Exhibit 99.2
Harry Winston Diamond Corporation
Highlights
(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
|
1 The term EBITDA (earnings before interest, taxes, depreciation and amortization) does not have a standardized meaning according to International Financial Reporting Standards. The Company defines EBITDA as sales minus cost of sales and selling, general and administrative expenses, meaning it represents operating profit before depreciation and amortization. |
Consolidated sales were $222.4 million for the second quarter compared to $153.7 million for the comparable quarter of the prior year, resulting in a 6% increase in gross margin to $72.2 million and an operating profit of $23.1 million, compared to an operating profit of $29.9 million in the comparable quarter of the prior year. Consolidated EBITDA was $43.8 million compared to $49.4 million in the comparable quarter of the prior year.
The mining segment recorded sales of $89.6 million, a 3% increase from $86.8 million in the comparable quarter of the prior year. The increase in sales resulted primarily from a 41% increase in achieved rough diamond prices during the quarter, offset by a 27% decrease in volume of carats sold. The mining segment recorded operating profit of $16.3 million compared to $27.6 million in the comparable quarter of the prior year. EBITDA for the mining segment was $33.7 million compared to $44.0 million in the comparable quarter of the prior year.
The luxury brand segment recorded sales of $132.8 million, an increase of 98% from sales of $66.9 million in the comparable quarter of the prior year (81% at constant exchange rates). Included in the second quarter were $55.6 million of high-value transactions, which generally carry lower-than-average gross margins. Operating profit was $6.8 million for the quarter compared to $2.3 million in the same quarter of the prior year. EBITDA for the luxury brand segment was $10.1 million compared to $5.5 million in the comparable quarter of the prior year.
The Company recorded a consolidated net profit attributable to shareholders of $10.0 million or $0.12 per share for the quarter, compared to a net profit attributable to shareholders of $13.0 million or $0.17 per share in the second quarter of the prior year.
2012 SECOND QUARTER REPORT
2
Harry Winston Diamond Corporation
Management’s Discussion and Analysis
PREPARED AS OF SEPTEMBER 7, 2011 (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 and six months ended July 31, 2011, and its financial position as at July 31, 2011. This MD&A is based on the Company’s unaudited interim condensed consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) and should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto for the three and six months ended July 31, 2011 and for the three months ended April 30, 2011, and the audited consolidated financial statements of the Company and notes thereto for the year ended January 31, 2011 (prepared in accordance with generally accepted accounting principles in Canada (“Canadian GAAP” or “CDN GAAP”)). Unless otherwise specified, all financial information is presented in United States dollars. Unless otherwise indicated, all references to “second quarter” refer to the three months ended July 31. Unless otherwise indicated, references to “international” for the luxury brand segment refer to Europe and Asia.
Certain comparative figures have been reclassified to conform to the current year’s presentation.
Certain information included in this MD&A may constitute forward-looking information within the meaning of Canadian and United States securities laws. In some cases, forward-looking information can be identified by the use of terms such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “foresee”, “appears”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue”, “objective”, “modeled” or other similar expressions concerning matters that are not historical facts. Forward-looking information may relate to management’s future outlook and anticipated events or results, and may include statements or information regarding plans, timelines and targets for construction, mining, development, production and exploration activities at the Diavik Diamond Mine, future mining and processing at the Diavik Diamond Mine, projected capital expenditure requirements and the funding thereof, liquidity and working capital requirements and sources, estimated reserves and resources at, and production from, the Diavik Diamond Mine, the number and timing of expected rough diamond sales, the demand for rough diamonds, expected diamond prices and expectations concerning the diamond industry and the demand for luxury goods, expected cost of sales and gross margin trends in the mining segment, targets for compound annual growth rates of sales and operating income in the luxury brand segment, plans for expansion of the retail salon network, and expected sales trends and market conditions in the luxury brand segment. Actual results may vary from the forward-looking information. See “Risks and Uncertainties” on page 17 for material risk factors that could cause actual results to differ materially from the forward-looking information.
Forward-looking information is based on certain factors and assumptions regarding, among other things, mining, production, construction and exploration activities at the Diavik Diamond Mine, world and US economic conditions and the worldwide demand for luxury goods. Specifically, in making statements regarding expected diamond prices and expectations concerning the diamond industry and expected sales trends and market conditions in the luxury brand segment, the Company has made assumptions regarding, among other things, the state of world and US economic conditions, worldwide diamond production levels, and demand for luxury goods. While the Company considers these assumptions to be reasonable based on the information currently available to it, they may prove to be incorrect. See “Risks and Uncertainties” on page 17.
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, cash flow and liquidity risks, the risks of competition in the luxury jewelry business as well as changes in demand for high-end luxury goods. Please see page 17 of this Interim Report, as well as the Company’s current Annual Information Form, available at www.sedar.com, for a discussion of these and other risks and uncertainties involved in the Company’s operations.
2012 SECOND QUARTER REPORT
3
Harry Winston Diamond Corporation
Readers are cautioned not to place undue importance on forward-looking information, which speaks only as of the date of this MD&A, and should not rely upon this information as of any other date. Due to assumptions, risks and uncertainties, including the assumptions, risks and uncertainties identified above and elsewhere in this MD&A, actual events may differ materially from current expectations. The Company uses forward-looking statements because it believes such statements provide useful information with respect to the expected future operations and financial performance of the Company, and cautions readers that the information may not be appropriate for other purposes. While the Company may elect to, it is under no obligation and does not undertake to update or revise any forward-looking information, whether as a result of new information, future events or otherwise at any particular time, except as required by law. Additional information concerning factors that may cause actual results to materially differ from those in such forward-looking statements is contained in the Company’s filings with Canadian and United States securities regulatory authorities and can be found at www.sedar.com and www.sec.gov, respectively.
Summary Discussion
Harry Winston
Diamond Corporation is a diamond enterprise with premium assets in the mining
and retailing segments of the diamond industry. The Company supplies rough
diamonds to the global market from its 40% ownership interest in the Diavik
Diamond Mine, located in Canada’s Northwest Territories. The Company’s luxury
brand segment is a premier diamond jeweler and luxury timepiece retailer with
salons in key locations including New York, Paris, London, Beijing, Tokyo, Hong
Kong and Beverly Hills.
The Company’s mining asset is an ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the “Joint Venture”) is an unincorporated joint arrangement between Diavik Diamond Mines Inc. (“DDMI”) (60%) and Harry Winston Diamond Limited Partnership (“HWDLP”) (40%) where HWDLP holds an undivided 40% ownership interest in the assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is the operator of the Diavik Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England.
Market Commentary
The
Diamond Market
The market continued to push the price of rough
diamonds to new highs in the second quarter of fiscal 2012, exceeding the record
highs achieved in the first quarter. The market price per carat for rough
diamonds increased approximately 50% over the comparable quarter of the prior
year. The driving markets remained the Far East and India. In addition, US
market demand remained steady as the retail sector restocked for the 2011
holiday season. Towards the end of the second quarter, the market experienced
resistance to further diamond price increases, which may persist until
confidence returns to the global market.
The Luxury Jewelry & Timepiece Market
Overall, the luxury jewelry and timepiece market experienced
another solid quarter with positive increases in sales and profits compared with
the comparable period of the prior year. Demand for luxury products around the
world continues to increase, supported by the rapidly rising wealth of clients
in emerging markets. Despite increased global economic uncertainty centered in
the US and Europe, the Company expects new consumers in emerging markets to
continue to drive luxury goods demand.
2012 SECOND QUARTER REPORT
4
Harry Winston Diamond Corporation
Condensed Consolidated Financial Results
The following is a summary of the Company’s consolidated quarterly
results for the eight quarters ended July 31, 2011 following the basis of
presentation utilized in its IFRS and Canadian GAAP financial statements:
(expressed in thousands of United States dollars
except per share amounts and where otherwise noted)
(quarterly results are unaudited)
| IFRS | CDN GAAP | IFRS | IFRS | |||||||||||||||||||||||||||
| Six | Six | |||||||||||||||||||||||||||||
| months | months | |||||||||||||||||||||||||||||
| ended | ended | |||||||||||||||||||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | 2011 | 2010 | 2010 | July 31, | July 31, | |||||||||||||||||||||
| Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | 2011 | 2010 | |||||||||||||||||||||
|
Sales |
$ | 222,378 | $ | 143,932 | $ | 215,358 | $ | 140,877 | $ | 153,728 | $ | 114,000 | $ | 133,654 | $ | 74,828 | $ | 366,310 | $ | 267,728 | ||||||||||
|
Cost of sales |
150,177 | 96,452 | 141,391 | 84,765 | 85,798 | 75,711 | 96,257 | 45,227 | 246,629 | 161,509 | ||||||||||||||||||||
|
Gross margin |
72,201 | 47,480 | 73,967 | 56,112 | 67,930 | 38,289 | 37,397 | 29,601 | 119,681 | 106,219 | ||||||||||||||||||||
|
Gross margin (%) |
32.5% | 33.0% | 34.3% | 39.8% | 44.2% | 33.6% | 28.0% | 39.6% | 32.7% | 39.7% | ||||||||||||||||||||
|
Selling, general and administrative expenses |
49,101 | 42,795 | 52,722 | 41,282 | 37,998 | 35,948 | 40,479 | 34,542 | 91,896 | 73,946 | ||||||||||||||||||||
|
Operating profit (loss) |
23,100 | 4,685 | 21,245 | 14,830 | 29,932 | 2,341 | (3,082 | ) | (4,941 | ) | 27,785 | 32,273 | ||||||||||||||||||
|
Finance expenses |
(5,183 | ) | (3,983 | ) | (3,727 | ) | (3,835 | ) | (2,985 | ) | (2,880 | ) | (2,396 | ) | (2,448 | ) | (9,166 | ) | (5,865 | ) | ||||||||||
|
Exploration costs |
(781 | ) | (212 | ) | (351 | ) | (212 | ) | (76 | ) | (27 | ) | – | – | (993 | ) | (103 | ) | ||||||||||||
|
Finance and other income |
83 | 258 | 278 | 69 | 154 | 168 | 129 | 99 | 341 | 322 | ||||||||||||||||||||
|
Insurance settlement |
– | – | – | – | – | – | – | 100 | – | – | ||||||||||||||||||||
|
Foreign exchange gain (loss) |
288 | (177 | ) | 1,392 | 135 | 1,043 | (2,213 | ) | (1,978 | ) | 1,598 | 111 | (1,170 | ) | ||||||||||||||||
|
Profit (loss) before income taxes |
17,507 | 571 | 18,837 | 10,987 | 28,068 | (2,611 | ) | (7,327 | ) | (5,592 | ) | 18,078 | 25,457 | |||||||||||||||||
|
Income tax expense (recovery) |
7,519 | (3,027 | ) | 5,261 | (2,410 | ) | 10,877 | (5,524 | ) | (5,800 | ) | (4,221 | ) | 4,492 | 5,353 | |||||||||||||||
|
Net profit (loss) |
$ | 9,988 | $ | 3,598 | $ | 13,576 | $ | 13,397 | $ | 17,191 | $ | 2,913 | $ | (1,527 | ) | $ | (1,371 | ) | $ | 13,586 | $ | 20,104 | ||||||||
|
Attributable to shareholders |
$ | 9,986 | $ | 3,596 | $ | 13,569 | $ | 12,657 | $ | 13,043 | $ | 2,137 | $ | (3,358 | ) | $ | (214 | ) | $ | 13,582 | $ | 15,180 | ||||||||
|
Attributable to non-controlling interest |
2 | 2 | 7 | 740 | 4,148 | 776 | 1,831 | (1,157 | ) | 4 | 4,924 | |||||||||||||||||||
|
Basic earnings (loss) per share |
$ | 0.12 | $ | 0.04 | $ | 0.16 | $ | 0.15 | $ | 0.17 | $ | 0.03 | $ | (0.04 | ) | $ | 0.00 | $ | 0.16 | $ | 0.20 | |||||||||
|
Diluted earnings (loss) per share |
$ | 0.12 | $ | 0.04 | $ | 0.16 | $ | 0.15 | $ | 0.17 | $ | 0.03 | $ | (0.04 | ) | $ | 0.00 | $ | 0.16 | $ | 0.20 | |||||||||
|
Cash dividends declared per share |
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||
|
Total assets (i) |
$ | 1,665 | $ | 1,666 | $ | 1,606 | $ | 1,584 | $ | 1,596 | $ | 1,522 | $ | 1,495 | $ | 1,535 | $ | 1,665 | $ | 1,596 | ||||||||||
|
Total long-term liabilities (i) |
$ | 625 | $ | 605 | $ | 597 | $ | 588 | $ | 531 | $ | 449 | $ | 477 | $ | 506 | $ | 625 | $ | 531 | ||||||||||
|
Operating profit (loss) |
$ | 23,100 | $ | 4,685 | $ | 21,245 | $ | 14,830 | $ | 29,932 | $ | 2,341 | $ | (3,082 | ) | $ | (4,941 | ) | $ | 27,785 | $ | 32,273 | ||||||||
|
Depreciation and amortization (ii) |
20,716 | 20,291 | 24,635 | 18,657 | 19,515 | 14,200 | 18,258 | 11,208 | 41,007 | 33,715 | ||||||||||||||||||||
|
EBITDA (iii) |
$ | 43,816 | $ | 24,976 | $ | 45,880 | $ | 33,487 | $ | 49,447 | $ | 16,541 | $ | 15,176 | $ | 6,267 | $ | 68,792 | $ | 65,988 | ||||||||||
| (i) |
Total assets and total long-term liabilities are expressed in millions of United States dollars. |
| (ii) |
Depreciation and amortization included in cost of sales and selling, general and administrative expenses. |
| (iii) |
Earnings before interest, taxes, depreciation and amortization (“EBITDA”). See “Non-GAAP Measure” on page 16. |
|
The comparability of quarter-over-quarter results is impacted by seasonality for both the mining and luxury brand segments. Harry Winston Diamond Corporation expects that the quarterly results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Diamond Mine, the number of sales events conducted during the quarter, and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter. The quarterly results for the luxury brand segment are also seasonal, with generally higher sales during the fourth quarter due to the holiday season. See “Segmented Analysis” on page 9 for additional information. |
2012 SECOND QUARTER REPORT
5
Harry Winston Diamond Corporation
Three Months Ended July 31, 2011 Compared to
Three Months Ended July 31, 2010
CONSOLIDATED NET PROFIT
ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded a second quarter
consolidated net profit attributable to shareholders of $10.0 million or $0.12
per share compared to a net profit attributable to shareholders of $13.0 million
or $0.17 per share in the second quarter of the prior year.
CONSOLIDATED SALES
Sales for the second quarter totalled
$222.4 million, consisting of rough diamond sales of $89.6 million and luxury
brand segment sales of $132.8 million. This compares to sales of $153.7 million
in the comparable quarter of the prior year (rough diamond sales of $86.8
million and luxury brand segment sales of $66.9 million). See “Segmented
Analysis” on page 9 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company’s
second quarter cost of sales was $150.2 million for a gross margin of 32.5%
compared to a cost of sales of $85.8 million and a gross margin of 44.2% for the
comparable quarter of the prior year. The Company’s cost of sales includes costs
associated with mining, rough diamond sorting and luxury brand sales activities.
See “Segmented Analysis” on page 9 for additional information.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of selling, general and administrative (“SG&A”)
expenses include expenses for salaries and benefits, advertising and marketing,
rent and building related costs. The Company incurred SG&A expenses of $49.1
million for the second quarter, compared to $38.0 million in the comparable
quarter of the prior year.
Included in SG&A expenses for the second quarter was $5.7 million for the mining segment compared to $4.8 million for the comparable quarter of the prior year and $43.4 million for the luxury brand segment compared to $33.2 million for the comparable quarter of the prior year. See “Segmented Analysis” on page 9 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income
tax expense of $7.5 million during the second quarter, compared to a net income
tax expense of $10.9 million in the comparable quarter of the prior year. The
Company’s combined Canadian federal and provincial statutory tax rate for the
quarter is 27.9%. There are a number of items that can significantly impact the
Company’s effective tax rate, including foreign currency exchange rate
fluctuations, the Northwest Territories mining royalty, earnings subject to tax
different than the statutory rate such as earnings in foreign jurisdictions, and
changes in valuation allowances. As a result, the Company’s recorded tax
provision can be significantly different than the expected tax provision
calculated based on the statutory tax rate.
