Harry Winston Diamond Corporation Announces First Quarter Fiscal 2010 Results
TORONTO, June 4 /CNW/ - Harry Winston Diamond Corporation (TSX: HW, NYSE:
HWD) (the "Company") today reported first quarter results for the period
ending April 30, 2009. The Company recorded a consolidated net loss of $45.1
million or $0.68 per share for the quarter, compared to net earnings of $21.3
million or $0.35 per share in the first quarter of the prior year.
Consolidated net loss for the quarter included a non-cash dilution loss of
$34.2 million or $0.52 per share as a result of the investment by Kinross Gold
Corporation in Harry Winston Diamond Limited Partnership, which holds the
Company's 40% interest in the Diavik Diamond Mine. The consolidated net loss
also includes a $5.8 million net foreign exchange loss or $0.09 per share,
compared to a $0.2 million net foreign exchange gain in the comparable quarter
of the prior year, and an after-tax gain on the insurance settlement of $1.9
million or $0.03 per share. Excluding the impact of the non-cash dilution
loss, the net foreign exchange loss, and the after-tax gain on the insurance
settlement, the net loss would have been $6.9 million or $0.10 per share for
the quarter.
Robert Gannicott, Chairman and Chief Executive Officer commented: "We
began this quarter with a rough diamond market that could see no bottom and
retail sales effectively stalled. Rough diamond prices fell to levels not seen
since the inception of the Diavik Project, seven years ago. We ended the
quarter with consistent improvement in rough diamond prices and the return of
customers to our retail stores. This improvement has continued through May in
both of our business segments."
Consolidated sales were $109.6 million for the quarter compared to $156.1
million for the comparable quarter of the prior year, resulting in a 69%
decrease in gross margin and a loss from operations of $10.1 million.
The mining segment recorded sales of $57.7 million, a 29% decrease from
$81.4 million in the comparable quarter of the prior year. Rough diamond
production for the calendar quarter was 0.7 million carats, consistent with
production in the comparable quarter of the prior year. As a result of lower
sales, the mining segment recorded a loss from operations for the quarter of
$5.1 million compared to earnings from operations of $42.0 million for the
comparable quarter of the prior year.
The retail segment recorded a 30% decrease in sales to $51.9 million,
with a loss from operations of $5.0 million compared to a loss from operations
of $2.4 million in the first quarter of the prior year. Retail segment
selling, general and administrative expenses decreased by $5.8 million from
$36.1 million in the comparable quarter of the prior year.
First Quarter Fiscal 2010 Financial Highlights
(US$ in millions except Earnings per Share amounts)
-------------------------------------------------------------------------
Three Three Twelve
months months months
ended ended ended
April 30, April 30, January 31,
2009 2008 2009
-------------------------------------------------------------------------
Sales 109.6 156.1 609.2
-------------------------------------------------------------------------
Earnings from operations (loss) (10.1) 39.6 166.1
-------------------------------------------------------------------------
Net earnings (loss) (45.1) 21.3 70.1
-------------------------------------------------------------------------
Earnings (loss) per share ($0.68) $0.35 $1.15
-------------------------------------------------------------------------
Annual General Meeting and Webcast
Beginning at 10:00AM (EDT) today, June 4, 2009, the Company will hold its
Annual Meeting of Shareholders at the Fairmont Royal York Hotel, 100 Front
Street West, Toronto, Ontario in the Imperial Room on the Lobby Level.
Interested parties unable to attend may listen to a webcast of the meeting and
a review of the first quarter results on the company's website at
http://investor.harrywinston.com. An online archive of the webcast will be
available on the company's website at http://investor.harrywinston.com later
the same day.
About Harry Winston Diamond Corporation
Harry Winston Diamond Corporation is a specialist diamond enterprise with
assets in the mining and retail segments of the diamond industry. Harry
Winston supplies rough diamonds to the global market from its 40 per cent
ownership interest in the Diavik Diamond Mine (economic ownership of 31%).
The company's retail division is a premier diamond jeweler and luxury
timepiece retailer with salons in key locations, including New York, Paris,
London, Beijing, 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.
For investor information, visit http://investor.harrywinston.com or call
Investor Relations on (416) 362-2237 ext 290.
2010 First Quarter Report
HARRY WINSTON DIAMOND CORPORATION
Three Months Ended April 30, 2009
Highlights
(All figures are in United States dollars unless otherwise indicated)
Harry Winston Diamond Corporation recorded a consolidated net loss of
$45.1 million or $0.68 per share for the quarter, compared to net earnings of
$21.3 million or $0.35 per share in the first quarter of the prior year.
Consolidated net loss for the quarter included a non-cash dilution loss of
$34.2 million or $0.52 per share as a result of the investment by Kinross Gold
Corporation in Harry Winston Diamond Limited Partnership, which holds the
Company's 40% interest in the Diavik Diamond Mine. The consolidated net loss
also includes a $5.8 million net foreign exchange loss or $0.09 per share,
compared to a $0.2 million net foreign exchange gain in the comparable quarter
of the prior year.
Consolidated sales were $109.6 million for the quarter compared to $156.1
million for the comparable quarter of the prior year, resulting in a 69%
decrease in gross margin and a loss from operations of $10.1 million.
The mining segment recorded sales of $57.7 million, a 29% decrease from
$81.4 million in the comparable quarter of the prior year. The decrease in
sales resulted from lower rough diamond prices in the first quarter. Rough
diamond production for the calendar quarter was 0.7 million carats, consistent
with production in the comparable quarter of the prior year. As a result of
lower sales, the mining segment recorded a loss from operations for the
quarter of $5.1 million compared to earnings from operations of $42.0 million
for the comparable quarter of the prior year.
The retail segment recorded a 30% decrease in sales to $51.9 million,
with a loss from operations of $5.0 million compared to a loss from operations
of $2.4 million in the first quarter of the prior year. Retail segment
selling, general and administrative expenses decreased by $5.8 million from
$36.1 million in the comparable quarter of the prior year.
Management's Discussion and Analysis
Prepared as of June 3, 2009
(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
The following is management's discussion and analysis ("MD&A") of the
results of operations for Harry Winston Diamond Corporation ("Harry Winston
Diamond Corporation", or the "Company") for the three months ended April 30,
2009 and its financial position as at April 30, 2009. This MD&A is based on
the Company's consolidated financial statements prepared in accordance with
generally accepted accounting principles in Canada ("Canadian GAAP") and
should be read in conjunction with the unaudited consolidated financial
statements and notes thereto for the three months ended April 30, 2009 and the
audited consolidated financial statements of the Company and notes thereto for
the year ended January 31, 2009. Unless otherwise specified, all financial
information is presented in United States dollars. Unless otherwise indicated,
all references to "first quarter" refer to the three months ended April 30,
2009 and all references to "international" for the retail segment refer to
Europe and Asia. Certain comparative figures have been reclassified to conform
with the current year's presentation.
Caution Regarding Forward-Looking Information
Certain information included in this MD&A may constitute forward-looking
information within the meaning of Canadian and United States securities laws.
In some cases, forward-looking information can be identified by the use of
terms such as "may", "will", "should", "expect", "plan", "anticipate",
"believe", "intend", "estimate", "predict", "potential", "continue" or other
similar expressions concerning matters that are not historical facts.
Forward-looking information may relate to management's future outlook and
anticipated events or results, and may include statements or information
regarding plans, timelines and targets for construction, mining, development,
production and exploration activities at the Diavik Diamond Mine, future
mining and processing at the Diavik Diamond Mine, projected capital
expenditure requirements and the funding thereof, new salon openings,
liquidity and working capital requirements and sources, estimated reserves and
resources at, and production from, the Diavik Diamond Mine, the number and
timing of expected rough diamond sales, expected diamond prices and
expectations concerning the diamond industry, expected cost of sales and gross
margin trends in the mining segment, and expected sales trends in the retail
segment. Actual results may vary from the forward-looking information. See
"Risks and Uncertainties" on page 15 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, the level of worldwide
diamond production and world and US economic conditions and demand for luxury
goods. Specifically, in estimating the Company's projected Diavik Diamond Mine
capital expenditure requirements over the next five years, the Company has
used an average Canadian/US dollar exchange rate of $0.90. In making
statements regarding expected diamond prices and expectations concerning the
diamond industry and expected sales trends in the retail segment, the Company
has made assumptions regarding, among other things, world and US economic
conditions and demand for luxury goods. While the Company considers these
assumptions to be reasonable based on the information currently available to
it, they may prove to be incorrect. See "Risks and Uncertainties" on page 15.
Forward-looking information is subject to certain factors, including
risks and uncertainties, which could cause actual results to differ materially
from what we currently expect. These factors include, among other things, the
uncertain nature of mining activities, including risks associated with
underground construction and mining operations, risks associated with joint
venture operations, risks associated with the remote location of and harsh
climate at the Diavik Diamond Mine site, risks associated with regulatory
requirements, fluctuations in diamond prices and changes in US and world
economic conditions, the risk of fluctuations in the Canadian/US dollar
exchange rate, financing risk, risks relating to the Company's salon expansion
strategy and the risks of competition in the luxury jewelry segment. Please
see page 15 of this Interim Report, as well as the Company's Annual Report,
available at www.sedar.com, for a discussion of these and other risks and
uncertainties involved in the Company's operations.
Readers are cautioned not to place undue importance on forward-looking
information, which speaks only as of the date of this Management's Discussion
and Analysis, and should not rely upon this information as of any other date.
Due to assumptions, risks and uncertainties, including the assumptions, risks
and uncertainties identified above and elsewhere in this Management's
Discussion and Analysis, actual events may differ materially from current
expectations. The Company uses forward-looking statements because it believes
such statements provide useful information with respect to the expected future
operations and financial performance of the Company, and cautions readers that
the information may not be appropriate for other purposes. While the Company
may elect to, it is under no obligation and does not undertake to update or
revise any forward-looking information, whether as a result of new
information, future events or otherwise at any particular time, except as
required by law. Additional information concerning factors that may cause
actual results to materially differ from those in such forward-looking
statements is contained in the Company's filings with Canadian and United
States securities regulatory authorities and can be found at www.sedar.com and
www.sec.gov, respectively.
Summary Discussion
Harry Winston Diamond Corporation is a specialist diamond company
focusing on the mining and retail segments of the diamond industry. The
Company supplies rough diamonds to the global market from production received
from its 40% ownership interest in the Diavik Diamond Mine (economic interest
of 31%), located off Lac de Gras in Canada's Northwest Territories. The
Company also owns a 100% interest in Harry Winston Inc., the premier fine
jewelry and watch retailer operating under the Harry Winston(R) brand.
The Company's most significant asset is an ownership interest in the
Diavik group of mineral claims. The Diavik Joint Venture (the "Joint Venture")
is an unincorporated joint arrangement between Diavik Diamond Mines Inc.
("DDMI") (60%) and Harry Winston Diamond Limited Partnership ("HWDLP") (40%)
where HWDLP holds an undivided 40% ownership interest in the assets,
liabilities and expenses. DDMI is the operator of the Diavik Diamond Mine.
DDMI and HWDLP are headquartered in Yellowknife, Canada. DDMI is a wholly
owned subsidiary of Rio Tinto plc of London, England. As a result of the
strategic investment by Kinross Gold Corporation ("Kinross") of Toronto,
Canada, described below, HWDLP is 77.5% owned by the Company and 22.5% owned
by Kinross.
