Harry Winston Diamond Corporation Announces Third Quarter Fiscal 2010 Results
Robert Gannicott, Chairman and Chief Executive Officer commented: "We are very pleased to see a solid reversal in the negative trends that have characterized the previous quarters. Diavik production is set to increase, rough diamond prices continue to rise, and retail sales have seen substantial improvement, led by the Far East, including
Consolidated sales were
The mining segment recorded sales of
The retail segment recorded a 7% decrease in sales to
Third Quarter Fiscal 2010 Financial Highlights
(US$ in millions except Earnings per Share amounts)
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Three Three Nine Nine
months months months months
ended ended ended ended
Oct 31, Oct 31, Oct 31, Oct 31,
2009 2008 2009 2008
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Sales 74.8 148.6 279.2 490.8
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Earnings from operations (loss) (4.9) 42.9 (18.9) 156.0
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Net earnings (loss) (0.2) 71.9 (69.8) 143.1
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Earnings (loss) per share $0.00 $1.17 ($0.95) $2.35
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Conference Call and Webcast
Beginning at
An online archive of the broadcast will be available by accessing the Company's investor relations web site at http://investor.harrywinston.com. A telephone replay of the call will be available starting the same day at
About
The Company's retail division is a premier diamond jeweler and luxury timepiece retailer with salons in key locations, including New York,
The Company focuses on the two most profitable segments of the diamond industry, mining and retail, in which its expertise creates shareholder value. This unique business model provides key competitive advantages; rough diamond sales and polished diamond purchases provide market intelligence that enhances the Company's overall performance.
For more information, please visit www.harrywinston.com. or for investor information, visit http://investor.harrywinston.com.
Harry Winston Diamond Corporation
2010 THIRD QUARTER REPORT
Highlights
(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
Consolidated sales were
The mining segment recorded sales of
The retail segment recorded a 7% decrease in sales to
Management's Discussion and Analysis
Prepared as of December 9, 2009
(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
The following is management's discussion and analysis ("MD&A") of the results of operations for
Certain comparative figures have been reclassified to conform to the current year's presentation.
Caution Regarding Forward-Looking Information
Certain information included in this MD&A may constitute forward-looking information within the meaning of Canadian and
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 in the retail segment, the Company has made assumptions regarding, among other things, world and US economic conditions and demand for luxury goods. While the Company considers these assumptions to be reasonable based on the information currently available to it, they may prove to be incorrect. See "Risks and Uncertainties" on page 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 and the risks of competition in the luxury jewelry segment. Please see page 17 of this Interim Report, as well as the Company's Annual Report, available at www.sedar.com, for a discussion of these and other risks and uncertainties involved in the Company's operations.
Readers are cautioned not to place undue importance on forward-looking information, which speaks only as of the date of this Management's Discussion and Analysis, and should not rely upon this information as of any other date. Due to assumptions, risks and uncertainties, including the assumptions, risks and uncertainties identified above and elsewhere in this Management's Discussion and Analysis, actual events may differ materially from current expectations. The Company uses forward-looking statements because it believes such statements provide useful information with respect to the expected future operations and financial performance of the Company, and cautions readers that the information may not be appropriate for other purposes. While the Company may elect to, it is under no obligation and does not undertake to update or revise any forward-looking information, whether as a result of new information, future events or otherwise at any particular time, except as required by law. Additional information concerning factors that may cause actual results to materially differ from those in such forward-looking statements is contained in the Company's filings with Canadian and
Summary Discussion
The Company's most significant asset is an ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the "Joint Venture") is an unincorporated joint arrangement between Diavik
On
Market Commentary
The
The rough diamond market continues to strengthen as sustained demand for polished diamonds from the Far East and
Polished diamond demand remains healthy with shortages appearing in popular ranges. Polished diamond inventories have been depleted as a result of the reduction in capacity earlier in the year as manufacturers responded to market conditions and the ongoing scarcity of rough diamonds. These conditions have allowed manufacturers to achieve higher polished prices and negotiate more favourable credit terms.
The Retail Jewelry Market
Encouraging signs of recovery are beginning to appear in certain economies, particularly in Asia. The tone in the US and European markets indicates that the worst of the global recession's impact appears to have passed, but signs of the recovery are modest. The increase in commodity prices has helped to bolster a modest renewal in consumer demand for luxury goods from the Russian and Middle Eastern markets. The outlook is cautiously optimistic regarding the holiday season as the global economy appears to have stabilized and shown improvements in certain regions.
(R)
Consolidated Financial Results
The following is a summary of the Company's consolidated quarterly results for the eight quarters ended
(expressed in thousands of United States dollars except per share amounts
and where otherwise noted)
(quarterly results are unaudited)
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2010 2010 2010 2009 2009
Q3 Q2 Q1 Q4 Q3
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Sales $ 74,828 $ 94,776 $109,643 $118,399 $148,623
Cost of sales 45,227 66,294 83,944 68,908 71,679
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Gross margin 29,601 28,482 25,699 49,491 76,944
Gross margin (%) 39.6% 30.1% 23.4% 41.8% 51.8%
Selling, general and
administrative expenses 34,542 32,380 35,749 39,399 33,998
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Earnings (loss) from
operations (4,941) (3,898) (10,050) 10,092 42,946
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Interest and financing
expenses (2,448) (2,998) (3,699) (4,960) (4,678)
Other income 99 83 281 778 407
Insurance settlement 100 - 3,250 17,240 -
Dilution loss - (539) (34,222) - -
Impairment charge - - - (93,780) -
Foreign exchange
gain (loss) 1,598 (25,274) (5,839) 4,649 48,982
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Earnings (loss) before
income taxes (5,592) (32,626) (50,279) (65,981) 87,657
Income taxes (recovery) (4,221) (5,662) (3,120) 7,052 15,685
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Earnings (loss) before
non-controlling interest (1,371) (26,964) (47,159) (73,033) 71,972
Non-controlling interest (1,157) (2,443) (2,075) (58) 81
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Net earnings (loss) $ (214) $(24,521) $(45,084) $(72,975) $ 71,891
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Basic earnings (loss)
per share $ 0.00 $ (0.32) $ (0.68) $ (1.19) $ 1.17
Diluted earnings (loss)
per share $ 0.00 $ (0.32) $ (0.68) $ (1.19) $ 1.17
Cash dividends declared
per share $ 0.00 $ 0.00 $ 0.00 $ 0.05 $ 0.05
Total assets(i) $ 1,535 $ 1,533 $ 1,592 $ 1,567 $ 1,645
Total long-term
liabilities(i) $ 506 $ 507 $ 496 $ 550 $ 562
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Nine Nine
months months
ended ended
2009 2009 2008 Oct. 31, Oct. 31,
Q2 Q1 Q4 2009 2008
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Sales $186,119 $156,079 $188,195 $279,247 $490,821
Cost of sales 73,542 73,149 83,637 195,465 218,370
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Gross margin 112,577 82,930 104,558 83,782 272,451
Gross margin (%) 60.5% 53.1% 55.6% 30.0% 55.5%
Selling, general and
administrative expenses 39,194 43,285 45,494 102,671 116,477
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Earnings (loss) from
operations 73,383 39,645 59,064 (18,889) 155,974
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Interest and financing
expenses (5,366) (5,453) (7,082) (9,145) (15,497)
Other income 815 246 706 463 1,468
Insurance settlement - - 13,488 3,350 -
Dilution loss - - - (34,761) -
Impairment charge - - - - -
Foreign exchange
gain (loss) 5,301 155 22,270 (29,515) 54,438
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Earnings (loss) before
income taxes 74,133 34,593 88,446 (88,497) 196,383
Income taxes (recovery) 24,185 13,336 (1,968) (13,002) 53,205
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Earnings (loss) before
non-controlling interest 49,948 21,257 90,414 (75,495) 143,178
Non-controlling interest 1 1 (34) (5,676) 83
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Net earnings (loss) $ 49,947 $ 21,256 $ 90,448 $(69,819) $143,095
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Basic earnings (loss)
per share $ 0.81 $ 0.35 $ 1.55 $ (0.95) $ 2.35
Diluted earnings (loss)
per share $ 0.81 $ 0.35 $ 1.54 $ (0.95) $ 2.34
Cash dividends declared
per share $ 0.05 $ 0.05 $ 0.05 $ 0.00 $ 0.15
Total assets(i) $ 1,637 $ 1,591 $ 1,494 $ 1,535 $ 1,645
Total long-term
liabilities(i) $ 617 $ 634 $ 660 $ 506 $ 562
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(i) Total assets and total long-term liabilities are expressed in
millions of United States dollars.