The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations. The Company’s functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the second quarter, the Canadian dollar weakened against the US dollar. As a result, the Company recorded an unrealized foreign exchange gain of $1.9 million on the revaluation of the Company’s Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange gain of $1.8 million in the comparable quarter of the prior year. The unrealized foreign exchange gain is recorded as part of the Company’s deferred income tax recovery, and is not taxable for Canadian income tax purposes. During the second quarter, the Company also recognized a deferred income tax expense of $4.0 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate translation of foreign currency non-monetary items. This compares to a deferred income tax expense of $3.4 million recognized in the comparable quarter of the prior year. The recorded tax provision during the second quarter also included a net income tax recovery of $1.2 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollar. This compares to a net income tax recovery of $0.2 million recognized in the comparable period of the prior year.
The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2031.
Due to the number of factors that can potentially impact the effective tax rate and the sensitivity of the tax provision to these factors, as discussed above, it is expected that the Company’s effective tax rate will fluctuate in future periods.
2012 SECOND QUARTER REPORT
6
Harry Winston Diamond Corporation
CONSOLIDATED FINANCE EXPENSES
Finance expenses of $5.2
million were incurred during the second quarter compared to $3.0 million during
the comparable quarter of the prior year. Finance expenses were impacted by
increased debt levels in the mining segment relating to the drawdown of $50.0
million on the Standard Chartered Bank credit facility on July 31, 2010 and the
$70.0 million promissory note payable to Kinross Gold Corporation (“Kinross”)
issued on August 25, 2010.
CONSOLIDATED EXPLORATION EXPENSE
Exploration expense of
$0.8 million was incurred during the second quarter compared to $0.1 million in
the comparable quarter of the prior year.
CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other
income of $0.1 million was recorded during the quarter compared to $0.2 million
in the comparable quarter of the prior year.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain
of $0.3 million was recognized during the quarter compared to a net foreign
exchange gain of $1.0 million in the comparable quarter of the prior year. The
Company does not currently have any significant foreign exchange derivative
instruments outstanding.
Six Months Ended July 31, 2011 Compared to Six
Months Ended July 31, 2010
CONSOLIDATED NET PROFIT ATTRIBUTABLE
TO SHAREHOLDERS
The Company recorded consolidated net profit attributable to
shareholders of $13.6 million or $0.16 per share for the six months ended July
31, 2011, compared to a net profit attributable to shareholders of $15.2 million
or $0.20 per share in the comparable period of the prior year.
CONSOLIDATED SALES
Sales for the six months ended July 31,
2011, totalled $366.3 million, consisting of rough diamond sales of $151.6
million and luxury brand segment sales of $214.7 million. This compares to sales
of $267.7 million in the comparable period of the prior year (rough diamond
sales of $135.7 million and luxury brand segment sales of $132.0 million). See
“Segmented Analysis” on page 9 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company’s
cost of sales for the six months ended July 31, 2011, was $246.6 million for a
gross margin of 32.7% compared to a cost of sales of $161.5 million and a gross
margin of 39.7% in the comparable period of the prior year. The Company’s cost
of sales includes costs associated with mining, rough diamond sorting and luxury
brand sales activities. See “Segmented Analysis” on page 9 for additional
information.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
The principal components of SG&A expenses include expenses for
salaries and benefits, advertising and marketing, rent and building related
costs. The Company incurred SG&A expenses of $91.9 million for the six
months ended July 31, 2011, compared to $73.9 million in the comparable period
of the prior year.
Included in SG&A expenses for the six months ended July 31, 2011, was $13.7 million for the mining segment compared to $8.7 million for the comparable period of the prior year and $78.2 million for the luxury brand segment compared to $65.2 million for the comparable period of the prior year. See “Segmented Analysis” on page 9 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income
tax expense of $4.5 million during the six months ended July 31, 2011, compared
to a net income tax expense of $5.4 million in the comparable period of the
prior year. The Company’s combined Canadian federal and provincial statutory tax
rate for the quarter is 27.9% . There are a number of items that can
significantly impact the Company’s effective tax rate, including foreign
currency exchange rate fluctuations, the Northwest Territories mining royalty,
earnings subject to tax different than the statutory rate such as earnings in
foreign jurisdictions, and changes in valuation allowances. As a result, the
Company’s recorded tax provision can be significantly different than the
expected tax provision calculated based on the statutory tax rate.
2012 SECOND QUARTER REPORT
7
Harry Winston Diamond Corporation
The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations. The Company’s functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the six months ended July 31, 2011, the Canadian dollar strengthened against the US dollar. As a result, the Company recorded an unrealized foreign exchange loss of $9.8 million on the revaluation of the Company’s Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange loss of $6.2 million in the comparable period of the prior year. The unrealized foreign exchange loss is recorded as part of the Company’s deferred income tax recovery, and is not deductible for Canadian income tax purposes. During the six months ended July 31, 2011, the Company also recognized a deferred income tax recovery of $8.6 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate translation of foreign currency non-monetary items. This compares to a deferred income tax recovery of $6.6 million recognized in the comparable period of the prior year. The recorded tax provision during the six months ended July 31, 2011 also included a net income tax recovery of $3.2 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollar. This compares to a net income tax recovery of $1.8 million recognized in the comparable period of the prior year.
The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2031.
Due to the number of factors that can potentially impact the effective tax rate and the sensitivity of the tax provision to these factors, as discussed above, it is expected that the Company’s effective tax rate will fluctuate in future periods.
CONSOLIDATED FINANCE EXPENSES
Finance expenses of $9.2
million were incurred during the six months ended July 31, 2011, compared to
$5.9 million during the comparable period of the prior year. Finance expenses
were impacted by increased debt levels in the mining segment relating to the
drawdown of $50.0 million on the Standard Chartered Bank credit facility on July
31, 2010 and the $70.0 million promissory note payable to Kinross issued on
August 25, 2010.
CONSOLIDATED EXPLORATION EXPENSE
Exploration expense of
$1.0 million was incurred during the six months ended July 31, 2011, compared to
$0.1 million in the comparable period of the prior year.
CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other
income of $0.3 million was recorded during the six months ended July 31, 2011,
consistent with the comparable period of the prior year.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain
of $0.1 million was recognized during the six months ended July 31, 2011,
compared to a net foreign exchange loss of $1.2 million in the comparable period
of the prior year. The Company does not currently have any significant foreign
exchange derivative instruments outstanding.
2012 SECOND QUARTER REPORT
8
Harry Winston Diamond Corporation
Segmented Analysis
The operating segments of the Company include mining and
luxury brand segments.
Mining
The mining segment
includes the production and sale of rough diamonds.
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
| IFRS | CDN GAAP | IFRS | IFRS | |||||||||||||||||||||||||||
| Six | Six | |||||||||||||||||||||||||||||
| months | months | |||||||||||||||||||||||||||||
| ended | ended | |||||||||||||||||||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | 2011 | 2010 | 2010 | July 31, | July 31, | |||||||||||||||||||||
| Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | 2011 | 2010 | |||||||||||||||||||||
|
Sales |
$ | 89,608 | $ | 62,035 | $ | 82,697 | $ | 60,708 | $ | 86,827 | $ | 48,922 | $ | 63,489 | $ | 20,765 | $ | 151,643 | $ | 135,749 | ||||||||||
|
Cost of sales |
67,613 | 53,443 | 61,822 | 45,039 | 54,408 | 44,143 | 57,027 | 20,319 | 121,056 | 98,551 | ||||||||||||||||||||
|
Gross margin |
21,995 | 8,592 | 20,875 | 15,669 | 32,419 | 4,779 | 6,462 | 446 | 30,587 | 37,198 | ||||||||||||||||||||
|
Gross margin (%) |
24.5% | 13.9% | 25.2% | 25.8% | 37.3% | 9.8% | 10.2% | 2.1% | 20.2% | 27.4% | ||||||||||||||||||||
|
Selling, general and administrative expenses |
5,709 | 8,026 | 4,828 | 6,231 | 4,813 | 3,870 | 4,885 | 4,932 | 13,735 | 8,683 | ||||||||||||||||||||
|
Operating profit (loss) |
$ | 16,286 | $ | 566 | $ | 16,047 | $ | 9,438 | $ | 27,606 | $ | 909 | $ | 1,577 | $ | (4,486 | ) | $ | 16,852 | $ | 28,515 | |||||||||
|
Depreciation and amortization (i) |
17,461 | 17,083 | 20,669 | 15,428 | 16,352 | 10,975 | 14,976 | 7,845 | 34,544 | 27,327 | ||||||||||||||||||||
|
EBITDA (ii) |
$ | 33,747 | $ | 17,649 | $ | 36,716 | $ | 24,866 | $ | 43,958 | $ | 11,884 | $ | 16,553 | $ | 3,359 | $ | 51,396 | $ | 55,842 | ||||||||||
| (i) Depreciation and amortization included in cost of sales and selling, general and administrative expenses. |
| (ii) Earnings before interest, taxes, depreciation and amortization (“EBITDA”). See “Non-GAAP Measure” on page 16. |
Three Months Ended July 31, 2011 Compared to
Three Months Ended July 31, 2010
MINING SALES
During the
quarter, the Company sold 0.57 million carats for a total of $89.6 million for
an average price per carat of $157 compared to 0.78 million carats for a total
of $86.8 million for an average price per carat of $112 in the comparable
quarter of the prior year. The Company held two complete rough diamond sales in
the second quarter, compared to three complete sales in the comparable quarter
of the prior year. The 41% increase in the Company’s achieved rough diamond
price per carat was impacted by a sales mix, dominated by production from the
lower value A-418 B ore.
On a quarterly basis, the Company expects that results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Diamond Mine, the number of sales events conducted during the quarter, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter.
MINING COST OF SALES AND GROSS MARGIN
The Company’s second
quarter cost of sales was $67.6 million resulting in a gross margin of 24.5%
compared to a cost of sales of $54.4 million and a gross margin of 37.3% in the
comparable quarter of the prior year. Cost of sales included $16.8 million of
depreciation and amortization compared to $15.7 million in the comparable
quarter of the prior year. The increase in cost of sales was due primarily to a
greater volume of production during the quarter from the higher-cost underground
development mining. The mining gross margin is anticipated to fluctuate between
quarters, resulting from variations in the specific mix of product sold during
each quarter and rough diamond prices.
A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Diamond Mine. Cost of sales also includes sorting costs, which consist of the Company’s cost of handling and sorting product in preparation for sales to third parties, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment increased by $0.9 million from the
comparable quarter of the prior year due to a mark-to-market on stock-based
compensation and the strengthening of the Canadian dollar.
2012 SECOND QUARTER REPORT
9
Harry Winston Diamond Corporation
Six Months Ended July 31, 2011 Compared to Six
Months Ended July 31, 2010
MINING SALES
During the six months
ended July 31, 2011, the Company sold 1.0 million carats for a total of $151.6
million for an average price per carat of $146 compared to 1.2 million carats
for a total of $135.7 million for an average price per carat of $109 in the
comparable period of the prior year. The Company held four complete rough
diamond sales in the six months ended July 31, 2011, compared to five complete
sales in the comparable period of the prior year. The 34% increase in the
Company’s achieved rough diamond price per carat was impacted by a sales mix,
dominated by production from the lower value A-418 B ore.
The Company expects that results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Diamond Mine, the number of sales events conducted during the quarter, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter.
MINING COST OF SALES AND GROSS MARGIN
The Company’s cost of
sales for the six months ended July 31, 2011, was $121.1 million resulting in a
gross margin of 20.2% compared to a cost of sales of $98.6 million and a gross
margin of 27.4% in the comparable period of the prior year. Cost of sales
included $33.2 million of depreciation and amortization compared to $26.1
million in the comparable period of the prior year. The increase in cost of
sales was due primarily to a higher volume of production during the period from
the higher-cost underground mine. The mining gross margin is anticipated to
fluctuate between quarters, resulting from variations in the specific mix of
product sold during each quarter and rough diamond prices.
A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Diamond Mine. Cost of sales also includes sorting costs, which consist of the Company’s cost of handling and sorting product in preparation for sales to third parties, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment increased by $5.1 million from the
comparable period of the prior year due to executive severance, a mark-to-market
on stock-based compensation and the strengthening of the Canadian dollar during
the period.
MINING SEGMENT OPERATIONAL UPDATE
Ore production for the
second calendar quarter consisted of 1.47 million carats produced from 0.43
million tonnes of ore from the A-418 kimberlite pipe, 0.18 million carats
produced from 0.09 million tonnes of ore from the A-154 North kimberlite pipe,
and 0.09 million carats produced from 0.02 million tonnes of ore from the A-154
South kimberlite pipe. Also included in production for the calendar quarter was
an estimated 0.05 million carats from reprocessed plant rejects (“RPR”). These
RPR are not included in the Company’s reserves and resource statement and are
therefore incremental to production. Rough diamond production was 11% higher
than the comparable calendar quarter of the prior year due primarily to the
improvement in grade of the ore from the A-418 open pit.
HARRY WINSTON DIAMOND LIMITED PARTNERSHIP’S 40% SHARE OF DIAVIK DIAMOND MINE PRODUCTION
(reported on a one-month lag)
| Three months | Three months | Six months | Six months | |||||||||
| ended | ended | ended | ended | |||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||
|
Diamonds recovered (000s carats) |
716 | 645 | 1,256 | 1,270 | ||||||||
|
Grade (carats/tonne) |
3.29 | 3.09 | 3.06 | 3.48 |
Mining Segment Outlook
PRODUCTION
The approved mine plan and budget for calendar
2011 estimates Diavik Diamond Mine production of approximately 6.9 million
carats from the mining of 2.0 million tonnes of ore and processing of 2.2
million tonnes of ore, with the increment delivered from stockpile. It is
expected that with the accelerated production towards the end of the year,
carats shipped will be lower than carats produced in the calendar year. This
difference is expected to reverse in calendar 2012. Production for the year is
expected to comprise approximately 1.4 million tonnes from the A-418 open pit,
and 0.6 million tonnes from the underground portions of A-154 South and A-154
North. The Company expects that in the second half of the year, the higher grade
A-154 South will continue to be mined using sub-level retreat, the higher
velocity and lower cost mining method that commenced in July 2011.
2012 SECOND QUARTER REPORT
10
Harry Winston Diamond Corporation
Looking beyond calendar 2011, the objective is to fully utilize processing capacity with a combination of underground and open pit production. Current plans see A-21 development beginning in 2013, with production in 2015. In addition, exploration work has identified extensions at depth to the A-418 and A-154 North kimberlite pipes. The inclusion of these extensions into ore reserves will be largely dependent upon the costs of new underground mining techniques currently under review. The Company is in the process of updating the life-of-mine plan, which it expects to release publicly later this year.
PRICING
The rough diamond market continued to improve into
the second quarter of fiscal 2012. Towards the end of the second quarter, the
market experienced resistance to further diamond price increases which may
persist until confidence returns to the global market. Based on Harry Winston
Diamond Corporation’s rough diamond sales prices as of July 2011 and the current
diamond recovery profile of the Diavik processing plant, the Company has modeled
the approximate rough diamond price per carat for each of the Diavik ore types
as follows:
| Average price | |||
| per carat | |||
| Ore type | (in US dollars) | ||
| A-154 South | $ | 200 | |
| A-154 North | 260 | ||
| A-418 A Type Ore | 185 | ||
| A-418 B Type Ore | 120 | ||
| RPR | 65 |
COST OF SALES
The Company expects cost of sales in fiscal
2012 to be approximately $265 million. Included in this amount is depreciation
and amortization of approximately $80 million at an assumed average Canadian/US
dollar exchange rate of $1.00. This increase in cost of sales as compared to
fiscal 2011 is expected to result primarily from an increase in the proportion
of underground ore mined.
CAPITAL EXPENDITURES
During fiscal 2012, HWDLP’s 40% share
of the planned capital expenditures at the Diavik Diamond Mine is expected to be
approximately $62 million at an assumed average Canadian/US dollar exchange rate
of $1.00. During the second quarter, HWDLP’s share of capital expenditures was
$9.7 million.
EXPLORATION
The Company has additionally staked 226,000
acres of mineral claims on the prospective geological trend to the southwest of
the existing mine site and is starting a small but important basal till drilling
program to assess the potential for new diamondiferous kimberlite pipes over the
coming years. On September 6, 2011, the Company announced that Harry Winston
Diamond Mines Ltd. and its wholly owned subsidiary 6355137 Canada Inc. have
entered into an option agreement with North Arrow Minerals Inc.("North Arrow")
and Springbok Holdings Inc., ("Springbok") in regards to their Lac de Gras
properties in the Northwest Territories. Under the terms of the agreement, the
two properties collectively will form a "Joint Venture Property". In order for
the option to vest, the Company is to carry out exploration on the Joint Venture
Property, making expenditures of at least $5 million over a five year period.
Upon vesting, a joint venture will be formed, in which the Company will hold a
55% interest, and North Arrow and Springbok will equally share a 45% interest,
in the entire Joint Venture Property.
