan (b)(i) US 3.75% March 31, 2013 Secured bank loan (b)(ii) CHF 3.15% April 22, 2013 Secured bank loan (b)(ii) CHF 3.55% January 31, 2033 Secured bank loan (a)(i) US 4.60% June 24, 2013 First mortgage on real property (a)(iii) CDN 7.98% September 1, 2018 Secured bank advance (d) US 12.00% Due on demand Secured bank advance (d) YEN 2.50% February 22, 2012 Unsecured bank advance (d) YEN 2.98% February 27, 2012 Unsecured bank advance (d) YEN 2.98% February 29, 2012 Unsecured bank advance (d) YEN 2.00% October 31, 2012
Carrying amount at Face value at January 31, 2012 January 31, 2012 Borrower Secured bank loan (b)(i) $200.5 million $200.5 million Harry Winston Inc. Secured bank loan (b)(ii) $3.8 million $3.8 million Harry Winston S.A. Secured bank loan (b)(ii) $12.8 million $12.8 million Harry Winston S.A. Secured bank loan (a)(i) $50.0 million $50.0 million Harry Winston Diamond Corporation and Harry Winston Diamond Mines Ltd. First mortgage on real property (a)(iii) $6.3 million $6.3 million 6019838 Canada Inc. Secured bank advance (d) $4.3 million $4.3 million Harry Winston Diamond (India) Private Limited Secured bank advance (d) $7.5 million $7.5 million Harry Winston Japan, K.K. Unsecured bank advance (d) $7.0 million $7.0 million Harry Winston Japan, K.K. Unsecured bank advance (d) $7.7 million $7.7 million Harry Winston Japan, K.K. Unsecured bank advance (d) $1.3 million $1.3 million Harry Winston Japan, K.K.
(a)Mining segment credit facilities
(i) The mining segment maintains a senior secured revolving credit facility with Standard Chartered Bank that was increased from $100.0 million to $125.0 million on February 28, 2011. The facility has an initial maturity date of June 24, 2013 with two one-year extensions at the Company's option. There are no scheduled repayments required before maturity. The facility is available to the Company and Harry Winston Diamond Mines Ltd. for general corporate purposes. Borrowings bear an interest margin of 3.5% above the higher of LIBOR or lender cost of funds. The Company is required to comply with financial covenants at the mining segment level customary for a financing of this nature, with change in control provisions at the Company and Diavik Diamond Mines level. These provisions include consolidated minimum tangible net worth, maximum mining segment debt to equity ratio, maximum mining segment debt to EBITDA ratio and minimum interest coverage ratio. At January 31, 2012, the Company had $50.0 million outstanding on its mining segment senior secured (ii) revolving credit facility. On August 25, 2010, the Company issued a promissory note in the amount of $70.0 million, maturing on August 25, 2011, as part of the consideration for reacquiring its 9% indirect interest in the Diavik Joint Venture from Kinross. The note bears interest at a rate of 5% per annum and can be paid in cash. On August 25, 2011, the Company paid the $70.0 million promissory note plus accrued interest to (iii) Kinross from cash on hand. The Company's first mortgage on real property has scheduled principal payments of approximately $0.2 million quarterly, and may be prepaid at any time.
(b)Luxury brand segment credit facilities
(i) Harry Winston Inc. maintains a credit agreement with a syndicate of banks for a $250.0 million five-year revolving credit facility. In addition, Harry Winston Inc. may increase the credit facility by an additional $50.0 million to $300.0 million during the term of the facility. There are no scheduled repayments required before maturity on March 31, 2013. The credit facility is supported by a $20.0 million limited guarantee provided by Harry Winston Diamond Corporation. The amount available under this facility is subject to a borrowing base formula based on certain assets of Harry Winston Inc. The credit agreement contains affirmative and negative non-financial and financial covenants, which apply to the luxury brand segment. These provisions include consolidated minimum tangible net worth, minimum coverage of fixed charges, and leverage ratio limitations on capital expenditures and certain investments, including the restriction to advance funds to the parent company. The credit agreement also includes a change of control provision, which would result in the entire unpaid principal and all accrued interest of the facility becoming due immediately upon change of control, as defined. Any material adverse change, as defined, in the luxury brand segment's business, assets, liabilities, consolidated financial position or consolidated results of operations constitutes an event of default under the agreement. The luxury brand segment has pledged 100% of Harry Winston Inc.'s common stock and 66â…”% of the common stock of its foreign subsidiaries to the bank to secure the loan. Inventory, accounts receivable and the trademark of Harry Winston Inc. are pledged as collateral to secure the borrowings of Harry Winston Inc. In addition, an assignment of proceeds on insurance covering pledged collateral was made. Loans under the credit facility can be either fixed rate loans or revolving line of credit loans. The fixed rate loans will bear interest within a range of 1.50% to 2.25% above LIBOR, based upon a pricing grid determined by the fixed charge coverage ratio. Interest under this option will be determined for periods of either one, two, three or six months. The revolving line of credit loans will bear interest within a range of 0.50% to 0.75% above the bank's prime rate based upon a pricing grid determined by the fixed charge coverage ratio as well. (ii) Harry Winston S.A. maintains a 25-year loan agreement for CHF 17.5 million ($18.9 million) used to finance the construction of the Company's watch factory in Geneva, Switzerland. The loan agreement is comprised of a CHF 3.5 million ($3.8 million) loan and a CHF 14.0 million ($15.1 million) loan. The bank has a secured interest in the factory building.
(c)Required principal repayments
2013 $ 29,239 2014 255,738 2015 1,515 2016 1,587 2017 1,664 Thereafter 11,522
The Company has available a $45.0 million (utilization in either US dollars or Euros) revolving financing facility for inventory and receivables funding in connection with marketing activities through its Belgian subsidiary, Harry Winston Diamond International N.V., and its Indian subsidiary, Harry Winston Diamond (India) Private Limited. Borrowings under the Belgian facility bear interest at the bank's base rate plus 1.5%. Borrowings under the Indian facility bear an interest rate of 12.0%. At January 31, 2012, $4.3 million was drawn under the Company's revolving financing facility relating to Harry Winston Diamond (India) Private Limited and $nil was drawn by Harry Winston Diamond International N.V. The facility is guaranteed by Harry Winston Diamond Corporation.
Harry Winston Japan, K.K., maintains unsecured credit agreements with three banks, each amounting to ¥1,250 million ($16.1 million). Harry Winston Japan, K.K., also maintains a secured credit agreement amounting to ¥575 million ($7.5 million). This facility is secured by inventory owned by Harry Winston Japan, K.K.