The comparability of quarter-over-quarter results is impacted by
seasonality for both the mining and retail segments. Harry Winston
Diamond Corporation expects that the quarterly results for its mining
segment will continue to fluctuate depending on the seasonality of
production at the Diavik Diamond Mine, the number of sales events
conducted during the quarter, and the volume, size and quality
distribution of rough diamonds delivered from the Diavik Diamond Mine
in each quarter. The quarterly results for the retail segment are
also seasonal, with generally higher sales during the fourth quarter
due to the holiday season. See "Segmented Analysis" on page 9 for
additional information.
Three Months Ended
CONSOLIDATED NET EARNINGS
The Company recorded a third quarter consolidated net loss of
CONSOLIDATED SALES
Sales for the third quarter totaled
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's third quarter cost of sales was
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of selling, general and administrative ("SG&A") expenses include expenses for salaries and benefits, advertising, professional fees, rent and building related costs. The Company incurred SG&A expenses of
Included in SG&A expenses for the third quarter are
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax recovery of
The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the third quarter, the Canadian dollar weakened against the US dollar. As a result, the Company recorded an unrealized foreign exchange gain of
The consolidated net loss before taxes for the third quarter is
The rate of income tax payable by
The Company has provided a table below summarizing the movement from the statutory to the effective income tax rate as a percentage of earnings before taxes:
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Three months Three months
ended ended
October 31, October 31,
2009 2008
-------------------------------------------------------------------------
Statutory income tax rate 30 % 31 %
Stock compensation (2)% - %
Northwest Territories mining royalty
(net of income tax relief) 5 % 5 %
Impact of foreign exchange 22 % (19)%
Earnings subject to tax different
than statutory rate 34 % 1 %
Changes in valuation allowance (4)% - %
Impact of loss allocated to
non-controlling interest (10)% - %
Assessments and adjustments (4)% 1 %
Other items 4 % (1)%
Effective income tax rate 75 % 18 %
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CONSOLIDATED INTEREST AND FINANCING EXPENSES
Interest and financing expenses of
CONSOLIDATED OTHER INCOME
Other income of
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of
Nine Months Ended
CONSOLIDATED NET EARNINGS
The Company recorded a consolidated net loss for the nine months ended
CONSOLIDATED SALES
Sales for the nine months ended
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's cost of sales for the nine months ended
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company incurred SG&A expenses of
Included in SG&A expenses for the nine months ended
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax recovery of
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 nine months ended
During the nine months ended
The rate of income tax payable by
The Company has provided a table below summarizing the movement from the statutory to the effective income tax rate as a percentage of earnings before taxes:
-------------------------------------------------------------------------
Nine months Nine months
ended ended
October 31, October 31,
2009 2008
-------------------------------------------------------------------------
Statutory income tax rate 30 % 31 %
Northwest Territories mining royalty
(net of income tax relief) - % 8 %
Impact of foreign exchange (5)% (11)%
Earnings subject to tax different
than statutory rate 6 % (1)%
Changes in valuation allowance (1)% - %
Impact of dilution loss (12)% - %
Impact of loss allocated to
non-controlling interest (2)% - %
Assessments and adjustments (1)% 1 %
Other items - % (1)%
Effective income tax rate 15 % 27 %
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CONSOLIDATED INTEREST AND FINANCING EXPENSES
Interest and financing expenses of
CONSOLIDATED OTHER INCOME
Other income of
CONSOLIDATED INSURANCE SETTLEMENT
The Company received the remaining insurance settlement of
CONSOLIDATED DILUTION LOSS
During the nine months ended
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange loss of
Segmented Analysis
The operating segments of the Company include mining and retail segments.
Mining
The mining segment includes the production and sale of rough diamonds.
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
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2010 2010 2010 2009 2009
Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Sales $ 20,765 $ 45,941 $ 57,690 $ 51,100 $ 90,716
Cost of sales 20,319 40,049 57,256 34,612 40,617
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Gross margin 446 5,892 434 16,488 50,099
Gross margin (%) 2.1% 12.8% 0.8% 32.3% 55.2%
Selling, general and
administrative expenses 4,932 4,182 5,503 4,430 3,114
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Earnings (loss) from
operations $ (4,486) $ 1,710 $ (5,069) $ 12,058 $ 46,985
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Nine Nine
months months
ended ended
2009 2009 2008 Oct. 31, Oct. 31,
Q2 Q1 Q4 2009 2008
-------------------------------------------------------------------------
Sales $105,014 $ 81,393 $103,238 $124,396 $277,123
Cost of sales 32,390 32,150 36,962 117,624 105,157
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Gross margin 72,624 49,243 66,276 6,772 171,966
Gross margin (%) 69.2% 60.5% 64.2% 5.4% 62.1%
Selling, general and
administrative expenses 5,151 7,208 5,663 14,617 15,473
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Earnings (loss) from
operations $ 67,473 $ 42,035 $ 60,613 $ (7,845) $156,493
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Three Months Ended
MINING SALES
Rough diamond sales for the quarter totaled
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 at each sales location during the quarter, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter.
MINING COST OF SALES AND GROSS MARGIN
The Company's third quarter cost of sales was
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
Nine Months Ended
MINING SALES
Rough diamond sales for the nine months ended
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 at each sales location during the quarter, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter.
MINING COST OF SALES AND GROSS MARGIN
For the nine months ended
A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Diamond Mine. Cost of sales also includes sorting costs, which consist of the Company's cost of handling and sorting product in preparation for sales to third parties, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment decreased by
Mining Segment Operational Update
Ore production for the third calendar quarter consisted of 0.7 million carats produced from 0.12 million tonnes of ore from the A-154 South kimberlite pipe and 0.1 million carats produced from 0.06 million tonnes of ore from the A-418 kimberlite pipe. Rough diamond production was significantly lower than the third calendar quarter of the prior year as a result of the Summer Shutdown, which greatly reduced the ore throughput to the processing plant. Average grade increased to 4.4 carats per tonne from 3.4 carats per tonne in the prior year. The increase in average grade was primarily driven by a significant increase in the proportion of ore sourced from the A-154 South kimberlite pipe.
During the third calendar quarter, open pit mining and processing of the A-154 South and A-418 kimberlite pipes continued. The Diavik Diamond Mine was shut down from
HARRY WINSTON DIAMOND LIMITED PARTNERSHIP'S 40% SHARE OF DIAVIK DIAMOND
MINE PRODUCTION
(reported on a one-month lag)
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Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Diamonds recovered
(000s carats) 331 928 1,614 2,651
Grade (carats/tonne) 4.43 3.36 4.05 3.59
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Mining Segment Outlook
The Company's mine plan for calendar 2009 incorporated various production options, including a six-week shutdown at year end. The year-end shutdown, which was originally planned for
The Company plans to hold three rough diamond sales in the fourth quarter (total fiscal 2010 rough diamond sales of eight) compared to two rough diamond sales in the fourth quarter of the prior year (total fiscal 2009 rough diamond sales of nine).
A new mine plan and budget for calendar 2010 is under final review by Rio Tinto plc, the operator of the Diavik Diamond Mine, and the Company. The plan for calendar 2010 foresees Diavik Diamond Mine production of approximately 7.8 million carats from the processing of 2.1 million tonnes of ore.
PRICING
The rough diamond market continues to experience a robust recovery from the extreme market lows seen in the first quarter of the year and pricing has improved significantly. The current tone in the market has encouraged diamond producers to sell-down inventory, but this has not led to lower prices.
