TORONTO, Dec. 10 /PRNewswire-FirstCall/ -
Highlights
(All figures are in United States dollars unless otherwise indicated)
The Company recorded consolidated net earnings of $71.9 million, or $1.17
per share, for the third quarter compared to a net loss of $7.4 million, or
$0.13 per share, respectively, in the third quarter of the prior year.
Consolidated net earnings for the third quarter included a $49.0 million net
foreign exchange gain, or $0.80 per share, as a result of the weakening of the
Canadian dollar relative to the US dollar, compared to a $40.6 million net
foreign exchange loss, or $0.70 per share, in the comparable quarter of the
prior year.
Consolidated sales were $148.6 million for the third quarter compared to
$176.5 million for the comparable quarter of the prior year, resulting in a
24% decrease in gross margin and a 35% decrease in consolidated earnings from
operations.
Earnings from operations for the mining segment decreased 33% to $47.0
million compared to the comparable quarter of the prior year. Rough diamond
production for the third calendar quarter was down 26% to 0.9 million carats
produced versus 1.25 million for the comparable quarter of the prior year
resulting from the continuing grade variation in the A-154 South pipe, and the
processing of a higher volume of low grade mud-rich material from the top of
the A-418 pipe. Mining sales were down 26% to $90.7 million compared to $122.7
million in the comparable quarter of the prior year due to reduced production.
Since September, rough diamond production has returned to normal levels with
grades in both A-154 South and A-418 returning to levels consistent with the
ore reserve. However, beginning in October, the rough diamond market has
become subdued as the diamond distribution chain seeks to deleverage by not
replenishing inventories.
The retail segment recorded an 8% increase in sales to $57.9 million, with
a loss from operations of $4.0 million compared to a loss from operations of
$3.6 million in the comparable quarter of the prior year. Retail segment SG&A
as a percentage of sales remained consistent with the comparable quarter of
the prior year at 53%.
Management's Discussion and Analysis
Prepared as of December 10, 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 and nine months ended October 31, 2008, and its financial
position as at October 31, 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 and nine months ended October 31, 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 "third quarter" refer to the three months ended October 31,
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" on page 18.
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 and general capital
market conditions and the ability of the Company to refinance or replace its
existing credit facilities, the level of worldwide diamond production and
world and US economic conditions and demand for luxury goods. 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 $0.96, 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 and demand for luxury
goods. 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" on page 18.
Forward-looking information is subject to certain factors, including risks
and uncertainties, which could cause actual results to differ materially from
what we currently expect. These factors include, among other things, the
uncertain nature of mining activities, including risks associated with
underground construction and mining operations, risks associated with joint
venture operations, risks associated with the remote location of and harsh
climate at the Diavik Diamond Mine site, risks associated with regulatory
requirements, fluctuations in diamond prices and changes in US and world
economic conditions, the risk of fluctuations in the Canadian/US dollar
exchange rate, 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(R) 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 diamond industry is being impacted by the current economic malaise
resulting from the global credit crisis. Prices in all rough diamond
categories have softened.
The prices for polished diamonds have not declined as much as for rough
diamonds, as manufacturers continue to defend the value of their polished
diamond stocks. The continuing lackluster market for polished diamonds in the
US and Japan is in part offset by positive demand from developing economies.
In the longer term, a continuing shrinkage of mine supply coupled with
expanded demand from these emerging economies is expected to underpin future
price increases, once the world economy recovers.
The Retail Jewelry Market
Consumers have reduced discretionary spending in response to the impact of
deteriorating economies. Demand for luxury diamond jewelry products continues
to hold up in the Middle Eastern market as well as parts of Asia, while other
regions have witnessed significant reductions.
(R) Harry Winston is a registered trademark of Harry Winston Inc.
Consolidated Financial Results
The following is a summary of the Company's consolidated quarterly results
for the eight quarters ended October 31, 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 2009 2009 2008 2008
Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Sales $148,623 $186,119 $156,079 $188,195 $176,478
Cost of sales 71,679 73,542 73,149 83,637 74,591
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Gross margin 76,944 112,577 82,930 104,558 101,887
Gross margin (%) 51.8% 60.5% 53.1% 55.6% 57.7%
Selling, general
and administrative
expenses 33,998 39,194 43,285 45,494 35,539
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Earnings from
operations 42,946 73,383 39,645 59,064 66,348
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Interest and
financing expenses (4,678) (5,366) (5,453) (7,082) (7,422)
Other income (expense) 407 815 246 706 594
Insurance settlement - - - 13,488 -
Foreign exchange
gain (loss) 48,982 5,301 155 22,270 (40,584)
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Earnings before
income taxes 87,657 74,133 34,593 88,446 18,936
Income taxes (recovery) 15,685 24,185 13,336 (1,968) 26,197
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Earnings (loss) before
minority interest 71,972 49,948 21,257 90,414 (7,261)
Minority interest 81 1 1 (34) 90
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Net earnings (loss) $ 71,891 $ 49,947 $ 21,256 $ 90,448 $ (7,351)
-------------------------------------------------------------------------
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Basic earnings (loss)
per share $ 1.17 $ 0.81 $ 0.35 $ 1.55 $ (0.13)
Diluted earnings
(loss) per share $ 1.17 $ 0.81 $ 0.35 $ 1.54 $ (0.13)
Cash dividends
declared per share $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.25
Total assets(i) $ 1,645 $ 1,637 $ 1,591 $ 1,494 $ 1,433
Total long-term
liabilities(i) $ 562 $ 617 $ 634 $ 660 $ 530
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Nine Nine
Months Months
Ended Ended
2008 2008 2007 Oct. 31, Oct. 31,
Q2 Q1 Q4 2008 2007
-------------------------------------------------------------------------
Sales $173,269 $141,365 $154,328 $490,821 $491,112
Cost of sales 81,827 71,132 78,559 218,370 227,550
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Gross margin 91,442 70,233 75,769 272,451 263,562
Gross margin (%) 52.8% 49.7% 49.1% 55.5% 53.7%
Selling, general
and administrative
expenses 35,201 34,211 38,590 116,477 104,951
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Earnings from
operations 56,241 36,022 37,179 155,974 158,611
-------------------------------------------------------------------------
Interest and
financing expenses (7,222) (6,132) (6,441) (15,497) (20,776)
Other income (expense) 545 913 (111) 1,468 2,052
Insurance settlement - - - - -
Foreign exchange
gain (loss) (11,785) (13,292) 9,831 54,438 (65,661)
-------------------------------------------------------------------------
Earnings before
income taxes 37,779 17,511 40,458 196,383 74,226
Income taxes (recovery) 17,747 14,118 13,169 53,205 58,062
-------------------------------------------------------------------------
Earnings (loss) before
minority interest 20,032 3,393 27,289 143,178 16,164
Minority interest (26) 140 (5) 83 204
-------------------------------------------------------------------------
Net earnings (loss) $ 20,058 $ 3,253 $ 27,294 $143,095 $ 15,960
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Basic earnings (loss)
per share $ 0.34 $ 0.06 $ 0.47 $ 2.35 $ 0.27
Diluted earnings
(loss) per share $ 0.33 $ 0.05 $ 0.46 $ 2.34 $ 0.27
Cash dividends
declared per share $ 0.25 $ 0.25 $ 0.25 $ 0.15 $ 0.75
Total assets(i) $ 1,367 $ 1,315 $ 1,288 $ 1,645 $ 1,433
Total long-term
liabilities(i) $ 486 $ 408 $ 536 $ 562 $ 530
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(i) Total assets and total long-term liabilities are expressed in
millions of United States dollars.
The comparability of quarter-over-quarter results is impacted by
seasonality for both the mining and retail segments. Harry Winston
Diamond Corporation expects that the quarterly results for its mining
segment will continue to fluctuate depending on the seasonality of
production at the Diavik Diamond Mine, the number of 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 October 31, 2008 Compared to Three Months Ended
October 31, 2007
Consolidated Net Earnings
The third quarter net earnings of $71.9 million or $1.17 per share
represent an increase of $79.2 million or $1.30 per share as compared to the
results of the third quarter of the prior year. The increase is primarily due
to a net foreign exchange gain of $49.0 million, or $0.80 per share, in the
current quarter related principally to an unrealized non-cash gain on future
income taxes payable, compared to a $40.6 million net foreign exchange loss,
or $0.70 per share, recognized in the comparable quarter of the prior year.
