TORONTO, April 4, 2012 /CNW/ - Harry Winston Diamond Corporation
(the 'Company') today announced its fourth quarter and year-end results for the period ending January 31, 2012.
Annual Results Highlights:
-- Consolidated sales increased 13% to $702.0 million for the year
ended January 2012 compared to $624.0 million for the prior
year. This resulted in operating profit of $56.5 million,
compared to an operating profit of $68.3 million last year.
Included in the fiscal 2012 results was a non-cash $13.0
million charge ($8.4 million after tax) related to the
de-recognition of certain components of the backfill plant at
the Diavik Diamond Mine. Excluding this non-cash charge of
$13.0 million, the Company's operating profit would have been
$69.5 million representing a slight increase over the prior
fiscal year.
-- EBITDA was $148.2 million compared to $145.4 million in the
prior year.
-- For the mining segment, the Company sold 2.1 million carats for
a total of $290.1 million for an average price per carat of
$137 compared to 2.6 million carats for a total of $279.2
million for an average price per carat of $106 in the prior
year. The increase in sales resulted from a 29% increase in the
Company's achieved rough diamond price per carat. This was
partially offset by a 19% decrease in volume of carats sold as
the Company elects to hold inventory.
-- Rough diamond production for the calendar year 2011 was 6.7
million carats compared to 6.5 million carats in the prior
calendar year (on a 100% basis). Rough diamond production was
3% higher than the prior calendar year due primarily to an
increase in ore processed.
-- Luxury brand segment sales increased 19% (12% at constant
exchange rates) to $411.9 million from $344.8 million in the
prior year. The increase in sales resulted in operating profit
for the year of $19.4 million compared to $14.9 million in the
prior year.
-- The Company recorded consolidated net profit attributable to
shareholders of $25.5 million or $0.30 per share for the year,
compared to consolidated net profit attributable to
shareholders of $41.5 million or $0.52 per share in the prior
year. Excluding the $8.4 million after-tax charge for
de-recognition of certain paste plant assets in the mining
segment, the Company would have recorded a net profit
attributable to shareholders of $33.8 million or $0.40 per
share for the period.
-- Excluding the paste plant derecognition charge, consolidated
net profit decreased primarily due to higher financing expenses
related to the Kinross buy-back transaction with the final
payment made in August 2011, higher mining exploration expenses
and higher income tax expense. The higher income tax expense
primarily resulted from the revaluation of both non-monetary
assets and liabilities and of the net deferred income tax
liability due to foreign exchange fluctuations.
Robert Gannicott, Chairman and Chief Executive Officer stated: 'Our own rough diamond prices have now stabilized at levels approximately 20% above the beginning of the year and resumed a steady growth in many categories. This is consistent with the trends that we see in our luxury brand business where strong demand for watches has propelled not only our own timepiece orders but also the pricing of the small diamonds that are used throughout the watch industry. Our jewelry sales continue to show strong growth in the bridal and collection jewelry segments that we have targeted as a keystone of our expansion plans as we service not only new markets in China but also broaden our offering in our home market in the US.'
He continued, 'In light of Rio Tinto`s review of its diamond business, including the Diavik Diamond Mine, Harry Winston has decided, not to release a full life of mine plan for the Diavik project at this time in the expectation that project parameters may change in the course of this review.'
Fourth Quarter Highlights:
-- Consolidated sales were $216.0 million for the fourth quarter
compared to $215.4 million for the comparable quarter of the
prior year. Operating profit increased 45% to $30.7 million,
compared to an operating profit of $21.2 million in the
comparable quarter of the prior year. EBITDA was $58.2 million
compared to $45.9 million in the comparable quarter of the
prior year.
-- For the mining segment, rough diamond sales for the fourth
quarter were 24% higher at $102.2 million compared to $82.7
million for the fourth quarter last year. This increase
resulted from a 14% increase in the volume of carats sold and a
9% increase in the Company's achieved rough diamond prices.
The average price per carat during the quarter was $120,
compared to $110 in the comparable quarter of the prior year.
-- Rough diamond production during the calendar quarter from the
Diavik Diamond Mine was 1.60 million carats, compared to 1.54
million carats for the fourth calendar quarter of last year (on
a 100% basis).
-- Luxury brand segment sales for the fourth quarter decreased 14%
(18% at constant exchange rates) to $113.8 million from $132.7
million for the comparable quarter of the prior year. The
decrease was primarily due to a high-value transaction in the
prior year's quarter that was not repeated in the current
quarter.
-- Consolidated net profit attributable to shareholders for the
fourth quarter was $16.6 million or $0.20 per share compared to
a consolidated net profit attributable to shareholders of
$13.7 million or $0.16 per share in the fourth quarter of the
prior year.
The Company now reports its sales on a geographic basis. The mining and luxury brand segments now discloses four geographic areas being North America, Europe, Asia excluding Japan, and Japan. Additionally, the Company now reports a third segment 'Corporate', distinct from the mining and luxury segments, for expenses not specifically related to the individual segments.
Fourth Quarter and Fiscal 2012 Financial Summary
(US$ in millions except Earnings per Share amounts)
____________________________________________________________________
| |Three months|Three months| Twelve |Twelve months|
| | ended | ended | months | ended |
| | Jan. 31, | Jan. 31, | ended |Jan. 31, 2011|
| | 2012 | 2011 |Jan. 31,| |
| | | | 2012 | |
|___________________|____________|____________|________|_____________|
|Sales | 216.0 | 215.4 | 702.0 | 624.0 |
|- Mining | 102.2 | 82.7 | 290.1 | 279.2 |
|Segment | 113.8 | 132.7 | 411.9 | 344.8 |
|- Luxury Brand | | | | |
|Segment | | | | |
|___________________|____________|____________|________|_____________|
|Operating Profit | 30.7 | 21.2 | 56.5 | 68.3 |
|(loss) | 27.4 | 17.9 | 48.7 | 62.3 |
|- MiningSegment| 6.8 | 5.3 | 19.4 | 14.9 |
|- Luxury Brand | (3.5) | (2.0) | (11.6) | (8.9) |
|Segment | | | | |
|- Corporate | | | | |
|Segment | | | | |
|___________________|____________|____________|________|_____________|
|Net Profit | 16.6 | 13.7 | 25.5 | 41.5 |
|attributable to | | | | |
|shareholders | | | | |
|___________________|____________|____________|________|_____________|
|Earnings per share | $0.20 | $0.16 | $0.30 | $0.52 |
|___________________|____________|____________|________|_____________|
Outlook
For the mining segment, a mine plan and budget for calendar 2012 has been approved by Rio Tinto plc, the operator of the Diavik Diamond Mine, and the Company. The plan for calendar 2012 foresees Diavik Diamond Mine production of approximately 8.3 million carats (100% basis) from the mining of 2.0 million tonnes of ore and processing of 2.2 million tonnes of ore. Open pit mining of approximately 1.0 million tonnes is expected to be exclusively from A-418. Underground mining of approximately 1.0 million tonnes is expected to be sourced equally from the A-154 South and A-154 North kimberlite pipes. Included in the estimated production for calendar 2012 is approximately 1.0 million carats from reprocessed plant rejects ('RPR') and 0.1 million carats from the implementation of an improved recovery process for small diamonds. These RPR and small diamond recoveries are not included in the Company's reserves and resource statement and are therefore incremental to production.
Looking beyond calendar 2012, the objective is to fully utilize processing capacity with a combination of production from the underground portions of A-154 South, A-154 North and A-418 supplemented by the A-21 open pit. The A-21 project now enters final feasibility study with the objective of approval in time to mobilize equipment on the next winter road.
For the luxury brand segment, the Company is targeting a compound annual revenue growth in the mid-teens, a gross margin target in the low 50% range, and an operating profit margin target in the low to mid-teens by fiscal 2016. The current salon growth target is to expand to approximately 35 directly operated salons, 15 licensed salons, and to grow to 300 wholesale timepiece doors by fiscal 2016.
Conference Call and Webcast
Beginning at 8:30AM (ET) on Thursday, April 5, the Company will host a conference call for analysts, investors and other interested parties. Listeners may access a live broadcast of the conference call on the Company's investor relations web site at http://investor.harrywinston.com or by dialing 800-510-9691 within North America or 617-614-3453 from international locations and entering passcode 22046474.
An online archive of the broadcast will be available by accessing the Company's investor relations web site at http://investor.harrywinston.com. A telephone replay of the call will be available one hour after the call through 11:00PM (ET), Thursday, April 19, 2012 by dialing 888-286-8010 within North America or 617-801-6888 from international locations and entering passcode 87878793.
About Harry Winston Diamond Corporation
Harry Winston Diamond Corporation is a diamond enterprise with premium assets in the mining and retail segments of the diamond industry. Harry Winston supplies rough diamonds to the global market from its 40 percent ownership interest in the Diavik Diamond Mine. The Company's luxury brand segment is a premier diamond jeweler and luxury timepiece retailer with salons in key locations, including New York, Paris, London, Beijing, Shanghai, Hong Kong, Singapore, Tokyo and Beverly Hills.
The Company focuses on the two most profitable segments of the diamond industry, mining and retail, in which its expertise creates shareholder value. This unique business model provides key competitive advantages; rough diamond sales and polished diamond purchases provide market intelligence that enhances the Company's overall performance.
For more information, please visit www.harrywinston.com or for investor information, visit http://investor.harrywinston.com.
Highlights
(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
FOURTH QUARTER RESULTS
Consolidated sales were $216.0 million for the fourth quarter compared to $215.4 million for the comparable quarter of the prior year, resulting in a 17% increase in gross margin to $86.2 million and an operating profit of $30.7 million, compared to an operating profit of $21.2 million in the comparable quarter of the prior year. Consolidated EBITDA was $58.2 million compared to $45.9 million in the comparable quarter of the prior year.
The mining segment recorded sales of $102.2 million, a 24% increase from $82.7 million in the comparable quarter of the prior year. The increase in sales resulted from a 14% increase in volume of carats sold and a 9% increase in achieved rough diamond prices. The mining segment recorded an operating profit of $27.4 million compared to an operating profit of $17.9 million in the comparable quarter of the prior year. EBITDA for the mining segment was $51.7 million compared to $38.5 million in the comparable quarter of the prior year.
The luxury brand segment recorded sales of $113.8 million, a decrease of 14% from sales of $132.7 million in the comparable quarter of the prior year (a decrease of 18% at constant exchange rates). Operating profit was $6.8 million for the quarter compared to $5.3 million in the comparable quarter of the prior year. EBITDA for the luxury brand segment was $9.9 million compared to $9.0 million in the comparable quarter of the prior year.
The Company recorded a consolidated net profit attributable to shareholders of $16.6 million or $0.20 per share for the quarter, compared to a net profit attributable to shareholders of $13.7 million or $0.16 per share in the fourth quarter of the prior year.
ANNUAL RESULTS
Consolidated sales were $702.0 million for the year compared to $624.0 million for the prior year, resulting in a 6% increase in gross margin to $250.1 million and an operating profit of $56.5 million, compared to an operating profit of $68.3 million in the prior year. Consolidated EBITDA was $148.2 million compared to $145.4 million in the prior year.
The mining segment recorded sales of $290.1 million, a 4% increase from $279.2 million in the prior year. The increase in sales resulted from a 29% increase in the Company's achieved rough diamond price per carat. This was partially offset by a 19% decrease in volume of carats sold as the Company elected to hold inventory. The mining segment recorded an operating profit of $48.7 million compared to an operating profit of $62.3 million in the prior year. Excluding the $13.0 million non-cash charge for de-recognition of certain paste production assets in the mining segment incurred in the third quarter of fiscal 2012, operating profit would have been $61.7 million. EBITDA for the mining segment was $127.5 million compared to $125.7 million in the prior year.
The luxury brand segment recorded sales of $411.9 million, an increase of 19% from sales of $344.8 million in the prior year (an increase of 12% at constant exchange rates). Operating profit was $19.4 million for the year compared to $14.9 million in the prior year. EBITDA for the luxury brand segment was $31.8 million compared to $27.2 million in the prior year.