PRODUCTION
The estimate for calendar 2009 is unchanged at 1.4 million tonnes of open pit ore mined, the majority of which will come from the A-418 kimberlite pipe, with the remaining production coming from the A-154 South open pit. Total carat production is expected to be approximately 5.5 million carats on a 100% basis.
In calendar 2010, open pit mining from A-418 supplemented by A-154 South is expected to be the primary source of ore. Underground mining is scheduled to commence in the first calendar quarter, with ore sourced mainly from the A-154 South kimberlite pipe. Total open pit ore mined is expected to be 1.4 million tonnes and total underground is expected to be 0.7 million tonnes.
Looking beyond calendar 2010, the objective is to utilize as much of the processing capability with a combination of underground and open pit production. As underground capacity ramps up, open pit production from the A-418 kimberlite pipe will synchronously decline. A new mining technique is under consideration for the potential mining of the A-21 resource. The feasibility of this resource is now under review with the objective that it becomes the supplemental ore source to underground production beyond 2012. In addition, exploration work has identified extensions at depth to the A-418 and A-154 North kimberlite pipes. Extension of production beyond 2022 will be dependent on bringing resources and exploratory tonnages into reserves.
COST OF SALES
Cost of sales for the mining segment for fiscal 2010 is estimated to be approximately
CAPITAL EXPENDITURES
HWDLP's portion of capital expenditure for the fiscal year ending
Retail
The retail segment includes sales from
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
-------------------------------------------------------------------------
2010 2010 2010 2009 2009
Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Sales $ 54,063 $ 48,835 $ 51,953 $ 67,299 $ 57,907
Cost of sales 24,908 26,245 26,688 34,296 31,062
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Gross margin 29,155 22,590 25,265 33,003 26,845
Gross margin (%) 53.9% 46.3% 48.6% 49.0% 46.4%
Selling, general and
administrative expenses 29,610 28,198 30,246 34,969 30,884
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Earnings (loss) from
operations $ (455) $ (5,608) $ (4,981) $ (1,966) $ (4,039)
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Nine Nine
months months
ended ended
2009 2009 2008 Oct. 31, Oct. 31,
Q2 Q1 Q4 2009 2008
-------------------------------------------------------------------------
Sales $ 81,105 $ 74,686 $ 84,957 $154,851 $213,698
Cost of sales 41,152 40,999 46,675 77,841 113,213
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Gross margin 39,953 33,687 38,282 77,010 100,485
Gross margin (%) 49.3% 45.1% 45.1% 49.7% 47.0%
Selling, general and
administrative expenses 34,043 36,077 39,831 88,054 101,004
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Earnings (loss) from
operations $ 5,910 $ (2,390) $ (1,549) $(11,044) $ (519)
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Three Months Ended
RETAIL SALES
Sales for the third quarter were
RETAIL COST OF SALES AND GROSS MARGIN
Cost of sales for the retail segment for the third quarter was
RETAIL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses decreased to
Nine Months Ended
RETAIL SALES
Sales for the nine months ended
RETAIL COST OF SALES AND GROSS MARGIN
Cost of sales for the retail segment for the nine months ended
RETAIL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses decreased to
Retail Segment Operational Update
During the third quarter, the retail segment recorded a 7% decline in sales over the comparable quarter of the prior year. All markets outside of the US have experienced a positive sales trend compared to the same quarter of the prior year. The US market continues to remain subdued with soft consumer demand. The Company successfully introduced the
Retail Segment Outlook
Sales within the third quarter increased sequentially from August to October, an encouraging trend as the retail segment enters the important fourth quarter.
Liquidity and Capital Resources
Working Capital
As at
During the quarter ended
Working capital increased to
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 retail segment. The Company's principal working capital needs include investments in inventory, prepaid expenses and other current assets, and accounts payable and income taxes payable.
With the closing of the Kinross transaction and the repayment in full of the mining segment's senior secured credit facilities, 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 12 months.
Financing Activities
As at
Also included in long-term debt of the Company's retail operations is a 25-year loan agreement for CHF 17.5 million (
At
Investing Activities
During the third quarter, the Company purchased capital assets of
Contractual Obligations
The Company has contractual payment obligations with respect to long-term debt and, through its participation in the Joint Venture, future site restoration costs at the Diavik Diamond Mine level. Additionally, at the Joint Venture level, contractual obligations exist with respect to operating purchase obligations, as administered by DDMI, the operator of the mine. In order to maintain its 40% ownership interest in the Diavik Diamond Mine, 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 2010 to 2014, is approximately
CONTRACTUAL OBLIGATIONS
(expressed in thousands Less
of United States than Year Year After
dollars) Total 1 year 2-3 4-5 5 years
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Long-term debt(a)(b) $203,973 $ 8,569 $ 16,530 $161,591 $ 17,283
Environmental and
participation
agreements incremental
commitments(c) 87,682 72,829 2,958 1,146 10,749
Operating lease
obligations(d) 104,451 18,787 25,961 19,730 39,973
Capital lease
obligations(e) 846 594 252 - -
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Total contractual
obligations $396,952 $100,779 $ 45,701 $182,467 $ 68,005
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(a) Long-term debt presented in the foregoing table includes current and
long-term portions. Harry Winston Inc. maintains a credit agreement
with a syndicate of banks for a $250.0 million five-year revolving
credit facility. There are no scheduled repayments required before
maturity. At October 31, 2009, $151.1 million had been drawn against
this secured credit facility, which expires on March 31, 2013.
Also included in long-term debt of Harry Winston Inc. is a 25-year
loan agreement for CHF 17.5 million ($17.0 million) used to finance
the construction of the Company's watch factory in Geneva,
Switzerland. The loan agreement is comprised of a CHF 3.5 million
($3.4 million) loan and a CHF 14.0 million ($13.6 million) loan. The
CHF 3.5 million loan bears interest at a rate of 3.9% 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 October 31, 2009,
$16.1 million was outstanding on the loan agreement compared to
$14.7 million at January 31, 2009. The bank has a secured interest in
the factory building. In addition, the Company has a demand credit
facility of CHF 2.0 million ($1.9 million), supported by a
$2.0 million standby letter of credit, which is classified as bank
advances. The demand credit facility bears interest at a rate of 5.0%
per annum. At October 31, 2009, $0.8 million was outstanding,
compared to $0.5 million at January 31, 2009.
Harry Winston Japan, K.K. maintains unsecured credit agreements with
two banks, each amounting to (Yen) 1,475 million ($16.2 million). At
October 31, 2009, $16.2 million had been drawn against these
facilities and classified as bank advances. The credit facilities
amounting to $8.0 million, $2.7 million and $5.5 million, bear
interest at 1.98%, 2.48% and 2.38%, respectively, and expire on
December 30, 2009 (extended from November 30, 2009), January 29, 2010
and June 28, 2010, respectively. Harry Winston Japan, K.K. also
maintains a secured credit agreement amounting to (Yen) 575 million
($6.3 million) classified as bank advances. The facility is secured
by inventory owned by Harry Winston Japan, K.K., bears interest at
2.15% and expires on December 18, 2009.
The Company's first mortgage on real property has scheduled principal
payments of approximately $0.2 million quarterly, and may be prepaid
at any time. On October 31, 2009, $7.3 million was outstanding on the
mortgage payable.
(b) Interest on long-term debt is calculated at various fixed and
floating rates. Projected interest payments on the current debt
outstanding were based on interest rates in effect at October 31,
2009, and have been included under long-term debt in the table above.
Interest payments for the next 12 months are approximated to be
$7.4 million.
(c) The Joint Venture, under environmental and other agreements, must
provide funding for the Environmental Monitoring Advisory Board.
These agreements also state the Joint Venture must provide security
deposits for the performance by the Joint Venture of its reclamation
and abandonment obligations under all environmental laws and
regulations. The operator of the Joint Venture has fulfilled such
obligations for the security deposits by posting letters of credit of
which HWDLP's share as at October 31, 2009 was $71.5 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 salons,
office space and long-term leases for property, land, office premises
and a fuel tank farm for the Diavik Diamond Mine. Harry Winston
Inc.'s New York salon lease expires on December 17, 2010 with an
option to renew.
