TORONTO, Apr 4, 2012, 2012 (Canada NewsWire via COMTEX) --Harry Winston Diamond Corporation (TSX:
HW) (NYSE: HWD) (the "Company") today announced its fourth quarter and
year-end results for the period ending January 31, 2012.
Annual Results Highlights:
-- Consolidated sales increased 13% to $702.0 million for the year
ended January 2012 compared to $624.0 million for the prior
year. This resulted in operating profit of $56.5 million,
compared to an operating profit of $68.3 million last year.
Included in the fiscal 2012 results was a non-cash $13.0
million charge ($8.4 million after tax) related to the
de-recognition of certain components of the backfill plant at
the Diavik Diamond Mine. Excluding this non-cash charge of
$13.0 million, the Company's operating profit would have been
$69.5 million representing a slight increase over the prior
fiscal year.
-- EBITDA was $148.2 million compared to $145.4 million in the
prior year.
-- For the mining segment, the Company sold 2.1 million carats for
a total of $290.1 million for an average price per carat of
$137 compared to 2.6 million carats for a total of $279.2
million for an average price per carat of $106 in the prior
year. The increase in sales resulted from a 29% increase in the
Company's achieved rough diamond price per carat. This was
partially offset by a 19% decrease in volume of carats sold as
the Company elects to hold inventory.
-- Rough diamond production for the calendar year 2011 was 6.7
million carats compared to 6.5 million carats in the prior
calendar year (on a 100% basis). Rough diamond production was
3% higher than the prior calendar year due primarily to an
increase in ore processed.
-- Luxury brand segment sales increased 19% (12% at constant
exchange rates) to $411.9 million from $344.8 million in the
prior year. The increase in sales resulted in operating profit
for the year of $19.4 million compared to $14.9 million in the
prior year.
-- The Company recorded consolidated net profit attributable to
shareholders of $25.5 million or $0.30 per share for the year,
compared to consolidated net profit attributable to
shareholders of $41.5 million or $0.52 per share in the prior
year. Excluding the $8.4 million after-tax charge for
de-recognition of certain paste plant assets in the mining
segment, the Company would have recorded a net profit
attributable to shareholders of $33.8 million or $0.40 per
share for the period.
-- Excluding the paste plant derecognition charge, consolidated
net profit decreased primarily due to higher financing expenses
related to the Kinross buy-back transaction with the final
payment made in August 2011, higher mining exploration expenses
and higher income tax expense. The higher income tax expense
primarily resulted from the revaluation of both non-monetary
assets and liabilities and of the net deferred income tax
liability due to foreign exchange fluctuations.
Robert Gannicott, Chairman and Chief Executive Officer stated: "Our own
rough diamond prices have now stabilized at levels approximately 20%
above the beginning of the year and resumed a steady growth in many
categories. This is consistent with the trends that we see in our
luxury brand business where strong demand for watches has propelled not
only our own timepiece orders but also the pricing of the small
diamonds that are used throughout the watch industry. Our jewelry sales
continue to show strong growth in the bridal and collection jewelry
segments that we have targeted as a keystone of our expansion plans as
we service not only new markets in China but also broaden our offering
in our home market in the US."
He continued, "In light of Rio Tinto`s review of its diamond business,
including the Diavik Diamond Mine, Harry Winston has decided, not to
release a full life of mine plan for the Diavik project at this time in
the expectation that project parameters may change in the course of
this review."
Fourth Quarter Highlights:
-- Consolidated sales were $216.0 million for the fourth quarter
compared to $215.4 million for the comparable quarter of the
prior year. Operating profit increased 45% to $30.7 million,
compared to an operating profit of $21.2 million in the
comparable quarter of the prior year. EBITDA was $58.2 million
compared to $45.9 million in the comparable quarter of the
prior year.
-- For the mining segment, rough diamond sales for the fourth
quarter were 24% higher at $102.2 million compared to $82.7
million for the fourth quarter last year. This increase
resulted from a 14% increase in the volume of carats sold and a
9% increase in the Company's achieved rough diamond prices.
The average price per carat during the quarter was $120,
compared to $110 in the comparable quarter of the prior year.
-- Rough diamond production during the calendar quarter from the
Diavik Diamond Mine was 1.60 million carats, compared to 1.54
million carats for the fourth calendar quarter of last year (on
a 100% basis).
-- Luxury brand segment sales for the fourth quarter decreased 14%
(18% at constant exchange rates) to $113.8 million from $132.7
million for the comparable quarter of the prior year. The
decrease was primarily due to a high-value transaction in the
prior year's quarter that was not repeated in the current
quarter.
-- Consolidated net profit attributable to shareholders for the
fourth quarter was $16.6 million or $0.20 per share compared to
a consolidated net profit attributable to shareholders of
$13.7 million or $0.16 per share in the fourth quarter of the
prior year.
The Company now reports its sales on a geographic basis. The mining and
luxury brand segments now discloses four geographic areas being North
America, Europe, Asia excluding Japan, and Japan. Additionally, the
Company now reports a third segment "Corporate", distinct from the
mining and luxury segments, for expenses not specifically related to
the individual segments.
Fourth Quarter and Fiscal 2012 Financial Summary
(US$ in millions except Earnings per Share amounts)
_____________________________________________________________________
| |Three months|Three months|Twelve months|Twelve months|
| | ended | ended | ended | ended |
| | Jan. 31, | Jan. 31, |Jan. 31, 2012|Jan. 31, 2011|
| | 2012 | 2011 | | |
|_______________|____________|____________|_____________|_____________|
|Sales | 216.0 | 215.4 | 702.0 | 624.0 |
|- Mining | 102.2 | 82.7 | 290.1 | 279.2 |
|Segment | 113.8 | 132.7 | 411.9 | 344.8 |
|- Luxury | | | | |
|Brand Segment | | | | |
|_______________|____________|____________|_____________|_____________|
|Operating | 30.7 | 21.2 | 56.5 | 68.3 |
|Profit (loss) | 27.4 | 17.9 | 48.7 | 62.3 |
|- Mining | 6.8 | 5.3 | 19.4 | 14.9 |
|Segment | (3.5) | (2.0) | (11.6) | (8.9) |
|- Luxury | | | | |
|Brand Segment | | | | |
|- Corporate| | | | |
|Segment | | | | |
|_______________|____________|____________|_____________|_____________|
|Net Profit | 16.6 | 13.7 | 25.5 | 41.5 |
|attributable to| | | | |
|shareholders | | | | |
|_______________|____________|____________|_____________|_____________|
|Earnings per | $0.20 | $0.16 | $0.30 | $0.52 |
|share | | | | |
|_______________|____________|____________|_____________|_____________|
Outlook
For the mining segment, a mine plan and budget for calendar 2012 has
been approved by Rio Tinto plc, the operator of the Diavik Diamond
Mine, and the Company. The plan for calendar 2012 foresees Diavik
Diamond Mine production of approximately 8.3 million carats (100%
basis) from the mining of 2.0 million tonnes of ore and processing of
2.2 million tonnes of ore. Open pit mining of approximately 1.0 million
tonnes is expected to be exclusively from A-418. Underground mining of
approximately 1.0 million tonnes is expected to be sourced equally from
the A-154 South and A-154 North kimberlite pipes. Included in the
estimated production for calendar 2012 is approximately 1.0 million
carats from reprocessed plant rejects ("RPR") and 0.1 million carats
from the implementation of an improved recovery process for small
diamonds. These RPR and small diamond recoveries are not included in
the Company's reserves and resource statement and are therefore
incremental to production.
Looking beyond calendar 2012, the objective is to fully utilize
processing capacity with a combination of production from the
underground portions of A-154 South, A-154 North and A-418 supplemented
by the A-21 open pit. The A-21 project now enters final feasibility
study with the objective of approval in time to mobilize equipment on
the next winter road.
For the luxury brand segment, the Company is targeting a compound annual
revenue growth in the mid-teens, a gross margin target in the low 50%
range, and an operating profit margin target in the low to mid-teens by
fiscal 2016. The current salon growth target is to expand to
approximately 35 directly operated salons, 15 licensed salons, and to
grow to 300 wholesale timepiece doors by fiscal 2016.
Conference Call and Webcast
Beginning at 8:30AM (ET) on Thursday, April 5, the Company will host a
conference call for analysts, investors and other interested parties.
Listeners may access a live broadcast of the conference call on the
Company's investor relations web site at http://investor.harrywinston.com or by dialing 800-510-9691 within North America or 617-614-3453 from
international locations and entering passcode 22046474.
An online archive of the broadcast will be available by accessing the
Company's investor relations web site at http://investor.harrywinston.com. A telephone replay of the call will be available one hour after the
call through 11:00PM (ET), Thursday, April 19, 2012 by dialing
888-286-8010 within North America or 617-801-6888 from international
locations and entering passcode 87878793.
About Harry Winston Diamond Corporation
Harry Winston Diamond Corporation is a diamond enterprise with premium assets in the mining and retail segments
of the diamond industry. Harry Winston supplies rough diamonds to the
global market from its 40 percent ownership interest in the Diavik
Diamond Mine. The Company's luxury brand segment is a premier diamond
jeweler and luxury timepiece retailer with salons in key locations,
including New York, Paris, London, Beijing, Shanghai, Hong Kong,
Singapore, Tokyo and Beverly Hills.
The Company focuses on the two most profitable segments of the diamond
industry, mining and retail, in which its expertise creates shareholder
value. This unique business model provides key competitive advantages;
rough diamond sales and polished diamond purchases provide market
intelligence that enhances the Company's overall performance.
For more information, please visit www.harrywinston.com or for investor information, visit http://investor.harrywinston.com.
Highlights
(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
FOURTH QUARTER RESULTS
Consolidated sales were $216.0 million for the fourth quarter compared
to $215.4 million for the comparable quarter of the prior year,
resulting in a 17% increase in gross margin to $86.2 million and an
operating profit of $30.7 million, compared to an operating profit of
$21.2 million in the comparable quarter of the prior year. Consolidated
EBITDA was $58.2 million compared to $45.9 million in the comparable
quarter of the prior year.
The mining segment recorded sales of $102.2 million, a 24% increase from
$82.7 million in the comparable quarter of the prior year. The increase
in sales resulted from a 14% increase in volume of carats sold and a 9%
increase in achieved rough diamond prices. The mining segment recorded
an operating profit of $27.4 million compared to an operating profit of
$17.9 million in the comparable quarter of the prior year. EBITDA for
the mining segment was $51.7 million compared to $38.5 million in the
comparable quarter of the prior year.
The luxury brand segment recorded sales of $113.8 million, a decrease of
14% from sales of $132.7 million in the comparable quarter of the prior
year (a decrease of 18% at constant exchange rates). Operating profit
was $6.8 million for the quarter compared to $5.3 million in the
comparable quarter of the prior year. EBITDA for the luxury brand
segment was $9.9 million compared to $9.0 million in the comparable
quarter of the prior year.
The Company recorded a consolidated net profit attributable to
shareholders of $16.6 million or $0.20 per share for the quarter,
compared to a net profit attributable to shareholders of $13.7 million
or $0.16 per share in the fourth quarter of the prior year.
ANNUAL RESULTS
Consolidated sales were $702.0 million for the year compared to $624.0
million for the prior year, resulting in a 6% increase in gross margin
to $250.1 million and an operating profit of $56.5 million, compared to
an operating profit of $68.3 million in the prior year. Consolidated
EBITDA was $148.2 million compared to $145.4 million in the prior year.
The mining segment recorded sales of $290.1 million, a 4% increase from
$279.2 million in the prior year. The increase in sales resulted from a
29% increase in the Company's achieved rough diamond price per carat.
This was partially offset by a 19% decrease in volume of carats sold as
the Company elected to hold inventory. The mining segment recorded an
operating profit of $48.7 million compared to an operating profit of
$62.3 million in the prior year. Excluding the $13.0 million non-cash
charge for de-recognition of certain paste production assets in the
mining segment incurred in the third quarter of fiscal 2012, operating
profit would have been $61.7 million. EBITDA for the mining segment was
$127.5 million compared to $125.7 million in the prior year.
The luxury brand segment recorded sales of $411.9 million, an increase
of 19% from sales of $344.8 million in the prior year (an increase of
12% at constant exchange rates). Operating profit was $19.4 million for
the year compared to $14.9 million in the prior year. EBITDA for the
luxury brand segment was $31.8 million compared to $27.2 million in the
prior year.
The Company recorded a consolidated net profit attributable to
shareholders of $25.5 million or $0.30 per share for the year, compared
to a net profit attributable to shareholders of $41.5 million or $0.52
per share in the prior year. Excluding the $8.4 million after-tax
charge for de-recognition of certain paste production assets in the
mining segment incurred in the third quarter of fiscal 2012, the
Company would have recorded a net profit attributable to shareholders
of $33.8 million or $0.40 per share for the period.
Management's Discussion and Analysis
PREPARED AS OF APRIL 4, 2012 (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 HarryWinston Diamond Corporation
("HarryWinston Diamond Corporation", or the "Company") for the twelve
months ended January 31, 2012, andits financial position as at January
31, 2012. This MD&A is based on the Company's consolidated financial
statements prepared in accordance with International Financial
Reporting Standards ("IFRS") and should be read in conjunction with the
consolidated financial statements and notes. Unless otherwise
specified, all financial information is presented in United States
dollars. Unless otherwise indicated, all references to "year" refer to
the fiscal year ended January 31. Unless otherwise indicated,
references to "international" for the luxury brand segment refer to
Europe and Asia.
Certain comparative figures have been reclassified to conform to the
current year's presentation.
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", "foresee", "appears", "believe", "intend", "estimate",
"predict", "potential", "continue", "objective", "modeled" 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, 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,
the demand for rough diamonds, expected diamond prices and expectations
concerning the diamond industry and the demand for luxury goods,
expected cost of sales and gross margin trends in the mining segment,
targets for compound annual growth rates of sales and operating income
in the luxury brand segment, plans for expansion of the luxury brand
retail salon network, and expected sales trends and market conditions
in the luxury brand segment. Actual results may vary from the
forward-looking information. See "Risks and Uncertainties" on page 20
for material risk factors that could cause actual results to differ
materially from the forward-looking information.
Forward-looking information is based on certain factors and assumptions
regarding, among other things, mining, production, construction and
exploration activities at the Diavik Diamond Mine, world and US
economic conditions, and the worldwide demand for luxury goods.
Specifically, in making statements regarding expected diamond prices
and expectations concerning the diamond industry and expected sales
trends and market conditions in the luxury brand segment, the Company
has made assumptions regarding, among other things, the state of world
and US economic conditions, worldwide diamond production levels, and
demand for luxury goods. While the Company considers these assumptions
to be reasonable based on the information currently available to it,
they may prove to be incorrect. See "Risks and Uncertainties" on page
20.
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, including risks
associated with the inability to control the timing and scope of future
capital expenditures, risks associated with the remote location of and
harsh climate at the Diavik Diamond Mine site, risks resulting from the
Eurozone financial crisis, risks associated with regulatory
requirements, fluctuations in diamond prices and changes in US and
world economic conditions, the risk of fluctuations in the Canadian/US
dollar exchange rate, cash flow and liquidity risks, the risks relating
to the Company's expansion strategy and of competition in the luxury
jewelry business as well as changes in demand for high-end luxury
goods. Please see page 20 of this Annual Report, as well as the
Company's current Annual Information Form, available at www.sedar.com, for a discussion of these and other risks and uncertainties involved
in the Company's operations.
Readers are cautioned not to place undue importance on forward-looking
information, which speaks only as of the date of this MD&A, 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 MD&A, actual
events may differ materially from current expectations. The Company
uses forward-looking statements because it believes such statements
provide useful information with respect to the currently expected
future operations and financial performance of the Company, and
cautions readers that the information may not be appropriate for other
purposes. While the Company may elect to, it is under no obligation and
does not undertake to update or revise any forward-looking information,
whether as a result of new information, future events or otherwise at
any particular time, except as required by law. Additional information
concerning factors that may cause actual results to materially differ
from those in such forward-looking statements is contained in the
Company's filings with Canadian and United States securities regulatory
authorities and can be found at www.sedar.com and www.sec.gov, respectively.
Summary Discussion
Harry Winston Diamond Corporation is a diamond enterprise with premium
assets in the mining and retailing segments of the diamond industry.
The Company supplies rough diamonds to the global market from its 40%
ownership interest in the Diavik Diamond Mine, located in Canada's
Northwest Territories. The Company's luxury brand segment is a premier
diamond jeweler and luxury timepiece retailer with salons in key
locations including New York, Paris, London, Beijing, Shanghai, Tokyo,
Hong Kong and Beverly Hills.
The Company's mining asset is an ownership interest in the Diavik group
of mineral claims. The Diavik Joint Venture (the "Joint Venture") is an
unincorporated joint arrangement between Diavik Diamond Mines Inc.
("DDMI") (60%) and HarryWinston Diamond Limited Partnership ("HWDLP")
(40%) where HWDLP holds an undivided 40% ownership interest in the
assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is
the operator of the Diavik Diamond Mine. DDMI and HWDLP are
headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary
of Rio Tinto plc of London, England.
Market Commentary
The Diamond Market
In parallel with the 2011 global economic environment, rough diamond
prices rose strongly in the first half of the fiscal year but partially
weakened in the second half, primarily due to the ongoing European
sovereign debt crisis. Additionally, a substantial increase in rough
diamond supply from Zimbabwe market resulted in a build-up of rough
diamond inventories, which exerted downward pressure on polished
diamond prices during the third quarter. However, by year end resilient
retail demand for diamond jewelry returned greater stability to the
market and fiscal 2012 closed with prices significantly higher than at
the start of the fiscal year.
The medium-term diamond supply demand imbalance looks ever more
positive. In small high-quality diamonds that are primarily used in
high- end watches, that supply demand imbalance is already noticeable,
with prices of some categories more than doubling in the first nine
months of last year and only coming off slightly when the overall
market weakened towards the end of 2011.
The Luxury Jewelry and Timepiece Market
The luxury jewelry and timepiece market continued to perform very well
during the year. Increased consumer demand for luxury products was
supported by new, young wealthy consumers from emerging market
economies. These consumers focus on purchasing unique, high-quality
luxury products from global brands. Strong increases in tourism from
China and other emerging markets in Asia, Latin America and Eastern
Europe continued to fuel the growth in demand for luxury products in
the US and European markets as well as in their local markets. The
economic recovery in the US has strengthened, providing additional
demand for luxury goods. Global brands are investing in expanding
distribution networks to meet the increasing demand for luxury
products.
Consolidated Financial Results
The following is a summary of the Company's consolidated quarterly
results for the eight quarters ended January 31, 2012 following the
basis of presentation utilized in its IFRS and Canadian generally
accepted accounting principles ("GAAP") financial statements:
(expressed in thousands of United States dollars except per share
amounts and where otherwise noted) (quarterly results are unaudited)
CDN
IFRS GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Sales $ 216,017 $ 119,716 $ 222,378 $ 143,932 $ 215,358 $ 140,877 $ 153,728 $ 114,000 $ 702,043 $ 623,963 $ 412,901
Cost of sales 129,807 75,524 150,177 96,452 141,391 84,765 85,798 75,711 451,960 387,665 291,722
Gross margin 86,210 44,192 72,201 47,480 73,967 56,112 67,930 38,289 250,083 236,298 121,179
Gross margin
(%) 39.9% 36.9% 32.5% 33.0% 34.3% 39.8% 44.2% 33.6% 35.6% 37.9% 29.3%
Selling,
general and
administrative
expenses 55,500 46,155 49,101 42,795 52,722 41,282 37,998 35,948 193,552 167,950 143,150
Operating
profit (loss) 30,710 (1,963) 23,100 4,685 21,245 14,830 29,932 2,341 56,531 68,348 (21,971)
Finance
expenses (3,481) (4,040) (5,183) (3,983) (3,727) (3,835) (2,985) (2,880) (16,687) (13,427) (11,541)
Exploration
costs (177) (600) (781) (212) (351) (212) (76) (27) (1,770) (666) -
Finance and
other income 81 164 83 258 278 69 154 168 586 669 592
Insurance
settlement - - - - - - - - - - 3.350
Dilution loss - - - - - - - - - - (34,761)
Foreign
exchange gain
(loss) 458 436 288 (177) 1,392 135 1,043 (2,213) 1,005 357 (31,493)
Profit (loss)
before income
taxes 27,591 (6,003) 17,507 571 18,837 10,987 28,068 (2,611) 39,665 55,281 (95,824)
Income tax
expense
(recovery) 11,001 (1,272) 7,519 (3,027) 5,137 (2,410) 10,877 (5,524) 14,222 8,080 (18,803)
Net profit $
(loss) $ 16,590 $ (4,731) $ 9,988 $ 3,598 13,700 $ 13,397 $ 17,191 $ 2,913 $ 25,443 $ 47,201 $ (77,021)
Attributable to $
shareholders $ 16,602 $ (4,728) $ 9,986 $ 3,596 13,693 $ 12,657 $ 13,043 $ 2,137 $ 25,454 $ 41,530 $ (73,176)
Attributable to
non-controlling
interest (12) (3) 2 2 7 740 4,148 776 (11) 5,671 (3,845)
Basic earnings $
(loss) per
share $ 0.20 $ (0.06) $ 0.12 $ 0.04 0.16 $ 0.15 $ 0.17 $ 0.03 $ 0.30 $ 0.52 $ (0.99)
Diluted $
earnings (loss)
per share $ 0.19 $ (0.06) $ 0.12 $ 0.04 0.16 $ 0.15 $ 0.17 $ 0.03 $ 0.30 $ 0.51 $ (0.99)
Cash dividends $
declared per
share $ 0.00 $ 0.00 $ 0.00 $ 0.00 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Total assets ( $
(i)) $ 1,631 $ 1,651 $ 1,665 $ 1,666 1,604 $ 1,584 $ 1,596 $ 1,522 $ 1,631 $ 1,604 $ 1,495
Total long-term $
liabilities (
(i)) $ 670 $ 654 $ 625 $ 605 603 $ 596 $ 539 $ 457 $ 670 $ 603 $ 477
Operating $
profit (loss) $ 30,710 $ (1,963) $ 23,100 $ 4,685 21,245 $ 14,830 $ 29,932 $ 2,341 $ 56,531 $ 68,348 $ (21,971)
Depreciation
and
amortization (
(ii)) 27,512 23,121 20,716 20,291 24,635 18,657 19,515 14,200 91,639 77,007 64,112
EBITDA ((iii) ) $ 58,222 $ 21,158 $ 43,816 $ 24,976 $ 45,880 $ 33,487 $ 49,447 $ 16,541 $ 148,170 $ 145,355 $ 42,141
((i)) Total assets and total long-term liabilities are expressed in
millions of United States dollars.
((ii)) Depreciation and amortization included in cost of sales and
selling, general and administrative expenses.
((iii)) Earnings before interest, taxes, depreciation and amortization
("EBITDA"). See "Non-GAAP Measure" on page 18.
The comparability of quarter-over-quarter results is impacted
by seasonality for both the mining and luxury brand segments.
Harry Winston Diamond Corporation expects that the quarterly
results for its mining segment will continue to fluctuate
depending on the seasonality of production at the Diavik
Diamond Mine, the number of sales events conducted during the
quarter, and the volume, size and quality distribution of rough
diamonds delivered from the Diavik Diamond Mine and sold by the
Company in each quarter. The quarterly results for the luxury
brand segment are also seasonal, with generally higher sales
during the fourth quarter due to the holiday season. See
"Segmented Analysis" on page 10 for additional information.
Three Months Ended January 31, 2012 ComparedtoThree Months Ended
January 31, 2011
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded a fourth quarter consolidated net profit
attributable to shareholders of $16.6 million or $0.20 per share
compared to a net profit attributable to shareholders of $13.7million
or $0.16 per share in the fourth quarter of the prior year.
CONSOLIDATED SALES
Sales for the fourth quarter totalled $216.0 million, consisting of
rough diamond sales of $102.2 million and luxury brand segmentsales of
$113.8 million. This compares to sales of $215.4 million in the
comparable quarter of theprior year (rough diamond sales of
$82.7million and luxury brand segment sales of $132.7 million). The
Company now reports sales based on the selling location. See"Segmented
Analysis" on page 10 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's fourth quarter cost of sales was $129.8 million, for a
gross margin of 39.9% compared toa cost of sales of $141.4 million and
a gross margin of 34.3% for the comparable quarter of the prior year.