(a)Future site restoration costs
2012 2011 At February 1, 2011 and 2010 $ 50,130 $ 43,691 Revision of previous estimates 13,179 4,435 Accretion of provision 1,936 2,004 At January 31, 2012 and 2011 $ 65,245 $ 50,130
The Joint Venture has an obligation under various agreements (Note 22) to reclaim and restore the lands disturbed by its mining operations.
The Company's share of the total undiscounted amount of the future cash flows that will be required to settle the obligation incurred at January 31, 2012 is estimated to be $84.7 million, of which approximately $23.7 million is expected to occur at the end of the mine life. The revision of previous estimates in fiscal 2012 is based on revised expectations of reclamation activity costs and changes in estimated reclamation timelines. The anticipated cash flows relating to the obligation at the time of the obligation have been discounted at an annualized rate of 1.5%.
(b)Provisions for litigation claims
By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. The Company is subject to various litigation actions, whose outcome could have an impact on the Company's results should it be required to make payments to the plaintiffs. Legal advisors assess the potential outcome of the litigation and the Company establishes provisions for future disbursements as required. At January 31, 2012, the Company does not have any material provisions for litigation claims.
Unlimited common shares without par value.
Number of shares Amount Balance, January 31, 2010 76,588,593 $ 426,593 SHARES ISSUED FOR: Issued to Kinross 7,142,857 69,737 Exercise of options 428,401 5,799 Balance, January 31, 2011 84,159,851 502,129 SHARES ISSUED FOR: Exercise of options 714,930 5,846 Balance, January 31, 2012 84,874,781 $ 507,975
Under the Employee Stock Option Plan, amended and approved by the shareholders on June 4, 2008, the Company may grant options for up to 6,000,000 shares of common stock. Options may be granted to any director, officer, employee or consultant of the Company or any of its affiliates. Options granted to directors vest immediately and options granted to officers, employees or consultants vest over three to four years. The maximum term of an option is ten years. The number of shares reserved for issuance to any one optionee pursuant to options cannot exceed 2% of the issued and outstanding common shares of the Company at the date of grant of such options.
The exercise price of each option cannot be less than the fair market value of the shares on the last trading day preceding the date of grant.
The Company's shares are primarily traded on a Canadian dollar based exchange, and accordingly stock option information is presented in Canadian dollars, with conversion to US dollars at the average exchange rate for the year.
Compensation expense for stock options was $2.1 million for fiscal 2012 (2011 - $1.3 million) and is presented as a component of both cost of sales and selling, general and administrative expenses. The amount credited to share capital for the exercise of the options is the sum of (a) the cash proceeds received and (b) the amount debited to contributed surplus upon exercise of stock options by optionees (2012 - $0.6 million; 2011 - $2.8 million).
Changes in share options outstanding are as follows:
2012 Weighted average Options exercise price 000s CDN $ US $ Outstanding, beginning of year 2,868 $ 12.58 $ 12.26 Granted 350 16.70 17.44 Exercised (715) 7.26 7.43 Expired (102) 25.54 26.14 Outstanding, end of year 2,401 $ 14.21 $ 14.34
2011 Weighted average Options exercise price 000s CDN $ US $ Outstanding, beginning of year 3,234 $ 12.89 $ 7.61 Granted 300 12.35 11.78 Exercised (428) 7.14 6.92 Expired (238) 26.34 25.79 Outstanding, end of year 2,868 $ 12.58 $ 12.26
Exercisable options totaled 1.9 million at January 31, 2012 (2.2 million at January 31, 2011).
The following summarizes information about stock options outstanding at January 31, 2012:
Weighted average remaining Number contractual Range of exercise prices outstanding life in years CDN $ 000s $3.78 1,015 7.2 12.35-16.70 650 6.8 23.35-29.25 600 0.6 41.45 136 2.2 2,401
Options outstanding Options exercisable Weighted Weighted average Number average Range of exercise prices exercise price exercisable exercise price CDN $ CDN $ 000s CDN $ $3.78 $ 3.78 1,016 $ 3.78 12.35-16.70 14.69 100 12.35 23.35-29.25 25.21 600 25.21 41.45 41.45 136 41.45 $ 14.21 1,852 $ 13.94
The Company applies the fair value method to all grants of stock options.
The fair value of options granted during the years ended January 31, 2012 and 2011 was estimated using a Black-Scholes option pricing model with the following weighted average assumptions:
2012 2011 Risk-free interest rate 2.41% 2.13% Dividend yield 0.00% 0.00% Volatility factor 50.00% 50.00% Expected life of the options 3.5 years 5.9 years Average fair value per option, CDN $ 6.51 $ 5.90 Average fair value per option, US $ 6.80 $ 5.63
Expected volatility is estimated by considering historic average share price volatility based on the average expected life of the options.
(e)RSU and DSU Plans
RSU Number of units Balance, January 31, 2010 45,880 Awards and payouts during the year (net) RSU awards 145,880 RSU payouts (35,814) Balance, January 31, 2011 155,946 Awards and payouts during the year (net) RSU awards 66,991 RSU payouts (46,963) Balance, January 31, 2012 175,974 DSU Number of units Balance, January 31, 2010 159,475 Awards and payouts during the year (net) DSU awards 33,739 DSU payouts - Balance, January 31, 2011 193,214 Awards and payouts during the year (net) DSU awards 38,781 DSU payouts (17,127) Balance, January 31, 2012 214,868
During the fiscal year, the Company granted 66,931 RSUs (net of forfeitures) and 38,781 DSUs under an employee and director incentive compensation program, respectively. The RSU and DSU Plans are full value phantom shares that mirror the value of Harry Winston Diamond Corporation's publicly traded common shares.
Grants under the RSU Plan are on a discretionary basis to employees of the Company subject to Board of Directors approval. The RSUs granted vest one-third on March 31 and one-third on each anniversary thereafter. The vesting of grants of RSUs is subject to special rules for a change in control, death and disability. The Company shall pay out cash on the respective vesting dates of RSUs and redemption dates of DSUs.
Only non-executive directors of the Company are eligible for grants under the DSU Plan. Each DSU grant vests immediately on the grant date.
The expenses related to the RSUs and DSUs are accrued based on fair value. This expense is recognized on a straight-line basis over each vesting period. The Company recognized an expense of $2.2 million (2011 - $0.9 million) for the year ended January 31, 2012. The total carrying amount of liabilities for cash settled share-based payment arrangements is $3.7 million (2011 - $2.5 million). The amounts for obligations and expense (recovery) for cash settled share-based payment arrangements have been grouped with Employee Benefit Plans in Note 13 for presentation purposes.
The Company operates in three segments within the diamond industry - mining, luxury brand and corporate, for the years ended January 31, 2012 and 2011.