On March 31, 2009, Kinross made a net investment of $150.0 million to
acquire an indirect interest in the Diavik Diamond Mine and a direct equity
stake in the Company. Kinross subscribed for 15.2 million of the Company's
treasury shares at a price of $3.00 per share, being approximately 19.9% of
the Company's issued equity post the transaction. Kinross also subscribed for
new partnership units representing a 22.5% interest in HWDLP, for a net
effective subscription value of $104.4 million. With the closing of the
Kinross transaction, the Company's economic interest in the Diavik Diamond
Mine is 31%.
Market Commentary
The Diamond Market
During the quarter, the rough diamond market recovered slightly from the
low point reached at the beginning of the fiscal year. The diamond processing
and jewelry manufacturers are returning to the market as positive demand from
Asia coupled with the first signs of activity from the US market have
encouraged manufacturers to begin restocking. This renewed activity in a
market previously depleted as the result of reductions in rough diamond
production by the mining industry has improved prices for both rough and
polished diamonds.
The Retail Jewelry Market
The global economic downturn continues to negatively impact the luxury
diamond jewelry market. Although there have been very tentative indications
that the U.S. economy is stabilizing, the global retail environment remains
very challenging.
(R) Harry Winston is a registered trademark of Harry Winston Inc.
Consolidated Financial Results
The following is a summary of the Company's consolidated quarterly results
for the eight quarters ended April 30, 2009 following the basis of
presentation utilized in its Canadian GAAP financial statements:
(expressed in thousands of United States dollars except per share
amounts and where otherwise noted)
(quarterly results are unaudited)
-------------------------------------------------------------------------
2010 2009 2009 2009 2009
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $109,643 $118,399 $148,623 $186,119 $156,079
Cost of sales 83,944 68,908 71,679 73,542 73,149
-------------------------------------------------------------------------
Gross margin 25,699 49,491 76,944 112,577 82,930
Gross margin (%) 23.4% 41.8% 51.8% 60.5% 53.1%
Selling, general
and administrative
expenses 35,749 39,399 33,998 39,194 43,285
-------------------------------------------------------------------------
Earnings (loss)
from operations (10,050) 10,092 42,946 73,383 39,645
-------------------------------------------------------------------------
Interest and
financing expenses (3,699) (4,960) (4,678) (5,366) (5,453)
Other income 281 778 407 815 246
Insurance settlement 3,250 17,240 - - -
Dilution loss (34,222) - - - -
Impairment charge - (93,780) - - -
Foreign exchange
gain (loss) (5,839) 4,649 48,982 5,301 155
-------------------------------------------------------------------------
Earnings (loss) before
income taxes (50,279) (65,981) 87,657 74,133 34,593
Income taxes (recovery) (3,120) 7,052 15,685 24,185 13,336
-------------------------------------------------------------------------
Earnings (loss) before
minority interest and
non-controlling
interest (47,159) (73,033) 71,972 49,948 21,257
Minority interest 7 (58) 81 1 1
Non-controlling
interest (2,082) - - - -
-------------------------------------------------------------------------
Net earnings (loss) $(45,084) $(72,975) $ 71,891 $ 49,947 $ 21,256
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings
(loss) per share $ (0.68) $ (1.19) $ 1.17 $ 0.81 $ 0.35
Diluted earnings
(loss) per share $ (0.68) $ (1.19) $ 1.17 $ 0.81 $ 0.35
Cash dividends
declared per share $ 0.00 $ 0.05 $ 0.05 $ 0.05 $ 0.05
Total assets(i) $ 1,592 $ 1,567 $ 1,645 $ 1,637 $ 1,591
Total long-term
liabilities(i) $ 496 $ 550 $ 562 $ 617 $ 634
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Three
months months
ended ended
2008 2008 2008 April 30, April 30,
Q4 Q3 Q2 2009 2008
-------------------------------------------------------------------------
Sales $188,195 $176,478 $173,269 $109,643 $156,079
Cost of sales 83,637 74,591 81,827 83,944 73,149
-------------------------------------------------------------------------
Gross margin 104,558 101,887 91,442 25,699 82,930
Gross margin (%) 55.6% 57.7% 52.8% 23.4% 53.1%
Selling, general
and administrative
expenses 45,494 35,539 35,201 35,749 43,285
-------------------------------------------------------------------------
Earnings (loss)
from operations 59,064 66,348 56,241 (10,050) 39,645
-------------------------------------------------------------------------
Interest and
financing expenses (7,082) (7,422) (7,222) (3,699) (5,453)
Other income 706 594 545 281 246
Insurance settlement 13,488 - - 3,250 -
Dilution loss - - - (34,222) -
Impairment charge - - - - -
Foreign exchange
gain (loss) 22,270 (40,584) (11,785) (5,839) 155
-------------------------------------------------------------------------
Earnings (loss) before
income taxes 88,446 18,936 37,779 (50,279) 34,593
Income taxes (recovery) (1,968) 26,197 17,747 (3,120) 13,336
-------------------------------------------------------------------------
Earnings (loss) before
minority interest and
non-controlling
interest 90,414 (7,261) 20,032 (47,159) 21,257
Minority interest (34) 90 (26) 7 1
Non-controlling
interest - - - (2,082) -
-------------------------------------------------------------------------
Net earnings (loss) $ 90,448 $ (7,351) $ 20,058 $(45,084) $ 21,256
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings
(loss) per share $ 1.55 $ (0.13) $ 0.34 $ (0.68) $ 0.35
Diluted earnings
(loss) per share $ 1.54 $ (0.13) $ 0.33 $ (0.68) $ 0.35
Cash dividends
declared per share $ 0.05 $ 0.25 $ 0.25 $ 0.00 $ 0.05
Total assets(i) $ 1,494 $ 1,433 $ 1,367 $ 1,592 $ 1,591
Total long-term
liabilities(i) $ 660 $ 530 $ 486 $ 496 $ 634
-------------------------------------------------------------------------
(i) Total assets and total long-term liabilities are expressed in
millions of United States dollars.
The comparability of quarter-over-quarter results is impacted by
seasonality for both the mining and retail segments. Harry Winston
Diamond Corporation expects that the quarterly results for its mining
segment will continue to fluctuate depending on the seasonality of
production at the Diavik Diamond Mine, the number of sales events
conducted during the quarter, and the volume, size and quality
distribution of rough diamonds delivered from the Diavik Diamond Mine
in each quarter. The quarterly results for the retail segment are
also seasonal, with generally higher sales during the fourth quarter
due to the holiday season. See "Segmented Analysis" on page 7 for
additional information.
Three Months Ended April 30, 2009 Compared to Three Months Ended
April 30, 2008
CONSOLIDATED NET EARNINGS
The Company recorded a first quarter loss of $45.1 million or $0.68 per
share compared to net earnings of $21.3 million or $0.35 per share in the
first quarter of the prior year. Consolidated net loss for the quarter
included a non-cash dilution loss of $34.2 million or $0.52 per share as a
result of the investment by Kinross Gold Corporation in HWDLP, which holds the
Company's 40% interest in the Diavik Diamond Mine. The consolidated net loss
also includes a $5.8 million net foreign exchange loss or $0.09 per share,
compared to a $0.2 million net foreign exchange gain in the comparable quarter
of the prior year.
CONSOLIDATED SALES
Sales for the first quarter totalled $109.6 million, consisting of rough
diamond sales of $57.7 million and retail segment sales of $51.9 million. This
compares to sales of $156.1 million in the comparable quarter of the prior
year (rough diamond sales of $81.4 million and retail segment sales of $74.7
million). The Company held two primary rough diamond sales in the first
quarter, consistent with the prior year. Ongoing quarterly variations in
revenues are inherent in the Company's business, resulting from the
seasonality of the mining and retail activities as well as from the
variability of the rough diamond sales schedule. See "Segmented Analysis" on
page 7 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's first quarter cost of sales was $83.9 million for a gross
margin of 23.4% compared to $73.1 million cost of sales and gross margin of
53.1% for the comparable quarter of the prior year. The Company's cost of
sales includes costs associated with mining, rough diamond sorting and retail
sales activities. See "Segmented Analysis" on page 7 for additional
information.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of selling, general and administrative expenses
("SG&A") expenses include expenses for salaries and benefits, advertising,
professional fees, rent and building related costs. The Company incurred SG&A
expenses of $35.7 million for the first quarter, compared to $43.3 million in
the comparable quarter of the prior year.
Included in SG&A expenses for the first quarter are $5.5 million for the
mining segment as compared to $7.2 million for the comparable quarter of the
prior year and $30.2 million for the retail segment as compared to $36.1
million for the comparable quarter of the prior year. For the mining segment,
the decrease was primarily due to an adjustment to incentive based
compensation and a reduction in discretionary spending. For the retail
segment, the decrease was due to a combination of an adjustment to incentive
based compensation and reduced advertising and selling expenses. See
"Segmented Analysis" on page 7 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax recovery of $3.1 million during the
first quarter, compared to a net income tax expense of $13.3 million in the
comparable quarter of the prior year. The Company's effective income tax rate
for the quarter, excluding Harry Winston's retail segment, is 4%, which is
based on a statutory income tax rate of 30% adjusted for various items
including Northwest Territories mining royalty, impact of foreign exchange,
earnings subject to tax different than the statutory rate, impact of income
allocated to non-controlling interest and impact of dilution loss.
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 first quarter, the Canadian dollar strengthened against
the US dollar. As a result, the Company recorded an unrealized foreign
exchange loss of $4.0 million on the revaluation of the Company's Canadian
dollar denominated future income tax liability. This compares to an unrealized
foreign exchange gain of $0.9 million in the comparable quarter of the
previous year. The unrealized foreign exchange loss is not deductible for
Canadian income tax purposes.
During the first quarter, the Company recorded a non-cash dilution loss
of $34.2 million as a result of the investment by Kinross in HWDLP, which
holds the Company's 40% interest in the Diavik Diamond Mine. The dilution loss
is not deductible for Canadian tax purposes and hence no tax recovery was
recorded against the dilution loss. In addition, a certain portion of the
Company's earnings and loss before income taxes is allocated to Kinross as a
result of its investment of an indirect interest in the Diavik Diamond Mine.
As a result, the tax impact of the income allocated to non-controlling
interest is recorded as a reconciling item in the tax rate reconciliation.
The rate of income tax payable by Harry Winston Inc. varies by
jurisdiction. Net operating losses are available in certain jurisdictions to
offset future income taxes payable in such jurisdictions. The net operating
losses are scheduled to expire through 2029.
The Company has provided a table below summarizing the movement from the
statutory to the effective income tax rate as a percentage of earnings before
taxes:
Three Three
months months
ended ended
April 30, April 30,
2009 2008
-------------------------------------------------------------------------
Statutory income tax rate 30 % 31 %
Northwest Territories mining royalty
(net of income tax relief) - % 12 %
Impact of foreign exchange (1)% (3)%
Earnings subject to tax different than
statutory rate 1 % (4)%
Changes in valuation allowance (1)% 1 %
Impact of dilution loss (21)% - %
Impact of income allocated to
non-controlling interest (1)% - %
Assessments and adjustments - % 2 %
Other items (1)% (1)%
Effective income tax rate 6 % 38 %
-------------------------------------------------------------------------
CONSOLIDATED INTEREST AND FINANCING EXPENSES
Interest and financing expenses of $3.7 million were incurred during the
first quarter compared to $5.5 million during the comparable quarter of the
prior year. During the quarter, the Company repaid $74.2 million of the mining
segment's senior secured term and revolving credit facilities with the closing
of the Kinross transaction.