For more detail on the impact of the foreign exchange gain on future income
taxes payable, see "Consolidated Income Taxes" below.
Consolidated Sales
Sales for the third quarter totalled $148.6 million, consisting of rough
diamond sales of $90.7 million and retail segment sales of $57.9 million. This
compares to sales of $176.5 million in the comparable quarter of the prior
year (rough diamond sales of $122.7 million and retail segment sales of $53.8
million). The Company held three primary rough diamond sales in the third
quarter consistent with 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 third quarter cost of sales was $71.7 million for a gross
margin of 51.8% compared to $74.6 million cost of sales and a gross margin of
57.7% 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, advertising, professional
fees, rent and building related costs. The Company incurred SG&A expenses of
$34.0 million for the third quarter, compared to $35.5 million in the
comparable quarter of the prior year.
Included in SG&A expenses for the third quarter are $3.1 million for the
mining segment as compared to $6.7 million for the comparable quarter of the
prior year, and $30.9 million for the retail segment as compared to $28.8
million for the comparable quarter of the prior year. For the mining segment,
the decrease in SG&A expenses was primarily due to a mark-to-market reduction
in stock-based compensation. For the retail segment, the increase in SG&A
expenses 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. See "Segmented
Analysis" on page 8 for additional information.
Consolidated Income Taxes
The Company recorded a tax expense of $15.7 million during the third
quarter, compared to a tax expense of $26.2 million in the comparable quarter
of the prior year. The Company's effective income tax rate for the quarter,
excluding the Company's retail segment, is 18%, 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. During the third quarter of fiscal 2009, the Canadian dollar
weakened by 15% relative to the US dollar. As a result, the Company recorded a
foreign exchange gain of $39.4 million on the revaluation of the Company's
Canadian dollar denominated future income tax liability. This compares to a
foreign exchange loss of $31.4 million in the comparable quarter of the
previous year when the Canadian dollar strengthened by 13% relative to the US
dollar. The unrealized foreign exchange gain is not taxable for Canadian
income tax purposes, and is the primary reason for the decrease of the overall
effective income tax rate in the current period.
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.
The Company has provided a table below summarizing the movement from the
statutory to the effective income tax rate as a percentage of earnings before
taxes:
Three Months Three Months
Ended Oct. 31, Ended Oct. 31,
2008 2007
-------------------------------------------------------------------------
Statutory income tax rate 31 % 34 %
Stock compensation - % 2 %
Northwest Territories mining royalty
(net of income tax relief) 5 % 33 %
Impact of foreign exchange (19) % 69 %
Earnings subject to tax different
than statutory rate 1 % (15) %
Changes in valuation allowance - % 10 %
Assessments and adjustments 1 % - %
Other items (1) % 5 %
Effective income tax rate 18 % 138 %
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Consolidated Interest and Financing Expenses
Interest and financing expenses of $4.7 million were incurred during the
third quarter compared to $7.4 million during the comparable quarter of the
prior year. The reduction in interest and financing expenses relates primarily
to the reduction in debt levels in the mining segment.
Consolidated Other Income
Other income of $0.4 million was recorded during the third quarter
compared to other income of $0.6 million in the comparable quarter of the
prior year.
Consolidated Foreign Exchange Gain (Loss)
A net foreign exchange gain of $49.0 million was recognized during the
quarter compared to a net foreign exchange loss of $40.6 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.
Nine Months Ended October 31, 2008 Compared to Nine Months Ended
October 31, 2007
Consolidated Net Earnings
Net earnings for the nine months ended October 31, 2008 were $143.1
million or $2.35 per share compared to $16.0 million or $0.27 per share for
the nine months ended October 31, 2007. The increase is due primarily to a net
foreign exchange gain of $54.4 million, or $0.89 per share, for the nine
months ended October 31, 2008 compared to a $65.7 million net foreign exchange
loss, or $1.12 per share, recognized in the comparable period of the prior
year related principally to an unrealized non-cash loss on future income taxes
payable.
Consolidated Sales
Sales for the nine months ended October 31, 2008 were $490.8 million,
consistent with sales of $491.1 million for the nine months ended October 31,
2007. Rough diamond sales accounted for $277.1 million of total sales compared
to $310.5 million for the comparable period of the prior year. Retail segment
sales of $213.7 million accounted for the balance, compared to $180.6 million
for the comparable period of the prior year.
Consolidated Cost of Sales and Gross Margin
The Company's cost of sales for the nine months ended October 31, 2008 was
$218.4 million for a gross margin of 55.5% compared to $227.6 million cost of
sales and a gross margin of 53.7% for the comparable period of the prior year.
Included in the nine months ended October 31, 2008 is a $4.3 million insurance
settlement relating to an excavator fire that occurred in the fourth quarter
of fiscal 2006 at the Diavik Diamond Mine. The settlement represents the
recovery of the cost of the excavator that was previously written off along
with incremental operating expenses relating to the procurement of a
replacement excavator. 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 Company incurred SG&A expenses of $116.5 million for the nine months
ended October 31, 2008, compared to $105.0 million for the nine months ended
October 31, 2007.
Included in SG&A expenses for the nine months ended October 31, 2008 are
$15.5 million for the mining segment as compared to $17.7 million for the
comparable period of the prior year, and $101.0 million for the retail segment
as compared to $87.3 million for the comparable period of the prior year. For
the mining segment, the decrease in SG&A expenses was primarily due to a
mark-to-market reduction in stock-based compensation. 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 in the first quarter of fiscal 2009. See "Segmented Analysis" on
page 8 for additional information.
Consolidated Income Taxes
The Company recorded a tax expense of $53.2 million during the nine months
ended October 31, 2008, compared to a tax expense of $58.1 million in the
comparable period of the prior year. The Company's effective income tax rate
for the quarter, excluding the Company's retail segment, is 27%, 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.
During the nine months ended October 31, 2008, the Company recorded an
unrealized foreign exchange gain of $44.7 million on the revaluation of the
Canadian dollar denominated future income tax liability, as compared to an
unrealized foreign exchange loss of $54.7 million recorded in the comparable
period of the prior year. The unrealized foreign exchange gain is not taxable
for Canadian income tax purposes.
The rate of income tax payable by Harry Winston Inc. varies by
jurisdiction. Net operating losses are available in certain jurisdictions to
offset future income taxes payable in such jurisdictions. The net operating
losses are scheduled to expire through 2027.
The Company has provided a table below summarizing the movement from the
statutory to the effective income tax rate as a percentage of earnings before
taxes:
Nine Months Nine Months
Ended Oct. 31, Ended Oct. 31,
2008 2007
-------------------------------------------------------------------------
Statutory income tax rate 31 % 34 %
Northwest Territories mining royalty
(net of income tax relief) 8 % 18 %
Impact of change in future income tax rate - % (1) %
Impact of foreign exchange (11) % 27 %
Earnings subject to tax different than
statutory rate (1) % (6) %
Changes in valuation allowance - % 1 %
Benefits of losses recognized through
reduction of goodwill - % 2 %
Assessments and adjustments 1 % - %
Other items (1) % 3 %
Effective income tax rate 27 % 78 %
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Consolidated Interest and Financing Expenses
Interest and financing expenses of $15.5 million were incurred during the
nine months ended October 31, 2008 compared to $20.8 million for the
comparable period of the prior year. The reduction in interest and financing
expenses relates primarily to the reduction in debt levels in the mining
segment.
Consolidated Other Income
Other income, which includes interest income on the Company's various bank
balances, was $1.5 million during the nine months ended October 31, 2008
compared to $2.1 million for the comparable period of the prior year.