The Company recorded a consolidated net profit attributable to shareholders of $25.5 million or $0.30 per share for the year, compared to a net profit attributable to shareholders of $41.5 million or $0.52 per share in the prior year. Excluding the $8.4 million after-tax charge for de-recognition of certain paste production assets in the mining segment incurred in the third quarter of fiscal 2012, the Company would have recorded a net profit attributable to shareholders of $33.8 million or $0.40 per share for the period.
Management's Discussion and Analysis
PREPARED AS OF APRIL 4, 2012 (ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
The following is management's discussion and analysis ('MD&A') of the results of operations for Harry Winston Diamond Corporation ('Harry Winston Diamond Corporation', or the 'Company') for the twelve months ended January 31, 2012, and its financial position as at January 31, 2012. This MD&A is based on the Company's consolidated financial statements prepared in accordance with International Financial Reporting Standards ('IFRS') and should be read in conjunction with the consolidated financial statements and notes. Unless otherwise specified, all financial information is presented in United States dollars. Unless otherwise indicated, all references to 'year' refer to the fiscal year ended January 31. Unless otherwise indicated, references to 'international' for the luxury brand segment refer to Europe and Asia.
Certain comparative figures have been reclassified to conform to the current year's presentation.
Certain information included in this MD&A may constitute forward-looking information within the meaning of Canadian and United States securities laws. In some cases, forward-looking information can be identified by the use of terms such as 'may', 'will', 'should', 'expect', 'plan', 'anticipate', 'foresee', 'appears', 'believe', 'intend', 'estimate', 'predict', 'potential', 'continue', 'objective', 'modeled' or other similar expressions concerning matters that are not historical facts. Forward-looking information may relate to management's future outlook and anticipated events or results, and may include statements or information regarding plans, timelines and targets for construction, mining, development, production and exploration activities at the Diavik Diamond Mine, future mining and processing at the Diavik Diamond Mine, projected capital expenditure requirements and the funding thereof, liquidity and working capital requirements and sources, estimated reserves and resources at, and production from, the Diavik Diamond Mine, the number and timing of expected rough diamond sales, the demand for rough diamonds, expected diamond prices and expectations concerning the diamond industry and the demand for luxury goods, expected cost of sales and gross margin trends in the mining segment, targets for compound annual growth rates of sales and operating income in the luxury brand segment, plans for expansion of the luxury brand retail salon network, and expected sales trends and market conditions in the luxury brand segment. Actual results may vary from the forward-looking information. See 'Risks and Uncertainties' on page 20 for material risk factors that could cause actual results to differ materially from the forward-looking information.
Forward-looking information is based on certain factors and assumptions regarding, among other things, mining, production, construction and exploration activities at the Diavik Diamond Mine, world and US economic conditions, and the worldwide demand for luxury goods. Specifically, in making statements regarding expected diamond prices and expectations concerning the diamond industry and expected sales trends and market conditions in the luxury brand segment, the Company has made assumptions regarding, among other things, the state of world and US economic conditions, worldwide diamond production levels, and demand for luxury goods. While the Company considers these assumptions to be reasonable based on the information currently available to it, they may prove to be incorrect. See 'Risks and Uncertainties' on page 20.
Forward-looking information is subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from what we currently expect. These factors include, among other things, the uncertain nature of mining activities, including risks associated with underground construction and mining operations, risks associated with joint venture operations, including risks associated with the inability to control the timing and scope of future capital expenditures, risks associated with the remote location of and harsh climate at the Diavik Diamond Mine site, risks resulting from the Eurozone financial crisis, risks associated with regulatory requirements, fluctuations in diamond prices and changes in US and world economic conditions, the risk of fluctuations in the Canadian/US dollar exchange rate, cash flow and liquidity risks, the risks relating to the Company's expansion strategy and of competition in the luxury jewelry business as well as changes in demand for high-end luxury goods. Please see page 20 of this Annual Report, as well as the Company's current Annual Information Form, available at www.sedar.com, for a discussion of these and other risks and uncertainties involved in the Company's operations.
Readers are cautioned not to place undue importance on forward-looking information, which speaks only as of the date of this MD&A, and should not rely upon this information as of any other date. Due to assumptions, risks and uncertainties, including the assumptions, risks and uncertainties identified above and elsewhere in this MD&A, actual events may differ materially from current expectations. The Company uses forward-looking statements because it believes such statements provide useful information with respect to the currently expected future operations and financial performance of the Company, and cautions readers that the information may not be appropriate for other purposes. While the Company may elect to, it is under no obligation and does not undertake to update or revise any forward-looking information, whether as a result of new information, future events or otherwise at any particular time, except as required by law. Additional information concerning factors that may cause actual results to materially differ from those in such forward-looking statements is contained in the Company's filings with Canadian and United States securities regulatory authorities and can be found at www.sedar.com and www.sec.gov, respectively.
Summary Discussion
Harry Winston Diamond Corporation is a diamond enterprise with premium assets in the mining and retailing segments of the diamond industry. The Company supplies rough diamonds to the global market from its 40% ownership interest in the Diavik Diamond Mine, located in Canada's Northwest Territories. The Company's luxury brand segment is a premier diamond jeweler and luxury timepiece retailer with salons in key locations including New York, Paris, London, Beijing, Shanghai, Tokyo, Hong Kong and Beverly Hills.
The Company's mining asset is an ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the 'Joint Venture') is an unincorporated joint arrangement between Diavik Diamond Mines Inc. ('DDMI') (60%) and 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
In parallel with the 2011 global economic environment, rough diamond prices rose strongly in the first half of the fiscal year but partially weakened in the second half, primarily due to the ongoing European sovereign debt crisis. Additionally, a substantial increase in rough diamond supply from Zimbabwe market resulted in a build-up of rough diamond inventories, which exerted downward pressure on polished diamond prices during the third quarter. However, by year end resilient retail demand for diamond jewelry returned greater stability to the market and fiscal 2012 closed with prices significantly higher than at the start of the fiscal year.
The medium-term diamond supply demand imbalance looks ever more positive. In small high-quality diamonds that are primarily used in high- end watches, that supply demand imbalance is already noticeable, with prices of some categories more than doubling in the first nine months of last year and only coming off slightly when the overall market weakened towards the end of 2011.
The Luxury Jewelry and Timepiece Market
The luxury jewelry and timepiece market continued to perform very well during the year. Increased consumer demand for luxury products was supported by new, young wealthy consumers from emerging market economies. These consumers focus on purchasing unique, high-quality luxury products from global brands. Strong increases in tourism from China and other emerging markets in Asia, Latin America and Eastern Europe continued to fuel the growth in demand for luxury products in the US and European markets as well as in their local markets. The economic recovery in the US has strengthened, providing additional demand for luxury goods. Global brands are investing in expanding distribution networks to meet the increasing demand for luxury products.
Consolidated Financial Results
The following is a summary of the Company's consolidated quarterly results for the eight quarters ended January 31, 2012 following the basis of presentation utilized in its IFRS and Canadian generally accepted accounting principles ('GAAP') financial statements:
(expressed in thousands of United States dollars except per share amounts and where otherwise noted) (quarterly results are unaudited)
CDN
IFRS GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Sales $ 216,017 $ 119,716 $ 222,378 $ 143,932 $ 215,358 $ 140,877 $ 153,728 $ 114,000 $ 702,043 $ 623,963 $ 412,901
Cost of sales 129,807 75,524 150,177 96,452 141,391 84,765 85,798 75,711 451,960 387,665 291,722
Gross margin 86,210 44,192 72,201 47,480 73,967 56,112 67,930 38,289 250,083 236,298 121,179
Gross margin
(%) 39.9% 36.9% 32.5% 33.0% 34.3% 39.8% 44.2% 33.6% 35.6% 37.9% 29.3%
Selling,
general and
administrative
expenses 55,500 46,155 49,101 42,795 52,722 41,282 37,998 35,948 193,552 167,950 143,150
Operating
profit (loss) 30,710 (1,963) 23,100 4,685 21,245 14,830 29,932 2,341 56,531 68,348 (21,971)
Finance
expenses (3,481) (4,040) (5,183) (3,983) (3,727) (3,835) (2,985) (2,880) (16,687) (13,427) (11,541)
Exploration
costs (177) (600) (781) (212) (351) (212) (76) (27) (1,770) (666) -
Finance and
other income 81 164 83 258 278 69 154 168 586 669 592
Insurance
settlement - - - - - - - - - - 3.350
Dilution loss - - - - - - - - - - (34,761)
Foreign
exchange gain
(loss) 458 436 288 (177) 1,392 135 1,043 (2,213) 1,005 357 (31,493)
Profit (loss)
before income
taxes 27,591 (6,003) 17,507 571 18,837 10,987 28,068 (2,611) 39,665 55,281 (95,824)
Income tax
expense
(recovery) 11,001 (1,272) 7,519 (3,027) 5,137 (2,410) 10,877 (5,524) 14,222 8,080 (18,803)
Net profit $
(loss) $ 16,590 $ (4,731) $ 9,988 $ 3,598 13,700 $ 13,397 $ 17,191 $ 2,913 $ 25,443 $ 47,201 $ (77,021)
Attributable to $
shareholders $ 16,602 $ (4,728) $ 9,986 $ 3,596 13,693 $ 12,657 $ 13,043 $ 2,137 $ 25,454 $ 41,530 $ (73,176)
Attributable to
non-controlling
interest (12) (3) 2 2 7 740 4,148 776 (11) 5,671 (3,845)
Basic earnings $
(loss) per
share $ 0.20 $ (0.06) $ 0.12 $ 0.04 0.16 $ 0.15 $ 0.17 $ 0.03 $ 0.30 $ 0.52 $ (0.99)
Diluted $
earnings (loss)
per share $ 0.19 $ (0.06) $ 0.12 $ 0.04 0.16 $ 0.15 $ 0.17 $ 0.03 $ 0.30 $ 0.51 $ (0.99)
Cash dividends $
declared per
share $ 0.00 $ 0.00 $ 0.00 $ 0.00 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Total assets $
(i) $ 1,631 $ 1,651 $ 1,665 $ 1,666 1,604 $ 1,584 $ 1,596 $ 1,522 $ 1,631 $ 1,604 $ 1,495
Total long-term $
liabilities (i) $ 670 $ 654 $ 625 $ 605 603 $ 596 $ 539 $ 457 $ 670 $ 603 $ 477
Operating $
profit (loss) $ 30,710 $ (1,963) $ 23,100 $ 4,685 21,245 $ 14,830 $ 29,932 $ 2,341 $ 56,531 $ 68,348 $ (21,971)
Depreciation
and
amortization
(ii) 27,512 23,121 20,716 20,291 24,635 18,657 19,515 14,200 91,639 77,007 64,112
EBITDA (iii) $ 58,222 $ 21,158 $ 43,816 $ 24,976 $ 45,880 $ 33,487 $ 49,447 $ 16,541 $ 148,170 $ 145,355 $ 42,141
(i) Total assets and total long-term liabilities are expressed in
millions of United States dollars.
(ii) Depreciation and amortization included in cost of sales and
selling, general and administrative expenses.
(iii) Earnings before interest, taxes, depreciation and amortization
('EBITDA'). See 'Non-GAAP Measure' on page 18.
The comparability of quarter-over-quarter results is impacted by
seasonality for both the mining and luxury brand segments. Harry
Winston Diamond Corporation expects that the quarterly results
for its mining segment will continue to fluctuate depending on
the seasonality of production at the Diavik Diamond Mine, the
number of sales events conducted during the quarter, and the
volume, size and quality distribution of rough diamonds delivered
from the Diavik Diamond Mine and sold by the Company in each
quarter. The quarterly results for the luxury brand segment are
also seasonal, with generally higher sales during the fourth
quarter due to the holiday season. See 'Segmented Analysis' on
page 10 for additional information.
Three Months Ended January 31, 2012 Compared to Three Months Ended January 31, 2011
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded a fourth quarter consolidated net profit attributable to shareholders of $16.6 million or $0.20 per share compared to a net profit attributable to shareholders of $13.7 million or $0.16 per share in the fourth quarter of the prior year.
