TORONTO, June 4 /PRNewswire-FirstCall/ - Harry Winston Diamond Corporation
(TSX: HW; NYSE: HWD) today reported first quarter results for the period
ending April 30, 2008. The Company recorded an increase in consolidated sales
for the quarter of 10%, generating an 18% increase in gross margin and a 10%
increase in consolidated earnings from operations compared to the results of
the first quarter of the prior year. Consolidated quarterly sales totalled
$156.1 million with earnings from operations of $39.6 million compared to
$141.4 million and $36.0 million, respectively, for the comparable quarter of
the prior year.
Net earnings were $21.3 million, or $0.35 per share, compared to net
earnings of $3.3 million, or $0.06 per share, respectively, in the first
quarter of the prior year. Net earnings for the comparable quarter of the
prior year were reduced by a net $13.3 million foreign exchange loss, or $0.23
per share, as a result of the strengthening of the Canadian dollar relative to
the US dollar during the quarter, compared to a net $0.2 million foreign
exchange gain in the current quarter.
Earnings from operations for the mining segment increased 13% to $42.0
million compared to the comparable quarter of the prior year. Extreme cold
temperatures, compounded by the mining of a lower-grade section of the A-154
South ore body, caused a 31% decrease in carat production, with 0.7 million
being produced in the quarter versus 1.0 million for the comparable quarter of
the prior year. Mining sales, however, were down only 2% to $81.4 million as
higher diamond prices compensated for reduced volume.
The retail segment recorded a 27% increase in sales to $74.7 million.
However, a $2.0 million non-recurring expense related to restructuring and
improvements carried out at the Geneva watch factory resulted in the retail
segment recording a loss from operations of $2.4 million. Excluding the impact
of the restructuring charge, loss from operations would have been $0.3 million
compared to a loss of $1.1 million in the comparable quarter of the prior
year.
First Quarter Fiscal 2009 Financial Highlights
(US$ in millions except Earnings per Share amounts)
-------------------------------------------------------------------------
Three months Three months Twelve months
ended ended ended
Apr. 30, Apr. 30, Jan. 31,
2008 2007 2008
-------------------------------------------------------------------------
Sales 156.1 141.4 679.4
-------------------------------------------------------------------------
Earnings from operations 39.6 36.0 217.7
-------------------------------------------------------------------------
Net earnings 21.3 3.3 106.4
-------------------------------------------------------------------------
Earnings per share $0.35 $0.06 $1.82
-------------------------------------------------------------------------
"This quarter has delivered improved operating results in both of our
business segments despite a rough diamond production shortfall and a troubled
economy in the principle diamond retail market of the US. Robust pricing
continues for the white rough diamonds that are the signature of the Diavik
Mine as production shortfalls meet increased demand from emerging economies.
Our jewelry business has turned in exceptional sales growth, principally from
global customers beyond the US, as we continue to improve both revenues and
costs in this truly global brand," said Robert Gannicott, Chairman and Chief
Executive Officer.
Thomas J. O'Neill, President of Harry Winston Diamond Corporation added,
"First quarter sales in our retail segment were particularly strong as our
strategy to build market share through a growing network of salons and
strengthening our watch business progressed. Although gross margin was
impacted by high value individual sales at lower margins, this was mitigated
by lower SG&A as a percentage of the increased sales base. Transactions to
Asian, Russian and Middle Eastern clients more than offset the decline in the
US and continue to grow as a proportion of our business. We look forward to a
year of continued sales growth and improved profitability."
Dividend Announcement
Harry Winston Diamond Corporation is pleased to declare an eligible
quarterly dividend payment of US$0.05 per share. Shareholders of record at the
close of business on July 15, 2008, will be entitled to receive payment of
this dividend on July 29, 2008.
Annual Meeting of Shareholders and Webcast
As previously announced, Harry Winston Diamond Corporation will hold its
Annual Meeting of Shareholders on June 4th at 10:00AM EDT at the Fairmont
Royal York Hotel located at 100 Front Street West, Toronto, Ontario.
Interested parties unable to attend may listen to a webcast of the meeting and
a review of the first quarter results on the company's web site at
http://investor.harrywinston.com. An online archive of the webcast will be
available on the company's website at http://investor.harrywinston.com later
the same day.
Information in this news release that is not current or historical factual
information may constitute forward-looking information or statements within
the meaning of applicable securities laws. Implicit in this information,
particularly in respect of statements as to future operating results and
economic performance of Harry Winston Diamond Corporation, are assumptions
regarding world economic conditions, projected revenue and expenses, diamond
prices, and the Canadian/US dollar exchange rate. Specifically, in estimating
Harry Winston Diamond Corporation's share of the Diavik Mine capital
expenditure requirements, Harry Winston Diamond Corporation has used a
Canadian/US dollar exchange rate of $1.00, and has assumed that construction
will continue on schedule and without undue disruption with respect to current
underground mining construction initiatives. These assumptions, although
considered reasonable by Harry Winston Diamond Corporation at the time of
preparation, may prove to be incorrect. 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 and mine
development activities, risks associated with underground construction
activities, risks associated with joint venture operations, risks associated
with the remote location of the Diavik Mine site, risks associated with
regulatory and financing requirements, fluctuations in diamond prices, changes
in world economic conditions, increased competition from other luxury goods
retailers, changes in consumer preferences and tastes in jewelry, and the risk
of continued fluctuations in the Canadian/US dollar exchange rate.
About Harry Winston Diamond Corporation
Harry Winston Diamond Corporation (TSX: HW; NYSE: HWD) is a specialist
diamond enterprise with assets in the mining and retail segments of the
diamond industry. The company supplies rough diamonds to the global market
from its 40% interest in the Diavik Diamond Mine, located in Canada's
Northwest Territories. The company's retail division, Harry Winston, Inc., is
a premier jewelry and timepiece retailer with salons in key locations
including New York, Paris, London, Beijing, Tokyo and Beverly Hills. For more
information, please go to www.harrywinston.com or for investor information,
visit investor.harrywinston.com.
Highlights
(All figures are in United States dollars unless otherwise indicated)
The Company recorded an increase in consolidated sales for the quarter of
10%, generating an 18% increase in gross margin and a 10% increase in
consolidated earnings from operations compared to the results of the first
quarter of the prior year. Consolidated quarterly sales totalled $156.1
million with earnings from operations of $39.6 million compared to $141.4
million and $36.0 million, respectively, for the comparable quarter of the
prior year.
Net earnings were $21.3 million, or $0.35 per share, compared to net
earnings of $3.3 million, or $0.06 per share, respectively, in the first
quarter of the prior year. Net earnings for the comparable quarter of the
prior year were reduced by a net $13.3 million foreign exchange loss, or $0.23
per share, as a result of the strengthening of the Canadian dollar relative to
the US dollar during the quarter, compared to a net $0.2 million foreign
exchange gain in the current quarter.
Earnings from operations for the mining segment increased 13% to $42.0
million compared to the comparable quarter of the prior year. Extreme cold
temperatures compounded by the mining of a lower-grade section of the A-154
South ore body, caused a 31% decrease to 0.7 million carats produced versus
1.0 million for the comparable quarter of the prior year. Mining sales,
however, were down only 2% to $81.4 million as higher diamond prices
compensated for reduced volume.
The retail segment recorded a 27% increase in sales to $74.7 million.
Although the retail segment recorded a loss from operations of $2.4 million
compared to $1.1 million in the comparable quarter of the prior year, the
selling, general and administrative expenses included approximately $2.0
million of non-recurring expenses related to restructuring and improvements
carried out at the Geneva watch factory. Retail segment SG&A as a percentage
of sales decreased to 48% in the first quarter from 50% in the comparable
quarter of the prior year. Excluding the impact of the non-recurring expenses,
SG&A as a percentage of sales would have been 46%.
Management's Discussion and Analysis
Prepared as of June 3, 2008 (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 (the "Company")
for the three months ended April 30, 2008, and its financial position as at
April 30, 2008. This MD&A is based on the Company's consolidated financial
statements prepared in accordance with generally accepted accounting
principles in Canada ("Canadian GAAP") and should be read in conjunction with
the unaudited consolidated financial statements and notes thereto for the
three months ended April 30, 2008 and the audited consolidated financial
statements of the Company and notes thereto for the year ended January 31,
2008. Unless otherwise specified, all financial information is presented in
United States dollars. Unless otherwise indicated, all references to "first
quarter" refer to the three months ended April 30, 2008 and all references to
"international" for the retail segment refer to Europe and Asia.
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 United States securities laws.
In some cases, forward-looking information can be identified by the use of
terms such as "may", "will", "should", "expect", "plan", "anticipate",
"believe", "intend", "estimate", "predict", "potential", "continue" or other
similar expressions concerning matters that are not historical facts.
Forward-looking information may relate to management's future outlook and
anticipated events or results, and may include statements or information
regarding plans, timelines and targets for construction, mining, development,
production and exploration activities at the Diavik Diamond Mine, future
mining and processing at the Diavik Diamond Mine, projected capital
expenditure requirements and the funding thereof, new salon openings,
liquidity and working capital requirements and sources, estimated reserves and
resources at, and production from, the Diavik Diamond Mine, the number and
timing of expected rough diamond sales, expected diamond prices and
expectations concerning the diamond industry, expected cost of sales and gross
margin trends in the mining segment, and expected sales trends in the retail
segment. Actual results may vary. See "Risks and Uncertainties".