The Company's cost of sales includes costs associated with mining,
rough diamond sorting and luxury brand sales activities. See "Segmented
Analysis" on page 10 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 and
marketing, rent and building related costs. The Company incurred SG&A
expenses of $55.5 million for the fourth quarter compared to
$52.7million in the comparable quarter of the prior year.
Included in SG&A expenses for the fourth quarter was $2.1 million for
the mining segment compared to $3.0 million for the comparable quarter
of the prior year, $49.9 million for the luxury brand segment compared
to $47.9 million for the comparable quarter of the prior year, and $3.5
million for the corporate segment compared to $1.8 million for the
comparable quarter of the prior year. The corporate segment captures
costs not specifically related to operations of the mining or luxury
brand segments. See"Segmented Analysis" on page 10 for additional
information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $11.0 million during
the fourth quarter, compared to a net income tax expense of $5.1
million in the comparable quarter of the prior year. The Company's
combined Canadian federal and provincial statutory tax rate for the
quarter is 27.9%. There are a number of items that can significantly
impact the Company's effective tax rate, including foreign currency
exchange rate fluctuations, the Northwest Territories mining royalty,
earnings subject to tax different than the statutory rate such as
earnings in foreign jurisdictions, and changes in our view of whether
deferred tax assets are probable of being realized. As a result, the
Company's recorded tax provision can be significantly different than
the expected tax provision calculated based on the statutory tax rate.
The recorded tax provision is particularly impacted by foreign currency
exchange rate fluctuations. 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 fourth quarter, the Canadian dollar weakened against the US dollar.
As a result, the Company recorded an unrealized foreign exchange gain
of $1.2 million on the revaluation of the Company's Canadian dollar
denominated deferred income tax liability. This compares to an
unrealized foreign exchange loss of $3.5 million in the comparable
quarter of the prior year. The unrealized foreign exchange gain is
recorded as part of the Company's deferred income tax expense, and is
not taxable for Canadian income tax purposes. During the fourth
quarter, the Company also recognized a deferred income tax expense of
$2.8 million for temporary differences arising from the difference
between the historical exchange rate and the current exchange rate on
translation of foreign currency non-monetary items. This compares to a
deferred income tax recovery of $3.0 million recognized in the
comparable quarter of the prior year. The recorded tax provision
during the fourth quarter also included a net income tax recovery of
$0.6 million relating to foreign exchange differences between income in
the currency of the country of origin and the US dollars. This
compares to a net income tax recovery of $1.6 million recognized in the
comparable period of the prior year.
The rate of income tax payable by Harry Winston Inc. varies by
jurisdiction. Net operating losses are available in certain
jurisdictions to offset future cash taxes payable in such
jurisdictions. The net operating losses are scheduled to expire through
2032.
Due to the number of factors that can potentially impact the effective
tax rate and the sensitivity of the tax provision to these factors, as
discussed above, it is expected that the Company's effective tax rate
will fluctuate in future periods.
CONSOLIDATED FINANCE EXPENSES
Finance expenses of $3.5 million were incurred during the fourth quarter
compared to $3.7 million during the comparable quarter of the prior
year.
CONSOLIDATED EXPLORATION COSTS
Exploration costs of $0.2 million were incurred during the fourth
quarter compared to $0.4 million in the comparable quarter of the prior
year.
CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.1 million was recorded during the quarter
compared to $0.3 million in the comparable quarter of the prior year.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of $0.5 million was recognized during the
quarter compared to a net foreign exchange gain of $1.4 million in the
comparable quarter of the prior year. TheCompany does not currently
have any significant foreign exchange derivative instruments
outstanding.
Twelve Months Ended January 31, 2012 ComparedtoTwelve Months Ended
January 31, 2011
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded consolidated net profit attributable to
shareholders of $25.5 million or $0.30 per share for the twelve months
ended January 31, 2012, compared to a net profit attributable to
shareholders of $41.5 million or $0.52 per share in the comparable
period of the prior year. Excluding the $8.4 million after-tax charge
for de-recognition of certain paste production assets in the mining
segment incurred in the third quarter of fiscal 2012, the Company would
have recorded a net profit attributable to shareholders of $33.8
million or $0.40 per share for the period.
CONSOLIDATED SALES
Sales for the twelve months ended January 31, 2012, totalled $702.0
million, consisting of rough diamond sales of $290.1 million and luxury
brand segmentsales of $411.9 million. This compares to sales of $624.0
million in the comparable period of theprior year (rough diamond sales
of $279.2million and luxury brand segment sales of $344.8million).
The Company now reports sales based on the selling location.
See"Segmented Analysis" on page 10 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's cost of sales for the twelve months ended January 31,
2012, was $452.0 million, for a gross margin of 35.6% compared toa
cost of sales of $387.7 million and a gross margin of 37.9% in the
comparable period of the prior year. The Company's cost of sales
includes costs associated with mining, rough diamond sorting and luxury
brand sales activities. See "Segmented Analysis" on page 10 for
additional information.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of SG&A expenses include expenses for salaries
and benefits, advertising and marketing, rent and building related
costs. The Company incurred SG&A expenses of $193.6 million for the
twelve months ended January 31, 2012, compared to $168.0million in the
comparable period of the prior year.
Included in SG&A expenses for the twelve months ended January 31, 2012,
was $13.5 million for the mining segment compared to $11.5 million for
the comparable period of the prior year, $168.6 million for the luxury
brand segment compared to $147.9 million for the comparable period of
the prior year, and $11.5 million for the corporate segment compared to
$8.6 million for the comparable period of the prior year. The corporate
segment captures costs not specifically related to operations of the
mining or luxury brand segments. See"Segmented Analysis" on page 10
for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $14.2 million during
the twelve months ended January 31, 2012, compared to a net income tax
expense of $8.1 million in the comparable period of the prior year. The
Company's combined Canadian federal and provincial statutory tax rate
for the period is 27.9%. There are a number of items that can
significantly impact the Company's effective tax rate, including
foreign currency exchange rate fluctuations, the Northwest Territories
mining royalty, earnings subject to tax different than the statutory
rate, such as earnings in foreign jurisdictions and changes in our view
of whether deferred tax assets are probable of being realized. As a
result, the Company's recorded tax provision can be significantly
different than the expected tax provision calculated based on the
statutory tax rate.
The recorded tax provision is particularly impacted by foreign currency
exchange rate fluctuations. 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 twelve months ended January 31, 2012, the Company recorded an
unrealized foreign exchange loss of $0.5 million on the revaluation of
the Company's Canadian dollar denominated deferred income tax
liability. This compares to an unrealized foreign exchange loss of
$12.5 million in the comparable period of the prior year. The
unrealized foreign exchange loss is recorded as part of the Company's
deferred income tax recovery, and is not deductible for Canadian income
tax purposes. During the twelve months ended January 31, 2012, the
Company also recognized a deferred income tax expense of $5.6 million
for temporary differences arising from the difference between the
historical exchange rate and the current exchange rate on translation
of foreign currency non-monetary items. This compares to a deferred
income tax recovery of $17.6 million recognized in the comparable
period of the prior year. The recorded tax provision during the twelve
months ended January 31, 2012 also included a net income tax recovery
of $4.4 million relating to foreign exchange differences between income
in the currency of the country of origin and the US dollars. This
compares to a net income tax recovery of $4.7 million recognized in the
comparable period of the prior year.
The rate of income tax payable by Harry Winston Inc. varies by
jurisdiction. Net operating losses are available in certain
jurisdictions to offset future cash taxes payable in such
jurisdictions. The net operating losses are scheduled to expire through
2032.
Due to the number of factors that can potentially impact the effective
tax rate and the sensitivity of the tax provision to these factors, as
discussed above, it is expected that the Company's effective tax rate
will fluctuate in future periods.
CONSOLIDATED FINANCE EXPENSES
Finance expenses of $16.7 million were incurred during the twelve months
ended January 31, 2012, compared to $13.4 million during the comparable
period of the prior year. Finance expenses were impacted by increased
debt levels in the mining segment related to the $60.0 million
outstanding on the Standard Chartered Bank credit facility during the
year and the $70.0 million promissory note payable to Kinross Gold
Corporation ("Kinross") issued on August 25, 2010, which was repaid on
August 25, 2011.
CONSOLIDATED EXPLORATION COSTS
Exploration costs of $1.8 million were incurred during the twelve months
ended January 31, 2012, compared to $0.7 million in the the prior year.
CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.6 million was recorded during the twelve
months ended January 31, 2012, compared to $0.7 million in the prior
year.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of $1.0 million was recognized during the
twelve months ended January 31, 2012, compared to a net foreign
exchange gain of $0.4 million in the prior year. TheCompany does not
currently have any significant foreign exchange derivative instruments
outstanding.
Segmented Analysis
The operating segments of the Company include mining, luxury brand and
corporate segments. The corporate segment captures costs not
specifically related to operations of the mining or luxury brand
segments.
Mining
The mining segment includes the production, sorting and sale of rough
diamonds.
(expressed in thousands of United States dollars) (quarterly results are
unaudited)
IFRS CDN
GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Sales
North $ 2,727 $ 8,835 $ 447 $ 3,009 $ 2,689 $ 2,560 $ 1,128 $ 4,040 $ 15,018 $ 10,418 $
America 7,310
Europe 78,846 21,993 80,131 50,752 75,715 50,353 81,462 40,146 231,722 247,677 148,364
Asia 20,659 5,411 9,030 8,274 4,291 7,795 4,237 4,736 43,374 21,059
32,211
Total sales 102,232 36,239 89,608 62,035 82,697 60,708 86,827 48,922 290,114 279,154 187,885
Cost of sales 72,783 34,112 67,613 53,443 61,822 45,039 54,408 44,143 227,951 205,412 174,651
Gross margin 29,449 2,127 21,995 8,592 20,875 15,669 32,419 4,779 62,163 73,742 13,234
Gross margin 28.8% 5.9% 24.5% 13.9% 25.2% 25.8% 37.3% 9.8% 21.4% 26.4% 7.0%
(%)
Selling,
general and
administrative
expenses 2,061 3,274 3,489 4,630 3,017 3,031 2,872 2,558 13,454 11,478 19,502
Operating $ 27,388 $ (1,147) $ 18,506 $ 3,962 $ 17,858 $ 12,638 $ 29,547 $ 2,221 $ 48,709 $ 62,264 $ (6,268)
profit (loss)
Depreciation
and
amortization (
(i)) 24,284 19,932 17,461 17,083 20,669 15,428 16,352 10,975 78,760 63,424 51,154
EBITDA ((ii) ) $ 51,672 $ 18,785 $ 35,967 $ 21,045 $ 38,527 $ 28,066 $ 45,899 $ 13,196 $ 127,469 $ 125,688 $ 44,886
((i)) Depreciation and amortization included in cost of sales and
selling, general and administrative expenses.
((ii)) Earnings before interest, taxes, depreciation and amortization
("EBITDA"). See "Non-GAAP Measure" on page 18.
Three Months Ended January 31, 2012 ComparedtoThree Months Ended
January 31, 2011
MINING SALES
During the quarter, the Company sold 0.86 million carats for a total of
$102.2 million for an average price per carat of $120 compared to
0.75million carats for a total of $82.7 million for an average price
per carat of $110 in the comparable quarter of the prior year. The
increase in sales resulted from a 14% increase in volume of carats sold
and a 9% increase in the Company's achieved rough diamond price per
carat. The increase in the carats sold was primarily the result of the
sale of a portion of the lower priced goods held back by the Company at
October 31, 2011 due to an oversupply in the market.
On a quarterly basis, 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 sales events
conducted during the quarter, rough diamond prices and the volume, size
and quality distribution of rough diamonds delivered from the Diavik
Diamond Mine and sold by the Company in eachquarter.
MINING COST OF SALES AND GROSS MARGIN
The Company's fourth quarter cost of sales was $72.8 million, resulting
in a gross margin of 28.8% compared to a cost of sales of $61.8million
and a gross margin of 25.2% in the comparable quarter of the prior
year. Cost of sales included $24.3 million of depreciation and
amortization compared to $20.7 million in the comparable quarter of the
prior year. The mining gross margin is anticipated to fluctuate between
quarters, resulting from variations in the specific mix of product sold
during each quarter and rough diamond prices.
A substantial portion of cost of sales is mining operating costs, which
are incurred at the Diavik Diamond Mine. Cost of sales also includes
sorting costs, which consist of the Company's cost of handling and
sorting product in preparation for sales to third parties, and
amortization and depreciation, the majority of which is recorded using
the unit-of-production method over estimated proven and probable
reserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment decreased by $1.0 million from the
comparable quarter of the prior year primarily due to a decrease in
professional fees.
Twelve Months Ended January 31, 2012 ComparedtoTwelve Months Ended
January 31, 2011
MINING SALES
During the twelve months ended January 31, 2012, the Company sold 2.1
million carats for a total of $290.1 million for an average price per
carat of $137 compared to 2.6million carats for a total of $279.2
million for an average price per carat of $106 in the prior year. The
increase in sales resulted from a 29% increase in the Company's
achieved rough diamond price per carat. This was partially offset by a
19% decrease in volume of carats sold as the Company elected to hold
inventory.
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 sales events conducted during the quarter,
rough diamond prices and the volume, size and quality distribution of
rough diamonds delivered from the Diavik Diamond Mine and sold by the
Company in eachquarter.
MINING COST OF SALES AND GROSS MARGIN
The Company's cost of sales for the twelve months ended January 31,
2012, was $228.0 million, resulting in a gross margin of 21.4% compared
to a cost of sales of $205.4 million and a gross margin of 26.4% in the
prior year. Cost of sales included $78.8 million of depreciation and
amortization compared to $63.4 million in the prior year. Included in
the cost of sales for the fiscal year was a non-cash $13.0 million
charge ($8.4 million after-tax) related to the de-recognition of
certain components of the backfill plant (the "Paste Plant") associated
with paste production at the Diavik Diamond Mine. The original mine
plan envisioned the use of blasthole stoping and underhand cut and fill
underground mining methods for the Diavik ore bodies using paste to
preserve underground stability. It is now expected that the higher
velocity and lower cost sub-level retreat mining method, which does not
require paste, will be used for both the A-154 South and A-418
underground ore bodies. As a result, certain components of the Paste
Plant necessary for the production of paste will no longer be required
and accordingly were de-recognized during the third quarter. Excluding
this charge, cost of sales would have been $215.0 million (gross margin
of 25.9%), a 5% increase from the prior year. This increase was the
result of higher volume of production during the fiscal year from the
higher cost underground mine offset by a 19% decrease in volume of
carats sold. The mining gross margin is anticipated to fluctuate
between quarters, resulting from variations in the specific mix of
product sold during each quarter and rough diamond prices.
A substantial portion of cost of sales is mining operating costs, which
are incurred at the Diavik Diamond Mine. Cost of sales also includes
sorting costs, which consist of the Company's cost of handling and
sorting product in preparation for sales to third parties, and
amortization and depreciation, the majority of which is recorded using
the unit-of-production method over estimated proven and probable
reserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment increased by $2.0 million from the
prior year due to stock-based compensation and executive severance
costs.
MINING SEGMENT OPERATIONAL UPDATE
Production for calendar year 2011 at the Diavik Diamond Mine was
6.7million carats consisting of 5.4 million carats produced from 1.80
million tonnes of ore from the A-418 kimberlite pipe, 0.7million
carats produced from 0.36 million tonnes of ore from the A-154 North
kimberlite pipe, and 0.4million carats produced from 0.10million
tonnes of ore from the A-154 South kimberlite pipe. Also included in
production for the calendar year was an estimated 0.2 million carats
from reprocessed plant rejects ("RPR"). These RPR are not included in
the Company's reserves and resource statement and are therefore
incremental to production. Rough diamond production was 3% higher than
the prior calendar year due primarily to an increase in ore processed.
Ore production for the fourth calendar quarter consisted of 0.1million
carats produced from 0.04million tonnes of ore from the A-154 South
kimberlite pipe, 0.2million carats produced from 0.10million tonnes
of ore from the A-154 North kimberlite pipe and 1.2million carats
produced from 0.42 million tonnes of ore from the A-418 kimberlite
pipe. Also included in production for the calendar quarter was an
estimated 0.05 million carats from RPR. Average grade increased to 2.9
carats per tonne in the fourth calendar quarter from 2.8 carats per
tonne in the comparable quarter of the prior year. The increase in
average grade was the result of the production of RPR in the current
calendar quarter.
HARRY WINSTON DIAMOND LIMITED PARTNERSHIP'S 40% SHARE OF DIAVIK DIAMOND
MINE PRODUCTION
(reported on a
one-month lag)
Three months Three months Twelve months Twelve months
ended ended ended ended
December 31, December 31, December 31, December 31,
2011 2010 2011 2010
Diamonds 641 617 2,670 2,599
recovered (000s
carats)
Grade 2.88 2.77 2.99 3.15
(carats/tonne)
Mining Segment Outlook
PRODUCTION
A mine plan and budget for calendar 2012 has been approved by Rio Tinto
plc, the operator of the Diavik Diamond Mine, and the Company. The
plan for calendar 2012 foresees Diavik Diamond Mine production of
approximately 8.3 million carats from the mining of 2.0 million tonnes
of ore and processing of 2.2 million tonnes of ore. Open pit mining of
approximately 1.0 million tonnes is expected to be exclusively from
A-418. Underground mining of approximately 1.0 million tonnes is
expected to be sourced equally from the A-154 South and A-154 North
kimberlite pipes. Included in the estimated production for calendar
2012 is approximately 1.0 million carats from RPR and 0.1 million
carats from the implementation of an improved recovery process for
small diamonds. These RPR and small diamond recoveries are not included
in the Company's reserves and resource statement and are therefore
incremental to production.
Looking beyond calendar 2012, the objective is to fully utilize
processing capacity with a combination of production from the
underground portions of A-154 South, A-154 North and A-418 supplemented
by the A-21 open pit. The A-21 pre-feasibility study currently being
undertaken, assumes that the A-21 pipe will be mined with the open pit
methods used for the other pipes. A dyke would be constructed similar
to the two other pits but smaller in size. Detailed plans are still
being refined and optimized although no underground mining is being
planned. The capital expenditures are estimated to be in the region of
$500 million (100% basis). The Company still expects that the A-21
pipe, if mined together with the other pipes, would have a positive net
present value.
PRICING
The rough diamond market experienced a modest improvement in prices
during the fourth quarter of fiscal 2012 from the market deterioration
in the third quarter. Based on prices from the Company's last complete
rough diamond sale in February 2012 and the current diamond recovery
profile of the Diavik processing plant, the Company has modeled the
approximate rough diamond price per carat for each of the Diavik ore
types in the table that follows.
February 2012
average price per
carat
Ore type (in US dollars)
A-154 South $ 160
A-154 North 205
A-418 A Type Ore 145
A-418 B Type Ore 100
RPR 55
COST OF SALES AND CASH COST OF PRODUCTION
The Company expects cost of sales in fiscal 2013 to be approximately
$330 million. Included in this amount is depreciation and amortization
of approximately $110 million at an assumed average Canadian/US dollar
exchange rate of $1.00. The increase over fiscal 2012 is due to a
combination of an increase in the proportion of underground ore mined,
which is more costly to produce, and the expected sale during fiscal
2013 of the remaining lower priced goods previously held back in
inventory by the Company. At January 31, 2012, the Company had 0.8
million carats of rough diamond inventory available for sale with an
estimated current market value of approximately $80 million. Of these,
approximately 65% were goods held back by the Company at October 31,
2011 due to an oversupply in the market.
The Company's share of the cash cost of production at the Diavik Diamond
Mine for calendar 2012 is expected to be $173 million at an assumed
average Canadian/US dollar exchange rate of $1.00. This compares to
cash cost of production of $168 million for calendar 2011 at an actual
average Canadian/US dollar exchange rate of $1.00.
The Company's MD&A refers to cash cost of production, a non-GAAP
performance measure, in order to provide investors with information
about the measure used by management to monitor performance. This
information is used to assess how well the Diavik Diamond Mine is
performing compared to the mine plan and prior periods. Cash cost of
production includes mine site operating costs such as mining,
processing and administration, but is exclusive of amortization,
capital, and exploration and development costs. Cash cost of production
does not have any standardized meaning prescribed by IFRS and differs
from measures determined in accordance with IFRS. This is intended to
provide additional information and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with IFRS. This measure is not necessarily indicative of net
profit or cash flow from operations as determined under IFRS. The
following table provides a reconciliation of cash cost of production to
the mining segment cost of sales disclosed in these financial
statements for the fiscal year ended January 31, 2012.
(expressed in thousands of United States dollars) 2012
Diavik cash cost of production $ 167,787
Private royalty 5,535
Other cash costs 4,009
Total cash cost of production 177,331
Depreciation and amortization 88,302
Total cost of production 265,633
Adjusted for stock movements (37,682)
Total cost of sales $ 227,951
CAPITAL EXPENDITURES
During fiscal 2012 and the fourth quarter, HWDLP's 40% share of capital
expenditures at the Diavik Diamond Mine was approximately $42.6 million
and $12.2 million, respectively. During fiscal 2013, HWDLP's 40% share
of the planned capital expenditures at the Diavik Diamond Mine is
expected to be approximately $78 million at an assumed average
Canadian/US dollar exchange rate of $1.00.
EXPLORATION
The Company has additionally staked 226,000 acres of mineral claims on
the prospective geological trend to the southwest of the existing mine
site and is starting a small but important basal till drilling program
to assess the potential for new diamondiferous kimberlite pipes over
the coming years. On September 6, 2011, the Company announced that
Harry Winston Diamond Mines Ltd. and its wholly owned subsidiary,
6355137 Canada Inc., entered into an option agreement with North Arrow
Minerals Inc. ("North Arrow") and Springbok Holdings Inc.,
("Springbok") in regards to their Lac de Gras properties in the
Northwest Territories. Under the terms of the agreement, the two
properties collectively will form a "Joint Venture Property". In order
for the option to vest, the Company is to carry out exploration on the
Joint Venture Property, making expenditures of at least $5 million over
a five-year period. Upon vesting, a joint venture will be formed, in
which the Company will hold a 55% interest, and in which North Arrow
and Springbok will equally share a 45% interest, in the entire Joint
Venture Property.
Luxury Brand
The luxury brand segment includes sales from Harry Winston 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 andLondon; and five salons in Asia outside of Japan: Beijing,
Shanghai, Taipei, Hong Kong and Singapore.
(expressed in thousands of United States
dollars)
(quarterly results are
unaudited)
CDN
IFRS GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Sales
North
America $ 41,537 $ 28,817 $ 27,183 $ 35,487 $ 46,489 $ 20,977 $ 19,456 $ 21,578 $ 133,024 $ 108,500 $ 72,764
Europe 31,204 19,561 26,098 17,446 15,701 27,155 20,327 15,441 94,309 78,624 52,339
Asia
(excluding
Japan) 17,272 13,133 59,056 14,354 50,817 16,671 10,858 14,158 103,815 92,504 45,601
Japan 23,772 21,966 20,433 14,610 19,654 15,366 16,260 13,901 80,781 65,181 54,312
Total sales 113,785 83,477 132,770 81,897 132,661 80,169 66,901 65,078 411,929 344,809 225,016
Cost of sales 57,024 41,378 82,513 42,958 79,518 39,675 31,339 31,517 223,873 182,049 117,071
Gross margin 56,761 42,099 50,257 38,939 53,143 40,494 35,562 33,561 188,056 162,760 107,945
Gross margin
(%) 49.9% 50.4% 37.9% 47.5% 40.1% 50.5% 53.2% 51.6% 45.7% 47.2% 48.0%
Selling,
general and
administrative
expenses 49,929 40,635 43,331 34,716 47,866 34,942 33,081 31,967 168,611 147,856 123,648
Operating
profit (loss) $ 6,832 $ 1,464 $ 6,926 $ 4,223 $ 5,277 $ 5,552 $ 2,481 $ 1,594 $ 19,445 $ 14,904 $ (15,703)
Depreciation
and
amortization (
(i)) 3,089 3,048 3,115 3,069 3,688 2,882 2,816 2,878 12,321 12,264 12,958
EBITDA ((ii) )
$ 9,921 $ 4,512 $ 10,041 $ 7,292 $ 8,965 $ 8,434 $ 5,297 $ 4,472 $ 31,766 $ 27,168 $ (2,745)
((i)) Depreciation and amortization included in cost of sales and
selling, general and administrative expenses.