Consolidated Foreign Exchange Gain (Loss)
A net foreign exchange gain of $54.4 million was recognized during the
nine months ended October 31, 2008 compared to a net foreign exchange loss of
$65.7 million recorded during the nine months ended October 31, 2007. The
current year-to-date gain relates principally to the revaluation of the
Company's Canadian dollar denominated long-term future income tax liability as
a result of the weakening of the Canadian dollar against the US dollar at
October 31, 2008. 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)
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2009 2009 2009 2008 2008
Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Sales $ 90,716 $105,014 $ 81,393 $103,238 $122,711
Cost of sales 40,617 32,390 32,150 36,962 45,985
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Gross margin 50,099 72,624 49,243 66,276 76,726
Gross margin (%) 55.2% 69.2% 60.5% 64.2% 62.5%
Selling, general
and administrative
expenses 3,114 5,151 7,208 5,663 6,748
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Earnings from
operations $ 46,985 $ 67,473 $ 42,035 $ 60,613 $ 69,978
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Nine Nine
Months Months
Ended Ended
2008 2008 2007 Oct. 31, Oct. 31,
Q2 Q1 Q4 2008 2007
-------------------------------------------------------------------------
Sales $105,071 $ 82,752 $ 81,035 $277,123 $310,534
Cost of sales 46,217 40,516 39,413 105,157 132,718
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Gross margin 58,854 42,236 41,622 171,966 177,816
Gross margin (%) 56.0% 51.0% 51.4% 62.1% 57.3%
Selling, general
and administrative
expenses 5,861 5,087 7,397 15,473 17,696
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Earnings from
operations $ 52,993 $ 37,149 $ 34,225 $156,493 $160,120
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Three Months Ended October 31, 2008 Compared to Three Months Ended
October 31, 2007
Mining Sales
Rough diamond sales for the third quarter totalled $90.7 million compared
to $122.7 million in the comparable quarter of the prior year resulting
primarily from lower carat production. Rough diamond production decreased 26%
in the third calendar quarter from the prior year as a result of the
continuing grade variation in the A-154 South kimberlite pipe, and the
processing of a higher volume of low grade mud-rich material from the top of
the A-418 pipe.
The Company held three primary rough diamond sales in the third quarter
consistent with the comparable quarter of the prior year. The Company expects
that results for its mining segment will continue to fluctuate depending on
the seasonality of production at the Diavik Diamond Mine, the number of
primary and secondary sales events conducted at each sales location during the
quarter, 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 third quarter cost of sales was $40.6 million for a gross
margin of 55.2% compared to a $46.0 million cost of sales and a gross margin
of 62.5% in the comparable quarter of the prior year. The reduction in gross
margin percentage resulted from a combination of reduced sales and a lower
proportion of cost attributable to development activity versus production
activity in the current quarter. 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 decreased by $3.6 million from the
comparable period of the prior year primarily due to a mark-to-market
reduction to stock-based compensation.
Nine Months Ended October 31, 2008 Compared to Nine Months Ended
October 31, 2007
Mining Sales
Rough diamond sales for the nine months ended October 31, 2008 totalled
$277.1 million compared to $310.5 million in the comparable period of the
prior year resulting primarily from lower carat production. Rough diamond
production decreased 26% during the first nine months of the calendar year
compared to the prior year as the result of the continuing grade variation in
the A-154 South kimberlite pipe, the stripping of low grade A-418 ore mixed
with waste overburden material and a higher volume of A-418 ore processed.
The Company held seven primary rough diamond sales, one of which was an
open-market tender, during the nine months ended October 31, 2008, compared to
eight in the comparable period of the prior year. Harry Winston Diamond
Corporation 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
For the nine months ended October 31, 2008, cost of sales was $105.2
million for a gross margin of 62.1% compared to $132.7 million cost of sales
and a gross margin of 57.3% in the comparable period of the prior year. The
increase in gross margin percentage resulted in part from a greater proportion
of cost attributable to development activity versus production activity. Also
included in the nine months ended October 31, 2008, is a $4.3 million
insurance settlement relating to an excavator fire that occurred in the fourth
quarter of fiscal 2006 at the Diavik Diamond Mine. The settlement represents
the recovery of the cost of the excavator that was previously written off
along with incremental operating expenses relating to the procurement of a
replacement excavator. Total proceeds of $5.0 million from the insurance
settlement were received in December 2008 and will result in a gain of
approximately $0.7 million in the fourth quarter. 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 decreased by $2.2 million from the
comparable period of the prior year primarily due to a mark-to-market
reduction to stock-based compensation.
Retail
The retail segment includes sales from Harry Winston's salons, which are
located in prime markets around the world including eight salons in the United
States: New York, Beverly Hills, Bal Harbour, Honolulu, Las Vegas, Dallas,
Chicago and Costa Mesa; five salons in Japan: Ginza, Roppongi Hills, Osaka,
Omotesando and Nagoya; two salons in Europe: Paris and London; and three
salons in Asia outside of Japan: Beijing, Taipei and Hong Kong.
(expressed in thousands of United States dollars) (quarterly results
are unaudited)
-------------------------------------------------------------------------
2009 2009 2009 2008 2008
Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Sales $ 57,907 $ 81,105 $ 74,686 $ 84,957 $ 53,767
Cost of sales 31,062 41,152 40,999 46,675 28,606
-------------------------------------------------------------------------
Gross margin 26,845 39,953 33,687 38,282 25,161
Gross margin (%) 46.4% 49.3% 45.1% 45.1% 46.8%
Selling, general
and administrative
expenses 30,884 34,043 36,077 39,831 28,791
-------------------------------------------------------------------------
Earnings (loss)
from operations $ (4,039) $ 5,910 $ (2,390) $ (1,549) $ (3,630)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine Nine
Months Months
Ended Ended
2008 2008 2007 Oct. 31, Oct. 31,
Q2 Q1 Q4 2008 2007
-------------------------------------------------------------------------
Sales $ 68,198 $ 58,613 $ 73,293 $213,698 $180,578
Cost of sales 35,610 30,616 39,146 113,213 94,832
-------------------------------------------------------------------------
Gross margin 32,588 27,997 34,147 100,485 85,746
Gross margin (%) 47.8% 47.8% 46.6% 47.0% 47.5%
Selling, general
and administrative
expenses 29,340 29,124 31,193 101,004 87,255
-------------------------------------------------------------------------
Earnings (loss)
from operations $ 3,248 $ (1,127) $ 2,954 $ (519) $ (1,509)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended October 31, 2008 Compared to Three Months Ended
October 31, 2007
Retail Sales
Sales for the third quarter were $57.9 million compared to $53.8 million
for the comparable quarter of the prior year, an increase of 8%. Sales in the
European market increased 15% to $23.4 million, US sales increased 10% to
$21.3 million, and Asian sales decreased 5% to $13.2 million.
Retail Cost of Sales and Gross Margin
Cost of sales for Harry Winston Inc. for the third quarter was $31.1
million compared to $28.6 million for the comparable quarter of the prior
year. Gross margin for the quarter was $26.8 million or 46.4% compared to
$25.2 million or 46.8% for the third quarter of the prior year. Excluding the
impact of sales of Harry Winston Inc. pre-acquisition inventory, gross margin
for the third quarter and the comparable quarter of the prior year would have
been 48.6% and 52.4%, respectively. This decrease in gross margin is the
result of the product mix sold in the quarter, in particular a lower
proportion of higher-margin sales in the Japanese market, and higher research
and development costs to support the growing watch business.
Retail Selling, General and Administrative Expenses
With the expansion of the new international salon network, consistent with
the Company's retail growth strategy, SG&A expenses increased to $30.9 million
from $28.8 million 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 $1.0 million in depreciation and
amortization, an increase of $0.7 million in professional fees and $0.4
million in other expenses. SG&A expenses include depreciation and amortization
expense of $3.1 million compared to $2.1 million in the comparable quarter of
the prior year. SG&A as a percentage of sales remained consistent with the
comparable quarter of the prior year at 53%.
Nine Months Ended October 31, 2008 Compared to Nine Months Ended
October 31, 2007
Retail Sales
Sales for the nine months ended October 31, 2008 were $213.7 million
compared to $180.6 million for the comparable period of the prior year, an
increase of 18%. Sales in the European market increased 36% to $86.7 million,
US sales increased 14% to $75.2 million, and Asian sales increased 2% to $51.8
million.
Retail Cost of Sales and Gross Margin
Cost of sales for the nine months ended October 31, 2008 was $113.2
million compared to $94.8 million for the nine months ended October 31, 2007.
Gross margin for the nine months ended October 31, 2008 was $100.5 million or
47.0% compared to $85.7 million or 47.5% for the comparable period of the
prior year. Excluding the impact of sales of Harry Winston Inc.
pre-acquisition inventory, gross margin for the nine months ended October 31,
2008 and the comparable period of the prior year would have been 49.2% and
51.7%, respectively. Gross margin for the nine months ended October 31, 2008
was impacted by three factors: an increased contribution of high dollar value
transactions in the first quarter, which carry lower-than-average gross
margins; an increase in research and development costs to support the growing
watch business; and a lower proportion of higher-margin Japanese sales in the
third quarter.