CONSOLIDATED SALES
Sales for the fourth quarter totalled $216.0 million, consisting of rough diamond sales of $102.2 million and luxury brand segment sales of $113.8 million. This compares to sales of $215.4 million in the comparable quarter of the prior year (rough diamond sales of $82.7 million and luxury brand segment sales of $132.7 million). The Company now reports sales based on the selling location. See 'Segmented Analysis' on page 10 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's fourth quarter cost of sales was $129.8 million, for a gross margin of 39.9% compared to a cost of sales of $141.4 million and a gross margin of 34.3% for the comparable quarter of the prior year. The Company's cost of sales includes costs associated with mining, rough diamond sorting and luxury brand sales activities. See 'Segmented Analysis' on page 10 for additional information.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of selling, general and administrative ('SG&A') expenses include expenses for salaries and benefits, advertising and marketing, rent and building related costs. The Company incurred SG&A expenses of $55.5 million for the fourth quarter compared to $52.7 million in the comparable quarter of the prior year.
Included in SG&A expenses for the fourth quarter was $2.1 million for the mining segment compared to $3.0 million for the comparable quarter of the prior year, $49.9 million for the luxury brand segment compared to $47.9 million for the comparable quarter of the prior year, and $3.5 million for the corporate segment compared to $1.8 million for the comparable quarter of the prior year. The corporate segment captures costs not specifically related to operations of the mining or luxury brand segments. See 'Segmented Analysis' on page 10 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $11.0 million during the fourth quarter, compared to a net income tax expense of $5.1 million in the comparable quarter of the prior year. The Company's combined Canadian federal and provincial statutory tax rate for the quarter is 27.9%. There are a number of items that can significantly impact the Company's effective tax rate, including foreign currency exchange rate fluctuations, the Northwest Territories mining royalty, earnings subject to tax different than the statutory rate such as earnings in foreign jurisdictions, and changes in our view of whether deferred tax assets are probable of being realized. As a result, the Company's recorded tax provision can be significantly different than the expected tax provision calculated based on the statutory tax rate.
The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations. The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the fourth quarter, the Canadian dollar weakened against the US dollar. As a result, the Company recorded an unrealized foreign exchange gain of $1.2 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange loss of $3.5 million in the comparable quarter of the prior year. The unrealized foreign exchange gain is recorded as part of the Company's deferred income tax expense, and is not taxable for Canadian income tax purposes. During the fourth quarter, the Company also recognized a deferred income tax expense of $2.8 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate on translation of foreign currency non-monetary items. This compares to a deferred income tax recovery of $3.0 million recognized in the comparable quarter of the prior year. The recorded tax provision during the fourth quarter also included a net income tax recovery of $0.6 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollars. This compares to a net income tax recovery of $1.6 million recognized in the comparable period of the prior year.
The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future cash taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2032.
Due to the number of factors that can potentially impact the effective tax rate and the sensitivity of the tax provision to these factors, as discussed above, it is expected that the Company's effective tax rate will fluctuate in future periods.
CONSOLIDATED FINANCE EXPENSES
Finance expenses of $3.5 million were incurred during the fourth quarter compared to $3.7 million during the comparable quarter of the prior year.
CONSOLIDATED EXPLORATION COSTS
Exploration costs of $0.2 million were incurred during the fourth quarter compared to $0.4 million in the comparable quarter of the prior year.
CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.1 million was recorded during the quarter compared to $0.3 million in the comparable quarter of the prior year.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of $0.5 million was recognized during the quarter compared to a net foreign exchange gain of $1.4 million in the comparable quarter of the prior year. The Company does not currently have any significant foreign exchange derivative instruments outstanding.
Twelve Months Ended January 31, 2012 Compared to Twelve Months Ended January 31, 2011
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded consolidated net profit attributable to shareholders of $25.5 million or $0.30 per share for the twelve months ended January 31, 2012, compared to a net profit attributable to shareholders of $41.5 million or $0.52 per share in the comparable period of the prior year. Excluding the $8.4 million after-tax charge for de-recognition of certain paste production assets in the mining segment incurred in the third quarter of fiscal 2012, the Company would have recorded a net profit attributable to shareholders of $33.8 million or $0.40 per share for the period.
CONSOLIDATED SALES
Sales for the twelve months ended January 31, 2012, totalled $702.0 million, consisting of rough diamond sales of $290.1 million and luxury brand segment sales of $411.9 million. This compares to sales of $624.0 million in the comparable period of the prior year (rough diamond sales of $279.2 million and luxury brand segment sales of $344.8 million). The Company now reports sales based on the selling location. See 'Segmented Analysis' on page 10 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company's cost of sales for the twelve months ended January 31, 2012, was $452.0 million, for a gross margin of 35.6% compared to a cost of sales of $387.7 million and a gross margin of 37.9% in the comparable period of the prior year. The Company's cost of sales includes costs associated with mining, rough diamond sorting and luxury brand sales activities. See 'Segmented Analysis' on page 10 for additional information.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of SG&A expenses include expenses for salaries and benefits, advertising and marketing, rent and building related costs. The Company incurred SG&A expenses of $193.6 million for the twelve months ended January 31, 2012, compared to $168.0 million in the comparable period of the prior year.
Included in SG&A expenses for the twelve months ended January 31, 2012, was $13.5 million for the mining segment compared to $11.5 million for the comparable period of the prior year, $168.6 million for the luxury brand segment compared to $147.9 million for the comparable period of the prior year, and $11.5 million for the corporate segment compared to $8.6 million for the comparable period of the prior year. The corporate segment captures costs not specifically related to operations of the mining or luxury brand segments. See 'Segmented Analysis' on page 10 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $14.2 million during the twelve months ended January 31, 2012, compared to a net income tax expense of $8.1 million in the comparable period of the prior year. The Company's combined Canadian federal and provincial statutory tax rate for the period is 27.9%. There are a number of items that can significantly impact the Company's effective tax rate, including foreign currency exchange rate fluctuations, the Northwest Territories mining royalty, earnings subject to tax different than the statutory rate, such as earnings in foreign jurisdictions and changes in our view of whether deferred tax assets are probable of being realized. As a result, the Company's recorded tax provision can be significantly different than the expected tax provision calculated based on the statutory tax rate.
The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations. The Company's functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the twelve months ended January 31, 2012, the Company recorded an unrealized foreign exchange loss of $0.5 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange loss of $12.5 million in the comparable period of the prior year. The unrealized foreign exchange loss is recorded as part of the Company's deferred income tax recovery, and is not deductible for Canadian income tax purposes. During the twelve months ended January 31, 2012, the Company also recognized a deferred income tax expense of $5.6 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate on translation of foreign currency non-monetary items. This compares to a deferred income tax recovery of $17.6 million recognized in the comparable period of the prior year. The recorded tax provision during the twelve months ended January 31, 2012 also included a net income tax recovery of $4.4 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollars. This compares to a net income tax recovery of $4.7 million recognized in the comparable period of the prior year.
The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future cash taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2032.
Due to the number of factors that can potentially impact the effective tax rate and the sensitivity of the tax provision to these factors, as discussed above, it is expected that the Company's effective tax rate will fluctuate in future periods.
CONSOLIDATED FINANCE EXPENSES
Finance expenses of $16.7 million were incurred during the twelve months ended January 31, 2012, compared to $13.4 million during the comparable period of the prior year. Finance expenses were impacted by increased debt levels in the mining segment related to the $60.0 million outstanding on the Standard Chartered Bank credit facility during the year and the $70.0 million promissory note payable to Kinross Gold Corporation ('Kinross') issued on August 25, 2010, which was repaid on August 25, 2011.
CONSOLIDATED EXPLORATION COSTS
Exploration costs of $1.8 million were incurred during the twelve months ended January 31, 2012, compared to $0.7 million in the the prior year.
CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.6 million was recorded during the twelve months ended January 31, 2012, compared to $0.7 million in the prior year.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of $1.0 million was recognized during the twelve months ended January 31, 2012, compared to a net foreign exchange gain of $0.4 million in the prior year. The Company does not currently have any significant foreign exchange derivative instruments outstanding.
Segmented Analysis
The operating segments of the Company include mining, luxury brand and corporate segments. The corporate segment captures costs not specifically related to operations of the mining or luxury brand segments.
Mining
The mining segment includes the production, sorting and sale of rough diamonds.
(expressed in thousands of United States dollars) (quarterly results are unaudited)
IFRS CDN
GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Sales
North $ 2,727 $ 8,835 $ 447 $ 3,009 $ 2,689 $ 2,560 $ 1,128 $ 4,040 $ 15,018 $ 10,418 $
America 7,310
Europe 78,846 21,993 80,131 50,752 75,715 50,353 81,462 40,146 231,722 247,677 148,364
Asia 20,659 5,411 9,030 8,274 4,291 7,795 4,237 4,736 43,374 21,059
32,211
Total sales 102,232 36,239 89,608 62,035 82,697 60,708 86,827 48,922 290,114 279,154 187,885
Cost of sales 72,783 34,112 67,613 53,443 61,822 45,039 54,408 44,143 227,951 205,412 174,651
Gross margin 29,449 2,127 21,995 8,592 20,875 15,669 32,419 4,779 62,163 73,742 13,234
Gross margin 28.8% 5.9% 24.5% 13.9% 25.2% 25.8% 37.3% 9.8% 21.4% 26.4% 7.0%
(%)
Selling,
general and
administrative
expenses 2,061 3,274 3,489 4,630 3,017 3,031 2,872 2,558 13,454 11,478 19,502
Operating $ 27,388 $ (1,147) $ 18,506 $ 3,962 $ 17,858 $ 12,638 $ 29,547 $ 2,221 $ 48,709 $ 62,264 $ (6,268)
profit (loss)
Depreciation
and
amortization
(i) 24,284 19,932 17,461 17,083 20,669 15,428 16,352 10,975 78,760 63,424 51,154
EBITDA (ii) $ 51,672 $ 18,785 $ 35,967 $ 21,045 $ 38,527 $ 28,066 $ 45,899 $ 13,196 $ 127,469 $ 125,688 $ 44,886
(i) Depreciation and amortization included in cost of sales and
selling, general and administrative expenses.
(ii) Earnings before interest, taxes, depreciation and amortization
('EBITDA'). See 'Non-GAAP Measure' on page 18.
Three Months Ended January 31, 2012 Compared to Three Months Ended January 31, 2011
MINING SALES
During the quarter, the Company sold 0.86 million carats for a total of $102.2 million for an average price per carat of $120 compared to 0.75 million carats for a total of $82.7 million for an average price per carat of $110 in the comparable quarter of the prior year. The increase in sales resulted from a 14% increase in volume of carats sold and a 9% increase in the Company's achieved rough diamond price per carat. The increase in the carats sold was primarily the result of the sale of a portion of the lower priced goods held back by the Company at October 31, 2011 due to an oversupply in the market.
On a quarterly basis, the Company expects that results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Diamond Mine, the number of sales events conducted during the quarter, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine and sold by the Company in each quarter.
MINING COST OF SALES AND GROSS MARGIN
The Company's fourth quarter cost of sales was $72.8 million, resulting in a gross margin of 28.8% compared to a cost of sales of $61.8 million and a gross margin of 25.2% in the comparable quarter of the prior year. Cost of sales included $24.3 million of depreciation and amortization compared to $20.7 million in the comparable quarter of the prior year. The mining gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices.
A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Diamond Mine. Cost of sales also includes sorting costs, which consist of the Company's cost of handling and sorting product in preparation for sales to third parties, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment decreased by $1.0 million from the comparable quarter of the prior year primarily due to a decrease in professional fees.
Twelve Months Ended January 31, 2012 Compared to Twelve Months Ended January 31, 2011
MINING SALES
During the twelve months ended January 31, 2012, the Company sold 2.1 million carats for a total of $290.1 million for an average price per carat of $137 compared to 2.6 million carats for a total of $279.2 million for an average price per carat of $106 in the prior year. The increase in sales resulted from a 29% increase in the Company's achieved rough diamond price per carat. This was partially offset by a 19% decrease in volume of carats sold as the Company elected to hold inventory.
The Company expects that results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Diamond Mine, the number of sales events conducted during the quarter, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine and sold by the Company in each quarter.