The mining segment consists of the Company's rough diamond business. This business includes the 40% ownership interest in the Diavik group of mineral claims and the sale of rough diamonds.
The luxury brand segment consists of the Company's ownership in Harry Winston Inc. This segment consists of the marketing of fine jewelry and watches on a worldwide basis.
The corporate segment captures costs not specifically related to operations of the mining or luxury brand segments.
For the year ended January 31, 2012 Mining Luxury brand Corporate Total Sales North America $ 15,018 $ 133,024 $ - $ 148,042 Europe 231,722 94,309 - 326,031 Asia excluding Japan 43,374 103,815 - 147,189 Japan - 80,781 - 80,781 Total sales 290,114 411,929 - 702,043 Cost of sales Depreciation and amortization 76,052 262 - 76,314 All other costs 151,899 223,611 136 375,646 Total cost of sales 227,951 223,873 136 451,960 Gross margin 62,163 188,056 (136) 250,083 Gross margin (%) 21.4% 45.7% -% 35.6% Selling, general and administrative expenses Selling and related expenses 3,412 129,445 - 132,857 Administrative expenses 10,042 39,166 11,487 60,695 Total selling, general and administrative expenses 13,454 168,611 11,487 193,552 Operating profit (loss) 48,709 19,445 (11,623) 56,531 Finance expenses (10,787) (5,900) - (16,687) Exploration costs (1, 770) - - (1, 770) Finance and other income 462 124 - 586 Foreign exchange gain 834 171 - 1,005 Segmented profit (loss) before income taxes $ 37,448 $ 13,840 $ (11,623) $ 39,665 Segmented assets as at January 31, 2012 Canada $ 936,723 $ - $ - $ 936,723 United States - 347,430 116,076 463,506 Other foreign countries 19,759 210,948 - 230,707 $ 956,482 $ 558,378 $ 116,076 $ 1,630,936 Capital expenditures $ 45,165 $ 19,681 $ - $ 64,846 Other significant non-cash items: Deferred income tax expense (recovery) $ (2,291) $ 1,486 $ (283) $ (1,088) Operating profit (loss) for the year ended January 31, 2012 includes the following items of expense: Mining Luxury Brand Corporate Total Research and development $ 4,147 $ 2,412 $ - $ 6,559 Operating lease 317 30,269 - 30,586 Employee compensation expense 43,500 68,782 4,089 116,371 Depreciation and amortization 78,760 12,321 558 91,639 For the year ended January 31, 2011 Mining Luxury brand Corporate Total Sales North America $ 10,418 $ 108,500 $ - $ 118,918 Europe 247,677 78,624 - 326,301 Asia excluding Japan 21,059 92,504 - 113,563 Japan - 65,181 - 65,181 Total sales 279,154 344,809 - 623,963 Cost of sales Depreciation and amortization 60,923 320 - 61,243 All other costs 144,489 181,729 204 326,422 Total cost of sales 205,412 182,049 204 387,665 Gross margin 73,742 162,760 (204) 236,298 Gross margin (%) 26.4% 47.2% -% 37.9% Selling, general and administrative expenses Selling and related expenses 2,786 106,498 - 109,284 Administrative expenses 8,692 41,358 8,616 58,666 Total selling, general and administrative expenses 11,478 147,856 8,616 167,950 Operating profit (loss) 62,264 14,904 (8,820) 68,348 Finance expenses (7,136) (6,291) - (13,427) Exploration costs (666) - - (666) Finance and other income 280 389 - 669 Foreign exchange gain (loss) (1,644) 2,001 - 357 Segmented profit (loss) before income taxes $ 53,098 $ 11,003 $ (8,820) $ 55,281 Segmented assets as at January 31, 2011 Canada $ 954,072 $ - $ - $ 954,072 United States - 331,138 106,767 437,905 Other foreign countries 25,413 186,185 - 211,598 $ 979,485 $ 517,323 $ 106,767 $ 1,603,575 Capital expenditures $ 41,859 $ 6,751 $ - $ 48,610 Other significant non-cash items: Deferred income tax expense (recovery) $ 12,380 $ 5,060 $ (623) $ 16,817 Operating profit (loss) for the year ended January 31, 2011 includes the following items of expense: Mining Luxury Brand Corporate Total Research and development $ 5,165 $ 1,719 $ - $ 6,884 Operating lease 317 21,244 - 21,561 Employee compensation expense 38,557 58,786 3,334 100,677 Depreciation and amortization 63,424 12,264 1,319 77,007
Earnings per Share
The following table presents the calculation of diluted earnings per share:
2012 2011 NUMERATOR Net earnings for the year attributable to shareholders $ 25,454 $ 41,530 DENOMINATOR (000s SHARES) Weighted average number of shares outstanding 84,661 79,858 Dilutive effect of employee stock options 871 1,083 85,532 80,941
Related Party Disclosure
(a) Operational information
The Company had the following investments in significant subsidiaries at January 31, 2012:
Name of company Effective interest Country of incorporation Harry Winston Diamond Mines Ltd. 100% Canada Harry Winston Diamond Limited Partnership 100% Canada Harry Winston Diamond (India) Private Limited 100% India Harry Winston Diamond International N.V. 100% Belgium Harry Winston Technical Services Inc. 100% Canada 6019838 Canada Inc. 100% Canada Harry Winston Inc. 100% US Harry Winston SARL 100% France Harry Winston Japan, K.K. 100% Japan Harry Winston (UK) Limited 100% UK Harry Winston Inc. Taiwan Branch 100% Taiwan Harry Winston S.A. 100% Switzerland Harry Winston (Hong Kong) Limited 100% Hong Kong Harry Winston Commercial (Beijing) Co., Ltd 100% China Harry Winston N.A. Pte Ltd. 100% Singapore
Certain comparative figures have been reclassified to conform with the current year's presentation.
Commitments and Guarantees
Through negotiations of environmental and other agreements, the Joint Venture must provide funding for the Environmental Monitoring Advisory Board. HWDLP anticipates its share of this funding requirement will be approximately $0.3 million for calendar 2012. Further funding will be required in future years; however, specific amounts have not yet been determined. These agreements also state that the Joint Venture must provide security deposits for the performance by the Joint Venture of its reclamation and abandonment obligations under all environmental laws and regulations. HWDLP's share of the letters of credit outstanding posted by the operator of the Joint Venture with respect to the environmental agreements as at January 31, 2012, was $81.1 million. The agreement specifically provides that these funding requirements will be reduced by amounts incurred by the Joint Venture on reclamation and abandonment activities.