Retail Selling, General and Administrative Expenses
SG&A expenses increased to $101.0 million for the nine months ended
October 31, 2008 as compared to $87.3 million in the comparable period of the
prior year. However, SG&A as a percentage of sales decreased to 47% for the
nine months ended October 31, 2008 compared to 48% in the comparable period of
the prior year. The increase, which was primarily due to the continued
expansion of the retail salon network, included an increase of $3.6 million in
rent and building related expenses, an increase of $3.3 million in
depreciation and amortization, an increase of $2.7 million in salaries and
benefits and an increase in professional fees of $2.1 million. 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 $9.4
million compared to $6.1 million in the comparable period 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 third calendar quarter of 2008, the Diavik Diamond Mine
produced 2.3 million carats from 0.69 million tonnes of ore sourced from both
the A-154 open pit and the A-418 kimberlite pipe. Rough diamond production
decreased 26% in the third calendar quarter from the prior year as the result
of the continuing grade variation in the A-154 South kimberlite pipe, and the
processing of a higher volume of low grade mud-rich material from the top of
the A-418 pipe.
Kimberlite was recovered from the A-418 pipe as part of the ongoing
pre-stripping of waste overburden to prepare the pipe for open pit production.
This initial material is low grade, weathered kimberlite capping the A-418
pipe, diluted with overlying glacial till.
Steady progress continues to be made in the new underground mine.
Approximately 10 kilometres of tunneling have been completed underground, and
work continues to progress on workshops, water pumping stations, and
ventilation facilities. On surface, work continues on the new crusher and
paste backfill plants, expanded electrical generating and water treatment
facilities, and additional permanent accommodations.
Harry Winston Diamond Corporation's 40% Share of Diavik Diamond Mine
Production
(reported on a one-month lag)
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Diamonds recovered
(000s carats) 928 1,249 2,651 3,600
Grade (carats/tonne) 3.36 4.75 3.59 4.95
-------------------------------------------------------------------------
Retail Segment
For the three months ended October 2008, the retail segment recorded a
sales increase of 8% over the comparable quarter of the prior year reflecting
the strength of the Harry Winston brand during a period of economic
uncertainty and volatility. Sales growth in the US and international markets
outside of Japan more than offset weak sales in the Japanese market. Sales for
the third quarter started off strong, consistent with the first half of the
fiscal year, but weakened as the economy declined in the latter part of the
quarter. Harry Winston Inc. operated a network of 18 retail salons during the
quarter compared to 16 salons in the comparable quarter of the prior year. A
new salon was opened in August 2008 in Costa Mesa, California.
Liquidity and Capital Resources
Working Capital and Cash Flow from Operations
As at October 31, 2008, the Company had unrestricted cash and cash
equivalents of $40.5 million and contingency cash collateral and reserves of
$25.3 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 $40.5 million and no
short-term investments at October 31, 2008 compared to $33.0 million and $16.6
million, respectively, at January 31, 2008. Short-term investments are held in
overnight deposits. Total cash resources at October 31, 2008 were $65.8
million, $9.4 million lower than the total cash resources of $75.2 million at
January 31, 2008.
During the quarter ended October 31, 2008, the Company generated $48.3
million in cash from operations, compared to $61.4 million in the comparable
quarter of the prior year.
Working capital decreased to $198.8 million at October 31, 2008 from
$220.0 million at January 31, 2008. During the third quarter, the Company
decreased accounts receivable by $2.5 million, decreased prepaid expenses and
other current assets by $12.0 million, increased inventory by $23.0 million,
decreased accounts payable and accrued liabilities by $6.0 million, and
increased income taxes payable by $28.4 million.
The Company's liquidity requirements fluctuate from quarter to quarter
depending on, among other factors, the seasonality of production at the Diavik
Diamond Mine, seasonality of mine operating expenses, capital expenditure
programs, the number of sales events conducted during the quarter and the
volume, size and quality distribution of rough diamonds delivered from the
Diavik Diamond Mine in each quarter, along with the seasonality of sales and
salon expansion in the retail segment. The Company's principal working capital
needs include investments in inventory, prepaid expenses and other current
assets, and accounts payable and income taxes payable.
The Company's mining and retail segments maintain separate financing
arrangements. Accordingly, the Company assesses liquidity and capital
resources on a segmented basis. The retail segment's cash requirements are for
cash operating expenses, working capital and capital expenditures, including
salon expansion. The Company believes that cash on hand, cash generated from
operations and access to credit facilities will be sufficient to meet
anticipated cash requirements for the retail segment next fiscal year.
The mining segment's cash requirements are for cash operating expenses,
working capital, capital expenditures and contractual debt repayments. The
Company believes that cash on hand and cash generated from the sale of rough
diamonds will be sufficient to meet anticipated cash requirements for the next
fiscal year, excluding certain debt repayments. The Company anticipates
refinancing of approximately $50 million by June 2009. However, the weakening
of the global economy could reduce the Company's ability to generate cash from
operations, which would require it to refinance approximately $75 million by
March 2009. The Company expects to be able to refinance this debt on
acceptable terms. However, considering the extreme conditions in credit and
other capital markets in recent months, there is no assurance that the Company
will be able to complete any refinancing on acceptable terms, if at all, and
the Company may be required to generate liquidity from alternate sources,
including the sale of certain assets.
Financing Activities
During the third quarter, the Company repaid $12.5 million of its senior
secured term facilities. At October 31, 2008, the Company had $36.7 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.
As at October 31, 2008, Harry Winston Inc. had $170.6 million outstanding
on its $250.0 million secured five-year revolving credit facility, which is
used to fund salon inventory and capital expenditure requirements. This
represents an increase of $16.6 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 October 31, 2008, $14.8
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. On
June 26, 2008, the bank further extended a demand credit facility for 2.0
million CHF. The new facility is supported by a $2.0 million standby letter of
credit. At October 31, 2008, no amount was drawn against this demand credit
facility.
Harry Winston Japan, K.K. maintains secured and unsecured credit
agreements with three banks amounting to (Yen)2,075 million. At October 31,
2008, $21.1 million had been drawn against these facilities, $5.1 million of
which is long term, payable on June 28, 2010, with the balance of $16.0
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 October 31, 2008, $13.5 million and $5.5 million were 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 third quarter, the Company made dividend payments of $3.1
million or $0.05 per share to its shareholders.
Investing Activities
During the third quarter, the Company purchased capital assets of $39.7
million, of which $38.3 million were purchased for the mining segment and $1.4
million for the retail segment.
Contractual Obligations
The Company has contractual payment obligations with respect to long-term
debt and, through its participation in the Joint Venture, future site
restoration costs at the Diavik Diamond Mine. Additionally, at the Joint
Venture, 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 fiscal
years 2010 to 2014, is approximately $180 million assuming, among other
factors, a Canadian/US average exchange rate of $0.95 for the five years. The
most significant contractual obligations for the ensuing five-year period can
be summarized as follows:
Contractual Obligations
(expressed in Less
thousands of United than Year Year After
States dollars) Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Long-term debt(a)(b) $339,997 $ 84,681 $ 46,729 $ 17,561 $191,026
Environmental and
participation
agreements
incremental
commitments(c) 81,142 63,756 3,321 1,661 12,404
Operating lease
obligations(d) 108,703 17,162 25,763 16,789 48,989
Capital lease
obligations(e) 1,622 852 770
-------------------------------------------------------------------------
Total contractual
obligations $531,464 $166,451 $ 76,583 $ 36,011 $252,419
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Long-term debt presented in the foregoing table includes current and
long-term portions. The mining segment'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 October 31, 2008, $36.7
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 will be $12.5 million in the next two
quarters, and decline thereafter. 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 October 31, 2008, $7.0 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 October 31, 2008, $170.6 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 October 31, 2008, $14.8 million was
outstanding on this loan agreement. On June 26, 2008, the bank
further extended a demand credit facility for 2.0 million CHF. The
new facility is supported by a $2.0 million standby letter of credit
and bears interest at a rate of 5.0% per annum. At October 31, 2008,
no amount was drawn against the demand credit facility.
(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 October 31,
2008 and have been included under long-term debt in the table above.
Interest payments for the next 12 months are estimated to be
$12.7 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 October 31, 2008 was $62.6 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
$62.6 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.
(e) Capital lease obligations represent future minimum annual rentals
under non-cancellable capital leases for Harry Winston Inc. retail
exhibit space.