MINING COST OF SALES AND GROSS MARGIN
The Company's cost of sales for the twelve months ended January 31, 2012, was $228.0 million, resulting in a gross margin of 21.4% compared to a cost of sales of $205.4 million and a gross margin of 26.4% in the prior year. Cost of sales included $78.8 million of depreciation and amortization compared to $63.4 million in the prior year. Included in the cost of sales for the fiscal year was a non-cash $13.0 million charge ($8.4 million after-tax) related to the de-recognition of certain components of the backfill plant (the 'Paste Plant') associated with paste production at the Diavik Diamond Mine. The original mine plan envisioned the use of blasthole stoping and underhand cut and fill underground mining methods for the Diavik ore bodies using paste to preserve underground stability. It is now expected that the higher velocity and lower cost sub-level retreat mining method, which does not require paste, will be used for both the A-154 South and A-418 underground ore bodies. As a result, certain components of the Paste Plant necessary for the production of paste will no longer be required and accordingly were de-recognized during the third quarter. Excluding this charge, cost of sales would have been $215.0 million (gross margin of 25.9%), a 5% increase from the prior year. This increase was the result of higher volume of production during the fiscal year from the higher cost underground mine offset by a 19% decrease in volume of carats sold. The mining gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices.
A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Diamond Mine. Cost of sales also includes sorting costs, which consist of the Company's cost of handling and sorting product in preparation for sales to third parties, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment increased by $2.0 million from the prior year due to stock-based compensation and executive severance costs.
MINING SEGMENT OPERATIONAL UPDATE
Production for calendar year 2011 at the Diavik Diamond Mine was 6.7 million carats consisting of 5.4 million carats produced from 1.80 million tonnes of ore from the A-418 kimberlite pipe, 0.7 million carats produced from 0.36 million tonnes of ore from the A-154 North kimberlite pipe, and 0.4 million carats produced from 0.10 million tonnes of ore from the A-154 South kimberlite pipe. Also included in production for the calendar year was an estimated 0.2 million carats from reprocessed plant rejects ('RPR'). These RPR are not included in the Company's reserves and resource statement and are therefore incremental to production. Rough diamond production was 3% higher than the prior calendar year due primarily to an increase in ore processed.
Ore production for the fourth calendar quarter consisted of 0.1 million carats produced from 0.04 million tonnes of ore from the A-154 South kimberlite pipe, 0.2 million carats produced from 0.10 million tonnes of ore from the A-154 North kimberlite pipe and 1.2 million carats produced from 0.42 million tonnes of ore from the A-418 kimberlite pipe. Also included in production for the calendar quarter was an estimated 0.05 million carats from RPR. Average grade increased to 2.9 carats per tonne in the fourth calendar quarter from 2.8 carats per tonne in the comparable quarter of the prior year. The increase in average grade was the result of the production of RPR in the current calendar quarter.
HARRY WINSTON DIAMOND LIMITED PARTNERSHIP'S 40% SHARE OF DIAVIK DIAMOND MINE PRODUCTION
(reported on a
one-month lag)
Three months Three months Twelve months Twelve months
ended ended ended ended
December 31, December 31, December 31, December 31,
2011 2010 2011 2010
Diamonds 641 617 2,670 2,599
recovered (000s
carats)
Grade 2.88 2.77 2.99 3.15
(carats/tonne)
Mining Segment Outlook
PRODUCTION
A mine plan and budget for calendar 2012 has been approved by Rio Tinto plc, the operator of the Diavik Diamond Mine, and the Company. The plan for calendar 2012 foresees Diavik Diamond Mine production of approximately 8.3 million carats from the mining of 2.0 million tonnes of ore and processing of 2.2 million tonnes of ore. Open pit mining of approximately 1.0 million tonnes is expected to be exclusively from A-418. Underground mining of approximately 1.0 million tonnes is expected to be sourced equally from the A-154 South and A-154 North kimberlite pipes. Included in the estimated production for calendar 2012 is approximately 1.0 million carats from RPR and 0.1 million carats from the implementation of an improved recovery process for small diamonds. These RPR and small diamond recoveries are not included in the Company's reserves and resource statement and are therefore incremental to production.
Looking beyond calendar 2012, the objective is to fully utilize processing capacity with a combination of production from the underground portions of A-154 South, A-154 North and A-418 supplemented by the A-21 open pit. The A-21 pre-feasibility study currently being undertaken, assumes that the A-21 pipe will be mined with the open pit methods used for the other pipes. A dyke would be constructed similar to the two other pits but smaller in size. Detailed plans are still being refined and optimized although no underground mining is being planned. The capital expenditures are estimated to be in the region of $500 million (100% basis). The Company still expects that the A-21 pipe, if mined together with the other pipes, would have a positive net present value.
PRICING
The rough diamond market experienced a modest improvement in prices during the fourth quarter of fiscal 2012 from the market deterioration in the third quarter. Based on prices from the Company's last complete rough diamond sale in February 2012 and the current diamond recovery profile of the Diavik processing plant, the Company has modeled the approximate rough diamond price per carat for each of the Diavik ore types in the table that follows.
February 2012
average price per
carat
Ore type (in US dollars)
A-154 South $ 160
A-154 North 205
A-418 A Type Ore 145
A-418 B Type Ore 100
RPR 55
COST OF SALES AND CASH COST OF PRODUCTION
The Company expects cost of sales in fiscal 2013 to be approximately $330 million. Included in this amount is depreciation and amortization of approximately $110 million at an assumed average Canadian/US dollar exchange rate of $1.00. The increase over fiscal 2012 is due to a combination of an increase in the proportion of underground ore mined, which is more costly to produce, and the expected sale during fiscal 2013 of the remaining lower priced goods previously held back in inventory by the Company. At January 31, 2012, the Company had 0.8 million carats of rough diamond inventory available for sale with an estimated current market value of approximately $80 million. Of these, approximately 65% were goods held back by the Company at October 31, 2011 due to an oversupply in the market.
The Company's share of the cash cost of production at the Diavik Diamond Mine for calendar 2012 is expected to be $173 million at an assumed average Canadian/US dollar exchange rate of $1.00. This compares to cash cost of production of $168 million for calendar 2011 at an actual average Canadian/US dollar exchange rate of $1.00.
The Company's MD&A refers to cash cost of production, a non-GAAP performance measure, in order to provide investors with information about the measure used by management to monitor performance. This information is used to assess how well the Diavik Diamond Mine is performing compared to the mine plan and prior periods. Cash cost of production includes mine site operating costs such as mining, processing and administration, but is exclusive of amortization, capital, and exploration and development costs. Cash cost of production does not have any standardized meaning prescribed by IFRS and differs from measures determined in accordance with IFRS. This is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. This measure is not necessarily indicative of net profit or cash flow from operations as determined under IFRS. The following table provides a reconciliation of cash cost of production to the mining segment cost of sales disclosed in these financial statements for the fiscal year ended January 31, 2012.
(expressed in thousands of United States dollars) 2012
Diavik cash cost of production $ 167,787
Private royalty 5,535
Other cash costs 4,009
Total cash cost of production 177,331
Depreciation and amortization 88,302
Total cost of production 265,633
Adjusted for stock movements (37,682)
Total cost of sales $ 227,951
CAPITAL EXPENDITURES
During fiscal 2012 and the fourth quarter, HWDLP's 40% share of capital expenditures at the Diavik Diamond Mine was approximately $42.6 million and $12.2 million, respectively. During fiscal 2013, HWDLP's 40% share of the planned capital expenditures at the Diavik Diamond Mine is expected to be approximately $78 million at an assumed average Canadian/US dollar exchange rate of $1.00.
EXPLORATION
The Company has additionally staked 226,000 acres of mineral claims on the prospective geological trend to the southwest of the existing mine site and is starting a small but important basal till drilling program to assess the potential for new diamondiferous kimberlite pipes over the coming years. On September 6, 2011, the Company announced that Harry Winston Diamond Mines Ltd. and its wholly owned subsidiary, 6355137 Canada Inc., entered into an option agreement with North Arrow Minerals Inc. ('North Arrow') and Springbok Holdings Inc., ('Springbok') in regards to their Lac de Gras properties in the Northwest Territories. Under the terms of the agreement, the two properties collectively will form a 'Joint Venture Property'. In order for the option to vest, the Company is to carry out exploration on the Joint Venture Property, making expenditures of at least $5 million over a five-year period. Upon vesting, a joint venture will be formed, in which the Company will hold a 55% interest, and in which North Arrow and Springbok will equally share a 45% interest, in the entire Joint Venture Property.
Luxury Brand
The luxury brand segment includes sales from Harry Winston salons, which are located in prime markets around the world, including eight salons in the United States: New York, Beverly Hills, Bal Harbour, Honolulu, Las Vegas, Dallas, Chicago and Costa Mesa; five salons in Japan: Ginza, Roppongi Hills, Osaka, Omotesando and Nagoya; two salons in Europe: Paris and London; and five salons in Asia outside of Japan: Beijing, Shanghai, Taipei, Hong Kong and Singapore.
(expressed in thousands of United States
dollars)
(quarterly results are
unaudited)
CDN
IFRS GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Sales
North
America $ 41,537 $ 28,817 $ 27,183 $ 35,487 $ 46,489 $ 20,977 $ 19,456 $ 21,578 $ 133,024 $ 108,500 $ 72,764
Europe 31,204 19,561 26,098 17,446 15,701 27,155 20,327 15,441 94,309 78,624 52,339
Asia
(excluding
Japan) 17,272 13,133 59,056 14,354 50,817 16,671 10,858 14,158 103,815 92,504 45,601
Japan 23,772 21,966 20,433 14,610 19,654 15,366 16,260 13,901 80,781 65,181 54,312
Total sales 113,785 83,477 132,770 81,897 132,661 80,169 66,901 65,078 411,929 344,809 225,016
Cost of sales 57,024 41,378 82,513 42,958 79,518 39,675 31,339 31,517 223,873 182,049 117,071
Gross margin 56,761 42,099 50,257 38,939 53,143 40,494 35,562 33,561 188,056 162,760 107,945
Gross margin
(%) 49.9% 50.4% 37.9% 47.5% 40.1% 50.5% 53.2% 51.6% 45.7% 47.2% 48.0%
Selling,
general and
administrative
expenses 49,929 40,635 43,331 34,716 47,866 34,942 33,081 31,967 168,611 147,856 123,648
Operating
profit (loss) $ 6,832 $ 1,464 $ 6,926 $ 4,223 $ 5,277 $ 5,552 $ 2,481 $ 1,594 $ 19,445 $ 14,904 $ (15,703)
Depreciation
and
amortization
(i) 3,089 3,048 3,115 3,069 3,688 2,882 2,816 2,878 12,321 12,264 12,958
EBITDA (ii)
$ 9,921 $ 4,512 $ 10,041 $ 7,292 $ 8,965 $ 8,434 $ 5,297 $ 4,472 $ 31,766 $ 27,168 $ (2,745)
(i) Depreciation and amortization included in cost of sales and
selling, general and administrative expenses.
(ii) Earnings before interest, taxes, depreciation and amortization
('EBITDA'). See 'Non-GAAP Measure' on page 18.
Three Months Ended January 31, 2012 Compared to Three Months Ended January 31, 2011
LUXURY BRAND SALES
Sales for the fourth quarter were $113.8 million compared to $132.7 million for the comparable quarter of the prior year, a decrease of 14% (a decrease of 18% at constant exchange rates). North American sales decreased 11% to $41.5 million, European sales increased 99% to $31.2 million, sales in Asia (excluding Japan) decreased 66% to $17.3 million and sales in Japan increased 21% to $23.8 million. The fourth quarter of the prior year included a significant sale in Asia (excluding Japan) that was not repeated in the current fourth quarter. During the quarter there were $6.7 million of high-value transactions, which carry generally lower-than-average gross margins, compared with $48.0 million in the comparable period of the prior year.
LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the fourth quarter was $57.0 million compared to $79.5 million for the comparable quarter of the prior year. Gross margin for the quarter was $56.8 million or 49.9% compared to $53.1 million or 40.1% for the fourth quarter of the prior year. The improvement in gross margin was primarily due to product mix and several high-value transactions in the prior year totalling $48.0 million that generated lower-than-average gross margins.
LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 4% to $49.9 million from $47.9 million in the comparable quarter of the prior year. The increase was due primarily to higher advertising, marketing and selling expenses and increased rent and building related expenses. Fixed costs accounted for $1.9 million of the increase, while variable expenses linked to higher volume of sales accounted for $0.2 million of the increase. SG&A expenses included depreciation and amortization expense of $3.0 million compared to $3.6 million in the comparable quarter of the prior year.