(e) Capital lease obligations represent future minimum annual rentals
under non-cancellable capital leases for Harry Winston Inc. retail
exhibit space.
Dividend
On
Risks and Uncertainties
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
Agreement with Kinross
Under the amended partnership agreement of HWDLP, the general partner is entitled to request that the partners in the partnership advance funds to the partnership pro rata based on their holdings of partnership units for the purpose of satisfying the partnership's obligations under various contractual commitments, including those deriving from the joint arrangement between DDMI and the partnership. The partners may unanimously determine to fund any cash call by way of a loan rather than equity contribution. If a partner fails to contribute its proportion of funds with respect to a cash call, the non-defaulting partner or partners will have the option, but not the obligation, to fund the defaulting partner's portion of the cash call by way of equity contribution or loan or a combination of the two; provided that if any equity contribution is made, the non-defaulting partner's interest in the partnership will be increased proportionately through the issuance of additional partnership units.
As DDMI, under the joint arrangement between DDMI and the partnership, is able to determine the timing and scope of future project capital expenditures and to impose capital expenditure requirements on the Company that the Company may not have sufficient cash to meet, the Company's interest in HWDLP could be diluted under the amended partnership agreement as a result of a failure by the Company to meet cash call requirements imposed by the amended partnership agreement.
Diamond Prices and Demand for Diamonds
The profitability of the Company is dependent upon production from the Diavik Diamond Mine and on the results of the operations of its retail operations. Each in turn is dependent in significant part upon the worldwide demand for and price of diamonds. Diamond prices fluctuate and are affected by numerous factors beyond the control of the Company, including worldwide economic trends, particularly in the US,
Cash Flow and Liquidity
The Company's liquidity requirements fluctuate from quarter to quarter depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, seasonality of mine operating expenses, capital expenditure programs, the number of 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 retail segment. The Company's principal working capital needs include investments in inventory, prepaid expenses and other current assets, and accounts payable and income taxes payable. There can be no assurance that the Company will be able to meet each or all of its liquidity requirements. A failure by the Company to meet its liquidity requirements could result in the Company failing to meet its planned development objectives, or in the Company being in default of a contractual obligation, each of which could have a material adverse effect on the Company's business prospects or financial condition.
Economic Environment
The Company's financial results are tied to the global economic environment. The global markets have experienced the impact of a significant US and international economic downturn. This could restrict the Company's growth opportunities both domestically and internationally. Should economic conditions not improve or further deteriorate, the Company could experience revenue pressure across both its business segments and a decrease in the availability of credit, which could have a material adverse effect on the Company's business prospects or financial condition.
Currency Risk
Currency fluctuations may affect the Company's financial performance. Diamonds are sold throughout the world based principally on the US dollar price, and although the Company reports its financial results in US dollars, a majority of the costs and expenses of the Diavik Diamond Mine are incurred in Canadian dollars. Further, the Company has a significant future income tax liability that has been incurred and will be payable in Canadian dollars. The Company's currency exposure relates primarily to expenses and obligations incurred by it in Canadian dollars and, secondarily, to revenues of
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
Regulatory and Environmental Risks
The operation of the Diavik Diamond Mine, exploration activities at the Diavik Project and the manufacturing of jewelry and watches are subject to various laws and regulations governing the protection of the environment, exploration, development, production, taxes, labour standards, occupational health, waste disposal, mine safety, manufacturing safety and other matters. New laws and regulations, amendments to existing laws and regulations, or more stringent implementation or changes in enforcement policies under existing laws and regulations could have a material adverse impact on the Company by increasing costs and/or causing a reduction in levels of production from the Diavik Diamond Mine and in the manufacture of jewelry and watches. As well, as the Company's international operations expand, it or its subsidiaries become subject to laws and regulatory regimes which differ materially from those under which they operate in
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
Resource and Reserve Estimates
The Company's figures for mineral resources and ore reserves on the Diavik group of mineral claims are estimates, and no assurance can be given that the anticipated carats will be recovered. The estimation of reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production and the timing of future expenditures, all of which are subject to numerous uncertainties and various interpretations. The Company expects that its estimates of reserves will change to reflect updated information. Reserve estimates may be revised upward or downward based on the results of current and future drilling, testing or production levels and on changes in mine design. In addition, market fluctuations in the price of diamonds or increases in the costs to recover diamonds from the Diavik Diamond Mine may render the mining of ore reserves uneconomical.
Mineral resources that are not mineral reserves do not have demonstrated economic viability. Due to the uncertainty that may attach to inferred mineral resources, there is no assurance that mineral resources at the Diavik property will be upgraded to proven and probable ore reserves.
Insurance
The Company's business is subject to a number of risks and hazards, including adverse environmental conditions, industrial accidents, labour disputes, unusual or unexpected geological conditions, risks relating to the physical security of diamonds and jewelry held as inventory or in transit, changes in the regulatory environment and natural phenomena such as inclement weather conditions. Such occurrences could result in damage to the Diavik Diamond Mine, personal injury or death, environmental damage to the Diavik property, delays in mining, closing of
Fuel Costs
The Diavik Diamond Mine's expected fuel needs are purchased periodically during the year for storage, and transported to the mine site by way of the winter road. These costs will increase if transportation by air freight is required due to a shortened "winter road season" or unexpectedly high fuel usage.
The cost of the fuel purchased is based on the then prevailing price and expensed into operating costs on a usage basis. The Diavik Diamond Mine currently has no hedges for its future anticipated fuel consumption.
Reliance on Skilled Employees
Production at the Diavik Diamond Mine is dependent upon the efforts of certain skilled employees of DDMI. The loss of these employees or the inability of DDMI to attract and retain additional skilled employees may adversely affect the level of diamond production from the Diavik Diamond Mine.
The Company's success at marketing rough diamonds and in operating the business of
Expansion of the Existing Salon Network
A key component of the Company's retail strategy has been the expansion of its salon network. This strategy requires the Company to make ongoing capital expenditures to build and open new salons, to refurbish existing salons from time to time, and to incur additional operating expenses in order to operate the new salons. To date, much of this expansion has been financed through borrowings by
Competition in the Luxury Jewelry Segment
The Company is exposed to competition in the retail diamond market from other luxury goods, diamond, jewelry and watch retailers. The ability of
Critical Accounting Estimates
Management is often required to make judgments, assumptions and estimates in the application of Canadian generally accepted accounting principles that have a significant impact on the financial results of the Company. Certain policies are more significant than others and are, therefore, considered critical accounting policies. Accounting policies are considered critical if they rely on a substantial amount of judgment (use of estimates) in their application or if they result from a choice between accounting alternatives and that choice has a material impact on the Company's reported results or financial position. There have been no changes to the Company's critical accounting policies or estimates from those disclosed in the Company's MD&A for its fiscal year ended
Changes in Accounting Policies
Goodwill and Intangibles Assets
On
Recently Issued Accounting Standards
Credit Risk and the Fair Value of Financial Assets and Liabilities
In
Mining Exploration Costs
In
Financial Instruments
In
Equity
In
International Financial Reporting Standards ("IFRS")
In
The conversion project from Canadian GAAP to IFRS is led by finance management, and includes representatives from various areas of the Company as necessary to plan for and achieve a smooth transition. The Company has engaged the services of a third party expert advisor to assist. Regular progress reporting to senior management and to the Audit Committee on the status of the IFRS conversion project is in place. The conversion project consists of three phases:
Assessment Phase - This phase involves a review of accounting differences
between Canadian GAAP and IFRS; an evaluation of IFRS 1 exemptions for
first time IFRS adopters; and a high-level impact assessment on systems
and business processes. This phase was substantially completed during the
second quarter.