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, credit market conditions
and the ability of the Company to refinance its existing credit facilities,
the level of worldwide diamond production and world and US economic
conditions. Specifically, in estimating Harry Winston Diamond Corporation's
projected share of the Diavik Diamond Mine capital expenditure requirements
over the next two years, Harry Winston Diamond Corporation has used an average
Canadian/US dollar exchange rate of $0.99, and has assumed that construction
will continue on schedule and without undue disruption with respect to current
underground mining construction initiatives. In making statements regarding
estimated production at the Diavik Diamond Mine and future mining activity and
mine plans, including plans, timelines and targets for construction, mining,
development, production and exploration activities at the Diavik Diamond Mine,
and future rough diamond sales, Harry Winston Diamond Corporation has assumed,
among other things, that mining operations and construction and exploration
activities will proceed in the ordinary course according to schedule and
consistent with past results. 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. While Harry Winston
Diamond Corporation considers these assumptions to be reasonable based on the
information currently available to it, they may prove to be incorrect. See
"Risks and Uncertainties".
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, financing and credit market risk, risks relating to the
Company's salon expansion strategy 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 Harry Winston Diamond
Corporation'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. While Harry Winston Diamond Corporation 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 Harry Winston Diamond Corporation's filings with Canadian and United
States securities regulatory authorities and can be found at www.sedar.com and
www.sec.gov respectively.
Summary Discussion
Harry Winston Diamond Corporation is a specialist diamond company focusing
on the mining and retail segments of the diamond industry. The Company
supplies rough diamonds to the global market from production received from its
40% ownership interest in the Diavik Diamond Mine, located off Lac de Gras in
Canada's Northwest Territories. The Company also owns a 100% interest in Harry
Winston Inc., the premier fine jewelry and watch retailer. Harry Winston
Diamond Corporation's mission is to deliver shareholder value through the
enhanced earning power and longevity of the Diavik Diamond Mine asset as the
cornerstone of a profitable synergy with the Harry Winston brand. In a
changing diamond market-place, Harry Winston Diamond Corporation has charted a
unique course to continue to build shareholder value.
The Company's most significant asset is a 40% 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 Mines Ltd. (40%) where Harry Winston Diamond
Corporation owns an undivided 40% interest in the assets, liabilities and
expenses. DDMI is the operator of the Diavik Diamond Mine. Both companies are
headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio
Tinto plc of London, England, and Harry Winston Diamond Mines Ltd. is a wholly
owned subsidiary of Harry Winston Diamond Corporation of Toronto, Canada.
Market Commentary
The Diamond Market
The current quarter saw continuing price rises in the larger,
better-quality rough diamonds, while the price of lower-quality rough diamonds
remained unchanged in response to softening US demand. The demand in the Asian
markets remained robust in all price ranges.
The Retail Jewelry Market
The global luxury diamond jewelry market continued to show strength in the
first quarter of calendar 2008. Luxury retailers with operations outside of
the US have experienced solid sales results, especially in the Asian, Russian
and Middle Eastern markets. In the US, the higher end of the retail jewelry
market has been impacted by the downturn in the economy but to a lesser extent
than the broad-based jewelry market, where Harry Winston does not conduct
business.
Consolidated Financial Results
The following is a summary of the Company's consolidated quarterly results
for the eight quarters ended April 30, 2008 following the basis of
presentation utilized in the Company's Canadian GAAP financial statements:
(expressed in thousands of United States dollars except per share amounts
and where otherwise noted)
(quarterly results are unaudited)
-------------------------------------------------------------------------
2009 2008 2008 2008 2008
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $156,079 $188,195 $176,478 $173,269 $141,365
Cost of sales 73,149 83,637 74,591 81,827 71,132
-------------------------------------------------------------------------
Gross margin 82,930 104,558 101,887 91,442 70,233
Gross margin (%) 53.1% 55.6% 57.7% 52.8% 49.7%
Selling, general and
administrative
expenses 43,285 45,494 35,539 35,201 34,211
-------------------------------------------------------------------------
Earnings from operations 39,645 59,064 66,348 56,241 36,022
-------------------------------------------------------------------------
Interest and financing
expenses (5,453) (7,082) (7,422) (7,222) (6,132)
Other income (expense) 246 706 594 545 913
Insurance settlement - 13,488 - - -
Foreign exchange gain
(loss) 155 22,270 (40,584) (11,785) (13,292)
-------------------------------------------------------------------------
Earnings before income
taxes 34,593 88,446 18,936 37,779 17,511
Income taxes (recovery) 13,336 (1,968) 26,197 17,747 14,118
-------------------------------------------------------------------------
Earnings (loss) before
minority interest 21,257 90,414 (7,261) 20,032 3,393
Minority interest 1 (34) 90 (26) 140
-------------------------------------------------------------------------
Net earnings (loss) $ 21,256 $ 90,448 $ (7,351) $ 20,058 $ 3,253
-------------------------------------------------
-------------------------------------------------
Basic earnings (loss)
per share $ 0.35 $ 1.55 $ (0.13) $ 0.34 $ 0.06
Diluted earnings (loss)
per share $ 0.35 $ 1.54 $ (0.13) $ 0.33 $ 0.05
Cash dividends declared
per share $ 0.05 $ 0.05 $ 0.25 $ 0.25 $ 0.25
Total assets(i) $ 1,591 $ 1,494 $ 1,433 $ 1,367 $ 1,315
Total long-term
liabilities(i) $ 634 $ 660 $ 530 $ 486 $ 408
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Three
months months
ended ended
2007 2007 2007 April 30, April 30,
Q4 Q3 Q2 2008 2007
-------------------------------------------------------------------------
Sales $154,328 $145,232 $139,962 $156,079 $141,365
Cost of sales 78,559 74,636 68,458 73,149 71,132
-------------------------------------------------------------------------
Gross margin 75,769 70,596 71,504 82,930 70,233
Gross margin (%) 49.1% 48.6% 51.1% 53.1% 49.7%
Selling, general and
administrative
expenses 38,590 33,480 27,171 43,285 34,211
-------------------------------------------------------------------------
Earnings from
operations 37,179 37,116 44,333 39,645 36,022
-------------------------------------------------------------------------
Interest and financing
expenses (6,441) (5,570) (4,805) (5,453) (6,132)
Other income (expense) (111) 1,764 1,805 246 913
Insurance settlement - - - - -
Foreign exchange gain
(loss) 9,831 (1,560) 2,619 155 (13,292)
-------------------------------------------------------------------------
Earnings before income
taxes 40,458 31,750 43,952 34,593 17,511
Income taxes (recovery) 13,169 13,005 9,692 13,336 14,118
-------------------------------------------------------------------------
Earnings (loss) before
minority interest 27,289 18,745 34,260 21,257 3,393
Minority interest (5) (86) (5) 1 140
-------------------------------------------------------------------------
Net earnings (loss) $ 27,294 $ 18,831 $ 34,265 $ 21,256 $ 3,253
-------------------------------------------------
-------------------------------------------------
Basic earnings (loss)
per share $ 0.47 $ 0.32 $ 0.59 $ 0.35 $ 0.06
Diluted earnings (loss)
per share $ 0.46 $ 0.32 $ 0.58 $ 0.35 $ 0.05
Cash dividends declared
per share $ 0.25 $ 0.25 $ 0.25 $ 0.05 $ 0.25
Total assets(i) $ 1,288 $ 1,246 $ 1,116 $ 1,591 $ 1,315
Total long-term
liabilities(i) $ 536 $ 530 $ 460 $ 634 $ 408
-------------------------------------------------------------------------
(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 rough diamond
sales events conducted during the quarter, and the volume, size and
quality distribution of rough diamonds delivered from the Diavik
Diamond Mine in each quarter. 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 8 for additional information.
Three Months Ended April 30, 2008 Compared to Three Months Ended
April 30, 2007
Consolidated Net Earnings
The first quarter earnings of $21.3 million or $0.35 per share represent
an increase of $18.0 million or $0.29 per share as compared to the results of
the first quarter of the prior year. The increase is due in part to a net
foreign exchange gain of $0.2 million in the current quarter compared to a
$13.3 million net foreign exchange loss, or $0.23 per share, recognized in the
comparable quarter of the prior year related principally to an unrealized
non-cash loss on future income taxes payable. For more detail on the impact of
the foreign exchange gain on future income taxes payable and the future income
tax recovery, see "Consolidated Income Taxes" below.
Consolidated Sales
Sales for the first quarter totalled $156.1 million, consisting of rough
diamond sales of $81.4 million and retail segment sales of $74.7 million. This
compares to sales of $141.4 million in the comparable quarter of the prior
year (rough diamond sales of $82.8 million and retail segment sales of $58.6
million). The Company held two primary rough diamond sales, one of which was
an open-market tender, in the first quarter compared to the same number in the
comparable quarter of the prior year. Ongoing quarterly variations in revenues
are inherent in the Company's business, resulting from the seasonality of the
mining and retail activities as well as from the variability of the rough
diamond sales schedule.
Consolidated Cost of Sales and Gross Margin
The Company's first quarter cost of sales was $73.1 million for a gross
margin of 53.1% compared to $71.1 million cost of sales and a gross margin of
49.7% for the comparable quarter of the prior year. The Company's cost of
sales includes costs associated with mining, rough diamond sorting and retail
sales activities. See "Segmented Analysis" on page 8 for additional
information.
Consolidated Selling, General and Administrative Expenses
The principal components of selling, general and administrative ("SG&A")
expenses include expenses for salaries and benefits (including salon
personnel), advertising, professional fees, rent and building related costs.
The Company incurred SG&A expenses of $43.3 million for the first quarter,
compared to $34.2 million in the comparable quarter of the prior year.
Included in SG&A expenses for the first quarter are $7.2 million for the
mining segment as compared to $5.1 million for the comparable quarter of the
prior year, and $36.1 million for the retail segment as compared to $29.1
million for the comparable quarter of the prior year. For the mining segment,
$0.9 million of the increase was due to a mark-to-market adjustment to
stock-based compensation, and $0.8 million of the increase related to higher
salaries and benefits. For the retail segment, the increase was as a result of
our continued investment in the Harry Winston brand, and reflected an increase
in salaries and benefits, rent and building related expenses and depreciation
and amortization expense. Retail segment SG&A expenses also included
approximately $2.0 million of non-recurring expenses related to restructuring
and improvements carried out at the Geneva watch factory. See "Segmented
Analysis" on page 8 for additional information.