Twelve Months Ended January 31, 2012 Compared to Twelve Months Ended January 31, 2011
LUXURY BRAND SALES
Sales for the twelve months ended January 31, 2012, were $411.9 million compared to $344.8 million for the prior year, an increase of 19% (12% at constant exchange rates). North American sales increased 23% to $133.0 million, European sales increased 20% to $94.3 million, sales in Asia (excluding Japan) increased 12% to $103.8 million and sales in Japan increased 24% to $80.8 million. During the period there were $67.5 million of high-value transactions, which carry generally lower-than-average gross margins, compared to $54.0 million in the prior year.
LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the twelve months ended January 31, 2012, was $223.9 million compared to $182.1 million for the prior year. Gross margin for the twelve months ended January 31, 2012, was $188.1 million or 45.7% compared to $162.8 million or 47.2% for the prior year. The decrease in gross margin resulted primarily from development costs related to the launch of two new watch collections during the year.
LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 14% to $168.6 million from $147.9 million in the prior year. The increase was due primarily to higher advertising, marketing and selling expenses, higher variable compensation expenses resulting from higher sales and increased rent and building related expenses. Fixed costs accounted for $16.9 million of the increase, while variable expenses linked to higher volume of sales accounted for $3.8 million of the increase. SG&A expenses included depreciation and amortization expense of $12.1 million compared to $11.9 million in the prior year.
LUXURY BRAND SEGMENT OPERATIONAL UPDATE
During the fiscal year ended January 31, 2012, the luxury brand segment generated sales of $411.9 million, an increase of 19% over the prior year at actual exchange rates and a 12% increase at constant exchange rates. The Company recorded high-value transactions of $67.5 million during the twelve-month period compared with $54.0 million in the prior year. The North American market generated sales of $133.0 million, an increase of 23% over the prior year. The long-term trend of growing wealth in Asia has resulted in increased mobility of luxury consumers, benefiting the North American market. In Japan, sales of $80.8 million increased by 24% at actual exchange rates and by 13% on a constant exchange rate basis over the prior year. Asia (excluding Japan) had sales of $103.8 million, representing an increase of 12% at actual exchange rates and 5% on a constant exchange rate basis over the prior year. In Europe, sales of $94.3 million were 20% higher at actual exchange rates and 8% higher on a constant exchange rate basis over the prior year.
Two new licensed Harry Winston salons were opened during the fiscal year: in the Emirates Towers and in the Dubai Mall, in Dubai, United Arab Emirates. During January 2012, a new Harry Winston directly operated salon was opened in Shanghai, China.
The luxury brand segment's distribution network consists of 20 directly operated salons, four licensed salons (in Manila, Philippines, Kiev, Ukraine and two in Dubai, United Arab Emirates) and 194 wholesale watch doors around the world.
Luxury Brand Segment Outlook
With the long-term trend of increasing global demand for luxury products, the Company is optimistic that fiscal 2013 will represent a strong opportunity to grow sales and profitability. The influx of new young wealthy consumers from emerging markets is expected to continue to drive demand for luxury products in the US and Europe as well as in local markets. Luxury brands with strong global distribution networks are well positioned to benefit from the increased mobility of wealthy consumers. The Company will continue to focus on expanding its distribution network, especially in emerging markets such as China, Russia and the Middle East, where consumer demand for luxury products is growing rapidly. The strength of the Harry Winston brand, the introduction of new jewelry and watch products, supported by innovative advertising campaigns and promotional events, will allow the Company to continue to build global brand awareness.
In fiscal 2013, a new directly operated flagship salon in Shanghai, China, is expected to be opened during the first quarter, and a second directly operated salon in London, United Kingdom, in mid-year. Also during the fiscal year, two new licensed salons are expected to be opened in Moscow, Russia, and Kuwait City, Kuwait. The Company also plans to expand by 30 wholesale watch doors to more than 220 doors by the end of fiscal 2013. A key component of the luxury brand segment's growth strategy is the expansion of its salon network and wholesale distribution network. The growth target is to expand to approximately 35 directly operated salons, 15 licensed salons and 300 wholesale doors by fiscal 2016. Management's long-term financial objectives to fiscal 2016 include compound annual revenue growth in the mid-teens, a gross margin target in the low 50% range, and an operating profit margin target in the low to mid-teens.
On May 19, 2011, the Company announced that Harry Winston Inc. had entered into a business arrangement with Diamond Asset Advisors AG ('DAA'), which is in the process of establishing a polished diamond investment fund (the 'Fund'). The Fund will be structured as a limited partnership with total funding of up to $250 million, offering institutional investors direct exposure to the wholesale market price of polished diamonds. Under the terms of the arrangement with the Fund, the Company's expert diamond team will source diamonds for the Fund that have the same high-quality characteristics that the luxury brand segment uses in its jewelry and watches, with a portion of the diamonds coming from the Company's existing inventory. The Fund will purchase the diamonds and then consign them to Harry Winston Inc., which will act as custodian. Harry Winston Inc. will use the consigned polished diamonds in the manufacturing of its jewelry and watches, paying the Fund when the jewelry or watch is sold. The price paid by the Fund to replace the sold polished diamonds will be used to determine the Fund's market value. This arrangement will increase the inventory available to Harry Winston Inc.'s expanding international salon network without additional demands on working capital. The Fund is expected to raise the first capital subscription of approximately $100 million from investors in fiscal 2013, with the remaining $150 million expected to be raised over the following year, subject to market conditions.
Corporate
The corporate segment captures costs not specifically related to operations of the mining or luxury brand segments.
(expressed in thousands of United States
dollars)
(quarterly results are unaudited)
IFRS CDN GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Sales $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -
Cost of sales - 34 51 51 51 51 51 51 136 204 -
Gross margin - (34) (51) (51) (51) (51) (51) (51) (136) (204) -
Gross margin
(%) -% -% -% -% -% -% -% -% -% -% -%
Selling,
general and
administrative
expenses 3,510 2,246 2,281 3,449 1,839 3,309 2,045 1,423 11,487 8,616 -
Operating
profit (loss) $ (3,510) (2,280) (2,332) (3,500) (1,890) (3,360) (2,096) (1,474) (11,623) (8,820) $ -
Depreciation
and
amortization
(i) 139 141 140 139 278 347 347 347 558 1,319 -
EBITDA (ii) $ (3,371) $ (2,139) $ (2,192) $ (3,361) $ (1,612) $ (3,013) $ (1,749) $ (1,127) $ (11,065) $ (7,501) $ -
(i) Depreciation and amortization included in cost of sales and
selling, general and administrative expenses.
(ii) Earnings before interest, taxes, depreciation and amortization
('EBITDA'). See 'Non-GAAP Measure' on page 18.
Three Months Ended January 31, 2012 Compared to Three Months Ended January 31, 2011
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the corporate segment increased by $1.7 million from the comparable quarter of the prior year primarily due to travel expenses and salaries and benefits related to additional corporate employees.
Twelve Months Ended January 31, 2012 Compared to Twelve Months Ended January 31, 2011
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the corporate segment increased by $2.9 million from the prior year primarily due to stock-based compensation, and travel expenses and salaries and benefits related to additional corporate employees.
Liquidity and Capital Resources
Working Capital
As at January 31, 2012, the Company had unrestricted cash and cash equivalents of $78.1 million compared to $108.7 million at January 31, 2011. The Company had cash on hand and balances with banks of $76.0 million and short-term investments of $2.1 million at January 31, 2012. During the year ended January 31, 2012, the Company reported cash from operations of $59.0 million compared to $72.8 million in the prior year. At January 31, 2012, the Company had 0.8 million carats of rough diamond inventory available for sale at an estimated current market value of approximately $80 million.
Working capital increased to $439.0 million at January 31, 2012, from $328.6 million at January 31, 2011. During the year, the Company increased accounts receivable by $4.3 million, increased inventory and supplies by $42.0 million, increased other current assets by $4.2 million, decreased trade and other payables by $31.2 million and increased employee benefit plans by $2.1 million.
The Company's liquidity requirements fluctuate from quarter to quarter depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, the seasonality of mine operating expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine and sold by the Company in each quarter, along with the seasonality of sales and salon expansion in the luxury brand segment. The Company's principal working capital needs include investments in inventory, other current assets, trade and other payables, and income 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 at least for the next twelve months.
Financing Activities
The mining segment maintains a senior secured revolving credit facility with Standard Chartered Bank that was increased from $100.0 million to $125.0 million on February 28, 2011. At January 31, 2012, $50.0 million was outstanding compared to $50.0 million at January 31, 2011.
During the year, the Company paid the $70.0 million promissory note plus accrued interest owing to Kinross from cash on hand. The promissory note was issued to Kinross on August 25, 2010, as part of the consideration for reacquiring Kinross's 9% indirect interest in the Diavik Joint Venture.
As at January 31, 2012, $nil and $4.3 million was outstanding under the Company's revolving financing facility relating to its Belgian subsidiary, Harry Winston Diamond International N.V., and its Indian subsidiary, Harry Winston Diamond (India) Private Limited, respectively, compared to $nil at January 31, 2011.
During the year ended January 31, 2012, the luxury brand subsidiary, Harry Winston Inc., increased the amount outstanding on its secured five-year revolving credit facility to $200.5 million from $165.0 million at January 31, 2011.
Investing Activities
During the fiscal year, the Company purchased property, plant and equipment of $64.9 million, of which $45.2 million was purchased for the mining segment and $19.7 million for the luxury brand segment.
Contractual Obligations
The Company has contractual payment obligations with respect to interest-bearing loans and borrowings and, through its participation in the 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 2012 to 2016, 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 Less than Year Year After
OBLIGATIONS
(expressed in Total 1 year 2-3 4-5 5 years
thousands of United
States dollars)
Interest-bearing $ 321,751 $ 39,578 $ 260,954 $ 4,852 $ 16,367
loans and borrowings
(a)(b)
Environmental and 93,330 82,676 4,844 - 5,810
participation
agreements
incremental
commitments (c)
Operating lease 220,352 22,439 39,288 35,997 122,628
obligations (d)
Total contractual $ 635,433 $ 144,693 $ 305,086 $ 40,849 $ 144,805
obligations
(a) Interest-bearing loans and borrowings presented in the foregoing table include current and long-term portions. The mining segment maintains a senior secured revolving credit facility with Standard Chartered Bank for $125.0 million. The facility has an initial maturity date of June 24, 2013, with two one-year extensions at the Company's option. There are no scheduled repayments required before maturity. At January 31, 2012, $50.0 million was outstanding.
The Company has available a $45.0 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 January 31, 2012, $nil and $4.3 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 January 31, 2012, $200.5 million had been drawn against this secured credit facility.
Also included in long-term debt of Harry Winston Inc. is a 25-year loan agreement for CHF 17.5 million ($18.9 million) used to finance the construction of the Company's watch factory in Geneva, Switzerland. The loan agreement is comprised of a CHF 3.5 million ($3.8 million) loan and a CHF 14.0 million ($15.1 million) loan. The CHF 3.5 million loan bears interest at a rate of 3.15% and matures on April 22, 2013. The CHF 14.0 million loan bears interest at a rate of 3.55% and matures on January 31, 2033. At January 31, 2012, $16.6 million was outstanding. The bank has a secured interest in the factory building.
Harry Winston Japan, K.K., maintains unsecured credit agreements with three banks, amounting to ¥1,250 million ($16.1 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. At January 31, 2012, $23.6 million was outstanding.
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 January 31, 2012, $6.3 million was outstanding on the mortgage.
(b) Interest on loans and borrowings is calculated at various fixed and floating rates. Projected interest payments on the current debt outstanding were based on interest rates in effect at January 31, 2012, and have been included under interest-bearing loans and borrowings in the table above. Interest payments for the next twelve months are approximated to be $10.3 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 January 31, 2012, was $81.1 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 and office premises.
Non-GAAP Measure
In addition to discussing earnings measures in accordance with IFRS, the MD&A provides the following non-GAAP measure, which is also used by management to monitor and evaluate the performance of the Company and its business segments.