Design Phase - This phase involves prioritizing and resolving accounting
treatment issues; quantifying the impact of converting to IFRS; reviewing
and approving accounting policy choices; performing a detailed impact
assessment on systems and processes; designing system and business
process changes; developing IFRS training material; and drafting IFRS
financial statement content. The Company is currently progressing through
its design phase activities.
Implementation Phase - This phase involves changes to systems and
business processes; determining the opening IFRS transition balance
sheet; dual accounting under both Canadian GAAP and IFRS; and preparing
detailed reconciliations of Canadian GAAP to IFRS financial statements.
Although the Company's IFRS conversion project consists of three sequential phases, certain aspects of each phase sometimes occur concurrently, resulting in the analysis of certain areas being further developed than in other areas.
EXPECTED ACCOUNTING DIFFERENCES BETWEEN CANADIAN GAAP & IFRS
The following areas have been identified where the accounting differences between Canadian GAAP and existing IFRS may have an impact on the Company's consolidated financial statements. The accounting differences described below should not be regarded as a complete list of areas that may be impacted by the transition to IFRS. Analysis of accounting differences is still in progress, particularly where choices of accounting policies are available.
Property, plant and equipment - Separate accounting for components of
property, plant and equipment is more vigorously applied and broader
under IFRS. Costs are allocated to significant parts of an asset if the
useful lives differ, and each part is then separately depreciated.
Exploration and evaluation - IFRS 6, "Exploration for and Evaluation of
Mineral Resources", allows an entity to either develop a new accounting
policy for exploration and evaluation expenditures consistent with IFRS
requirements or continue to follow the Company's existing policy.
Income taxes - Existing IFRS requires the recognition of deferred taxes
in situations not required under Canadian GAAP. Specifically, a deferred
tax liability (asset) is recognized for exchange gains and losses
relating to foreign non-monetary assets and liabilities that are
remeasured into the functional currency using historical exchange rates.
Similar timing differences are also recognized for the difference in tax
bases between jurisdictions as a result of intra-group transfer of
assets.
Asset impairment - Under IFRS, assets are tested for impairment either
individually or within cash generating units. This approach reflects the
smallest group of assets capable of generating largely independent cash
inflows, which may differ from asset groups under Canadian GAAP.
Impairment charges relating to long-lived assets may be more frequent
under IFRS as the cash flow test for recoverability is based on a one
step discounted cash flow approach. Impairment under IFRS is recognized
if the carrying amount exceeds the higher of fair value less cost to
sell, or value in use. Reversal of impairment charges is required under
IFRS if the circumstances leading to the impairment have changed.
In addition, the International Accounting Standards Board has a number of ongoing projects that could result in the issuance of new IFRS that could affect the ultimate differences between Canadian GAAP and IFRS. In particular, the Company expects that there may be revised IFRS issued and in effect in relation to joint arrangements and income taxes. The Company is monitoring these international accounting developments.
The Company also anticipates a significant increase in disclosure within its consolidated financial statements resulting from the adoption of IFRS and is continuing to assess the level of disclosure required.
FIRST TIME ADOPTION OF IFRS
IFRS 1, "First Time Adoption of International Financial Reporting Standards" ("IFRS 1"), provides mandatory guidance that generally requires full retrospective application of the IFRS and interpretations from the date of transition,
At this time, the impact on the Company's financial position and results of operations is not reasonably determinable or estimable for any of the IFRS conversion areas identified. From the perspective of the Company's systems and controls, no significant impact has currently been identified to date.
Outstanding Share Information
As at
-------------------------------------------------------------------------
Authorized Unlimited
Issued and outstanding shares 76,588,592
Options outstanding 3,233,779
Fully diluted 79,822,371
-------------------------------------------------------------------------
Additional Information
Additional information relating to the Company, including the Company's most recently filed annual information form, can be found on SEDAR at www.sedar.com, and is also available on the Company's website at http://investor.harrywinston.com.
Consolidated Balance Sheets
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
October 31, January 31,
2009 2009
(unaudited)
-------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 3) $ 53,846 $ 16,735
Cash collateral and cash reserves (note 3) 287 30,145
Accounts receivable (note 14) 22,740 66,980
Inventory and supplies (note 4) 346,083 346,235
Prepaid expenses and other current assets 37,787 48,130
-------------------------------------------------------------------------
460,743 508,225
Mining capital assets 808,896 800,358
Retail capital assets 65,814 68,258
Intangible assets, net (note 6) 129,518 130,752
Other assets 16,149 15,644
Future income tax asset 54,247 43,338
-------------------------------------------------------------------------
$ 1,535,367 $ 1,566,575
--------------------------
--------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities
(note 7) $ 86,367 $ 118,390
Income taxes payable 44,871 76,987
Bank advances 30,897 42,621
Current portion of long-term debt (note 8) 1,153 75,097
-------------------------------------------------------------------------
163,288 313,095
Long-term debt (note 8) 173,723 205,625
Future income tax liability 288,722 303,284
Other long-term liability 2,774 1,946
Future site restoration costs 40,807 39,506
Non-controlling interest (note 1) 178,911 280
Shareholders' Equity:
Share capital (note 9) 426,281 381,541
Contributed surplus 17,560 16,079
Retained earnings 213,358 283,177
Accumulated other comprehensive income (note 7) 29,943 22,042
-------------------------------------------------------------------------
687,142 702,839
Commitments and guarantees (note 10)
-------------------------------------------------------------------------
$ 1,535,367 $ 1,566,575
--------------------------
--------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Earnings
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS,
EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three months Three months Nine months Nine months
ended ended ended ended
October 31, October 31, October 31, October 31,
2009 2008 2009 2008
-------------------------------------------------------------------------
Sales $ 74,828 $ 148,623 $ 279,247 $ 490,821
Cost of sales 45,227 71,679 195,465 218,370
-------------------------------------------------------------------------
Gross margin 29,601 76,944 83,782 272,451
Selling, general
and administrative
expenses 34,542 33,998 102,671 116,477
-------------------------------------------------------------------------
Earnings (loss)
from operations (4,941) 42,946 (18,889) 155,974
-------------------------------------------------------------------------
Interest and financing
expenses (2,448) (4,678) (9,145) (15,497)
Other income 99 407 463 1,468
Insurance settlement
(note 14) 100 - 3,350 -
Dilution loss (note 15) - - (34,761) -
Foreign exchange
gain (loss) 1,598 48,982 (29,515) 54,438
-------------------------------------------------------------------------
Earnings (loss) before
income taxes (5,592) 87,657 (88,497) 196,383
Income tax expense
- Current 1,293 23,804 2,487 72,893
Income tax recovery
- Future (5,514) (8,119) (15,489) (19,688)
-------------------------------------------------------------------------
Earnings (loss) before
non-controlling
interest (1,371) 71,972 (75,495) 143,178
Non-controlling
interest (note 1) (1,157) 81 (5,676) 83
-------------------------------------------------------------------------
Net earnings (loss) $ (214) $ 71,891 $ (69,819) $ 143,095
----------------------------------------------------
----------------------------------------------------
Earnings (loss)
per share
Basic $ 0.00 $ 1.17 $ (0.95) $ 2.35
----------------------------------------------------
----------------------------------------------------
Fully diluted $ 0.00 $ 1.17 $ (0.95) $ 2.34
----------------------------------------------------
----------------------------------------------------
Weighted average
number of shares
outstanding 76,588,592 61,372,091 73,202,442 60,894,313
----------------------------------------------------
----------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Three months Three months Nine months Nine months
ended ended ended ended
October 31, October 31, October 31, October 31,
2009 2008 2009 2008
-------------------------------------------------------------------------
Net earnings (loss) $ (214) $ 71,891 $ (69,819) $ 143,095
Other comprehensive