Consolidated Income Taxes
The Company recorded a tax expense of $13.3 million during the first
quarter compared to a tax expense of $14.1 million in the comparable quarter
of the prior year. The Company's effective income tax rate for the quarter,
excluding Harry Winston's retail segment, is 38%, which is based on a
statutory income tax rate of 31% adjusted for various items including
Northwest Territories mining royalty, impact of foreign exchange, and earnings
subject to tax different than the statutory rate.
The Company's functional and reporting currency is US dollars; however,
the calculation of income tax expense is based on income in the currency of
the country of origin. As such, the Company is continually subject to foreign
exchange fluctuations, particularly as the Canadian dollar moves against the
US dollar. The weakening of the Canadian dollar during the first quarter
resulted in an unrealized foreign exchange gain of $0.9 million on the
revaluation of the Canadian denominated future income tax liability, compared
to an unrealized foreign exchange loss of $13.6 million recorded in the
comparable quarter of the prior year. This unrealized foreign exchange gain is
not taxable for Canadian income tax purposes.
The rate of income tax payable by Harry Winston Inc. varies by
jurisdiction. Net operating losses are available in certain jurisdictions to
offset future income taxes payable in such jurisdictions. The net operating
losses are scheduled to expire through 2027.
Three months Three months
ended ended
April 30, April 30,
2008 2007
-------------------------------------------------------------------------
Statutory income tax rate 31% 34%
Stock compensation 0% 1%
Northwest Territories mining royalty (net of
income tax relief) 12% 16%
Impact of foreign exchange (3)% 29%
Earnings subject to tax different than statutory
rate (4)% (5)%
Changes in valuation allowance 1% 0%
Benefits of losses recognized through reduction
of goodwill 0% 5%
Assessments and adjustments 2% 0%
Other items (1)% 1%
Effective income tax rate 38% 81%
-------------------------------------------------------------------------
Consolidated Interest and Financing Expenses
Interest and financing expenses of $5.5 million were incurred during the
first quarter compared to $6.1 million during the comparable quarter of the
prior year.
Consolidated Other Income
Other income of $0.2 million was recorded during the quarter compared to
other income of $0.9 million in the comparable quarter of the prior year.
Consolidated Foreign Exchange Gain
A net foreign exchange gain of $0.2 million was recognized during the
quarter compared to a net loss of $13.3 million in the comparable quarter of
the prior year. The gain in the current quarter relates principally to the
revaluation of the Company's Canadian dollar denominated long-term future
income tax liability as a result of the weakening of the Canadian dollar
against the US dollar at quarter end. The Company's ongoing currency exposure
relates primarily to expenses and obligations incurred in Canadian dollars, as
well as the revaluation of certain Canadian monetary balance sheet amounts.
The Company does not currently have any significant derivative instruments
outstanding.
Segmented Analysis
The operating segments of the Company include mining and retail segments.
Mining
The mining segment includes the production and sale of rough diamonds.
(expressed in thousands of United States dollars) (quarterly results are
unaudited)
-------------------------------------------------------------------------
2009 2008 2008 2008 2008
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 81,393 $103,238 $122,711 $105,071 $ 82,752
Cost of sales 32,150 36,962 45,985 46,217 40,516
-------------------------------------------------------------------------
Gross margin 49,243 66,276 76,726 58,854 42,236
Gross margin (%) 60.5% 64.2% 62.5% 56.0% 51.0%
Selling, general and
administrative
expenses 7,208 5,663 6,748 5,861 5,087
-------------------------------------------------------------------------
Earnings from
operations $ 42,035 $ 60,613 $ 69,978 $ 52,993 $ 37,149
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------------------------------
Three Three
months months
ended ended
2007 2007 2007 April 30, April 30,
Q4 Q3 Q2 2008 2007
-------------------------------------------------------------------------
Sales $ 81,035 $ 90,754 $ 91,476 $ 81,393 $ 82,752
Cost of sales 39,413 45,461 43,256 32,150 40,516
-------------------------------------------------------------------------
Gross margin 41,622 45,293 48,220 49,243 42,236
Gross margin (%) 51.4% 49.9% 52.7% 60.5% 51.0%
Selling, general and
administrative
expenses 7,397 4,665 4,373 7,208 5,087
-------------------------------------------------------------------------
Earnings from
operations $ 34,225 $ 40,628 $ 43,847 $ 42,035 $ 37,149
-------------------------------------------------
-------------------------------------------------
Three Months Ended April 30, 2008 Compared to Three Months Ended
April 30, 2007
Mining Sales
Rough diamond sales for the quarter totalled $81.4 million compared to
$82.8 million in the comparable quarter of the prior year resulting from a
combination of lower carat production offset by higher pricing. During the
quarter, the persistent very low temperatures that enabled an early start to a
successful winter road season made the challenges of winter mining in the open
pit more acute than usual, affecting equipment reliability and productivity
and resulting in lower processed ore and carats recovered. This was further
compounded by the mining of a lower grade section of the A-154 South pipe.
This section of the pipe yielded a grade of approximately 4.0 carats per tonne
versus a global grade for the entire pipe of 5.2 carats per tonne based on the
April 2000 feasibility study.
The Company held two primary rough diamond sales, one of which was an
open-market tender, in the first quarter compared to the same number in the
comparable quarter of the prior year. With the Company's continued expansion
of its global rough diamond sales network, sales are now conducted throughout
the quarter in each of the Company's three selling offices located in Belgium,
Israel and India. 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, and the volume, size and quality
distribution of rough diamonds delivered from the Diavik Diamond Mine in each
quarter.
Mining Cost of Sales and Gross Margin
The Company's first quarter cost of sales was $32.2 million for a gross
margin of 60.5% compared to a $40.5 million cost of sales and a gross margin
of 51.0% in the comparable quarter of the prior year. The reduction in cost of
sales resulted primarily from a greater proportion of cost attributable to
development activity versus production activity. The mining gross margin is
anticipated to fluctuate between quarters, resulting from variations in the
specific mix of product sold during each quarter and the nature of the mining
activities.
A substantial portion of cost of sales is mine operating costs, which are
incurred at the Diavik Diamond Mine. Cost of sales also includes rough diamond
sorting costs, which consist of the Company's cost of handling and sorting
product in preparation for sales to third parties, and amortization and
depreciation, the majority of which is recorded using the unit-of-production
method over estimated proven and probable reserves.
Mining Selling, General and Administrative Expenses
SG&A expenses for the mining segment increased by $2.1 million from the
comparable period of the prior year due to a $0.9 million mark-to-market
adjustment to stock-based compensation and a $0.8 million increase in salaries
and benefits.
Retail
The retail segment includes sales from Harry Winston's salons, which are
located in prime markets around the world including seven salons in the United
States: New York, Beverly Hills, Bal Harbour, Honolulu, Las Vegas, Dallas and
Chicago; five salons in Japan: Ginza, Roppongi Hills, Osaka, Omotesando and
Nagoya; three salons in Europe: Paris, London and Geneva; and three salons in
Asia outside of Japan: Beijing, Taipei and Hong Kong.
(expressed in thousands of United States dollars) (quarterly results are
unaudited)
-------------------------------------------------------------------------
2009 2008 2008 2008 2008
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 74,686 $ 84,957 $ 53,767 $ 68,198 $ 58,613
Cost of sales 40,999 46,675 28,606 35,610 30,616
-------------------------------------------------------------------------
Gross margin 33,687 38,282 25,161 32,588 27,997
Gross margin (%) 45.1% 45.1% 46.8% 47.8% 47.8%
Selling, general and
administrative
expenses 36,077 39,831 28,791 29,340 29,124
-------------------------------------------------------------------------
Earnings (loss) from
operations $ (2,390) $ (1,549) $ (3,630) $ 3,248 $ (1,127)
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------------------------------
Three Three
months months
ended ended
2007 2007 2007 April 30, April 30,
Q4 Q3 Q2 2008 2007
-------------------------------------------------------------------------
Sales $ 73,293 $ 54,478 $ 48,486 $ 74,686 $ 58,613
Cost of sales 39,146 29,175 25,202 40,999 30,616
-------------------------------------------------------------------------
Gross margin 34,147 25,303 23,284 33,687 27,997
Gross margin (%) 46.6% 46.4% 48.0% 45.1% 47.8%
Selling, general and
administrative
expenses 31,193 28,815 22,798 36,077 29,124
-------------------------------------------------------------------------
Earnings (loss) from
operations $ 2,954 $ (3,512) $ 486 $ (2,390) $ (1,127)
-------------------------------------------------
-------------------------------------------------
Three Months Ended April 30, 2008 Compared to Three Months Ended
April 30, 2007
Retail Sales
Sales for the first quarter were $74.7 million compared to $58.6 million
for the comparable quarter of the prior year. The 27% increase in Harry
Winston Inc. sales relative to the comparable quarter of the prior year is
primarily attributable to strong momentum in Asia and Russia. Sales in the
Asian market increased 52% to $18.1 million, European sales increased 42% to
$31.7 million and US sales increased 2% to $24.9 million.
Retail Cost of Sales and Gross Margin
Cost of sales for Harry Winston Inc. for the first quarter was $41.0
million compared to $30.6 million for the comparable quarter of the prior
year. Gross margin for the quarter was $33.7 million or 45.1% compared to
$28.0 million or 47.8% for the first quarter of the prior year. Excluding the
impact of sales of Harry Winston Inc. pre-acquisition inventory, gross margin
for the first quarter and the comparable quarter of the prior year would have
been 47.3% and 51.6%, respectively. Gross margin for the first quarter was
impacted primarily by three factors: an increased contribution of high dollar
value transactions, which carry lower-than-average gross margins; an increase
in costs related to precious metals and gem stones; and an increase in
research and development costs to support the growing watch business.