2012 SECOND QUARTER REPORT
11
Harry Winston Diamond Corporation
Luxury Brand
The luxury brand
segment includes sales from Harry Winston salons, which are located in prime
markets around the world, including eight salons in the United States: New York,
Beverly Hills, Bal Harbour, Honolulu, Las Vegas, Dallas, Chicago and Costa Mesa;
five salons in Japan: Ginza, Roppongi Hills, Osaka, Omotesando and Nagoya; two
salons in Europe: Paris and London; and four salons in Asia outside of Japan:
Beijing, Taipei, Hong Kong and Singapore.
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
| IFRS | CDN GAAP | IFRS | IFRS | |||||||||||||||||||||||||||
| Six | Six | |||||||||||||||||||||||||||||
| months | months | |||||||||||||||||||||||||||||
| ended | ended | |||||||||||||||||||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | 2011 | 2010 | 2010 | July 31, | July 31, | |||||||||||||||||||||
| Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | 2011 | 2010 | |||||||||||||||||||||
|
Sales |
$ | 132,770 | $ | 81,897 | $ | 132,661 | $ | 80,169 | $ | 66,901 | $ | 65,078 | $ | 70,165 | $ | 54,063 | $ | 214,667 | $ | 131,979 | ||||||||||
|
Cost of sales |
82,564 | 43,009 | 79,569 | 39,726 | 31,390 | 31,568 | 39,230 | 24,908 | 125,573 | 62,958 | ||||||||||||||||||||
|
Gross margin |
50,206 | 38,888 | 53,092 | 40,443 | 35,511 | 33,510 | 30,935 | 29,155 | 89,094 | 69,021 | ||||||||||||||||||||
|
Gross margin (%) |
37.8% | 47.5% | 40.0% | 50.4% | 53.1% | 51.5% | 44.1% | 53.9% | 41.5% | 52.3% | ||||||||||||||||||||
|
Selling, general and administrative expenses |
43,392 | 34,769 | 47,894 | 35,051 | 33,185 | 32,078 | 35,594 | 29,610 | 78,161 | 65,263 | ||||||||||||||||||||
|
Operating profit (loss) |
$ | 6,814 | $ | 4,119 | $ | 5,198 | $ | 5,392 | $ | 2,326 | $ | 1,432 | $ | (4,659 | ) | $ | (455 | ) | $ | 10,933 | $ | 3,758 | ||||||||
|
Depreciation and amortization (i) |
3,255 | 3,209 | 3,966 | 3,229 | 3,162 | 3,226 | 3,282 | 3,363 | 6,463 | 6,388 | ||||||||||||||||||||
|
EBITDA (ii) |
$ | 10,069 | $ | 7,328 | $ | 9,164 | $ | 8,621 | $ | 5,488 | $ | 4,658 | $ | (1,377 | ) | $ | 2,908 | $ | 17,396 | $ | 10,146 | |||||||||
| (i) Depreciation and amortization included in cost of sales and selling, general and administrative expenses. |
| (ii) Earnings before interest, taxes, depreciation and amortization (“EBITDA”). See “Non-GAAP Measure” on page 16. |
Three Months Ended July 31, 2011 Compared to
Three Months Ended July 31, 2010
LUXURY BRAND SALES
Sales for
the second quarter were $132.8 million compared to $66.9 million for the
comparable quarter of the prior year, an increase of 98% (81% at constant
exchange rates). Sales in Asia increased 223% to $72.9 million, European sales
increased 24.6% to $30.8 million, and US sales increased 48% to $29.1 million.
Included in the second quarter were $55.6 million of high-value transactions,
which generally carry lower-than-average gross margins.
LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales
for the luxury brand segment for the second quarter was $82.6 million compared
to $31.4 million for the comparable quarter of the prior year. Gross margin for
the quarter was $50.2 million or 37.8% compared to $35.5 million or 53.1% for
the second quarter of the prior year. The decrease in gross margin resulted
primarily from exceptional high-value transactions during the second quarter,
which carry generally lower-than-average gross margins.
LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 31% to $43.4 million from $33.2 million in
the comparable quarter of the prior year (21% at constant exchange rates). The
increase was due primarily to higher advertising, marketing and selling
expenses, higher variable compensation expenses resulting from higher sales and
increased rent and building related expenses. Fixed costs accounted for $8.3
million of the increase, while variable expenses linked to higher volume of
sales accounted for $1.9 million of the increase. SG&A expenses include
depreciation and amortization expense of $3.2 million consistent with the
comparable quarter of the prior year.
Six Months Ended July 31, 2011 Compared to Six Months Ended July 31, 2010
LUXURY BRAND SALES
Sales for the
six months ended July 31, 2011, were $214.7 million compared to $132.0 million
for the comparable period of the prior year, an increase of 63% (48% at constant
exchange rates). Sales in Asia increased 112% to $97.8 million, US sales
increased 57% to $65.5 million and European sales increased 16% to $51.4
million. During the period there were $60.8 million of high-value transactions,
which carry generally lower-than-average gross margins.
2012 SECOND QUARTER REPORT
12
Harry Winston Diamond Corporation
LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales
for the luxury brand segment for the six months ended July 31, 2011, was $125.6
million compared to $63.0 million for the comparable period of the prior year.
Gross margin for the six months ended July 31, 2011, was $89.1 million or 41.5%
compared to $69.0 million or 52.3% for the comparable period of the prior year.
The decrease in gross margin resulted primarily from exceptional high-value
transactions during the period, which carry generally lower-than-average gross
margins.
LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 20% to $78.2 million from $65.3 million in
the comparable period of the prior year (11% at constant exchange rate). The
increase was due primarily to higher advertising, marketing and selling
expenses, higher variable compensation expenses resulting from higher sales and
increased rent and building related expenses. Fixed costs accounted for $9.8
million of the increase, while variable expenses linked to higher volume of
sales accounted for $3.1 million of the increase. SG&A expenses include
depreciation and amortization expense of $6.3 million consistent with the
comparable period of the prior year.
LUXURY BRAND SEGMENT OPERATIONAL UPDATE
During the six
months ended July 31, 2011, the luxury brand segment generated sales of $214.7
million, an increase of 63% over the comparable period of the prior year at
actual exchange rates. The Company recorded significant high-value transactions
of $60.8 million during the six month period. Sales growth was achieved across
all geographic regions. The US market generated sales of $65.5 million, an
increase of 57% over the comparable quarter of the prior year. The US market
continues to benefit from strong tourist flows supported by a weak US dollar. In
Japan, sales of $33.0 million increased by 17% at actual exchange rates and by
4% on a constant exchange rate basis over the comparable period of the prior
year. Asia excluding Japan had sales of $64.8 million representing an increase
of 262% at actual exchange rates and positive 240% on a constant exchange basis
over the comparable period of the prior year. In Europe, sales of $51.4 million
were 16% higher at actual exchange rates and negative 2% on a constant exchange
basis over the comparable period of the prior year.
Harry Winston successfully launched the Lily Cluster jewelry collection and the Midnight watch collection during the quarter, supported by a global marketing campaign. Consumers responded positively to the new collections.
The luxury brand segment’s distribution network consists of 19 directly operated salons, 2 licensed salons (in Manila, Philippines, and Kiev, Ukraine) and 189 wholesale watch doors around the world.
Luxury Brand Segment Outlook
Although the current economic disruptions emanating primarily
from the US and Europe represent significant challenges, the Company is
optimistic that the introduction of new products supported by an innovative
advertising campaign will translate into increasing sales and profitability.
The Company continues to focus on expanding its global distribution network. A new directly operated salon will be opened in Shanghai, China, in the fourth quarter as well as three licensed salons and 35 wholesale watch doors through the remainder of the fiscal year. A key component of the luxury brand’s growth strategy is the expansion of its current salon network and wholesale distribution channel. The growth target is to expand to approximately 35 directly operated salons, 15 licensed salons, and 300 wholesale doors by fiscal 2016.
On May 19, 2011, the Company announced that it had entered into a business arrangement with Diamond Asset Advisors AG (“DAA”), which is in the process of establishing a polished diamond investment fund (the “Fund”). The Fund will be structured as a limited partnership with total funding of up to $250 million, offering institutional investors direct exposure to the wholesale market price of polished diamonds. Under the terms of the Company’s arrangement with the Fund, the Company’s expert diamond team will source diamonds for the Fund that have the same high-quality characteristics that the luxury brand segment uses in its jewelry and watches, with a portion of the diamonds coming from the Company’s existing inventory. The Fund will purchase the diamonds and then consign them to the Company, which will act as custodian. The Company will use the consigned polished diamonds in the manufacturing of its jewelry and watches, paying the Fund when the jewelry or watch is sold. The price paid by the Fund to replace the sold polished diamonds will be used to determine the Fund’s market value. This arrangement will increase the inventory available to the Company’s expanding international salon network without additional demands on working capital. The Fund is expected to raise the first capital subscription of approximately $100 million from investors later this fiscal year, with the remaining $150 million expected to be raised over the following year, subject to market conditions.
2012 SECOND QUARTER REPORT
13
Harry Winston Diamond Corporation
Liquidity and Capital Resources
Working Capital
As at July 31, 2011,
the Company had unrestricted cash and cash equivalents of $139.9 million
compared to $108.7 million at January 31, 2011. The Company had cash on hand and
balances with banks of $132.5 million and short-term investments of $7.4 million
at July 31, 2011. During the quarter ended July 31, 2011, the Company reported
cash from operations of $40.1 million compared to $2.4 million in the comparable
quarter of the prior year.
Working capital increased to $396.1 million at July 31, 2011 from $328.6 million at January 31, 2011. During the quarter, the Company increased accounts receivable by $2.8 million, decreased other current assets by $3.2 million, decreased inventory and supplies by $38.0 million, decreased trade and other payables by $54.7 million and increased employee benefit plans by $0.1 million.
The Company’s liquidity requirements fluctuate from quarter to quarter depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, seasonality of mine operating expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter, along with the seasonality of sales and salon expansion in the luxury brand segment. The Company’s principal working capital needs include investments in inventory, other current assets, and trade and other payables and income taxes payable.
The Company assesses liquidity and capital resources on a consolidated basis. The Company’s requirements are for cash operating expenses, working capital, contractual debt requirements and capital expenditures. The Company believes that it will generate sufficient liquidity to meet its anticipated requirements for the next twelve months.
Financing Activities
The mining
segment maintains a senior secured revolving credit facility with Standard
Chartered Bank that was increased from $100.0 million to $125.0 million on
February 28, 2011. At July 31, 2011, $50.0 million was outstanding; this amount
remains unchanged from January 31, 2011.
As at July 31, 2011, $1.6 million was outstanding under the Company’s revolving financing facility relating to its India subsidiary, Harry Winston Diamond (India) Private Limited, compared to $nil at January 31, 2011.
During the quarter ended July 31, 2011, the luxury brand subsidiary, Harry Winston Inc., increased the amount outstanding on its secured five-year revolving credit facility to $188.3 million from $165.0 million at January 31, 2011.
Investing Activities
During the
second quarter, the Company purchased property, plant and equipment of $14.5
million, of which $12.6 million was purchased for the mining segment and $1.9
million for the luxury brand segment.
Contractual Obligations
The
Company has contractual payment obligations with respect to interest-bearing
loans and borrowings and, through its participation in the 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, HWDLP
is obligated to fund 40% of the Joint Venture’s total expenditures on a monthly
basis. HWDLP’s current projected share of the planned capital expenditures at
the Diavik Diamond Mine, which are not reflected in the table below, including
capital expenditures for the calendar years 2011 to 2015, is approximately $140
million assuming a Canadian/US average exchange rate of $1.00 for the five
years. The most significant contractual obligations for the ensuing five-year
period can be summarized as follows:
| CONTRACTUAL OBLIGATIONS | Less than | Year | Year | After | |||||||||||
| (expressed in thousands of United States dollars) | Total | 1 year | 2–3 | 4–5 | 5 years | ||||||||||
|
Interest-bearing loans and borrowings (a)(b) |
$ | 383,454 | $ | 104,563 | $ | 254,138 | $ | 5,168 | $ | 19,585 | |||||
|
Environmental and participation agreements incremental commitments (c) |
99,171 | 86,112 | 713 | 865 | 11,481 | ||||||||||
|
Operating lease obligations (d) |
240,209 | 25,640 | 41,148 | 39,735 | 133,686 | ||||||||||
|
Total contractual obligations |
$ | 722,834 | $ | 216,315 | $ | 295,999 | $ | 45,768 | $ | 164,752 |
2012 SECOND QUARTER REPORT
14
Harry Winston Diamond Corporation
| (a) |
Interest-bearing loans and borrowings presented in the foregoing table include current and long-term portions. The mining segment maintains a senior secured revolving credit facility with Standard Chartered Bank for $125.0 million. The facility has an initial maturity date of June 24, 2013 with two one-year extensions at the Company’s option. There are no scheduled repayments required before maturity. At July 31, 2011, $50.0 million was outstanding. |
|
On August 25, 2010, the Company issued a promissory note in the amount of $70.0 million, maturing on August 25, 2011, as part of the consideration for reacquiring its 9% indirect interest in the Diavik Joint Venture (the “Kinross Buy Back Transaction”) from Kinross. The note bears interest at a rate of 5% per annum and can be paid in cash. On August 25, 2011, the Company paid the $70.0 million promissory note plus accrued interest to Kinross from cash on hand. | |
|
The Company has available a $45.0 million revolving financing facility (utilization in either US dollars or Euros) for inventory and receivables funding in connection with marketing activities through its Belgian subsidiary, Harry Winston Diamond International N.V., and its Indian subsidiary, Harry Winston Diamond (India) Private Limited. Borrowings under the Belgian facility bear interest at the bank’s base rate plus 1.5%. Borrowings under the Indian facility bear an interest rate of 12.0%. At July 31, 2011, $nil and $1.6 million were outstanding under this facility relating to its Belgian subsidiary, Harry Winston Diamond International N.V., and its Indian subsidiary, Harry Winston Diamond (India) Private Limited, respectively. The facility is guaranteed by Harry Winston Diamond Corporation. | |
|
Harry Winston Inc. maintains a credit agreement with a syndicate of banks for a $250.0 million five-year revolving credit facility, which expires on March 31, 2013. There are no scheduled repayments required before maturity. At July 31, 2011, $188.3 million had been drawn against this secured credit facility. | |
|
Also included in long-term debt of Harry Winston Inc. is a 25-year loan agreement for CHF 17.5 million ($21.6 million) used to finance the construction of the Company’s watch factory in Geneva, Switzerland. The loan agreement is comprised of a CHF 3.5 million ($4.3 million) loan and a CHF 14.0 million ($17.3 million) loan. The CHF 3.5 million loan bears interest at a rate of 3.15% and matures on April 22, 2013. The CHF 14.0 million loan bears interest at a rate of 3.55% and matures on January 31, 2033. At July 31, 2011, $19.3 million was outstanding. The bank has a secured interest in the factory building. | |
|
Harry Winston Japan, K.K. maintains unsecured credit agreements with two banks, amounting to ¥1,215 million ($15.8 million). Harry Winston Japan, K.K. also maintains a secured credit agreement amounting to ¥575 million ($7.5 million). This facility is secured by inventory owned by Harry Winston Japan, K.K. | |
|
The Company’s first mortgage on real property has scheduled principal payments of approximately $0.2 million quarterly, may be prepaid at any time, and matures on September 1, 2018. On July 31, 2011, $7.0 million was outstanding on the mortgage payable. | |
| (b) |
Interest on loans and borrowings is calculated at various fixed and floating rates. Projected interest payments on the current debt outstanding were based on interest rates in effect at July 31, 2011, and have been included under interest-bearing loans and borrowings in the table above. Interest payments for the next twelve months are approximated to be $10.3 million. |
| (c) |
The Joint Venture, under environmental and other agreements, must provide funding for the Environmental Monitoring Advisory Board. These agreements also state that the Joint Venture must provide security deposits for the performance by the Joint Venture of its reclamation and abandonment obligations under all environmental laws and regulations. The operator of the Joint Venture has fulfilled such obligations for the security deposits by posting letters of credit of which HWDLP’s share as at July 31, 2011 was $84.3 million based on its 40% ownership interest in the Diavik Diamond Mine. There can be no assurance that the operator will continue its practice of posting letters of credit in fulfillment of this obligation, in which event HWDLP would be required to post its proportionate share of such security directly, which would result in additional constraints on liquidity. The requirement to post security for the reclamation and abandonment obligations may be reduced to the extent of amounts spent by the Joint Venture on those activities. The Joint Venture has also signed participation agreements with various native groups. These agreements are expected to contribute to the social, economic and cultural well-being of area Aboriginal bands. The actual cash outlay for the Joint Venture’s obligations under these agreements is not anticipated to occur until later in the life of the Diavik Diamond Mine. |
| (d) |
Operating lease obligations represent future minimum annual rentals under non-cancellable operating leases for Harry Winston Inc. salons and office space, and long-term leases for property, land, office premises and a fuel tank farm for the Diavik Diamond Mine. |
2012 SECOND QUARTER REPORT
15
Harry Winston Diamond Corporation
Non-GAAP Measure
In addition to
discussing earnings measures in accordance with IFRS, the MD&A provides the
following non-GAAP measure, which is also used by management to monitor and
evaluate the performance of the Company and its business segments.