Outlook
Mining
Overview
Harry Winston has been advised that DDMI is expected to announce changes
to the Diavik Diamond Mine development plan and schedule in the near future,
which will likely reduce operating and capital expenditure requirements for
the Company.
Production
Year-to-date rough diamond production decreased 26% from the prior year as
a result of the continuing grade variation in the A-154 South kimberlite pipe,
and the processing of a higher volume of low grade mud-rich material from the
top of the A-418 pipe. Since the quarter end, the grade of the A-154 South
kimberlite pipe has recovered to levels consistent with the ore reserve. A
program of detailed drilling to confirm the A-154 South underground reserve
grade will be undertaken from the pit floor commencing in March 2009. 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 kimberlite pipes that make
up the bulk of the underground mining reserve.
Although the estimated rough diamond production for calendar 2008 remains
at approximately 10.0 million carats, the engineering challenges of mining the
bottom of the A-154 pit and the consequent greater proportion of mining A-418
ore results in risks to achieving production goals.
Pre-stripping of the A-418 kimberlite pipe has concluded and commercial
production from the A-418 open pit commenced in the third quarter. Initial
processing of A-418 ore indicates that the grade is in line with the ore
reserve estimate.
It is expected that diamond production from underground mining will be
deferred to begin in the third calendar quarter of 2009, and is expected to
replace open pit mining by calendar 2012.
Rough Diamond Prices
From a peak in August 2008, the Company's rough diamond prices have
declined to levels of the first quarter of 2007. The rough diamond market
remains nervous with manufacturers reluctant to hold rough diamond inventory
in the face of the uncertainty of holiday season sales. The Company expects
uncertainty and volatility in the rough diamond market to persist into the New
Year.
Rough Diamond Sales Cycle
The Company is expecting to hold two primary rough diamond sales in the
fourth quarter. Sales are now conducted throughout the quarter in each of the
Company's three selling offices located in Belgium, Israel and India.
Cost of Sales
Cost of sales for the fourth quarter will be impacted by the Canadian/US
dollar exchange rate and production levels. Cost of sales will also be
impacted by the commencement of commercial production in the A-418 open pit
and the consequent shift of a greater proportion of costs from development
activity to production activity. We continue to expect cost of sales for the
full year to be lower than previously anticipated. Fiscal 2010 cost of sales
are also expected to be lower than originally planned, primarily due to the
delay in the start-up of the underground mining which is more costly than
surface mining until the third quarter.
Capital Expenditures
The capital budget for the Diavik Diamond Mine is under active review.
Year to date, the Company has spent approximately $165 million at an average
Canadian/US dollar exchange rate of $0.99, $116 million of which relates to
the underground development project. Although the current mine plan
anticipates the Company's portion of planned capital expenditures at the
Diavik Diamond Mine for fiscal 2010 to 2014 to be approximately $180 million
at an average Canadian/US dollar exchange rate of $0.95. This plan is
currently under review with the objective of reducing near-term capital
expenditures, and it is expected that the small diamond recovery project
announced in the second quarter will be put on hold. It is not anticipated,
however, that DDMI will announce significant changes to the underground
construction plans for the project.
Retail
Harry Winston Inc. expects the luxury diamond jewelry market to be
challenging throughout the holiday season and into the next fiscal year. The
unprecedented economic challenges currently being faced throughout the world
could have a negative impact for luxury diamond jewelry, however predicting
the magnitude of this impact is difficult. The Company believes the retail
segment's strong brand and international distribution network provide the
strength to withstand the impact of the current economic challenges, however
the recent robbery at the Paris salon in December 2008 is expected to impact
sales and SG&A expenses into fiscal 2010. The retail segment continues to
focus on strategies and products to drive long-term growth. The retail segment
opened one salon in Costa Mesa, California, during August 2008 and plans a
very selective expansion of the network next year.
Subsequent Event
In December 2008, approximately $30.0 million in Company-owned and
consigned retail inventory at cost was stolen during a robbery at the Harry
Winston Paris salon. The Company has an insurance policy in place and an
insurance claim is subject to investigation by insurers.
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.
Goodwill
The Company reviews the carrying value of its goodwill for impairment in
the fourth quarter of each year or more frequently if an event occurs that
triggers an interim review. The Company's goodwill relates to its retail
segment, which was acquired through the purchase of Harry Winston Inc. If the
carrying value of the retail segment exceeds its fair value, an impairment
charge equal to the difference in the carrying value of the goodwill and the
implied fair value of the goodwill would be recorded.
Due to the significant adverse changes in the global business climate
during the third quarter and the impact on sales forecasts, the retail segment
goodwill was reviewed for impairment as of October 31, 2008. The Company
determined the fair values of the retail segment relying primarily on the
discounted cash flow method and sales multiple analysis. The test for goodwill
impairment involves the use of significant accounting judgments and estimates
as to future operating results and discount rates. Changes in estimates or use
of different assumptions could produce significantly different results. Based
on its testing, the Company determined that the goodwill relating to the
retail segment was not impaired at October 31, 2008.
Given the unprecedented market conditions, the Company will continue to
monitor the value of its retail segment for impairment. The annual year-end
review of goodwill will include both internal analysis and an independent
valuation of the retail segment. If the current conditions worsen, and the
estimated fair value of the retail segment is reduced, it is possible that the
Company could record a non-cash goodwill impairment charge in the fourth
quarter of 2009.
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 11 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 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
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 notes 12 and 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")
The Company plans to report under International Financial Reporting
Standards ("IFRS") as of February 1, 2011. Changing from Canadian GAAP to IFRS
could materially affect the Company's reported financial position and results
of operations. During the second quarter of fiscal 2009, the Company commenced
preparation of its changeover plan. The Company intends to engage a third
party advisor to assist with the plan. Over the next few months, specific
actions include identifying the major accounting differences between current
Canadian GAAP and IFRS as they affect the Company and determining resource
requirements over the next two years as the Company implements its transition
plan.
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 inability to exert influence over strategic decisions
made in respect of the Diavik Diamond Mine and the Diavik group of mineral
claims. By virtue of DDMI's 60% interest in the Diavik Diamond Mine, it has a
controlling vote in virtually all Joint Venture management decisions
respecting the development and operation of the Diavik Diamond Mine and the
development of the Diavik group of mineral claims. Accordingly, DDMI is able
to determine the timing and scope of future project capital expenditures, and
therefore is able to impose capital expenditure requirements on 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 current mine plan is
estimated to be $83 million for fiscal 2010 at an average Canadian/US dollar
exchange rate of $0.98, with funding expected to be provided by cash flow from
operations and a refinancing of the Company's 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 requires 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,
including adverse environmental conditions, industrial accidents, labour
disputes, unusual or unexpected geological conditions, risks relating to the
physical security of diamonds and jewelry held as inventory or in transit,
changes in the regulatory environment and natural phenomena such as inclement
weather conditions. Such occurrences could result in damage to the Diavik
Diamond Mine, personal injury or death, environmental damage to the Diavik
property, delays in mining, closing of Harry Winston Inc.'s manufacturing
facilities or salons, monetary losses and possible legal liability. Although
insurance is maintained to protect against certain risks in connection with
the Diavik Diamond Mine and the Company's operations, the insurance in place
will not cover all potential risks. It may not be possible to maintain
insurance to cover insurable risks at economically feasible premiums.
Fuel Costs
The Diavik Diamond Mine's expected fuel needs are purchased periodically
during the year for storage, and transported to the mine site by way of the
winter road. These costs will increase if transportation by air freight is
required due to a shortened "winter road season" or unexpectedly high fuel
usage.
The cost of the fuel purchased is based on the then prevailing price and
expensed into operating costs on a usage basis. The Diavik Diamond Mine
currently has no hedges for its future anticipated fuel consumption.
Reliance on Skilled Employees
Production at the Diavik Diamond Mine is dependent upon the efforts of
certain skilled employees of DDMI. The loss of these employees or the
inability of DDMI to attract and retain additional skilled employees may
adversely affect the level of diamond production from the Diavik Diamond Mine.