Retail Selling, General and Administrative Expenses
With the expansion of the new international salon activity consistent with
the Company's retail growth strategy, SG&A expenses increased to $36.1 million
from $29.1 million in the comparable quarter of the prior year. However, SG&A
as a percentage of sales decreased to 48.3% in the first quarter from 49.7% in
the comparable quarter of the prior year. The increase, which was primarily
due to the continued expansion of the retail salon network, included an
increase of $2.3 million in rent and building related expenses, an increase of
$1.6 million in salaries and benefits, and an increase of $1.3 million in
depreciation and amortization. These increases were partially offset by a $1.1
million decrease in advertising and selling expenses. Additionally, SG&A
expenses included approximately $2.0 million of non-recurring expenses related
to restructuring and improvements carried out at the Geneva watch factory.
SG&A expenses include depreciation and amortization expense of $3.2 million
compared to $1.9 million in the comparable quarter of the prior year.
Operational Update
Harry Winston Diamond Corporation's results of operations include results
from its mining and retail operations.
Mining Segment
During the first calendar quarter of 2008, the Diavik Diamond Mine
produced 1.8 million carats from 0.47 million tonnes of ore sourced entirely
from the A-154 South kimberlite pipe. Extreme cold temperatures experienced in
the first calendar quarter affected equipment reliability and productivity,
resulting in lower processed ore and 31% less carats recovered. This was
further compounded by the mining of a lower-grade area of the A-154 pipe.
Detailed sampling of the area already mined shows sample grades ranging from
as low as 2 carats per tonne to over 9 carats per tonne, with an average of 4
carats per tonne. This short-range grade variation within the longer range ore
reserve is a common feature of diamond mineralization due to the size range
and distribution of the diamonds within the host rock. This shortfall is not
expected to persist through the balance of the A-154 South kimberlite pipe. A
program of detailed drilling to confirm the A-154 South underground reserve
grade will be undertaken from the pit floor after open pit mining finishes at
year end. Given that it has been the active mining area, there has been less
definition drilling on this pipe than on A-154 North and A-418, which make up
the bulk of the underground mining reserve.
The Diavik Diamond Mine successfully completed its 2008 winter road
program in April, with 4,174 loads transported to the site. In addition to
supplies required to support day-to-day mining operations of its open pits,
the Diavik Diamond Mine trucked additional loads of fuel, cement, explosives,
equipment and materials to support construction currently underway to prepare
for underground mining, expected to begin in calendar 2009.
Preparation of the new A-418 open pit is continuing as planned, with
sustainable diamond production expected to begin towards the end of the
calendar year. Construction of surface infrastructure to support underground
mining continues on the crusher and the paste backfill plant, and on the
expansion of the water treatment and power plants. A fifth fuel tank was
commissioned to meet the increasing electricity requirements of underground
mining. Diamond production from underground is scheduled to begin in calendar
2009, and is expected to replace open pit mining by calendar 2012.
In exploration, a large diameter reverse circulation drilling program was
successfully conducted from the ice to obtain an additional bulk sample to
better define the A-21 kimberlite pipe, located near the existing mining
operations. The results of this drilling program are still pending. In
addition, an aggressive exploration program has been started on the Joint
Venture's substantial claim block around the mine site, with a budget of CDN
$10.0 million for calendar 2008.
The Company's expectations for capital expenditures to support the new
mine plan's underground development remain at approximately $221 million over
the next two years, assuming among other factors a Canadian/US dollar average
exchange rate of $0.99. It is expected that the funds for this capital
expenditure program will come from a combination of cash from operations,
proceeds from the recent common share private placement and a refinancing of
the Company's credit facility.
Harry Winston Diamond Corporation's 40% Share of Diavik Diamond Mine
Production
(reported on a one-month lag)
Three months Three months Twelve months
ended ended ended
March 31, March 31, December 31,
2008 2007 2007
-------------------------------------------------------------------------
Diamonds recovered (000s carats) 714 1,034 4,777
Grade (carats/tonne) 4.08 4.97 4.97
-------------------------------------------------------------------------
Retail Segment
For the quarter ended April 2008, the retail segment generated sales
growth of 27% over the comparable period of the prior year. Strong sales
growth outside of the US more than offset softer sales in the US market. Gross
margin for the first quarter was impacted primarily by three factors: an
increased contribution of high dollar value transactions, which carry
lower-than-average gross margins; an increase in costs related to precious
metals and gem stones; and an increase in research and development costs to
support the growing watch business. Harry Winston Inc. operated a network of
18 salons during the quarter as compared to 14 salons in the comparable
quarter of the prior year. The next new salon opening is scheduled for the
second quarter of fiscal 2009 in Costa Mesa, California.
Harry Winston Inc. introduced its new watches at the watch and jewelry
fair in Basel, Switzerland, which was held in April 2008. The new offerings
were well received both by the press and customers. The sales orders taken
during the Basel Fair were significantly higher than the prior year, a
reflection of the continued strength of the watch business.
Liquidity and Capital Resources
Working Capital
As at April 30, 2008, the Company had unrestricted cash and cash
equivalents of $61.8 million and contingency cash collateral and reserves of
$33.9 million as required under the Company's debt arrangements, compared to
$49.6 million and $25.6 million, respectively, at January 31, 2008. The
Company had cash on hand and balances with banks of $61.8 million and
short-term investments of $nil at April 30, 2008 compared to $33.0 million and
$16.6 million, respectively, at January 31, 2008. The short-term investments
were held in overnight deposits. Total cash resources at April 30, 2008 were
$20.5 million higher than $75.2 million at January 31, 2008, resulting
primarily from additional funds relating to the recent private equity
placement of CDN $75.0 million.
Working capital increased to $232.3 million at April 30, 2008 from $220.0
million at January 31, 2008.
The Company's working capital and working capital requirements fluctuate
from quarter to quarter depending on, among other factors, 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, along with
the seasonality of the retail segment. The Company's principal working capital
needs include investments in inventory, prepaid expenses and other current
assets, and accounts payable and income taxes payable. The Company's cash
requirements are driven by differences in the timing of cash receipts and the
cash outflows. The Company has the ability to draw on its various credit
facilities to finance these timing differences.
Cash Flow from Operations
During the quarter ended April 30, 2008, the Company generated $34.3
million in cash from operations, compared to $14.3 million in the comparable
quarter of the prior year.
During the quarter, the Company increased accounts payable and accrued
liabilities by $18.7 million, purchased inventory of $18.6 million, increased
income taxes payable by $9.6 million, decreased prepaid expenses and other
current assets by $4.4 million, and decreased accounts receivable by $1.7
million.
The liquidity and capital requirements of the Company vary by quarter
depending on the seasonal and production variability of its mining and retail
segments. Timing differences in cash flow are financed by drawing down on the
Company's credit facilities. Over the course of a fiscal year, the Company
does not expect the fluctuations to be material. Over the next two fiscal
years, capital requirements for the mining segment are expected to increase
significantly in accordance with the expected investment program at the Diavik
Diamond Mine. Thereafter, capital requirements for the mining segment are
expected to moderate and the mining segment is expected to generate sufficient
cash flow to finance its operations and capital expenditure requirements. The
capital requirements for the retail segment are ordinary in course and are not
expected to fluctuate materially over the next few years. The retail segment
will finance its operations and capital requirements during these years from
operating cash flow and its credit facilities.
Financing Activities
During the quarter, the Company repaid $12.5 million of its senior secured
term facilities. At April 30, 2008, the Company had $63.9 million outstanding
on its senior secured term credit facilities and $50.0 million outstanding on
its senior secured revolving credit facility. In comparison, at January 31,
2008, $76.4 million was outstanding on the term credit facilities and $50.0
million was outstanding on the secured revolving credit facility.
On February 22, 2008, Harry Winston Inc. entered into a new credit
agreement with a syndicate of banks for a $250.0 million, five-year revolving
credit facility. As at April 30, 2008, Harry Winston Inc. had $160.1 million
outstanding on its $250.0 million secured credit facility, which is used to
fund salon inventory and capital expenditure requirements. This represents an
increase of $6.1 million from the amount outstanding at January 31, 2008.
Also included in long-term debt of the Company's retail operations is a
25-year loan agreement for 17.5 million CHF used to finance the construction
of the new watch factory in Geneva, Switzerland. At April 30, 2008, $16.7
million had been drawn against the facility compared to $16.1 million at
January 31, 2008. The bank has a secured interest in the factory building.
Harry Winston Japan, K.K. maintains secured and unsecured credit
agreements with three banks amounting to (Yen)2,075 million. At April 30,
2008, $19.9 million had been drawn against these facilities, $4.8 million of
which is long term, payable on June 28, 2010, with the balance of $15.1
million classified as bank advances. At January 31, 2008, $19.4 million had
been drawn against these facilities, $4.7 million of which is long term with
the balance of $14.7 million classified as bank advances.
At April 30, 2008, $0.6 million and $8.5 million was drawn under the
Company's revolving financing facilities relating to its Belgian subsidiary,
Harry Winston Diamond International N.V., and its Israeli subsidiary, Harry
Winston Diamond (Israel) Limited, respectively. At January 31, 2008, $10.5
million and $9.4 million were drawn under the Company's revolving financing
facilities relating to Harry Winston Diamond International N.V. and Harry
Winston Diamond (Israel) Limited, respectively.
During the first quarter, the Company made dividend payments of $3.1
million or $0.05 per share to its shareholders.
On March 14, 2008, the Company completed a private placement of 3 million
common shares at a price of CDN $25 per share. The private placement was
completed on a non-brokered basis, with no fees or commissions payable. The
private placement generated net proceeds of CDN $75.0 million, and diluted the
Company's issued and outstanding shares by 5%.
Investing Activities
During the quarter, the Company purchased capital assets of $68.1 million,
of which $64.9 million were purchased for the mining segment and $3.2 million
for the retail segment. Also included in deferred mineral property costs were
expenditures of $1.7 million made during the quarter.