income
Net gain (loss) on
translation of net
foreign operations
(net of tax - nil) 4,735 (6,281) 8,514 (4,346)
Change in fair value
of derivative
financial
instruments
designated as cash
flow hedges (613) - (613) -
-------------------------------------------------------------------------
Total comprehensive
income (loss) $ 3,908 $ 65,610 $ (61,918) $ 138,749
----------------------------------------------------
----------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Three months Three months Nine months Nine months
ended ended ended ended
October 31, October 31, October 31, October 31,
2009 2008 2009 2008
-------------------------------------------------------------------------
COMMON SHARES:
Balance at beginning
of period $ 426,281 $ 381,541 $ 381,541 $ 305,502
Issued during the
period - - 44,740 76,039
-------------------------------------------------------------------------
Balance at end of
period 426,281 381,541 426,281 381,541
-------------------------------------------------------------------------
CONTRIBUTED SURPLUS:
Balance at beginning
of period 17,357 15,906 16,079 15,614
Stock option expense 203 87 1,481 379
-------------------------------------------------------------------------
Balance at end
of period 17,560 15,993 17,560 15,993
-------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning
of period 213,572 290,398 283,177 225,334
Net earnings (loss) (214) 71,891 (69,819) 143,095
Dividends paid - (3,069) - (9,209)
-------------------------------------------------------------------------
Balance at end
of period 213,358 359,220 213,358 359,220
-------------------------------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME:
Balance at beginning
of period 25,821 27,147 22,042 25,212
Other comprehensive
income
Net gain (loss) on
translation of net
foreign operations
(net of tax - nil) 4,735 (6,281) 8,514 (4,346)
Change in fair value
of derivative
financial
instruments
designated as cash
flow hedges (613) - (613) -
-------------------------------------------------------------------------
Balance at end
of period 29,943 20,866 29,943 20,866
-------------------------------------------------------------------------
Total Shareholders'
Equity $ 687,142 $ 777,620 $ 687,142 $ 777,620
----------------------------------------------------
----------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Three months Three months Nine months Nine months
ended ended ended ended
October 31, October 31, October 31, October 31,
2009 2008 2009 2008
-------------------------------------------------------------------------
Cash provided by
(used in):
Operating
Net earnings (loss) $ (214) $ 71,891 $ (69,819) $ 143,095
Items not involving
cash:
Amortization and
accretion 11,208 21,707 45,854 52,440
Future income
tax recovery (5,514) (8,119) (15,489) (19,688)
Stock-based
compensation and
pension expense 1,020 296 2,310 875
Foreign exchange
loss (gain) (1,679) (51,331) 29,419 (57,582)
Loss on disposal
of assets - 3 - 491
Non-controlling
interest (1,157) 81 (5,676) 83
Dilution loss - - 34,761 -
Change in non-cash
operating working
capital (19,977) 13,815 (18,910) 9,144
-------------------------------------------------------------------------
(16,313) 48,343 2,450 128,858
-------------------------------------------------------------------------
Financing
Decrease in long-
term debt (142) (12,558) (264) (39,725)
Increase (decrease)
in revolving credit 7,886 (5,530) (43,959) 174,895
Repayment of mining
segment senior secured
term and revolving
credit facilities - - (74,160) -
Repayment of Harry
Winston Inc. 2008
revolving credit
facility - - - (159,109)
Distribution to Kinross - - (6,750) -
Dividends paid - (3,069) - (9,209)
Issue of common shares,
net of issue costs - - 44,740 76,039
-------------------------------------------------------------------------
7,744 (21,157) (80,393) 42,891
-------------------------------------------------------------------------
Investing
Subscription of
partnership units - - 125,095 -
Cash collateral and
cash reserve 1 46 29,858 358
Mining capital assets (6,547) (38,350) (43,348) (168,258)
Retail capital assets (1,029) (1,384) (2,596) (9,040)
Other assets (446) - (753) (1)
-------------------------------------------------------------------------
(8,021) (39,688) 108,256 (176,941)
-------------------------------------------------------------------------
Foreign exchange effect
on cash balances 2,533 (3,278) 6,798 (3,898)
Increase (decrease)
in cash and cash
equivalents (14,057) (15,780) 37,111 (9,090)
Cash and cash
equivalents, beginning
of period (note 3) 67,903 56,318 16,735 49,628
-------------------------------------------------------------------------
Cash and cash
equivalents, end
of period (note 3) $ 53,846 $ 40,538 $ 53,846 $ 40,538
----------------------------------------------------
----------------------------------------------------
Change in non-cash
operating working
capital
Accounts receivable (4,709) 2,503 44,465 (2,224)
Prepaid expenses and
other current assets 12,548 11,963 7,612 13,497
Inventory and supplies (21,042) (23,027) 4,078 (46,013)
Accounts payable and
accrued liabilities (4,171) (5,985) (35,188) 8,850
Income taxes payable (2,603) 28,361 (39,877) 35,034
-------------------------------------------------------------------------
$ (19,977) $ 13,815 $ (18,910) $ 9,144
-------------------------------------------------------------------------
Supplemental cash flow
information
Cash taxes paid $ 6,304 $ (5,864) $ 42,782 $ 36,704
Cash interest paid $ 2,713 $ 4,165 $ 8,852 $ 12,963
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
OCTOBER 31, 2009 WITH COMPARATIVE FIGURES
(TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS,
EXCEPT AS OTHERWISE NOTED)
NOTE 1:
Nature of Operations
The Company's most significant asset is an ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the "Joint Venture") is an unincorporated joint arrangement between Diavik
On
The Company also owns a 100% interest in
Certain comparative figures have been reclassified to conform with the current year's presentation.
NOTE 2:
Significant Accounting Policies
The interim consolidated financial statements are prepared by management in accordance with accounting principles generally accepted in
The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in the Company's Annual Report for the year ended
Adoption of New Accounting Standards and Developments
GOODWILL AND INTANGIBLE ASSETS
On
Recently Issued Accounting Standards
CREDIT RISK AND THE FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
In
MINING EXPLORATION COSTS
In
FINANCIAL INSTRUMENTS
In
EQUITY
In
NOTE 3:
Cash Resources
October 31, January 31,
2009 2009
-------------------------------------------------------------------------
Cash on hand and balances with banks $ 53,846 $ 14,118
Short-term investments(a) - 2,617
-------------------------------------------------------------------------
Total cash and cash equivalents 53,846 16,735
Cash collateral and cash reserves 287 30,145
-------------------------------------------------------------------------
Total cash resources $ 54,133 $ 46,880
--------------------------
--------------------------
(a) Short-term investments are held in overnight deposits.
Total cash resources were impacted by the
NOTE 4:
Inventory and Supplies
October 31, January 31,
2009 2009
-------------------------------------------------------------------------
Rough diamond inventory $ 33,406 $ 31,872
Merchandise inventory 233,378 240,419
Supplies inventory 79,299 73,944
-------------------------------------------------------------------------
Total inventory and supplies $ 346,083 $ 346,235
--------------------------
--------------------------
During the three months ended
NOTE 5:
Diavik Joint Venture
The following represents
October 31, January 31,
2009 2009
-------------------------------------------------------------------------
Current assets $ 97,028 $ 105,612
Long-term assets 765,581 754,886
Current liabilities 25,099 38,808
Long-term liabilities and participant's account 837,510 821,690
-------------------------------------------------------------------------
Three months Three months Nine months Nine months
ended ended ended ended
October 31, October 31, October 31, October 31,
2009 2008 2009 2008
-------------------------------------------------------------------------
Expenses net of
interest income of
$0.1 million (2008 -
interest income of
$0.1 million)(a)(b) $ 29,511 $ 61,168 $ 112,079 $ 138,798
Cash flows resulting
from (used in)
operating activities (33,883) (47,434) (91,896) (108,655)
Cash flows resulting
from financing
activities 36,433 68,220 132,030 243,721
Cash flows resulting
from (used in)
investing activities (1,457) (31,365) (40,700) (146,337)
-------------------------------------------------------------------------
(a) The Joint Venture only earns interest income.
(b) Expenses net of interest income for the nine months ended October 31,
2009 of $0.3 million (nine months ended October 31, 2008 of
$0.3 million).
The Company is contingently liable for the other participant's portion of the liabilities of the Joint Venture, and to the extent the Company's participating interest has increased because of the failure of the other participant to make a cash contribution when required, the Company would have access to an increased portion of the assets of the Joint Venture to settle these liabilities.