CONSOLIDATED OTHER INCOME
Other income of $0.3 million was recorded during the quarter compared to
other income of $0.2 million in the comparable quarter of the prior year.
CONSOLIDATED INSURANCE SETTLEMENT
During the quarter, the Company received the remaining insurance
settlement of $3.3 million related to the December 2008 robbery at the Harry
Winston Paris salon.
CONSOLIDATED DILUTION LOSS
During the quarter, the Company recorded a non-cash dilution loss of
$34.2 million or $0.52 per share as a result of the investment by Kinross in
HWDLP, which holds the Company's 40% interest in the Diavik Diamond Mine.
CONSOLIDATED FOREIGN EXCHANGE GAIN
A net foreign exchange loss of $5.8 million was recognized during the
quarter compared to a net foreign exchange gain of $0.2 million in the
comparable quarter of the prior year. The loss relates principally to the
revaluation of the Company's Canadian dollar denominated long-term future
income tax liability as a result of the strengthening of the Canadian dollar
against the US dollar at April 30, 2009. The Company's ongoing currency
exposure relates primarily to expenses and obligations incurred in Canadian
dollars, as well as the revaluation of certain Canadian monetary balance sheet
amounts. The Company does not currently have any significant derivative
instruments outstanding.
Segmented Analysis
The operating segments of the Company include mining and retail segments.
Mining
The mining segment includes the production and sale of rough diamonds.
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
-------------------------------------------------------------------------
2010 2009 2009 2009 2009
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 57,690 $ 51,100 $ 90,716 $105,014 $ 81,393
Cost of sales 57,256 34,612 40,617 32,390 32,150
-------------------------------------------------------------------------
Gross margin 434 16,488 50,099 72,624 49,243
Gross margin (%) 0.8% 32.3% 55.2% 69.2% 60.5%
Selling, general
and administrative
expenses 5,503 4,430 3,114 5,151 7,208
-------------------------------------------------------------------------
Earnings (loss) from
operations $ (5,069) $ 12,058 $ 46,985 $ 67,473 $ 42,035
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Three
months months
ended ended
2008 2008 2008 April 30, April 30,
Q4 Q3 Q2 2009 2008
-------------------------------------------------------------------------
Sales $103,238 $122,711 $105,071 $ 57,690 $ 81,393
Cost of sales 36,962 45,985 46,217 57,256 32,150
-------------------------------------------------------------------------
Gross margin 66,276 76,726 58,854 434 49,243
Gross margin (%) 64.2% 62.5% 56.0% 0.8% 60.5%
Selling, general
and administrative
expenses 5,663 6,748 5,861 5,503 7,208
-------------------------------------------------------------------------
Earnings (loss) from
operations $ 60,613 $ 69,978 $ 52,993 $ (5,069) $ 42,035
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended April 30, 2009 Compared to Three Months Ended
April 30, 2008
MINING SALES
Rough diamond sales for the quarter totalled $57.7 million compared to
$81.4 million in the comparable first quarter of the prior year resulting from
lower rough diamond prices. Rough diamond prices were at their lowest level
since the Diavik Diamond Mine began operation, and the Company's achieved
prices were particularly low in the first quarter as the sales mix contained a
significant proportion of lower value goods carried in inventory from January
31, 2009. Rough diamond production during the quarter was consistent with the
comparable quarter of the prior year.
The Company held two primary rough diamond sales in the first quarter,
consistent with the comparable quarter of the prior year. The Company expects
that results for its mining segment will continue to fluctuate depending on
the seasonality of production at the Diavik Diamond Mine, the number of
primary and secondary sales events conducted at each sales location during the
quarter, rough diamond prices and the volume, size and quality distribution of
rough diamonds delivered from the Diavik Diamond Mine in each quarter.
MINING COST OF SALES AND GROSS MARGIN
The Company's first quarter cost of sales was $57.3 million resulting in
a gross margin of 0.8% compared to $32.2 million cost of sales and gross
margin of 60.5% in the comparable quarter of the prior year. The increase in
cost of sales resulted from higher mining costs and from a greater proportion
of costs attributable to production activity versus development activity. Also
included in first quarter cost of sales is $9.8 million related to goods
carried in inventory at January 31, 2009 and an inventory write-down of $4.1
million. 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 $1.7 million from the
comparable period of the prior year primarily due to an adjustment to
incentive based compensation and a reduction in discretionary spending.
Mining Segment Operational Update
Ore production for the first calendar quarter consisted of 1.1 million
carats produced from 0.17 million tonnes of ore from the A-154 South
kimberlite pipe and 0.7 million carats produced from 0.26 million tonnes of
ore from the A-418 kimberlite pipe. Rough diamond production was consistent
with the first calendar quarter from the prior year as a result of a slight
decrease in ore production offset by a slight increase in average grade. The
increase in average grade was driven by a significant increase in the grade of
the ore from the A-154 South kimberlite pipe.
HARRY WINSTON DIAMOND LIMITED PARTNERSHIP'S 40% SHARE OF
DIAVIK DIAMOND MINE PRODUCTION
(reported on a one-month lag)
-------------------------------------------------------------------------
Twelve Three Three
months months months
ended ended ended
March 31, March 31, December 31,
2009 2008 2008
-------------------------------------------------------------------------
Diamonds recovered (000s carats) 714 714 3,690
Grade (carats/tonne) 4.18 4.08 3.82
-------------------------------------------------------------------------
Mining Segment Outlook
A mine plan and revised budget for calendar 2009 was approved in the
first quarter of calendar 2009 by both Rio Tinto plc, the operator of the
Diavik Diamond Mine, and the Company. The updated plan incorporates various
production options that will enable the operation to adapt to changes in the
diamond market. The plan allows for changes to carat production by varying the
mix of ore that comes from the A-418 kimberlite pipe and the higher grade
A-154 South pit. The base plan for calendar year 2009 foresees Diavik Diamond
Mine production of 5.4 million carats from the processing of 1.3 million
tonnes of ore, and contemplates two six-week shutdown periods in mid-summer
and at year end. A new mining technique is under consideration for the
potential mining of the A-21 resource, and exploration work has identified
extensions at depth to the A-418 and A-154 North kimberlite pipes.
PRODUCTION
In calendar 2009, it is estimated that 1.3 million tonnes of open pit ore
will be mined, the majority of which will come from the A-418 kimberlite pipe,
with the remaining production coming from the A-154 South open pit. However,
if market conditions improve, additional carats can be produced by shifting
the mix of ore from A-418 kimberlite pipe to the higher grade A-154 South
kimberlite pipe. Total carat production is expected to be between 5 and 6
million carats on a 100% basis.
In calendar 2010, the A-418 kimberlite open pit is expected to be the
primary ore source supplemented by A-154 South kimberlite pipe, where open pit
mining is planned to be complete by the second quarter. Total open pit ore
mined is expected to be 1.5 million tonnes. In addition, underground mining is
scheduled to commence on a limited scale with approximately 0.5 million tonnes
of ore during the year, sourced mainly from the A-154 North kimberlite pipe.
In calendar 2011, underground mining is expected to ramp up to 0.9
million tonnes a year, principally from the A-154 North and South kimberlite
pipes. Production from the A-418 open pit is expected to peak at 1.5 million
tonnes as the strip ratio is reduced during the later phases of open pit
mining.
In the absence of production from A-21, calendar 2012 is expected to be
the final year of open pit mining. An amended pit plan for A-418 is expected
to allow the open pit depth to be extended by 10 meters to 9,200 elevation,
reallocating 240,000 tonnes of A-418 ore from underground to open pit for a
total of 0.3 million tonnes from open pit in calendar 2012. Underground mining
in 2012 is expected to reach approximately 1.0 million tonnes.
By 2013, underground mining is expected to reach its ongoing capacity of
1.5 million tonnes a year with a blend of ore from A-154 North, A-154 South
and A-418 kimberlite pipes. Additional production capacity beyond 1.5 million
tonnes a year or to extend production beyond 2022 will be dependent on, among
other things, bringing resources and exploratory tonnages into reserves.
COST OF SALES
The summer and winter production shutdowns are planned to last six weeks
each, during which time diamond production will temporarily cease and the mine
will be placed on a short-term care and maintenance schedule. The summer
shutdown is scheduled for July 14, 2009 to August 24, 2009 inclusive and will
reduce goods available for sale by the Company in the third quarter of fiscal
2010.
The winter shutdown is scheduled for December 1, 2009 to January 11, 2010
inclusive, and can be reversed should market conditions improve. If this
shutdown were to go ahead it would reduce goods available for sale in the
first quarter of fiscal 2011.
Cost of sales for the mining segment for fiscal 2009 included proceeds of
an insurance settlement related to a Diavik Diamond Mine shovel fire and
significant costs attributable to development activity versus production
activity during the A-418 pre-production period. After adjusting for these
factors, the Company expects cost of sales for the mining segment to increase
in fiscal 2010 by an estimated 10% to approximately $185 million. The 10%
increase is due in part to year-end operating costs that would normally be
carried over as cost of sales in the next fiscal year being expensed in the
current year due to the planned winter shutdown, and costs associated with
unsold inventory at the end of fiscal 2009.
The expected increase in cost of sales for fiscal 2010 is specific to the
Company's mining segment and is not indicative of the trend in operating costs
at the Diavik Diamond Mine. On a Canadian dollar basis, cash operating costs
at the mine are expected to be slightly lower in calendar 2009 compared with
calendar 2008.
CAPITAL EXPENDITURES
During the next three years, HWDLP's 40% share of the planned capital
expenditure is expected to be approximately $130 million at an assumed average
Canadian/US dollar exchange rate of $0.86. HWDLP's portion of capital
expenditure for the fiscal year ending January 31, 2010 is expected to be $47
million at an assumed average Canadian/US dollar exchange rate of $0.85, the
majority of which is related to underground development. During the first
quarter, HWDLP's share of underground capital expenditures was $21.9 million.
By August 2009, underground development is expected to be at a stage when
limited production could commence, although further development work that will
allow for optimum production levels by use of different mining methods will be
deferred until calendar 2010 and 2011. The Company expects to contribute $53
million over the following two years, assuming an average Canadian/US dollar
exchange rate of $0.86, in support of this stage of underground development.
The balance of capital expenditures during this period represents sustaining
requirements.
Retail
The retail 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 and London; and three
salons in Asia outside of Japan: Beijing, Taipei and Hong Kong.