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, the
Company is obligated to fund 40% of the Joint Venture's total expenditures on
a monthly basis. Based on the current mine plan, the Company'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 2008 to 2012, is approximately $320
million assuming, among other factors, a Canadian/US average exchange rate of
$0.96 for the five years. The most significant contractual obligations for the
ensuing five-year period can be summarized as follows:
Contractual Obligations
(expressed in thousands Less
of United States than Year Year After
dollars) Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Long-term debt(a)(b) $370,557 $ 78,090 $ 84,326 $ 23,281 $184,860
Environmental and
participation
agreements
incremental
commitments(c) 97,037 76,245 3,972 1,985 14,835
Operating lease
obligations(d) 121,030 16,642 28,332 18,029 58,027
Capital lease
obligations(e) 2,234 929 1,239 66 -
-------------------------------------------------------------------------
Total contractual
obligations $590,858 $171,906 $117,869 $ 43,361 $257,722
-------------------------------------------------
-------------------------------------------------
(a) Long-term debt presented in the foregoing table includes current and
long-term portions. The Company's credit agreements are comprised of
two senior secured term credit facilities and a senior secured
revolving credit facility. The existing facilities have a maturity
date of December 15, 2009. At April 30, 2008, $63.9 million in total
was outstanding on the senior secured term credit facilities, and
$50.0 million was outstanding on the senior secured revolving credit
facility. Scheduled repayments on the senior secured term credit
facilities commenced March 15, 2008 with $12.5 million in repayments
due every quarter. The maximum amount permitted to be drawn under the
senior secured revolving credit facility will be reduced by
$12.5 million on a quarterly basis commencing March 15, 2009.
The Company's first mortgage on real property has scheduled principal
payments of approximately $0.1 million quarterly, and may be prepaid
after 2009. On April 30, 2008, $8.7 million was outstanding on the
mortgage payable.
On February 22, 2008, Harry Winston Inc. entered into a new 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 April 30, 2008, $160.1 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 17.5 million CHF used to finance the construction
of the new watch factory in Geneva, Switzerland. The bank has a
secured interest in the factory building. The loan agreement is
comprised of a 3.5 million CHF loan and a 14.0 million CHF loan. The
3.5 million CHF loan bears interest at a rate of 3.9% and matures on
April 22, 2010. The 14.0 million CHF loan bears interest at a rate of
3.55% and matures on January 31, 2033, with quarterly payments
commencing on June 30, 2008. At April 30, 2008, $16.7 million was
outstanding on this loan agreement.
(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 April 30, 2008
and have been included under long-term debt in the table above.
Interest payments for the next 12 months are approximated to be
$14.5 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 Joint Venture has fulfilled its obligations for the
security deposits by posting letters of credit of which the Company's
share as at April 30, 2008 was $74.8 million. 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 amounts reflected as contractual obligations in
the table above represent obligations that are in addition to the
$74.8 million in letters of credit posted. The actual cash outlay for
the Joint Venture's obligations under these agreements is not
anticipated to occur until later in the life of the Diavik Diamond
Mine.
(d) Operating lease obligations represent future minimum annual rentals
under non-cancellable operating leases for Harry Winston Inc. salons
and office space. 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.
Outlook
Mining
Production
During the first calendar quarter, the persistent very low temperatures
that enabled an early start to a successful winter road season at the Diavik
Diamond Mine made the challenges of winter mining in the open pit more acute
than usual, resulting in a lower tonnage of processed ore. This was compounded
by the mining of a lower-grade section of the A-154 South kimberlite pipe
together resulting in 31% less carats recovered than in the comparable period
of the prior year. This lower grade ore has a grade of approximately 4 carats
per tonne versus a global grade for the entire pipe of 5.2 carats per tonne
based on the April 2000 feasibility study.
Detailed sampling of the area already mined shows sample grades ranging
from as low as 2 carats per tonne to over 9 carats per tonne, with an average
of 4 carats per tonne. This short-range grade variation within the longer
range ore reserve is a common feature of diamond mineralization due to the
size range and distribution of the diamonds within the host rock. This
shortfall is not expected to persist through the balance of the A-154 South
kimberlite pipe. A program of detailed drilling to confirm the A-154 South
underground reserve grade will be undertaken from the pit floor after open pit
mining finishes at year end. Given that it has been the active mining area,
there has been less definition drilling on this pipe than on A-154 North and
A-418 that make up the bulk of the underground mining reserve.
The grade variance in the A-154 South pipe has persisted, to some extent,
into the second quarter. As a result, the Company expects about a 10%
shortfall in carat production from the original forecast of approximately 12
million carats although price increases are expected to significantly offset
this.
Pre-stripping of the A-418 kimberlite pipe continues, with sustainable
production from the A-418 open pit anticipated towards late in the calendar
year. The expected start date of 2009 for underground production from A-154
South, A-154 North and A-418 remains unchanged. The Company expects diamond
prices to remain robust with softness in the US being offset by strong demand
in the world economy, especially in the Far East.
Cost of Sales
The continuation of pre-stripping of the A-418 kimberlite pipe is expected
to result in lower cost of sales in calendar 2008 than previously anticipated.
Cost of sales will also be impacted by the expected reduction in production
from the original estimate of approximately 12 million carats. The Company
continues to expect cost of sales to peak in calendar 2009, followed by an
anticipated decline in cost of sales over the following two years as the
overlap between open pit and underground mining diminishes.
Capital Expenditures
The Company continues to expect capital contributions of approximately
$221 million over the next two years in support of the underground development
project. Financing for this capital contribution is expected to be drawn from
a combination of cash from operations, proceeds from the recent common share
private placement and refinancing of the Company's credit facility. Based on
the current mine plan, the Company's portion of planned capital expenditures
at the Diavik Diamond Mine for calendar years 2008 to 2012 is expected to be
approximately $320 million at a Canadian/US dollar average exchange rate of
$0.96.
Rough Diamond Sales Cycle
The Company is expecting to hold two rough diamond sales in the second
quarter, two in the third quarter and three in the fourth. Sales are now
conducted throughout the quarter in each of the Company's three selling
offices located in Belgium, Israel and India.
Retail
Harry Winston Inc. expects sales in the luxury jewelry industry to remain
robust. The retail segment is strategically well positioned to withstand
regional economic disruptions as a result of its diverse global distribution
network. Continued strong demand for luxury diamond jewelry and watches from
markets in Asia, Russia and the Middle East is expected to offset the
difficult retail environment in the US market. The sales performance in the
first quarter leaves us well positioned to achieve our annual sales growth
objective of in excess of 15%.
Harry Winston Inc. will continue to strengthen its brand in mature and
emerging markets through the expansion of the salon network over the next
several years and introduction of new jewelry offerings using the highest
quality of diamonds and other gemstones. One salon is scheduled to be opened
in Costa Mesa, California during the second quarter.
Related Parties
Transactions with related parties for the three months ended April 30,
2008 include $0.4 million of rent relating to the New York salon, payable to a
Harry Winston Inc. employee.
Changes in Internal Control over Financial Reporting
During the first quarter of fiscal 2009, there were no changes in the
Company's internal control over financial reporting that materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
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 January 31, 2008.
Changes in Accounting Policies
Capital Disclosures
Effective February 1, 2008, the Company adopted new accounting
recommendations from the Canadian Institute of Chartered Accountants ("CICA"),
Handbook Section 1535, "Capital Disclosures". This new standard specifies the
requirements for disclosure of both qualitative and quantitative information
to enable users of financial statements to evaluate the Company's objectives,
policies and processes for managing capital. This disclosure is contained in
note 12 to the interim consolidated financial statements.
Inventories
Effective February 1, 2008, the Company adopted new accounting
recommendations from the CICA, Handbook Section 3031, "Inventories", which
supersedes the previously issued standard on inventory. The new standard
introduces significant changes to the measurement and disclosure of inventory.
The measurement changes include: the elimination of LIFO, the requirement to
measure inventories at the lower of cost and net realizable value method, for
inventories that are not ordinarily interchangeable and goods or services
produced for specific purposes, the requirement for an entity to use a
consistent cost formula for inventory of a similar nature and use, and the
reversal of previous write-downs to net realizable value when there is a
subsequent increase in the value of inventories. Disclosures of inventories
have also been enhanced. Inventory policies, carrying amounts, amounts
recognized as an expense, write-downs and the reversals of write-downs are
required to be disclosed. This standard has had no material impact on the
Company's consolidated financial statements.
Financial Instruments
Effective February 1, 2008, the Company adopted new accounting
recommendations from the CICA, Handbook Section 3862, "Financial Instruments -
Disclosures" and Handbook Section 3863, "Financial Instruments -
Presentation". Section 3862 provides guidance on disclosure of risks
associated with both recognized and unrecognized financial instruments and how
the Company manages these risks. Section 3863 details financial instruments
presentation requirements, which are unchanged from those discussed in Section
3861, "Financial Instruments - Disclosure and Presentation". This disclosure
is contained in note 13 to the interim consolidated financial statements.
Recently Issued Accounting Standards
Goodwill and Intangibles
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. Concurrent with the introduction of this standard, the CICA
withdrew EIC 27, "Revenues and Expenses During the Pre-operating Period,"
which eliminates the ability for companies to defer costs and revenues
incurred prior to commercial production at new mine operations. The changes
are effective for interim and annual financial statements beginning January 1,
2009. The Company is currently assessing the impact of this standard on its
consolidated financial statements.
International Financial Reporting Standards ("IFRS")
In 2006, the Canadian Accounting Standards Board ("AcSB") published a new
strategic plan that will significantly impact financial reporting requirements
for Canadian companies. The AcSB strategic plan outlines the convergence of
Canadian GAAP with IFRS over an expected five-year transitional period. In
February 2008, the AcSB announced that 2011 is the changeover date for public
accountable companies to convert from Canadian GAAP to IFRS. The transition
date is for interim and annual financial statements relating to fiscal years
beginning on or after January 1, 2011. Accordingly, this new standard will
apply to the Company effective for the fiscal year commencing February 1,
2011. While the Company has begun assessing the adoption of IFRS for 2011, the
financial reporting impact of the transition to IFRS cannot be reasonably
estimated at this time.