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
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 October 31, 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)
October 31, January 31,
2008 2008
(unaudited)
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 3) $ 40,538 $ 49,628
Cash collateral and cash reserves (note 3) 25,257 25,615
Accounts receivable 25,977 25,505
Inventory and supplies (note 4) 368,241 322,228
Prepaid expenses and other current assets 43,314 58,617
-------------------------------------------------------------------------
503,327 481,593
Mining capital assets 788,792 658,200
Retail capital assets 69,726 70,617
Intangible assets, net (note 6) 131,164 132,628
Goodwill 93,780 93,780
Other assets 15,925 16,167
Future income tax asset 42,245 40,963
-------------------------------------------------------------------------
$ 1,644,959 $ 1,493,948
--------------------------
--------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 123,427 $ 124,426
Income taxes payable 74,030 48,118
Bank advances 35,073 34,928
Current portion of long-term debt (note 7) 71,991 54,137
-------------------------------------------------------------------------
304,521 261,609
Long-term debt (note 7) 211,958 255,212
Future income tax liability 309,092 370,500
Other long-term liability 2,224 1,730
Future site restoration costs 39,206 32,980
Minority interest 338 255
Shareholders' equity:
Share capital (note 8) 381,541 305,502
Contributed surplus 15,993 15,614
Retained earnings 359,220 225,334
Accumulated other comprehensive income 20,866 25,212
-------------------------------------------------------------------------
777,620 571,662
Commitments and guarantees (note 9)
-------------------------------------------------------------------------
$ 1,644,959 $ 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 Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
2008 2007 2008 2007
-------------------------------------------------------------------------
Sales $ 148,623 $ 176,478 $ 490,821 $ 491,112
Cost of sales
(note 14) 71,679 74,591 218,370 227,550
-------------------------------------------------------------------------
Gross margin 76,944 101,887 272,451 263,562
Selling, general
and administrative
expenses 33,998 35,539 116,477 104,951
-------------------------------------------------------------------------
Earnings from
operations 42,946 66,348 155,974 158,611
-------------------------------------------------------------------------
Interest and financing
expenses (4,678) (7,422) (15,497) (20,776)
Other income 407 594 1,468 2,052
Foreign exchange
gain (loss) 48,982 (40,584) 54,438 (65,661)
-------------------------------------------------------------------------
Earnings before
income taxes 87,657 18,936 196,383 74,226
Income tax expense
(recovery) - Current 23,804 (4,856) 72,893 37,675
Income tax expense
(recovery) - Future (8,119) 31,053 (19,688) 20,387
-------------------------------------------------------------------------
Earnings (loss) before
minority interest 71,972 (7,261) 143,178 16,164
Minority interest 81 90 83 204
-------------------------------------------------------------------------
Net earnings (loss) $ 71,891 $ (7,351) $ 143,095 $ 15,960
----------------------------------------------------
----------------------------------------------------
Earnings (loss) per
share
Basic $ 1.17 $ (0.13) $ 2.35 $ 0.27
----------------------------------------------------
----------------------------------------------------
Fully diluted $ 1.17 $ (0.13) $ 2.34 $ 0.27
----------------------------------------------------
----------------------------------------------------
Weighted average
number of shares
outstanding 61,372,091 58,371,004 60,894,313 58,368,409
----------------------------------------------------
----------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
(expressed in thousands of United States dollars) (unaudited)
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
2008 2007 2008 2007
-------------------------------------------------------------------------
Net earnings (loss) $ 71,891 $ (7,351) $ 143,095 $ 15,960
Other comprehensive
income (loss)
Net gain (loss) on
translation of
foreign operations
(net of tax - nil) (6,281) 3,390 (4,346) 5,990
-------------------------------------------------------------------------
Total comprehensive
income (loss) $ 65,610 $ (3,961) $ 138,749 $ 21,950
----------------------------------------------------
----------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(expressed in thousands of United States dollars) (unaudited)
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
2008 2007 2008 2007
-------------------------------------------------------------------------
Common shares:
Balance at beginning
of period $ 381,541 $ 305,502 $ 305,502 $ 305,165
Issued during the
period - - 76,039 337
-------------------------------------------------------------------------
Balance at end of
period 381,541 305,502 381,541 305,502
-------------------------------------------------------------------------
Contributed surplus:
Balance at beginning
of period 15,906 15,239 15,614 14,922
Stock option expense 87 158 379 475
-------------------------------------------------------------------------
Balance at end of
period 15,993 15,397 15,993 15,397
-------------------------------------------------------------------------
Retained earnings:
Balance at beginning
of period 290,398 159,752 225,334 165,625
Net earnings (loss) 71,891 (7,351) 143,095 15,960
Dividends paid (3,069) (14,593) (9,209) (43,777)
-------------------------------------------------------------------------
Balance at end of
period 359,220 137,808 359,220 137,808
-------------------------------------------------------------------------
Accumulated other
comprehensive income:
Balance at beginning
of period 27,147 18,616 25,212 16,016
Other comprehensive
income (loss)
Net gain (loss) on
translation of
foreign operations
(net of tax - nil) (6,281) 3,390 (4,346) 5,990
-------------------------------------------------------------------------
Balance at end of
period 20,866 22,006 20,866 22,006
-------------------------------------------------------------------------
Total shareholders'
equity $ 777,620 $ 480,713 $ 777,620 $ 480,713
----------------------------------------------------
----------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(expressed in thousands of United States dollars) (unaudited)
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided by
(used in):
Operating
Net earnings (loss) $ 71,891 $ (7,351) $ 143,095 $ 15,960
Items not involving
cash:
Amortization and
accretion 21,707 20,704 52,440 60,361
Future income tax
expense (recovery) (8,119) 31,053 (19,688) 20,387
Stock-based
compensation and
pension expense 296 158 875 1,563
Foreign exchange
loss (gain) (51,331) 41,639 (57,582) 66,540
Loss on disposal
of assets 3 - 491 -
Minority interest 81 90 83 204
Change in non-cash
operating working
capital 13,815 (24,925) 9,144 (59,651)
-------------------------------------------------------------------------
48,343 61,368 128,858 105,364
-------------------------------------------------------------------------
Financing
Decrease in long-term
debt (12,558) (7,626) (39,725) (16,620)
Increase (decrease) in
revolving credit (5,530) (1,790) 174,895 52,955
Repayment of Harry
Winston Inc.
revolving credit - - (159,109) -
Dividends paid (3,069) (14,593) (9,209) (43,777)
Issue of common shares - - 76,039 337
-------------------------------------------------------------------------
(21,157) (24,009) 42,891 (7,105)
-------------------------------------------------------------------------
Investing
Cash collateral and
cash reserve 46 (31) 358 25,907
Mining capital assets (38,350) (48,580) (168,258) (121,209)
Retail capital assets (1,384) (11,947) (9,040) (28,983)
Other assets - (48) (1) (793)
-------------------------------------------------------------------------
(39,688) (60,606) (176,941) (125,078)
-------------------------------------------------------------------------
Foreign exchange effect
on cash balances (3,278) (150) (3,898) 896
Increase (decrease)
in cash and cash
equivalents (15,780) (23,397) (9,090) (25,923)
Cash and cash
equivalents, beginning
of period (note 3) 56,318 51,648 49,628 54,174
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period (note 3) $ 40,538 $ 28,251 $ 40,538 $ 28,251
----------------------------------------------------
----------------------------------------------------
Change in non-cash
operating working
capital
Accounts receivable 2,503 (22,549) (2,224) (27,827)
Prepaid expenses and
other current assets 11,963 (16,037) 13,497 (30,172)
Inventory and supplies (23,027) (9,477) (46,013) (57,053)
Accounts payable and
accrued liabilities (5,985) (12,471) 8,850 28,040
Income tax payable 28,361 35,609 35,034 27,361
-------------------------------------------------------------------------
$ 13,815 $ (24,925) $ 9,144 $ (59,651)
-------------------------------------------------------------------------
Supplemental cash
flow information
Cash taxes paid
(recovered) $ (5,864) $ 3,805 $ 36,704 $ 6,846
Cash interest paid $ 4,165 $ 6,282 $ 12,963 $ 17,488
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
October 31, 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.
Certain comparative figures have been reclassified to conform with the
current year's presentation.
NOTE 2:
Significant Accounting Policies
The interim consolidated financial statements are prepared by management
in accordance with accounting principles generally accepted in Canada.
The interim consolidated financial statements include the accounts of the
Company and all of its subsidiaries as well as its proportionate interest
in the assets, liabilities and expenses of joint arrangements.