The term EBITDA (earnings before interest, taxes, depreciation and amortization) does not have a standardized meaning according to IFRS and therefore may not be comparable to similar measures presented by other issuers. The Company defines EBITDA as sales minus cost of sales and selling, general and administrative expenses, meaning it represents operating profit before depreciation and amortization.
EBITDA is a measure commonly reported and widely used by investors and analysts as an indicator of the Company's operating performance and ability to incur and service debt and as a valuation metric. EBITDA margin is defined as the ratio obtained by dividing EBITDA by sales.
CONSOLIDATED
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
IFRS CDN GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Operating $ 30,710 $ (1,963) $ 23,100 $ 4,685 $ 21,245 $ 14,830 $ 29,932 $ 2,341 $ 56,531 $ 68,348 $ (21,971)
profit
(loss)
Depreciation
and
amortization 27,512 23,121 20,716 20,291 24,635 18,657 19,515 14,200 91,639 77,007 64,112
EBITDA $ 58,222 $ 21,158 $ 43,816 $ 24,976 $ 45,880 $ 33,487 $ 49,447 $ 16,541 $ 148,170 $ 145,355 $ 42,141
MINING SEGMENT
(expressed in thousands of United States dollars)
(quarterly results are
unaudited)
IFRS CDN
GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Operating $ 27,388 $ (1,147) $ 18,506 $ 3,962 $ 17,858 $ 12,638 $ 29,547 $ 2,221 $ 48,709 $ 62,264 $ (6,268)
profit
(loss)
Depreciation 24,284 19,932 17,461 17,083 20,669 15,428 16,352 10,975 78,760 63,424 51,154
and
amortization
EBITDA $ 51,672 $ 18,785 $ 35,967 $ 21,045 $ 38,527 $ 28,066 $ 45,899 $ 13,196 $ 127,469 $ 125,688 $ 44,886
LUXURY BRAND SEGMENT
(expressed in thousands of United
States dollars)
(quarterly results are
unaudited)
IFRS CDN GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Operating $ 6,832 $ 1,464 $ 6,926 $ 4,223 $ 5,277 $ 5,552 $ 2,481 $ 1,594 $ 19,445 $ 14,904 $ (15,703)
profit
(loss)
Depreciation 3,089 3,048 3,115 3,069 3,688 2,882 2,816 2,878 12,321 12,264 12,958
and
amortization
EBITDA $ 9,921 $ 4,512 $ 10,041 $ 7,292 $ 8,965 $ 8,434 $ 5,297 $ 4,472 $ 31,766 $ 27,168 $ (2,745)
CORPORATE SEGMENT
(expressed in thousands of United
States dollars)
(quarterly results are
unaudited)
IFRS CDN
GAAP
2012 2012 2012 2012 2011 2011 2011 2011 2012 2011 2010
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Total Total
Operating $ (3,510) (2,280) (2,332) (3,500) (1,890) (3,360) (2,096) (1,474) (11,623) (8,820) $ -
profit
(loss)
Depreciation 139 141 140 139 278 347 347 347 558 1,319 -
and
amortization
EBITDA $ (3,371) $ (2,139) $ (2,192) $ (3,361) $ (1,612) $ (3,013) $ (1,749) $ (1,127) $ (11,065) $ (7,501) $ -
Risks and Uncertainties
Harry Winston Diamond Corporation is subject to a number of risks and uncertainties as a result of its operations. 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 crushed rock-fill strengths, and unexpected local ground conditions. Hazards, such as unusual or unexpected rock formations, rock bursts, pressures, collapses, flooding or other conditions, may be encountered during mining. Such risks could result in personal injury or fatality; damage to or destruction of mining properties, processing facilities or equipment; environmental damage; delays, suspensions or permanent reductions in mining production; monetary losses; and possible legal liability.
The Diavik Diamond Mine, because of its remote northern location and access only by winter road or by air, is subject to special climate and transportation risks. These risks include the inability to operate or to operate efficiently during periods of extreme cold, the unavailability of materials and equipment, and increased transportation costs due to the late opening and/or early closure of the winter road. Such factors can add to the cost of mine development, production and operation and/or impair production and mining activities, thereby affecting the Company's profitability.
Nature of Interest in DDMI
HWDLP holds an undivided 40% interest in the assets, liabilities and expenses of the Diavik Diamond Mine and the Diavik group of mineral claims. The Diavik Diamond Mine and the exploration and development of the Diavik group of mineral claims is a joint arrangement between DDMI (60%) and HWDLP (40%), and is subject to the risks normally associated with the conduct of joint ventures and similar joint arrangements. These risks include the inability to exert influence over strategic decisions made in respect of the Diavik Diamond Mine and the Diavik group of mineral claims. 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 terrorist attacks or similar activities creating disruptions in economic growth could result in decreased demand for luxury goods such as diamonds and jewelry, thereby negatively affecting the price of diamonds and jewelry. Similarly, a substantial increase in the worldwide level of diamond production or in diamonds available for sale through recommencement of suspended mining activity or the release of stocks held back during recent periods of low demand could also negatively affect the price of diamonds. In each case, such developments could have a material adverse effect on the Company's results of operations.
Cash Flow and Liquidity
The Company's liquidity requirements fluctuate from quarter to quarter and year to year depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, the seasonality of mine operating expenses, exploration expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine and sold by the Company in each quarter, along with the seasonality of sales and salon refurbishment and expansion in the luxury brand segment. The Company's principal working capital needs include investments in inventory, prepaid expenses and other current assets, and accounts payable and income taxes payable. There can be no assurance that the Company will be able to meet each or all of its liquidity requirements. A failure by the Company to meet its liquidity requirements could result in the Company failing to meet its planned development objectives, or in the Company being in default of a contractual obligation, each of which could have a material adverse effect on the Company's business prospects or financial condition.
Economic Environment
The Company's financial results are tied to the global economic conditions and their impact on levels of consumer confidence and consumer spending. The global markets have experienced the impact of a significant US and international economic downturn since the fall of 2008. This has restricted the Company's growth opportunities both domestically and internationally, and a return to a recession or weak recovery, due to recent disruptions in financial markets in the US, the Eurozone or elsewhere, the 2011 disaster in Japan and political upheavals in the Middle East, could cause the Company to experience revenue declines across both of its business segments due to deteriorated consumer confidence and spending, and a decrease in the availability of credit, which could have a material adverse effect on the Company's business prospects or financial condition. The credit facilities essential to the diamond polishing industry are largely underwritten by European banks that are currently under stress with the European sovereign debt issue. The withdrawal or reduction of such facilities could also have a material adverse effect on the Company's business prospects or financial condition. The Company monitors economic developments in the markets in which it operates and uses this information in its continuous strategic and operational planning in an effort to adjust its business in response to changing economic conditions.
Currency Risk
Currency fluctuations may affect the Company's financial performance. Diamonds are sold throughout the world based principally on the 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 property and the manufacturing of jewelry and watches are subject to various laws and regulations governing the protection of the environment, exploration, development, production, taxes, labour standards, occupational health, waste disposal, mine safety, manufacturing safety and other matters. New laws and regulations, amendments to existing laws and regulations, or more stringent implementation or changes in enforcement policies under existing laws and regulations could have a material adverse effect on the Company by increasing costs and/or causing a reduction in levels of production from the 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.
Mining and manufacturing are subject to potential risks and liabilities associated with pollution of the environment and the disposal of waste products occurring as a result of mining and manufacturing operations. To the extent that the Company's operations are subject to uninsured environmental liabilities, the payment of such liabilities could have a material adverse effect on the Company.
Climate Change
The Canadian government has established a number of policy measures in response to concerns relating to climate change. While the impact of these measures cannot be quantified at this time, the likely effect will be to increase costs for fossil fuels, electricity and transportation; restrict industrial emission levels; impose added costs for emissions in excess of permitted levels; and increase costs for monitoring and reporting. Compliance with these initiatives could have a material adverse effect on the Company's results of operations.
Resource and Reserve Estimates
The Company's figures for mineral resources and ore reserves on the Diavik group of mineral claims are estimates, and no assurance can be given that the anticipated carats will be recovered. The estimation of reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production and the timing of future expenditures, all of which are subject to numerous uncertainties and various interpretations. The Company expects that its estimates of reserves will change to reflect updated information as well as to reflect depletion due to production. Reserve estimates may be revised upward or downward based on the results of current and future drilling, testing or production levels, and on changes in mine design. In addition, market fluctuations in the price of diamonds or increases in the costs to recover diamonds from the Diavik Diamond Mine may render the mining of ore reserves uneconomical.
Mineral resources that are not mineral reserves do not have demonstrated economic viability. Due to the uncertainty that may attach to inferred mineral resources, there is no assurance that mineral resources at the Diavik property will be upgraded to proven and probable ore reserves.
Insurance
The Company's business is subject to a number of risks and hazards, including adverse environmental conditions, industrial accidents, labour disputes, unusual or unexpected geological conditions, risks relating to the physical security of diamonds and jewelry held as inventory or in transit, changes in the regulatory environment, and natural phenomena such as inclement weather conditions. Such occurrences could result in damage to the Diavik Diamond Mine, personal injury or death, environmental damage to the Diavik property, delays in mining, the closing of Harry Winston Inc.'s manufacturing facilities or salons, monetary losses and possible legal liability. Although insurance is maintained to protect against certain risks in connection with the Diavik Diamond Mine and the Company's operations, the insurance in place will not cover all potential risks. It may not be possible to maintain insurance to cover insurable risks at economically feasible premiums.
Fuel Costs
The Diavik Diamond Mine's expected fuel needs are purchased periodically during the year for storage, and 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 unexpected 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.
Expansion and Refurbishment of the Existing Salon Network
A key component of the Company's luxury brand strategy in recent years has been the expansion of its salon network. The Company currently expects to expand its retail salon network to a total of 35 salons and 300 wholesale doors worldwide by fiscal 2016. An additional objective of the Company in the luxury brand segment is to achieve a compound annual growth rate in sales in the mid-teens and an operating profit in the low to mid-teens, in each case by fiscal 2016. Although the Company considers these objectives to be reasonable, they are subject to a number of risks and uncertainties, and there can be no assurance that these objectives will be realized. This strategy requires the Company to make ongoing capital expenditures to build and open new salons, to refurbish existing salons from time to time, and to incur additional operating expenses in order to operate the new salons. To date, much of this expansion has been financed by Harry Winston Inc. through borrowings. The successful expansion of the Company's global salon network, and achieving an increase in sales and in operating profit, will depend on a variety of factors, including worldwide economic conditions, market demand for luxury goods, the strength of the Harry Winston brand and the availability of sufficient funding. There can be no assurance that the expansion of the salon network will continue or that the current expansion will prove successful in increasing annual sales or earnings from the luxury brand segment, and the increased debt levels resulting from this expansion could negatively impact the Company's liquidity and its results from operations in the absence of increased sales and earnings.
The Company has to date licensed four retail salons to operate under the Harry Winston name and currently expects to increase the number of licensed salons to 15 by fiscal 2016. There is no assurance that the Company will be able to find qualified third parties to enter into these licensing arrangements, or that the licensees will honour the terms of the agreements. The conduct of licensees may have a negative impact on the Company's distinctive brand name and reputation.
Competition in the Luxury Brand Segment
The Company is exposed to competition in the luxury brand market from other luxury goods, diamond, jewelry and watch retailers. The ability of Harry Winston Inc. to successfully compete with such luxury goods, diamond, jewelry and watch retailers is dependent upon a number of factors, including the ability to source high-end polished diamonds and protect and promote its distinctive brand name and reputation. If Harry Winston Inc. is unable to successfully compete in the luxury jewelry segment, the Company's results of operations will be adversely affected.
Cybersecurity
The Company and certain of its third-party vendors receive and store personal information in connection with human resources operations and other aspects of the business. Despite the Company's implementation of security measures, its IT systems are vulnerable to damages from computer viruses, natural disasters, unauthorized access, cyber attack and other similar disruptions. Any system failure, accident or security breach could result in disruptions to the Company's operations. A material network breach in the security of the IT systems could include the theft of intellectual property or trade secrets. To the extent that any disruption or security breach results in a loss or damage to the Company's data, or in inappropriate disclosure of confidential information, financial data, or credit card cardholder data, it could cause significant damage to the Company's reputation, affect relationships with our customers, lead to claims against the Company and ultimately harm its business. In addition, the Company may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future. Although the Company believes that it has robust information security procedures and other safeguards in place, as cyber threats continue to evolve, the Company may be required to expend additional resources to continue to enhance its information security measures and/or to investigate and remediate any information security vulnerabilities.