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
The Company owns an undivided 40% interest in the assets, liabilities and
expenses of the Diavik Diamond Mine and the Diavik group of mineral claims.
The Diavik Diamond Mine and the exploration and development of the Diavik
group of mineral claims is a joint arrangement between DDMI (60%) and Harry
Winston Diamond Mines Ltd. (40%), and is subject to the risks normally
associated with the conduct of joint ventures and similar joint arrangements.
These risks include the limited ability 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 the Company
that the Company may not have sufficient cash to meet. The Company's
contribution to capital requirements to complete the underground development
and supporting infrastructure contemplated by the new mine plan is estimated
to be $221 million over the next two years, with funding expected to be
provided in part from a CDN $75 million private placement completed on March
14, 2008, cash flow from operations and a refinancing of the Company's
existing credit facilities. There can be no assurance that the Company will be
able to refinance its current credit facilities on satisfactory terms and
conditions, or at all. A failure by the Company to meet capital expenditure
requirements imposed by DDMI could result in the Company's interest in the
Diavik Diamond Mine and the Diavik group of mineral claims being diluted.
Diamond Prices and Demand for Diamonds
The profitability of the Company is dependent upon production from the
Diavik Diamond Mine and on the results of the operations of its retail
operations. Each in turn is dependent in significant part upon the worldwide
demand for and price of diamonds. Diamond prices fluctuate and are affected by
numerous factors beyond the control of the Company, including worldwide
economic trends, particularly in the US, Japan, China and India, worldwide
levels of diamond discovery and production and the level of demand for, and
discretionary spending on, luxury goods such as diamonds and jewelry. Low or
negative growth in the worldwide economy, prolonged credit market disruptions
or the occurrence of terrorist or similar activities creating disruptions in
economic growth could result in decreased demand for luxury goods such as
diamonds and jewelry, thereby negatively affecting the price of diamonds and
jewelry. Similarly, a substantial increase in the worldwide level of diamond
production could also negatively affect the price of diamonds. In each case,
such developments could materially adversely affect the Company's results of
operations.
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, which are borne
40% by the Company, 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 require licenses and permits from the Canadian government. Renewal of
the Diavik Diamond Mine Type "A" Water License was granted by the regional
Wek'eezhii Land and Water Board on November 1, 2007 for an eight-year period.
While the Company anticipates that DDMI, which is also the operator of the
Diavik Diamond Mine, will be able to renew this license and other necessary
permits in the future, there can be no guarantee that DDMI will be able to do
so or obtain or maintain all other necessary licenses and permits that may be
required to maintain the operation of the Diavik Diamond Mine or to further
explore and develop the Diavik property.
Regulatory and Environmental Risks
The operation of the Diavik Diamond Mine, exploration activities at the
Diavik Project and the manufacturing of jewelry and watches are subject to
various laws and regulations governing the protection of the environment,
exploration, development, production, taxes, labour standards, occupational
health, waste disposal, mine safety, manufacturing safety and other matters.
New laws and regulations, amendments to existing laws and regulations, or more
stringent implementation or changes in enforcement policies under existing
laws and regulations could have a material adverse 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 Canada and the US.
Mining and manufacturing are subject to potential risks and liabilities
associated with pollution of the environment and the disposal of waste
products occurring as a result of mining and manufacturing operations. To the
extent that the Company's operations are subject to uninsured environmental
liabilities, the payment of such liabilities could have a material adverse
effect on the Company.
Climate Change
Canada ratified the Kyoto Protocol to the United Nations Framework
Convention on Climate Change in late 2002 and the Kyoto Protocol came into
effect in Canada in February 2005. The Canadian government is currently
developing a number of policy measures in order to meet its emission reduction
guidelines. While the impact of these measures cannot be quantified at this
time, the likely effect will be to increase costs for fossil fuels,
electricity and transportation, restrict industrial emission levels, impose
added costs for emissions in excess of permitted levels and increase costs for
monitoring and reporting. Compliance with these initiatives could have a
material adverse effect on the Company's results of operations.
Resource and Reserve Estimates
The Company's figures for mineral resources and ore reserves on the Diavik
group of mineral claims are estimates, and no assurance can be given that the
anticipated carats will be recovered. The estimation of reserves is a
subjective process. Forecasts are based on engineering data, projected future
rates of production and the timing of future expenditures, all of which are
subject to numerous uncertainties and various interpretations. The Company
expects that its estimates of reserves will change to reflect updated
information. 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
generally, 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. 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.
Currently, there is significant competition for skilled workers in remote
northern operations due to the significant number of large-scale construction
projects ongoing and planned in Canada's north, including the various
construction projects relating to the development of the oil sands in northern
Alberta.
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
existing 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.
Outstanding Share Information
As at April 30, 2008
-------------------------------------------------------------------------
Authorized Unlimited
Issued and outstanding shares 61,372,091
Options outstanding 1,619,338
Fully diluted 62,991,429
-------------------------------------------------------------------------
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)
April 30,
2008 January 31,
(unaudited) 2008
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 3) $ 61,776 $ 49,628
Cash collateral and cash
reserves (note 3) 33,938 25,615
Accounts receivable 23,726 25,505
Inventory and supplies (note 4) 340,805 322,228
Prepaid expenses and other current
assets 59,484 58,617
-------------------------------------------------------------------------
519,729 481,593
Deferred mineral property costs 177,549 179,990
Capital assets 610,180 548,827
Intangible assets, net (note 6) 131,986 132,628
Goodwill 93,780 93,780
Other assets 17,587 16,167
Future income tax asset 39,920 40,963
$ 1,590,731 $ 1,493,948
----------------------------
----------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued
liabilities $ 141,871 $ 124,426
Income taxes payable 57,684 48,118
Bank advances 24,228 34,928
Current portion of long-term debt
(note 7) 63,618 54,137
-------------------------------------------------------------------------
287,401 261,609
Long-term debt (note 7) 240,007 255,212
Future income tax liability 359,100 370,500
Other long-term liability 1,931 1,730
Future site restoration costs 33,404 32,980
Minority interest 256 255
Shareholders' equity:
Share capital (note 8) 381,541 305,502
Contributed surplus 15,769 15,614
Retained earnings 243,521 225,334
Accumulated other comprehensive
income 27,801 25,212
-------------------------------------------------------------------------
668,632 571,662
Commitments and guarantees (note 9)
-------------------------------------------------------------------------
$ 1,590,731 $ 1,493,948
----------------------------
----------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Earnings
(expressed in thousands of United States dollars,
except per share amounts) (unaudited)
Three Months Three Months
Ended Ended
April 30, April 30,
2008 2007
-------------------------------------------------------------------------
Sales $ 156,079 $ 141,365
Cost of sales 73,149 71,132
-------------------------------------------------------------------------
Gross margin 82,930 70,233
Selling, general and administrative
expenses 43,285 34,211
-------------------------------------------------------------------------
Earnings from operations 39,645 36,022
-------------------------------------------------------------------------
Interest and financing expenses (5,453) (6,132)
Other income 246 913
Foreign exchange gain (loss) 155 (13,292)
-------------------------------------------------------------------------
Earnings before income taxes 34,593 17,511
Income tax expense - Current 21,501 17,440
Income tax recovery - Future (8,165) (3,322)
-------------------------------------------------------------------------
Earnings before minority interest 21,257 3,393
Minority interest 1 140
-------------------------------------------------------------------------
Net earnings $ 21,256 $ 3,253
----------------------------
----------------------------
Earnings per share
Basic $ 0.35 $ 0.06
----------------------------
----------------------------
Fully diluted $ 0.35 $ 0.05
----------------------------
----------------------------
Weighted average number of shares
outstanding 59,905,424 58,362,128
----------------------------
----------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
(expressed in thousands of United States dollars) (unaudited)
Three Months Three Months
Ended Ended
April 30, April 30,
2008 2007
-------------------------------------------------------------------------
Net earnings $ 21,256 $ 3,253
Other comprehensive income
Net gain on translation of
foreign operations
(net of tax - nil) 2,589 1,991
-------------------------------------------------------------------------
----------------------------
Total comprehensive income $ 23,845 $ 5,244
----------------------------
----------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(expressed in thousands of United States dollars) (unaudited)
Three Months Three Months
Ended Ended
April 30, April 30,
2008 2007
-------------------------------------------------------------------------
Common shares:
Balance at beginning of period $ 305,502 $ 305,165
Issued during the period 76,039 43
-------------------------------------------------------------------------
Balance at end of period 381,541 305,208
-------------------------------------------------------------------------
Contributed surplus:
Balance at beginning of period 15,614 14,922
Stock option expense 155 185
-------------------------------------------------------------------------
Balance at end of period 15,769 15,107
-------------------------------------------------------------------------
Retained earnings:
Balance at beginning of period 225,334 165,625
Net earnings 21,256 3,253
Dividends paid (3,069) (14,593)
-------------------------------------------------------------------------
Balance at end of period 243,521 154,285
-------------------------------------------------------------------------
Accumulated other comprehensive
income:
Balance at beginning of period 25,212 16,016
Other comprehensive income
Net gain on translation of
foreign operations
(net of tax - nil) 2,589 1,991
-------------------------------------------------------------------------
Balance at end of period 27,801 18,007
-------------------------------------------------------------------------
Total shareholders' equity $ 668,632 $ 492,607
----------------------------
----------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(expressed in thousands of United States dollars) (unaudited)
Three Months Three Months
Ended Ended
April 30, April 30,
2008 2007
-------------------------------------------------------------------------
Cash provided by (used in):
Operating
Net earnings $ 21,256 $ 3,253
Items not involving cash:
Amortization and accretion 13,955 19,603
Future income taxes (8,165) (3,194)
Stock-based compensation and
pension expense 357 1,282
Foreign exchange (574) 13,461
Loss on disposal of assets 469 -
Minority interest 1 140
Change in non-cash operating
working capital 7,008 (20,219)
-------------------------------------------------------------------------
34,307 14,326
-------------------------------------------------------------------------
Financing
Decrease in long-term debt (12,477) (3,626)
Increase in revolving credit 155,190 19,011
Repayment of Harry Winston Inc.