((ii)) Earnings before interest, taxes, depreciation and amortization
("EBITDA"). See "Non-GAAP Measure" on page 18.
Three Months Ended January 31, 2012 ComparedtoThree Months Ended
January 31, 2011
LUXURY BRAND SALES
Sales for the fourth quarter were $113.8 million compared to $132.7
millionfor the comparable quarter of the prior year, a decrease of 14%
(a decrease of 18% at constant exchange rates). North American sales
decreased 11% to $41.5 million, European sales increased 99% to $31.2
million, sales in Asia (excluding Japan) decreased 66% to $17.3 million
and sales in Japan increased 21% to $23.8 million. The fourth quarter
of the prior year included a significant sale in Asia (excluding Japan)
that was not repeated in the current fourth quarter. During the quarter
there were $6.7 million of high-value transactions, which carry
generally lower-than-average gross margins, compared with $48.0 million
in the comparable period of the prior year.
LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the fourth quarter was
$57.0 million compared to $79.5 million for the comparable quarter of
the prior year. Gross margin for the quarter was $56.8 million or 49.9%
compared to $53.1 million or 40.1% for the fourth quarter of the prior
year. The improvement in gross margin was primarily due to product mix
and several high-value transactions in the prior year totalling $48.0
million that generated lower-than-average gross margins.
LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 4% to $49.9 million from $47.9 million in the
comparable quarter of the prior year. The increase was due primarily to
higher advertising, marketing and selling expenses and increased rent
and building related expenses. Fixed costs accounted for $1.9 million
of the increase, while variable expenses linked to higher volume of
sales accounted for $0.2 million of the increase. SG&A expenses
included depreciation and amortization expense of $3.0 million compared
to $3.6 million in the comparable quarter of the prior year.
Twelve Months Ended January 31, 2012 ComparedtoTwelve Months Ended
January 31, 2011
LUXURY BRAND SALES
Sales for the twelve months ended January 31, 2012, were $411.9 million
compared to $344.8 millionfor the prior year, an increase of 19% (12%
at constant exchange rates). North American sales increased 23% to
$133.0 million, European sales increased 20% to $94.3 million, sales in
Asia (excluding Japan) increased 12% to $103.8 million and sales in
Japan increased 24% to $80.8 million. During the period there were
$67.5 million of high-value transactions, which carry generally
lower-than-average gross margins, compared to $54.0 million in the
prior year.
LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the twelve months ended
January 31, 2012, was $223.9 million compared to $182.1 million for the
prior year. Gross margin for the twelve months ended January 31, 2012,
was $188.1 million or 45.7% compared to $162.8 million or 47.2% for the
prior year. The decrease in gross margin resulted primarily from
development costs related to the launch of two new watch collections
during the year.
LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 14% to $168.6 million from $147.9 million in
the prior year. The increase was due primarily to higher advertising,
marketing and selling expenses, higher variable compensation expenses
resulting from higher sales and increased rent and building related
expenses. Fixed costs accounted for $16.9 million of the increase,
while variable expenses linked to higher volume of sales accounted for
$3.8 million of the increase. SG&A expenses included depreciation and
amortization expense of $12.1 million compared to $11.9 million in the
prior year.
LUXURY BRAND SEGMENT OPERATIONAL UPDATE
During the fiscal year ended January 31, 2012, the luxury brand segment
generated sales of $411.9 million, an increase of 19% over the prior
year at actual exchange rates and a 12% increase at constant exchange
rates. The Company recorded high-value transactions of $67.5 million
during the twelve-month period compared with $54.0 million in the prior
year. The North American market generated sales of $133.0 million, an
increase of 23% over the prior year. The long-term trend of growing
wealth in Asia has resulted in increased mobility of luxury consumers,
benefiting the North American market. In Japan, sales of $80.8 million
increased by 24% at actual exchange rates and by 13% on a constant
exchange rate basis over the prior year. Asia (excluding Japan) had
sales of $103.8 million, representing an increase of 12% at actual
exchange rates and 5% on a constant exchange rate basis over the prior
year. In Europe, sales of $94.3 million were 20% higher at actual
exchange rates and 8% higher on a constant exchange rate basis over the
prior year.
Two new licensed Harry Winston salons were opened during the fiscal
year: in the Emirates Towers and in the Dubai Mall, in Dubai, United
Arab Emirates. During January 2012, a new Harry Winston directly
operated salon was opened in Shanghai, China.
The luxury brand segment's distribution network consists of 20 directly
operated salons, four licensed salons (in Manila, Philippines, Kiev,
Ukraine and two in Dubai, United Arab Emirates) and 194 wholesale watch
doors around the world.
Luxury Brand Segment Outlook
With the long-term trend of increasing global demand for luxury
products, the Company is optimistic that fiscal 2013 will represent a
strong opportunity to grow sales and profitability. The influx of new
young wealthy consumers from emerging markets is expected to continue
to drive demand for luxury products in the US and Europe as well as in
local markets. Luxury brands with strong global distribution networks
are well positioned to benefit from the increased mobility of wealthy
consumers. The Company will continue to focus on expanding its
distribution network, especially in emerging markets such as China,
Russia and the Middle East, where consumer demand for luxury products
is growing rapidly. The strength of the Harry Winston brand, the
introduction of new jewelry and watch products, supported by innovative
advertising campaigns and promotional events, will allow the Company to
continue to build global brand awareness.
In fiscal 2013, a new directly operated flagship salon in Shanghai,
China, is expected to be opened during the first quarter, and a second
directly operated salon in London, United Kingdom, in mid-year. Also
during the fiscal year, two new licensed salons are expected to be
opened in Moscow, Russia, and Kuwait City, Kuwait. The Company also
plans to expand by 30 wholesale watch doors to more than 220 doors by
the end of fiscal 2013. A key component of the luxury brand segment's
growth strategy is the expansion of its salon network and wholesale
distribution network. The growth target is to expand to approximately
35 directly operated salons, 15 licensed salons and 300 wholesale doors
by fiscal 2016. Management's long-term financial objectives to fiscal
2016 include compound annual revenue growth in the mid-teens, a gross
margin target in the low 50% range, and an operating profit margin
target in the low to mid-teens.
On May 19, 2011, the Company announced that Harry Winston Inc. had
entered into a business arrangement with Diamond Asset Advisors AG
("DAA"), which is in the process of establishing a polished diamond
investment fund (the "Fund"). The Fund will be structured as a limited
partnership with total funding of up to $250 million, offering
institutional investors direct exposure to the wholesale market price
of polished diamonds. Under the terms of the arrangement with the Fund,
the Company's expert diamond team will source diamonds for the Fund
that have the same high-quality characteristics that the luxury brand
segment uses in its jewelry and watches, with a portion of the diamonds
coming from the Company's existing inventory. The Fund will purchase
the diamonds and then consign them to Harry Winston Inc., which will
act as custodian. Harry Winston Inc. will use the consigned polished
diamonds in the manufacturing of its jewelry and watches, paying the
Fund when the jewelry or watch is sold. The price paid by the Fund to
replace the sold polished diamonds will be used to determine the Fund's
market value. This arrangement will increase the inventory available to
Harry Winston Inc.'s expanding international salon network without
additional demands on working capital. The Fund is expected to raise
the first capital subscription of approximately $100 million from
investors in fiscal 2013, with the remaining $150 million expected to
be raised over the following year, subject to market conditions.
Corporate
The corporate segment captures costs not specifically related to
operations of the mining or luxury brand segments.
(expressed in thousands of United States
dollars)
(quarterly results are unaudited)
IFRS CDN GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Sales $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -
Cost of sales - 34 51 51 51 51 51 51 136 204 -
Gross margin - (34) (51) (51) (51) (51) (51) (51) (136) (204) -
Gross margin
(%) -% -% -% -% -% -% -% -% -% -% -%
Selling,
general and
administrative
expenses 3,510 2,246 2,281 3,449 1,839 3,309 2,045 1,423 11,487 8,616 -
Operating
profit (loss) $ (3,510) (2,280) (2,332) (3,500) (1,890) (3,360) (2,096) (1,474) (11,623) (8,820) $ -
Depreciation
and
amortization (
(i)) 139 141 140 139 278 347 347 347 558 1,319 -
EBITDA ((ii) ) $ (3,371) $ (2,139) $ (2,192) $ (3,361) $ (1,612) $ (3,013) $ (1,749) $ (1,127) $ (11,065) $ (7,501) $ -
((i)) Depreciation and amortization included in cost of sales and
selling, general and administrative expenses.
((ii)) Earnings before interest, taxes, depreciation and amortization
("EBITDA"). See "Non-GAAP Measure" on page 18.
Three Months Ended January 31, 2012 ComparedtoThree Months Ended
January 31, 2011
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the corporate segment increased by $1.7 million from
the comparable quarter of the prior year primarily due to travel
expenses and salaries and benefits related to additional corporate
employees.
Twelve Months Ended January 31, 2012 ComparedtoTwelve Months Ended
January 31, 2011
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the corporate segment increased by $2.9 million from
the prior year primarily due to stock-based compensation, and travel
expenses and salaries and benefits related to additional corporate
employees.
Liquidity and Capital Resources
Working Capital
As at January 31, 2012, the Company had unrestricted cash and cash
equivalents of $78.1million compared to $108.7million at January 31,
2011. The Company had cash on hand and balances with banks of
$76.0million and short-term investments of $2.1million at January 31,
2012. During the year ended January 31, 2012, the Company reported cash
from operations of $59.0million compared to $72.8million in the prior
year. At January 31, 2012, the Company had 0.8 million carats of rough
diamond inventory available for sale at an estimated current market
value of approximately $80 million.
Working capital increased to $439.0million at January 31, 2012, from
$328.6million at January 31, 2011. During the year, the Company
increased accounts receivable by $4.3 million, increased inventory and
supplies by $42.0million, increased other current assets by $4.2
million, decreased trade and other payables by $31.2million and
increased employee benefit plans by $2.1 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, the seasonality of mine operating expenses,
capital expenditure programs, 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
and sold by the Company in each quarter, along with the seasonality of
sales and salon expansion in the luxury brand segment. The Company's
principal working capital needs include investments in inventory, other
current assets, trade and other payables, and income taxespayable.
The Company assesses liquidity and capital resources on a consolidated
basis. The Company's requirements are for cash operating expenses,
working capital, contractual debt requirements and capital
expenditures. The Company believes that it will generate sufficient
liquidity to meet its anticipated requirements at least for the next
twelve months.
Financing Activities
The mining segment maintains a senior secured revolving credit facility
with Standard Chartered Bank that was increased from $100.0 million to
$125.0 million on February 28, 2011. At January 31, 2012, $50.0 million
was outstanding compared to $50.0 million at January 31, 2011.
During the year, the Company paid the $70.0 million promissory note plus
accrued interest owing to Kinross from cash on hand. The promissory
note was issued to Kinross on August 25, 2010, as part of the
consideration for reacquiring Kinross's 9% indirect interest in the
Diavik Joint Venture.
As at January 31, 2012, $nil and $4.3 million was outstanding under the
Company's revolving financing facility relating to its Belgian
subsidiary, Harry Winston Diamond International N.V., and its Indian
subsidiary, HarryWinston Diamond (India) Private Limited,
respectively, compared to $nil at January 31, 2011.
During the year ended January 31, 2012, the luxury brand subsidiary,
Harry Winston Inc., increased the amount outstanding on its secured
five-year revolving credit facility to $200.5 million from $165.0
million at January 31, 2011.
Investing Activities
During the fiscal year, the Company purchased property, plant and
equipment of $64.9million, of which $45.2million was purchased for
the mining segment and $19.7 million for the luxury brand segment.
Contractual Obligations
The Company has contractual payment obligations with respect to
interest-bearing loans and borrowings and, through its participation in
the JointVenture, future site restoration costs at the Diavik Diamond
Mine level. Additionally, at the Joint Venture level, contractual
obligations exist with respect to operating purchase obligations, as
administered by DDMI, the operator of the mine. In order to maintain
its 40% ownership interest in the Diavik Diamond Mine, HWDLP is
obligated to fund 40% of the Joint Venture's total expenditures on a
monthly basis. HWDLP's current projected share of the planned capital
expenditures at the Diavik Diamond Mine, which are not reflected in the
table below, including capitalexpenditures for the calendar years 2012
to 2016, is approximately $140million, assuming a Canadian/US average
exchange rate of $1.00 for the fiveyears. The most significant
contractual obligations for the ensuing five-year period can be
summarized as follows:
CONTRACTUAL Less than Year Year After
OBLIGATIONS
(expressed in Total 1 year 2-3 4-5 5 years
thousands of United
States dollars)
Interest-bearing $ 321,751 $ 39,578 $ 260,954 $ 4,852 $ 16,367
loans and borrowings
(a)(b)
Environmental and 93,330 82,676 4,844 - 5,810
participation
agreements
incremental
commitments (c)
Operating lease 220,352 22,439 39,288 35,997 122,628
obligations (d)
Total contractual $ 635,433 $ 144,693 $ 305,086 $ 40,849 $ 144,805
obligations
(a) Interest-bearing loans and borrowings presented in the foregoing
table include current and long-term portions. The mining segment
maintains a senior secured revolving credit facility with Standard
Chartered Bank for $125.0 million. The facility has an initial maturity
date of June 24, 2013, with two one-year extensions at the Company's
option.There are no scheduled repayments required before maturity. At
January 31, 2012, $50.0 million was outstanding.
The Company has available a $45.0million revolving financing facility
(utilization in either US dollars or Euros) for inventory and
receivables funding in connection with marketing activities through its
Belgian subsidiary, HarryWinston Diamond International N.V., and its
Indian subsidiary, HarryWinston Diamond (India) Private Limited.
Borrowings under the Belgian facility bear interest at the bank's base
rate plus 1.5%. Borrowings under the Indian facility bear an interest
rate of 12.0%. At January 31, 2012, $nil and $4.3 million were
outstanding under this facility relating to its Belgian subsidiary,
HarryWinston Diamond International N.V., and its Indian subsidiary,
HarryWinston Diamond (India) Private Limited, respectively. The
facility is guaranteed by HarryWinston Diamond Corporation.
Harry Winston Inc. maintains a credit agreement with a syndicate of
banks for a $250.0million five-year revolving credit facility, which
expires on March 31, 2013. There are no scheduled repayments required
before maturity. At January 31, 2012, $200.5 million had been drawn
against this secured credit facility.
Also included in long-term debt of Harry Winston Inc. is a 25-year loan
agreement for CHF 17.5 million ($18.9 million) used to finance the
construction of the Company's watch factory in Geneva, Switzerland. The
loan agreement is comprised of a CHF 3.5 million ($3.8 million) loan
and a CHF 14.0 million ($15.1 million) loan. The CHF 3.5 million loan
bears interest at a rate of 3.15% and matures on April 22, 2013. The
CHF14.0 million loan bears interest at a rate of 3.55% and matures on
January 31, 2033. At January 31, 2012, $16.6 million was outstanding.
The bank has a secured interest in the factory building.
HarryWinston Japan, K.K., maintains unsecured credit agreements with
three banks, amounting to ¥1,250 million ($16.1million). HarryWinston
Japan, K.K. also maintains a secured credit agreement amounting to
¥575million ($7.5million). This facility is secured by inventory
owned by HarryWinston Japan, K.K. At January 31, 2012, $23.6 million
was outstanding.
The Company's first mortgageon real property has scheduled principal
payments of approximately $0.2 million quarterly, may be prepaid at any
time, and matures on September 1, 2018. On January 31, 2012, $6.3
million was outstanding on the mortgage.
(b)Interest on loans and borrowings is calculated at various fixed and
floating rates. Projected interest payments on the current debt
outstanding were based on interest rates in effect at January 31, 2012,
and have been included under interest-bearing loans and borrowings in
the table above. Interest payments for the next twelve months are
approximated to be $10.3million.
(c)The Joint Venture, under environmental and other agreements, must
provide funding for the Environmental Monitoring Advisory Board. These
agreements also state that the Joint Venture must provide security
deposits for the performance by the Joint Venture of its reclamation
and abandonment obligations under all environmental laws and
regulations. Theoperator of the Joint Venture has fulfilled such
obligations for the security deposits by posting letters of credit of
which HWDLP's share as at January 31, 2012, was $81.1million based on
its 40% ownership interest in the Diavik Diamond Mine. There can be no
assurance that the operator will continue its practice of posting
letters of credit in fulfillment of this obligation, in which event
HWDLP would be required to post its proportionate share of such
security directly, which would result in additional constraints on
liquidity. The requirement to post security for the reclamation and
abandonment obligations may be reduced to the extent of amounts spent
by the Joint Venture on those activities. The Joint Venture has also
signed participation agreements with various native groups. These
agreements are expected to contribute to the social, economic and
cultural well-being of area Aboriginal bands. The actual cash outlay
for the Joint Venture's obligations under these agreements is not
anticipated to occur until later in the life of the DiavikDiamond
Mine.
(d)Operating lease obligations represent future minimum annual rentals
under non-cancellable operating leases for HarryWinston Inc. salons
and office space, and long-term leases for property, land and office
premises.
Non-GAAP Measure
In addition to discussing earnings measures in accordance with IFRS, the
MD&A provides the following non-GAAP measure, which is also used by
management to monitor and evaluate the performance of the Company and
its business segments.
The term EBITDA (earnings before interest, taxes, depreciation and
amortization) does not have a standardized meaning according to IFRS
and therefore may not be comparable to similar measures presented by
other issuers. The Company defines EBITDA as sales minus cost of sales
and selling, general and administrative expenses, meaning it represents
operating profit before depreciation and amortization.
EBITDA is a measure commonly reported and widely used by investors and
analysts as an indicator of the Company's operating performance and
ability to incur and service debt and as a valuation metric. EBITDA
margin is defined as the ratio obtained by dividing EBITDA by sales.
CONSOLIDATED
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
IFRS CDN GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Operating $ 30,710 $ (1,963) $ 23,100 $ 4,685 $ 21,245 $ 14,830 $ 29,932 $ 2,341 $ 56,531 $ 68,348 $ (21,971)
profit
(loss)
Depreciation
and
amortization 27,512 23,121 20,716 20,291 24,635 18,657 19,515 14,200 91,639 77,007 64,112
EBITDA $ 58,222 $ 21,158 $ 43,816 $ 24,976 $ 45,880 $ 33,487 $ 49,447 $ 16,541 $ 148,170 $ 145,355 $ 42,141
MINING SEGMENT
(expressed in thousands of United States dollars)
(quarterly results are
unaudited)
IFRS CDN
GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Operating $ 27,388 $ (1,147) $ 18,506 $ 3,962 $ 17,858 $ 12,638 $ 29,547 $ 2,221 $ 48,709 $ 62,264 $ (6,268)
profit
(loss)
Depreciation 24,284 19,932 17,461 17,083 20,669 15,428 16,352 10,975 78,760 63,424 51,154
and
amortization
EBITDA $ 51,672 $ 18,785 $ 35,967 $ 21,045 $ 38,527 $ 28,066 $ 45,899 $ 13,196 $ 127,469 $ 125,688 $ 44,886
LUXURY BRAND SEGMENT
(expressed in thousands of United
States dollars)
(quarterly results are
unaudited)
IFRS CDN GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Operating $ 6,832 $ 1,464 $ 6,926 $ 4,223 $ 5,277 $ 5,552 $ 2,481 $ 1,594 $ 19,445 $ 14,904 $ (15,703)
profit
(loss)
Depreciation 3,089 3,048 3,115 3,069 3,688 2,882 2,816 2,878 12,321 12,264 12,958
and
amortization
EBITDA $ 9,921 $ 4,512 $ 10,041 $ 7,292 $ 8,965 $ 8,434 $ 5,297 $ 4,472 $ 31,766 $ 27,168 $ (2,745)
CORPORATE SEGMENT
(expressed in thousands of United
States dollars)
(quarterly results are
unaudited)
IFRS CDN
GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Operating $ (3,510) (2,280) (2,332) (3,500) (1,890) (3,360) (2,096) (1,474) (11,623) (8,820) $ -
profit
(loss)
Depreciation 139 141 140 139 278 347 347 347 558 1,319 -
and
amortization
EBITDA $ (3,371) $ (2,139) $ (2,192) $ (3,361) $ (1,612) $ (3,013) $ (1,749) $ (1,127) $ (11,065) $ (7,501) $ -
Risks and Uncertainties
Harry Winston Diamond Corporation is subject to a number of risks and
uncertainties as a result of its operations. Inaddition to the other
information contained in this MD&A 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
crushed rock-fill 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 Interest in DDMI
HWDLP holds 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 HWDLP (40%), and is subject to the risks normally associated
with the conduct of joint ventures and similar joint arrangements.
These risks include the inability to exert influence over strategic
decisions made in respect of the Diavik Diamond Mine and the Diavik
group of mineral claims. Byvirtue of DDMI's 60% interest in the Diavik
Diamond Mine, it has a controlling vote in virtually all Joint Venture
management decisions respecting the development and operation of the
Diavik Diamond Mine and the development of the Diavik group of mineral
claims. Accordingly, DDMI is able to determine the timing and scope of
future project capital expenditures, and therefore is able to impose
capital expenditure requirements on HWDLP that the Company may not have
sufficient cash to meet. A failure to meet capital expenditure
requirements imposed by DDMI could result in HWDLP's interest in the
Diavik Diamond Mine and the Diavik group of mineral claims being
diluted.
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 luxury
brand 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, renewed or additional credit market disruptions,
natural disasters or the occurrence of terrorist attacks 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 or in
diamonds available for sale through recommencement of suspended mining
activity or the release of stocks held back during recent periods of
low demand could also negatively affect the price of diamonds. In each
case, such developments could have a material adverse effect on the
Company's results of operations.
Cash Flow and Liquidity
The Company's liquidity requirements fluctuate from quarter to quarter
and year to year depending on, among other factors, the seasonality of
production at the Diavik Diamond Mine, the seasonality of mine
operating expenses, exploration expenses, capital expenditure programs,
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 and sold by the Company in each
quarter, along with the seasonality of sales and salon refurbishment
and expansion in the luxury brand segment. The Company's principal
working capital needs include investments in inventory, prepaid
expenses and other current assets, and accounts payable and income
taxes payable. There can be no assurance that the Company will be able
to meet each or all of its liquidity requirements. A failure by the
Company to meet its liquidity requirements could result in the Company
failing to meet its planned development objectives, or in the Company
being in default of a contractual obligation, each of which could have
a material adverse effect on the Company's business prospects or
financial condition.
Economic Environment
The Company's financial results are tied to the global economic
conditions and their impact on levels of consumer confidence and
consumer spending. The global markets have experienced the impact of a
significant US and international economic downturn since the fall of
2008. This has restricted the Company's growth opportunities both
domestically and internationally, and a return to a recession or weak
recovery, due to recent disruptions in financial markets in the US, the
Eurozone or elsewhere, the 2011 disaster in Japan and political
upheavals in the Middle East, could cause the Company to experience
revenue declines across both of its business segments due to
deteriorated consumer confidence and spending, and a decrease in the
availability of credit, which could have a material adverse effect on
the Company's business prospects or financial condition. The credit
facilities essential to the diamond polishing industry are largely
underwritten by European banks that are currently under stress with the
European sovereign debt issue. The withdrawal or reduction of such
facilities could also have a material adverse effect on the Company's
business prospects or financial condition. The Company monitors
economic developments in the markets in which it operates and uses this
information in its continuous strategic and operational planning in an
effort to adjust its business in response to changing economic
conditions.
Currency Risk
Currency fluctuations may affect the Company's financial performance.
Diamonds are sold throughout the world based principally on the
USdollar price, and although the Company reports its financial results
in US dollars, a majority of the costs and expenses of the
DiavikDiamond Mine are incurred in Canadian dollars. Further, the
Company has a significant deferred 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 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
theCompany will receive from diamond sales, and will decrease the US
dollar revenues received by Harry Winston Inc. Fromtime to time, the
Company may use a limited number of derivative financial instruments to
manage its foreign currencyexposure.
Licences and Permits
The operation of the Diavik Diamond Mine and exploration on the Diavik
property requires licences and permits from the Canadian government.
The Diavik Diamond Mine Type "A" Water Licence was renewed by the
regional Wek'eezhii Land and Water Board to October31, 2015. While the
Company anticipates that DDMI, the operator of the Diavik Diamond Mine,
will be able to renew this licence 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 licences and permits that may be
required to maintain the operation of the Diavik Diamond Mine or to
further explore and develop the Diavikproperty.