NOTE 6:
Intangible Assets
Amortization Accumulated October 31, January 31,
period Cost amortization 2009 net 2009 net
-------------------------------------------------------------------------
Trademark indefinite
life $ 112,995 $ - $ 112,995 $ 112,995
Drawings indefinite
life 12,365 - 12,365 12,365
Wholesale
distribution
network 120 months 5,575 (2,344) 3,231 3,649
Store leases 65 to 105
months 5,639 (4,712) 927 1,743
-------------------------------------------------------------------------
Intangible
assets $ 136,574 $ (7,056) $ 129,518 $ 130,752
-----------------------------------------------
-----------------------------------------------
Amortization expense for the nine months ended
NOTE 7:
Derivative Financial Instruments
On
October 31, 2009
-------------------------------------------------------------------------
Interest rates
-----------------------
Notional
principal Receive Pay
-------------------------------------------------------------------------
Interest 1 year: receive
rate swap variable - pay fixed $ 140,000 1-month LIBOR 3.19%
-------------------------------------------------------------------------
NOTE 8:
Long-Term Debt
October 31, January 31,
2009 2009
-------------------------------------------------------------------------
Mining segment credit facilities $ - $ 74,107
Harry Winston Inc. credit facilities 167,612 199,846
First mortgage on real property 7,264 6,769
-------------------------------------------------------------------------
Total long-term debt 174,876 280,722
-------------------------------------------------------------------------
Less current portion (1,153) (75,097)
-------------------------------------------------------------------------
$ 173,723 $ 205,625
--------------------------
--------------------------
On
NOTE 9:
Share Capital
(a) Authorized
Unlimited common shares without par value.
(b) Issued
Number of
shares Amount
---------------------------------------------------------------------
Balance, January 31, 2009 61,372,092 $ 381,541
SHARES ISSUED FOR:
Cash 15,200,000 44,685
Cash on exercise of options 16,500 55
---------------------------------------------------------------------
Balance, October 31, 2009 76,588,592 $ 426,281
--------------------------
--------------------------
(c) Stock Options
During the nine months ended October 31, 2009, the Company issued
1,674,000 stock options to officers and employees of the Company and
its affiliates. These options vested 50% immediately; 25% will vest
on the first anniversary date and the remaining 25% will vest on the
second anniversary date of the grant. The maximum term of these
options is 10 years. The Company estimated the fair value of the
options granted using the Black-Scholes option pricing model.
Compensation expense for stock options was $1.5 million for the nine
months ended October 31, 2009 ($0.4 million for the nine months ended
October 31, 2008) and is presented as a component of selling, general
and administrative expenses. The Company used historical exercise
data to determine the expected term of the options granted.
(d) RSU and DSU Plans
Number of
RSU units
---------------------------------------------------------------------
Balance, January 31, 2009 108,599
AWARDS AND PAYOUTS DURING THE PERIOD (NET):
RSU awards 11,500
RSU payouts (74,614)
---------------------------------------------------------------------
Balance, October 31, 2009 45,485
-------------
-------------
Number of
DSU units
---------------------------------------------------------------------
Balance, January 31, 2009 128,988
AWARDS AND PAYOUTS DURING THE PERIOD (NET):
DSU awards 59,144
DSU payouts (15,741)
---------------------------------------------------------------------
Balance, October 31, 2009 172,391
-------------
-------------
Three months Three months Nine months Nine months
Expense ended ended ended ended
(recovery) October 31, October 31, October 31, October 31,
for the period 2009 2008 2009 2008
---------------------------------------------------------------------
RSU $ 81 $ (995) $ 98 $ (660)
DSU 542 (659) 958 (422)
---------------------------------------------------------------------
$ 623 $ (1,654) $ 1,056 $ (1,082)
----------------------------------------------------
----------------------------------------------------
During the nine months ended
Grants under the RSU Plan are on a discretionary basis to employees of the Company subject to Board of Director approval or in accordance with employment contracts. Each RSU grant vests on the third anniversary of the grant date, subject to special rules for death and disability. The Company anticipates paying out cash on maturity of RSUs and DSUs.
Only non-executive directors of the Company are eligible for grants under the DSU Plan. Each DSU grant vests immediately on the grant date.
The expenses related to the RSUs and DSUs are accrued based on the price of
NOTE 10:
Commitments and Guarantees
(a) Environmental Agreement
Through negotiations of environmental and other agreements, the Joint
Venture must provide funding for the Environmental Monitoring
Advisory Board. HWDLP's share of this funding requirement is
$0.2 million for calendar 2009. Further funding will be required in
future years; however, specific amounts have not yet been determined.
These agreements also state the Joint Venture must provide security
deposits for the performance by the Joint Venture of its reclamation
and abandonment obligations under all environmental laws and
regulations. HWDLP's share of the letters of credit outstanding
posted by the operator of the Joint Venture with respect to the
environmental agreements as at October 31, 2009 was $71.5 million.
The agreement specifically provides that these funding requirements
will be reduced by amounts incurred by the Joint Venture on
reclamation and abandonment activities.
(b) Participation Agreements
The Joint Venture has signed participation agreements with various
native groups. These agreements are expected to contribute to the
social, economic and cultural well-being of the Aboriginal bands. The
agreements are each for an initial term of 12 years and shall be
automatically renewed on terms to be agreed for successive periods of
six years thereafter until termination. The agreements terminate in
the event the mine permanently ceases to operate.
(c) Commitments
Commitments include the cumulative maximum funding commitments
secured by letters of credit of the Joint Venture's environmental and
participation agreements at Harry Winston Diamond Limited
Partnership's 40% ownership interest, before any reduction of future
reclamation activities, and future minimum annual rentals under non-
cancellable operating and capital leases for retail salons, corporate
office space, and long-term leases for property, land, office
premises and a fuel tank farm at the Diavik Diamond Mine and are as
follows:
2010 $ 92,210
2011 88,683
2012 87,993
2013 86,398
2014 86,791
Thereafter 127,655
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NOTE 11:
Employee Benefit Plans
Three months Three months Nine months Nine months
ended ended ended ended
Expenses for October 31, October 31, October 31, October 31,
the period 2009 2008 2009 2008
-------------------------------------------------------------------------
Defined benefit
pension plan -
Harry Winston
retail segment $ 466 $ 413 $ 1,424 $ 1,227
Defined contribution
plan - Harry Winston
retail segment 210 235 630 705
Defined contribution
plan - Harry Winston
mining segment 29 - 130 236
Defined contribution
plan - Diavik
Diamond Mine 190 236 591 733
-------------------------------------------------------------------------
$ 895 $ 884 $ 2,775 $ 2,901
----------------------------------------------------
----------------------------------------------------
NOTE 12:
Capital Management
As part of the Kinross investment, the Company and Kinross have agreed to certain provisions regarding capital management for a period of two years following closing subject to earlier termination in specified circumstances. During this period, without Kinross' consent not to be unreasonably withheld, the Company has agreed not to incur indebtedness in excess of a specified amount, subject to an exception for indebtedness incurred to finance an acquisition by the Company. In addition, the Company has agreed not to pay dividends and to limit the amount of funding it will provide to the retail segment. The capital management provisions do not in any way limit the Company's ability to issue equity or equity-linked securities subject to compliance with Kinross' pro rata participation right in such equity issuances.
NOTE 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 and long-term debt.
Cash and cash equivalents consist of cash on hand and balances with banks and short-term investments held in overnight deposits with a maturity on acquisition of less than 90 days. Cash and cash equivalents are designated as held-for-trading and are carried at fair value.
The fair value of accounts receivable is determined by the amount of cash anticipated to be received in the normal course of business from the financial asset.
The Company's long-term debt is fully secured; hence the fair value of this instrument at
The fair value of derivative financial instruments included in accounts payable and accrued liabilities is determined using standard valuation techniques with observable market information.