Intercompany transactions and balances have been eliminated.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto in the Company's Annual Report for the year ended January 31,
2008, since these interim financial statements do not include all
disclosures required by Canadian generally accepted accounting principles
("GAAP"). Excluding adoption of the new accounting standards described
below, these statements have been prepared following the same accounting
policies and methods of computation as the consolidated financial
statements for the year ended January 31, 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 11 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 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 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 notes 12 and 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")
The Company plans to report under International Financial Reporting
Standards ("IFRS") as of February 1, 2011. Changing from Canadian GAAP to
IFRS could materially affect the Company's reported financial position
and results of operations. During the second quarter of fiscal 2009, the
Company commenced preparation of its changeover plan. The Company intends
to engage a third party advisor to assist with the plan. Over the next
few months, specific actions include identifying the major accounting
differences between current Canadian GAAP and IFRS as they affect the
Company and determining resource requirements over the next two years as
the Company implements its transition plan.
NOTE 3:
Cash Resources
October 31, January 31,
2008 2008
-------------------------------------------------------------------------
Cash on hand and balances with banks $ 40,538 $ 33,028
Short-term investments(a) - 16,600
-------------------------------------------------------------------------
Total cash and cash equivalents 40,538 49,628
Cash collateral and cash reserves 25,257 25,615
-------------------------------------------------------------------------
Total cash resources $ 65,795 $ 75,243
--------------------------
--------------------------
(a) Short-term investments are held in overnight deposits.
NOTE 4:
Inventory and Supplies
October 31, January 31,
2008 2008
-------------------------------------------------------------------------
Rough diamond inventory $ 30,112 $ 17,097
Merchandise inventory 263,062 254,101
Supplies inventory 75,067 51,030
-------------------------------------------------------------------------
Total inventory and supplies $ 368,241 $ 322,228
--------------------------
--------------------------
NOTE 5:
Diavik Joint Venture
The following represents Harry Winston Diamond Corporation's 40%
proportionate interest in the Joint Venture as at September 30, 2008 and
December 31, 2007:
October 31, January 31,
2008 2008
-------------------------------------------------------------------------
Current assets $ 108,223 $ 110,199
Long-term assets 740,765 605,300
Current liabilities 37,058 40,631
Long-term liabilities and participant's account 811,930 674,868
-------------------------------------------------------------------------
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
2008 2007 2008 2007
-------------------------------------------------------------------------
Expenses net of
interest income of
$0.1 million (2007 -
$0.1 million)(a)(b) 61,168 48,118 138,798 135,828
Cash flows resulting
from (used in)
operating activities (47,434) (14,044) (108,655) (98,027)
Cash flows resulting
from financing
activities 68,220 64,007 243,721 207,733
Cash flows resulting
from (used in)
investing activities (31,365) (54,409) (146,337) (122,222)
-------------------------------------------------------------------------
(a) The Joint Venture only earns interest income.
(b) Expenses net of interest income for the nine months ended October 31,
2008 of $0.3 million (2007 - $0.3 million).
The Company is contingently liable for the other participant's portion of
the liabilities of the Joint Venture and to the extent the Company's
participating interest has increased because of the failure of the other
participant to make a cash contribution when required, the Company would
have access to an increased portion of the assets of the Joint Venture to
settle these liabilities.
NOTE 6:
Intangible Assets
Accum-
ulated October January
Amortization Amorti- 31, 31,
Period Cost zation 2008 net 2008 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 (1,786) 3,789 4,206
Store
leases 65 to 105 months 5,639 (3,624) 2,015 3,062
-------------------------------------------------------------------------
Intangible assets $ 136,574 $ (5,410) $ 131,164 $ 132,628
--------------------------------------------
--------------------------------------------
Amortization expense for the nine months ended October 31, 2008 was
$1.5 million (2007 - $1.3 million).
NOTE 7:
Long-Term Debt
October 31, January 31,
2008 2008
-------------------------------------------------------------------------
Mining credit facilities $ 86,449 $ 125,677
Retail credit facilities and loans 190,490 174,850
First mortgage on real property 7,010 8,822
-------------------------------------------------------------------------
Total long-term debt 283,949 309,349
-------------------------------------------------------------------------
Less current portion (71,991) (54,137)
-------------------------------------------------------------------------
$ 211,958 $ 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 October 31, 2008, $170.6 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, October 31, 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 (net of forfeitures) (9,620)
RSU payouts (32,616)
---------------------------------------------------------------------
Balance, October 31, 2008 101,479
-----------------
-----------------
DSU Number of Units
---------------------------------------------------------------------
Balance, January 31, 2008 72,198
Awards during the period (net):
DSU awards 32,252
---------------------------------------------------------------------
Balance, October 31, 2008 104,450
-----------------
-----------------
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Expense for the October 31, October 31, October 31, October 31,
Period 2008 2007 2008 2007
---------------------------------------------------------------------
RSU $ (995) $ 629 $ (660) $ 1,089
DSU (659) 362 (422) 365
---------------------------------------------------------------------
$ (1,654) $ 991 $ (1,082) $ 1,454
----------------------------------------------------
----------------------------------------------------
During the nine months ended October 31, 2008, the Company granted
(9,620) RSUs (net of forfeitures) and 32,252 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. In
addition, 32,616 RSUs vested during the nine months ended October 31,
2008, resulting in a payout of $0.8 million.
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 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 that the Joint Venture must provide
security deposits for the performance by the Joint Venture of its
reclamation and abandonment obligations under all environmental laws
and regulations. The Company's share of the Joint Venture's letters
of credit outstanding with respect to the environmental agreements as
at October 31, 2008 was $62.6 million. The agreement specifically
provides that these funding obligations 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 $ 81,770
2010 81,185
2011 77,842
2012 77,048
2013 76,553
Thereafter 130,131
---------------------------------------------------------------------
NOTE 10:
Employee Benefit Plans
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Expenses for the Oct. 31, Oct. 31, Oct. 31, Oct. 31,
Period 2008 2007 2008 2007
-------------------------------------------------------------------------
Defined benefit pension
plan - Harry Winston
retail segment $ 413 $ 6 $ 1,227 $ 18
Defined contribution
plan - Harry Winston
retail segment 235 210 705 810
Defined contribution
plan - Diavik
Diamond Mine 236 218 733 619
-------------------------------------------------------------------------
$ 884 $ 434 $ 2,665 $ 1,447
----------------------------------------------------
----------------------------------------------------
NOTE 11:
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. There has been no change with respect to the Company's
overall capital risk management strategy. At October 31, 2008, the
Company is in compliance with this covenant.
NOTE 12:
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:
October 31, 2008 January 31, 2008
Estimated Carrying Estimated Carrying
Fair Value Value Fair Value Value
-------------------------------------------------------------------------
Financial Assets:
Cash and cash
equivalents $ 40,538 $ 40,538 $ 49,628 $ 49,628
Cash collateral
and cash reserves 25,257 25,257 25,615 25,615
Accounts receivable 25,977 25,977 25,505 25,505
-------------------------------------------------------------------------
$ 91,772 $ 91,772 $ 100,748 $ 100,748
----------------------------------------------------
----------------------------------------------------
Financial Liabilities:
Accounts payable
and accrued
liabilities $ 123,427 $ 123,427 $ 124,426 $ 124,426
Bank advances 35,073 35,073 34,928 34,928
Long-term debt 283,949 283,949 309,349 309,349
-------------------------------------------------------------------------
$ 442,449 $ 442,449 $ 468,703 $ 468,703
----------------------------------------------------
----------------------------------------------------
NOTE 13:
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 to assess the steps
management has taken to monitor, control, report and mitigate such risks
to the Company.
Financial risk management is carried out by the Finance department, which
identifies and evaluates financial risks and establishes controls and
procedures to ensure financial risks are mitigated.
The types of risk exposure and the way in which such exposures are
managed are as follows:
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. 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 October 31, 2008, a one-cent change in the
exchange rate would have impacted pre-tax net earnings for the
quarter by $2.4 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 sales policy, which requires receipt of cash prior
to the delivery of rough diamonds to its customers.
The Company manages credit risk, in respect of short-term
investments, by maintaining bank accounts with Tier 1 banks and
investing only in term deposits or banker's acceptances with highly
rated financial institutions that are capable of prompt liquidation.
The Company monitors and manages its concentration of counterparty
credit risk on an ongoing basis.
At October 31, 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 October 31, 2008, the Company had $40.5 million of cash and cash
equivalents and $43.6 million available under credit facilities.