Regulatory and Environmental Risks
The operation of the Diavik Diamond Mine, exploration activities at the
Diavik property 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 effect on the Company by
increasing costs and/or causing a reduction in levels of production
from the DiavikDiamond 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 andregulatory regimes that
could 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
The Canadian government has established a number of policy measures in
response to concerns relating to climate change. 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 as well as to
reflect depletion due to production. 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, the 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 transportedto 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
unexpected high fuel usage.
Thecost of the fuelpurchased is based on the then prevailingprice and
expensed into operating costs ona usage basis. TheDiavik 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
DiavikDiamond Mine.
The Company's success in marketing rough diamonds and 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 operating its luxury brand
segment.
Expansion and Refurbishment of the Existing Salon Network
A key component of the Company's luxury brand strategy in recent years
has been the expansion of its salon network. The Company currently
expects to expand its retail salon network to a total of 35 salons and
300 wholesale doors worldwide by fiscal 2016. An additional objective
of the Company in the luxury brand segment is to achieve a compound
annual growth rate in sales in the mid-teens and an operating profit in
the low to mid-teens, in each case by fiscal 2016. Although the Company
considers these objectives to be reasonable, they are subject to a
number of risks and uncertainties, and there can be no assurance that
these objectives will be realized. 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 by Harry Winston Inc. through
borrowings. The successful expansion of the Company's global salon
network, and achieving an increase in sales and in operating profit,
will depend on a variety of factors, including worldwide economic
conditions, market demand for luxury goods, the strength of the Harry
Winston brand and the availability of sufficient funding. There can be
no assurance that the expansion of the salon network will continue or
that the current expansion will prove successful in increasing annual
sales or earnings from the luxury brand 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.
The Company has to date licensed four retail salons to operate under the
Harry Winston name and currently expects to increase the number of
licensed salons to 15 by fiscal 2016. There is no assurance that the
Company will be able to find qualified third parties to enter into
these licensing arrangements, or that the licensees will honour the
terms of the agreements. The conduct of licensees may have a negative
impact on the Company's distinctive brand name and reputation.
Competition in the Luxury Brand Segment
The Company is exposed to competition in the luxury brand 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
HarryWinston Inc. is unable to successfully compete in the luxury
jewelry segment, the Company's results of operations will be adversely
affected.
Cybersecurity
The Company and certain of its third-party vendors receive and store
personal information in connection with human resources operations and
other aspects of the business. Despite the Company's implementation of
security measures, its IT systems are vulnerable to damages from
computer viruses, natural disasters, unauthorized access, cyber attack
and other similar disruptions. Any system failure, accident or security
breach could result in disruptions to the Company's operations. A
material network breach in the security of the IT systems could include
the theft of intellectual property or trade secrets. To the extent that
any disruption or security breach results in a loss or damage to the
Company's data, or in inappropriate disclosure of confidential
information, financial data, or credit card cardholder data, it could
cause significant damage to the Company's reputation, affect
relationships with our customers, lead to claims against the Company
and ultimately harm its business. In addition, the Company may be
required to incur significant costs to protect against damage caused by
these disruptions or security breaches in the future. Although the
Company believes that it has robust information security procedures and
other safeguards in place, as cyber threats continue to evolve, the
Company may be required to expend additional resources to continue to
enhance its information security measures and/or to investigate and
remediate any information security vulnerabilities.
Disclosure Controls and Procedures
The Company has designed a system of disclosure controls and procedures
to provide reasonable assurance that material information relating to
HarryWinston Diamond Corporation, including its consolidated
subsidiaries, is made known to the management of the Company by others
within those entities, particularly during the period in which the
Company's annual filings are being prepared. In designing and
evaluating the disclosure controls and procedures, the management of
the Company recognized that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. The management of
HarryWinston Diamond Corporation was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures. Theresult of the inherent limitations in all control
systems means no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, have been
detected.
The management of HarryWinston Diamond Corporation has evaluated the
effectiveness of the design and operation of its disclosure controls
and procedures as of the end of the period covered by the Annual
Report. Based on that evaluation, management has concluded that these
disclosure controls and procedures, as defined in Canada by
Multilateral Instrument 52-109, Certification of Disclosure in Issuers'
Annual and Interim Filings, and in the United States by Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act"), are effective as of January 31, 2012, to ensure
that information required to be disclosed in reports that the Company
will file or submit under Canadian securities legislation and the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified in those rules and forms.
Critical Accounting Estimates
Management is often required to make judgments, assumptions and
estimates in the application of IFRS 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
financial performanceor financial position. The following discussion
outlines the accounting policies and practices that are critical to
determining HarryWinston Diamond Corporation's financial results.
Use of Estimates
The preparation of financial statements in conformity with IFRS requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financialstatements, and the
reported amounts of earnings, revenues and expensesduring the
reporting year. Significant areas requiring the use ofmanagement
estimates relate to the determination of impairment of property, plant
and equipment, intangible assets, goodwill and deferred mineral
property costs, estimation of future site restoration costs and
deferred income taxes. Financial results as determined by actual events
could differ from those estimated.
The most significant estimates relate to the valuation of deferred
mineral property costs and future site restoration costs. Management
makes significant estimates related to the measurement of reclamation
obligations and the timing of the related cash flows. Such timing and
measurement uncertainty could have a material effect on the reported
results of operations and the financial position of the Company.
Actual results could differ materially from those estimates in the near
term.
Deferred Mineral Property Costs and Mineral Reserves
HarryWinston Diamond Corporation capitalizes all direct development and
pre-production costs relating to mineral properties and amortizes such
costs on a unit-of-production basis upon commencement of commercial
production relating to the underlying property. Deferred mineral
property costs are amortized based on estimated proven and probable
reserves at the property.
On an ongoing basis, the Company evaluates deferred costs relating to
each property to ensure that the estimated recoverable amount exceeds
the carrying value. Based on the Diavik Diamond Mine's latest projected
open pit and underground life from the mine plan and diamond prices
from the Diavik Project feasibility study, there is no requirement to
write down deferred mineral property costs.
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 can be revised upward or downward based on the
results of future drilling, testing or production levels, anddiamond
prices. Changes in reserve estimates can lead to an impairment of
deferred mineral property costs.
Future Site Restoration Costs
The Company has obligations for future site restoration costs. The
Company records the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation
associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development and/or normal
use of the assets. The fair value of the liability is added to the
carrying amount of the associated asset and this additional carrying
amount is depreciated over the life of the asset. Subsequent to the
initial measurement of the asset retirement obligation, the obligation
is adjusted at the end of each period to reflect the passage of time
and changes in the estimated future cash flows underlying the
obligation. If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain or loss on
settlement. As at January 31, 2012, estimates of all legal obligations
at the Joint Venture level have been included in the consolidated
financial statements of the Company. Processes to track and monitor
these obligations are carried out at the Joint Venture level.
Intangible Assets
Certain of the Company's intangible assets are recorded at fair value
upon acquisition and have an indefinite useful life. The Company
assesses impairment of such intangible assets by determining whether
the carrying value exceeds thefairvalue. If the fair value is
determined to be less than the carrying value, the excess of the
carrying value overthefair value is charged to earnings in the year
in which such impairment is determined by management. These approaches
involve significant management judgment and, as a result, are subject
to change.
Changes in Accounting Policies
The International Accounting Standards Board ("IASB") has issued a new
standard, IFRS 9, "Financial Instruments" ("IFRS 9"), which will
ultimately replace IAS 39, "Financial Instruments: Recognition and
Measurement" ("IAS 39"). IFRS 9 provides guidance on the classification
and measurement of financial assets and financial liabilities. This
standard becomes effective for the Company's fiscal year end beginning
February 1, 2015. The Company is currently assessing the impact of the
new standard on its consolidated financial statements.
IFRS 10, "Consolidated Financial Statements" ("IFRS 10"), was issued by
the IASB on May 12, 2011, and will replace the consolidation
requirements inSIC-12, "Consolidation - Special Purpose Entities" and
IAS 27, "Consolidated and Separate Financial Statements". The new
standard establishes control as the basis for determining which
entities are consolidated in the consolidated financial statements and
provides guidance to assist in the determination of control where it is
difficult to assess. IFRS 10 is effective for the Company's fiscal year
end beginning February 1, 2013, with early adoption permitted. The
Company is currently assessing the impact of IFRS 10 on its
consolidated financial statements.
IFRS 11, "Joint Arrangements" ("IFRS 11"), was issued by the IASB on May
12, 2011, and will replace IAS 31, "Interest in Joint Ventures". The
new standard will apply to the accounting for interests in joint
arrangements where there is joint control. Under IFRS 11, joint
arrangements are classified as either joint ventures or joint
operations. The structure of the joint arrangement will no longer be
the most significant factor in determining whether a joint arrangement
is either a joint venture or a joint operation. Proportionate
consolidations will no longer be allowed and will be replaced by equity
accounting. IFRS 11 is effective for the Company's fiscal year end
beginning February 1, 2013, with early adoption permitted. The Company
is currently assessing the impact of IFRS 11 on its results of
operations and financial position.
IFRS 13, "Fair Value Measurement" ("IFRS 13"), was also issued by the
IASB on May 12, 2011. The new standard makes IFRS consistent with
generally accepted accounting principles in the United States ("US
GAAP") on measuring fair value and related fair value disclosures. The
new standard creates a single source of guidance for fair value
measurements. IFRS 13 is effective for the Company's fiscal year end
beginning February 1, 2013, with early adoption permitted. The Company
is assessing the impact of IFRS 13 on its consolidated financial
statements.
Outstanding Share Information
As at March 31, 2012
Authorized Unlimited
Issued and outstanding shares 84,874,781
Options outstanding 2,390,899
Fully diluted 87,265,680
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) (UNAUDITED)
February 1,
As at January 31, 2012 2011 2010
ASSETS
Current assets
Cash and cash equivalents (note $ 78,116 $ 108,693 $ 62,969
4)
Accounts receivable (note 5) 26,910 22,788 23,598
Inventory and supplies (note 6) 457,827 403,212 311,188
Other current assets (note 7) 45,494 41,317 39,299
608,347 576,010 437,054
Property, plant and equipment - 734,146 764,093 783,432
Mining (note 8)
Property, plant and equipment - 69,781 61,019 62,277
Luxury brand (note 8)
Intangible assets, net (note 10) 127,337 127,894 129,213
Other non-current assets (note 14,165 14,521 15,629
11)
Deferred income tax assets (note 77,160 60,038 50,524
14)
Total assets $ 1,630,936 $ 1,603,575 $ 1,478,129
LIABILITIES AND EQUITY
Current liabilities
Trade and other payables (note $ 104,681 $ 139,551 $ 75,893
12)
Employee benefit plans (note 6,026 4,317 11,284
13)
Income taxes payable (note 14) 29,450 6,660 46,297
Promissory note (note 15) - 70,000 -
Current portion of 29,238 24,215 23,831
interest-bearing loans and
borrowings (note 15)
169,395 244,743 157,305
Interest-bearing loans and 270,485 235,516 161,691
borrowings (note 15)
Deferred income tax liabilities 325,035 309,868 246,398
(note 14)
Employee benefit plans (note 13) 9,463 7,287 6,898
Provisions (note 16) 65,245 50,130 43,691
Total liabilities 839,623 847,544 615,983
Equity
Share capital (note 17) 507,975 502,129 426,593
Contributed surplus 17,764 16,233 17,730
Retained earnings 255,233 229,779 242,057
Accumulated other comprehensive 10,086 7,624 (2,571)
income
Total shareholders' equity 791,058 755,765 683,809
Non-controlling interest 255 266 178,337
Total equity 791,313 756,031 862,146
Total liabilities and equity $ 1,630,936 $ 1,603,575 $ 1,478,129
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Income Statements
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE
AMOUNTS) (UNAUDITED)
Years ended January 31, 2012 2011
Sales $ 702,043 $ 623,963
Cost of sales 451,960 387,665
Gross margin 250,083 236,298
Selling, general and administrative expenses 193,552 167,950
Operating profit 56,531 68,348
Finance expenses (16,687) (13,427)
Exploration costs (1,770) (666)
Finance and other income 586 669
Foreign exchange gain 1,005 357
Profit before income taxes 39,665 55,281
Net income tax expense (note 14) 14,222 8,080
Net profit $ 25,443 $ 47,201
Attributable to shareholders $ 25,454 $ 41,530
Attributable to non-controlling interest $ (11) $ 5,671
Earnings per share (note 19)
Basic $ 0.30 $ 0.52
Diluted $ 0.30 $ 0.51
Weighted average number of shares outstanding 84,660,766 79,858,018
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Comprehensive Income
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Years ended January 31, 2012 2011
Net profit $ 25,443 $ 47,201
Other comprehensive income
Net gain (loss) on translation of net foreign 10,879
operations (net of tax of nil) 3,634
Change in fair value of derivative financial
instruments (net of tax of
$0.2 million for the year ended January 31, 2011) - 354
Actuarial loss on employee benefit plans (net of
tax of
$0.6 million for the year ended January 31, 2012;
2011 - $0.2 million) (1,172) (1,038)
Other comprehensive income, net of tax 2,462 10,195
Total comprehensive income $ 27,905 $ 57,396
Attributable to shareholders $ 27,916 $ 51,725
Attributable to non-controlling interest $ (11) $ 5,671
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Changes in Equity
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Years ended January 31, 2012 2011
Common shares:
Balance at beginning of period $ 502,129 $ 426,593
Issued during the period 5,286 72,701
Transfer from contributed surplus on exercise of 560 2,835
options
Balance at end of period 507,975 502,129
Contributed surplus:
Balance at beginning of period 16,233 17,730
Stock-based compensation expense 2,091 1,338
Transfer from contributed surplus on exercise of (560) (2,835)
options
Balance at end of period 17,764 16,233
Retained earnings:
Balance at beginning of period 229,779 242,057
Net profit attributable to common shareholders 25,454 41,530
Reacquisition of partnership units (including - (53,808)
transaction costs)
Balance at end of period 255,233 229,779
Accumulated other comprehensive income:
Balance at beginning of period 7,624 (2,571)
Other comprehensive income
Net gain on translation of net foreign 3,634 10,879
operations (net of tax of nil)
Change in fair value of derivative financial
instruments (net of
tax of $0.2 million for the year ended January
31, 2011) - 354
Actuarial loss on employee benefit plans (net
of tax of
$0.6 million for the year ended January 31,
2012;
2011 - $0.2 million) (1,172) (1,038)
Balance at end of period 10,086 7,624
Non-controlling interest:
Balance at beginning of period 266 178,337
Non-controlling interest (11) 5,671
Distribution to Kinross - (9,900)
Reacquisition of Kinross interest - (173,842)
Balance at end of period 255 266
Total shareholders' equity $ 791,313 $ 756,031
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Cash Flows
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Years ended January 31, 2012 2011
Cash provided by (used in)
OPERATING
Net profit $ 25,443 $ 47,201
Depreciation and amortization 91,639 77,007
Deferred income tax expense (recovery) (1,088) 16,817
Current income tax expense 15,310 (8,737)
Finance expenses 16,687 13,427
Stock-based compensation 2,091 1,338
Other non-cash items 556 -
Foreign exchange gain (loss) (5,771) 1,806
Loss on disposal of assets 9 237
Change in non-cash operating working capital, (79,517) (35,619)
excluding taxes and finance expenses
Cash provided from operating activities 65,359 113,477
Interest paid (14,347) (8,958)
Income and mining taxes paid 7,979 (31,763)
Net cash from operating activities 58,991 72,756
FINANCING
Decrease in interest-bearing loans and (709) (1,399)
borrowings
Increase in revolving credit 266,495 288,366
Decrease in revolving credit (226,402) (211,721)
Repayment of promissory note (70,000) -
Issue of common shares, net of issue costs 5,286 2,964
Distribution to Kinross - (9,900)
Cash provided from financing activities (25,330) 68,310
INVESTING
Reacquisition of partnership units - (51,450)
Property, plant and equipment - Mining (45,165) (41,859)
Property, plant and equipment - Luxury brand (19,681) (6,751)
Other non-current assets (1,889) (3,230)
Cash used in investing activities (66,735) (103,290)
Foreign exchange effect on cash balances 2,497 7,948
Increase (decrease) in cash and cash (30,577) 45,724
equivalents
Cash and cash equivalents, beginning of period 108,693 62,969
Cash and cash equivalents, end of period $ 78,116 $ 108,693
Change in non-cash operating working capital,
excluding taxes and
finance expenses
Accounts receivable (4,277) 1,029
Inventory and supplies (41,953) (86,570)
Other current assets (4,178) (2,210)
Trade and other payables (31,202) 59,163
Employee benefit plans 2,093 (7,031)
$ (79,517) $ (35,619)
The accompanying notes are an integral part of these consolidated
financial statements.
Notes to Consolidated Financial Statements
JANUARY 31, 2012 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 diamond
enterprise with assets in the mining and luxury brand segments of the
diamond industry.
The Company's mining asset is an ownership interest in the Diavik group
of mineral claims. The Diavik Joint Venture (the "Joint Venture") is an
unincorporated joint arrangement between Diavik Diamond Mines Inc.
("DDMI") (60%) and HarryWinston Diamond Limited Partnership ("HWDLP")
(40%) where HWDLP holds an undivided 40% ownership interest in the
assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is
the operator of the Diavik Diamond Mine. DDMI and HWDLP are
headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary
of Rio Tinto plc of London, England, and HWDLP is a wholly owned
subsidiary of HarryWinston Diamond Corporation of Toronto, Canada.
The Company also owns Harry Winston Inc., the premier fine jewelry and
watch retailer with select locations throughout the world. Its head
office is located in New York City, United States.
Certain comparative figures have been reclassified to conform with
current year's presentation.
The Company is incorporated and domiciled in Canada and its shares are
publicly traded on the Toronto Stock Exchange and the New York Stock
Exchange. The address of its registered office is Toronto, Ontario.
Note 2:
Basis of Preparation
(a)Statement of compliance
These consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards ("IFRS"). These are
the Company's first annual consolidated financial statements under IFRS
for the fiscal year ending January 31, 2012. The accounting policies
adopted in these consolidated financial statements are based on IFRS as
issued by the International Accounting Standards Board ("IASB") as of
January 31, 2012.
(b)Basis of measurement
These consolidated financial statements have been prepared on the
historical cost basis except for the following:
-- financial instruments through profit and loss are measured at
fair value.
-- liabilities for Restricted Share Unit and Deferred Share Unit
Plans are measured at fair value.
(c)Currency of presentation
These consolidated financial statements are expressed in United States
dollars, consistent with the predominant functional currency of the
Company's operations. All financial information presented in United
States dollars has been rounded to the nearest thousand.
Note 3:
Significant Accounting Policies
The accounting policies set out below have been applied consistently to
all periods presented in these consolidated financial statements, and
have been applied consistently by Company entities.
(a)Basis of consolidation
The consolidated financial statements comprise the financial statements
of the Company and its subsidiaries as at January 31, 2012.
Subsidiaries are fully consolidated from the date of acquisition or
creation, being the date on which the Company obtains control, and
continue to be consolidated until the date that such control ceases.
The financial statements of the subsidiaries are prepared for the same
reporting period as the parent company, using consistent accounting
policies. All intercompany balances, income and expenses, and
unrealized gains and losses resulting from intercompany transactions
are eliminated in full. For partly owned subsidiaries, the net assets
and net earnings attributable to minority shareholders are presented as
non-controlling interests on the consolidated balance sheet.
Interest in Diavik Joint Venture
HWDLP owns an undivided 40% ownership interest in the assets,
liabilities and expenses of the Joint Venture. The Company records its
interest in the assets, liabilities and expenses of the Joint Venture
in its consolidated financial statements with a one-month lag. The
accounting policies described below include those of the Joint Venture.
(b)Revenue
Sales from the sale of rough diamonds, fine jewelry and watches are
recognized when significant risks and rewards of ownership are
transferred to the customer, the amount of sales can be measured
reliably and the receipt of future economic benefits are probable.
Sales are measured at the fair value of the consideration received or
receivable, net of value-added taxes, duties and other sales taxes, and
after eliminating sales within the Company.
(c)Cash resources
Cash and cash equivalents consist of cash on hand, balances with banks
and short-term money market instruments (with a maturity on acquisition
of less than 90 days), and are carried at fair value.
(d)Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and
generally do not bear interest. The allowance for doubtful accounts is
the Company's best estimate of the amount of probable credit losses in
the existing accounts receivable. The Company reviews its allowance for
doubtful accounts monthly. Account balances are written off against the
allowance after all means of collection have been exhausted and the
potential for recovery is considered remote.
(e)Inventory and supplies
Luxury brand raw materials and work-in-progress are valued at the lower
of cost and net realizable value, with cost determined using either a
weighted average or specific item identification basis depending on the
nature of the inventory. Work-in-progress costs include an appropriate
share of production costs such as material, labour and overhead costs.
Luxury brand merchandise inventory is recorded at the lower of cost or
net realizable value and includes jewelry and watches. Cost is
determined on a specific item basis for jewelry and the average cost
method is used for watches.
Mining rough diamond inventory is recorded at the lower of cost or net
realizable value. Cost is determined on an average cost basis including
production costs and value-added processing activity.
Mining supplies inventory is recorded at the lower of cost or net
realizable value. Supplies inventory includes consumables and spare
parts maintained at the Diavik Diamond Mine site and at the Company's
sorting and distribution facility locations.
Net realizable value is the estimated selling price in the ordinary
course of business, less estimated costs of completion and costs of
selling the final product. In order to determine net realizable value,
the carrying amount of obsolete and slow moving items is written down
on a basis of an estimate of their future use or realization. A
provision for obsolescence is made when the carrying amount is higher
than net realizable value.
(f)Exploration, evaluation and development expenditures
Exploration and evaluation activities include: acquisition of rights to
explore; topographical, geological, geochemical and geophysical
studies; exploratory drilling; trenching and sampling; and activities
involved in evaluating the technical feasibility and commercial
viability of extracting mineral resources. Capitalized exploration and
evaluation expenditures are recorded as a component of property, plant
and equipment. Exploration and evaluation assets are no longer
classified as such when the technical feasibility and commercial
viability of extracting a mineral resource are demonstrable. Before
reclassification, exploration and evaluation assets are assessed for
impairment. Recognized exploration and evaluation assets will be
assessed for impairment when the facts and circumstances suggest that
the carrying amount may exceed its recoverable amount.
Drilling and related costs are capitalized for an ore body where proven
and probable reserves exist and the activities are directed at either
(a) obtaining additional information on the ore body that is classified
within proven and probable reserves, or (b) converting non-reserve
mineralization to proven and probable reserves and the benefit is
expected to be realized over an extended period of time. All other
drilling and related costs are expensed as incurred.
(g)Property, plant and equipment
Items of property, plant and equipment are measured at cost, less
accumulated depreciation and accumulated impairment losses. The initial
cost of an asset comprises its purchase price and construction cost,
any costs directly attributable to bringing the asset into operation,
including stripping costs incurred in open pit mining before production
commences, the initial estimate of the rehabilitation obligation, and
for qualifying assets, borrowing costs. The purchase price or
construction cost is the aggregate amount paid and the fair value of
any other consideration given to acquire the asset. Also included
within property, plant and equipment is the capitalized value of
finance leases.
When parts of an item of property, plant and equipment have different
useful lives, the parts are accounted for as separate items (major
components) of property, plant and equipment.
Gains and losses on disposal of an item of property, plant and equipment
are determined by comparing the proceeds from the disposal with the
carrying amount of property, plant and equipment and are recognized
within cost of sales and selling, general and administrative expenses.
(i)DEPRECIATION
Depreciation commences when the asset is available for use. Depreciation
is charged so as to write off the depreciable amount of the asset to
its residual value over its estimated useful life, using a method that
reflects the pattern in which the asset's future economic benefits are
expected to be consumed by the Company. Depreciation methods, useful
lives and residual values are reviewed, and adjusted if appropriate, at
each reporting date.
The unit-of-production method is applied to a substantial portion of
Diavik Diamond Mine property, plant and equipment, and, depending on
the asset, is based on carats of diamonds recovered during the period
relative to the estimated proven and probable ore reserves of the ore
deposit being mined, or to the total ore deposit. Other plant, property
and equipment are depreciated using the straight-line method over the
estimated useful lives of the related assets, for the current and
comparative periods, which are as follows:
Asset Estimated useful life (years)
Buildings 10-40
Machinery and mobile equipment 3-10
Computer equipment and software 3
Furniture, fixtures and equipment 2-10
Leasehold and building improvements Up to 20
Amortization for mine related assets was charged to mineral properties
during the pre-commercial production stage.