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
-------------------------------------------------------------------------
2010 2009 2009 2009 2009
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 51,953 $ 67,299 $ 57,907 $ 81,105 $ 74,686
Cost of sales 26,688 34,296 31,062 41,152 40,999
-------------------------------------------------------------------------
Gross margin 25,265 33,003 26,845 39,953 33,687
Gross margin (%) 48.6% 49.0% 46.4% 49.3% 45.1%
Selling, general
and administrative
expenses 30,246 34,969 30,884 34,043 36,077
-------------------------------------------------------------------------
Earnings (loss)
from operations $ (4,981) $ (1,966) $ (4,039) $ 5,910 $ (2,390)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Three
months months
ended ended
2008 2008 2008 April 30, April 30,
Q4 Q3 Q2 2009 2008
-------------------------------------------------------------------------
Sales $ 84,957 $ 53,767 $ 68,198 $ 51,953 $ 74,686
Cost of sales 46,675 28,606 35,610 26,688 40,999
-------------------------------------------------------------------------
Gross margin 38,282 25,161 32,588 25,265 33,687
Gross margin (%) 45.1% 46.8% 47.8% 48.6% 45.1%
Selling, general
and administrative
expenses 39,831 28,791 29,340 30,246 36,077
-------------------------------------------------------------------------
Earnings (loss)
from operations $ (1,549) $ (3,630) $ 3,248 $ (4,981) $ (2,390)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended April 30, 2009 Compared to Three Months Ended
April 30, 2008
RETAIL SALES
Sales for the first quarter were $51.9 million compared to $74.7 million
for the comparable quarter of the prior year, a decrease of 30%. Sales in the
European market decreased 39% to $19.3 million, US sales decreased 25% to
$18.8 million, and Asian sales decreased 24% to $13.8 million.
RETAIL COST OF SALES AND GROSS MARGIN
Cost of sales for Harry Winston Inc. for the first quarter was $26.7
million compared to $41.0 million for the comparable quarter of the prior
year. Gross margin for the quarter was $25.3 million or 48.6% compared to
$33.7 million or 45.1% for the first quarter of the prior year. Excluding the
impact of sales of Harry Winston Inc. pre-acquisition inventory, gross margin
for the first quarter and the comparable quarter of the prior year would have
been 49.6% and 47.3%, respectively. Gross margin for the first quarter of the
prior year was impacted primarily by three factors: an increased contribution
of high dollar value transactions, which carried lower-than-average gross
margins; an increase in costs relating to precious metals and gem stones; and
an increase in research and development costs to support the watch business.
RETAIL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses decreased to $30.2 million from $36.1 million in the
comparable quarter of the prior year. The decrease was due to a combination of
an adjustment to incentive based compensation and reduced advertising and
selling expenses. SG&A expenses include depreciation and amortization expense
of $3.1 million, consistent with the comparable quarter of the prior year.
SG&A as a percentage of sales increased to 58% compared to 48% in the
comparable quarter of the prior year.
Retail Segment Operational Update
During the first quarter, the retail segment recorded a 30% decline in
sales over the comparable quarter of the prior year, which were particularly
high due to strong momentum in Asia and Russia. Sales were generally weaker
throughout the retail salon network. In response to the continuing global
recession, the retail segment has implemented tight controls over operating
expenses, capital expenditures and inventory purchases. Harry Winston Inc.
operated a network of 18 retail salons during the quarter.
Retail Segment Outlook
Harry Winston Inc. expects sales in the luxury diamond jewelry industry
to be negatively impacted by a weak global economy for the remainder of the
year. The Company has implemented a series of cost-control initiatives in
light of the current economic environment, including expense and staff
reductions, close monitoring of inventory levels and reductions in capital
expenditures. In addition, the Company is limiting its current year expansion
of the retail salon distribution network to one new salon in Singapore during
the second quarter.
Harry Winston Inc. continues to focus on providing customers with the
highest level of service and product quality in the industry. The strength of
the Harry Winston brand, combined with our global distribution network and
high-quality product, provides the Company with a solid platform to withstand
the current economic downturn and position the Company for long-term success.
Liquidity and Capital Resources
Working Capital
As at April 30, 2009, the Company had unrestricted cash and cash
equivalents of $122.0 million and contingency cash collateral and reserves of
$0.3 million, compared to $16.7 million and $30.1 million, respectively, at
January 31, 2009. The Company had cash on hand and balances with banks of
$121.2 million and short-term investments of $0.8 million at April 30, 2009.
The short-term investments were held in overnight deposits. During the
quarter, total cash resources were impacted by the $150.0 million net
investment by Kinross and the subsequent repayment by the Company of the
mining segment's $74.2 million senior secured term and revolving credit
facilities.
During the quarter ended April 30, 2009, the Company generated $38.8
million in cash from operations, compared to $34.3 million in the comparable
quarter of the prior year.
Working capital increased to $327.2 million at April 30, 2009 from $195.1
million at January 31, 2009. During the quarter, the Company decreased
accounts receivable by $50.0 million; increased prepaid expenses and other
current assets by $4.1 million; decreased inventory by $6.8 million; decreased
accounts payable and accrued liabilities by $12.1 million; and decreased
income taxes payable by $11.8 million. The decrease in accounts receivable
resulted from the receipt of $51.7 million for the insurance settlement of the
Harry Winston Paris salon robbery that occurred in December 2008.
The Company's liquidity requirements fluctuate from quarter to quarter
depending on, among other factors, the seasonality of production at the Diavik
Diamond Mine, seasonality of mine operating expenses, capital expenditure
programs, the number of sales events conducted during the quarter and the
volume, size and quality distribution of rough diamonds delivered from the
Diavik Diamond Mine in each quarter, along with the seasonality of sales and
salon expansion in the retail segment. The Company's principal working capital
needs include investments in inventory, prepaid expenses and other current
assets, and accounts payable and income taxes payable.
The Company's mining and retail segments maintain separate financing
arrangements. Accordingly, the Company assesses liquidity and capital
resources on a segmented basis. The retail segment's cash requirements are for
cash operating expenses, working capital and capital expenditures, including
salon expansion. The Company believes that cash on hand, cash generated from
operations and access to credit facilities will be sufficient to meet
anticipated cash requirements for the retail segment for the next 12 months.
The mining segment's cash requirements are for cash operating expenses,
working capital and capital expenditures. With the closing of the Kinross
transaction, the Company believes that cash on hand and cash generated from
the sale of rough diamonds will be sufficient to meet anticipated cash
requirements for the next 12 months.
Financing Activities
On March 31, 2009, the Company issued 15.2 million of treasury shares at
a price of $3.00 per share to Kinross, being approximately 19.9% of the
Company's issued equity post the transaction. This transaction generated net
proceeds of $44.8 million, net of transaction costs.
During the quarter, the Company repaid $74.2 million of the mining
segment's senior secured term and revolving credit facilities with the closing
of the Kinross transaction.
As at April 30, 2009, Harry Winston Inc. had $159.5 million outstanding
on its $250.0 million secured five-year revolving credit facility, which is
used to fund operating and capital expenditure requirements. This represents a
decrease of $20.1 million from the amount outstanding at January 31, 2009.
Also included in long-term debt of the Company's retail operations is a
25-year loan agreement for $15.2 million (17.5 million CHF) used to finance
the construction of the Company's watch factory in Geneva, Switzerland, and a
demand credit facility of 2.0 million CHF, supported by a $2.0 million standby
letter of credit. At April 30, 2009, $15.2 million had been drawn against the
facilities compared to the same amount at January 31, 2009. The bank has a
secured interest in the factory building.
Harry Winston Japan, K.K. maintains secured and unsecured credit
agreements with three banks amounting to $21.4 million ((Yen)2,075 million).
At April 30, 2009, $21.4 million had been drawn against these facilities, $5.2
million of which is long term, payable on June 28, 2010, with the balance of
$16.2 million classified as bank advances.
At April 30, 2009, $5.8 million, $1.3 million and $0.3 million were drawn
under the Company's revolving financing facilities relating to its Belgian
subsidiary, Harry Winston Diamond International N.V., its Indian subsidiary,
Harry Winston Diamond (India) Private Limited and its Israeli subsidiary,
Harry Winston Diamond (Israel) Limited, respectively. At January 31, 2009,
$18.4 million, $4.7 million and $1.5 million were drawn under the Company's
revolving financing facilities relating to Harry Winston Diamond International
N.V., Harry Winston Diamond (Israel) Limited and Harry Winston Diamond (India)
Private Limited, respectively.
Investing Activities
Kinross also subscribed for new partnership units representing a 22.5%
interest in HWDLP, for a subscription value of $125.8 million.
During the quarter, the Company purchased capital assets of $22.5
million, of which $22.1 million were purchased for the mining segment and $0.4
million for the retail segment.
Contractual Obligations
The Company has contractual payment obligations with respect to long-term
debt and, through its participation in the Joint Venture, future site
restoration costs at the Diavik Diamond Mine level. Additionally, at the Joint
Venture level, contractual obligations exist with respect to operating
purchase obligations, as administered by DDMI, the operator of the mine. In
order to maintain its 40% ownership interest in the Diavik Diamond Mine, the
Company is obligated to fund 40% of the Joint Venture's total expenditures on
a monthly basis. Harry Winston Diamond Corporation's current projected share
of the planned capital expenditures at the Diavik Diamond Mine, which are not
reflected in the table below, including capital expenditures for the calendar
years 2009 to 2013, is approximately $150 million assuming a Canadian/US
average exchange rate of $0.90 for the five years. The most significant
contractual obligations for the ensuing five-year period can be summarized as
follows:
CONTRACTUAL OBLIGATIONS
(expressed in Less
thousands of United than Year Year After
States dollars) Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Long-term debt(a)(b) $219,075 $ 11,650 $ 21,775 $169,105 $ 16,545
Environmental and
participation
agreements
incremental
commitments(c) 79,517 66,047 2,682 1,040 9,748
Operating lease
obligations(d) 109,184 18,713 27,427 18,973 44,071
Capital lease
obligations(e) 1,174 760 414 - -
-------------------------------------------------------------------------
Total contractual
obligations $408,950 $ 97,170 $ 52,298 $189,118 $ 70,364
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Long-term debt presented in the foregoing table includes current and
long-term portions. The Company's first mortgage on real property has
scheduled principal payments of approximately $0.1 million quarterly,
and may be prepaid after 2009. On April 30, 2009, $6.8 million was
outstanding on the mortgage payable.
Harry Winston Inc. maintains a credit agreement with a syndicate of
banks for a $250.0 million five-year revolving credit facility. There
are no scheduled repayments required before maturity. At April 30,
2009, $159.5 million had been drawn against this secured credit
facility which expires on March 31, 2013.
Also included in long-term debt of Harry Winston Inc. is a 25-year
loan agreement for $15.2 million (17.5 million CHF) used to finance
the construction of the Company's watch factory in Geneva,
Switzerland, and a demand credit facility for 2.0 million CHF,
supported by a $2.0 million standby letter of credit. The bank has a
secured interest in the factory building. The loan agreement is
comprised of a 3.5 million CHF loan and a 14.0 million CHF loan. The
3.5 million CHF loan bears interest at a rate of 3.9% and matures on
April 22, 2010. The 14.0 million CHF loan bears interest at a rate of
3.55% and matures on January 31, 2033. The demand credit facility
bears interest at a rate of 5.0% per annum. Quarterly payments on the
loan began on June 30, 2008. At April 30, 2009, $15.2 million was
outstanding on these loan agreements.
Harry Winston Japan, K.K. maintains unsecured credit agreements with
two banks each amounting to $7.7 million ((Yen)750 million). At April
30, 2009, $15.5 million had been drawn against these facilities, $5.2
million of which is long term, with the balance of $10.3 million
classified as bank advances. The short-term portion of the credit
facilities bear interest at 1.98% and expire on June 1, 2009 and July
30, 2009, respectively. The long-term portion bears interest at 2.38%
and expires on June 28, 2010. Harry Winston Japan, K.K. also
maintains a secured credit agreement amounting to $5.9 million
((Yen)575 million). The facility is secured by inventory owned by
Harry Winston Japan, K.K., bears interest at 2.25% and expires on
June 19, 2009.