The term EBITDA (earnings before interest, taxes, depreciation and amortization) does not have a standardized meaning according to IFRS and therefore may not be comparable to similar measures presented by other issuers. The Company defines EBITDA as sales minus cost of sales and selling, general and administrative expenses, meaning it represents operating profit before depreciation and amortization.
EBITDA is a measure commonly reported and widely used by investors and analysts as an indicator of the Company’s operating performance and ability to incur and service debt and as a valuation metric. EBITDA margin is defined as the ratio obtained by dividing EBITDA by sales.
CONSOLIDATED
(expressed in thousands of United
States dollars)
(quarterly results are unaudited)
| IFRS | CDN GAAP | IFRS | IFRS | |||||||||||||||||||||||||||
| Six | Six | |||||||||||||||||||||||||||||
| months | months | |||||||||||||||||||||||||||||
| ended | ended | |||||||||||||||||||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | 2011 | 2010 | 2010 | July 31, | July 31, | |||||||||||||||||||||
| Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | 2011 | 2010 | |||||||||||||||||||||
|
Operating profit (loss) |
$ | 23,100 | $ | 4,685 | $ | 21,245 | $ | 14,830 | $ | 29,932 | $ | 2,341 | $ | (3,082 | ) | $ | (4,941 | ) | $ | 27,785 | $ | 32,273 | ||||||||
|
Depreciation and amortization |
20,716 | 20,291 | 24,635 | 18,657 | 19,515 | 14,200 | 18,258 | 11,208 | 41,007 | 33,715 | ||||||||||||||||||||
|
EBITDA |
$ | 43,816 | $ | 24,976 | $ | 45,880 | $ | 33,487 | $ | 49,447 | $ | 16,541 | $ | 15,176 | $ | 6,267 | $ | 68,792 | $ | 65,988 | ||||||||||
MINING SEGMENT
(expressed in thousands of
United States dollars)
(quarterly results are unaudited)
| IFRS | CDN GAAP | IFRS | IFRS | |||||||||||||||||||||||||||
| Six | Six | |||||||||||||||||||||||||||||
| months | months | |||||||||||||||||||||||||||||
| ended | ended | |||||||||||||||||||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | 2011 | 2010 | 2010 | July 31, | July 31, | |||||||||||||||||||||
| Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | 2011 | 2010 | |||||||||||||||||||||
|
Operating profit (loss) |
$ | 16,286 | $ | 566 | $ | 16,047 | $ | 9,438 | $ | 27,606 | $ | 909 | $ | 1,577 | $ | (4,486 | ) | $ | 16,852 | $ | 28,515 | |||||||||
|
Depreciation and amortization |
17,461 | 17,083 | 20,669 | 15,428 | 16,352 | 10,975 | 14,976 | 7,845 | 34,544 | 27,327 | ||||||||||||||||||||
|
EBITDA |
$ | 33,747 | $ | 17,649 | $ | 36,716 | $ | 24,866 | $ | 43,958 | $ | 11,884 | $ | 16,553 | $ | 3,359 | $ | 51,396 | $ | 55,842 | ||||||||||
LUXURY BRAND SEGMENT
(expressed in thousands
of United States dollars)
(quarterly results are
unaudited)
| IFRS | CDN GAAP | IFRS | IFRS | |||||||||||||||||||||||||||
| Six | Six | |||||||||||||||||||||||||||||
| months | months | |||||||||||||||||||||||||||||
| ended | ended | |||||||||||||||||||||||||||||
| 2012 | 2012 | 2011 | 2011 | 2011 | 2011 | 2010 | 2010 | July 31, | July 31, | |||||||||||||||||||||
| Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | 2011 | 2010 | |||||||||||||||||||||
|
Operating profit (loss) |
$ | 6,814 | $ | 4,119 | $ | 5,198 | $ | 5,392 | $ | 2,326 | $ | 1,432 | $ | (4,659 | ) | $ | (455 | ) | $ | 10,933 | $ | 3,758 | ||||||||
|
Depreciation and amortization |
3,255 | 3,209 | 3,966 | 3,229 | 3,162 | 3,226 | 3,282 | 3,363 | 6,463 | 6,388 | ||||||||||||||||||||
|
EBITDA |
$ | 10,069 | $ | 7,328 | $ | 9,164 | $ | 8,621 | $ | 5,488 | $ | 4,658 | $ | (1,377 | ) | $ | 2,908 | $ | 17,396 | $ | 10,146 | |||||||||
2012 SECOND QUARTER REPORT
16
Harry Winston Diamond Corporation
Subsequent Event
On August 25, 2011,
the Company paid the $70.0 million promissory note plus accrued interest owing
to Kinross from cash on hand. The promissory note was issued to Kinross on
August 25, 2010, as part of the consideration for reacquiring Kinross’s 9%
indirect interest in the Diavik Joint Venture.
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
MD&A and the Company’s other publicly filed disclosure documents, readers
should give careful consideration to the following risks, each of which could
have a material adverse effect on the Company’s business prospects or financial
condition.
Nature of Mining
The operation
of the Diavik Diamond Mine is subject to risks inherent in the mining industry,
including variations in grade and other geological differences, unexpected
problems associated with required water retention dikes, water quality, surface
and underground conditions, processing problems, equipment performance,
accidents, labour disputes, risks relating to the physical security of the
diamonds, force majeure risks and natural disasters. Particularly with
underground mining operations, inherent risks include variations in rock
structure and strength as it impacts on mining method selection and performance,
de-watering and water handling requirements, achieving the required 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
HWDLP holds an undivided 40% interest in the assets, liabilities
and expenses of the Diavik Diamond Mine and the Diavik group of mineral claims.
The Diavik Diamond Mine and the exploration and development of the Diavik group
of mineral claims is a joint arrangement between DDMI (60%) and HWDLP (40%), and
is subject to the risks normally associated with the conduct of joint ventures
and similar joint arrangements. These risks include the inability to exert
influence over strategic decisions made in respect of the Diavik Diamond Mine
and the Diavik group of mineral claims. 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 may not have sufficient cash to meet. A
failure to meet capital expenditure requirements imposed by DDMI could result in
HWDLP’s interest in the Diavik Diamond Mine and the Diavik group of mineral
claims being diluted.
Diamond Prices and Demand for Diamonds
The profitability of the Company is dependent upon production
from the Diavik Diamond Mine and on the results of the operations of its luxury
brand operations. Each, in turn, is dependent in significant part upon the
worldwide demand for and price of diamonds. Diamond prices fluctuate and are
affected by numerous factors beyond the control of the Company, including
worldwide economic trends, particularly in the US, Japan, China and India,
worldwide levels of diamond discovery and production, and the level of demand
for, and discretionary spending on, luxury goods such as diamonds and jewelry.
Low or negative growth in the worldwide economy, renewed or additional credit
market disruptions, natural disasters or the occurrence of further terrorist
attacks or similar activities creating disruptions in economic growth could
result in decreased demand for luxury goods such as diamonds and jewelry,
thereby negatively affecting the price of diamonds and jewelry. Similarly, a
substantial increase in the worldwide level of diamond production or in diamonds
available for sale through recommencement of suspended mining activity or the
release of stocks held back during recent periods of low demand could also
negatively affect the price of diamonds. In each case, such developments could
have a material adverse effect on the Company’s results of operations.
2012 SECOND QUARTER REPORT
17
Harry Winston Diamond Corporation
Cash Flow and Liquidity
The Company’s liquidity requirements fluctuate from
quarter to quarter and year to year depending on, among other factors, the
seasonality of production at the Diavik Diamond Mine, seasonality of mine
operating expenses, capital expenditure programs, the number of rough diamond
sales events conducted during the quarter and the volume, size and quality
distribution of rough diamonds delivered from the Diavik Diamond Mine in each
quarter, along with the seasonality of sales and salon refurbishment and
expansion in the luxury brand segment. The Company’s principal working capital
needs include investments in inventory, prepaid expenses and other current
assets, and accounts payable and income taxes payable. There can be no assurance
that the Company will be able to meet each or all of its liquidity requirements.
A failure by the Company to meet its liquidity requirements could result in the
Company failing to meet its planned development objectives, or in the Company
being in default of a contractual obligation, each of which could have a
material adverse effect on the Company’s business prospects or financial
condition.
Economic Environment
The
Company’s financial results are tied to the global economic conditions and their
impact on levels of consumer confidence and consumer spending. The global
markets have experienced the impact of a significant US and international
economic downturn since the fall of 2008. This has restricted the Company’s
growth opportunities both domestically and internationally, and a return to a
recession or weak recovery, due to recent disruptions in financial markets in
the US and the European Union or otherwise, the 2011 disaster in Japan and
political upheavals in the Middle East, could cause the Company to experience
further revenue declines across both of its business segments due to
deteriorated consumer confidence and spending, and a decrease in the
availability of credit, which could have a material adverse effect on the
Company’s business prospects or financial condition. The Company monitors
economic developments in the markets in which it operates and uses this
information in its continuous strategic and operational planning in an effort to
adjust its business in response to changing economic conditions.
Currency Risk
Currency fluctuations may affect the Company’s financial
performance. Diamonds are sold throughout the world based principally on the 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 deferred
income tax liability that has been incurred and will be payable in Canadian
dollars. The Company’s currency exposure relates primarily to expenses and
obligations incurred by it in Canadian dollars and, secondarily, to revenues of
Harry Winston Inc. in currencies other than the US dollar. The appreciation of
the Canadian dollar against the US dollar, and the depreciation of other
currencies against the US dollar, therefore, will increase the expenses of the
Diavik Diamond Mine and the amount of the Company’s Canadian dollar liabilities
relative to the revenue 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.
Licences and Permits
The
operation of the Diavik Diamond Mine and exploration on the Diavik property
requires licences and permits from the Canadian government. The Diavik Diamond
Mine Type “A” Water Licence was renewed by the regional Wek’eezhii Land and
Water Board to October 31, 2015. While the Company anticipates that DDMI, the
operator of the Diavik Diamond Mine, will be able to renew this licence and
other necessary permits in the future, there can be no guarantee that DDMI will
be able to do so or obtain or maintain all other necessary licences and permits
that may be required to maintain the operation of the Diavik Diamond Mine or to
further explore and develop the 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 effect 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 that could differ materially from those
under which they operate in Canada and the US.
2012 SECOND QUARTER REPORT
18
Harry Winston Diamond Corporation
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 has established 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 as well as to reflect depletion due to production. Reserve estimates
may be revised upward or downward based on the results of current and future
drilling, testing or production levels, and on changes in mine design. In
addition, market fluctuations in the price of diamonds or increases in the costs
to recover diamonds from the Diavik Diamond Mine may render the mining of ore
reserves uneconomical.
Mineral resources that are not mineral reserves do not have demonstrated economic viability. Due to the uncertainty that may attach to inferred mineral resources, there is no assurance that mineral resources at the Diavik property will be upgraded to proven and probable ore reserves.
Insurance
The Company’s business
is subject to a number of risks and hazards, including adverse environmental
conditions, industrial accidents, labour disputes, unusual or unexpected
geological conditions, risks relating to the physical security of diamonds and
jewelry held as inventory or in transit, changes in the regulatory environment
and natural phenomena such as inclement weather conditions. Such occurrences
could result in damage to the Diavik Diamond Mine, personal injury or death,
environmental damage to the Diavik property, delays in mining, the closing of
Harry Winston Inc.’s manufacturing facilities or salons, monetary losses and
possible legal liability. Although insurance is maintained to protect against
certain risks in connection with the Diavik Diamond Mine and the Company’s
operations, the insurance in place will not cover all potential risks. It may
not be possible to maintain insurance to cover insurable risks at economically
feasible premiums.
Fuel Costs
The Diavik Diamond
Mine’s expected fuel needs are purchased periodically during the year for
storage, and 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 in marketing rough diamonds and operating the business of Harry Winston Inc. is dependent on the services of key executives and skilled employees, as well as the continuance of key relationships with certain third parties, such as diamantaires. The loss of these persons or the Company’s inability to attract and retain additional skilled employees or to establish and maintain relationships with required third parties may adversely affect its business and future operations in marketing diamonds and operating its luxury brand segment.
2012 SECOND QUARTER REPORT
19
Harry Winston Diamond Corporation
Expansion and Refurbishment of the Existing
Salon Network
A key component of the Company’s luxury brand
strategy in recent years has been the expansion of its salon network. The
Company currently expects to expand its retail salon network to 35 salons (in
total) and 300 wholesale doors worldwide by fiscal 2016. An additional objective
of the Company is to achieve compound annual growth rate in sales in the
mid-teens in the luxury brand segment and an operating profit in the low to
mid-teens in the luxury brand segment, in each case over the five-year period
from fiscal 2012 to 2016. Although the Company considers these objectives to be
reasonable, they are subject to a number of risks and uncertainties, and there
can be no assurance that these objectives will be realized. This strategy
requires the Company to make ongoing capital expenditures to build and open new
salons, to refurbish existing salons from time to time, and to incur additional
operating expenses in order to operate the new salons. To date, much of this
expansion has been financed by Harry Winston Inc. through borrowings. The
successful expansion of the Company’s global salon network, and achieving an
increase in sales and in operating profit, will depend on a variety of factors,
including worldwide economic conditions, market demand for luxury goods, the
strength of the Harry Winston brand and the availability of sufficient funding.
There can be no assurance that the expansion of the salon network will continue
or that the current expansion will prove successful in increasing annual sales
or earnings from the luxury brand segment, and the increased debt levels
resulting from this expansion could negatively impact the Company’s liquidity
and its results from operations in the absence of increased sales and earnings.
The Company has to date licensed two retail salons to operate under the Harry Winston name and currently expects to increase the number of licensed salons to 15 by fiscal 2016. There is no assurance that the Company will be able to find qualified third parties to enter into these licensing arrangements, or that the licensees will honour the terms of the agreements. The conduct of licensees may have a negative impact on the Company’s distinctive brand name and reputation.
Competition in the Luxury Brand Segment
The Company is exposed to competition in the luxury brand market
from other luxury goods, diamond, jewelry and watch retailers. The ability of
Harry Winston Inc. to successfully compete with such luxury goods, diamond,
jewelry and watch retailers is dependent upon a number of factors, including the
ability to source high-end polished diamonds and protect and promote its
distinctive brand name and reputation. If Harry Winston Inc. is unable to
successfully compete in the luxury jewelry segment, then the Company’s results
of operations will be adversely affected.
Changes in Disclosure Controls and Procedures and
Internal Control over Financial Reporting
During the second quarter
of fiscal 2012, there were no changes in the Company’s disclosure controls and
procedures or internal control over financial reporting that materially
affected, or are reasonably likely to materially affect, the Company’s
disclosure controls and procedures or internal control over financial reporting.
Critical Accounting Estimates
Management is often required to make judgments, assumptions and
estimates in the application of IFRS that have a significant impact on the
financial results of the Company. Certain policies are more significant than
others and are, therefore, considered critical accounting policies. Accounting
policies are considered critical if they rely on a substantial amount of
judgment (use of estimates) in their application or if they result from a choice
between accounting alternatives and that choice has a material impact on the
Company’s reported results or financial position. There have been no significant
changes to critical accounting estimates since the first quarter of fiscal 2012.
Changes in Accounting Policies
The
International Accounting Standards Board (“IASB”) has issued a new standard,
IFRS 9, “Financial Instruments” (“IFRS 9”), which will ultimately replace IAS
39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9
provides guidance on the classification and measurement of financial assets and
financial liabilities. This standard becomes effective for the Company’s fiscal
year end beginning February 1, 2013. The Company is currently assessing the
impact of the new standard on its financial statements.
IFRS 11, "Joint Arrangements" (“IFRS 11”), was issued by the IASB on May 12, 2011 and will replace IAS 31, “Interest in Joint Ventures”. The new standard will apply to the accounting for interests in joint arrangements where there is joint control. Under IFRS 11, joint arrangements are classified as either joint ventures or joint operations. The structure of the joint arrangement will no longer be the most significant factor in determining whether a joint arrangement is either a joint venture or a joint operation. Proportionate consolidations will no longer be allowed and will be replaced by equity accounting. IFRS 11 is effective for the Company’s fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is currently assessing the impact of IFRS 11 on its results of operations and financial position.