Upon the disposition of an asset, the accumulated depreciation and
accumulated impairment losses are deducted from the original cost, and
any gain or loss is reflected in current net profit or loss.
Depreciation methods, useful lives and residual values are reviewed at
each financial year end and adjusted if appropriate. The impact of
changes to the estimated useful lives or residual values is accounted
for prospectively.
(ii)STRIPPING COSTS
Mining costs associated with stripping activities in an open pit mine
are expensed unless the stripping activity can be shown to represent a
betterment to the mineral property, in which case the stripping costs
would be capitalized and included in deferred mineral property costs
within mining assets. Stripping costs incurred during the production
phase of an open pit mine are variable production costs that are
included as a component of inventory to be recognized as a component of
cost of sales in the same period as the sale of inventory.
(iii)MAJOR MAINTENANCE AND REPAIRS
Expenditure on major maintenance refits or repairs comprises the cost of
replacement assets or parts of assets and overhaul costs. When an
asset, or part of an asset that was separately depreciated, is replaced
and it is probable that future economic benefits associated with the
new asset will flow to the Company through an extended life, the
expenditure is capitalized. The unamortized value of the existing asset
or part of the existing asset that is being replaced is expensed. Where
part of the existing asset was not separately considered as a
component, the replacement value is used to estimate the carrying
amount of the replaced assets, which is immediately written off. All
other day-to-day maintenance costs are expensed as incurred.
(h)Intangible assets
Intangible assets acquired separately are measured on initial
recognition at cost, which comprises its purchase price plus any
directly attributable cost of preparing the asset for its intended use.
The cost of intangible assets acquired in a business combination is
measured at fair value as at the date of acquisition.
Intangible assets with indefinite useful lives are not amortized after
initial recognition and are tested for impairment annually or more
frequently if events or changes in circumstances indicate that the
asset is impaired. HarryWinston's trademark and drawings are
considered to have an indefinite life because it is expected that these
assets will contribute to net cash inflows indefinitely. For purposes
of impairment testing, trademark and drawings are tested for
recoverability individually. The Company maintains a program to protect
its trademark from unauthorized use by third parties. The Harry Winston
drawings are very closely related with the brand and have an enduring
life expectancy. The archive of drawings reflects unique designs for
jewelry and watches that form the basis for newly inspired jewelry and
watch designs that are exclusive to Harry Winston and attract its
clientele.
Following initial recognition, intangible assets with finite useful
lives are carried at cost less any accumulated amortization and any
accumulated impairment losses. Intangible assets with finite useful
lives are amortized on a straight-line basis over their useful lives
and recognized in profit or loss as follows:
Asset Estimated useful life (years)
Wholesale distribution network 10
The amortization methods and estimated useful lives of intangible assets
are reviewed annually and adjusted if appropriate.
(i)Other non-current assets
Other non-current assets include depreciable assets amortized over a
period not exceeding ten years.
(j)Financial instruments
From time to time, the Company may use a limited number of derivative
financial instruments to manage its foreign currency and interest rate
exposure. For a derivative to qualify as a hedge at inception and
throughout the hedged period, the Company formally documents the nature
and relationships between the hedging instruments and hedgeditems, as
well as its risk-management objectives, strategies for undertaking the
various hedge transactions andmethod of assessing hedge effectiveness.
Financial instruments qualifying for hedge accounting must maintain a
specified levelof effectiveness between the hedge instrument and the
item being hedged, both at inception and throughout the hedged period.
Gains and losses resulting from any ineffectiveness in a hedging
relationship must be recognized immediately in net profit or loss.
(k)Provisions
Provisions represent obligations to the Company for which the amount or
timing is uncertain. Provisions are recognized when (a) the Company has
a present obligation (legal or constructive) as a result of a past
event, (b) it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation, and (c) a
reliable estimate can be made of the amount of the obligation. The
expense relating to any provision is included in net profit or loss. If
the effect of the time value of money is material, provisions are
discounted using a current pre-tax rate that reflects, where
appropriate, the risks specific to the obligation. Where discounting is
used, the increase in the provision due to the passage of time is
recognized as a finance cost in net profit or loss.
Mine rehabilitation and site restoration provision:
The Company records the present value of estimated costs of legal and
constructive obligations required to restore operating locations in the
period in which the obligation is incurred. The nature of these
restoration activities includes dismantling and removing structures,
rehabilitating mines and tailings dams, dismantling operating
facilities, closure of plant and waste sites, and restoration,
reclamation and re-vegetation of affected areas.
The obligations generally arise when the asset is installed or the
ground/environment is disturbed at the production location. When the
liability is initially recognized, the present value of the estimated
cost is capitalized by increasing the carrying amount of the related
assets. Over time, the discounted liability is increased/decreased for
the change in present value based on the discount rates that reflect
current market assessments and the risks specific to the liability.
Additional disturbances or changes in rehabilitation costs, including
re-measurement from changes in the discount rate, are recognized as
additions or charges to the corresponding assets and rehabilitation
liability when they occur. The periodic unwinding of the discount is
recognized in net profit or loss as a finance cost.
(l)Foreign currency
Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are
translated to US dollars at exchange rates in effect at the balance
sheet date, and non-monetary assets and liabilities are translated at
rates of exchange in effect when the assets were acquired or
obligations incurred. Revenues and expenses are translated at rates in
effect at the time of the transactions. Foreign exchange gains and
losses are included in net profit or loss.
For certain subsidiaries of the Company where the functional currency is
not the US dollar, the assets and liabilities of these subsidiaries are
translated at the rate of exchange in effect at the reporting date.
Sales and expenses are translated at the rate of exchange in effect at
the time of the transactions. Foreign exchange gains and losses are
accumulated in other comprehensive income under shareholders' equity.
When a foreign operation is disposed of, in part or in full, the
relevant amount in the foreign exchange reserve account is reclassified
to net profit or loss as part of profit or loss on disposal.
(m)Income taxes
Current and deferred taxes
Income tax expense comprises current and deferred tax and is recognized
in net profit or loss except to the extent that it relates to items
recognized directly in equity, in which case it is recognized in equity
or in other comprehensive income.
Current tax expense is the expected tax payable on the taxable income
for the year, using tax rates enacted or substantively enacted at the
reporting date, and any adjustment to tax payable in respect of
previous years. Deferred tax expense is recognized in respect of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
taxation purposes. Deferred tax expense is measured at the tax rates
that are expected to be applied to temporary differences when they
reverse, based on the laws that have been enacted or substantively
enacted by the reporting date.
A deferred tax asset is recognized to the extent that it is probable
that future taxable profits will be available against which the
temporary difference can be utilized. Deferred tax assets are reviewed
at each reporting date and are reduced to the extent that it is
probable that the related tax benefit will not be realized.
Deferred income and mining tax assets and deferred income and mining tax
liabilities are offset, if a legally enforceable right exists to offset
current tax assets against current income tax liabilities and the
deferred income taxes relate to the same taxable entity and the same
taxation authority.
The Company classifies exchange differences on deferred tax assets or
liabilities in jurisdictions where the functional currency is different
from the currency used for tax purposes as income tax expense.
(n)Stock-based payment transactions
Stock-based compensation
The Company applies the fair value method to all grants of stock
options. The fair value of options granted is estimated at the date of
grant using a Black-Scholes option pricing model incorporating
assumptions regarding risk-free interest rates, dividend yield,
volatility factor of the expected market price of the Company's stock,
and a weighted average expected life of the options. When option awards
vest in installments over the vesting period, each installment is
accounted for as a separate arrangement. The estimated fair value of
the options is recorded as an expense with an offsetting credit to
shareholders' equity. Any consideration received on amounts
attributable to stock options is credited to share capital.
Restricted and Deferred Share UnitPlans
The Restricted and Deferred Share Unit ("RSU" and "DSU") Plans are full
value phantom shares that mirror the value of HarryWinston Diamond
Corporation's publicly traded common shares. Grants under the RSU Plan
are on a discretionary basis to employees of the Company subject to
Board of Directors approval. Under the prior RSU Plan, each RSU grant
vests on the third anniversary of the grant date. Under the 2010 RSU
Plan, each RSU grant vests equally over a three-year period. Vesting
under both RSU Plans is subject to special rules for death, disability
and change in control. Grants under the DSU Plan are awarded to
non-executive directors of the Company. Each DSU grant vests
immediately on the grant date. The expenses related to the RSUs and
DSUs are accrued based on fair value. When a share-based payment award
vests in installments over the vesting period, each installment is
accounted for as a separate arrangement. These awards are accounted for
as liabilities with the value of these liabilities being remeasured at
each reporting date based on changes in the fair value of the awards,
and at settlement date. Any changes in the fair value of the liability
are recognized as employee benefit plan expense in net profit or loss.
(o)Employee benefit plans
The Company operates defined benefit pension plans, which require
contributions to be made to separately administered funds. The cost of
providing benefits under the defined benefit plans is determined
separately using the projected unit credit valuation method by
qualified actuaries. Actuarial gains and losses are recognized
immediately in other comprehensive income.
The defined benefit asset or liability comprises the present value of
the defined benefit obligation, plus any actuarial gains (less any
losses) not recognized as a result of the treatment above, less past
service cost not yet recognized and less the fair value of plan assets
out of which the obligations are to be settled directly. The value of
any asset is restricted to the sum of any past service cost not yet
recognized and the present value of any economic benefits available in
the form of refunds from the plan or reductions in future contributions
to the plan.
Contributions to defined contribution pension plans are expensed as
incurred.
(p)Segment reporting
A segment is a distinguishable component of the Company that is engaged
either in providing related products or services (business segment) or
in providing products or services within a particular economic
environment (geographical segment), which is subject to risks and
returns that are different from those of other segments. The Company's
primary format for segment reporting is based on business segments.
Each operating segment's operations are reviewed regularly by the
Company's Chief Executive Officer to make decisions about resources to
be allocated to the segment and to assess its performance, and for
which discrete financial information is available.
(q)Operating leases
Minimum rent payments under operating leases, including any rent-free
periodsand/or construction allowances, are recognized on a
straight-line basis over the term of the lease and included in net
profit or loss.
(r)Impairment of non-financial assets
The carrying amounts of the Company's non-financial assets other than
inventory and deferred taxes are reviewed at each reporting date to
determine whether there is any indication of impairment. If any such
indication exists, then the asset's recoverable amount is estimated.
For an intangible asset that has an indefinite life, the recoverable
amount is estimated annually at the same time, or more frequently if
events or changes in circumstances indicate that the asset may be
impaired.
The recoverable amount of an asset is the greater of its fair value less
costs to sell and its value in use. In the absence of a binding sales
agreement, fair value is estimated on the basis of values obtained from
an active market or from recent transactions or on the basis of the
best information available that reflects the amount that the Company
could obtain from the disposal of the asset. Value in use is defined as
the present value of future pre-tax cash flows expected to be derived
from the use of an asset, using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks
specific to the asset. For the purpose of impairment testing, assets
are grouped together into the smallest group of assets that generates
cash inflows from continuing use that are largely independent of the
cash inflows of other assets or groups of assets (the "cash-generating
unit").
An impairment loss is recognized if the carrying amount of an asset or
its cash-generating unit exceeds its estimated recoverable amount.
Impairment losses are recognized in the consolidated statement of
income in those expense categories consistent with the function of the
impaired asset. Impairment losses recognized in respect of
cash-generating units would be allocated to reduce the carrying amounts
of the assets in the unit (group of units) on a pro rata basis.
For property, plant and equipment, an assessment is made at each
reporting date as to whether there is any indication that previously
recognized impairment losses may no longer exist or may have decreased.
If such indication exists, the Company makes an estimate of the
recoverable amount. A previously recognized impairment loss is reversed
only if there has been a change in the estimates used to determine the
asset's recoverable amount since the last impairment loss was
recognized. If this is the case, the carrying amount of the asset is
increased to its recoverable amount. The increased amount cannot exceed
the carrying amount that would have been determined, net of
depreciation, had no impairment loss been recognized for the asset in
prior years. Such reversal is recognized in the consolidated statement
of income.
(s)Basic and diluted earnings per share
Basic earnings per share are calculated by dividing net profit or loss
by the weighted average number of shares outstanding during the period.
Diluted earnings per share are determined using the treasury stock
method to calculate the dilutive effect of options and warrants. The
treasury stock method assumes that the exercise of any "in-the-money"
options with the option proceeds would be used to purchase common
shares at the average market value for the period. Options with an
exercise price higher than the average market value for the period are
not included in the calculation of diluted earnings per share as such
options are not dilutive.
(t)Use of estimates, judgments and assumptions
The preparation of the consolidated financial statements in conformity
with IFRS requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and
reported amounts of assets and liabilities and contingent liabilities
at the date of the consolidated financialstatements, and the reported
amounts of sales and expenses during the reporting period. Estimates
and assumptions are continually evaluated and are based on management's
experience and other factors, including expectations of future events
that are believed to be reasonable under the circumstances. However,
actual outcomes can differ from these estimates. Revisions to
accounting estimates are recognized in the period in which the
estimates are revised and in any future periods affected. Information
about significant areas of estimation uncertainty and critical
judgments in applying accounting policies that have the most
significant effect on the amounts recognized in the consolidated
financial statements is as follows:
Mineral reserves, mineral properties and exploration costs
The estimation of mineral reserves is a subjective process. The Company
estimates its mineral reserves based on information compiled by an
appropriately qualified person. 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
can be revised upward or downward based on the results of future
drilling, testing or production levels, anddiamond prices. Changes in
reserve estimates may impact the carrying value of exploration and
evaluation assets, mineral properties, property, plant and equipment,
mine rehabilitation and site restoration provision, recognition of
deferred tax assets, and depreciation charges. Estimates and
assumptions about future events and circumstances are also used to
determine whether economically viable reserves exist that can lead to
commercial development of an ore body.
Estimated mineral reserves are used in determining the depreciation of
mine-specific assets. This results in a depreciation charge
proportional to the depletion of the anticipated remaining life of mine
production. A units-of-production depreciation method is applied, and
depending on the asset, is based on carats of diamonds recovered during
the period relative to the estimated proven and probable reserves of
the ore deposit being mined or to the total ore deposit. Changes in
estimates are accounted for prospectively.
Impairment of long-lived assets
The Company assesses each cash-generating unit at least annually to
determine whether any indication of impairment exists. Where an
indicator of impairment exists, a formal estimate of the recoverable
amount is made, which is considered to be the higher of the fair value
of an asset less costs to sell and its value in use. These assessments
require the use of estimates and assumptions such as long-term
commodity prices, discount rates, future capital requirements,
exploration potential and operating performance. Financial results as
determined by actual events could differ from those estimated.
Impairment of intangible assets with an indefinite life
The impairment assessment for trademark and drawings requires the use of
estimates and assumptions. Financial results as determined by actual
events could differ from those estimated.
Recovery of deferred tax assets
Judgment is required in determining whether deferred tax assets are
recognized in the consolidated balance sheet. Deferred tax assets,
including those arising from un-utilized tax losses, require management
to assess the likelihood that the Company will generate taxable
earnings in future periods in order to utilize recognized deferred tax
assets. Estimates of future taxable income are based on forecasted
income from operations and the application of existing tax laws in each
jurisdiction. To the extent that future taxable income differs
significantly from estimates, the ability of the Company to realize the
deferred tax assets recorded at the consolidated balance sheet date
could be impacted. Additionally, future changes in tax laws in the
jurisdictions in which the Company operates could limit the ability of
the Company to obtain tax deductions in future periods.
Mine rehabilitation and site restoration provision
The mine rehabilitation and site restoration provision has been provided
by management of the Diavik Diamond Mine and is based on internal
estimates. Assumptions, based on the current economic environment, have
been made which DDMI management believes are a reasonable basis upon
which to estimate the future liability. These estimates are reviewed
regularly by management of the Diavik Diamond Mine to take into account
any material changes to the assumptions. However, actual rehabilitation
costs will ultimately depend upon future costs for the necessary
decommissioning work required, which will reflect market conditions at
the relevant time. Furthermore, the timing of rehabilitation is likely
to depend on when the Diavik Diamond Mine ceases to produce at
economically viable rates. This, in turn, will depend upon a number of
factors including future diamond prices, which are inherently
uncertain.
Commitments and contingencies
The Company has conducted its operations in the ordinary course of
business in accordance with its understanding and interpretation of
applicable tax legislation in the countries where the Company has
operations. The relevant tax authorities could have a different
interpretation of those tax laws that could lead to contingencies or
additional liabilities for the Company. The Company believes that its
tax filing positions as at the balance sheet date are appropriate and
supportable. Should the ultimate tax liability materially differ from
the provision, the Company's effective tax rate and its profit or loss
could be affected positively or negatively in the period in which the
matters are resolved.
(u)Standards issued but not yet effective
The following standards and interpretations have been issued but are not
yet effective and have not been early adopted in these financial
statements.
The IASB has issued a new standard, IFRS 9, "Financial Instruments"
("IFRS 9"), which will ultimately replace IAS 39, "Financial
Instruments: Recognition and Measurement" ("IAS 39"). IFRS 9 provides
guidance on the classification and measurement of financial assets and
financial liabilities. This standard becomes effective for the
Company's fiscal year end beginning February 1, 2015. The Company is
currently assessing the impact of the new standard on its consolidated
financial statements.
IFRS 10, "Consolidated Financial Statements" ("IFRS 10"), was issued by
the IASB on May 12, 2011, and will replace the consolidation
requirements inSIC-12, "Consolidation - Special Purpose Entities" and
IAS 27, "Consolidated and Separate Financial Statements". The new
standard establishes control as the basis for determining which
entities are consolidated in the consolidated financial statements and
provides guidance to assist in the determination of control where it is
difficult to assess. IFRS 10 is effective for the Company's fiscal year
end beginning February 1, 2013, with early adoption permitted. The
Company is currently assessing the impact of IFRS 10 on its
consolidated financial statements.
IFRS 11, "Joint Arrangements" ("IFRS 11"), was issued by the IASB on May
12, 2011 and will replace IAS 31, "Interest in Joint Ventures". The new
standard will apply to the accounting for interests in joint
arrangements where there is joint control. Under IFRS 11, joint
arrangements are classified as either joint ventures or joint
operations. The structure of the joint arrangement will no longer be
the most significant factor in determining whether a joint arrangement
is either a joint venture or a joint operation. Proportionate
consolidations will no longer be allowed and will be replaced by equity
accounting. IFRS 11 is effective for the Company's fiscal year end
beginning February 1, 2013, with early adoption permitted. The Company
is currently assessing the impact of IFRS 11 on its results of
operations and financial position.
IFRS 13, "Fair Value Measurement" ("IFRS 13"), was also issued by the
IASB on May 12, 2011. The new standard makes IFRS consistent with
generally accepted accounting principles in the United States ("US
GAAP") on measuring fair value and related fair value disclosures. The
new standard creates a single source of guidance for fair value
measurements. IFRS 13 is effective for the Company's fiscal year end
beginning February 1, 2013, with early adoption permitted. The Company
is assessing the impact of IFRS 13 on its consolidated financial
statements.
Note 4:
Cash Resources
2012 2011 February 1, 2010
Cash on hand and balances with $ 76,030 $ 107,993 $ 61,449
banks
Short-term investments ((a)) 2,086 700 1,520
Total cash resources $ 78,116 $ 108,693 $ 62,969
((a))Short-term investments are held in overnight deposits and money market
instruments with a maturity of 30 days.
The Company's exposure to interest rate risk and sensitivity analysis is
disclosed in Note 23.
Note 5:
Accounts Receivable
2012 2011 February 1, 2010
Luxury brand trade receivables $ 25,828 $ 20,672 $ 20,306
Mining other receivables 1,923 2,746 3,824
Luxury brand allowance for (841) (630) (532)
doubtful accounts
Total accounts receivable $ 26,910 $ 22,788 $ 23,598
The Company's exposure to interest rate risk and sensitivity analysis is
disclosed in Note 23.
Note 6:
Inventory and Supplies
2012 2011 February 1, 2010
Luxury brand raw materials $ 62,188 $ 50,109 $ 43,139
Mining rough diamond inventory 62,472 30,451 25,318
124,660 80,560 68,457
Luxury brand work-in-progress 45,407 29,904 13,406
Luxury brand merchandise 218,844 226,358 161,104
inventory
Mining supplies inventory 68,916 66,390 68,221
Total inventory and supplies $ 457,827 $ 403,212 $ 311,188
Total inventory and supplies is net of a provision for obsolescence of
$3.1 million ($2.9 million at January 31, 2011). Cost of sales includes
inventory of $418.9 million sold during the year (2011 - $373.6
million), with another $33.1 million of non-inventoried costs (2011 -
$14.1 million).
Note 7:
Other Current Assets
2012 2011 February 1, 2010
Luxury brand prepaid assets $ 10,264 $ 10,916 $ 10,704
Luxury brand other current assets 7,082 6,746 5,175
Mining prepaid assets 28,148 23,655 23,420
Total other current assets $ 45,494 $ 41,317 $ 39,299
Note 8:
Property, Plant and Equipment
MINING SEGMENT
Diavik Mine
equipment Real rehabilitation
and Furniture, property - Assets and site
Mineral leaseholds equipment land and under restoration(
properties((a)) ((b)) and other((c)) building((d)) construction (e)) Total
Cost:
Balance at February 1, $ 250,047 $ 768,515 $ 7,927 $ 35,227 $ 82,135 $ 40,291 $ 1,184,142
2011
Additions - - 1,379 2,450 41,872 13,180 58,881
Disposals (942)
- - - - - (942)
Impairments for the year (13,193)
- - - - - (13,193)
Foreign exchange - - - (100) - - (100)
differences
Transfers and other (520) 100,833 - - (100,833) - (520)
movements
Balance at January 31, $ 249,527 $ 855,213 $ 9,306 $ 37,577 $ 53,471 $ 1,228,268
2012 $ 23,174
Accumulated
depreciation/amortization:
Balance at February 1, $ 149,814 $ 239,883 $ 5,677 $ 8,063 - $ 16,613 $ 420,050
2011 $
Depreciation and 12,254 58,304 351 1,293 - 2,833 75,035
amortization for the year
Disposals - (942) - - - -
(942)
Foreign exchange - - - (21) - -
differences (21)
Balance at January 31, 162,068 297,245 6,028 9,335 - 19,446 494,122
2012
Net book value at January $ 87,459 $ 557,968 $ 3,278 $ 28,242 $ 23,174 $ 34,025 $ 734,146
31, 2012
Real
Diavik property Mine
equipment Furniture, - rehabilitation
Mineral and equipment land and Assets and site
properties leaseholds and other( building under restoration(
((a)) ((b)) (c)) ((d)) construction (e)) Total
Cost:
Balance at February 1, $ 250,415 $ 494,613 $ 7,742 $ 32,468 $ 321,245 $ 32,985 $ 1,139,468
2010
Additions - - 185 1,028 40,646 7,306 49,165
Disposals - (6,222) - - - - (6,222)
Foreign exchange - - - 1,731 - - 1,731
differences
Transfers and other (368) 280,124 - - (279,756) - -
movements
Balance at January 31, $ 250,047 $ $ 7,927 $ 35,227 $ 82,135 $ 40,291 $ 1,184,142
2011 768,515
Accumulated
depreciation/amortization:
Balance at February 1, $ 136,223 $ 196,587 $ 5,319 $ 6,696 $ - $ 11,211 $ 356,036
2010
Depreciation and 13,591 49,282 358 1,086 - 5,402 69,719
amortization for the year
Disposals - (5,986) - - - - (5,986)
Foreign exchange - - - 280 - - 280
differences
Transfers and other - - - - - - -
movements
Balance at January 31, 149,814 239,883 5,677 8,062 - 16,613 420,049
2011
Net book value at January $ 100,233 $ $ 2,250 $ 27,165 $ 82,135 $ 23,678 $ 764,093
31, 2011 528,632
LUXURY BRAND SEGMENT
Real
property
Furniture, -
equipment land and
and other( building Assets under
(c)) ((d)) construction Total
Cost:
Balance at February 1, $ 34,866 $ 85,430 $ 63 $ 120,359
2011
Additions 8,196 1,587 9,898 19,681
Disposals (765) (1,366) - (2,131)
Foreign exchange 727 2,177 - 2,904
differences
Balance at January 31, 43,024 87,828 9,961 140,813
2012
Accumulated
depreciation/amortization:
Balance at February 1, $ 23,879 $ 35,461 $ - $ 59,340
2011
Depreciation and 5,835 6,487 - 12,322
amortization for the year
Disposals (763) (1,358) - (2,121)
Foreign exchange 509 982 - 1,491
differences
Balance at January 31, 29,460 41,572 - 71,032
2012
Net book value at January $ 13,564 $ 46,256 $ 9,961 $ 69,781
31, 2012
Real
property
Furniture, -
equipment land and
and other( building Assets under
(c)) ((d)) construction Total
Cost:
Balance at February 1, $ 29,278 $ 77,244 $ 241 $ 106,763
2010
Additions 2,475 - 4,276 6,751
Disposals (266) - - (266)
Foreign exchange 1,673 5,438 - 7,111
differences
Transfers and other 1,706 2,748 (4,454) -
movements
Balance at January 31, $ 34,866 $ 85,430 $ 63 $ 120,359
2011
Accumulated
depreciation/amortization:
Balance at February 1, $ 18,139 $ 26,347 $ - $ 44,486
2010
Depreciation and 5,049 7,215 - 12,264
amortization for the year
Disposals (263) - - (263)
Foreign exchange 954 1,899 - 2,853
differences
Balance at January 31, 23,879 35,461 - 59,340
2011
Net book value at January $ 10,987 $ 49,969 $ 63 $ 61,019
31, 2011
((a))The Company holds a 40% ownership interest in the Diavik group of
mineral claims, which contains commercially mineable diamond reserves.