The Joint Venture has signed participation agreements with various native groups. These agreements are expected to contribute to the social, economic and cultural well-being of the Aboriginal bands. The agreements are each for an initial term of twelve years and shall be automatically renewed on terms to be agreed upon for successive periods of six years thereafter until termination. The agreements terminate in the event that the mine permanently ceases to operate. Harry Winston Diamond Corporation's share of the Joint Venture's participation agreements as at January 31, 2012 was $1.5 million.
(c)Operating lease commitments
The Company has entered into leases for the rental of luxury brand salons and office premises. The leases have varying terms, escalation clauses and renewal rights. Any renewal terms are at the option of the lessee at lease payments based on market prices at the time of renewal. Certain leases contain either restrictions relating to opening additional salons within a specified radius or contain additional rents related to sales levels. Future minimum lease payments under non-cancellable operating leases as at January 31 are as follows:
2012 2011 Within one year $ 22,439 $ 18,720 After one year but not more than five years 75,285 49,973 More than five years 122,628 35,856 $ 220,352 $ 104,549
(d)Capital commitments related to the Joint Venture
At January 31, 2012, Harry Winston Diamond Corporation's share of approved capital expenditures at the Joint Venture was $23.4 million (2011 - $14.6 million). At January 31, 2012, Harry Winston Diamond Corporation's current projected share of the planned capital expenditures at the Diavik Diamond Mine for the calendar years 2012 to 2016, is approximately $140 million (2011 - $170 million) assuming a Canadian/US average exchange rate of $1.00 for the five years (2011 - $1.00).
Financial Risk Management Objectives and Policies
The Company is exposed, in varying degrees, to a variety of financial-instrument-related risks by virtue of its activities. The Company's overall financial risk-management program focuses on the preservation of capital and protecting current and future Company assets and cash flows by minimizing exposure to risks posed by the uncertainties and volatilities of financial markets.
The Company's Audit Committee has responsibility to review and discuss significant financial risks or exposures and to assess the steps management has taken to monitor, control, report and mitigate such risks to the Company.
Financial risk management is carried out by the Finance department, which identifies and evaluates financial risks and establishes controls and procedures to ensure financial risks are mitigated.
The types of risk exposure and the way in which such exposures are managed are as follows:
The Company's sales are predominantly denominated in US dollars. As the Company operates in an international environment, some of the Company's financial instruments and transactions are denominated in currencies other than the US dollar. The results of the Company's operations are subject to currency transaction risk and currency translation risk. The operating results and financial position of the Company are reported in US dollars in the Company's consolidated financial statements.
The Company's primary foreign exchange exposure impacting pre-tax profit arises from the following sources:
Net Canadian dollar denominated monetary assets and liabilities - The Company's functional and reporting currency is US dollars; however, many of the mining segment's monetary assets and liabilities are in Canadian dollars. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. The weakening/strengthening of the Canadian dollar versus the US dollar results in an unrealized foreign exchange gain/loss on the revaluation of the Canadian dollar denominated assets and liabilities. Committed or anticipated foreign currency denominated transactions - primarily Canadian dollar costs at the Diavik Diamond Mine.
Based on the Company's net exposure to Canadian dollar monetary assets and liabilities at January 31, 2012, a one-cent change in the exchange rate would have impacted pre-tax profit for the year by $0.5 million (2011 - $0.2 million).
The Company also has foreign exchange exposure impacting accumulated other comprehensive income arising from assets recorded in currencies other than the US dollar at its luxury brand salons and watch factory. A one percent change in these underlying currencies at January 31, 2012 would have impacted accumulated other comprehensive income by $0.5 million.
(ii)Interest rate risk
Interest rate risk is the risk borne by an interest-bearing asset or liability as a result of fluctuations in interest rates. Financial assets and financial liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company's most significant interest rate risk arises from its various credit facilities, which bear variable interest based on LIBOR. Based on the Company's LIBOR-based credit facilities at January 31, 2012, a 100 basis point change in LIBOR would have impacted pre-tax net profit for the year by $2.3 million (2011 - $1.9 million).
(iii)Concentration of credit risk
Credit risk is the risk of a financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligation.
Financial instruments that potentially subject the Company to credit risk consist of trade receivables from luxury brand segment clients. While economic factors can affect credit risk, the Company manages risk by providing credit terms on a case-by-case basis only after a review of the client's financial position and credit history. The Company has not experienced significant losses in the past from its customers.
The Company's exposure to credit risk in the mining segment is minimized by its sales policy, which requires receipt of cash prior to the delivery of rough diamonds to its customers.
The Company manages credit risk, in respect of short-term investments, by maintaining bank accounts with Tier 1 banks and investing only in term deposits or banker's acceptances with highly rated financial institutions that are capable of prompt liquidation. The Company monitors and manages its concentration of counterparty credit risk on an ongoing basis.
At January 31, 2012, the Company's maximum counterparty credit exposure consists of the carrying amount of cash and cash equivalents and accounts receivable, which approximates fair value.
The Company considers any accounts receivables outstanding more than 30 days to be past due. At January 31, 2012, past due accounts receivable were as follows:
2012 2011 31- 60 days $ 4,651 $ 531 61 - 90 days 1,692 338 Over 90 days 2,115 10,329 $ 8,458 $ 11,198
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due.
The Company manages its liquidity by ensuring that there is sufficient capital to meet short-term and long-term business requirements, after taking into account cash flows from operations and the Company's holdings of cash and cash equivalents. The Company also strives to maintain sufficient financial liquidity at all times in order to participate in investment opportunities as they arise, as well as to withstand sudden adverse changes in economic circumstances. The Company assesses liquidity and capital resources on a consolidated basis. Management forecasts cash flows for its current and subsequent fiscal years to predict future financing requirements. Future financing requirements are met through a combination of committed credit facilities and access to capital markets.
At January 31, 2012, the Company had $78.2 million of cash and cash equivalents and $116.0 million available under credit facilities.
The following table summarizes the aggregate amount of contractual undiscounted future cash outflows for the Company's financial liabilities:
Less than Total 1 year Trade and other payables $ 104,681 $ 104,681 Income taxes payable 29,450 29,450 Interest-bearing loans and borrowings(a) 321,751 39,578 Environmental and participation agreement incremental commitments 93,330 82,676 Operating lease obligations 220,352 22,439
Year Year After 2-3 4-5 5 years Trade and other payables $ - $ - $ - Income taxes payable - - - Interest-bearing loans and borrowings(a) 260,954 4,852 16,367 Environmental and participation agreement incremental commitments 4,844 - 5,810 Operating lease obligations 39,288 35,997 122,628
(a) Includes projected interest payments on the current debt outstanding based on interest rates in effect at January 31, 2012.