2012 SECOND QUARTER REPORT
20
Harry Winston Diamond Corporation
IFRS 13, “Fair Value Measurement” (“IFRS 13”), was also issued by the IASB on May 12, 2011. The new standard makes IFRS consistent with generally accepted accounting principles in the United States (“US GAAP”) on measuring fair value and related fair value disclosures. The new standard creates a single source of guidance for fair value measurements. IFRS 13 is effective for the Company’s fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is assessing the impact of IFRS 13 on its consolidated financial statements.
| Outstanding Share Information | |||
|
As at August 31, 2011 |
|||
| Authorized | Unlimited | ||
| Issued and outstanding shares | 84,793,781 | ||
| Options outstanding | 2,481,899 | ||
| Fully diluted | 87,275,680 |
Additional Information
Additional
information relating to the Company, including the Company’s most recently filed
Annual Information Form, can be found on SEDAR at www.sedar.com, and is also
available on the Company’s website at http://investor.harrywinston.com.
2012 SECOND QUARTER REPORT
21
Harry Winston Diamond Corporation
Condensed Consolidated Balance Sheets
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
|
|
July 31, | January 31, | ||||
|
|
2011 | 2011 | ||||
|
|
||||||
|
ASSETS |
||||||
|
Current assets |
||||||
|
Cash and cash equivalents (note 4) |
$ | 139,881 | $ | 108,693 | ||
|
Accounts receivable |
31,032 | 22,788 | ||||
|
Inventory and supplies (note 5) |
430,204 | 403,212 | ||||
|
Other current assets |
36,034 | 38,662 | ||||
|
|
637,151 | 573,355 | ||||
|
Property, plant and equipment – Mining |
755,501 | 764,093 | ||||
|
Property, plant and equipment – Luxury brand |
63,986 | 61,019 | ||||
|
Intangible assets, net (note 7) |
127,616 | 127,894 | ||||
|
Other non-current assets |
14,000 | 16,626 | ||||
|
Deferred income tax assets |
67,085 | 62,693 | ||||
|
Total assets |
$ | 1,665,339 | $ | 1,605,680 | ||
|
|
||||||
|
|
||||||
|
LIABILITIES AND EQUITY |
||||||
|
Current liabilities |
||||||
|
Trade and other payables |
$ | 112,256 | $ | 136,490 | ||
|
Income taxes payable |
25,740 | 6,660 | ||||
|
Employee benefit plans (note 8) |
6,682 | 7,378 | ||||
|
Promissory note (note 9) |
70,000 | 70,000 | ||||
|
Current portion of interest-bearing loans and borrowings (note 9) |
26,350 | 24,215 | ||||
|
|
241,028 | 244,743 | ||||
|
Interest-bearing loans and borrowings (note 9) |
260,972 | 237,621 | ||||
|
Deferred income tax liabilities |
304,393 | 301,980 | ||||
|
Employee benefit plans (note 8) |
7,857 | 7,287 | ||||
|
Provisions |
51,716 | 50,130 | ||||
|
Total liabilities |
865,966 | 841,761 | ||||
|
Equity |
||||||
|
Share capital (note 10) |
509,410 | 502,129 | ||||
|
Contributed surplus |
15,043 | 16,233 | ||||
|
Retained earnings |
251,249 | 237,667 | ||||
|
Accumulated other comprehensive income |
23,401 | 7,624 | ||||
|
Total shareholders’ equity |
799,103 | 763,653 | ||||
|
Non-controlling interest |
270 | 266 | ||||
|
Total equity |
799,373 | 763,919 | ||||
|
Total Liabilities and Equity |
$ | 1,665,339 | $ | 1,605,680 |
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
2012 SECOND QUARTER REPORT
22
Harry Winston Diamond Corporation
Condensed Consolidated Income Statements
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
|
|
Three | Three | Six | Six | ||||||||
|
|
months ended | months ended | months ended | months ended | ||||||||
|
|
July 31, | July 31, | July 31, | July 31, | ||||||||
|
|
2011 | 2010 | 2011 | 2010 | ||||||||
|
Sales |
$ | 222,378 | $ | 153,728 | $ | 366,310 | $ | 267,728 | ||||
|
Cost of sales |
150,177 | 85,798 | 246,629 | 161,509 | ||||||||
|
Gross margin |
72,201 | 67,930 | 119,681 | 106,219 | ||||||||
|
Selling, general and administrative expenses |
49,101 | 37,998 | 91,896 | 73,946 | ||||||||
|
Operating profit |
23,100 | 29,932 | 27,785 | 32,273 | ||||||||
|
Finance expenses |
(5,183 | ) | (2,985 | ) | (9,166 | ) | (5,865 | ) | ||||
|
Exploration costs |
(781 | ) | (76 | ) | (993 | ) | (103 | ) | ||||
|
Finance and other income |
83 | 154 | 341 | 322 | ||||||||
|
Foreign exchange gain (loss) |
288 | 1,043 | 111 | (1,170 | ) | |||||||
|
Profit before income taxes |
17,507 | 28,068 | 18,078 | 25,457 | ||||||||
|
Net income tax expense |
7,519 | 10,877 | 4,492 | 5,353 | ||||||||
|
Net profit |
$ | 9,988 | $ | 17,191 | $ | 13,586 | $ | 20,104 | ||||
|
Attributable to shareholders |
$ | 9,986 | $ | 13,043 | $ | 13,582 | $ | 15,180 | ||||
|
Attributable to non-controlling interest |
$ | 2 | $ | 4,148 | $ | 4 | $ | 4,924 | ||||
|
Earnings per share |
||||||||||||
|
Basic |
$ | 0.12 | $ | 0.17 | $ | 0.16 | $ | 0.20 | ||||
|
Diluted |
$ | 0.12 | $ | 0.17 | $ | 0.16 | $ | 0.20 | ||||
|
Weighted average number of shares outstanding |
84,688,002 | 76,639,693 | 84,491,901 | 76,635,651 |
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
2012 SECOND QUARTER REPORT
23
Harry Winston Diamond Corporation
Condensed Consolidated Statements of Comprehensive Income
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
|
|
Three | Three | Six | Six | ||||||||
|
|
months ended | months ended | months ended | months ended | ||||||||
|
|
July 31, | July 31, | July 31, | July 31, | ||||||||
|
|
2011 | 2010 | 2011 | 2010 | ||||||||
|
Net profit |
$ | 9,988 | $ | 17,191 | $ | 13,586 | $ | 20,104 | ||||
|
|
||||||||||||
|
Other comprehensive income |
||||||||||||
|
Net gain on translation of net foreign operations (net of tax of nil) |
8,531 | 3,784 | 15,777 | 2,030 | ||||||||
|
Change in fair value of derivative financial instrument (net of tax of $0.1 million for the three months and $0.2 million for the six months ended July 31, 2010) |
– | 95 | – | 253 | ||||||||
|
Actuarial loss on employee benefit plans (net of tax of nil) |
– | – | – | (636 | ) | |||||||
|
Other comprehensive income, net of tax |
8,531 | 3,879 | 15,777 | 1,647 | ||||||||
|
|
||||||||||||
|
Total comprehensive income |
$ | 18,519 | $ | 21,070 | $ | 29,363 | $ | 21,751 | ||||
|
Attributable to shareholders |
$ | 18,517 | $ | 16,922 | $ | 29,359 | $ | 16,827 | ||||
|
Attributable to non-controlling interest |
$ | 2 | $ | 4,148 | $ | 4 | $ | 4,924 |
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
2012 SECOND QUARTER REPORT
24
Harry Winston Diamond Corporation
Condensed Consolidated Statements of Changes in Equity
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
|
|
Three | Three | Six | Six | ||||||||
|
|
months ended | months ended | months ended | months ended | ||||||||
|
|
July 31, | July 31, | July 31, | July 31, | ||||||||
|
|
2011 | 2010 | 2011 | 2010 | ||||||||
|
Common shares: |
||||||||||||
|
Balance at beginning of period |
$ | 507,207 | $ | 426,753 | $ | 502,129 | $ | 426,593 | ||||
|
Issued during the period |
1,063 | 89 | 4,981 | 249 | ||||||||
|
Transfer from contributed surplus on exercise of options |
1,140 | – | 2,300 | – | ||||||||
|
Balance at end of period |
509,410 | 426,842 | 509,410 | 426,842 | ||||||||
|
Contributed surplus: |
||||||||||||
|
Balance at beginning of period |
15,670 | 17,917 | 16,233 | 17,730 | ||||||||
|
Stock-based compensation expense |
513 | 161 | 1,110 | 348 | ||||||||
|
Transfer from contributed surplus on exercise of options |
(1,140 | ) | – | (2,300 | ) | – | ||||||
|
Balance at end of period |
15,043 | 18,078 | 15,043 | 18,078 | ||||||||
|
Retained earnings: |
||||||||||||
|
Balance at beginning of period |
241,263 | 252,205 | 237,667 | 250,068 | ||||||||
|
Net profit attributable to common shareholders |
9,986 | 13,043 | 13,582 | 15,180 | ||||||||
|
Balance at end of period |
251,249 | 265,248 | 251,249 | 265,248 | ||||||||
|
Accumulated other comprehensive income: |
||||||||||||
|
Balance at beginning of period |
14,870 | (4,802 | ) | 7,624 | (2,570 | ) | ||||||
|
Other comprehensive income |
||||||||||||
|
Net gain on translation of net foreign operations (net of tax of nil) |
8,531 | 3,784 | 15,777 | 2,030 | ||||||||
|
Change in fair value of derivative financial instruments (net of tax of $0.1 million for the three months and $0.2 million for the six months ended July 31, 2010) |
– | 95 | – | 253 | ||||||||
|
Actuarial loss on employee benefit plans (net of tax of nil) |
– | – | – | (636 | ) | |||||||
|
Balance at end of period |
23,401 | (923 | ) | 23,401 | (923 | ) | ||||||
|
NON-CONTROLLING INTEREST: |
||||||||||||
|
Balance at beginning of period |
268 | 179,113 | 266 | 178,337 | ||||||||
|
Non-controlling interest |
2 | 4,148 | 4 | 4,924 | ||||||||
|
Distribution to Kinross |
– | (9,900 | ) | – | (9,900 | ) | ||||||
|
Balance at end of period |
270 | 173,361 | 270 | 173,361 | ||||||||
|
Total Shareholders’ Equity |
$ | 799,373 | $ | 882,606 | $ | 799,373 | $ | 882,606 |
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
2012 SECOND QUARTER REPORT
25
Harry Winston Diamond Corporation
Condensed Consolidated Statements of Cash Flows
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
|
|
Three | Three | Six | Six | ||||||||
|
|
months ended | months ended | months ended | months ended | ||||||||
|
|
July 31, | July 31, | July 31, | July 31, | ||||||||
|
|
2011 | 2010 | 2011 | 2010 | ||||||||
|
Cash provided by (used in) |
||||||||||||
|
OPERATING |
||||||||||||
|
Net profit |
$ | 9,988 | $ | 17,191 | $ | 13,586 | $ | 20,104 | ||||
|
Depreciation and amortization |
20,716 | 19,515 | 41,007 | 33,715 | ||||||||
|
Deferred income tax expense (recovery) |
(771 | ) | 9,081 | (3,419 | ) | 3,043 | ||||||
|
Current income tax expense |
8,290 | 1,796 | 7,911 | 2,310 | ||||||||
|
Finance expenses |
5,183 | 2,985 | 9,166 | 5,865 | ||||||||
|
Stock-based compensation |
513 | 161 | 1,110 | 348 | ||||||||
|
Foreign exchange gain (loss) |
(725 | ) | (1,189 | ) | (192 | ) | 1,781 | |||||
|
Loss on disposal of assets |
– | – | – | 243 | ||||||||
|
Income tax refund (paid), net |
13,165 | (16,083 | ) | 10,454 | (17,568 | ) | ||||||
|
Change in non-cash operating working capital, excluding taxes and finance expenses |
(16,302 | ) | (31,099 | ) | (57,516 | ) | (22,677 | ) | ||||
|
Cash provided from operating activities |
40,057 | 2,358 | 22,107 | 27,164 | ||||||||
|
FINANCING |
||||||||||||
|
Decrease in interest-bearing loans and borrowings |
(180 | ) | (79 | ) | (354 | ) | (131 | ) | ||||
|
Increase in revolving credit |
67,719 | 136,749 | 85,604 | 162,175 | ||||||||
|
Decrease in revolving credit |
(57,690 | ) |
(78,209 |
) | (58,007 | ) | (90,242 | ) | ||||
|
Interest paid |
(3,689 | ) | (2,188 | ) | (5,197 | ) | (4,008 | ) | ||||
|
Issue of common shares, net of issue costs |
1,063 | 89 | 4,981 | 249 | ||||||||
|
Distribution to Kinross |
– | (9,900 | ) | – | (9,900 | ) | ||||||
|
Cash provided from financing activities |
7,223 | 46,462 | 27,027 | 58,143 | ||||||||
|
INVESTING |
||||||||||||
|
Property, plant and equipment – Mining |
(12,649 | ) | (10,711 | ) | (25,084 | ) | (20,008 | ) | ||||
|
Property, plant and equipment – Luxury brand |
(1,900 | ) | (892 | ) | (3,289 | ) | (1,097 | ) | ||||
|
Other non-current assets |
(427 | ) | (3,754 | ) | (823 | ) | (3,460 | ) | ||||
|
Cash used in investing activities |
(14,976 | ) | (15,357 | ) | (29,196 | ) | (24,565 | ) | ||||
|
Foreign exchange effect on cash balances |
6,363 | 1,637 | 11,250 | 1,263 | ||||||||
|
Increase in cash and cash equivalents |
38,667 | 35,100 | 31,188 | 62,005 | ||||||||
|
Cash and cash equivalents, beginning of period |
101,214 | 89,874 | 108,693 | 62,969 | ||||||||
|
Cash and cash equivalents, end of period |
$ | 139,881 | $ | 124,974 | $ | 139,881 | $ | 124,974 | ||||
|
Change in non-cash operating working capital, excluding taxes and finance expenses |
||||||||||||
|
Accounts receivable |
(2,845 | ) | (1,770 | ) | (8,226 | ) | (2,440 | ) | ||||
|
Inventory and supplies |
37,959 | (34,132 | ) | (24,436 | ) | (59,106 | ) | |||||
|
Other current assets |
3,173 | (4,291 | ) | 2,617 | 3,153 | |||||||
|
Trade and other payables |
(54,726 | ) | 15,811 | (27,172 | ) | 42,490 | ||||||
|
Employee benefit plans |
137 | (6,717 | ) | (299 | ) | (6,774 | ) | |||||
|
|
$ | (16,302 | ) | $ | (31,099 | ) | $ | (57,516 | ) | $ | (22,677 | ) |
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
2012 SECOND QUARTER REPORT
26
Harry Winston Diamond Corporation
Notes to Condensed Consolidated Financial Statements
JULY 31, 2011 WITH COMPARATIVE FIGURES
(TABULAR AMOUNTS IN
THOUSANDS OF UNITED STATES DOLLARS, EXCEPT AS OTHERWISE NOTED)
Note 1:
Nature of
Operations
Harry Winston Diamond Corporation (the “Company”) is a
diamond enterprise with assets in the mining and luxury brand segments of the
diamond industry.
The Company’s mining asset is an ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the “Joint Venture”) is an unincorporated joint arrangement between Diavik Diamond Mines Inc. (“DDMI”) (60%) and Harry Winston Diamond Limited Partnership (“HWDLP”) (40%) where HWDLP holds an undivided 40% ownership interest in the assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is the operator of the Diavik Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England, and Harry Winston Diamond Limited Partnership is a wholly owned subsidiary of Harry Winston Diamond Corporation of Toronto, Canada.
The Company also owns Harry Winston Inc., the premier fine jewelry and watch retailer with select locations throughout the world. Its head office is located in New York City, United States.
Certain comparative figures have been reclassified to conform with current year’s presentation.
The Company is incorporated and domiciled in Canada and its shares are publicly traded on the Toronto Stock Exchange and the New York Stock Exchange. The address of its registered office is Toronto, Ontario.