DDMI, a subsidiary of Rio Tinto plc, is the operator of the Joint
Venture and holds the remaining 60%interest. The claims are subject to
private royalties, which are in the aggregate 2% of the value of
production.
((b))Diavik equipment and leaseholds are project related assets at the Joint
Venture level.
((c))Furniture, equipment and other includes equipment located at the
Company's diamond sorting facility and at HarryWinston Inc. salons.
((d))Real property is comprised of land and a building that houses the
corporate activities of the Company, and various leasehold improvements
to HarryWinston Inc. salons and corporate offices.
((e))The Joint Venture has an obligation under various agreements (note 22)
to reclaim and restore the lands disturbed by its mining operations.
Depreciation expense for 2012 was $87.4million (2011 - $82.0million).
Note 9:
Diavik Joint Venture
The following represents HWDLP's 40% interest in the Joint Venture at
the period end as at December 31, 2011 and 2010:
2011 2010
Current assets $ 101,454 $ 92,487
Non-current assets 685,590 714,386
Current liabilities 31,745 31,493
Non-current liabilities and 755,298 775,380
participant's account
2011 2010
Expenses net of interest income of $0.1 $ 257,807 $ 205,541
million (2010 - interest income of $0.1
million)((a))( )
Cash flows resulting from (used in) (166,854) (129,851)
operating activities
Cash flows resulting from financing 214,834 168,045
activities
Cash flows resulting from (used in) (43,499) (40,105)
investing activities
((a))The Joint Venture only earns interest income.
HWDLP is contingently liable for DDMI's portion of the liabilities of
the Joint Venture, and to the extent HWDLP's participating interest has
increased because of the failure of DDMI to make a cash contribution
when required, HWDLP would have access to an increased portion of the
assets of the Joint Venture to settle these liabilities. Additional
information on commitments and contingencies related to the Diavik
Joint Venture is found in Note 22.
During fiscal 2012, the Company recognized a non-cash $13.0 million
charge in cost of sales related to the de-recognition of certain
components of the backfill plant (the "Paste Plant") associated with
paste production at the Diavik Diamond Mine. The original mine plan
envisioned the use of blasthole stoping and underhand cut and fill
underground mining methods for the Diavik ore bodies using paste to
preserve underground stability. It is now expected that the higher
velocity and lower cost sub-level retreat mining method, which does not
require paste, will be used for both the A-154 South and A-418
underground ore bodies. As a result, certain components of the Paste
Plant necessary for the production of paste will no longer be required
and accordingly were de-recognized during the year.
Note 10:
Intangible Assets
Wholesale
distribution
Trademark Drawings network Total
Cost:
Balance at February $ 112,995 $ 12,365 $ 5,575 $ 130,935
1, 2011
Additions - - - -
Balance at January 112,995 12,365 5,575 130,935
31, 2012
Accumulated
amortization:
Balance at February $ - $ - $ 3,041 $ 3,041
1, 2011
Amortization for - - 557 557
the year
Balance at January - - 3,598 3,598
31, 2012
Net book value at $ 112,995 $ 12,365 $ 1,977 $ 127,337
January 31, 2012
Wholesale
distribution Store
Trademark Drawings network leases Total
Cost:
Balance at $ 112,995 $ 12,365 $ 5,575 $ 5,639 $ 136,574
February 1,
2010
Additions - - - - -
Balance at 112,995 12,365 5,575 5,639 136,574
January 31,
2011
Accumulated
amortization:
Balance at $ - $ - $ 2,483 $ 4,878 $ 7,361
February 1,
2010
Amortization - - 558 761 1,319
for the year
Balance at - - 3,041 5,639 8,680
January 31,
2011
Net book $ 112,995 $ 12,365 $ 2,534 $ - $ 127,894
value at
January 31,
2011
Trademark and drawings are considered to have an indefinite life because
it is expected that they will contribute to net cash inflows
indefinitely. For purposes of impairment testing, trademark and
drawings are tested for recoverability individually. The Company
maintains a program to protect its trademark from unauthorized use by
third parties. The Harry Winston drawings are closely related with the
brand and have an enduring life expectancy.The archive of drawings
includes unique designs for jewelry and watches that form the basis for
newly inspired product designs that are exclusive to Harry Winston. The
carrying amount of the trademark and drawings was determined to be
lower than its recoverable amount.
The test for impairment for the drawings is to compare the replacement
cost of the drawings to the carrying amount. Replacement cost is based
on the cost the Company would incur to reproduce the drawings.
The test for impairment for the trademark is to compare the recoverable
amount to the carrying amount. To determine the recoverable amount, the
Company uses a fair value less cost to sell ("FVLCS") valuation
premise, which is calculated using a relief-from-royalty approach. This
approach conceptually recognizes that the trademark could be sold
separately, and the purchaser could generate a future income stream
through licensing agreements. Revenue projections are based on the most
recent budget prepared by management. Key assumptions include those
regarding the royalty rates, discount rate and terminal growth rate.
The pre-tax discount rates are based on the weighted average cost of
capital adjusted for specific company and market risk factors.
The key assumptions used in performing the trademark intangible test
were as follows:
2012 2011
Royalty rate - watches 7% 7%
Royalty rate - jewelry 3.5% 3%
Terminal growth rate 3% 3%
Discount rate 12% 12%
Note 11:
Other Non-Current Assets
2012 2011 February 1, 2010
Prepaid pricing discount((a)), net $ 1,680 $ 3,120 $ 4,560
of accumulated amortization of
$10.3 million (2011 -
$8.9 million)
Other assets 3,276 3,398 1,328
Refundable security deposits 9,209 8,003 9,741
$ 14,165 $ 14,521 $ 15,629
((a))Prepaid pricing discount represents funds paid to Tiffany & Co. by the
Company to amend its rough diamond supply agreement. The amendment
eliminated all pricing discounts on future sales. The payment has been
deferred and is being amortized on a straight-line basis over the
remaining life of the contract.
Note 12:
Trade and Other Payables
2012 2011 February 1, 2010
Trade and other payables $ 41,031 $ 54,732 $ 25,949
Accrued expenses 17,835 17,635 15,837
Customer deposits 14,070 38,752 9,175
Payables and accruals at the 31,745 28,432 24,932
Diavik Joint Venture
$ 104,681 $ 139,551 $ 75,893
Note 13:
Employee Benefit Plans
The employee benefit obligation reflected in the consolidated balance
sheet is as follows:
2012 2011 February 1, 2010
Defined benefit plan $ 11,381 $ 9,009 $ 7,104
obligation - Harry Winston
luxury brand segment (a)
Defined contribution plan 88 80 70
obligation - Harry Winston
luxury brand segment (b)
Deferred compensation plan - - 9,207
obligation - Harry Winston
luxury brand segment (b)
Post-retirement benefit plan 289 - -
- Diavik Diamond Mine (c)
RSU and DSU plans (note 17) 3,731 2,515 1,801
Total employee benefit plan $ 15,489 $ 11,604 $ 18,182
obligation
2012 2011 February 1, 2010
Non-current $ 9,463 $ 7,287 $ 6,898
Current 6,026 4,317 11,284
Total employee benefit plan $ 15,489 $ 11,604 $ 18,182
obligation
The amounts recognized in the consolidated income statement in respect
of employee benefit plans are as follows:
2012 2011
Defined benefit pension plan - Harry Winston $ 2,074 $ 1,907
luxury brand segment (a)
Defined contribution plan - Harry Winston 1,065 783
luxury brand segment (b)
Defined contribution plan - Harry Winston 207 218
mining segment (b)
Defined contribution plan - Diavik Diamond Mine 2,081 1,061
(b)
Post-retirement benefit plan - Diavik Diamond 299 -
Mine (c)
RSU and DSU plans (note 17) 2,169 936
$ 7,595 $ 4,905
Cash settled share-based payment recovery 2,091 1,338
Total employee benefit plan expense $ 9,686 $ 6,243
Employee benefit plan expense has been included in the consolidated
income statement as follows:
2012 2011
Cost of sales $ 3,135 $ 1,717
Selling, general and administrative expenses 6,551 4,526
$ 9,686 $ 6,243
(a)Defined benefit pension plan
The luxury brand segment sponsors three separate defined benefit pension
plans covering employees in the United States, Japan and Switzerland.
The principal pension plan is the HarryWinston Employee Retirement Plan for HarryWinston Inc. US employees. The benefits for the HarryWinston
Inc. plan are based on years of service and the employee's
compensation. InApril2001, HarryWinston Inc. amended its defined
benefit pension plan. Theamendment froze plan participation effective
April30, 2001. HarryWinston Inc.'s funding policy for the US plan is
to contribute amounts to the plan sufficient to meet the minimum
funding requirements set forth in the Employee Retirement Income Security Act of 1974. Plan assets consist primarily of fixed income, equity and other
short-term investments. The other two defined benefit pension plans are
sponsored by luxury brand segment subsidiaries HarryWinston Japan,
K.K. and HarryWinston S.A., which converted their previous pension
plan arrangements into defined benefit plans effective February 1,
2007. Pension liabilities for these two non-US plans are funded in
accordance with local laws and regulations.
(i)INFORMATION ABOUT HARRYWINSTON INC.'S US DEFINED BENEFIT PLAN IS AS
FOLLOWS:
2012 2011
ACCRUED BENEFIT OBLIGATION
Balance, beginning of year $ 24,643 $ 20,700
Service costs 1,788 1,646
Interest cost 904 857
Employee contributions 496 372
Actuarial gain 904 1,825
Other net expenses (411) (387)
Benefits paid (1,544) (1,617)
Foreign exchange 690 1,247
Balance, end of year 27,460 24,643
PLAN ASSETS
Fair value, beginning of year 15,656 13,728
Actual return on plan assets (109) 1,355
Employee and employer contributions 1,968 1,556
Other net expenses (411) (387)
Benefits paid (1,112) (1,363)
Foreign exchange 87 745
Fair value, end of year 16,079 15,634
Funded status - plan deficit $ (11,381) $ (9,009)
The following table provides the components of the net periodic pension
costs for the three plans for the years ended January 31:
2012 2011
Service cost $ (1,788) $ (1,646)
Interest cost (904) (857)
Expected return on plan assets 618 663
Amortization of prior service cost - (67)
Total $ (2,074) $ (1,907)
(ii) PLAN ASSETS
US plan assets represented approximately 47% of total luxury brand
segment plan assets at January 31, 2012. The net unfunded status of the
luxury brand segment plans of $11.4 million is comprised of
$4.2million attributed to the US-based HarryWinston Inc. plan,
$5.2million attributed to the HarryWinston Japan, K.K. plan, and $2.0
million attributed to the HarryWinston S.A. plan. The HarryWinston
Japan, K.K. plan is non-funded with a benefit obligation of
$5.2million.
The asset allocation of luxury brand pension assets at January31 was as
follows:
2012 2011
ASSET CATEGORY
Cash equivalents 1% 1%
Equity securities 52% 57%
Fixed income securities 34% 36%
Other 13% 6%
Total 100% 100%
(iii)THE SIGNIFICANT ASSUMPTIONS USED FOR HARRYWINSTON INC.'S US PLAN
ARE AS FOLLOWS:
2012 2011
ACCRUED BENEFIT OBLIGATION
Discount rate - HW Inc. 4.84% 5.24%
Expected long-term rate of return - HW Inc. 7.50% 7.50%
Discount rate - Harry Winston Japan, K.K. 1.46% 1.58%
Expected long-term rate of return - Harry Winston -% -%
Japan, K.K.
Discount rate - Harry Winston S.A. 2.50% 2.75%
Expected long-term rate of return - Harry Winston S.A. 3.50% 3.75%
BENEFIT COSTS FOR THE YEAR
Discount rate - HW Inc. 5.24% 5.56%
Expected long-term rate of return on plan assets - HW 7.50% 7.50%
Inc.
Rate of compensation increase - HW Inc. -% -%
Discount rate - Harry Winston Japan, K.K. 1.58% 1.84%
Expected long-term rate of return on plan assets - -% -%
Harry Winston Japan, K.K.
Rate of compensation increase - Harry Winston Japan, 4.21% 4.36%
K.K.
Discount rate - Harry Winston S.A. 2.50% 2.75%
Expected long-term rate of return on plan assets - 3.50% 3.75%
Harry Winston S.A.
Rate of compensation increase - Harry Winston S.A. 3.00% 3.00%
(b)Defined contribution plan
HarryWinston Inc. has a defined contribution 401(k) plan covering
substantially all employees in the United States. For the fiscal years
ended January 31, 2012 and 2011, HarryWinston Inc. elected to increase
the employer-matching contribution to 100% of the first 6% of the
employee's salary from 50% in fiscal 2007 and prior. Employees must
meet minimum service requirements and be employed on December 31 of
each year in order to receive this matching contribution.
The Joint Venture sponsors a defined contribution plan whereby
theemployer contributes 6% of the employee's salary.
HarryWinston Diamond Corporation sponsors a defined contribution plan
for Canadian employees whereby the employer contributes to a maximum of
6% of the employee's salary to the maximum contribution limit under
Canada's Income Tax Act. The total defined contribution plan liability at January 31, 2012 was
$0.1 million ($0.1 million at January 31, 2011).
(c)Post-retirement benefit plan
The Joint Venture provides non-pension post-retirement benefits to
retired employees. The post-retirement benefit plan liability was $0.3
million at January 31, 2012 ($nil at January 31, 2011).
Note 14:
Income Taxes
The deferred income tax asset of the Company is $77.2 million, of which
$50.4million relates to the luxury brand segment. Included in the
deferred tax asset is $36.9 million that has been recorded to recognize
the benefit of $125.0 million of net operating losses that the Company
has available for carry forward to shelter income taxes for future
years. Certain net operating losses are scheduled to expire between
2013 and 2032.
The deferred income tax liability of the Company is $325.0 million of
which $100.6million relates to the luxury brand segment. The luxury
brand segment deferred income tax liabilities include $52.1 million
from a previous purchase price allocation. The Company's deferred
income tax asset and liability accounts are revalued to take into
consideration the change in the Canadian dollar compared to the
USdollar and the unrealized foreign exchange gain or loss is recorded
as part of deferred tax expenses for each year.
(a) The income tax provision consists of the following:
2012 2011
CURRENT TAX EXPENSE
Current period $ 18,326 $ (8,616)
Adjustment for prior period (3,016) (121)
Total current tax expense 15,310 (8,737)
DEFERRRED TAX EXPENSE
Origination and reversal of temporary differences (45) 17,315
Change in unrecognized deductible temporary (525) (718)
differences
Current year losses for which no deferred tax asset 1,489 894
was recognized
Recognition of previously unrecognized tax losses (2,007) (674)
Total deferred tax expense (1,088) 16,817
Total income tax expenses $ 14,222 $ 8,080
(b)The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at
January 31, 2012 and 2011 are as follows:
2012 2011
DEFERRED INCOME TAX ASSETS:
Net operating loss carryforwards $ 36,935 $ 27,046
Property, plant and equipment 4,625 3,449
Future site restoration costs 23,161 16,450
Luxury brand inventory 6,211 6,169
Deferred mineral property costs 251 283
Other deferred income tax assets 5,977 6,641
Deferred income tax assets 77,160 60,038
DEFERRED INCOME TAX LIABILITIES:
Deferred mineral property costs (29,339) (31,781)
Property, plant and equipment (160,616) (159,936)
Future site restoration costs (12,078) (7,059)
Luxury brand inventory (47,927) (34,630)
Intangible assets (52,081) (52,365)
Other deferred income tax liabilities (22,994) (24,097)
Deferred income tax liabilities (325,035) (309,868)
Deferred income tax liabilities, net $ (247,875) $ (249,830)
Movement in net deferred tax liabilities:
2012 2011
Balance at the beginning of the year $ (249,831) $ (195,902)
Recognized in profit (loss) 1,088 (16,817)
Recognized in accumulated other comprehensive 606 (647)
income
Acquired on business combination - (36,464)
Other 262 -
Balance at the end of the year $ (247,875) $ (249,830)
(c) Unrecognized deferred tax assets and liabilities:
Deferred tax assets have not been recognized in respect of the following
items:
2012 2011
Tax losses $ 6,460 $ 5,121
Deductible temporary differences 166 691
Total $ 6,626 $ 5,812
The tax losses not recognized expire as per the amount and years noted
below. The deductible temporary differences do not expire under current
tax legislation. Deferred tax assets have not been recognized in
respect of these items because it is not probable that future taxable
profit will be available against which the Company can utilize the
benefits therefrom.
The following table summarizes the Company's non-capital losses as at
January 31, 2012 that may be applied against future taxable profit:
Jurisdiction Type Amount Expiry Date
Luxemburg Net operating losses $ 1,918 No expiry
France Net operating losses 5,837 No expiry
United Kingdom Net operating losses 9,021 No expiry
China Net operating losses 5,840 2013 - 2017
Taiwan Net operating losses 952 2022
Singapore Net operating losses 521 No expiry
The deductible temporary differences associated with investments in
subsidiaries and joint ventures, for which a deferred tax asset has not
been recognized, aggregate to $67.2 million (2011 - $71.2 million).
(d)The difference between the amount of the reported consolidated
income tax provision and the amount computed by multiplying the
earnings (loss) before income taxes by the statutory tax rate of 28%
(2011 - 29%) is a result of the following:
2012 2011
Expected income tax expense $ 11,106 $ 16,030
Non-deductible (non-taxable) items 592 133
Impact of foreign exchange 1,153 (8,278)
Northwest Territories mining royalty (net of income 3,242 4,265
tax relief)
Earnings subject to tax different than statutory 1,687 918
rate
Assessments and adjustments (2,622) (2,254)
Current year losses for which no deferred tax asset 1,489 894
was recognized
Recognition of previously unrecognized tax losses (2,007) (674)
Change in unrecognized temporary differences (525) (718)
Other 107 (2,236)
Recorded income tax expense (recovery) $ 14,222 $ 8,080
(e)The mining segment has net operating loss carryforwards for
Canadian income tax purposes of approximately $1.2million and $1.9
million for other foreign jurisdictions' tax purposes. The luxury brand
segment has net operating loss carryforwards for US income tax purposes
of $95.7 million and $26.2 million for other foreign jurisdictions' tax
purposes.
Note 15:
Interest-Bearing Loans and Borrowings
2012 2011
Mining segment credit facilities $ 48,460 $ 47,895
Mining segment promissory note - 70,000
Harry Winston Inc. credit facilities 217,071 181,715
First mortgage on real property 6,342 7,048
Bank advances 27,850 22,902
Finance leases - 171
Total interest-bearing loans and borrowings 299,723 329,731
Less current portion (29,238) (94,215)
$ 270,485 $ 235,516
Face
Carrying value
amount at
Nominal at January
interest Date of January 31,
Currency rate maturity 31, 2012 2012 Borrower
Secured
bank loan March 31, $200.5 $200.5
(b)(i) US 3.75% 2013 million million Harry Winston Inc.
Secured
bank loan April 22, $3.8 $3.8
(b)(ii) CHF 3.15% 2013 million million Harry Winston S.A.
Secured
bank loan January $12.8 $12.8
(b)(ii) CHF 3.55% 31, 2033 million million Harry Winston S.A.
Harry Winston Diamond
Secured Corporation and
bank loan June 24, $50.0 $50.0 Harry Winston Diamond
(a)(i) US 4.60% 2013 million million Mines Ltd.
First
mortgage
on real
property September $6.3 $6.3
(a)(iii) CDN 7.98% 1, 2018 million million 6019838 Canada Inc.
Secured
bank Harry Winston Diamond
advance Due on $4.3 $4.3 (India) Private
(d) US 12.00% demand million million Limited
Secured
bank
advance February $7.5 $7.5 Harry Winston Japan,
(d) YEN 2.50% 22, 2012 million million K.K.
Unsecured
bank
advance February $7.0 $7.0 Harry Winston Japan,
(d) YEN 2.98% 27, 2012 million million K.K.
Unsecured
bank
advance February $7.7 $7.7 Harry Winston Japan,
(d) YEN 2.98% 29, 2012 million million K.K.
Unsecured
bank
advance October $1.3 $1.3 Harry Winston Japan,
(d) YEN 2.00% 31, 2012 million million K.K.
(a)Mining segment credit facilities
(i) The mining segment maintains a senior secured revolving credit
facility with Standard Chartered Bank that was increased from
$100.0 million to $125.0 million on February 28, 2011. The
facility has an initial maturity date of June 24, 2013 with two
one-year extensions at the Company's option. There are no
scheduled repayments required before maturity. The facility is
available to the Company and Harry Winston Diamond Mines Ltd.
for general corporate purposes. Borrowings bear an interest
margin of 3.5% above the higher of LIBOR or lender cost of
funds. The Company is required to comply with financial
covenants at the mining segment level customary for a financing
of this nature, with change in control provisions at the Company
and Diavik Diamond Mines level. These provisions include
consolidated minimum tangible net worth, maximum mining segment
debt to equity ratio, maximum mining segment debt to EBITDA
ratio and minimum interest coverage ratio. At January 31, 2012,
the Company had $50.0 million outstanding on its mining segment
senior secured revolving credit facility.
(ii) On August 25, 2010, the Company issued a promissory note in the
amount of $70.0 million, maturing on August 25, 2011, as part of
the consideration for reacquiring its 9% indirect interest in
the Diavik Joint Venture from Kinross. The note bears interest
at a rate of 5% per annum and can be paid in cash. On August 25,
2011, the Company paid the $70.0 million promissory note plus
accrued interest to Kinross from cash on hand.
(iii) The Company's first mortgage on real property has scheduled
principal payments of approximately $0.2 million quarterly, and
may be prepaid at any time.
(b)Luxury brand segment credit facilities
(i) Harry Winston Inc. maintains a credit agreement with a syndicate
of banks for a $250.0 million five-year revolving credit
facility. In addition, Harry Winston Inc. may increase the credit
facility by an additional $50.0 million to $300.0 million during
the term of the facility. There are no scheduled repayments
required before maturity on March 31, 2013. The credit facility
is supported by a $20.0 million limited guarantee provided by
Harry Winston Diamond Corporation. The amount available under
this facility is subject to a borrowing base formula based on
certain assets of Harry Winston Inc.
The credit agreement contains affirmative and negative
non-financial and financial covenants, which apply to the luxury
brand segment. These provisions include consolidated minimum
tangible net worth, minimum coverage of fixed charges, and
leverage ratio limitations on capital expenditures and certain
investments, including the restriction to advance funds to the
parent company. The credit agreement also includes a change of
control provision, which would result in the entire unpaid
principal and all accrued interest of the facility becoming due
immediately upon change of control, as defined. Any material
adverse change, as defined, in the luxury brand segment's
business, assets, liabilities, consolidated financial position or
consolidated results of operations constitutes an event of
default under the agreement.