(b) Interest on long-term debt is calculated at various fixed and
floating rates. Projected interest payments on the current debt
outstanding were based on interest rates in effect at April 30, 2009,
and have been included under long-term debt in the table above.
Interest payments for the next 12 months are approximated to be $7.6
million.
(c) The Joint Venture, under environmental and other agreements, must
provide funding for the Environmental Monitoring Advisory Board.
These agreements also state the Joint Venture must provide security
deposits for the performance by the Joint Venture of its reclamation
and abandonment obligations under all environmental laws and
regulations. The operator of the Joint Venture has fulfilled such
obligations for the security deposits by posting letters of credit of
which Harry Winston Diamond Corporation's share as at April 30, 2009
was $64.8 million based on the Company's 40% ownership interest in
the Diavik Diamond Mine. Following the closing of the transaction
with Kinross of an indirect interest in the Diavik Diamond Mine, the
Company will effectively have a 31% economic interest in the Diavik
Diamond Mine. The requirement to post security for the reclamation
and abandonment obligations may be reduced to the extent of amounts
spent by the Joint Venture on those activities. The Joint Venture has
also signed participation agreements with various native groups.
These agreements are expected to contribute to the social, economic
and cultural well-being of area Aboriginal bands. The actual cash
outlay for the Joint Venture's obligations under these agreements is
not anticipated to occur until later in the life of the Diavik
Diamond Mine.
(d) Operating lease obligations represent future minimum annual
rentals under non-cancellable operating leases for Harry Winston
salons, office space and long-term leases for property, land, office
premises and a fuel tank farm at the Diavik Diamond Mine. Harry
Winston Inc.'s New York salon lease expires on December 17, 2010 with
an option to renew.
(e) Capital lease obligations represent future minimum annual rentals
under non-cancellable capital leases for Harry Winston Inc. retail
exhibit space.
Dividend
On March 19, 2009, the Company announced that it has suspended its
dividend for the time being.
Risks and Uncertainties
Harry Winston Diamond Corporation is subject to a number of risks and
uncertainties as a result of its operations. In addition to the other
information contained in this Management's Discussion and Analysis and the
Company's other publicly filed disclosure documents, readers should give
careful consideration to the following risks, each of which could have a
material adverse effect on the Company's business prospects or financial
condition:
Nature of Mining
The operation of the Diavik Diamond Mine is subject to risks inherent in
the mining industry, including variations in grade and other geological
differences, unexpected problems associated with required water retention
dikes, water quality, surface and underground conditions, processing problems,
equipment performance, accidents, labour disputes, risks relating to the
physical security of the diamonds, force majeure risks and natural disasters.
Particularly with underground mining operations, inherent risks include
variations in rock structure and strength as it impacts on mining method
selection and performance, de-watering and water handling requirements,
achieving the required paste backfill strengths and unexpected local ground
conditions. Hazards, such as unusual or unexpected rock formations, rock
bursts, pressures, collapses, flooding or other conditions, may be encountered
during mining. Such risks could result in personal injury or fatality; damage
to or destruction of mining properties, processing facilities or equipment;
environmental damage; delays, suspensions or permanent reductions in mining
production; monetary losses; and possible legal liability.
The Diavik Diamond Mine, because of its remote northern location and
access only by winter road or by air, is subject to special climate and
transportation risks. These risks include the inability to operate or to
operate efficiently during periods of extreme cold, the unavailability of
materials and equipment, and increased transportation costs due to the late
opening and/or early closure of the winter road. Such factors can add to the
cost of mine development, production and operation and/or impair production
and mining activities, thereby affecting the Company's profitability.
Nature of Joint Arrangement with DDMI
Harry Winston Diamond Limited Partnership holds an undivided 40% interest
in the assets, liabilities and expenses of the Diavik Diamond Mine and the
Diavik group of mineral claims. Harry Winston Diamond Limited Partnership is
owned 77.5% by the Company and 22.5% by Kinross Gold Corporation. The Diavik
Diamond Mine and the exploration and development of the Diavik group of
mineral claims is a joint arrangement between DDMI (60%) and HWDLP (40%), and
is subject to the risks normally associated with the conduct of joint ventures
and similar joint arrangements. These risks include the inability to exert
influence over strategic decisions made in respect of the Diavik Diamond Mine
and the Diavik group of mineral claims. By virtue of DDMI's 60% interest in
the Diavik Diamond Mine, it has a controlling vote in virtually all Joint
Venture management decisions respecting the development and operation of the
Diavik Diamond Mine and the development of the Diavik group of mineral claims.
Accordingly, DDMI is able to determine the timing and scope of future project
capital expenditures, and therefore is able to impose capital expenditure
requirements on HWDLP that the Company and Kinross may not have sufficient
cash to meet. A failure to meet capital expenditure requirements imposed by
DDMI could result in HWDLP's interest in the Diavik Diamond Mine and the
Diavik group of mineral claims being diluted.
Agreement with Kinross
Under the amended partnership agreement of HWDLP, the general partner is
entitled to request that the partners in the partnership advance funds to the
partnership pro rata based on their holdings of partnership units for the
purpose of satisfying the partnership's obligations under various contractual
commitments, including those deriving from the joint arrangement between DDMI
and the partnership. The partners may unanimously determine to fund any cash
call by way of a loan rather than equity contribution. If a partner fails to
contribute its proportion of funds with respect to a cash call, the
non-defaulting partner or partners will have the option, but not the
obligation, to fund the defaulting partner's portion of the cash call by way
of equity contribution or loan or a combination of the two; provided that if
any equity contribution is made, the non-defaulting partner's interest in the
partnership will be increased proportionately through the issuance of
additional partnership units.
As DDMI, under the joint arrangement between DDMI and the partnership, is
able to determine the timing and scope of future project capital expenditures
and to impose capital expenditure requirements on the Company that the Company
may not have sufficient cash to meet, the Company's interest in the
partnership could be diluted under the amended partnership agreement as a
failure by the Company to meet cash call requirements imposed by the amended
partnership agreement.
Diamond Prices and Demand for Diamonds
The profitability of the Company is dependent upon production from the
Diavik Diamond Mine and on the results of the operations of its retail
operations. Each in turn is dependent in significant part upon the worldwide
demand for and price of diamonds. Diamond prices fluctuate and are affected by
numerous factors beyond the control of the Company, including worldwide
economic trends, particularly in the US, Japan, China and India, worldwide
levels of diamond discovery and production, and the level of demand for, and
discretionary spending on, luxury goods such as diamonds and jewelry. Low or
negative growth in the worldwide economy, prolonged credit market disruptions
or the occurrence of terrorist or similar activities creating disruptions in
economic growth could result in decreased demand for luxury goods such as
diamonds and jewelry, thereby negatively affecting the price of diamonds and
jewelry. Similarly, a substantial increase in the worldwide level of diamond
production could also negatively affect the price of diamonds. In each case,
such developments could materially adversely affect the Company's results of
operations.
Cash Flow and Liquidity
The Company's liquidity requirements fluctuate from quarter to quarter
depending on, among other factors, the seasonality of production at the Diavik
Diamond Mine, seasonality of mine operating expenses, capital expenditure
programs, the number of sales events conducted during the quarter and the
volume, size and quality distribution of rough diamonds delivered from the
Diavik Diamond Mine in each quarter, along with the seasonality of sales and
salon expansion in the retail segment. The Company's principal working capital
needs include investments in inventory, prepaid expenses and other current
assets, and accounts payable and income taxes payable. There can be no
assurance that the Company will be able to meet each or all of its liquidity
requirements. A failure by the Company to meet its liquidity requirements
could result in the Company failing to meet its planned development
objectives, or in the Company being in default of a contractual obligation,
each of which could have a material adverse effect on the Company's business
prospects or financial condition.
Economic Environment
The Company's financial results are tied to the global economic
environment. The global markets are experiencing the impact of a significant
US and international economic downturn. This could restrict the Company's
growth opportunities both domestically and internationally. Should economic
conditions not improve or further deteriorate, the Company could experience
revenue pressure across both its business segments and a decrease in the
availability of credit, which could have a material adverse effect on the
Company's business prospects or financial condition.
Currency Risk
Currency fluctuations may affect the Company's financial performance.
Diamonds are sold throughout the world based principally on the US dollar
price, and although the Company reports its financial results in US dollars, a
majority of the costs and expenses of the Diavik Diamond Mine are incurred in
Canadian dollars. Further, the Company has a significant future income tax
liability that has been incurred and will be payable in Canadian dollars. The
Company's currency exposure relates primarily to expenses and obligations
incurred by it in Canadian dollars and, secondarily, to revenues of Harry
Winston Inc. in currencies other than the US dollar. The appreciation of the
Canadian dollar against the US dollar, and the depreciation of such other
currencies against the US dollar, therefore, will increase the expenses of the
Diavik Diamond Mine and the amount of the Company's Canadian dollar
liabilities relative to the revenue the Company will receive from diamond
sales, and will decrease the US dollar revenues received by Harry Winston Inc.
From time to time, the Company may use a limited number of derivative
financial instruments to manage its foreign currency exposure.
Licenses and Permits
The operation of the Diavik Diamond Mine and exploration on the Diavik
property requires licenses and permits from the Canadian government. The
Diavik Diamond Mine Type "A" Water License was renewed by the regional
Wek'eezhii Land and Water Board to October 31, 2015. While the Company
anticipates that DDMI, which is also the operator of the Diavik Diamond Mine,
will be able to renew this license and other necessary permits in the future,
there can be no guarantee that DDMI will be able to do so or obtain or
maintain all other necessary licenses and permits that may be required to
maintain the operation of the Diavik Diamond Mine or to further explore and
develop the Diavik property.
Regulatory and Environmental Risks
The operation of the Diavik Diamond Mine, exploration activities at the
Diavik Project and the manufacturing of jewelry and watches are subject to
various laws and regulations governing the protection of the environment,
exploration, development, production, taxes, labour standards, occupational
health, waste disposal, mine safety, manufacturing safety and other matters.
New laws and regulations, amendments to existing laws and regulations, or more
stringent implementation or changes in enforcement policies under existing
laws and regulations could have a material adverse impact on the Company by
increasing costs and/or causing a reduction in levels of production from the
Diavik Diamond Mine and in the manufacture of jewelry and watches. As well, as
the Company's international operations expand, it or its subsidiaries become
subject to laws and regulatory regimes which differ materially from those
under which they operate in Canada and the US.
Mining and manufacturing are subject to potential risks and liabilities
associated with pollution of the environment and the disposal of waste
products occurring as a result of mining and manufacturing operations. To the
extent that the Company's operations are subject to uninsured environmental
liabilities, the payment of such liabilities could have a material adverse
effect on the Company.
Climate Change
Canada ratified the Kyoto Protocol to the United Nations Framework
Convention on Climate Change in late 2002 and the Kyoto Protocol came into
effect in Canada in February 2005. The Canadian government is currently
developing a number of policy measures in order to meet its emission reduction
guidelines. While the impact of these measures cannot be quantified at this
time, the likely effect will be to increase costs for fossil fuels,
electricity and transportation; restrict industrial emission levels; impose
added costs for emissions in excess of permitted levels and increase costs for
monitoring and reporting. Compliance with these initiatives could have a
material adverse effect on the Company's results of operations.