revolving credit (159,109) -
Dividends paid (3,069) (14,593)
Issue of common shares 76,039 34
-------------------------------------------------------------------------
56,574 826
-------------------------------------------------------------------------
Investing
Cash collateral and cash reserve (8,323) 12,259
Deferred mineral property costs (1,727) (3,782)
Capital assets (68,139) (37,566)
Other assets - (1,091)
-------------------------------------------------------------------------
(78,189) (30,180)
-------------------------------------------------------------------------
Foreign exchange effect on
cash balances (544) 382
Increase/(decrease) in cash
and cash equivalents 12,148 (14,646)
Cash and cash equivalents,
beginning of period (note 3) 49,628 54,174
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period (note 3) $ 61,776 $ 39,528
----------------------------
----------------------------
Change in non-cash operating
working capital
Accounts receivable 1,732 (4,285)
Prepaid expenses and other current
assets (4,435) 1,512
Inventory and supplies (18,577) (43,582)
Accounts payable and accrued liabilities 18,699 18,909
Income tax payable 9,589 7,227
-------------------------------------------------------------------------
$ 7,008 $ (20,219)
-------------------------------------------------------------------------
Supplemental cash flow information
Cash taxes paid $ 12,195 $ 736
Cash interest paid $ 4,408 $ 5,743
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
April 30, 2008 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 a 40% 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 Mines Ltd. (40%). DDMI is the
operator of the Diavik Diamond Mine. Both companies are headquartered in
Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc
of London, England, and Harry Winston Diamond Mines Ltd. is a wholly
owned subsidiary of Harry Winston Diamond Corporation of Toronto, Canada.
The Diavik Diamond Mine is located 300 kilometres northeast of
Yellowknife in the Northwest Territories. The Company records its
proportionate interest in the assets, liabilities and expenses of the
Joint Venture in the Company's financial statements with a one-month lag.
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.
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,
2008, since these interim financial statements do not include all
disclosures required by Canadian generally accepted accounting principles
("Canadian 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, 2008.
Adoption Of New Accounting Standards And Developments
Capital Disclosures
Effective February 1, 2008, the Company adopted new accounting
recommendations from the Canadian Institute of Chartered Accountants
("CICA"), Handbook Section 1535, "Capital Disclosures". This new standard
specifies the requirements for disclosure of both qualitative and
quantitative information to enable users of financial statements to
evaluate the Company's objectives, policies and processes for managing
capital. This disclosure is contained in note 12 to the interim
consolidated financial statements.
Inventories
Effective February 1, 2008, the Company adopted new accounting
recommendations from the CICA, Handbook Section 3031, "Inventories",
which supersedes the previously issued standard on inventory. The new
standard introduces significant changes to the measurement and disclosure
of inventory. The measurement changes include: the elimination of LIFO,
the requirement to measure inventories at the lower of cost and net
realizable value method, for inventories that are not ordinarily
interchangeable and goods or services produced for specific purposes, the
requirement for an entity to use a consistent cost formula for inventory
of a similar nature and use, and the reversal of previous write-downs to
net realizable value when there is a subsequent increase in the value of
inventories. Disclosures of inventories have also been enhanced.
Inventory policies, carrying amounts, amounts recognized as an expense,
write-downs and the reversals of write-downs are required to be
disclosed. This standard has had no material impact on the Company's
consolidated financial statements.
Financial Instruments
Effective February 1, 2008, the Company adopted new accounting
recommendations from the CICA, Handbook Section 3862, "Financial
Instruments - Disclosures" and Handbook Section 3863, "Financial
Instruments - Presentation". Section 3862 provides guidance on disclosure
of risks associated with both recognized and unrecognized financial
instruments and how the Company manages these risks. Section 3863 details
financial instruments presentation requirements, which are unchanged from
those discussed in Section 3861, "Financial Instruments - Disclosure and
Presentation". This disclosure in contained in note 13 to the interim
consolidated financial statements.
Recently Issued Accounting Standards
Goodwill and Intangibles
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. Concurrent with the introduction of this standard, the
CICA withdrew EIC 27, "Revenues and Expenses During the Pre-operating
Period," which eliminates the ability for companies to defer costs and
revenues incurred prior to commercial production at new mine operations.
The changes are effective for interim and annual financial statements
beginning January 1, 2009. The Company is currently assessing the impact
of this standard on its consolidated financial statements.
International Financial Reporting Standards ("IFRS"):
In 2006, the Canadian Accounting Standards Board ("AcSB") published a new
strategic plan that will significantly impact financial reporting
requirements for Canadian companies. The AcSB strategic plan outlines the
convergence of Canadian GAAP with IFRS over an expected five-year
transitional period. In February 2008, the AcSB announced that 2011 is
the changeover date for public accountable companies to convert from
Canadian GAAP to IFRS. The transition date is for interim and annual
financial statements relating to fiscal years beginning on or after
January 1, 2011. Accordingly, this new standard will apply to the Company
effective for the fiscal year commencing February 1, 2011. While the
Company has begun assessing the adoption of IFRS for 2011, the financial
reporting impact of the transition to IFRS cannot be reasonably estimated
at this time.
NOTE 3:
Cash Resources
April 30, January 31,
2008 2008
-------------------------------------------------------------------------
Cash on hand and balances with banks $ 61,776 $ 33,028
Short-term investments (a) - 16,600
-------------------------------------------------------------------------
Total cash and cash equivalents 61,776 49,628
Cash collateral and cash reserves 33,938 25,615
-------------------------------------------------------------------------
Total cash resources $ 95,714 $ 75,243
----------------------------
----------------------------
(a) Short-term investments are held in overnight deposits.
NOTE 4:
Inventory and Supplies
April 30, January 31,
2008 2008
-------------------------------------------------------------------------
Rough diamond inventory $ 22,349 $ 17,097
Merchandise inventory 256,908 254,101
Supplies inventory 61,548 51,030
-------------------------------------------------------------------------
Total inventory and supplies $ 340,805 $ 322,228
----------------------------
----------------------------
NOTE 5:
Diavik Joint Venture
The following represents Harry Winston Diamond Corporation's 40%
proportionate interest in the Joint Venture as at March 31, 2008 and
December 31, 2007:
April 30, January 31,
2008 2008
-------------------------------------------------------------------------
Current assets $ 118,617 $ 110,199
Long-term assets 663,300 605,300
Current liabilities 47,455 40,631
Long-term liabilities and
participant's account 734,462 674,868
April 30, April 30,
Three months ended: 2008 2007
-------------------------------------------------------------------------
Expenses net of interest income
of $0.1 million
(2007 - $0.1 million) (a) 33,959 40,101
Cash flows resulting from (used in)
operating activities (27,391) (44,042)
Cash flows resulting from financing
activities 89,124 64,272
Cash flows resulting from (used in)
investing activities (64,792) (29,622)
-------------------------------------------------------------------------
(a) The Joint Venture only earns interest income.
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
Accum- April January
ulated 30, 31,
Amortization amorti- 2008 2008
period Cost zation net net
-------------------------------------------------------------------------
Trademark indefinite life $ 112,995 $ - $ 112,995 $ 112,995
Drawings indefinite life 12,365 - 12,365 12,365
Wholesale
distribution
network 120 months 5,575 (1,508) 4,067 4,206
Store
leases 65 to 105 months 5,639 (3,080) 2,559 3,062
-------------------------------------------------------------------------
Intangible assets $ 136,574 $ (4,588) $ 131,986 $ 132,628
-------------------------------------------
-------------------------------------------
Amortization expense for the three months ended April 30, 2008 was
$0.6 million (2007 - $0.4 million).
NOTE 7:
Long-Term Debt
April 30, January 31,
2008 2008
-------------------------------------------------------------------------
Credit facilities $ 113,335 $ 125,677
Harry Winston Inc. credit facilities 181,631 174,850
First mortgage on real property 8,659 8,822
-------------------------------------------------------------------------
Total long-term debt 303,625 309,349
-------------------------------------------------------------------------
Less current portion (63,618) (54,137)
-------------------------------------------------------------------------
$ 240,007 $ 255,212
----------------------
----------------------
On February 22, 2008, Harry Winston Inc. entered into a new 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 April 30, 2008, $160.1 million had been drawn against
this secured credit facility, which expires on March 31, 2013.
NOTE 8:
Share Capital
(a) Authorized
Unlimited common shares without par value.
(b) Issued
Number of
shares Amount
-------------------------------------------------------------------------
Balance, January 31, 2008 58,372,091 $ 305,502
Shares issued for:
Cash 3,000,000 76,039
-------------------------------------------------------------------------
Balance, April 30, 2008 61,372,091 $ 381,541
-----------------------
-----------------------
(c) RSU and DSU Plans
RSU Number of units
-------------------------------------------------------------------------
Balance, January 31, 2008 143,715
Awards and payouts during the period (net):
RSU awards 11,172
RSU payouts (2,687)
-------------------------------------------------------------------------
Balance, April 30, 2008 152,200
-----------------------
-----------------------
DSU Number of units
-------------------------------------------------------------------------
Balance, January 31, 2008 72,198
Awards during the period (net):
DSU awards 6,839
-------------------------------------------------------------------------
Balance, April 30, 2008 79,037
-----------------------
-----------------------
Three Three
Months Months
Ended Ended
April 30, April 30,
Expense for the period: 2008 2007
-------------------------------------------------------------------------
RSU $ 509 $ 165
DSU 567 (73)
-------------------------------------------------------------------------
$ 1,076 $ 92
-----------------------
-----------------------
During the period, the Company granted 11,172 RSUs (net of forfeitures)
and 6,839 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. 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 vesting.