The Company's capital includes cash and cash equivalents, current and non-current interest-bearing loans and borrowings and equity, which includes issued common shares, contributed surplus and retained earnings.
The Company's primary objective with respect to its capital management is to ensure that it has sufficient cash resources to maintain its ongoing operations, to provide returns to shareholders and benefits for other stakeholders, and to pursue growth opportunities. To meet these needs, the Company may from time to time raise additional funds through borrowing and/or the issuance of equity or debt or by securing strategic partners, upon approval by the Board of Directors. The Board of Directors reviews and approves any material transactions out of the ordinary course of business, including proposals on acquisitions or other major investments or divestitures, as well as annual capital and operating budgets.
The Company assesses liquidity and capital resources on a consolidated basis. The Company's requirements are for cash operating expenses, working capital, contractual debt requirements and capital expenditures. The Company believes that it will generate sufficient liquidity to meet its anticipated requirements for the next twelve months.
The Company has various financial instruments comprising cash and cash equivalents, accounts receivable, trade and other payables, and interest-bearing loans and borrowings.
Cash and cash equivalents consist of cash on hand and balances with banks and short-term investments held in overnight deposits with a maturity on acquisition of less than 90 days. Cash and cash equivalents, which are designated as held-for-trading, are carried at fair value based on quoted market prices and are classified within Level 1 of the fair value hierarchy established by the International Accounting Standards Board.
The fair value of accounts receivable is determined by the amount of cash anticipated to be received in the normal course of business from the financial asset.
The Company's interest-bearing loans and borrowings are for the most part fully secured; hence the fair values of these instruments at January 31, 2012 are considered to approximate their carrying value.
The carrying values and estimated fair values of these financial instruments are as follows:
January 31, 2012 January 31, 2011 Estimated Carrying Estimated Carrying fair value value fair value value Financial assets Cash and cash equivalents $ 78,116 $ 78,116 $ 108,693 $ 108,693 Accounts receivable 26,910 26,910 22,788 22,788 $ 105,026 $ 105,026 $ 131,481 $ 131,481 Financial liabilities Trade and other payables $ 104,681 $ 104,681 $ 139,551 $ 139,551 Promissory note - - 70,000 70,000 Interest-bearing loans and borrowings 299,723 299,723 259,731 259,731 $ 404,404 $ 404,404 $ 469,282 $ 469,282
Explanation of Transition to IFRS
As stated in Note 2(a), these are the Company's first audited consolidated financial statements prepared in accordance with IFRS.
The preparation of these first consolidated financial statements in accordance with IFRS has resulted in changes to the accounting policies as compared with the most recent annual financial statements prepared under generally accepted accounting principles in Canada ("Canadian GAAP"). Canadian GAAP differs in some areas from IFRS. IFRS 1, "First-time Adoption of International Financial Reporting Standards", generally requires full retrospective application of the standards and interpretations in force assuming that the IFRS accounting policies had always been applied. However, IFRS 1 allows certain exemptions in the application of particular standards to prior periods in order to assist companies with the transition process. The Company has elected to take the following significant optional exemptions as permitted under IFRS 1 in preparing its opening IFRS balance sheet.
Business Combinations - IFRS 1 allows the Company not to apply IFRS 3, "Business Combinations" ("IFRS 3 (Revised)"), retrospectively to past acquisitions. Leases - The Company has utilized this exemption, which allows an entity not to have to reassess contracts that have already been assessed under Canadian GAAP, and which would have resulted in a similar conclusion as International Financial Reporting Interpretations Committee ("IFRIC") 4, "Determining Whether an Arrangement Contains a Lease". Cumulative Translation Differences - Retrospective application of IFRS would require the Company to determine cumulative currency translation differences in accordance with IAS 21, "The Effects of Changes in Foreign Exchange Rates" ("IAS 21"), from the date a subsidiary or associate was formed or acquired. This exemption permits the Company to reset existing cumulative translation differences to zero at transition date. Borrowing Costs - This exemption allows the Company to adopt IAS 23, "Borrowing Costs" ("IAS 23"), which requires the capitalization of borrowing costs on all qualifying assets, prospectively from the date of the opening IFRS balance sheet. The alternative to this exemption requires the Company to retrospectively restate borrowing costs in accordance with IFRS requirements, in addition to capitalizing borrowing costs from the date of transition. Decommissioning Liabilities Included in the Cost of Property, Plant and Equipment - IFRS 1 provides an optional exemption from the full retrospective application of decommissioning liabilities, which allows an entity to re-measure provisions on the transition date under IAS 37, "Provisions, Contingent Liabilities and Contingent Assets" ("IAS 37"), and estimate the amount to be included in the cost of the related asset by discounting the liability to the date at which it first arose. The alternative to this election, retrospective application, would require the Company to estimate its provision for reclamation and remediation at the original date incurred and reflect changes in estimate and discount rates through to the date of transition to IFRS.
The accounting policies described in Note 3 of the audited consolidated financial statements have been applied in preparing: the financial statements for the year ended January 31, 2012, the comparative information presented in these financial statements for both the year ended January 31, 2011, and in the preparation of an opening IFRS balance sheet at February 1, 2010 (the Company's date of transition).
An explanation of how the transition to IFRS has affected the reported financial position and financial performance of the Company is shown below, including reconciliations of equity, profit and loss and comprehensive income for the comparative periods and of equity at the date of transition reported under previous Canadian GAAP to those reported for those periods and at the date of transition under IFRS.