Resource and Reserve Estimates
The Company's figures for mineral resources and ore reserves on the
Diavik group of mineral claims are estimates, and no assurance can be given
that the anticipated carats will be recovered. The estimation of reserves is a
subjective process. Forecasts are based on engineering data, projected future
rates of production and the timing of future expenditures, all of which are
subject to numerous uncertainties and various interpretations. The Company
expects that its estimates of reserves will change to reflect updated
information. Reserve estimates may be revised upward or downward based on the
results of current and future drilling, testing or production levels and on
changes in mine design. In addition, market fluctuations in the price of
diamonds or increases in the costs to recover diamonds from the Diavik Diamond
Mine may render the mining of ore reserves uneconomical.
Mineral resources that are not mineral reserves do not have demonstrated
economic viability. Due to the uncertainty that may attach to inferred mineral
resources, there is no assurance that mineral resources at the Diavik property
will be upgraded to proven and probable ore reserves.
Insurance
The Company's business is subject to a number of risks and hazards,
including adverse environmental conditions, industrial accidents, labour
disputes, unusual or unexpected geological conditions, risks relating to the
physical security of diamonds and jewelry held as inventory or in transit,
changes in the regulatory environment and natural phenomena such as inclement
weather conditions. Such occurrences could result in damage to the Diavik
Diamond Mine, personal injury or death, environmental damage to the Diavik
property, delays in mining, closing of Harry Winston Inc.'s manufacturing
facilities or salons, monetary losses and possible legal liability. Although
insurance is maintained to protect against certain risks in connection with
the Diavik Diamond Mine and the Company's operations, the insurance in place
will not cover all potential risks. It may not be possible to maintain
insurance to cover insurable risks at economically feasible premiums.
Fuel Costs
The Diavik Diamond Mine's expected fuel needs are purchased periodically
during the year for storage, and transported to the mine site by way of the
winter road. These costs will increase if transportation by air freight is
required due to a shortened "winter road season" or unexpectedly high fuel
usage.
The cost of the fuel purchased is based on the then prevailing price and
expensed into operating costs on a usage basis. The Diavik Diamond Mine
currently has no hedges for its future anticipated fuel consumption.
Reliance on Skilled Employees
Production at the Diavik Diamond Mine is dependent upon the efforts of
certain skilled employees of DDMI. The loss of these employees or the
inability of DDMI to attract and retain additional skilled employees may
adversely affect the level of diamond production from the Diavik Diamond Mine.
The Company's success at marketing rough diamonds and in operating the
business of Harry Winston Inc. is dependent on the services of key executives
and skilled employees, as well as the continuance of key relationships with
certain third parties, such as diamantaires. The loss of these persons or the
Company's inability to attract and retain additional skilled employees or to
establish and maintain relationships with required third parties may adversely
affect its business and future operations in marketing diamonds and in
operating its retail segment.
Expansion of the Existing Salon Network
A key component of the Company's retail strategy is the expansion of its
salon network. This strategy requires the Company to make ongoing capital
expenditures to build and open new salons, to refurbish existing salons from
time to time, and to incur additional operating expenses in order to operate
the new salons. To date, much of this expansion has been financed through
borrowings by Harry Winston Inc. There can be no assurance that the expansion
of the salon network will prove successful in increasing annual sales or
earnings from the retail segment, and the increased debt levels resulting from
this expansion could negatively impact the Company's liquidity and its results
from operations in the absence of increased sales and earnings.
Competition in the Luxury Jewelry Segment
The Company is exposed to competition in the retail diamond market from
other luxury goods, diamond, jewelry and watch retailers. The ability of Harry
Winston Inc. to successfully compete with such luxury goods, diamond, jewelry
and watch retailers is dependent upon a number of factors, including the
ability to source high-end polished diamonds and protect and promote its
distinctive brand name and reputation. If Harry Winston Inc. is unable to
successfully compete in the luxury jewelry segment, then the Company's results
of operations will be adversely affected.
Critical Accounting Estimates
Management is often required to make judgments, assumptions and estimates
in the application of Canadian generally accepted accounting principles that
have a significant impact on the financial results of the Company. Certain
policies are more significant than others and are, therefore, considered
critical accounting policies. Accounting policies are considered critical if
they rely on a substantial amount of judgment (use of estimates) in their
application or if they result from a choice between accounting alternatives
and that choice has a material impact on the Company's reported results or
financial position. There have been no changes to the Company's critical
accounting policies or estimates from those disclosed in the Company's MD&A
for its fiscal year ended January 31, 2009.
Changes in Accounting Policies
Goodwill and Intangibles Assets
On February 1, 2008 the CICA issued Handbook Section 3064, "Goodwill and
Intangible Assets". This Section establishes revised standards for the
recognition, measurement, presentation and disclosure of goodwill and
intangible assets. The Company adopted the new standard effective February 1,
2009. This standard has had no material impact on the consolidated financial
statements.
Recently Issued Accounting Standards
Credit Risk and the Fair Value of Financial Assets and Liabilities
In January 2009, the CICA issued EIC-173, "Credit Risk and the Fair Value
of Financial Assets and Liabilities". This abstract requires companies to take
both counterparty's credit risk into account when measuring the fair value of
financial assets and liabilities, including derivatives. The Company applied
this EIC for the quarter ended April 30, 2009. This abstract has had no
material impact on the consolidated financial statements.
Mining Exploration Costs
In March 2009, the CICA issued EIC-174, "Mining Exploration Costs", which
provides guidance on the capitalization of exploration costs related to mining
properties and the subsequent impairment review of capitalized exploration
costs. The Company applied this EIC for the quarter ended April 30, 2009. This
abstract has had no material impact on the consolidated financial statements.
International Financial Reporting Standards ("IFRS")
In February 2008, the Canadian Accounting Standards Board confirmed that
publicly accountable enterprises will be required to adopt IFRS in place of
Canadian Generally Accepted Accounting Principles (GAAP) for financial periods
beginning on or after January 1, 2011. Accordingly, commencing February 1,
2011, the Company will convert over to IFRS and prepare its first financial
statements in accordance with IFRS for the three-month period ended April 30,
2011, with comparative information also prepared under IFRS.
The conversion project from Canadian GAAP to IFRS is led by finance
management, and includes representatives from various areas of the Company as
necessary to plan for and achieve a smooth transition. The Company has engaged
the services of a third party expert advisor to assist. Regular progress
reporting to senior management and to the Audit Committee on the status of the
IFRS conversion project is in place. The conversion project consists of three
phases:
Assessment Phase - This phase involves a review of accounting differences
between Canadian GAAP and IFRS; an evaluation of IFRS 1 exemptions for
first time IFRS adopters; and a high level impact assessment on systems
and business processes.
Design Phase - This phase involves prioritizing and resolving accounting
treatment issues; quantifying the impact of converting to IFRS; reviewing
and approving accounting policy choices; performing a detailed impact
assessment on systems and processes; designing system and business
process changes; developing IFRS training material; and drafting IFRS
financial statement content.
Implementation Phase - This phase involves changes to systems and
business processes; determining the opening IFRS transition balance
sheet; dual accounting under both Canadian GAAP and IFRS; and preparing
detailed reconciliations of Canadian GAAP to IFRS financial statements.
The Company is on schedule to complete the assessment phase of its IFRS
conversion project during the second quarter of fiscal 2010. The Company
cannot at this time reasonably estimate the impact of adopting IFRS on its
consolidated financial statements.
Outstanding Share Information
As at April 30, 2009
-------------------------------------------------------------------------
Authorized Unlimited
Issued and outstanding shares 76,572,092
Options outstanding 3,250,679
Fully diluted 79,822,771
-------------------------------------------------------------------------
Additional Information
Additional information relating to the Company, including the Company's
most recently filed annual information form, can be found on SEDAR at
www.sedar.com, and is also available on the Company's website at
http://investor.harrywinston.com.