Disclosure Controls and Procedures
The Company has designed a system of disclosure controls and procedures to provide reasonable assurance that material information relating to Harry Winston Diamond Corporation, including its consolidated subsidiaries, is made known to the management of the Company by others within those entities, particularly during the period in which the Company's annual filings are being prepared. In designing and evaluating the disclosure controls and procedures, the management of the Company recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The management of Harry Winston Diamond Corporation was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The result of the inherent limitations in all control systems means no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
The management of Harry Winston Diamond Corporation has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by the Annual Report. Based on that evaluation, management has concluded that these disclosure controls and procedures, as defined in Canada by Multilateral Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings, and in the United States by Rule 13a-15(e) under the Securities Exchange Act of 1934 (the 'Exchange Act'), are effective as of January 31, 2012, to ensure that information required to be disclosed in reports that the Company will file or submit under Canadian securities legislation and the Exchange Act is recorded, processed, summarized and reported within the time periods specified in those rules and forms.
Critical Accounting Estimates
Management is often required to make judgments, assumptions and estimates in the application of IFRS that have a significant impact on the financial results of the Company. Certain policies are more significant than others and are, therefore, considered critical accounting policies. Accounting policies are considered critical if they rely on a substantial amount of judgment (use of estimates) in their application, or if they result from a choice between accounting alternatives and that choice has a material impact on the Company's financial performance or financial position. The following discussion outlines the accounting policies and practices that are critical to determining Harry Winston Diamond Corporation's financial results.
Use of Estimates
The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of earnings, revenues and expenses during the reporting year. Significant areas requiring the use of management estimates relate to the determination of impairment of property, plant and equipment, intangible assets, goodwill and deferred mineral property costs, estimation of future site restoration costs and deferred income taxes. Financial results as determined by actual events could differ from those estimated.
The most significant estimates relate to the valuation of deferred mineral property costs and future site restoration costs. Management makes significant estimates related to the measurement of reclamation obligations and the timing of the related cash flows. Such timing and measurement uncertainty could have a material effect on the reported results of operations and the financial position of the Company.
Actual results could differ materially from those estimates in the near term.
Deferred Mineral Property Costs and Mineral Reserves
Harry Winston Diamond Corporation capitalizes all direct development and pre-production costs relating to mineral properties and amortizes such costs on a unit-of-production basis upon commencement of commercial production relating to the underlying property. Deferred mineral property costs are amortized based on estimated proven and probable reserves at the property.
On an ongoing basis, the Company evaluates deferred costs relating to each property to ensure that the estimated recoverable amount exceeds the carrying value. Based on the Diavik Diamond Mine's latest projected open pit and underground life from the mine plan and diamond prices from the Diavik Project feasibility study, there is no requirement to write down deferred mineral property costs.
The estimation of reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production and the timing of future expenditures, all of which are subject to numerous uncertainties and various interpretations. The Company expects that its estimates of reserves will change to reflect updated information. Reserve estimates can be revised upward or downward based on the results of future drilling, testing or production levels, and diamond prices. Changes in reserve estimates can lead to an impairment of deferred mineral property costs.
Future Site Restoration Costs
The Company has obligations for future site restoration costs. The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. As at January 31, 2012, estimates of all legal obligations at the Joint Venture level have been included in the consolidated financial statements of the Company. Processes to track and monitor these obligations are carried out at the Joint Venture level.
Intangible Assets
Certain of the Company's intangible assets are recorded at fair value upon acquisition and have an indefinite useful life. The Company assesses impairment of such intangible assets by determining whether the carrying value exceeds the fair value. If the fair value is determined to be less than the carrying value, the excess of the carrying value over the fair value is charged to earnings in the year in which such impairment is determined by management. These approaches involve significant management judgment and, as a result, are subject to change.
Changes in Accounting Policies
The International Accounting Standards Board ('IASB') has issued a new standard, IFRS 9, 'Financial Instruments' ('IFRS 9'), which will ultimately replace IAS 39, 'Financial Instruments: Recognition and Measurement' ('IAS 39'). IFRS 9 provides guidance on the classification and measurement of financial assets and financial liabilities. This standard becomes effective for the Company's fiscal year end beginning February 1, 2015. The Company is currently assessing the impact of the new standard on its consolidated financial statements.
IFRS 10, 'Consolidated Financial Statements' ('IFRS 10'), was issued by the IASB on May 12, 2011, and will replace the consolidation requirements in SIC-12, 'Consolidation - Special Purpose Entities' and IAS 27, 'Consolidated and Separate Financial Statements'. The new standard establishes control as the basis for determining which entities are consolidated in the consolidated financial statements and provides guidance to assist in the determination of control where it is difficult to assess. IFRS 10 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is currently assessing the impact of IFRS 10 on its consolidated financial statements.
IFRS 11, 'Joint Arrangements' ('IFRS 11'), was issued by the IASB on May 12, 2011, and will replace IAS 31, 'Interest in Joint Ventures'. The new standard will apply to the accounting for interests in joint arrangements where there is joint control. Under IFRS 11, joint arrangements are classified as either joint ventures or joint operations. The structure of the joint arrangement will no longer be the most significant factor in determining whether a joint arrangement is either a joint venture or a joint operation. Proportionate consolidations will no longer be allowed and will be replaced by equity accounting. IFRS 11 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is currently assessing the impact of IFRS 11 on its results of operations and financial position.
IFRS 13, 'Fair Value Measurement' ('IFRS 13'), was also issued by the IASB on May 12, 2011. The new standard makes IFRS consistent with generally accepted accounting principles in the United States ('US GAAP') on measuring fair value and related fair value disclosures. The new standard creates a single source of guidance for fair value measurements. IFRS 13 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is assessing the impact of IFRS 13 on its consolidated financial statements.
Outstanding Share Information
As at March 31, 2012
Authorized Unlimited
Issued and outstanding shares 84,874,781
Options outstanding 2,390,899
Fully diluted 87,265,680
Additional Information
Additional information relating to the Company, including the Company's most recently filed Annual Information Form, can be found on SEDAR at www.sedar.com, and is also available on the Company's website at http://investor.harrywinston.com.
Consolidated Balance Sheets
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
February 1,
As at January 31, 2012 2011 2010
ASSETS
Current assets
Cash and cash equivalents (note $ 78,116 $ 108,693 $ 62,969
4)
Accounts receivable (note 5) 26,910 22,788 23,598
Inventory and supplies (note 6) 457,827 403,212 311,188
Other current assets (note 7) 45,494 41,317 39,299
608,347 576,010 437,054
Property, plant and equipment - 734,146 764,093 783,432
Mining (note 8)
Property, plant and equipment - 69,781 61,019 62,277
Luxury brand (note 8)
Intangible assets, net (note 10) 127,337 127,894 129,213
Other non-current assets (note 14,165 14,521 15,629
11)
Deferred income tax assets (note 77,160 60,038 50,524
14)
Total assets $ 1,630,936 $ 1,603,575 $ 1,478,129
LIABILITIES AND EQUITY
Current liabilities
Trade and other payables (note $ 104,681 $ 139,551 $ 75,893
12)
Employee benefit plans (note 6,026 4,317 11,284
13)
Income taxes payable (note 14) 29,450 6,660 46,297
Promissory note (note 15) - 70,000 -
Current portion of 29,238 24,215 23,831
interest-bearing loans and
borrowings (note 15)
169,395 244,743 157,305
Interest-bearing loans and 270,485 235,516 161,691
borrowings (note 15)
Deferred income tax liabilities 325,035 309,868 246,398
(note 14)
Employee benefit plans (note 13) 9,463 7,287 6,898
Provisions (note 16) 65,245 50,130 43,691
Total liabilities 839,623 847,544 615,983
Equity
Share capital (note 17) 507,975 502,129 426,593
Contributed surplus 17,764 16,233 17,730
Retained earnings 255,233 229,779 242,057
Accumulated other comprehensive 10,086 7,624 (2,571)
income
Total shareholders' equity 791,058 755,765 683,809
Non-controlling interest 255 266 178,337
Total equity 791,313 756,031 862,146
Total liabilities and equity $ 1,630,936 $ 1,603,575 $ 1,478,129
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Income Statements
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE
AMOUNTS) (UNAUDITED)
Years ended January 31, 2012 2011
Sales $ 702,043 $ 623,963
Cost of sales 451,960 387,665
Gross margin 250,083 236,298
Selling, general and administrative expenses 193,552 167,950
Operating profit 56,531 68,348
Finance expenses (16,687) (13,427)
Exploration costs (1,770) (666)
Finance and other income 586 669
Foreign exchange gain 1,005 357
Profit before income taxes 39,665 55,281
Net income tax expense (note 14) 14,222 8,080
Net profit $ 25,443 $ 47,201
Attributable to shareholders $ 25,454 $ 41,530
Attributable to non-controlling interest $ (11) $ 5,671
Earnings per share (note 19)
Basic $ 0.30 $ 0.52
Diluted $ 0.30 $ 0.51
Weighted average number of shares outstanding 84,660,766 79,858,018
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Comprehensive Income
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Years ended January 31, 2012 2011
Net profit $ 25,443 $ 47,201
Other comprehensive income
Net gain (loss) on translation of net foreign 10,879
operations (net of tax of nil) 3,634
Change in fair value of derivative financial
instruments (net of tax of
$0.2 million for the year ended January 31, 2011) - 354
Actuarial loss on employee benefit plans (net of
tax of
$0.6 million for the year ended January 31, 2012;
2011 - $0.2 million) (1,172) (1,038)
Other comprehensive income, net of tax 2,462 10,195
Total comprehensive income $ 27,905 $ 57,396
Attributable to shareholders $ 27,916 $ 51,725
Attributable to non-controlling interest $ (11) $ 5,671
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Changes in Equity
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Years ended January 31, 2012 2011
Common shares:
Balance at beginning of period $ 502,129 $ 426,593
Issued during the period 5,286 72,701
Transfer from contributed surplus on exercise of 560 2,835
options
Balance at end of period 507,975 502,129
Contributed surplus:
Balance at beginning of period 16,233 17,730
Stock-based compensation expense 2,091 1,338
Transfer from contributed surplus on exercise of (560) (2,835)
options
Balance at end of period 17,764 16,233
Retained earnings:
Balance at beginning of period 229,779 242,057
Net profit attributable to common shareholders 25,454 41,530
Reacquisition of partnership units (including - (53,808)
transaction costs)
Balance at end of period 255,233 229,779
Accumulated other comprehensive income:
Balance at beginning of period 7,624 (2,571)
Other comprehensive income
Net gain on translation of net foreign 3,634 10,879
operations (net of tax of nil)
Change in fair value of derivative financial
instruments (net of
tax of $0.2 million for the year ended January
31, 2011) - 354
Actuarial loss on employee benefit plans (net
of tax of
$0.6 million for the year ended January 31,
2012;
2011 - $0.2 million) (1,172) (1,038)
Balance at end of period 10,086 7,624
Non-controlling interest:
Balance at beginning of period 266 178,337
Non-controlling interest (11) 5,671
Distribution to Kinross - (9,900)
Reacquisition of Kinross interest - (173,842)
Balance at end of period 255 266
Total shareholders' equity $ 791,313 $ 756,031
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statements of Cash Flows
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)
Years ended January 31, 2012 2011
Cash provided by (used in)
OPERATING
Net profit $ 25,443 $ 47,201
Depreciation and amortization 91,639 77,007
Deferred income tax expense (recovery) (1,088) 16,817
Current income tax expense 15,310 (8,737)
Finance expenses 16,687 13,427
Stock-based compensation 2,091 1,338
Other non-cash items 556 -
Foreign exchange gain (loss) (5,771) 1,806
Loss on disposal of assets 9 237
Change in non-cash operating working capital, (79,517) (35,619)
excluding taxes and finance expenses
Cash provided from operating activities 65,359 113,477
Interest paid (14,347) (8,958)
Income and mining taxes paid 7,979 (31,763)
Net cash from operating activities 58,991 72,756
FINANCING
Decrease in interest-bearing loans and (709) (1,399)
borrowings
Increase in revolving credit 266,495 288,366
Decrease in revolving credit (226,402) (211,721)
Repayment of promissory note (70,000) -
Issue of common shares, net of issue costs 5,286 2,964
Distribution to Kinross - (9,900)
Cash provided from financing activities (25,330) 68,310
INVESTING
Reacquisition of partnership units - (51,450)
Property, plant and equipment - Mining (45,165) (41,859)
Property, plant and equipment - Luxury brand (19,681) (6,751)
Other non-current assets (1,889) (3,230)
Cashused in investing activities (66,735) (103,290)
Foreign exchange effect on cash balances 2,497 7,948
Increase (decrease) in cash and cash (30,577) 45,724
equivalents
Cash and cash equivalents, beginning of period 108,693 62,969
Cash and cash equivalents, end of period $ 78,116 $ 108,693
Change in non-cash operating working
capital,excluding taxes and
finance expenses
Accounts receivable (4,277) 1,029
Inventory and supplies (41,953) (86,570)
Other current assets (4,178) (2,210)
Trade and other payables (31,202) 59,163
Employee benefit plans 2,093 (7,031)
$ (79,517) $ (35,619)
The accompanying notes are an integral part of these consolidated
financial statements.