Explanation of transition to IFRS: Reconciliation of equity
(in thousands of United States dollars) (unaudited) February 1, 2010 Effect of Canadian transition Ref. GAAP to IFRS IFRS ASSETS Current assets: Cash and cash equivalents $ 62,969 $ - $ 62,969 Accounts receivable (a) 23,520 78 23,598 Inventory and supplies 311,188 - 311,188 Other current assets (b) 44,220 (4,921) 39,299 441,897 (4,843) 437,054 Property, plant and equipment - Mining (c) 802,984 (19,552) 783,432 Property, plant and equipment - Luxury brand 62,277 - 62,277 Intangible assets, net 129,213 - 129,213 Other non-current assets (a) 15,629 - 15,629 Deferred income tax assets (a) 42,805 7,719 50,524 Total assets $ 1,494,805 $ (16,676) $ 1,478,129 LIABILITIES AND EQUITY Current liabilities: Trade and other payables (d) $ 87,448 $ (11,555) $ 75,893 Employee benefit plans (d) - 11,284 11,284 Income taxes payable 46,297 - 46,297 Bank advances (d) 22,485 (22,485) - Promissory note - - - Current portion of interest-bearing loans and borrowings (d) 1,154 22,677 23,831 157,384 (79) 157,305 Interest-bearing loans and borrowings (d) 161,538 153 161,691 Employee benefit plans (e) 2,201 4,697 6,898 Provisions (f) 41,275 2,416 43,691 Deferred income tax liabilities (g) 271,822 (25,424) 246,398 Total liabilities 634,220 (18,237) 615,983 Equity: Share capital 426,593 - 426,593 Contributed surplus 17,730 - 17,730 Retained earnings (h) 210,001 32,056 242,057 Accumulated other comprehensive income (i) 28,445 (31,016) (2,571) Total shareholders' equity 682,769 1,040 683,809 Non-controlling interest (j) 177,816 521 178,337 Total equity 860,585 1,561 862,146 Total liabilities and equity $ 1,494,805 $ (16,676) $ 1,478,129
(in thousands of United States dollars) (unaudited) January 31, 2011 Effect of Canadian transition Ref. GAAP to IFRS IFRS ASSETS Current assets: Cash and cash equivalents $ 108,693 $ - $ 108,693 Accounts receivable (a) 22,723 65 22,788 Inventory and supplies 403,212 - 403,212 Other current assets (b) 45,681 (4,364) 41,317 580,309 (4,299) 576,010 Property, plant and equipment - Mining (c) 777,807 (13,714) 764,093 Property, plant and equipment - Luxury brand 61,019 - 61,019 Intangible assets, net 127,894 - 127,894 Other non-current assets (a) 16,626 (2,105) 14,521 Deferred income tax assets (a) 53,857 6,181 60,038 Total assets $ 1,617,512 $ (13,937) $ 1,603,575 LIABILITIES AND EQUITY Current liabilities: Trade and other payables (d) $ 142,339 $ (2,788) $ 139,551 Employee benefit plans (d) - 4,317 4,317 Income taxes payable 6,660 - 6,660 Bank advances (d) 22,902 (22,902) - Promissory note 70,000 - 70,000 Current portion of interest-bearing loans and borrowings (d) 1,313 22,902 24,215 243,214 1,529 244,743 Interest-bearing loans and borrowings (d) 237,450 (1,934) 235,516 Employee benefit plans (e) 3,001 4,286 7,287 Provisions (f) 43,390 6,740 50,130 Deferred income tax liabilities (g) 355,531 (45,663) 309,868 Total liabilities 882,586 (35,042) 847,544 Equity: Share capital 502,129 - 502,129 Contributed surplus 16,233 - 16,233 Retained earnings (h) 176,620 53,159 229,779 Accumulated other comprehensive income (i) 39,678 (32,054) 7,624 Total shareholders' equity 734,660 21,105 755,765 Non-controlling interest (j) 266 - 266 Total equity 734,926 21,105 756,031 Total liabilities and equity $ 1,617,512 $ (13,937) $ 1,603,575
References to the Reconciliation of Equity and Profit
(a)Reclassification of assets
To conform to IFRS presentation requirements, certain asset balances have been reclassified.
Explanation of transition to IFRS: Reconciliation of profit (in thousands of United States dollars) (unaudited) For the fiscal year ended January 31, 2011 Effect of Canadian transition to Ref. GAAP IFRS IFRS Sales $ 623,963 $ - $ 623,963 Cost of sales (k) 391,562 (3,897) 387,665 Gross margin 232,401 3,897 236,298 Selling, general and administrative expenses 167,950 - 167,950 Operating profit 64,451 3,897 68,348 Finance expenses (l) (11,527) (1,900) (13,427) Exploration costs (m) - (666) (666) Finance and other income (m) 486 183 669 Foreign exchange gain (loss) (n) (14,406) 14,763 357 Profit before income taxes 39,004 16,277 55,281 Current income tax recovery (8,737) - (8,737) Deferred income tax expense(o) 21,121 (4,304) 16,817 Net profit $ 26,620 $ 20,581 $ 47,201 Attributable to: Shareholders $ 21,669 $ 19,861 $ 41,530 Non-controlling interest 4,951 720 5,671 Net profit $ 26,620 $ 20,581 $ 47,201 Earnings per share Basic $ 0.27 $ 0.25 $ 0.52 Diluted $ 0.27 $ 0.24 $ 0.51 Weighted average number of shares outstanding 79,858,018 79,858,018 79,858,018 Explanation of transition to IFRS: Reconciliation of comprehensive income (in thousands of United States dollars) (unaudited) For the fiscal year ended January 31, 2011 Effect of Canadian transition to Ref. GAAP IFRS IFRS Net profit - as above $ 26,620 $ 20,581 $ 47,201 Other comprehensive income Net gain (loss) on translation of net foreign operations 10,879 - 10,879 Change in fair value of derivative financial instruments 354 - 354 Actuarial loss on employee benefit plans (e)(i) - (1,038) (1,038) Total comprehensive income $ 37,853 $ 19,543 $ 57,396 Attributable to: Shareholders $ 32,902 $ 18,823 $ 51,725 Non-controlling interest 4,951 720 5,671 Total comprehensive income $ 37,853 $ 19,543 $ 57,396
(b)Other current assets
Twelve months ended Ref. February 1, 2010 January 31, 2011 Reclassification of assets See (a) $ (7,797) $ (6,246) Deferred tax impact on intra-group transfer of assets (i) 2,876 1,882 Net decrease in other current assets $ (4,921) $ (4,364)
Under IFRS, deferred taxes are recognized for the difference in tax bases between jurisdictions as a result of an intra-group transfer of assets. The deferred tax component under IFRS is computed using the tax rate applicable to the purchaser, whereas the seller's tax rate was applied under Canadian GAAP. On transition to IFRS at February 1, 2010, deferred income tax asset increased by $2.9 million along with a (i) corresponding increase in retained earnings. For the fiscal year ended January 31, 2011, the accounting under IFRS resulted in a reduction of $1.0 million in both deferred income tax asset and deferred income tax recovery.
(c)Property, plant and equipment - Mining
Twelve months ended Ref. February 1, 2010 January 31, 2011 Derecognition of exploration costs capitalized (i) $ (18,632) $ (17,072) Remeasurement of the asset retirement obligation See (f)(i) (920) 3,358 Net decrease in property, plant and equipment - Mining $ (19,552) $ (13,714)
(d)Reclassification of liabilities
To conform to IFRS presentation requirements, various liability balances have been reclassified.