These unaudited interim condensed consolidated financial statements have been approved for issue by the Audit Committee on September 7, 2011.
| Note 2: | |
| Basis of Preparation | |
| (a) |
Statement of compliance |
|
These unaudited interim condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) International Accounting Standard (“IAS”) 34, “Interim Financial Reporting”. The Company’s first annual consolidated financial statements under IFRS will be presented for the fiscal year ending January 31, 2012. The accounting policies adopted in these unaudited interim condensed consolidated financial statements are consistent with the accounting policies the Company expects to adopt in its IFRS consolidated financial statements for the fiscal year ending January 31, 2012, and are based on IFRS as issued by the International Accounting Standards Board (“IASB”) that the Company expects to be applicable at that time. | |
|
These unaudited interim condensed consolidated financial statements do not include all disclosures required by IFRS for annual consolidated financial statements and accordingly should be read in conjunction with the Company’s audited consolidated financial statements for the year ended January 31, 2011 presented under generally accepted accounting principles in Canada (‘‘Canadian GAAP’’) and in conjunction with the IFRS transition disclosures in Note 15 to these interim statements. These unaudited interim condensed consolidated financial statements have been prepared following the same accounting policies and methods of computation as presented in the unaudited interim condensed consolidated financial statements of April 30, 2011. | |
| (b) |
Basis of measurement |
|
These unaudited interim condensed consolidated financial statements have been prepared on the historical cost basis except for the following: | |
|
| |
|
| |
2012 SECOND QUARTER REPORT
27
Harry Winston Diamond Corporation
| (c) |
Currency of presentation |
|
These condensed consolidated interim financial statements are expressed in United States dollars, consistent with the predominant functional currency of the Company’s operations. All financial information presented in United States dollars has been rounded to the nearest thousand. |
Note 3:
Changes in
Accounting Policies
Standards issued but not yet
effective
The following standards and interpretations have been
issued but are not yet effective and have not been early adopted in these
financial statements. These standards may result in consequential changes to the
accounting policies and other note disclosures.
| (i) |
Fair Value Measurement Guidelines |
| (ii) |
IAS 1 (Revised) – Presentation of Financial Statements |
| (iii) |
IAS17 (Replacement) – Leases |
| (iv) |
IAS 32 (Replacement) – Liabilities and Equity |
| (v) |
IAS 19 (Replacement) – Employee Benefits and Pensions |
| (vi) |
IAS 11 and IAS 18 (Replacement) – Revenue Recognition |
| (vii) |
Improvements to IFRSs |
The IASB has issued a new standard, IFRS 9, “Financial Instruments” (“IFRS 9”), which will ultimately replace IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9 provides guidance on the classification and measurement of financial assets and financial liabilities. This standard becomes effective for the Company’s fiscal year end beginning February 1, 2013. The Company is currently assessing the impact of the new standard on its financial statements.
IFRS 11, "Joint Arrangements" (“IFRS 11”) was issued by the IASB on May 12, 2011 and will replace IAS 31, “Interest in Joint Ventures”. The new standard will apply to the accounting for interests in joint arrangements where there is joint control. Under IFRS 11, joint arrangements are classified as either joint ventures or joint operations. The structure of the joint arrangement will no longer be the most significant factor in determining whether a joint arrangement is either a joint venture or a joint operation. Proportionate consolidations will no longer be allowed and will be replaced by equity accounting. IFRS 11 is effective for the Company’s fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is currently assessing the impact of IFRS 11 on its results of operations and financial position.
IFRS 13, “Fair Value Measurement” (“IFRS 13”) was also issued by the IASB on May 12, 2011. The new standard makes IFRS consistent with generally accepted accounting principles in the United States (“US GAAP”) on measuring fair value and related fair value disclosures. The new standard creates a single source of guidance for fair value measurements. IFRS 13 is effective for the Company’s fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is assessing the impact of IFRS 13 on its consolidated financial statements.
| Note 4: | ||||||
| Cash Resources | ||||||
| July 31, | January 31, | |||||
| 2011 | 2011 | |||||
| Cash on hand and balances with banks | $ | 132,475 | $ | 107,993 | ||
| Short-term investments (a) | 7,406 | 700 | ||||
| Total cash resources | $ | 139,881 | $ | 108,693 |
(a) Short-term investments are held in overnight deposits and money market instruments with a maturity of 30 days.
2012 SECOND QUARTER REPORT
28
Harry Winston Diamond Corporation
|
Note 5: |
||||||
|
Inventory and Supplies |
||||||
| July 31, | January 31, | |||||
| 2011 | 2011 | |||||
| Luxury brand raw materials and work-in-progress | $ | 115,974 | $ | 80,013 | ||
| Luxury brand merchandise inventory | 208,763 | 226,358 | ||||
| Mining rough diamond inventory | 37,881 | 30,451 | ||||
| Mining supplies inventory | 67,586 | 66,390 | ||||
| Total inventory and supplies | $ | 430,204 | $ | 403,212 |
Total inventory and supplies is net of a provision for obsolescence of $ 1.9 million ($2.9 million at January 31, 2011).
Note 6:
Diavik Joint
Venture
The following represents HWDLP’s 40% proportionate interest
in the Joint Venture as at June 30, 2011 and December 31, 2010:
| July 31, | January 31, | |||||
| 2011 | 2011 | |||||
| Current assets | $ | 94,219 | $ | 92,487 | ||
| Non-current assets | 704,257 | 714,386 | ||||
| Current liabilities | 31,811 | 31,493 | ||||
| Non-current liabilities and participant’s account | 766,665 | 775,380 |
| Three | Three | Six | Six | |||||||||
| months | months | months | months | |||||||||
| ended | ended | ended | ended | |||||||||
| July 31, | July 31, | July 31, | July 31, | |||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||
|
Expenses net of interest income (a) (b) |
$ | 62,775 | $ | 42,818 | $ | 123,658 | $ | 95,465 | ||||
|
Cash flows resulting from (used in) operating activities |
(46,872 | ) | (22,188 | ) | (89,896 | ) | (53,315 | ) | ||||
|
Cash flows resulting from financing activities |
61,101 | 34,644 | 115,084 | 71,919 | ||||||||
|
Cash flows resulting from (used in) investing activities |
(10,044 | ) | (12,456 | ) | (22,221 | ) | (18,989 | ) |
| (a) |
The Joint Venture only earns interest income. |
| (b) |
Expenses net of interest income for the three and six months ended July 31, 2011 of $nil and $0.1 million, respectively (three and six months ended July 31, 2010 of $nil and $0.1 million, respectively) |
HWDLP is contingently liable for DDMI’s portion of the liabilities of the Joint Venture, and to the extent HWDLP’s participating interest has increased because of the failure of DDMI to make a cash contribution when required, HWDLP would have access to an increased portion of the assets of the Joint Venture to settle these liabilities.
| Note 7: | |||||||||||||||
| Intangible Assets | |||||||||||||||
| Amortization | Accumulated | July 31, | January 31, | ||||||||||||
| period | Cost | amortization | 2011 net | 2011 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 | (3,319 | ) | 2,256 | 2,534 | |||||||||
|
Intangible assets |
$ | 130,935 | $ | (3,319 | ) | $ | 127,616 | $ | 127,894 |
Amortization expense for the six months ended July 31, 2011 was $0.3 million ($0.7 million for the six months ended July 31, 2010). The Company completed a valuation of its trademark and drawings as of January 31, 2011 and concluded that there was no impairment of these assets.
2012 SECOND QUARTER REPORT
29
Harry Winston Diamond Corporation
Note 8:
Employee Benefit
Plans
The employee benefit obligation reflected in the consolidated
balance sheet is as follows:
|
|
July 31, | January 31, | ||||
|
|
2011 | 2011 | ||||
|
Defined benefit plan obligation – Harry Winston luxury brand segment |
$ | 10,437 | $ | 9,009 | ||
|
Defined contribution plan obligation – Harry Winston luxury brand segment |
560 | 80 | ||||
|
Defined contribution plan obligation – Harry Winston mining segment |
138 | – | ||||
|
Defined contribution plan obligation – Diavik Diamond Mine |
– | 3,061 | ||||
|
RSU and DSU plans (note 10) |
3,404 | 2,515 | ||||
|
Total employee benefit plan obligation |
$ | 14,539 | $ | 14,665 |
|
|
July 31, | January 31, | ||||
|
|
2011 | 2011 | ||||
|
Non-current |
$ | 7,857 | $ | 7,287 | ||
|
Current |
6,682 | 7,378 | ||||
|
Total employee benefit plan obligation |
$ | 14,539 | $ | 14,665 |
The amounts recognized in the consolidated income statement in respect of employee benefit plans are as follows:
|
|
Three | Three | Six | Six | ||||||||
|
|
months | months | months | months | ||||||||
|
|
ended | ended | ended | ended | ||||||||
|
|
July 31, | July 31, | July 31, | July 31, | ||||||||
|
|
2011 | 2010 | 2011 | 2010 | ||||||||
|
Defined benefit pension plan – Harry Winston luxury brand segment |
$ | 622 | $ | 598 | $ | 1,253 | $ | 1,008 | ||||
|
Defined contribution plan – Harry Winston luxury brand segment |
240 | 210 | 480 | 420 | ||||||||
|
Defined contribution plan – Harry Winston mining segment |
71 | 52 | 143 | 106 | ||||||||
|
Defined contribution plan – Diavik Diamond Mine |
484 | 338 | 1,134 | 550 | ||||||||
|
RSU and DSU plans (note 10) |
180 | 370 | 1,715 | 692 | ||||||||
|
|
$ | 1,597 | $ | 1,568 | $ | 4,725 | $ | 2,776 |
2012 SECOND QUARTER REPORT
30
Harry Winston Diamond Corporation
|
Note 9: |
||||||
|
Interest-Bearing Loans and Borrowings |
||||||
|
|
July 31, | January 31, | ||||
|
|
2011 | 2011 | ||||
|
Mining segment credit facilities |
$ | 48,938 | $ | 50,000 | ||
|
Mining segment promissory note |
68,970 | 70,000 | ||||
|
Harry Winston Inc. credit facilities |
207,519 | 181,715 | ||||
|
First mortgage on real property |
7,029 | 7,048 | ||||
|
Bank advances |
24,866 | 22,902 | ||||
|
Finance leases |
– | 171 | ||||
|
Total interest-bearing loans and borrowings |
357,322 | 331,836 | ||||
|
Less current portion |
(96,350 | ) | (94,215 | ) | ||
|
|
$ | 260,972 | $ | 237,621 |
| Nominal | Carrying | |||||||||||||||||
| interest | amount at July | Face value at July | ||||||||||||||||
| Currency | rate | Date of maturity | 31, 2011 | 31, 2011 | Borrower | |||||||||||||
| Secured bank loan | US | 3.75% | March 31, 2013 | $ | 188.3 million | $ | 188.3 million | Harry Winston Inc. | ||||||||||
| Secured bank loan | CHF | 3.15% | April 22, 2013 | $ | 4.3 million | $ | 4.3 million | Harry Winston S.A. | ||||||||||
| Secured bank loan | CHF | 3.55% | January 31, 2033 | $ | 15.0 million | $ | 15.0 million | Harry Winston S.A. | ||||||||||
| Secured bank loan |
US
|
4.01%
|
June
24, 2013 |
$ |
50.0
million |
$ |
50.0
million |
Harry Winston Diamond Corporation and Harry Winston Diamond Mines Ltd. |
||||||||||
| First mortgage on real property | CDN | 7.98% | September 1, 2018 | $ | 7.0 million | $ | 7.0 million | 6019838 Canada Inc. | ||||||||||
| Promissory note | US | 5.00% | August 25, 2011 | $ | 70.0 million | $ | 70.0 million | Harry Winston Diamond Corporation | ||||||||||
| Secured bank advance | US | N/A | Due on demand | $ | nil | $ | nil | Harry Winston Diamond International N.V. | ||||||||||
| US | 12.00% | $ | 1.6 million | $ | 1.6 million | Harry Winston Diamond (India) Private Limited | ||||||||||||
| Secured bank advance | YEN | 2.25% | August 22, 2011 | $ | 7.5 million | $ | 7.5 million | Harry Winston Japan, K.K. | ||||||||||
| Unsecured bank advance | YEN | 2.98% | August 31, 2011 | $ | 8.1 million | $ | 8.1 million | Harry Winston Japan, K.K. | ||||||||||
| Unsecured bank advance | YEN | 2.98% | August 22, 2011 | $ | 7.7 million | $ | 7.7 million | Harry Winston Japan, K.K. |
On February 28, 2011, the Company increased the mining segment senior secured revolving credit facility with Standard Chartered Bank by $25.0 million to $125.0 million.
On August 25, 2010, the Company issued a promissory note in the amount of $70.0 million, maturing on August 25, 2011, as part of the consideration for reacquiring Kinross Gold Corporation’s (“Kinross”) 9% indirect interest in the Diavik Joint Venture (the “Kinross Buy Back Transaction”) from Kinross. On August 25, 2011, the Company paid the $70.0 million promissory note plus accrued interest to Kinross from cash on hand.
2012 SECOND QUARTER REPORT
31
Harry Winston Diamond Corporation
|
Note 10: | |
| Share Capital | |
| (a) |
Authorized |
|
Unlimited common shares without par value. | |
| (b) |
Issued |
|
|
Number of shares | Amount | ||||
|
Balance, January 31, 2011 |
84,159,851 | $ | 502,129 | |||
|
Shares issued for: |
||||||
|
Exercise of options |
633,930 | 4,981 | ||||
|
Transfer from contributed surplus on exercise of options |
– | 2,300 | ||||
|
Balance, July 31, 2011 |
84,793,781 | $ | 509,410 |
| (c) |
RSU and DSU Plans |
|
RSU |
Number of units | ||
|
Balance, January 31, 2011 |
155,946 | ||
|
Awards and payouts during the year (net) |
|||
|
RSU awards |
66,991 | ||
|
RSU payouts |
(46,963 | ) | |
|
Balance, July 31, 2011 |
175,974 |
|
DSU |
Number of units | ||
|
Balance, January 31, 2011 |
193,214 | ||
|
Awards and payouts during the year (net) |
|||
|
DSU awards |
19,598 | ||
|
DSU payouts |
(17,127 | ) | |
|
Balance, July 31, 2011 |
195,685 |
During the period, the Company granted 66,991 RSUs (net of forfeitures) and 19,598 DSUs under an employee and director incentive compensation program, respectively. The RSU and DSU Plans are full value phantom shares that mirror the value of Harry Winston Diamond Corporation’s publicly traded common shares.
Grants under the RSU Plan are on a discretionary basis to employees of the Company subject to Board of Directors approval. The RSUs granted vest one-third on March 31 and one-third on each anniversary thereafter. The vesting of grants of RSUs is subject to special rules for a change in control, death and disability. The Company shall pay out cash on the respective vesting dates of RSUs and redemption dates of DSUs.
Only non-executive directors of the Company are eligible for grants under the DSU Plan. Each DSU grant vests immediately on the grant date.
The expenses related to the RSUs and DSUs are accrued based on fair value. This expense is recognized on a straight-line basis over each vesting period.
2012 SECOND QUARTER REPORT
32
Harry Winston Diamond Corporation
| Note 11: | |
|
Commitments and Guarantees | |
| (a) |
Environmental agreements |
|
Through negotiations of environmental and other agreements, the Joint Venture must provide funding for the Environmental Monitoring Advisory Board. HWDLP anticipates its share of this funding requirement will be approximately $0.2 million for calendar 2011. Further funding will be required in future years; however, specific amounts have not yet been determined. These agreements also state that the Joint Venture must provide security deposits for the performance by the Joint Venture of its reclamation and abandonment obligations under all environmental laws and regulations. HWDLP’s share of the letters of credit outstanding posted by the operator of the Joint Venture with respect to the environmental agreements as at July 31, 2011, was $84.3 million. The agreement specifically provides that these funding requirements will be reduced by amounts incurred by the Joint Venture on reclamation and abandonment activities. | |
| (b) |
Participation agreements |
|
The Joint Venture has signed participation agreements with various native groups. These agreements are expected to contribute to the social, economic and cultural well-being of the Aboriginal bands. The agreements are each for an initial term of twelve years and shall be automatically renewed on terms to be agreed for successive periods of six years thereafter until termination. The agreements terminate in the event that the mine permanently ceases to operate. Harry Winston Diamond Corporation’s share of the Joint Venture’s participation agreements as at July 31, 2011 was $1.8 million. | |
| (c) |
Commitments |
|
Commitments include the cumulative maximum funding commitments secured by letters of credit of the Joint Venture’s environmental and participation agreements at HWDLP’s 40% ownership interest, before any reduction of future reclamation activities; and future minimum annual rentals under non-cancellable operating and capital leases for luxury brand salons and 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: | |
| 2012 | $ | 111,752 | ||
| 2013 | 107,835 | |||
| 2014 | 106,905 | |||
| 2015 | 112,071 | |||
| 2016 | 107,207 | |||
| Thereafter | 232,857 |
Note 12:
Capital
Management
The Company's capital includes cash and cash equivalents,
short-term debt, long-term debt and equity, which includes issued common shares,
contributed surplus and retained earnings.
The Company's primary objective with respect to its capital management is to ensure that it has sufficient cash resources to maintain its ongoing operations, to provide returns to shareholders and benefits for other stakeholders, and to pursue growth opportunities. To meet these needs, the Company may from time to time raise additional funds through borrowing and/or the issuance of equity or debt or by securing strategic partners, upon approval by the Board of Directors. The Board of Directors reviews and approves any material transactions out of the ordinary course of business, including proposals on acquisitions or other major investments or divestitures, as well as annual capital and operating budgets.