Consolidated Balance Sheets
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
April 30, January 31,
2009 2009
(unaudited)
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 3) $ 121,997 $ 16,735
Cash collateral and cash reserves (note 3) 260 30,145
Accounts receivable (note 13) 16,961 66,980
Inventory and supplies (note 4) 339,459 346,235
Prepaid expenses and other current assets 51,423 48,130
-------------------------------------------------------------------------
530,100 508,225
Mining capital assets 809,197 800,358
Retail capital assets 65,112 68,258
Intangible assets, net (note 6) 130,341 130,752
Other assets 14,897 15,644
Future income tax asset 42,726 43,338
-------------------------------------------------------------------------
$ 1,592,373 $ 1,566,575
--------------------------
--------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 107,992 $ 118,390
Income taxes payable 66,677 76,987
Bank advances 24,230 42,621
Current portion of long-term debt (note 7) 4,051 75,097
-------------------------------------------------------------------------
202,950 313,095
Long-term debt (note 7) 182,109 205,625
Future income tax liability 272,606 303,284
Other long-term liability 1,936 1,946
Future site restoration costs 39,680 39,506
Minority interest 287 280
Non-controlling interest (note 1) 189,131 -
Shareholders' equity:
Share capital (note 8) 426,299 381,541
Contributed surplus 17,154 16,079
Retained earnings 238,093 283,177
Accumulated other comprehensive income 22,128 22,042
-------------------------------------------------------------------------
703,674 702,839
Commitments and guarantees (note 9)
-------------------------------------------------------------------------
$ 1,592,373 $ 1,566,575
--------------------------
--------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Earnings
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT
PER SHARE AMOUNTS)
Three Three
months months
ended ended
April 30, April 30,
2009 2008
-------------------------------------------------------------------------
Sales $ 109,643 $ 156,079
Cost of sales 83,944 73,149
-------------------------------------------------------------------------
Gross margin 25,699 82,930
Selling, general and administrative expenses 35,749 43,285
-------------------------------------------------------------------------
Earnings (loss) from operations (10,050) 39,645
-------------------------------------------------------------------------
Interest and financing expenses (3,699) (5,453)
Other income 281 246
Insurance settlement (note 13) 3,250 -
Dilution loss (note 14) (34,222) -
Foreign exchange gain (loss) (5,839) 155
-------------------------------------------------------------------------
Earnings (loss) before income taxes (50,279) 34,593
Income tax expense (recovery) - Current (825) 21,501
Income tax recovery - Future (2,295) (8,165)
-------------------------------------------------------------------------
Earnings (loss) before minority interest and
non-controlling interest (47,159) 21,257
Minority interest 7 1
Non-controlling interest (note 1) (2,082) -
-------------------------------------------------------------------------
Net earnings (loss) $ (45,084) $ 21,256
--------------------------
--------------------------
Earnings (loss) per share
Basic $ (0.68) $ 0.35
--------------------------
--------------------------
Fully diluted $ (0.68) $ 0.35
--------------------------
--------------------------
Weighted average number of shares outstanding 66,438,667 59,905,424
--------------------------
--------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
Three Three
months months
ended ended
April 30, April 30,
2009 2008
-------------------------------------------------------------------------
Net earnings (loss) $ (45,084) $ 21,256
Other comprehensive income
Net gain on translation of net foreign
operations (net of tax - nil) 86 2,589
-------------------------------------------------------------------------
Total comprehensive income $ (44,998) $ 23,845
--------------------------
--------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Three Three
months months
ended ended
April 30, April 30,
2009 2008
-------------------------------------------------------------------------
COMMON SHARES:
Balance at beginning of period $ 381,541 $ 305,502
Issued during the period 44,758 76,039
-------------------------------------------------------------------------
Balance at end of period 426,299 381,541
-------------------------------------------------------------------------
CONTRIBUTED SURPLUS:
Balance at beginning of period 16,079 15,614
Stock option expense 1,075 155
-------------------------------------------------------------------------
Balance at end of period 17,154 15,769
-------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of period 283,177 225,334
Net earnings (loss) (45,084) 21,256
Dividends paid - (3,069)
-------------------------------------------------------------------------
Balance at end of period 238,093 243,521
-------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of period 22,042 25,212
Other comprehensive income
Net gain on translation of net foreign
operations (net of tax - nil) 86 2,589
-------------------------------------------------------------------------
Balance at end of period 22,128 27,801
-------------------------------------------------------------------------
Total shareholders' equity $ 703,674 $ 668,632
--------------------------
--------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Three Three
months months
ended ended
April 30, April 30,
2009 2008
-------------------------------------------------------------------------
Cash provided by (used in):
Operating
Net earnings (loss) $ (45,084) $ 21,256
Items not involving cash:
Amortization and accretion 17,675 13,955
Future income tax recovery (2,295) (8,165)
Stock-based compensation and pension expense 1,065 357
Foreign exchange loss (gain) 6,494 (574)
Loss on disposal of assets - 469
Minority interest 7 1
Non-controlling interest (2,082) -
Dilution loss 34,222 -
Change in non-cash operating working capital 28,795 7,008
-------------------------------------------------------------------------
38,797 34,307
-------------------------------------------------------------------------
Financing
Decrease in long-term debt (48) (12,477)
Increase/(decrease) in revolving credit (38,916) 155,190
Repayment of mining segment senior secured
term and revolving credit facilities (74,160) -
Repayment of Harry Winston Inc. 2008 revolving
credit facility - (159,109)
Dividends paid - (3,069)
Issue of common shares, net of issue costs 44,758 76,039
-------------------------------------------------------------------------
(68,366) 56,574
-------------------------------------------------------------------------
Investing
Subscription of partnership units 125,791 -
Cash collateral and cash reserve 29,885 (8,323)
Mining capital assets (22,128) (66,623)
Retail capital assets (439) (3,243)
Other assets 218 -
-------------------------------------------------------------------------
133,327 (78,189)
-------------------------------------------------------------------------
Foreign exchange effect on cash balances 1,504 (544)
Increase/decrease in cash and cash equivalents 105,262 12,148
Cash and cash equivalents, beginning of period
(note 3) 16,735 49,628
-------------------------------------------------------------------------
Cash and cash equivalents, end of period
(note 3) $ 121,997 $ 61,776
--------------------------
--------------------------
Change in non-cash operating working capital
Accounts receivable 50,036 1,732
Prepaid expenses and other current assets (4,101) (4,435)
Inventory and supplies 6,776 (18,577)
Accounts payable and accrued liabilities (12,107) 18,699
Income taxes payable (11,809) 9,589
-------------------------------------------------------------------------
$ 28,795 $ 7,008
-------------------------------------------------------------------------
Supplemental cash flow information
Cash taxes paid $ 10,816 $ 12,195
Cash interest paid $ 3,747 $ 4,408
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
APRIL 30, 2009 WITH COMPARATIVE FIGURES
(TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT AS
OTHERWISE NOTED)
NOTE 1:
Nature of Operations
Harry Winston Diamond Corporation (the "Company") is a specialist diamond
company focusing on the mining and retail segments of the diamond
industry.
The Company's most significant asset is an ownership interest in the
Diavik group of mineral claims. The Diavik Joint Venture (the "Joint
Venture") is an unincorporated joint arrangement between Diavik Diamond
Mines Inc. ("DDMI") (60%) and Harry Winston Diamond Limited Partnership
("HWDLP") (40%) where HWDLP holds an undivided 40% ownership interest in
the assets, liabilities and expenses. DDMI is the operator of the Diavik
Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife, Canada.
DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England. As
a result of the strategic investment by Kinross Gold Corporation
("Kinross") of Toronto, Canada, described below, HWDLP is 77.5% owned by
the Company and 22.5% owned by Kinross. Kinross's 22.5% ownership is
reported as non-controlling interest.
On March 31, 2009, Kinross made a net investment of $150.0 million to
acquire an indirect interest in the Diavik Diamond Mine and a direct
equity stake in the Company. Kinross subscribed for 15.2 million of the
Company's treasury shares at a price of $3.00 per share, being
approximately 19.9% of the Company's issued equity post the transaction.
Kinross also subscribed for new partnership units representing a 22.5%
interest in HWDLP, for a net effective subscription value of
$104.4 million. With the closing of the Kinross transaction, the
Company's economic interest in the Diavik Diamond Mine is 31%.
The Company also owns a 100% interest in Harry Winston Inc., the premier
fine jewelry and watch retailer. The results of Harry Winston Inc.,
located in New York City, US, are consolidated in the financial
statements of the Company.
Certain comparative figures have been reclassified to conform with the
current year's presentation.
NOTE 2:
Significant Accounting Policies
The interim consolidated financial statements are prepared by management
in accordance with accounting principles generally accepted in Canada.
The interim consolidated financial statements include the accounts of the
Company and all of its subsidiaries as well as its proportionate interest
in the assets, liabilities and expenses of joint arrangements.
Intercompany transactions and balances have been eliminated.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto in the Company's Annual Report for the year ended January 31,
2009, since these interim financial statements do not include all
disclosures required by Canadian generally accepted accounting principles
("GAAP"). Excluding adoption of the new accounting standards described
below, these statements have been prepared following the same accounting
policies and methods of computation as the consolidated financial
statements for the year ended January 31, 2009.
Adoption of New Accounting Standards and Developments
GOODWILL AND INTANGIBLE ASSETS
On February 1, 2008, the CICA issued Handbook Section 3064, "Goodwill and
Intangible Assets". This Section establishes revised standards for the
recognition, measurement, presentation and disclosure of goodwill and
intangible assets. The Company adopted the new standard effective
February 1, 2009. This standard has had no material impact on the
consolidated financial statements.
Recently Issued Accounting Standards
CREDIT RISK AND THE FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
In January 2009, the CICA issued EIC-173, "Credit Risk and the Fair Value
of Financial Assets and Liabilities". This abstract requires companies to
take both counterparty's credit risk into account when measuring the fair
value of financial assets and liabilities, including derivatives. The
Company applied this EIC for the quarter ended April 30, 2009. This
abstract has had no material impact on the consolidated financial
statements.
MINING EXPLORATION COSTS
In March 2009, the CICA issued EIC-174, "Mining Exploration Costs", which
provides guidance on the capitalization of exploration costs related to
mining properties and the subsequent impairment review of capitalized
exploration costs. The Company applied this EIC for the quarter ended
April 30, 2009. This abstract has had no material impact on the
consolidated financial statements.
NOTE 3:
Cash Resources
April 30, January 31,
2009 2009
-------------------------------------------------------------------------
Cash on hand and balances with banks $ 121,246 $ 14,118
Short-term investments(a) 751 2,617
-------------------------------------------------------------------------
Total cash and cash equivalents 121,997 16,735
Cash collateral and cash reserves 260 30,145
-------------------------------------------------------------------------
Total cash resources $ 122,257 $ 46,880
--------------------------
--------------------------
(a) Short-term investments are held in overnight deposits.
During the quarter, total cash resources were impacted by the
$150.0 million net investment by Kinross and the subsequent repayment of
the mining segment's senior secured term and revolving credit facilities.
NOTE 4:
Inventory and Supplies
April 30, January 31,
2009 2009
-------------------------------------------------------------------------
Rough diamond inventory $ 27,245 $ 31,872
Merchandise inventory 235,925 240,419
Supplies inventory 76,289 73,944
-------------------------------------------------------------------------
Total inventory and supplies $ 339,459 $ 346,235
--------------------------
--------------------------
During the quarter, the Company recorded a write-down of $4.1 million on
rough diamond inventory, which was recorded in cost of sales.
NOTE 5:
Diavik Joint Venture
The following represents Harry Winston Diamond Limited Partnership's 40%
proportionate interest in the Joint Venture as at March 31, 2009 and
December 31, 2008:
April 30, January 31,
2009 2009
-------------------------------------------------------------------------
Current assets $ 107,226 $ 105,612
Long-term assets 764,999 754,886
Current liabilities 44,696 38,808
Long-term liabilities and participant's account 827,529 821,690
April 30, April 30,
THREE MONTHS ENDED: 2009 2008
-------------------------------------------------------------------------
Expenses net of interest income of
$0.2 million (2008 - interest income of
$0.2 million)(a) 41,896 33,959
Cash flows resulting from (used in) operating
activities (19,405) (27,391)
Cash flows resulting from financing activities 47,019 89,124
Cash flows resulting from (used in) investing
activities (23,291) (64,792)
-------------------------------------------------------------------------
(a) The Joint Venture only earns interest income.
The Company is contingently liable for the other participant's portion of
the liabilities of the Joint Venture, and to the extent the Company's
participating interest has increased because of the failure of the other
participant to make a cash contribution when required, the Company would
have access to an increased portion of the assets of the Joint Venture to
settle these liabilities.
NOTE 6:
Intangible Assets
Accumu-
lated January
Amortization amorti- April 30, 31,
period Cost zation 2009 net 2009 net
-------------------------------------------------------------------------
Trademark indefinite life $112,995 $ - $112,995 $112,995
Drawings indefinite life 12,365 - 12,365 12,365
Wholesale
distribution
network 120 months 5,575 2,065 3,510 3,649
Store
leases 65 to 105 months 5,639 4,168 1,471 1,743
-------------------------------------------------------------------------
Intangible
assets $136,574 $ 6,233 $130,341 $130,752
----------------------------------------
----------------------------------------
Amortization expense for the three months ended April 30, 2009 was
$0.4 million ($0.6 million for the three months ending April 30, 2008).
NOTE 7:
Long-Term Debt
April 30, January 31,
2009 2009
-------------------------------------------------------------------------
Mining segment credit facilities $ - $ 74,107
Harry Winston Inc. credit facilities 179,322 199,846
First mortgage on real property 6,838 6,769
-------------------------------------------------------------------------
Total long-term debt 186,160 280,722
-------------------------------------------------------------------------
Less current portion (4,051) (75,097)
-------------------------------------------------------------------------
$ 182,109 $ 205,625
--------------------------
--------------------------
On March 31, 2009, with the closing of the Kinross transaction, the
Company repaid all amounts outstanding on the mining segment's senior
secured term and revolving credit facilities.
NOTE 8:
Share Capital
(a) Authorized
Unlimited common shares without par value.