Under Canadian GAAP, the Company's policy on exploration expenditures incurred is to capitalize and to amortize using the units-of-production method. For IFRS purposes, the Company's accounting policy on exploration expenditures is to expense unless the exploration activity relates to proven and probable reserves. The retrospective application of this new accounting policy at the date of transition has resulted in the $18.6 million write-off of the net book value of capitalized exploration costs, and a decrease in deferred income tax liability, non-controlling interest and retained earnings (i) by $5.5 million, $0.9 million and $12.2 million, respectively. For the fiscal year ended January 31, 2011, the accounting under IFRS increased mining property, plant and equipment, deferred income tax liabilities and non-controlling interest by $1.6 million, $0.6 million and $0.2 million, respectively. Cost of sales decreased by $2.0 million, and exploration costs, deferred income tax expense and profit attributable to non-controlling interest increased by $0.5 million, $0.6 million and $0.2 million, respectively.
(e)Employee benefit plans
Twelve months ended Ref. February 1, 2010 January 31, 2011 Retrospective application of IAS 19, "Employee Benefits" (i) $ 4,771 $ 5,986 Reclassification of liabilities See (d) (74) (1,700) Net increase in employee benefit plans $ 4,697 $ 4,286
Under Canadian GAAP, actuarial gains or losses for defined benefit plans that exceeded the corridor threshold (10% of the greater of the obligation and fair value of plan assets at the beginning of the period) were recognized over the remaining average service life of active employees. For IFRS purposes, the Company's accounting policy is to recognize its actuarial gains and losses immediately in other comprehensive income, and has retrospectively applied this approach at the date of transition. As a result, $2.2 million in previously unrecognized cumulative actuarial losses at February 1, 2010 were recognized in accumulated other comprehensive income within equity, along with a $4.8 million increase in the defined benefit plan obligation and a $2.6 million decrease in deferred income tax (i) liabilities. For the fiscal year ended January 31, 2011, the accounting under IFRS resulted in a $1.2 million increase to the defined benefit plan obligation, a $1.0 million charge to other comprehensive income, and a $0.2 million decrease in deferred income tax liabilities.
Twelve months ended Ref. February 1, 2010 January 31, 2011 Remeasurement of the asset retirement obligation (i) $ 2,416 $ 6,740
The Company has elected to utilize the IFRS 1 optional exemption relating to "Changes in decommissioning, restoration and similar liabilities" in preparing its opening balance sheet under IFRS. Through application of this IFRS exemption, the site restoration provision under Canadian GAAP has been increased by $2.4 million along with reductions in mining capital assets, deferred income tax liability, non-controlling interest and retained earnings by $0.9 (i) million, $1.0 million, $0.2 million and $2.2 million, respectively. For the fiscal year ended January 31, 2011, the accounting under IFRS resulted in increases of $4.3 million in both mining capital assets and restoration site provision. Nominal changes were also made to deferred income tax liabilities, cost of sales, finance expenses and deferred income tax recovery.
(g)Deferred income tax liabilities
Twelve months ended Ref. February 1, 2010 January 31, 2011 Recognition of new deferred tax balances (i) $ (16,363) $ (34,749) Derecognition of exploration costs capitalized See (c)(i) (5,521) (4,887) Retrospective application of IAS 19, "Employee Benefits" See (e)(i) (2,555) (2,732) Remeasurement of the asset retirement obligation See (f)(i) (985) (1,002) Revaluation of deferred income tax liabilities (ii) - (2,293) Total decrease in deferred income tax liabilities $ (25,424) $ (45,663)
The effect of all IFRS adjustments has increased (decreased) retained earnings as follows:
Under IFRS, in the determination of temporary differences, the carrying value of non-monetary assets and liabilities is translated into the functional currency at the historical rate and compared to its tax value translated into the functional currency at the current rate. The resulting temporary difference (measured in the functional currency) is then multiplied by the appropriate tax rate to determine (i) the related deferred tax balance. Under Canadian GAAP, in the determination of temporary differences related to non-monetary assets and liabilities, the temporary differences computed in local currency are multiplied by the appropriate tax rate. The resulting future income tax amount is then translated into the Company's functional currency if it is different from the local currency. On transition, the accounting under IFRS related to the determination of temporary differences of foreign currency non-monetary assets and liabilities and other temporary differences that were treated as permanent under Canadian GAAP has reduced deferred tax liability by $24.4 million and increased retained earnings and non-controlling interest by $22.8 million and $1.6 million, respectively. In addition, upon finalizing the IFRS adjustments, the Company recorded an additional deferred tax liability of $8.0 million, with a corresponding impact on retained earnings related to immaterial adjustments of prior period balances, which were not previously recorded in the April 30, 2011 unaudited interim condensed consolidated financial statements. The Company has determined that these amounts were not material to its consolidated financial statements for any prior interim or annual periods. For the fiscal year ended January 31, 2011, the accounting under IFRS resulted in an $18.4 million decrease in deferred income tax liabilities and an $18.4 million increase in deferred income tax recovery. Net profit attributable to non-controlling interest also increased by $0.5 million. For the fiscal year ended January 31, 2011, the above IFRS adjustments to deferred income tax liabilities required a revaluation of the account balance resulting in a $2.3 million reduction in deferred income tax liabilities and a corresponding increase in deferred income tax recovery. Nominal changes were also made to (ii) non-controlling interest.
Twelve months ended Ref. February 1, 2010 January 31, 2011 Reset of cumulative translation differences See (i)(i) $ 28,800 $ 28,800 Recognition of new deferred tax balances See (g)(i) 14,775 32,692 Derecognition of exploration costs capitalized See (c)(i) (12,243) (11,496) Deferred tax impact on intra-group transfer of assets See (b)(i) 2,876 1,882 Remeasurement of the asset retirement obligation See (f)(i) (2,152) (2,181) Revaluation of deferred income tax liabilities See (g)(ii) - 2,221 Reacquisition of partnership units See (i)(i) - 1,241 Net increase in retained earnings $ 32,056 $ 53,159
(i)Accumulated other comprehensive income
Twelve months ended Ref. February 1, 2010 January 31, 2011 Reset of cumulative translation differences (i) $ (28,800) $ (28,800) Retrospective application of IAS 19, "Employee Benefits" See (e)(i) (2,216) (3,254) Total decrease in accumulated other comprehensive income $ (31,016) $ (32,054)
The Company has elected to utilize the IFRS 1 optional exemption relating to "Cumulative translation differences" in preparing its opening balance sheet under IFRS. Through application of this exemption on transition date, existing cumulative translation differences have been reset to zero and retained earnings has been (i) increased by $28.8 million.
Twelve months ended Ref. February 1, 2010 January 31, 2011 Derecognition of exploration costs capitalized See (c)(i) $ (868) $ (689) Remeasurement of the asset retirement obligation See (f)(i) (199) (199) Recognition of new deferred tax balances See (g)(i) 1,588 2,057 Revaluation of deferred income tax liabilities See (g)(ii) - 72 Reacquisition of partnership units (i) - (1,241) Net change in non-controlling interest $ 521 $ -
During the third quarter of fiscal 2011, the Company reacquired its 9% indirect interest in the Diavik Joint Venture from Kinross resulting in the reversal of previously recorded profit adjustments attributable (i) to non-controlling interest.