The luxury brand segment has pledged 100% of Harry Winston Inc.'s
common stock and 66⅔% of the common stock of its foreign
subsidiaries to the bank to secure the loan. Inventory, accounts
receivable and the trademark of Harry Winston Inc. are pledged as
collateral to secure the borrowings of Harry Winston Inc. In
addition, an assignment of proceeds on insurance covering pledged
collateral was made.
Loans under the credit facility can be either fixed rate loans or
revolving line of credit loans. The fixed rate loans will bear
interest within a range of 1.50% to 2.25% above LIBOR, based upon
a pricing grid determined by the fixed charge coverage ratio.
Interest under this option will be determined for periods of
either one, two, three or six months. The revolving line of
credit loans will bear interest within a range of 0.50% to 0.75%
above the bank's prime rate based upon a pricing grid determined
by the fixed charge coverage ratio as well.
(ii) Harry Winston S.A. maintains a 25-year loan agreement for CHF
17.5 million ($18.9 million) used to finance the construction of
the Company's watch factory in Geneva, Switzerland. The loan
agreement is comprised of a CHF 3.5 million ($3.8 million) loan
and a CHF 14.0 million ($15.1 million) loan. The bank has a
secured interest in the factory building.
(c)Required principal repayments
2013 $ 29,239
2014 255,738
2015 1,515
2016 1,587
2017 1,664
Thereafter 11,522
(d)Bank advances
The Company has available a $45.0million (utilization in either US
dollars or Euros) revolving financing facility for inventory and
receivables funding in connection with marketing activities through its
Belgian subsidiary, HarryWinston Diamond International N.V., and its
Indian subsidiary, HarryWinston Diamond (India) Private Limited.
Borrowings under the Belgian facility bear interest at the bank's base
rate plus 1.5%. Borrowings under the Indian facility bear an interest
rate of 12.0%. At January 31, 2012, $4.3 million was drawn under the
Company's revolving financing facility relating to HarryWinston
Diamond (India) Private Limited and $nil was drawn by HarryWinston
Diamond International N.V. The facility is guaranteed by HarryWinston
Diamond Corporation.
HarryWinston Japan, K.K., maintains unsecured credit agreements with
three banks, each amounting to ¥1,250 million ($16.1million).
HarryWinston Japan, K.K., also maintains a secured credit agreement
amounting to ¥575million ($7.5million). This facility is secured by
inventory owned by HarryWinston Japan, K.K.
Note 16:
Provisions
(a)Future site restoration costs
2012 2011
At February 1, 2011 and 2010 $ 50,130 $ 43,691
Revision of previous estimates 13,179 4,435
Accretion of provision 1,936 2,004
At January 31, 2012 and 2011 $ 65,245 $ 50,130
The Joint Venture has an obligation under various agreements (Note 22)
to reclaim and restore the lands disturbed by its mining operations.
The Company's share of the total undiscounted amount of the future cash
flows that will be required to settle the obligation incurred at
January31,2012 is estimated to be $84.7million, of which
approximately $23.7million is expected to occur at the end of the mine
life. The revision of previous estimates in fiscal 2012 is based on
revised expectations of reclamation activity costs and changes in
estimated reclamation timelines. Theanticipated cash flows relating to
the obligation at the time of the obligation have been discounted at an
annualized rate of 1.5%.
(b)Provisions for litigation claims
By their nature, contingencies will only be resolved when one or more
future events occur or fail to occur. The assessment of contingencies
inherently involves the exercise of significant judgment and estimates
of the outcome of future events. The Company is subject to various
litigation actions, whose outcome could have an impact on the Company's
results should it be required to make payments to the plaintiffs. Legal
advisors assess the potential outcome of the litigation and the Company
establishes provisions for future disbursements as required. At January
31, 2012, the Company does not have any material provisions for
litigation claims.
Note 17:
Share Capital
(a)Authorized
Unlimited common shares without par value.
(b)Issued
Number of shares Amount
Balance, January 31, 2010 76,588,593 $ 426,593
SHARES ISSUED FOR:
Issued to Kinross 7,142,857 69,737
Exercise of options 428,401 5,799
Balance, January 31, 2011 84,159,851 502,129
SHARES ISSUED FOR:
Exercise of options 714,930 5,846
Balance, January 31, 2012 84,874,781 $ 507,975
(c)Stock options
Under the Employee Stock Option Plan, amended and approved by the
shareholders on June 4, 2008, the Company may grant options for up to
6,000,000 shares of common stock. Options may be granted to any
director, officer, employee or consultant of the Company or any of its
affiliates. Options granted to directors vest immediately and options
granted to officers, employees or consultants vestover three to four
years. The maximum term of an option is ten years. Thenumber of shares
reserved for issuance to any one optionee pursuant to options cannot
exceed 2% of the issued and outstanding common shares of the Company at
the date of grant of such options.
The exercise price of each option cannot be less than the fair market
value of the shares on the last trading day preceding the date of
grant.
The Company's shares are primarily traded on a Canadian dollar based
exchange, and accordingly stock option information is presented in
Canadian dollars, with conversion to US dollars at the average exchange
rate for the year.
Compensation expense for stock options was $2.1million for fiscal 2012
(2011 - $1.3million) and is presented as a component of both cost of
sales and selling, general and administrative expenses. The amount
credited to share capital for the exercise of the options is the sum of
(a) the cash proceeds received and (b) the amount debited to
contributed surplus upon exercise of stock options by optionees (2012 -
$0.6million; 2011 - $2.8million).
Changes in share options outstanding are as follows:
2012 2011
Weighted Weighted
average average
Options exercise Options exercise
price price
000s CDN $ US $ 000s CDN $ US $
Outstanding, 2,868 $ 12.58 $ 12.26 3,234 $ 12.89 $ 7.61
beginning of
year
Granted 350 16.70 17.44 300 12.35 11.78
Exercised (715) 7.26 7.43 (428) 7.14 6.92
Expired (102) 25.54 26.14 (238) 26.34 25.79
Outstanding, 2,401 $ 14.21 $ 14.34 2,868 $ 12.58 $ 12.26
end of year
Exercisable options totaled 1.9 million at January 31, 2012 (2.2 million
at January 31, 2011).
The following summarizes information about stock options outstanding at
January 31, 2012:
Options Options
outstanding exercisable
Weighted
average
remaining Weighted Weighted
Number contractual average Number average
Range of outstanding life in exercise exercisable exercise
exercise years price price
prices
CDN $ 000s CDN $ 000s CDN $
$3.78 1,015 7.2 $ 3.78 1,016 $ 3.78
12.35-16.70 650 6.8 14.69 100 12.35
23.35-29.25 600 0.6 25.21 600 25.21
41.45 136 2.2 41.45 136 41.45
2,401 $ 14.21 1,852 $ 13.94
(d)Stock-based compensation
The Company applies the fair value method to all grants of stock
options.
The fair value of options granted during the years ended January 31,
2012 and 2011 was estimated using a Black-Scholes option pricing model
with the following weighted average assumptions:
2012 2011
Risk-free interest rate 2.41% 2.13%
Dividend yield 0.00% 0.00%
Volatility factor 50.00% 50.00%
Expected life of the options 3.5 years 5.9 years
Average fair value per option, CDN $ 6.51 $ 5.90
Average fair value per option, US $ 6.80 $ 5.63
Expected volatility is estimated by considering historic average share
price volatility based on the average expected life of the options.
(e)RSU and DSU Plans
RSU Number of units
Balance, January 31, 2010 45,880
Awards and payouts during the year (net)
RSU awards 145,880
RSU payouts (35,814)
Balance, January 31, 2011 155,946
Awards and payouts during the year (net)
RSU awards 66,991
RSU payouts (46,963)
Balance, January 31, 2012 175,974
DSU Number of units
Balance, January 31, 2010 159,475
Awards and payouts during the year (net)
DSU awards 33,739
DSU payouts -
Balance, January 31, 2011 193,214
Awards and payouts during the year (net)
DSU awards 38,781
DSU payouts (17,127)
Balance, January 31, 2012 214,868
During the fiscal year, the Company granted 66,931 RSUs (net of
forfeitures) and 38,781 DSUs under an employee and director incentive
compensation program, respectively. The RSU and DSU Plans are full
value phantom shares that mirror the value of HarryWinston Diamond
Corporation's publicly traded common shares.
Grants under the RSU Plan are on a discretionary basis to employees of
the Company subject to Board of Directors approval. The RSUs granted
vest one-third on March 31 and one-third on each anniversary
thereafter. The vesting of grants of RSUs is subject to special rules
for a change in control, death and disability. The Company shall pay
out cash on the respective vesting dates of RSUs and redemption dates
of DSUs.
Only non-executive directors of the Company are eligible for grants
under the DSU Plan. Each DSU grant vests immediately on the grant date.
The expenses related to the RSUs and DSUs are accrued based on fair
value. This expense is recognized on a straight-line basis over each
vesting period. The Company recognized an expense of $2.2million (2011
- $0.9million) for the year ended January 31, 2012. The total carrying
amount of liabilities for cash settled share-based payment arrangements
is $3.7 million (2011 - $2.5 million). The amounts for obligations and
expense (recovery) for cash settled share-based payment arrangements
have been grouped with Employee Benefit Plans in Note 13 for
presentation purposes.
Note 18:
Segmented Information
The Company operates in three segments within the diamond industry -
mining, luxury brand and corporate, for the years ended January 31,
2012 and 2011.
The mining segment consists of the Company's rough diamond business.
This business includes the 40% ownership interest in the Diavik group
of mineral claims and the sale of rough diamonds.
The luxury brand segment consists of the Company's ownership in Harry
Winston Inc. This segment consists of the marketing of fine jewelry and
watches on a worldwide basis.
The corporate segment captures costs not specifically related to
operations of the mining or luxury brand segments.
For the year
ended January Luxury
31, 2012 Mining brand Corporate Total
Sales
North America $ 15,018 $ 133,024 $ - $ 148,042
Europe 231,722 94,309 - 326,031
Asia excluding 43,374 103,815 - 147,189
Japan
Japan - 80,781 - 80,781
Total sales 290,114 411,929 - 702,043
Cost of sales
Depreciation 76,052 262 - 76,314
and
amortization
All other 151,899 223,611 136 375,646
costs
Total cost of 227,951 223,873 136 451,960
sales
Gross margin 62,163 188,056 (136) 250,083
Gross margin (%) 21.4% 45.7% -% 35.6%
Selling, general
and
administrative
expenses
Selling and 3,412 129,445 - 132,857
related
expenses
Administrative 10,042 39,166 11,487 60,695
expenses
Total selling, 13,454 168,611 11,487 193,552
general and
administrative
expenses
Operating profit
(loss) 48,709 19,445 (11,623) 56,531
Finance expenses (10,787) (5,900) - (16,687)
Exploration
costs (1, 770) - - (1, 770)
Finance and
other income 462 124 - 586
Foreign exchange
gain 834 171 - 1,005
Segmented profit $
(loss) before
income taxes 37,448 $ 13,840 $ (11,623) $ 39,665
Segmented assets
as at January
31, 2012
Canada $ 936,723 $ - $ - $ 936,723
United States - 347,430 116,076 463,506
Other foreign 19,759 210,948 - 230,707
countries
$ 956,482 $ 558,378 $ 116,076 $ 1,630,936
Capital $
expenditures 45,165 $ 19,681 $ - $ 64,846
Other
significant
non-cash items:
Deferred (2,291) 1,486 (283) (1,088)
income tax
expense
(recovery) $ $ $ $
Operating profit (loss) for the year ended January 31, 2012 includes
the following items of expense:
Luxury
Mining Brand Corporate Total
Research and $
development 4,147 $ 2,412 $ - $ 6,559
Operating lease 317 30,269 - 30,586
Employee
compensation
expense 43,500 68,782 4,089 116,371
Depreciation and
amortization 78,760 12,321 558 91,639
For the year
ended January Luxury
31, 2011 Mining brand Corporate Total
Sales
North America $ 10,418 $ 108,500 $ - $ 118,918
Europe 247,677 78,624 - 326,301
Asia excluding 21,059 92,504 - 113,563
Japan
Japan - 65,181 - 65,181
Total sales 279,154 344,809 - 623,963
Cost of sales
Depreciation 60,923 320 - 61,243
and
amortization
All other 144,489 181,729 204 326,422
costs
Total cost of 205,412 182,049 204 387,665
sales
Gross margin 73,742 162,760 (204) 236,298
Gross margin (%) 26.4% 47.2% -% 37.9%
Selling, general
and
administrative
expenses
Selling and 2,786 106,498 - 109,284
related
expenses
Administrative 8,692 41,358 8,616 58,666
expenses
Total selling, 11,478 147,856 8,616 167,950
general and
administrative
expenses
Operating profit
(loss) 62,264 14,904 (8,820) 68,348
Finance expenses (7,136) (6,291) - (13,427)
Exploration
costs (666) - - (666)
Finance and
other income 280 389 - 669
Foreign exchange
gain (loss) (1,644) 2,001 - 357
Segmented profit $
(loss) before
income taxes 53,098 $ 11,003 $ (8,820) $ 55,281
Segmented assets
as at January
31, 2011
Canada $ 954,072 $ - $ - $ 954,072
United States - 331,138 106,767 437,905
Other foreign 25,413 186,185 - 211,598
countries
$ 979,485 $ 517,323 $ 106,767 $ 1,603,575
Capital $
expenditures 41,859 $ 6,751 $ - $ 48,610
Other
significant
non-cash items:
Deferred 12,380 5,060 (623) 16,817
income tax
expense
(recovery) $ $ $ $
Operating profit (loss) for the year ended January 31, 2011 includes
the following items of expense:
Luxury
Mining Brand Corporate Total
Research and $
development 5,165 $ 1,719 $ - $ 6,884
Operating lease 317 21,244 - 21,561
Employee
compensation
expense 38,557 58,786 3,334 100,677
Depreciation and
amortization 63,424 12,264 1,319 77,007
Note 19:
Earnings per Share
The following table presents the calculation of diluted earnings per
share:
2012 2011
NUMERATOR
Net earnings for the year attributable to $ 25,454 $ 41,530
shareholders
DENOMINATOR (000s SHARES)
Weighted average number of shares 84,661 79,858
outstanding
Dilutive effect of employee stock options 871 1,083
85,532 80,941
Note 20:
Related Party Disclosure
(a)Operational information
The Company had the following investments in significant subsidiaries at
January 31, 2012:
Name of company Effective interest Country of
incorporation
Harry Winston Diamond 100% Canada
Mines Ltd.
Harry Winston Diamond 100% Canada
Limited Partnership
Harry Winston Diamond 100% India
(India) Private Limited
Harry Winston Diamond 100% Belgium
International N.V.
Harry Winston Technical 100% Canada
Services Inc.
6019838 Canada Inc. 100% Canada
Harry Winston Inc. 100% US
Harry Winston SARL 100% France
Harry Winston Japan, 100% Japan
K.K.
Harry Winston (UK) 100% UK
Limited
Harry Winston Inc. 100% Taiwan
Taiwan Branch
Harry Winston S.A. 100% Switzerland
Harry Winston (Hong 100% Hong Kong
Kong) Limited
Harry Winston 100% China
Commercial (Beijing)
Co., Ltd
Harry Winston N.A. Pte 100% Singapore
Ltd.
Note 21:
Reclassifications
Certain comparative figures have been reclassified to conform with the
current year's presentation.
Note 22:
Commitments and Guarantees
(a)Environmental agreements
Through negotiations of environmental and other agreements, the Joint
Venture must provide funding for the Environmental Monitoring Advisory
Board. HWDLP anticipates its share of this funding requirement will be
approximately $0.3 million for calendar 2012. Further funding will be
required in future years; however, specific amounts have not yet been
determined. These agreements also state that the Joint Venture must
provide security deposits for the performance by the Joint Venture of
its reclamation and abandonment obligations under all environmental
laws and regulations. HWDLP's share of the letters of credit
outstanding posted by the operator of the Joint Venture with respect to
the environmental agreements as at January 31, 2012, was $81.1 million.
The agreement specifically provides that these funding requirements
will be reduced by amounts incurred by the Joint Venture on reclamation
and abandonment activities.
(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 upon for successive periods
of six years thereafter until termination. The agreements terminate in
the event that the mine permanently ceases to operate. HarryWinston
Diamond Corporation's share of the Joint Venture's participation
agreements as at January 31, 2012 was $1.5 million.
(c)Operating lease commitments
The Company has entered into leases for the rental of luxury brand
salons and office premises. The leases have varying terms, escalation
clauses and renewal rights. Any renewal terms are at the option of the
lessee at lease payments based on market prices at the time of renewal.
Certain leases contain either restrictions relating to opening
additional salons within a specified radius or contain additional rents
related to sales levels. Future minimum lease payments under
non-cancellable operating leases as at January 31 are as follows:
2012 2011
Within one year $ 22,439 $ 18,720
After one year but not more than five 75,285 49,973
years
More than five years 122,628 35,856
$ 220,352 $ 104,549
(d)Capital commitments related to the Joint Venture
At January 31, 2012, Harry Winston Diamond Corporation's share of
approved capital expenditures at the Joint Venture was $23.4 million
(2011 - $14.6 million). At January 31, 2012, Harry Winston Diamond
Corporation's current projected share of the planned capital
expenditures at the Diavik Diamond Mine for the calendar years 2012 to
2016, is approximately $140 million (2011 - $170 million) assuming a
Canadian/US average exchange rate of $1.00 for the fiveyears (2011 -
$1.00).
Note 23:
Financial Risk Management Objectives and Policies
The Company is exposed, in varying degrees, to a variety of
financial-instrument-related risks by virtue of its activities.
TheCompany'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 financialmarkets.
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 predominantly denominated in US dollars. As the
Company operates in an international environment, some of the Company's
financial instruments and transactions are denominated in currencies
other than the USdollar. The results of the Company's operations are
subject to currency transaction risk and currency translation risk. The
operating results and financial position of the Company are reported in
US dollars in the Company's consolidated financial statements.
The Company's primary foreign exchange exposure impacting pre-tax profit
arises from the following sources:
Net Canadian dollar denominated monetary assets and liabilities
- The Company's functional and reporting currency is US
dollars; however, many of the mining segment's monetary assets
and liabilities are in Canadian dollars. As such, the Company
is continually subject to foreign exchange fluctuations,
particularly as the Canadian dollar moves against the US
dollar. The weakening/strengthening of the Canadian dollar
versus the US dollar results in an unrealized foreign exchange
gain/loss on the revaluation of the Canadian dollar denominated
assets and liabilities.
Committed or anticipated foreign currency denominated
transactions - primarily Canadian dollar costs at the Diavik
Diamond Mine.
Based on the Company's net exposure to Canadian dollar monetary assets
and liabilities at January 31, 2012, a one-cent change in the exchange
rate would have impacted pre-tax profit for the year by $0.5million
(2011 - $0.2 million).
The Company also has foreign exchange exposure impacting accumulated
other comprehensive income arising from assets recorded in currencies
other than the US dollar at its luxury brand salons and watch factory.
A one percent change in these underlying currencies at January 31, 2012
would have impacted accumulated other comprehensive income by $0.5
million.
(ii)Interest rate risk
Interest rate risk is the risk borne by an interest-bearing asset or
liability as a result of fluctuations in interest rates. Financial
assets and financial liabilities with variable interest rates expose
the Company to cash flow interest rate risk. TheCompany's most
significant interest rate risk arises from its various credit
facilities, which bear variable interest based onLIBOR. Based on the
Company's LIBOR-based credit facilities at January 31, 2012, a 100
basis point change in LIBOR would have impacted pre-tax net profit for
the year by $2.3 million (2011 - $1.9million).
(iii)Concentration of credit risk
Credit risk is the risk of a financial loss to the Company if a customer
or counterparty to a financial instrument fails to meet its contractual
obligation.
Financial instruments that potentially subject the Company to credit
risk consist of trade receivables from luxury brand segment clients.
While economic factors can affect credit risk, the Company manages risk
by providing credit terms on a case-by-case basis only after a review
of the client's financial position and credit history. The Company has
not experienced significant losses in the past from its customers.
The Company's exposure to credit risk in the mining segment is minimized
by its sales policy, which requires receipt of cash prior to the
delivery of rough diamonds to its customers.
The Company manages credit risk, in respect of short-term investments,
by maintaining bank accounts with Tier 1 banks and investing only in
term deposits or banker's acceptances with highly rated financial
institutions that are capable of prompt liquidation. The Company
monitors and manages its concentration of counterparty credit risk on
an ongoing basis.
At January 31, 2012, the Company's maximum counterparty credit exposure
consists of the carrying amount of cash and cash equivalents and
accounts receivable, which approximates fair value.
The Company considers any accounts receivables outstanding more than 30
days to be past due. At January 31, 2012, past due accounts receivable
were as follows:
2012 2011
31- 60 days $ 4,651 $ 531
61 - 90 days 1,692 338
Over 90 days 2,115 10,329
$ 8,458 $ 11,198
(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-term and long-term business requirements, after
taking into account cash flows from operations and the Company's
holdings of cash and cash equivalents. The Company also strives to
maintain sufficient financial liquidity at all times in order to
participate in investment opportunities as they arise, as well as to
withstand sudden adverse changes in economic circumstances. The Company
assesses liquidity and capital resources on a consolidated basis.
Management forecasts cash flows for its current and subsequent fiscal
years to predict future financing requirements. Future financing
requirements are met through a combination of committed credit
facilities and access to capital markets.
At January 31, 2012, the Company had $78.2million of cash and cash
equivalents and $116.0million available under credit facilities.
The following table summarizes the aggregate amount of contractual
undiscounted future cash outflows for the Company's financial
liabilities:
Less
than Year Year After
Total 1 year 2-3 4-5 5 years
Trade and other
payables $ 104,681 $ 104,681 $ - $ - $ -
Income taxes
payable 29,450 29,450 - - -
Interest-bearing
loans and
borrowings((a)) 321,751 39,578 260,954 4,852 16,367
Environmental
and
participation
agreement
incremental
commitments 93,330 82,676 4,844 - 5,810
Operating lease
obligations 220,352 22,439 39,288 35,997 122,628
((a)) Includes projected interest payments on the current debt outstanding
based on interest rates in effect at January 31, 2012.
(vi)Capital management
The Company's capital includes cash and cash equivalents, current and
non-current interest-bearing loans and borrowings and equity, which
includes issued common shares, contributed surplus and retained
earnings.
The Company's primary objective with respect to its capital management
is to ensure that it has sufficient cash resources to maintain its
ongoing operations, to provide returns to shareholders and benefits for
other stakeholders, and to pursue growth opportunities. To meet these
needs, the Company may from time to time raise additional funds through
borrowing and/or the issuance of equity or debt or by securing
strategic partners, upon approval by the Board of Directors. The Board
of Directors reviews and approves any material transactions out of the
ordinary course of business, including proposals on acquisitions or
other major investments or divestitures, as well as annual capital and
operating budgets.
The Company assesses liquidity and capital resources on a consolidated
basis. The Company's requirements are for cash operating expenses,
working capital, contractual debt requirements and capital
expenditures. The Company believes that it will generate sufficient
liquidity to meet its anticipated requirements for the next twelve
months.
Note 24:
Financial Instruments
The Company has various financial instruments comprising cash and cash
equivalents, accounts receivable, trade and other payables, and
interest-bearing loans and borrowings.
Cash and cash equivalents consist of cash on hand and balances with
banks and short-term investments held in overnight deposits with a
maturity on acquisition of less than 90 days. Cash and cash
equivalents, which are designated as held-for-trading, are carried at
fairvalue based on quoted market prices and are classified within
Level 1 of the fair value hierarchy established by the International
Accounting Standards Board.
The fair value of accounts receivable is determined by the amount of
cash anticipated to be received in the normal course of business from
the financial asset.
The Company's interest-bearing loans and borrowings are for the most
part fully secured; hence the fair values of these instruments at
January 31, 2012 are considered to approximate their carrying value.
The carrying values and estimated fair values of these financial
instruments are as follows:
January 31, 2012 January 31, 2011
Estimated Estimated
fair Carrying fair Carrying
value value value value
Financial assets
Cash and cash
equivalents $ 78,116 $ 78,116 $ 108,693 $ 108,693
Accounts
receivable 26,910 26,910 22,788 22,788
$ 105,026 $ 105,026 $ 131,481 $ 131,481
Financial
liabilities
Trade and other
payables $ 104,681 $ 104,681 $ 139,551 $ 139,551
Promissory note - - 70,000 70,000
Interest-bearing
loans and
borrowings 299,723 299,723 259,731 259,731
$ 404,404 $ 404,404 $ 469,282 $ 469,282
Note 25:
Explanation of Transition to IFRS
As stated in Note 2(a), these are the Company's first audited
consolidated financial statements prepared in accordance with IFRS.