The Company assesses liquidity and capital resources on a consolidated basis. The Company’s requirements are for cash operating expenses, working capital, contractual debt requirements and capital expenditures. The Company believes that it will generate sufficient liquidity to meet its anticipated requirements for the next twelve months.
2012 SECOND QUARTER REPORT
33
Harry Winston Diamond Corporation
Note 13:
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, promissory
note 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, which are designated as held-for-trading, are carried at fair value based on quoted market prices and are classified within Level 1 of the fair value hierarchy established by the International Accounting Standards Board.
The fair value of accounts receivable is determined by the amount of cash anticipated to be received in the normal course of business from the financial asset.
The promissory note is short term in nature; hence the fair value of this instrument at July 31, 2011 is considered to approximate its carrying value.
The Company’s interest-bearing loans and borrowings are fully secured; hence the fair values of these instruments at July 31, 2011 are considered to approximate their carrying value.
The carrying values of these financial instruments are as follows:
| July 31, 2011 | January 31, 2011 | |||||||||||
| Estimated | Carrying | Estimated | Carrying | |||||||||
| fair value | value | fair value | value | |||||||||
|
Financial Assets |
||||||||||||
|
Cash and cash equivalents |
$ | 139,881 | $ | 139,881 | $ | 108,693 | $ | 108,693 | ||||
|
Accounts receivable |
31,032 | 31,032 | 22,788 | 22,788 | ||||||||
|
|
$ | 170,913 | $ | 170,913 | $ | 131,481 | $ | 131,481 | ||||
|
Financial Liabilities |
||||||||||||
|
Trade and other payables |
$ | 112,256 | $ | 112,256 | $ | 136,490 | $ | 136,490 | ||||
|
Promissory note |
70,000 | 70,000 | 70,000 | 70,000 | ||||||||
|
Interest-bearing loans and borrowings |
287,322 | 287,322 | 261,836 | 261,836 | ||||||||
|
|
$ | 469,578 | $ | 469,578 | $ | 468,326 | $ | 468,326 | ||||
2012 SECOND QUARTER REPORT
34
Harry Winston Diamond Corporation
Note 14:
Segmented
Information
The Company operates in two segments within the diamond
industry, mining and luxury brand, for the three and six months ended July 31,
2011.
The mining segment consists of the Company’s rough diamond business. This business includes the 40% ownership interest in the Diavik group of mineral claims and the sale of rough diamonds.
The luxury brand segment consists of the Company’s ownership in Harry Winston Inc. This segment consists of the marketing of fine jewelry and watches on a worldwide basis.
|
For the three months ended July 31, 2011 |
Mining | Luxury brand | Total | ||||||
|
Sales |
|||||||||
|
Canada |
$ | 89,608 | $ | – | $ | 89,608 | |||
|
United States |
– | 29,058 | 29,058 | ||||||
|
Europe |
– | 30,780 | 30,780 | ||||||
|
Asia (a) |
– | 72,932 | 72,932 | ||||||
|
Total sales |
89,608 | 132,770 | 222,378 | ||||||
|
Cost of sales |
|||||||||
|
Depreciation and amortization |
16,802 | 77 | 16,879 | ||||||
|
All other costs |
50,811 | 82,487 | 133,298 | ||||||
|
Total cost of sales |
67,613 | 82,564 | 150,177 | ||||||
|
Gross margin |
21,995 | 50,206 | 72,201 | ||||||
|
Gross margin (%) |
24.5% | 37.8% | 32.5% | ||||||
|
Selling, general and administrative expenses |
|||||||||
|
Selling and related expenses |
777 | 32,977 | 33,754 | ||||||
|
Administrative expenses |
4,932 | 10,415 | 15,347 | ||||||
|
Total other operating expenses |
5,709 | 43,392 | 49,101 | ||||||
|
Operating profit |
16,286 | 6,814 | 23,100 | ||||||
|
Finance expense |
(3,787 | ) | (1,396 | ) | (5,183 | ) | |||
|
Exploration costs |
(781 | ) | – | (781 | ) | ||||
|
Finance and other income |
78 | 5 | 83 | ||||||
|
Foreign exchange gain (loss) |
846 | (558 | ) | 288 | |||||
|
Segmented profit before income taxes |
$ | 12,642 | $ | 4,865 | $ | 17,507 | |||
|
Segmented assets as at July 31, 2011 |
|||||||||
|
Canada |
$ | 983,625 | $ | – | $ | 983,625 | |||
|
United States |
– | 426,721 | 426,721 | ||||||
|
Other foreign countries |
33,536 | 221,457 | 254,993 | ||||||
|
|
$ | 1,017,161 | $ | 648,178 | $ | 1,665,339 | |||
|
Capital expenditures |
$ | 12,649 | $ | 1,900 | $ | 14,549 | |||
|
Other significant non-cash items: |
|||||||||
|
Deferred income tax expense (recovery) |
$ | (3,408 | ) | $ | 2,637 | $ | (771 | ) |
| (a) |
Sales to one significant customer in the luxury brand segment totalled $45.0 million for the three months ended July 31, 2011. |
2012 SECOND QUARTER REPORT
35
Harry Winston Diamond Corporation
|
For the three months ended July 31, 2010 |
Mining | Luxury brand | Total | ||||||
|
Sales |
|||||||||
|
Canada |
$ | 86,827 | $ | – | $ | 86,827 | |||
|
United States |
– | 19,640 | 19,640 | ||||||
|
Europe |
– | 24,704 | 24,704 | ||||||
|
Asia |
– | 22,557 | 22,557 | ||||||
|
Total sales |
86,827 | 66,901 | 153,728 | ||||||
|
Cost of sales |
|||||||||
|
Depreciation and amortization |
15,722 | 80 | 15,802 | ||||||
|
All other costs |
38,686 | 31,310 | 69,996 | ||||||
|
Total cost of sales |
54,408 | 31,390 | 85,798 | ||||||
|
Gross margin |
32,419 | 35,511 | 67,930 | ||||||
|
Gross margin (%) |
37.3% | 53.1% | 44.2% | ||||||
|
Selling, general and administrative expenses |
|||||||||
|
Selling and related expenses |
831 | 24,484 | 25,315 | ||||||
|
Administrative expenses |
3,982 | 8,701 | 12,683 | ||||||
|
Total other operating expenses |
4,813 | 33,185 | 37,998 | ||||||
|
Operating profit |
27,606 | 2,326 | 29,932 | ||||||
|
Finance expense |
(1,341 | ) | (1,644 | ) | (2,985 | ) | |||
|
Exploration costs |
(76 | ) | – | (76 | ) | ||||
|
Finance and other income |
43 | 111 | 154 | ||||||
|
Foreign exchange gain |
898 | 145 | 1,043 | ||||||
|
Segmented profit before income taxes |
$ | 27,130 | $ | 938 | $ | 28,068 | |||
|
Segmented assets as at July 31, 2010 |
|||||||||
|
Canada |
$ | 1,000,758 | $ | – | $ | 1,000,758 | |||
|
United States |
– | 411,292 | 411,292 | ||||||
|
Other foreign countries |
13,596 | 170,747 | 184,343 | ||||||
|
|
$ | 1,014,354 | $ | 582,039 | $ | 1,596,393 | |||
|
Capital expenditures |
$ | 10,711 | $ | 892 | $ | 11,603 | |||
|
Other significant non-cash items: |
|||||||||
|
Deferred income tax expense |
$ | 9,293 | $ | (212 | ) | $ | 9,081 |
2012 SECOND QUARTER REPORT
36
Harry Winston Diamond Corporation
|
For the six months ended July 31, 2011 |
Mining | Luxury brand | Total | ||||||
|
Sales |
|||||||||
|
Canada |
$ | 151,643 | $ | – | $ | 151,643 | |||
|
United States |
– | 65,452 | 65,452 | ||||||
|
Europe |
– | 51,367 | 51,367 | ||||||
|
Asia (a) |
– | 97,848 | 97,848 | ||||||
|
Total sales |
151,643 | 214,667 | 366,310 | ||||||
|
Cost of sales |
|||||||||
|
Depreciation and amortization |
33,232 | 157 | 33,389 | ||||||
|
All other costs |
87,824 | 125,416 | 213,240 | ||||||
|
Total cost of sales |
121,056 | 125,573 | 246,629 | ||||||
|
Gross margin |
30,587 | 89,094 | 119,681 | ||||||
|
Gross margin (%) |
20.2% | 41.5% | 32.7% | ||||||
|
Selling, general and administrative expenses |
|||||||||
|
Selling and related expenses |
1,426 | 59,298 | 60,724 | ||||||
|
Administrative expenses |
12,309 | 18,863 | 31,172 | ||||||
|
Total other operating expenses |
13,735 | 78,161 | 91,896 | ||||||
|
Operating profit |
16,852 | 10,933 | 27,785 | ||||||
|
Finance expense |
(6,480 | ) | (2,686 | ) | (9,166 | ) | |||
|
Exploration costs |
(993 | ) | – | (993 | ) | ||||
|
Finance and other income |
155 | 186 | 341 | ||||||
|
Foreign exchange gain (loss) |
(131 | ) | 242 | 111 | |||||
|
Segmented profit before income taxes |
$ | 9,403 | $ | 8,675 | $ | 18,078 | |||
|
Segmented assets as at July 31, 2011 |
|||||||||
|
Canada |
$ | 983,625 | $ | – | $ | 983,625 | |||
|
United States |
– | 426,721 | 426,721 | ||||||
|
Other foreign countries |
33,536 | 221,457 | 254,993 | ||||||
|
|
$ | 1,017,161 | $ | 648,178 | $ | 1,665,339 | |||
|
Capital expenditures |
$ | 25,084 | $ | 3,289 | $ | 28,373 | |||
|
Other significant non-cash items: |
|||||||||
|
Deferred income tax expense (recovery) |
$ | (7,963 | ) | $ | 4,544 | $ | (3,419 | ) |
| (a) |
Sales to one significant customer in the luxury brand segment totalled $45.0 million for the six months ended July 31, 2011. |
2012 SECOND QUARTER REPORT
37
Harry Winston Diamond Corporation
|
For the six months ended July 31, 2010 |
Mining | Luxury brand | Total | ||||||
|
Sales |
|||||||||
|
Canada |
$ | 135,749 | $ | – | $ | 135,749 | |||
|
United States |
– | 41,680 | 41,680 | ||||||
|
Europe |
– | 44,138 | 44,138 | ||||||
|
Asia |
– | 46,161 | 46,161 | ||||||
|
Total sales |
135,749 | 131,979 | 267,728 | ||||||
|
Cost of sales |
|||||||||
|
Depreciation and amortization |
26,068 | 160 | 26,228 | ||||||
|
All other costs |
72,483 | 62,798 | 135,281 | ||||||
|
Total cost of sales |
98,551 | 62,958 | 161,509 | ||||||
|
Gross margin |
37,198 | 69,021 | 106,219 | ||||||
|
Gross margin (%) |
27.4% | 52.3% | 39.7% | ||||||
|
Selling, general and administrative expenses |
|||||||||
|
Selling and related expenses |
1,396 | 45,918 | 47,314 | ||||||
|
Administrative expenses |
7,287 | 19,345 | 26,632 | ||||||
|
Total other operating expenses |
8,683 | 65,263 | 73,946 | ||||||
|
Operating profit |
28,515 | 3,758 | 32,273 | ||||||
|
Finance expense |
(2,654 | ) | (3,211 | ) | (5,865 | ) | |||
|
Exploration costs |
(103 | ) | – | (103 | ) | ||||
|
Finance and other income |
114 | 208 | 322 | ||||||
|
Foreign exchange gain (loss) |
(1,497 | ) | 327 | (1,170 | ) | ||||
|
Segmented profit before income taxes |
$ | 24,375 | $ | 1,082 | $ | 25,457 | |||
|
Segmented assets as at July 31, 2010 |
|||||||||
|
Canada |
$ | 1,000,758 | $ | – | $ | 1,000,758 | |||
|
United States |
– | 411,292 | 411,292 | ||||||
|
Other foreign countries |
13,596 | 170,747 | 184,343 | ||||||
|
|
$ | 1,014,354 | $ | 582,039 | $ | 1,596,393 | |||
|
Capital expenditures |
$ | 20,008 | $ | 1,097 | $ | 21,105 | |||
|
Other significant non-cash items: |
|||||||||
|
Deferred income tax expense |
$ | 2,622 | $ | 421 | $ | 3,043 |
Note 15:
Explanation of
Transition to IFRS
As stated in Note 2(a), these are the Company’s
second consolidated interim financial statements prepared in accordance with
IFRS.
The accounting policies described in Note 3 of the April 30, 2011 unaudited interim condensed consolidated financial statements have been applied in preparing: the interim financial statements for the three and six months ended July 31, 2011, and the comparative information presented in these interim financial statements for both the three and six months ended July 31, 2010. In preparing these interim financial statements, the Company has adjusted amounts reported previously in financial statements prepared in accordance with Canadian GAAP. An explanation of how the transition from Canadian GAAP to IFRS has affected the Company’s financial position and financial performance is set out in the following tables and the notes that accompany the tables.