The carrying values of these financial instruments are as follows:
October 31, 2009 January 31, 2009
-------------------------------------------------------------------------
Estimated Carrying Estimated Carrying
fair value value fair value value
-------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash
equivalents $ 53,846 $ 53,846 $ 16,735 $ 16,735
Cash collateral
and cash reserves 287 287 30,145 30,145
Accounts receivable 22,740 22,740 66,980 66,980
-------------------------------------------------------------------------
$ 76,873 $ 76,873 $ 113,860 $ 113,860
----------------------------------------------------
----------------------------------------------------
FINANCIAL LIABILITIES:
Accounts payable
and accrued
liabilities $ 86,367 $ 85,754 $ 118,390 $ 118,390
Bank advances 30,897 30,897 42,621 42,621
Long-term debt 174,876 174,876 280,722 280,722
-------------------------------------------------------------------------
$ 292,140 $ 291,527 $ 441,733 $ 441,733
----------------------------------------------------
----------------------------------------------------
NOTE 14:
Insurance Settlement
In
NOTE 15:
Dilution Loss
The Company recorded a non-cash dilution loss of
NOTE 16:
Segmented Information
The Company operates in two segments within the diamond industry, mining and retail, for the three months ended
The mining segment consists of the Company's rough diamond business. This business includes the 40% ownership interest in the Diavik group of mineral claims and the sale of rough diamonds in the market-place.
The retail segment consists of the Company's ownership in
For the three months ended
October 31, 2009 Mining Retail Total
-------------------------------------------------------------------------
Sales
Canada $ 20,765 $ - $ 20,765
United States - 12,847 12,847
Europe - 20,987 20,987
Asia - 20,229 20,229
Cost of sales 20,319 24,908 45,227
-------------------------------------------------------------------------
Gross margin 446 29,155 29,601
Gross margin (%) 2.1% 53.9% 39.6%
Selling, general and
administrative expenses 4,932 29,610 34,542
-------------------------------------------------------------------------
Loss from operations (4,486) (455) (4,941)
-------------------------------------------------------------------------
Interest and financing expenses (702) (1,746) (2,448)
Other income 92 7 99
Insurance proceeds - 100 100
Foreign exchange gain 1,551 47 1,598
-------------------------------------------------------------------------
Segmented loss before income taxes $ (3,545) $ (2,047) $ (5,592)
---------------------------------------
---------------------------------------
Segmented assets as at
October 31, 2009
Canada $ 972,604 $ - $ 972,604
United States - 371,109 371,109
Other foreign countries 23,194 168,460 191,654
-------------------------------------------------------------------------
$ 995,798 $ 539,569 $ 1,535,367
-------------------------------------------------------------------------
Capital expenditures $ 6,547 $ 1,029 $ 7,576
OTHER SIGNIFICANT NON-CASH ITEMS:
Income tax recovery $ (4,192) $ (1,322) $ (5,514)
Amortization and accretion $ 7,845 $ 3,363 $ 11,208
-------------------------------------------------------------------------
Sales to three significant customers in the mining segment totaled
For the three months ended
October 31, 2008 Mining Retail Total
-------------------------------------------------------------------------
Sales
Canada $ 90,716 $ - $ 90,716
United States - 21,278 21,278
Europe - 23,433 23,433
Asia - 13,196 13,196
Cost of sales 40,617 31,062 71,679
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Gross margin 50,099 26,845 76,944
Gross margin (%) 55.2% 46.4% 51.8%
Selling, general and
administrative expenses 3,114 30,884 33,998
-------------------------------------------------------------------------
Earnings (loss) from operations 46,985 (4,039) 42,946
-------------------------------------------------------------------------
Interest and financing expenses (1,898) (2,780) (4,678)
Other income 303 104 407
Foreign exchange gain (loss) 49,592 (610) 48,982
-------------------------------------------------------------------------
Segmented earnings (loss)
before income taxes $ 94,982 $ (7,325) $ 87,657
---------------------------------------
---------------------------------------
Segmented assets as at
October 31, 2008
Canada $ 981,791 $ - $ 981,791
United States - 469,130 469,130
Other foreign countries 33,108 160,930 194,038
-------------------------------------------------------------------------
$ 1,014,899 $ 630,060 $ 1,644,959
-------------------------------------------------------------------------
Goodwill as at October 31, 2008 $ - $ 93,780 $ 93,780
Capital expenditures $ 38,350 $ 1,384 $ 39,734
OTHER SIGNIFICANT NON-CASH ITEMS:
Income tax recovery $ (5,662) $ (2,457) $ (8,119)
Amortization and accretion $ 18,611 $ 3,096 $ 21,707
-------------------------------------------------------------------------
For the nine months ended
October 31, 2009 Mining Retail Total
-------------------------------------------------------------------------
Sales
Canada $ 124,396 $ - $ 124,396
United States - 46,657 46,657
Europe - 58,000 58,000
Asia - 50,194 50,194
Cost of sales 117,624 77,841 195,465
-------------------------------------------------------------------------
Gross margin 6,772 77,010 83,782
Gross margin (%) 5.4% 49.7% 30.0%
Selling, general and
administrative expenses 14,617 88,054 102,671
-------------------------------------------------------------------------
Loss from operations (7,845) (11,044) (18,889)
-------------------------------------------------------------------------
Interest and financing expenses (3,115) (6,030) (9,145)
Other income 432 31 463
Insurance settlement - 3,350 3,350
Dilution loss (34,761) - (34,761)
Foreign exchange gain (loss) (31,045) 1,530 (29,515)
-------------------------------------------------------------------------
Segmented loss before
income taxes $ (76,334) $ (12,163) $ (88,497)
---------------------------------------
---------------------------------------
Segmented assets as at
October 31, 2009
Canada $ 972,604 $ - $ 972,604
United States - 371,109 371,109
Other foreign countries 23,194 168,460 191,654
-------------------------------------------------------------------------
$ 995,798 $ 539,569 $ 1,535,367
-------------------------------------------------------------------------
Capital expenditures $ 43,348 $ 2,596 $ 45,944
OTHER SIGNIFICANT NON-CASH ITEMS:
Income tax recovery $ (9,044) $ (6,445) $ (15,489)
Amortization and accretion $ 36,178 $ 9,676 $ 45,854
-------------------------------------------------------------------------
Sales to three significant customers in the mining segment totaled
For the nine months ended
October 31, 2008 Mining Retail Total
-------------------------------------------------------------------------
Sales
Canada $ 277,123 $ - $ 277,123
United States - 75,188 75,188
Europe - 86,699 86,669
Asia - 51,811 51,811
Cost of sales 105,157 113,213 218,370
-------------------------------------------------------------------------
Gross margin 171,966 100,485 272,451
Gross margin (%) 62.1% 47.0% 55.5%
Selling, general and
administrative expenses 15,473 101,004 116,477
-------------------------------------------------------------------------
Earnings (loss) from operations 156,493 (519) 155,974
-------------------------------------------------------------------------
Interest and financing expenses (7,025) (8,472) (15,497)
Other income (expense) 1,751 (283) 1,468
Foreign exchange gain (loss) 54,853 (415) 54,438
-------------------------------------------------------------------------
Segmented earnings (loss)
before income taxes $ 206,072 $ (9,689) $ 196,383
---------------------------------------
---------------------------------------
Segmented assets as at
October 31, 2008
Canada $ 981,791 $ - $ 981,791
United States - 469,130 469,130
Other foreign countries 33,108 160,930 194,038
-------------------------------------------------------------------------
$ 1,014,899 $ 630,060 $ 1,644,959
-------------------------------------------------------------------------
Goodwill as at October 31, 2008 $ - $ 93,780 $ 93,780
Capital expenditures $ 168,258 $ 9,040 $ 177,298
OTHER SIGNIFICANT NON-CASH ITEMS:
Income tax recovery $ (15,401) $ (4,287) $ (19,688)
Amortization and accretion $ 43,039 $ 9,401 $ 52,440
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%SEDAR: 00003786E
For further information: Kelley Stamm, Manager, Investor Relations, (416) 362-2237 ext 223 or [email protected]
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