The preparation of these first consolidated financial statements in
accordance with IFRS has resulted in changes to the accounting policies
as compared with the most recent annual financial statements prepared
under generally accepted accounting principles in Canada ("Canadian
GAAP"). Canadian GAAP differs in some areas from IFRS. IFRS 1,
"First-time Adoption of International Financial Reporting Standards",
generally requires full retrospective application of the standards and
interpretations in force assuming that the IFRS accounting policies had
always been applied. However, IFRS 1 allows certain exemptions in the
application of particular standards to prior periods in order to assist
companies with the transition process. The Company has elected to take
the following significant optional exemptions as permitted under IFRS 1
in preparing its opening IFRS balance sheet.
Business Combinations - IFRS 1 allows the Company not to apply
IFRS 3, "Business Combinations" ("IFRS 3 (Revised)"),
retrospectively to past acquisitions.
Leases - The Company has utilized this exemption, which allows
an entity not to have to reassess contracts that have already
been assessed under Canadian GAAP, and which would have
resulted in a similar conclusion as International Financial
Reporting Interpretations Committee ("IFRIC") 4, "Determining
Whether an Arrangement Contains a Lease".
Cumulative Translation Differences - Retrospective application
of IFRS would require the Company to determine cumulative
currency translation differences in accordance with IAS 21,
"The Effects of Changes in Foreign Exchange Rates" ("IAS 21"),
from the date a subsidiary or associate was formed or acquired.
This exemption permits the Company to reset existing cumulative
translation differences to zero at transition date.
Borrowing Costs - This exemption allows the Company to adopt
IAS 23, "Borrowing Costs" ("IAS 23"), which requires the
capitalization of borrowing costs on all qualifying assets,
prospectively from the date of the opening IFRS balance sheet.
The alternative to this exemption requires the Company to
retrospectively restate borrowing costs in accordance with IFRS
requirements, in addition to capitalizing borrowing costs from
the date of transition.
Decommissioning Liabilities Included in the Cost of Property,
Plant and Equipment - IFRS 1 provides an optional exemption
from the full retrospective application of decommissioning
liabilities, which allows an entity to re-measure provisions on
the transition date under IAS 37, "Provisions, Contingent
Liabilities and Contingent Assets" ("IAS 37"), and estimate the
amount to be included in the cost of the related asset by
discounting the liability to the date at which it first arose.
The alternative to this election, retrospective application,
would require the Company to estimate its provision for
reclamation and remediation at the original date incurred and
reflect changes in estimate and discount rates through to the
date of transition to IFRS.
The accounting policies described in Note 3 of the audited consolidated
financial statements have been applied in preparing: the financial
statements for the year ended January 31, 2012, the comparative
information presented in these financial statements for both the year
ended January 31, 2011, and in the preparation of an opening IFRS
balance sheet at February 1, 2010 (the Company's date of transition).
An explanation of how the transition to IFRS has affected the reported
financial position and financial performance of the Company is shown
below, including reconciliations of equity, profit and loss and
comprehensive income for the comparative periods and of equity at the
date of transition reported under previous Canadian GAAP to those
reported for those periods and at the date of transition under IFRS.
Explanation of transition to IFRS: Reconciliation of equity
(in thousands of
United States
dollars)
(unaudited) February 1, 2010 January 31, 2011
Effect of Effect of
transition transition
Canadian Canadian
Ref. GAAP to IFRS IFRS GAAP to IFRS IFRS
ASSETS
Current assets:
Cash and cash
equivalents $ 62,969 $ - $ 62,969 $ 108,693 $ - $ 108,693
Accounts
receivable (a) 23,520 78 23,598 22,723 65 22,788
Inventory and
supplies 311,188 - 311,188 403,212 - 403,212
Other current
assets (b) 44,220 (4,921) 39,299 45,681 (4,364) 41,317
441,897 (4,843) 437,054 580,309 (4,299) 576,010
Property, plant
and equipment
- Mining (c) 802,984 (19,552) 783,432 777,807 (13,714) 764,093
Property, plant
and equipment
- Luxury brand 62,277 - 62,277 61,019 - 61,019
Intangible assets,
net 129,213 - 129,213 127,894 - 127,894
Other non-current
assets (a) 15,629 - 15,629 16,626 (2,105) 14,521
Deferred income
tax assets (a) 42,805 7,719 50,524 53,857 6,181 60,038
Total assets $ 1,494,805 $ (16,676) $ 1,478,129 $ 1,617,512 $ (13,937) $ 1,603,575
LIABILITIES AND
EQUITY
Current
liabilities:
Trade and other
payables (d) $ 87,448 $ (11,555) $ 75,893 $ 142,339 $ (2,788) $ 139,551
Employee benefit
plans (d) - 11,284 11,284 - 4,317 4,317
Income taxes
payable 46,297 - 46,297 6,660 - 6,660
Bank advances (d) 22,485 (22,485) - 22,902 (22,902) -
Promissory note - - - 70,000 - 70,000
Current portion
of
interest-bearing
loans and
borrowings (d) 1,154 22,677 23,831 1,313 22,902 24,215
157,384 (79) 157,305 243,214 1,529 244,743
Interest-bearing
loans and
borrowings (d) 161,538 153 161,691 237,450 (1,934) 235,516
Employee benefit
plans (e) 2,201 4,697 6,898 3,001 4,286 7,287
Provisions (f) 41,275 2,416 43,691 43,390 6,740 50,130
Deferred income
tax liabilities (g) 271,822 (25,424) 246,398 355,531 (45,663) 309,868
Total liabilities 634,220 (18,237) 615,983 882,586 (35,042) 847,544
Equity:
Share capital 426,593 - 426,593 502,129 - 502,129
Contributed
surplus 17,730 - 17,730 16,233 - 16,233
Retained
earnings (h) 210,001 32,056 242,057 176,620 53,159 229,779
Accumulated
other
comprehensive
income (i) 28,445 (31,016) (2,571) 39,678 (32,054) 7,624
Total
shareholders'
equity 682,769 1,040 683,809 734,660 21,105 755,765
Non-controlling
interest (j) 177,816 521 178,337 266 - 266
Total equity 860,585 1,561 862,146 734,926 21,105 756,031
Total liabilities
and equity $ 1,494,805 $ (16,676) $ 1,478,129 $ 1,617,512 $ (13,937) $ 1,603,575
Explanation of transition to IFRS: Reconciliation of profit
(in thousands of
United States
dollars)
(unaudited) For the fiscal year ended January 31, 2011
Effect of
transition
Canadian to
Ref. GAAP IFRS IFRS
Sales $ 623,963 $ - $ 623,963
Cost of sales (k) 391,562 (3,897) 387,665
Gross margin 232,401 3,897 236,298
Selling, general
and
administrative
expenses 167,950 - 167,950
Operating profit 64,451 3,897 68,348
Finance expenses (l) (11,527) (1,900) (13,427)
Exploration costs (m) - (666) (666)
Finance and other
income (m) 486 183 669
Foreign exchange
gain (loss) (n) (14,406) 14,763 357
Profit before
income taxes 39,004 16,277 55,281
Current income
tax recovery (8,737) - (8,737)
Deferred income
tax expense (o) 21,121 (4,304) 16,817
Net profit $ 26,620 $ 20,581 $ 47,201
Attributable to:
Shareholders $ 21,669 $ 19,861 $ 41,530
Non-controlling
interest 4,951 720 5,671
Net profit $ 26,620 $ 20,581 $ 47,201
Earnings per
share
Basic $ 0.27 $ 0.25 $ 0.52
Diluted $ 0.27 $ 0.24 $ 0.51
Weighted average
number of shares
outstanding 79,858,018 79,858,018 79,858,018
Explanation of transition to IFRS: Reconciliation of comprehensive income
(in thousands of
United States
dollars)
(unaudited) For the fiscal year ended January 31, 2011
Effect of
transition
Canadian to
Ref. GAAP IFRS IFRS
Net profit - as
above $ 26,620 $ 20,581 $ 47,201
Other
comprehensive
income
Net gain (loss)
on translation
of net foreign
operations 10,879 - 10,879
Change in fair
value of
derivative
financial
instruments 354 - 354
Actuarial loss
on employee (e)
benefit plans (i) - (1,038) (1,038)
Total
comprehensive
income $ 37,853 $ 19,543 $ 57,396
Attributable to:
Shareholders $ 32,902 $ 18,823 $ 51,725
Non-controlling
interest 4,951 720 5,671
Total
comprehensive
income $ 37,853 $ 19,543 $ 57,396
References to the Reconciliation of Equity and Profit
(a)Reclassification of assets
To conform to IFRS presentation requirements, certain asset balances
have been reclassified.
(b)Other current assets
Twelve
months ended
February 1, January 31,
Ref. 2010 2011
Reclassification
of assets See (a) $ (7,797) $ (6,246)
Deferred tax
impact on
intra-group
transfer of
assets (i) 2,876 1,882
Net decrease in
other current
assets $ (4,921) $ (4,364)
(i) Under IFRS, deferred taxes are recognized for the difference in
tax bases between jurisdictions as a result of an intra-group
transfer of assets. The deferred tax component under IFRS is
computed using the tax rate applicable to the purchaser, whereas
the seller's tax rate was applied under Canadian GAAP. On
transition to IFRS at February 1, 2010, deferred income tax asset
increased by $2.9 million along with a corresponding increase in
retained earnings.
For the fiscal year ended January 31, 2011, the accounting under
IFRS resulted in a reduction of $1.0 million in both deferred
income tax asset and deferred income tax recovery.
(c)Property, plant and equipment - Mining
Twelve months
ended
February 1, January 31,
Ref. 2010 2011
Derecognition
of exploration
costs
capitalized (i) $ (18,632) $ (17,072)
Remeasurement
of the asset
retirement
obligation See (f)(i) (920) 3,358
Net decrease
in property,
plant and
equipment -
Mining $ (19,552) $ (13,714)
(i) Under Canadian GAAP, the Company's policy on exploration
expenditures incurred is to capitalize and to amortize using the
units-of-production method. For IFRS purposes, the Company's
accounting policy on exploration expenditures is to expense unless
the exploration activity relates to proven and probable reserves.
The retrospective application of this new accounting policy at the
date of transition has resulted in the $18.6 million write-off of
the net book value of capitalized exploration costs, and a
decrease in deferred income tax liability, non-controlling
interest and retained earnings by $5.5 million, $0.9 million and
$12.2 million, respectively.
For the fiscal year ended January 31, 2011, the accounting under
IFRS increased mining property, plant and equipment, deferred
income tax liabilities and non-controlling interest by $1.6
million, $0.6 million and $0.2 million, respectively. Cost of
sales decreased by $2.0 million, and exploration costs, deferred
income tax expense and profit attributable to non-controlling
interest increased by $0.5 million, $0.6 million and $0.2 million,
respectively.
(d)Reclassification of liabilities
To conform to IFRS presentation requirements, various liability balances
have been reclassified.
(e)Employee benefit plans
Twelve months
ended
February 1, January 31,
Ref. 2010 2011
Retrospective $
application of
IAS 19,
"Employee
Benefits" (i) 4,771 $ 5,986
Reclassification
of liabilities See (d) (74) (1,700)
Net increase in $
employee benefit
plans 4,697 $ 4,286
(i) Under Canadian GAAP, actuarial gains or losses for defined benefit
plans that exceeded the corridor threshold (10% of the greater of
the obligation and fair value of plan assets at the beginning of
the period) were recognized over the remaining average service
life of active employees. For IFRS purposes, the Company's
accounting policy is to recognize its actuarial gains and losses
immediately in other comprehensive income, and has retrospectively
applied this approach at the date of transition. As a result, $2.2
million in previously unrecognized cumulative actuarial losses at
February 1, 2010 were recognized in accumulated other
comprehensive income within equity, along with a $4.8 million
increase in the defined benefit plan obligation and a $2.6 million
decrease in deferred income tax liabilities.
For the fiscal year ended January 31, 2011, the accounting under
IFRS resulted in a $1.2 million increase to the defined benefit
plan obligation, a $1.0 million charge to other comprehensive
income, and a $0.2 million decrease in deferred income tax
liabilities.
(f)Provisions
Twelve months
February 1, ended
Ref. 2010 January 31, 2011
Remeasurement
of the asset
retirement
obligation (i) $ 2,416 $ 6,740
(i) The Company has elected to utilize the IFRS 1 optional exemption
relating to "Changes in decommissioning, restoration and similar
liabilities" in preparing its opening balance sheet under IFRS.
Through application of this IFRS exemption, the site restoration
provision under Canadian GAAP has been increased by $2.4 million
along with reductions in mining capital assets, deferred income
tax liability, non-controlling interest and retained earnings by
$0.9 million, $1.0 million, $0.2 million and $2.2 million,
respectively.
For the fiscal year ended January 31, 2011, the accounting under
IFRS resulted in increases of $4.3 million in both mining capital
assets and restoration site provision. Nominal changes were also
made to deferred income tax liabilities, cost of sales, finance
expenses and deferred income tax recovery.
(g)Deferred income tax liabilities
Twelve months
ended
February 1, January 31,
Ref. 2010 2011
Recognition of
new deferred
tax balances (i) $ (16,363) $ (34,749)
Derecognition
of exploration
costs
capitalized See (c)(i) (5,521) (4,887)
Retrospective
application of
IAS 19,
"Employee
Benefits" See (e)(i) (2,555) (2,732)
Remeasurement
of the asset
retirement
obligation See (f)(i) (985) (1,002)
Revaluation of
deferred
income tax
liabilities (ii) - (2,293)
Total decrease
in deferred
income tax
liabilities $ (25,424) $ (45,663)
(i) Under IFRS, in the determination of temporary differences, the
carrying value of non-monetary assets and liabilities is
translated into the functional currency at the historical rate
and compared to its tax value translated into the functional
currency at the current rate. The resulting temporary difference
(measured in the functional currency) is then multiplied by the
appropriate tax rate to determine the related deferred tax
balance.
Under Canadian GAAP, in the determination of temporary
differences related to non-monetary assets and liabilities, the
temporary differences computed in local currency are multiplied
by the appropriate tax rate. The resulting future income tax
amount is then translated into the Company's functional currency
if it is different from the local currency.
On transition, the accounting under IFRS related to the
determination of temporary differences of foreign currency
non-monetary assets and liabilities and other temporary
differences that were treated as permanent under Canadian GAAP
has reduced deferred tax liability by $24.4 million and increased
retained earnings and non-controlling interest by $22.8 million
and $1.6 million, respectively.
In addition, upon finalizing the IFRS adjustments, the Company
recorded an additional deferred tax liability of $8.0 million,
with a corresponding impact on retained earnings related to
immaterial adjustments of prior period balances, which were not
previously recorded in the April 30, 2011 unaudited interim
condensed consolidated financial statements. The Company has
determined that these amounts were not material to its
consolidated financial statements for any prior interim or annual
periods.
For the fiscal year ended January 31, 2011, the accounting under
IFRS resulted in an $18.4 million decrease in deferred income tax
liabilities and an $18.4 million increase in deferred income tax
recovery. Net profit attributable to non-controlling interest
also increased by $0.5 million.
(ii) For the fiscal year ended January 31, 2011, the above IFRS
adjustments to deferred income tax liabilities required a
revaluation of the account balance resulting in a $2.3 million
reduction in deferred income tax liabilities and a corresponding
increase in deferred income tax recovery. Nominal changes were
also made to non-controlling interest.
(h)Retained earnings
The effect of all IFRS adjustments has increased (decreased) retained
earnings as follows:
Twelve
months
ended
February January 31,
Ref. 1, 2010 2011
Reset of
cumulative
translation
differences See (i)(i) $ 28,800 $ 28,800
Recognition
of new
deferred tax
balances See (g)(i) 14,775 32,692
Derecognition
of
exploration
costs
capitalized See (c)(i) (12,243) (11,496)
Deferred tax
impact on
intra-group
transfer of
assets See (b)(i) 2,876 1,882
Remeasurement
of the asset
retirement
obligation See (f)(i) (2,152) (2,181)
Revaluation
of deferred
income tax See (g)
liabilities (ii) - 2,221
Reacquisition
of
partnership
units See (i)(i) - 1,241
Net increase
in retained
earnings $ 32,056 $ 53,159
(i)Accumulated other comprehensive income
Twelve
months ended
February 1, January 31,
Ref. 2010 2011
Reset of
cumulative
translation
differences (i) $ (28,800) $ (28,800)
Retrospective
application
of IAS 19,
"Employee
Benefits" See (e)(i) (2,216) (3,254)
Total
decrease in
accumulated
other
comprehensive
income $ (31,016) $ (32,054)
(i) The Company has elected to utilize the IFRS 1 optional exemption
relating to "Cumulative translation differences" in preparing its
opening balance sheet under IFRS. Through application of this
exemption on transition date, existing cumulative translation
differences have been reset to zero and retained earnings has been
increased by $28.8 million.
(j)Non-controlling interest
Twelve
months
ended
February January 31,
Ref. 1, 2010 2011
Derecognition
of exploration
costs
capitalized See (c)(i) $ (868) $ (689)
Remeasurement
of the asset
retirement
obligation See (f)(i) (199) (199)
Recognition of
new deferred
tax balances See (g)(i) 1,588 2,057
Revaluation of
deferred income See (g)
tax liabilities (ii) - 72
Reacquisition
of partnership
units (i) - (1,241)
Net change in
non-controlling
interest $ 521 $ -
(i) During the third quarter of fiscal 2011, the Company reacquired
its 9% indirect interest in the Diavik Joint Venture from Kinross
resulting in the reversal of previously recorded profit
adjustments attributable to non-controlling interest.
(k)Cost of sales
Twelve months ended
Ref. January 31, 2011
Reclassification of $
accretion expense (i) (2,004)
Derecognition of
exploration costs
capitalized See (c)(i) (2,043)
Remeasurement of the
asset retirement
obligation See (f)(i) 150
Net decrease in cost of $
sales (3,897)
(i) In accordance with IFRIC 1, "Changes in Existing Decommissioning,
Restoration and Similar Liabilities", accretion expense is treated
as interest expense whereas under Canadian GAAP it had been
recorded as a component of cost of sales.
(l)Finance expenses
Twelve months ended
Ref. January 31, 2011
Reclassification of $
accretion expense See (k)(i) (2,004)
Remeasurement of the
asset retirement
obligation See (f)(i) 104
Net increase in finance $
expenses (1,900)
(m)Exploration costs
Twelve months ended
Ref. January 31, 2011
Derecognition of $
exploration costs
capitalized See (c)(i) (483)
Reclassification of
exploration costs See (m) (183)
Increase in exploration $
costs (666)
(n)Decrease in foreign exchange loss
Twelve months ended
Ref. January 31, 2011
Reclassification of foreign
exchange loss (i) $ 14,763
(i) Under Canadian GAAP, the foreign exchange difference from the
translation of deferred taxes was presented within the foreign
exchange gain/loss account. For IFRS reporting purposes, these
foreign exchange differences have been reclassified to deferred
income tax recovery/expense.
(o)Deferred income tax recovery
Twelve months ended
Ref. January 31, 2011
Derecognition of
exploration costs
capitalized See (c)(i) $ 634
Recognition of new
deferred income tax
liability balances See (g)(i) (18,385)
Deferred tax impact on
intra-group transfer
of assets See (b)(i) 994
Remeasurement of the
asset retirement
obligation See (f)(i) (17)
Reclassification of
foreign exchange loss See (n)(i) 14,763
Revaluation of
deferred income tax
liabilities See (g)(ii) (2,293)
Net increase in
deferred income tax
recovery $ (4,304)
Diavik Diamond Mine Mineral Reserve and
Mineral Resource Statement
AS OF DECEMBER 31, 2011
Proven and Probable Reserves
Proven Probable Proven and Probable
Open pit and Millions Carats Millions Millions Carats Millions Millions Carats Millions
underground
mining of per of of per of of per of
tonnes tonne carats tonnes tonne carats tonnes tonne carats
A-154 South
Open Pit - - - - - - - - -
Underground 1.6 4.0 6.3 1.4 3.4 4.7 2.9 3.7 10.9
Total A-154 1.6 4.0 6.3 1.4 3.4 4.7 2.9 3.7 10.9
South
A-154 North
Open Pit - - - - - - - - -
Underground 3.1 2.3 7.1 4.9 2.2 10.7 8.0 2.2 17.8
Total A-154 3.1 2.3 7.1 4.9 2.2 10.7 8.0 2.2 17.8
North
A-418
Open Pit 0.7 4.0 2.8 0.6 3.8 2.3 1.3 3.9 5.0
Underground - - - 6.7 3.8 25.1 6.7 3.8 25.1
Total A-418 0.7 4.0 2.8 7.3 3.8 27.4 8.0 3.8 30.2
Total
Open Pit 0.7 4.0 2.8 0.6 3.8 2.3 1.3 3.9 5.0
Underground 4.7 2.8 13.3 12.9 3.1 40.5 17.6 3.1 53.8
Total 5.4 3.0 16.1 13.5 3.2 42.8 18.9 3.1 58.9
Reserves
Note: Totals may not add up due to rounding.
Additional Indicated and Inferred Resources
Measured Resources Indicated Resources Inferred Resources
Millions Carats Millions Millions Carats Millions Millions Carats Millions
Kimberlite of per of of per of of per of
pipe tonnes tonne carats tonnes tonne carats tonnes tonne carats
A-154 - - - - - - 0.04 3.5 0.1
South
A-154 - - - - - - 2.2 2.4 5.3
North
A-418 - - - - - - 0.3 2.7 0.8
A-21 3.6 2.8 10.0 0.4 2.6 1.0 0.8 3.0 2.3
Total 3.6 2.8 10.0 0.4 2.6 1.0 3.3 2.6 8.5
Note: Totals may not add up due to rounding.
Cautionary Note to United States Investors Concerning Disclosure of
Mineral Reserves and Resources: The Company is organized under the laws of Canada. The mineral reserves
and resources described herein are estimates, and have been prepared in
compliance with NI 43-101. The definitions of proven and probable
reserves used in NI-43-101 differ from the definitions in the United
States Securities and Exchange Commission ("SEC") Industry Guide 7. In
addition, the terms "mineral resource", "measured mineral resource",
"indicated mineral resource" and "inferred mineral resource" are
defined in and required to be disclosed by NI 43-101; however, these
terms are not defined terms under SEC Industry Guide 7, and normally
are not permitted to be used in reports and registration statements
filed with the SEC. Accordingly, information contained in this
financial report [or this MD&A] containing descriptions of the Diavik
Diamond Mine's mineral deposits may not be comparable to similar
information made public by US companies subject to the reporting and
disclosure requirements under the United States federal securities laws
and the rules and regulations thereunder. United States investors are cautioned not to assume that all or any part
of Measured or Indicated Mineral Resources will ever be converted into
Mineral Reserves. United States investors are also cautioned not to
assume that all or any part of an Inferred Mineral Resource exists, or
is economically or legally mineable.
The above mineral reserve and mineral resource statement was prepared by
Diavik Diamond Mines Inc., operator of the Diavik Diamond Mine, under
the supervision of Calvin Yip, P.Eng., Principal Advisor, Strategic
Planning of Diavik Diamond Mines Inc., aQualified Person within the
meaning of National Instrument 43-101 of the Canadian Securities
Administrators. For further details and information concerning
HarryWinston Diamond Corporation's Mineral Reserves and Resources,
readers should reference HarryWinston Diamond Corporation's Annual
Information Form available through www.sedar.com and http://investor.harrywinston.com.
To view this news release in HTML formatting, please use the following URL: http://www.newswire.ca/en/releases/archive/April2012/04/c2600.html
SOURCE: Harry Winston Diamond Corporation
Mr. Richard Chetwode, Vice President, Corporate Development - +44 (0) 7720-970-762
orrchetwode@harrywinston.com Ms. Laura Kiernan, Director, Investor Relations - (212)
315-7934 orlkiernan@harrywinston.com Ms. Kelley Stamm, Manager, Investor Relations -
(416) 205-4380 orkstamm@harrywinston.com