(b) Issued
Number of
shares Amount
---------------------------------------------------------------------
Balance, January 31, 2009 61,372,092 $ 381,541
SHARES ISSUED FOR:
Cash 15,200,000 44,758
---------------------------------------------------------------------
Balance, April 30, 2009 76,572,092 $ 426,299
--------------------------
--------------------------
(c) Stock Options
During the period, the Company issued 1,674,000 stock options to
officer and employees of the Company and its affiliates. These
options vest 50% immediately; 25% vest on the first anniversary date
and the remaining 25% vest on the second anniversary date of the date
of grant. The maximum term of these options is 10 years. The Company
estimated the fair value of the options granted using the Black-
Scholes option pricing model. Compensation expense for stock options
was $1.1 million for the three months ended April 30, 2009 (2009 -
$0.2 million) and is presented as a component of selling, general and
administrative expenses. The Company used historical exercise data to
determine the expected term of the options granted.
(d) RSU and DSU Plans
RSU Number of units
---------------------------------------------------------------------
Balance, January 31, 2009 108,599
Awards and payouts during the PERIOD (net):
RSU awards 11,499
RSU payouts -
---------------------------------------------------------------------
Balance, April 30, 2009 120,098
------------
------------
DSU Number of units
---------------------------------------------------------------------
Balance, January 31, 2009 128,988
Awards and payouts during the PERIOD (net):
DSU awards 26,727
DSU payouts -
---------------------------------------------------------------------
Balance, April 30, 2009 155,715
------------
------------
Three Three
months months
ended ended
April 30, April 30,
Expense (recovery) for the period 2009 2008
---------------------------------------------------------------------
RSU $ (60) $ 509
DSU 126 567
---------------------------------------------------------------------
$ 66 $ 1,076
--------------------------
--------------------------
During the period, the Company granted 11,499 RSUs and 26,727 DSUs
under an employee and director incentive compensation program,
respectively. The RSU and DSU Plans are full value phantom shares
that mirror the value of Harry Winston Diamond Corporation's publicly
traded common shares.
Grants under the RSU Plan are on a discretionary basis to employees
of the Company subject to Board of Director approval or in accordance
with employment contracts. Each RSU grant vests on the third
anniversary of the grant date, subject to special rules for death and
disability. The Company anticipates paying out cash on maturity of
RSUs and DSUs.
Only non-executive directors of the Company are eligible for grants
under the DSU Plan. Each DSU grant vests immediately on the grant
date.
The expenses related to the RSUs and DSUs are accrued based on the
price of Harry Winston Diamond Corporation's common shares at the end
of the period and on the probability of vesting. This expense is
recognized on a straight-line basis over the term of the grant.
NOTE 9:
Commitments and Guarantees
(a) Environmental Agreement
Through negotiations of environmental and other agreements, the Joint
Venture must provide funding for the Environmental Monitoring
Advisory Board. HWDLP's share of this funding requirement is
$0.2 million for calendar 2009. Further funding will be required in
future years; however, specific amounts have not yet been determined.
These agreements also state the Joint Venture must provide security
deposits for the performance by the Joint Venture of its reclamation
and abandonment obligations under all environmental laws and
regulations. HWDLP's share of the letters of credit outstanding
posted by the operator of the Joint Venture with respect to the
environmental agreements as at April 30, 2009 was $64.8 million. The
agreement specifically provides that these funding requirements will
be reduced by amounts incurred by the Joint Venture on reclamation
and abandonment activities.
(b) Participation Agreements
The Joint Venture has signed participation agreements with various
native groups. These agreements are expected to contribute to the
social, economic and cultural well-being of the Aboriginal bands. The
agreements are each for an initial term of 12 years and shall be
automatically renewed on terms to be agreed for successive periods of
six years thereafter until termination. The agreements terminate in
the event the mine permanently ceases to operate.
(c) Commitments
Commitments include the cumulative maximum funding commitments
secured by letters of credit of the Joint Venture's environmental and
participation agreements at Harry Winston Diamond Limited
Partnership's 40% ownership interest, before any reduction of future
reclamation activities, and future minimum annual rentals under non-
cancellable operating and capital leases for retail salons, corporate
office space, and long-term leases for property, land, office
premises and a fuel tank farm at the Diavik Diamond Mine and are as
follows:
2010 $ 85,520
2011 83,165
2012 81,129
2013 79,161
2014 78,980
Thereafter 123,588
---------------------------------------------------------------------
NOTE 10:
Employee Benefit Plans
Three Three
months months
ended ended
April 30, April 30,
Expenses for the period 2009 2008
-------------------------------------------------------------------------
Defined benefit pension plan - Harry Winston
retail segment $ 504 $ 411
Defined contribution plan - Harry Winston
retail segment 210 234
Defined contribution plan - Diavik Diamond Mine 178 212
-------------------------------------------------------------------------
$ 892 $ 857
--------------------------
--------------------------
NOTE 11:
Capital Management
As part of the Kinross investment, the Company and Kinross have agreed to
certain provisions regarding capital management for a period of two years
following closing subject to earlier termination in specified
circumstances. During this period, without Kinross' consent not to be
unreasonably withheld, the Company has agreed not to incur indebtedness
in excess of a specified amount, subject to an exception for indebtedness
incurred to finance an acquisition by the Company. In addition, the
Company has agreed not to pay dividends and to limit the amount of
funding it will provide to the retail segment. The capital management
provisions do not in any way limit the Company's ability to issue equity
or equity-linked securities subject to compliance with Kinross' pro rata
participation right in such equity issuances.
NOTE 12:
Financial Instruments
The Company has various financial instruments comprising cash and cash
equivalents, cash collateral and cash reserves, accounts receivable,
accounts payable and accrued liabilities, bank advances and long-term
debt.
Cash and cash equivalents consist of cash on hand and balances with banks
and short-term investments held in overnight deposits with a maturity on
acquisition of less than 90 days. Cash and cash equivalents are
designated as held-for-trading and are carried at fair value.
The fair value of accounts receivable is determined by the amount of cash
anticipated to be received in the normal course of business from the
financial asset.
The Company's long-term debt is fully secured; hence the fair value of
this instrument at April 30, 2009 is considered to approximate its
carrying value.
The carrying values of these financial instruments are as follows:
April 30, 2009 January 31, 2009
-------------------------------------------------------------------------
Estimated Carrying Estimated Carrying
fair value value fair value value
-------------------------------------------------------------------------
Financial Assets:
Cash and cash
equivalents $ 121,997 $ 121,997 $ 16,735 $ 16,735
Cash collateral and
cash reserves 260 260 30,145 30,145
Accounts receivable 16,961 16,961 66,980 66,980
-------------------------------------------------------------------------
$ 139,218 $ 139,218 $ 113,860 $ 113,860
----------------------------------------------------
----------------------------------------------------
Financial Liabilities:
Accounts payable
and accrued
liabilities $ 107,992 $ 107,992 $ 118,390 $ 118,390
Bank advances 24,230 24,230 42,621 42,621
Long-term debt 186,160 186,160 280,722 280,722
-------------------------------------------------------------------------
$ 318,382 $ 318,382 $ 441,733 $ 441,733
----------------------------------------------------
----------------------------------------------------
NOTE 13:
Insurance Settlement
In December 2008, approximately $31.7 million in Company-owned and
consigned retail inventory at cost was stolen during a second robbery at
the Harry Winston Paris salon. Included in accounts receivable at January
31, 2009 is a $48.4 million receivable relating to the insurance
settlement that was received in February 2009. The $3.3 million balance
of the insurance claim was also received during the first quarter.
NOTE 14:
Dilution Loss
During the quarter, the Company recorded a non-cash dilution loss of
$34.2 million with respect to the investment by Kinross of an indirect
interest in the Diavik Diamond Mine.
NOTE 15:
Segmented Information
The Company operates in two segments within the diamond industry, mining
and retail, for the three months ended April 30, 2009.
The mining segment consists of the Company's rough diamond business. This
business includes the 40% ownership interest in the Diavik group of
mineral claims and the sale of rough diamonds in the market-place.
The retail segment consists of the Company's ownership in Harry Winston
Inc. This segment consists of the marketing of fine jewelry and watches
on a worldwide basis.
For the three months
ended April 30, 2009 Mining Retail Total
-------------------------------------------------------------------------
Revenue
Canada $ 57,690 $ - $ 57,690
United States - 18,775 18,775
Europe - 19,325 19,325
Asia - 13,853 13,853
Cost of sales 57,256 26,688 83,944
-------------------------------------------------------------------------
Gross margin 434 25,265 25,699
Gross margin (%) 0.8% 48.6% 23.4%
Selling, general and administrative
expenses 5,503 30,246 35,749
-------------------------------------------------------------------------
Loss from operations (5,069) (4,981) (10,050)
-------------------------------------------------------------------------
Interest and financing expenses (1,544) (2,155) (3,699)
Other income 261 20 281
Insurance settlement - 3,250 3,250
Dilution loss (34,222) - (34,222)
Foreign exchange gain (loss) (6,071) 232 (5,839)
-------------------------------------------------------------------------
Segmented loss before income taxes $ (46,645) $ (3,634) $ (50,279)
--------------------------------------
--------------------------------------
Segmented assets as at
April 30, 2009
Canada $ 1,058,266 $ - $ 1,058,266
United States - 362,279 362,279
Other foreign countries 18,592 153,236 171,828
-------------------------------------------------------------------------
$ 1,076,858 $ 515,515 $ 1,592,373
-------------------------------------------------------------------------
Capital expenditures $ 22,128 $ 439 $ 22,567
Other Significant Non-Cash Items:
Income tax recovery $ (626) $ (1,669) $ (2,295)
Amortization and accretion $ 14,573 $ 3,102 $ 17,675
-------------------------------------------------------------------------
For the three months
ended April 30, 2008 Mining Retail Total
-------------------------------------------------------------------------
Revenue
Canada $ 81,393 $ - $ 81,393
United States - 24,926 24,926
Europe - 31,630 31,630
Asia - 18,130 18,130
Cost of sales 32,150 40,999 73,149
-------------------------------------------------------------------------
Gross margin 49,243 33,687 82,930
Gross margin (%) 60.5% 45.1% 53.1%
Selling, general and
administrative expenses 7,208 36,077 43,285
-------------------------------------------------------------------------
Earnings (loss) from operations 42,035 (2,390) 39,645
-------------------------------------------------------------------------
Interest and financing expenses (2,479) (2,974) (5,453)
Other income 632 (386) 246
Foreign exchange gain 74 81 155
-------------------------------------------------------------------------
Segmented earnings (loss) before
income taxes $ 40,262 $ (5,669) $ 34,593
--------------------------------------
--------------------------------------
Segmented assets as at
April 30, 2008
Canada $ 944,842 $ - $ 944,842
United States - 461,519 461,519
Other foreign countries 18,049 166,321 184,370
-------------------------------------------------------------------------
$ 962,891 $ 627,840 $ 1,590,731
-------------------------------------------------------------------------
Goodwill as at April 30, 2008 $ - $ 93,780 $ 93,780
Capital expenditures $ 66,623 $ 3,243 $ 69,866
Other Significant Non-Cash Items:
Income tax recovery $ (6,628) $ (1,537) $ (8,165)
Amortization and accretion $ 10,739 $ 3,216 $ 13,955
-------------------------------------------------------------------------
Sales to three significant customers in the mining segment totalled
$34.0 million for the three months ended April 30, 2009 ($9.2 million for
the three months ended April 30, 2008 for the same three significant
customers).
%SEDAR: 00003786E
For further information: For investor information, visit
http://investor.harrywinston.com or call Investor Relations on (416) 362-2237
ext 290
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