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. The Company's share of this funding requirement was
$0.2 million for calendar 2008. 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. The Company's share of the Joint Venture's letters of
credit outstanding with respect to the environmental agreements as at
April 30, 2008 was $74.8 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 twelve years and shall be
automatically renewed on terms to be agreed for successive periods of
six years thereafter until termination. The agreements terminate in
the event 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 the Company's 40% share, before any
reduction of future reclamation activities, and future minimum annual
rentals under non-cancellable operating and capital leases for retail
salons and corporate office space, and are as follows:
2009 $ 93,816
2010 95,028
2011 92,991
2012 91,055
2013 90,650
Thereafter 155,064
---------------------------------------------------------------------
NOTE 10:
Employee Benefit Plans
Three Three
Months Months
Ended Ended
April 30, April 30,
Expense for the period: 2008 2007
-------------------------------------------------------------------------
Defined benefit pension plan - Harry Winston
retail segment $ 411 $ 6
Defined contribution plan - Harry Winston retail
segment 234 210
Defined contribution plan - Diavik Diamond Mine 212 163
-------------------------------------------------------------------------
$ 857 $ 379
-----------------------
-----------------------
NOTE 11:
Related Parties
Transactions with related parties for the three months ended April 30,
2008 include $0.4 million payable of rent ($0.4 million for the three
months ended April 30, 2007) relating to the New York salon, payable to a
Harry Winston Inc. employee.
NOTE 12:
Capital Management
The Company's capital includes cash and cash equivalents, short-term
debt, long-term debt and equity, which includes issued common shares,
contributed surplus and retained earnings.
The Company's primary objective with respect to its capital management is
to ensure that it has sufficient cash resources to maintain its ongoing
operations, to provide returns to shareholders and benefits for other
stakeholders, and to pursue growth opportunities. To meet these needs,
the Company may from time to time raise additional funds through
borrowing and/or the issuance of equity or debt or by securing strategic
partners upon approval by the Board of Directors. The Board of Directors
reviews and approves any material transactions out of the ordinary course
of business, including proposals on acquisitions or other major
investments or divestitures, as well as annual capital and operating
budgets.
The Company is subject to externally imposed capital requirements related
to its senior secured term and revolving credit facilities, whereby it is
required to maintain a consolidated tangible net worth in excess of
$250 million, and there has been no change with respect to the Company's
overall capital risk management strategy. At April 30, 2008, the Company
is in compliance with this covenant.
NOTE 13:
Financial Instruments
The Company has various financial instruments comprised of 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 carrying values of these financial instruments are as follows:
April 30, 2008 January 31, 2008
-------------------------------------------------------------------------
Estimated Carrying Estimated Carrying
Fair Value Value Fair Value Value
-------------------------------------------------------------------------
Financial Assets:
Cash and cash
equivalents $ 61,776 $ 61,776 $ 49,628 $ 49,628
Cash collateral and
cash reserves 33,938 33,938 25,615 25,615
Accounts receivable 23,726 23,726 25,505 25,505
-------------------------------------------------------------------------
$ 119,440 $ 119,440 $ 100,748 $ 100,748
-------------------------------------------------
-------------------------------------------------
Financial Liabilities:
Accounts payable and
accrued liabilities $ 141,871 $ 141,871 $ 124,426 $ 124,426
Bank advances 24,228 24,228 34,928 34,928
Long term debt 303,625 303,625 309,349 309,349
-------------------------------------------------------------------------
$ 469,724 $ 469,724 $ 468,703 $ 468,703
-------------------------------------------------
-------------------------------------------------
NOTE 14:
Financial Risk Exposure and Risk Management
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 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:
i) Currency Risk
The Company's sales are predominately 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. From
time to time, the Company may use a limited number of derivative
financial instruments to manage its foreign currency exposure. 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
earnings arises from the following sources:
- Net Canadian dollar-denominated monetary assets and liabilities. The
most significant exposure relates to its Canadian dollar future
income tax liability. The Company's functional and reporting currency
is US dollars; however, the calculation of income tax expense is
based on income in the currency of the country of origin. As such,
the Company is continually subject to foreign exchange fluctuations,
particularly as the Canadian dollar moves against the US dollar. The
weakening/strengthening of the Canadian dollar versus the US dollar
results in an unrealized foreign exchange gain/loss on the
revaluation of the Canadian dollar denominated future income tax
liability.
Committed or anticipated foreign currency denominated transactions,
primarily Canadian dollar costs at the Diavik Diamond Mine.
Based on the Company's net exposure to Canadian dollar monetary assets
and liabilities at April 30, 2008, a one cent change in the exchange rate
would have impacted pre-tax net earnings for the quarter by $2.8 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.
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 retail 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 past 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 ongoing review of customer credit-worthiness.
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 April 30, 2008, the Company's maximum counterparty credit
exposure consists of the carrying amount of cash and cash
equivalents and accounts receivable, which approximates fair value.
iv) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet
its financial obligations as they fall due.
The Company manages its liquidity by ensuring that there is
sufficient capital to meet short 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. Management forecasts cash flows for its current and
subsequent fiscal years to predict future financing requirements.
Future requirements are met through a combination of committed
credit facilities and access to capital markets.
At April 30, 2008, the Company had $61.8 million of cash and cash
equivalents and $47.2 million available under credit facilities.
The following table summarizes the aggregate amount of contractual
future cash outflows for the Company's financial liabilities:
Less than Year Year After
Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Accounts payable and
accrued liabilities $141,871 $141,871 $ - $ - $ -
Income taxes payable 57,684 57,684 - - -
Bank advances 24,228 24,228 - - -
Long-term debt(a) 370,557 78,090 84,326 23,281 184,860
Environmental and
participation
agreements
incremental
commitments 97,037 76,245 3,972 1,985 14,835
Operating lease
obligations 121,030 16,642 28,332 18,029 58,027
Capital lease
obligations 2,234 929 1,239 66 -
-------------------------------------------------------------------------
(a) Includes projected interest payments on the current debt outstanding
based on interest rates in effect at April 30, 2008.
NOTE 15:
Segmented Information
The Company operates in two segments within the diamond industry, mining
and retail, for the three months ended April 30, 2008.
The mining segment consists of the Company's rough diamond business. This
business includes the 40% 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
April 30, 2008 Mining Retail Total
-------------------------------------------------------------------------
Revenue
Canada $ 81,393 $ - $ 81,393
United States - 24,926 24,926
Europe - 31,630 31,630
Asia - 18,130 18,130
Cost of sales 32,150 40,999 73,149
-------------------------------------------------------------------------
Gross margin 49,243 33,687 82,930
Gross margin (%) 60.5% 45.1% 53.1%
Selling, general and
administrative expenses 7,208 36,077 43,285
-------------------------------------------------------------------------
Earnings (loss) from operations 42,035 (2,390) 39,645
-------------------------------------------------------------------------
Interest and financing expenses (2,479) (2,974) (5,453)
Other income (expense) 632 (386) 246
Foreign exchange gain 74 81 155
-------------------------------------------------------------------------
Segmented earnings (loss) before
income taxes $ 40,262 $ (5,669) $ 34,593
--------------------------------------
--------------------------------------
Segmented assets as at April 30,
2008
Canada $ 944,842 $ - $ 944,842
United States - 461,519 461,519
Other foreign countries 18,049 166,321 184,370
-------------------------------------------------------------------------
$ 962,891 $ 627,840 $1,590,731
-------------------------------------------------------------------------
Goodwill as at April 30, 2008 $ - $ 93,780 $ 93,780
Capital expenditures $ 64,896 $ 3,243 $ 68,139
Other significant non-cash items:
Income tax recovery $ (6,628) $ (1,537) $ (8,165)
Amortization and accretion $ 10,739 $ 3,216 $ 13,955
-------------------------------------------------------------------------
For the three months ended
April 30, 2007 Mining Retail Total
-------------------------------------------------------------------------
Revenue
Canada $ 82,752 $ - $ 82,752
United States - 24,341 24,341
Europe - 22,347 22,347
Asia - 11,925 11,925
Cost of sales 40,516 30,616 71,132
-------------------------------------------------------------------------
Gross margin 42,236 27,997 70,233
Gross margin (%) 51.0% 47.8% 49.7%
Selling, general and
administrative expenses 5,087 29,124 34,211
-------------------------------------------------------------------------
Earnings (loss) from operations 37,149 (1,127) 36,022
-------------------------------------------------------------------------
Interest and financing expenses (3,675) (2,457) (6,132)
Other income 766 147 913
Foreign exchange gain (loss) (13,311) 19 (13,292)
-------------------------------------------------------------------------
Segmented earnings (loss)
before income taxes $ 20,929 $ (3,418) $ 17,511
---------------------------------------
---------------------------------------
Segmented assets as at April 30,
2007
Canada $ 735,349 $ - $ 735,349
United States - 464,003 464,003
Other foreign countries 5,542 110,459 116,001
-------------------------------------------------------------------------
$ 740,891 $ 574,462 $1,315,353
-------------------------------------------------------------------------
Goodwill as at April 30, 2007 $ - $ 97,207 $ 97,207
Capital expenditures $ 29,010 $ 8,556 $ 37,566
Other significant non-cash items:
Income tax recovery $ (2,683) $ (639) $ (3,322)
Amortization and accretion $ 17,690 $ 1,913 $ 19,603
-------------------------------------------------------------------------
Sales to one customer in the mining segment totalled $3.6 million for the
three months ended April 30, 2008 ($4.6 million for the three months
ended April 30, 2007).
SOURCE Harry Winston Diamond Corporation
CONTACT: PRNewswire - - 06/04/2008/
END FIRST AND FINAL ADD/
(HW. HWD)