2012 SECOND QUARTER REPORT
38
Harry Winston Diamond Corporation
Explanation of Transition to IFRS: Reconciliation of Equity
|
(in thousands of United States |
||||||||||
|
dollars) |
July 31, 2010 | |||||||||
|
(unaudited) |
||||||||||
|
|
Effect of | |||||||||
|
|
Canadian | Transition to | ||||||||
|
|
Ref. | GAAP | IFRS | IFRS | ||||||
|
ASSETS |
||||||||||
|
Current assets: |
||||||||||
|
Cash and cash equivalents |
$ | 124,974 | $ | – | $ | 124,974 | ||||
|
Accounts receivable |
26,118 | – | 26,118 | |||||||
|
Inventory and supplies |
375,835 | – | 375,835 | |||||||
|
Other current assets |
(b) | 41,072 | (7,515 | ) | 33,557 | |||||
|
|
567,999 | (7,515 | ) | 560,484 | ||||||
|
Property, plant and equipment |
||||||||||
|
– Mining |
(c) | 791,163 | (18,673 | ) | 772,490 | |||||
|
Property, plant and equipment |
||||||||||
|
– Luxury brand |
58,348 | – | 58,348 | |||||||
|
Intangible assets, net |
128,519 | – | 128,519 | |||||||
|
Other non-current assets |
18,149 | – | 18,149 | |||||||
|
Deferred income tax assets |
(b) | 48,511 | 9,892 | 58,403 | ||||||
|
Total assets |
$ | 1,612,689 | $ | (16,296 | ) | $ | 1,596,393 | |||
|
|
||||||||||
|
LIABILITIES AND EQUITY |
||||||||||
|
Current liabilities: |
||||||||||
|
Trade and other payables |
(d) | $ | 124,113 | $ | (4,986 | ) | $ | 119,127 | ||
|
Employee benefit plans |
(d) | – | 6,037 | 6,037 | ||||||
|
Income taxes payable |
32,508 | – | 32,508 | |||||||
|
Bank advances |
(d) | 23,995 | (23,995 | ) | – | |||||
|
Interest-bearing loans and borrowings |
(d) | 1,211 | 24,204 | 25,415 | ||||||
|
|
181,827 | 1,260 | 183,087 | |||||||
|
Interest-bearing loans and borrowings |
(d) | 231,884 | 155 | 232,039 | ||||||
|
Employee benefit plans |
(e) | 3,158 | 3,988 | 7,146 | ||||||
|
Provisions |
(f) | 42,383 | 2,416 | 44,799 | ||||||
|
Deferred income tax liabilities |
(g) | 287,831 | (41,115 | ) | 246,716 | |||||
|
Total liabilities |
747,083 | (33,296 | ) | 713,787 | ||||||
|
Equity: |
||||||||||
|
Share capital |
426,842 | – | 426,842 | |||||||
|
Contributed surplus |
18,078 | – | 18,078 | |||||||
|
Retained earnings |
(h) | 217,837 | 47,411 | 265,248 | ||||||
|
Accumulated other comprehensive income |
(i) | 30,728 | (31,652 | ) | (924 | ) | ||||
|
Total shareholders’ equity |
693,485 | 15,759 | 709,244 | |||||||
|
Non-controlling interest |
(j) | 172,121 | 1,241 | 173,362 | ||||||
|
Total equity |
865,606 | 17,000 | 882,606 | |||||||
|
Total liabilities and equity |
$ | 1,612,689 | $ | (16,296 | ) | $ | 1,596,393 |
2012 SECOND QUARTER REPORT
39
Harry Winston Diamond Corporation
Explanation of Transition to IFRS: Reconciliation of Profit
|
(in thousands of United States dollars) |
|||||||||||||||||||||
|
(unaudited) |
For the three months ended July 31, 2010 | For the six months ended July 31, 2010 | |||||||||||||||||||
|
|
Effect of | Effect of | |||||||||||||||||||
|
|
Canadian | Transition to | Canadian | Transition to | |||||||||||||||||
|
|
Ref. | GAAP | IFRS | IFRS | GAAP | IFRS | IFRS | ||||||||||||||
|
Sales |
$ | 153,728 | $ | – | $ | 153,728 | $ | 267,728 | $ | – | $ | 267,728 | |||||||||
|
Cost of sales |
(k) | 86,797 | (999 | ) | 85,798 | 163,489 | (1,980 | ) | 161,509 | ||||||||||||
|
Gross margin |
66,931 | 999 | 67,930 | 104,239 | 1,980 | 106,219 | |||||||||||||||
|
Selling, general and administrative expenses |
37,998 | – | 37,998 | 73,946 | – | 73,946 | |||||||||||||||
|
Operating profit |
28,933 | 999 | 29,932 | 30,293 | 1,980 | 32,273 | |||||||||||||||
|
Finance expenses |
(l) | (2,483 | ) | (502 | ) | (2,985 | ) | (4,867 | ) | (998 | ) | (5,865 | ) | ||||||||
|
Exploration costs |
(m) | – | (76 | ) | (76 | ) | – | (103 | ) | (103 | ) | ||||||||||
|
Finance and other income |
154 | 154 | 322 | 322 | |||||||||||||||||
|
Foreign exchange gain (loss) |
(n) | 3,319 | (2,276 | ) | 1,043 | (8,473 | ) | 7,303 | (1,170 | ) | |||||||||||
|
Profit (loss) before income taxes |
29,923 | (1,855 | ) | 28,068 | 17,275 | 8,182 | 25,457 | ||||||||||||||
|
Current income tax expense |
1,797 | – | 1,797 | 2,311 | – | 2,311 | |||||||||||||||
|
Deferred income tax expense |
(o) | 7,317 | 1,763 | 9,080 | 2,923 | 119 | 3,042 | ||||||||||||||
|
Net profit (loss) |
$ | 20,809 | $ | (3,618 | ) | $ | 17,191 | $ | 12,041 | $ | 8,063 | $ | 20,104 | ||||||||
|
Attributable to: |
|||||||||||||||||||||
|
Shareholders |
$ | 16,490 | $ | (3,447 | ) | $ | 13,043 | $ | 7,837 | $ | 7,343 | $ | 15,180 | ||||||||
|
Non-controlling interest |
4,319 | (171 | ) | 4,148 | 4,204 | 720 | 4,924 | ||||||||||||||
|
Net profit (loss) |
$ | 20,809 | $ | (3,618 | ) | $ | 17,191 | $ | 12,041 | $ | 8,063 | $ | 20,104 | ||||||||
|
Earnings (loss) per share |
|||||||||||||||||||||
|
Basic |
$ | 0.22 | $ | (0.05 | ) | $ | 0.17 | $ | 0.10 | $ | 0.10 | $ | 0.20 | ||||||||
|
Fully diluted |
$ | 0.21 | $ | (0.04 | ) | $ | 0.17 | $ | 0.10 | $ | 0.10 | $ | 0.20 | ||||||||
|
Weighted average number of share outstanding |
76,639,693 | 76,639,693 | 76,639,693 | 76,635,651 | 76,635,651 | 76,635,651 | |||||||||||||||
Explanation of Transition to IFRS: Reconciliation of Comprehensive Income
|
(in thousands of United States dollars) |
For the three monthsended July 31, 2010 | For the six months ended July 31, 2010 | |||||||||||||||||||
|
(unaudited) |
Effect of | Effect of | |||||||||||||||||||
|
|
Canadian | Transition to | Canadian | Transition to | |||||||||||||||||
|
|
Ref. | GAAP | IFRS | IFRS | GAAP | IFRS | IFRS | ||||||||||||||
|
Net profit (loss) – as above |
$ | 20,809 | $ | (3,618 | ) | $ | 17,191 | $ | 12,041 | $ | 8,063 | $ | 20,104 | ||||||||
|
Other comprehensive income |
|||||||||||||||||||||
|
Net gain on translation of net foreign operations |
3,784 | – | 3,784 | 2,030 | – | 2,030 | |||||||||||||||
|
Change in fair value of derivative financial instrument |
95 | – | 95 | 253 | – | 253 | |||||||||||||||
|
|
|||||||||||||||||||||
|
Actuarial loss on employee benefit plans |
(e)(i) | – | – | – | (636 | ) | (636 | ) | |||||||||||||
|
Total comprehensive income (loss) |
$ | 24,688 | $ | (3,618 | ) | $ | 21,070 | $ | 14,324 | $ | 7,427 | $ | 21,751 | ||||||||
|
Attributable to: |
|||||||||||||||||||||
|
Shareholders |
$ | 20,369 | $ | (3,447 | ) | $ | 16,922 | $ | 10,120 | $ | 6,707 | $ | 16,827 | ||||||||
|
Non-controlling interest |
4,319 | (171 | ) | 4,148 | 4,204 | 720 | 4,924 | ||||||||||||||
|
Total comprehensive income (loss) |
$ | 24,688 | $ | (3,618 | ) | $ | 21,070 | $ | 14,324 | $ | 7,427 | $ | 21,751 | ||||||||
2012 SECOND QUARTER REPORT
40
Harry Winston Diamond Corporation
References to the reconciliation of equity and profit
| (a) |
Reclassification of assets |
|
To conform to IFRS presentation requirements, certain asset balances have been reclassified to current or non-current asset accounts. | |
| (b) |
Other current assets |
| Ref. | July 31, 2010 | ||||||
|
Reclassification of assets |
See (a) | $ | (9,892 | ) | |||
|
Deferred tax impact on intra-group transfer of assets |
(i) | 2,377 | |||||
|
Net decrease in other current assets |
$ | (7,515 | ) |
| (i) |
Under IFRS, deferred taxes are recognized for the difference in tax bases between jurisdictions as a result of an intra-group transfer of assets. The deferred tax component under IFRS is computed using the tax rate applicable to the purchaser, whereas the seller’s tax rate was applied under Canadian GAAP. | |
|
During the three months ended July 31, 2010, the accounting under IFRS resulted in a $0.1 million reduction in deferred income tax asset and increase in deferred income tax expense. | ||
|
During the six months ended July 31, 2010, the accounting under IFRS resulted in a $0.5 million reduction in deferred income tax asset and increase in deferred income tax expense. |
| (c) |
Property, plant and equipment – Mining |
| Ref. | July 31, 2010 | ||||||
|
Derecognition of exploration costs capitalized |
(i) | $ | (17,753 | ) | |||
|
Remeasurement of the asset retirement obligation |
See (f)(i) | (920 | ) | ||||
|
Total decrease in property, plant and equipment – Mining |
$ | (18,673 | ) |
| (i) |
Under Canadian GAAP, the Company’s policy on exploration expenditures incurred is to capitalize and to amortize using the units-of- production method. For IFRS purposes, the Company’s accounting policy on exploration expenditures is to expense unless the exploration activity relates to proven and probable reserves. | |
|
For the three months ended July 31, 2010, the accounting under IFRS increased mining capital assets by $0.4 million, decreased cost of goods sold by approximately $0.5 million, and increased exploration costs nominally, reflecting the net impact of reversing Canadian GAAP depreciation on capitalized exploration costs, partially offset by the expensing of exploration costs incurred in the quarter. Nominal changes were also made to deferred income tax liabilities, non-controlling interest and deferred income tax expense. | ||
|
For the six months ended July 31, 2010, the accounting under IFRS increased mining capital assets by $0.9 million, decreased cost of goods sold by approximately $1.0 million, and increased exploration costs by $0.1 million, reflecting the net impact of reversing Canadian GAAP depreciation on capitalized exploration costs, partially offset by the expensing of exploration costs incurred. Nominal changes were also made to deferred income tax liabilities, non-controlling interest and deferred income tax expense. |
| (d) |
Reclassification of liabilities |
|
To conform to IFRS presentation requirements, various liability balances have been reclassified. |
2012 SECOND QUARTER REPORT
41
Harry Winston Diamond Corporation
| (e) |
Employee benefit plans |
| Ref. | July 31, 2010 | ||||||
|
Retrospective application of IAS 19 employee benefits |
(i) | $ | 5,402 | ||||
|
Reclassification of liabilities |
See (d) | (1,414 | ) | ||||
|
Net increase in employee benefit plans |
$ | 3,988 |
| (i) |
Under Canadian GAAP, actuarial gains or losses for defined benefit plans that exceeded the corridor threshold (10% of the greater of the obligation and fair value of plan assets at the beginning of the period) were recognized over the remaining average service life of active employees. For IFRS purposes, the Company’s accounting policy is to recognize its actuarial gains and losses immediately in other comprehensive income, and has retrospectively applied this approach at the date of transition. | |
|
For the six months ended July 31, 2010, the accounting under IFRS resulted in a $0.6 million increase to the defined benefit plan obligation and a corresponding charge to other comprehensive income, reflecting the recognition of actuarial losses. A nominal change was made to deferred income tax liabilities. |
| (f) |
Provisions |
| Ref. | July 31, 2010 | ||||||
|
Remeasurement of the asset retirement obligation |
(i) | $ | 2,416 |
| (i) |
The Company has elected to utilize the IFRS 1 optional exemption relating to “Changes in decommissioning, restoration and similar liabilities” in preparing its opening balance sheet under IFRS. There was no further remeasurement of the asset retirement obligation from the amount on February 1, 2010. |
| (g) |
Deferred income tax liabilities |
| Ref. | July 31, 2010 | ||||||
|
Recognition of new deferred tax balances |
(i) | $ | (31,239 | ) | |||
|
Derecognition of exploration costs capitalized |
See (c)(i) | (5,230 | ) | ||||
|
Retrospective application of IAS 19 employee benefits |
See (e)(i) | (2,550 | ) | ||||
|
Remeasurement of the asset retirement obligation |
See (f)(i) | (985 | ) | ||||
|
Revaluation of deferred income tax liabilities |
(ii) | (1,111 | ) | ||||
|
Total decrease in deferred income tax liabilities |
$ | (41,115 | ) |
| (i) |
Under IFRS, in the determination of temporary differences, the carrying value of non-monetary assets and liabilities is translated into the functional currency at the historical rate and compared to its tax value translated into the functional currency at the current rate. The resulting temporary difference (measured in the functional currency) is then multiplied by the appropriate tax rate to determine the related deferred tax balance. | |
|
Under Canadian GAAP, in the determination of temporary differences related to non-monetary assets and liabilities, the temporary differences computed in local currency are multiplied by the appropriate tax rate. The resulting future income tax amount is then translated into the Company’s functional currency if it is different from the local currency. | ||
|
For the three months ended July 31, 2010, the accounting under IFRS resulted in a $3.3 million increase in deferred income tax liabilities and a $3.3 million increase in deferred income tax expense. Net profit attributable to non-controlling interest also decreased by $0.2 million. | ||
|
For the six months ended July 31, 2010, the accounting under IFRS resulted in a $6.9 million decrease in deferred income tax liabilities and a $6.9 million increase in deferred income tax recovery. Net profit attributable to non-controlling interest also increased by $0.5 million. |
2012 SECOND QUARTER REPORT
42
Harry Winston Diamond Corporation
| (ii) |
For the three months ended July 31, 2010, the above IFRS adjustments to deferred income tax liabilities required a revaluation of the account balance resulting in a $0.5 million increase in deferred income tax liabilities and a corresponding increase in deferred income tax expense. Net profit attributable to non-controlling interest also decreased nominally. | |
|
For the six months ended July 31, 2010, the above IFRS adjustments to deferred income tax liabilities required a revaluation of the account balance resulting in a $1.1 million reduction in deferred income tax liabilities and a corresponding increase in deferred income tax recovery. Net profit attributable to non-controlling interest also increased nominally. |
| (h) |
Retained earnings |
|
The effect of all IFRS adjustments has increased (decreased) retained earnings as follows: |
| Ref. | July 31, 2010 | ||||||
|
Reset of cumulative translation differences |
See (i)(i) | $ | 28,800 | ||||
|
Recognition of new deferred tax balances |
See (g)(i) | 29,182 | |||||
|
Derecognition of exploration costs capitalized |
See (c)(i) | (11,835 | ) | ||||
|
Deferred tax impact on intra-group transfer of assets |
See (b)(i) | 2,377 | |||||
|
Remeasurement of the asset retirement obligation |
See (f)(i) | (2,152 | ) | ||||
|
Revaluation of deferred income tax liabilities |
See (g)(ii) | 1,039 | |||||
|
Net increase in retained earnings |
$ | 47,411 |
| (i) |
Accumulated other comprehensive income |
| Ref. | July 31, 2010 | ||||||
|
Reset of cumulative translation differences |
(i) | $ | (28,800 | ) | |||
|
Retrospective application of IAS 19 employee benefits |
See (e)(i) | (2,852 | ) | ||||
|
Total decrease in accumulated other comprehensive income |
$ | (31,652 | ) |
| (i) |
The Company has elected to utilize the IFRS 1 optional exemption relating to “Cumulative translation differences” in preparing its opening balance sheet under IFRS. Through application of this exemption on transition date, existing cumulative translation differences as at February 1, 2010 were reset to zero and retained earnings was increased by $28.8 million. |
| (j) |
Non-controlling interest |
| Ref. | July 31, 2010 | ||||||
|
Derecognition of exploration costs capitalized |
See (c)(i) | (689 | ) | ||||
|
Remeasurement of the asset retirement obligation |
See (f)(i) | (199 | ) | ||||
|
Recognition of new deferred tax balances |
See (g)(i) | 2,057 | |||||
|
Revaluation of deferred income tax liabilities |
See (g)(ii) | 72 | |||||
|
Net change in non-controlling interest |
$ | 1,241 |
| (k) |
Cost of sales |
| Three months ended | Six months ended | |||||||||
| Ref. | July 31, 2010 | July 31, 2010 | ||||||||
|
Reclassification of accretion expense |
(i) | $ | (502 | ) | $ | (998 | ) | |||
|
Derecognition of exploration costs |
||||||||||
|
capitalized |
See (c)(i) | (497 | ) | (982 | ) | |||||
|
Decrease in cost of sales |
$ | (999 | ) | $ | (1,980 | ) |
| (i) |
In accordance with IFRIC 1, “Changes in Existing Decommissioning, Restoration and Similar Liabilities”, accretion expense is treated as interest expense whereas under Canadian GAAP it had been recorded as a component of cost of sales. |
2012 SECOND QUARTER REPORT
43
Harry Winston Diamond Corporation
| (l) |
Finance expenses |
| Three months ended | Six months ended | |||||||||
| Ref. | July 31, 2010 | July 31, 2010 | ||||||||
|
Reclassification of accretion expense |
See (k)(i) | $ | (502 | ) | $ | (998 | ) |
| (m) |
Exploration costs |
| Three months ended | Six months ended | |||||||||
| Ref. | July 31, 2010 | July 31, 2010 | ||||||||
|
Derecognition of exploration costs capitalized |
See (c)(i) | $ | (76 | ) | $ | (103 | ) |
| (n) |
Decrease in foreign exchange loss (gain) |
| Three months ended | Six months ended | |||||||||
| Ref. | July 31, 2010 | July 31, 2010 | ||||||||
|
Reclassification of foreign exchange loss (gain) |
(i) | $ | (2,276 | ) | $ | 7,303 |
| (i) |
Under Canadian GAAP, the foreign exchange difference from the translation of deferred taxes was presented within the foreign exchange gain/loss account. For IFRS reporting purposes, these foreign exchange differences have been reclassified to deferred income tax recovery/expense. |
| (o) |
Deferred income tax expense (recovery) |
| Three months ended | Six months ended | |||||||||
| Ref. | July 31, 2010 | July 31, 2010 | ||||||||
|
Derecognition of exploration costs capitalized |
See (c)(i) | $ | 138 | $ | 291 | |||||
|
Recognition of new deferred income tax liability balances |
See (g)(i) | 3,303 | (6,863 | ) | ||||||
|
Deferred tax impact on intra-group transfer of assets |
See (b)(i) | 84 | 499 | |||||||
|
Reclassification of foreign exchange |
See (n)(i) | (2,276 | ) | 7,303 | ||||||
|
Revaluation of deferred income tax liabilities |
See (g)(ii) | 514 | (1,111 | ) | ||||||
|
Total increase in deferred income tax expense |
$ | 1,763 | $ | 119 |
2012 SECOND QUARTER REPORT
44