(k)Cost of sales
Twelve months ended January 31, Ref. 2011 Reclassification of accretion expense (i) $ (2,004) Derecognition of exploration costs capitalized See (c)(i) (2,043) Remeasurement of the asset retirement obligation See (f)(i) 150 Net decrease in cost of sales $ (3,897)
In accordance with IFRIC 1, "Changes in Existing Decommissioning, Restoration and Similar Liabilities", accretion expense is treated as interest expense whereas under Canadian GAAP it had been recorded as a (i) component of cost of sales.
Twelve months ended Ref. January 31, 2011 Reclassification of accretion expense See (k)(i) $ (2,004) Remeasurement of the asset retirement obligation See (f)(i) 104 Net increase in finance expenses $ (1,900)
Twelve months ended Ref. January 31, 2011 Derecognition of exploration costs capitalized See (c)(i) $ (483) Reclassification of exploration costs See (m) (183) Increase in exploration costs $ (666)
(n)Decrease in foreign exchange loss
Twelve months ended Ref. January 31, 2011 Reclassification of foreign exchange loss (i) $ 14,763
(o)Deferred income tax recovery
Under Canadian GAAP, the foreign exchange difference from the translation of deferred taxes was presented within the foreign exchange gain/loss account. For IFRS reporting purposes, these foreign exchange differences have been reclassified to deferred income tax (i) recovery/expense.
Diavik Diamond Mine Mineral Reserve and
Mineral Resource Statement
AS OF DECEMBER 31, 2011
Proven and Probable Reserves
Twelve months ended Ref. January 31, 2011 Derecognition of exploration costs capitalized See (c)(i) $ 634 Recognition of new deferred income tax liability balances See (g)(i) (18,385) Deferred tax impact on intra-group transfer of assets See (b)(i) 994 Remeasurement of the asset retirement obligation See (f)(i) (17) Reclassification of foreign exchange loss See (n)(i) 14,763 Revaluation of deferred income tax liabilities See (g)(ii) (2,293) Net increase in deferred income tax recovery $ (4,304)
Proven Probable Open pit and underground Millions Carats Millions Millions mining of tonnes per tonne of carats of tonnes A-154 South Open Pit - - - - Underground 1.6 4.0 6.3 1.4 Total A-154 South 1.6 4.0 6.3 1.4 A-154 North Open Pit - - - - Underground 3.1 2.3 7.1 4.9 Total A-154 North 3.1 2.3 7.1 4.9 A-418 Open Pit 0.7 4.0 2.8 0.6 Underground - - - 6.7 Total A-418 0.7 4.0 2.8 7.3 Total Open Pit 0.7 4.0 2.8 0.6 Underground 4.7 2.8 13.3 12.9 Total Reserves 5.4 3.0 16.1 13.5
Note: Totals may not add up due to rounding.
Additional Indicated and Inferred Resources
Proven and Probable probable Open pit and underground Carats Millions Millions Carats Millions mining per tonne of carats of tonnes per tonne of carats A-154 South Open Pit - - - - - Underground 3.4 4.7 2.9 3.7 10.9 Total A-154 South 3.4 4.7 2.9 3.7 10.9 A-154 North Open Pit - - - - - Underground 2.2 10.7 8.0 2.2 17.8 Total A-154 North 2.2 10.7 8.0 2.2 17.8 A-418 Open Pit 3.8 2.3 1.3 3.9 5.0 Underground 3.8 25.1 6.7 3.8 25.1 Total A-418 3.8 27.4 8.0 3.8 30.2 Total Open Pit 3.8 2.3 1.3 3.9 5.0 Underground 3.1 40.5 17.6 3.1 53.8 Total Reserves 3.2 42.8 18.9 3.1 58.9
Measured Resources Millions Carats Millions Millions Kimberlite pipe of tonnes per tonne of carats of tonnes A-154 South - - - - A-154 North - - - - A-418 - - - - A-21 3.6 2.8 10.0 0.4 Total 3.6 2.8 10.0 0.4
Inferred Indicated Resources Resources Carats Millions Millions Carats Millions Kimberlite pipe per tonne of carats of tonnes per tonne of carats A-154 South - - 0.04 3.5 0.1 A-154 North - - 2.2 2.4 5.3 A-418 - - 0.3 2.7 0.8 A-21 2.6 1.0 0.8 3.0 2.3 Total 2.6 1.0 3.3 2.6 8.5
Note: Totals may not add up due to rounding.
Cautionary Note to United States Investors Concerning Disclosure of Mineral Reserves and Resources: The Company is organized under the laws of Canada. The mineral reserves and resources described herein are estimates, and have been prepared in compliance with NI 43-101. The definitions of proven and probable reserves used in NI-43-101 differ from the definitions in the United States Securities and Exchange Commission ("SEC") Industry Guide 7. In addition, the terms "mineral resource", "measured mineral resource", "indicated mineral resource" and "inferred mineral resource" are defined in and required to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7, and normally are not permitted to be used in reports and registration statements filed with the SEC. Accordingly, information contained in this financial report [or this MD&A] containing descriptions of the Diavik Diamond Mine's mineral deposits may not be comparable to similar information made public by US companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder. United States investors are cautioned not to assume that all or any part of Measured or Indicated Mineral Resources will ever be converted into Mineral Reserves. United States investors are also cautioned not to assume that all or any part of an Inferred Mineral Resource exists, or is economically or legally mineable.
The above mineral reserve and mineral resource statement was prepared by Diavik Diamond Mines Inc., operator of the Diavik Diamond Mine, under the supervision of Calvin Yip, P.Eng., Principal Advisor, Strategic Planning of Diavik Diamond Mines Inc., a Qualified Person within the meaning of National Instrument 43-101 of the Canadian Securities Administrators. For further details and information concerning Harry Winston Diamond Corporation's Mineral Reserves and Resources, readers should reference Harry Winston Diamond Corporation's Annual Information Form available through http://www.sedar.com and http://investor.harrywinston.com.
For further information:
Mr. Richard Chetwode, Vice President, Corporate Development - +44(0)7720-970-762 or [email protected]
Ms. Laura Kiernan, Director, Investor Relations - +1-(212)315-7934 or [email protected]
Ms. Kelley Stamm, Manager, Investor Relations - +1-(416)205-4380 or [email protected]
SOURCE Harry Winston Diamond Corporation