The following table summarizes the aggregate amount of contractual
future cash outflows for the Company's financial liabilities:
(expressed in
thousands of United Less than Year Year After
States dollars) Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Accounts payable and
accrued liabilities $123,427 $123,427 $ - $ - $ -
Income taxes payable 74,030 74,030 - - -
Bank advances 35,073 35,073 - - -
Long-term debt(a) 339,997 84,681 46,729 17,561 191,026
Environmental and
participation
agreements
incremental
commitments 81,142 63,756 3,321 1,661 12,404
Operating lease
obligations 108,703 17,162 25,763 16,789 48,989
Capital lease
obligations 1,622 852 770 - -
-------------------------------------------------------------------------
(a) Includes projected interest payments on the current debt outstanding
based on interest rates in effect at October 31, 2008.
NOTE 14:
Insurance Claim
Included in cost of sales for the mining segment is a $4.3 million
insurance settlement relating to an excavator fire that occurred in the
fourth quarter of fiscal 2006 at the Diavik Diamond Mine. The settlement
represents the recovery of the cost of the excavator that was previously
written off along with incremental operating expenses relating to the
procurement of a replacement excavator. Total proceeds of $5.0 million
from the insurance settlement were received in December 2008, which will
result in a gain of approximately $0.7 million in the fourth quarter.
NOTE 15:
Subsequent Event
In December 2008, approximately $30.0 million in Company-owned and
consigned retail inventory at cost was stolen during a robbery at the
Harry Winston Paris salon. The Company has an insurance policy in place
and an insurance claim is subject to investigation by insurers.
NOTE 16:
Segmented Information
The Company operates in two segments within the diamond industry, mining
and retail, for the three months ended October 31, 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
October 31, 2008 Mining Retail Total
-------------------------------------------------------------------------
Sales
Canada $ 90,716 $ - $ 90,716
United States - 21,278 21,278
Europe - 23,433 23,433
Asia - 13,196 13,196
Cost of sales 40,617 31,062 71,679
-------------------------------------------------------------------------
Gross margin 50,099 26,845 76,944
Gross margin (%) 55.2% 46.4% 51.8%
Selling, general and
administrative expenses 3,114 30,884 33,998
-------------------------------------------------------------------------
Earnings (loss) from operations 46,985 (4,039) 42,946
-------------------------------------------------------------------------
Interest and financing expenses (1,898) (2,780) (4,678)
Other income 303 104 407
Foreign exchange gain (loss) 49,592 (610) 48,982
-------------------------------------------------------------------------
Segmented earnings (loss) before
income taxes $ 94,982 $ (7,325) $ 87,657
---------------------------------------
---------------------------------------
Segmented assets as at
October 31, 2008
Canada $ 981,791 $ - $ 981,791
United States - 469,130 469,130
Other foreign countries 33,108 160,930 194,038
-------------------------------------------------------------------------
$ 1,014,899 $ 630,060 $ 1,644,959
-------------------------------------------------------------------------
Goodwill as at October 31, 2008 $ - $ 93,780 $ 93,780
Capital expenditures $ 38,350 $ 1,384 $ 39,734
Other significant non-cash items:
Income tax recovery - Future $ (5,662) $ (2,457) $ (8,119)
Amortization and accretion $ 18,611 $ 3,096 $ 21,707
-------------------------------------------------------------------------
Sales to one customer in the mining segment totalled $5.5 million for the
three months ended October 31, 2008 ($6.6 million for the three months
ended October 31, 2007).
For the three months ended
October 31, 2007 Mining Retail Total
-------------------------------------------------------------------------
Sales
Canada $ 122,711 $ - $ 122,711
United States - 19,413 19,413
Europe - 20,400 20,400
Asia - 13,954 13,954
Cost of sales 45,985 28,606 74,591
-------------------------------------------------------------------------
Gross margin 76,726 25,161 101,887
Gross margin (%) 62.5% 46.8% 57.7%
Selling, general and
administrative expenses 6,748 28,791 35,539
-------------------------------------------------------------------------
Earnings (loss) from operations 69,978 (3,630) 66,348
-------------------------------------------------------------------------
Interest and financing expenses (3,862) (3,560) (7,422)
Other income (expense) 606 (12) 594
Foreign exchange gain (loss) (41,502) 918 (40,584)
-------------------------------------------------------------------------
Segmented earnings (loss) before
income taxes $ 25,220 $ (6,284) $ 18,936
---------------------------------------
---------------------------------------
Segmented assets as at
October 31, 2007
Canada $ 784,468 $ - $ 784,468
United States - 493,494 493,494
Other foreign countries 12,855 142,087 154,942
-------------------------------------------------------------------------
$ 797,323 $ 635,581 $ 1,432,904
-------------------------------------------------------------------------
Goodwill as at October 31, 2007 $ - $ 96,575 $ 96,575
Capital expenditures $ 48,580 $ 11,947 $ 60,527
Other significant non-cash items:
Income tax expense (recovery)
- Future $ 31,764 $ (711) $ 31,053
Amortization and accretion $ 18,575 $ 2,129 $ 20,704
-------------------------------------------------------------------------
For the nine months ended
October 31, 2008 Mining Retail Total
-------------------------------------------------------------------------
Sales
Canada $ 277,123 $ - $ 277,123
United States - 75,188 75,188
Europe - 86,699 86,699
Asia - 51,811 51,811
Cost of sales 105,157 113,213 218,370
-------------------------------------------------------------------------
Gross margin 171,966 100,485 272,451
Gross margin (%) 62.1% 47.0% 55.5%
Selling, general and
administrative expenses 15,473 101,004 116,477
-------------------------------------------------------------------------
Earnings (loss) from operations 156,493 (519) 155,974
-------------------------------------------------------------------------
Interest and financing expenses (7,025) (8,472) (15,497)
Other income (expense) 1,751 (283) 1,468
Foreign exchange gain (loss) 54,853 (415) 54,438
-------------------------------------------------------------------------
Segmented earnings (loss) before
income taxes $ 206,072 $ (9,689) $ 196,383
---------------------------------------
---------------------------------------
Segmented assets as at
October 31, 2008
Canada $ 981,791 $ - $ 981,791
United States - 469,130 469,130
Other foreign countries 33,108 160,930 194,038
-------------------------------------------------------------------------
$ 1,014,899 $ 630,060 $ 1,644,959
-------------------------------------------------------------------------
Goodwill as at October 31, 2008 $ - $ 93,780 $ 93,780
Capital expenditures $ 168,258 $ 9,040 $ 177,298
Other significant non-cash items:
Income tax recovery - Future $ (15,401) $ (4,287) $ (19,688)
Amortization and accretion $ 43,039 $ 9,401 $ 52,440
-------------------------------------------------------------------------
Sales to one customer in the mining segment totalled $15.8 million for
the nine months ended October 31, 2008 ($19.3 million for the nine months
ended October 31, 2007).
For the nine months ended
October 31, 2007 Mining Retail Total
-------------------------------------------------------------------------
Sales
Canada $ 310,534 $ - $ 310,534
United States - 65,917 65,917
Europe - 63,994 63,994
Asia - 50,667 50,667
Cost of sales 132,718 94,832 227,550
-------------------------------------------------------------------------
Gross margin 177,816 85,746 263,562
Gross margin (%) 57.3% 47.5% 53.7%
Selling, general and
administrative expenses 17,696 87,255 104,951
-------------------------------------------------------------------------
Earnings (loss) from operations 160,120 (1,509) 158,611
-------------------------------------------------------------------------
Interest and financing expenses (11,519) (9,257) (20,776)
Other income 1,728 324 2,052
Foreign exchange gain (loss) (66,798) 1,137 (65,661)
-------------------------------------------------------------------------
Segmented earnings (loss) before
income taxes $ 83,531 $ (9,305) $ 74,226
---------------------------------------
---------------------------------------
Segmented assets as at
October 31, 2007
Canada $ 784,468 $ - $ 784,468
United States - 493,494 493,494
Other foreign countries 12,855 142,087 154,942
-------------------------------------------------------------------------
$ 797,323 $ 635,581 $ 1,432,904
-------------------------------------------------------------------------
Goodwill as at October 31, 2007 $ - $ 96,575 $ 96,575
Capital expenditures $ 121,209 $ 28,983 $ 150,192
Other significant non-cash items:
Income tax expense (recovery)
- Future $ 21,959 $ (1,572) $ 20,387
Amortization and accretion $ 54,234 $ 6,127 $ 60,361
-------------------------------------------------------------------------
SOURCE Harry Winston Diamond Corporation
CONTACT: Investor Relations - (416) 362-2237 ext 290 or
investor@harrywinston.com/
(HW. HWD)