Notes to Consolidated Financial Statements
JANUARY 31, 2012 WITH COMPARATIVE FIGURES
(TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT AS OTHERWISE NOTED)
Note 1:
Nature of Operations
Harry Winston Diamond Corporation (the 'Company') is a diamond enterprise with assets in the mining and luxury brand segments of the diamond industry.
The Company's mining asset is an ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the 'Joint Venture') is an unincorporated joint arrangement between Diavik Diamond Mines Inc. ('DDMI') (60%) and 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 HWDLP 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.
Note 2:
Basis of Preparation
(a) Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRS'). These are the Company's first annual consolidated financial statements under IFRS for the fiscal year ending January 31, 2012. The accounting policies adopted in these consolidated financial statements are based on IFRS as issued by the International Accounting Standards Board ('IASB') as of January 31, 2012.
(b) Basis of measurement
These consolidated financial statements have been prepared on the historical cost basis except for the following:
-- financial instruments through profit and loss are measured at
fair value.
-- liabilities for Restricted Share Unit and Deferred Share Unit
Plans are measured at fair value.
(c) Currency of presentation
These consolidated financial statements are expressed in United States dollars, consistent with the predominant functional currency of the Company's operations. All financial information presented in United States dollars has been rounded to the nearest thousand.
Note 3:
Significant Accounting Policies
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Company entities.
(a) Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at January 31, 2012. Subsidiaries are fully consolidated from the date of acquisition or creation, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intercompany balances, income and expenses, and unrealized gains and losses resulting from intercompany transactions are eliminated in full. For partly owned subsidiaries, the net assets and net earnings attributable to minority shareholders are presented as non-controlling interests on the consolidated balance sheet.
Interest in Diavik Joint Venture
HWDLP owns an undivided 40% ownership interest in the assets, liabilities and expenses of the Joint Venture. The Company records its interest in the assets, liabilities and expenses of the Joint Venture in its consolidated financial statements with a one-month lag. The accounting policies described below include those of the Joint Venture.
(b) Revenue
Sales from the sale of rough diamonds, fine jewelry and watches are recognized when significant risks and rewards of ownership are transferred to the customer, the amount of sales can be measured reliably and the receipt of future economic benefits are probable. Sales are measured at the fair value of the consideration received or receivable, net of value-added taxes, duties and other sales taxes, and after eliminating sales within the Company.
(c) Cash resources
Cash and cash equivalents consist of cash on hand, balances with banks and short-term money market instruments (with a maturity on acquisition of less than 90 days), and are carried at fair value.
(d) Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
(e) Inventory and supplies
Luxury brand raw materials and work-in-progress are valued at the lower of cost and net realizable value, with cost determined using either a weighted average or specific item identification basis depending on the nature of the inventory. Work-in-progress costs include an appropriate share of production costs such as material, labour and overhead costs.
Luxury brand merchandise inventory is recorded at the lower of cost or net realizable value and includes jewelry and watches. Cost is determined on a specific item basis for jewelry and the average cost method is used for watches.
Mining rough diamond inventory is recorded at the lower of cost or net realizable value. Cost is determined on an average cost basis including production costs and value-added processing activity.
Mining supplies inventory is recorded at the lower of cost or net realizable value. Supplies inventory includes consumables and spare parts maintained at the Diavik Diamond Mine site and at the Company's sorting and distribution facility locations.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and costs of selling the final product. In order to determine net realizable value, the carrying amount of obsolete and slow moving items is written down on a basis of an estimate of their future use or realization. A provision for obsolescence is made when the carrying amount is higher than net realizable value.
(f) Exploration, evaluation and development expenditures
Exploration and evaluation activities include: acquisition of rights to explore; topographical, geological, geochemical and geophysical studies; exploratory drilling; trenching and sampling; and activities involved in evaluating the technical feasibility and commercial viability of extracting mineral resources. Capitalized exploration and evaluation expenditures are recorded as a component of property, plant and equipment. Exploration and evaluation assets are no longer classified as such when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Before reclassification, exploration and evaluation assets are assessed for impairment. Recognized exploration and evaluation assets will be assessed for impairment when the facts and circumstances suggest that the carrying amount may exceed its recoverable amount.
Drilling and related costs are capitalized for an ore body where proven and probable reserves exist and the activities are directed at either (a) obtaining additional information on the ore body that is classified within proven and probable reserves, or (b) converting non-reserve mineralization to proven and probable reserves and the benefit is expected to be realized over an extended period of time. All other drilling and related costs are expensed as incurred.
(g) Property, plant and equipment
Items of property, plant and equipment are measured at cost, less accumulated depreciation and accumulated impairment losses. The initial cost of an asset comprises its purchase price and construction cost, any costs directly attributable to bringing the asset into operation, including stripping costs incurred in open pit mining before production commences, the initial estimate of the rehabilitation obligation, and for qualifying assets, borrowing costs. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Also included within property, plant and equipment is the capitalized value of finance leases.
When parts of an item of property, plant and equipment have different useful lives, the parts are accounted for as separate items (major components) of property, plant and equipment.
Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from the disposal with the carrying amount of property, plant and equipment and are recognized within cost of sales and selling, general and administrative expenses.
(i) DEPRECIATION
Depreciation commences when the asset is available for use. Depreciation is charged so as to write off the depreciable amount of the asset to its residual value over its estimated useful life, using a method that reflects the pattern in which the asset's future economic benefits are expected to be consumed by the Company. Depreciation methods, useful lives and residual values are reviewed, and adjusted if appropriate, at each reporting date.
The unit-of-production method is applied to a substantial portion of Diavik Diamond Mine property, plant and equipment, and, depending on the asset, is based on carats of diamonds recovered during the period relative to the estimated proven and probable ore reserves of the ore deposit being mined, or to the total ore deposit. Other plant, property and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets, for the current and comparative periods, which are as follows:
Asset Estimated useful life (years)
Buildings 10-40
Machinery and mobile equipment 3-10
Computer equipment and software 3
Furniture, fixtures and equipment 2-10
Leasehold and building improvements Up to 20
Amortization for mine related assets was charged to mineral properties during the pre-commercial production stage.
Upon the disposition of an asset, the accumulated depreciation and accumulated impairment losses are deducted from the original cost, and any gain or loss is reflected in current net profit or loss.
Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate. The impact of changes to the estimated useful lives or residual values is accounted for prospectively.
(ii) STRIPPING COSTS
Mining costs associated with stripping activities in an open pit mine are expensed unless the stripping activity can be shown to represent a betterment to the mineral property, in which case the stripping costs would be capitalized and included in deferred mineral property costs within mining assets. Stripping costs incurred during the production phase of an open pit mine are variable production costs that are included as a component of inventory to be recognized as a component of cost of sales in the same period as the sale of inventory.
(iii) MAJOR MAINTENANCE AND REPAIRS
Expenditure on major maintenance refits or repairs comprises the cost of replacement assets or parts of assets and overhaul costs. When an asset, or part of an asset that was separately depreciated, is replaced and it is probable that future economic benefits associated with the new asset will flow to the Company through an extended life, the expenditure is capitalized. The unamortized value of the existing asset or part of the existing asset that is being replaced is expensed. Where part of the existing asset was not separately considered as a component, the replacement value is used to estimate the carrying amount of the replaced assets, which is immediately written off. All other day-to-day maintenance costs are expensed as incurred.
(h) Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost, which comprises its purchase price plus any directly attributable cost of preparing the asset for its intended use. The cost of intangible assets acquired in a business combination is measured at fair value as at the date of acquisition.
Intangible assets with indefinite useful lives are not amortized after initial recognition and are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset is impaired. Harry Winston's trademark and drawings are considered to have an indefinite life because it is expected that these assets will contribute to net cash inflows indefinitely. For purposes of impairment testing, trademark and drawings are tested for recoverability individually. The Company maintains a program to protect its trademark from unauthorized use by third parties. The Harry Winston drawings are very closely related with the brand and have an enduring life expectancy. The archive of drawings reflects unique designs for jewelry and watches that form the basis for newly inspired jewelry and watch designs that are exclusive to Harry Winston and attract its clientele.
Following initial recognition, intangible assets with finite useful lives are carried at cost less any accumulated amortization and any accumulated impairment losses. Intangible assets with finite useful lives are amortized on a straight-line basis over their useful lives and recognized in profit or loss as follows:
Asset Estimated useful life (years)
Wholesale distribution network 10
The amortization methods and estimated useful lives of intangible assets are reviewed annually and adjusted if appropriate.
(i) Other non-current assets
Other non-current assets include depreciable assets amortized over a period not exceeding ten years.
(j) Financial instruments
From time to time, the Company may use a limited number of derivative financial instruments to manage its foreign currency and interest rate exposure. For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedge instrument and the item being hedged, both at inception and throughout the hedged period. Gains and losses resulting from any ineffectiveness in a hedging relationship must be recognized immediately in net profit or loss.
(k) Provisions
Provisions represent obligations to the Company for which the amount or timing is uncertain. Provisions are recognized when (a) the Company has a present obligation (legal or constructive) as a result of a past event, (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is included in net profit or loss. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the obligation. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost in net profit or loss.
Mine rehabilitation and site restoration provision:
The Company records the present value of estimated costs of legal and constructive obligations required to restore operating locations in the period in which the obligation is incurred. The nature of these restoration activities includes dismantling and removing structures, rehabilitating mines and tailings dams, dismantling operating facilities, closure of plant and waste sites, and restoration, reclamation and re-vegetation of affected areas.
The obligations generally arise when the asset is installed or the ground/environment is disturbed at the production location. When the liability is initially recognized, the present value of the estimated cost is capitalized by increasing the carrying amount of the related assets. Over time, the discounted liability is increased/decreased for the change in present value based on the discount rates that reflect current market assessments and the risks specific to the liability. Additional disturbances or changes in rehabilitation costs, including re-measurement from changes in the discount rate, are recognized as additions or charges to the corresponding assets and rehabilitation liability when they occur. The periodic unwinding of the discount is recognized in net profit or loss as a finance cost.
(l) Foreign currency
Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are translated to US dollars at exchange rates in effect at the balance sheet date, and non-monetary assets and liabilities are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Revenues and expenses are translated at rates in effect at the time of the transactions. Foreign exchange gains and losses are included in net profit or loss.
For certain subsidiaries of the Company where the functional currency is not the US dollar, the assets and liabilities of these subsidiaries are translated at the rate of exchange in effect at the reporting date. Sales and expenses are translated at the rate of exchange in effect at the time of the transactions. Foreign exchange gains and losses are accumulated in other comprehensive income under shareholders' equity. When a foreign operation is disposed of, in part or in full, the relevant amount in the foreign exchange reserve account is reclassified to net profit or loss as part of profit or loss on disposal.
(m) Income taxes
Current and deferred taxes
Income tax expense comprises current and deferred tax and is recognized in net profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity or in other comprehensive income.
Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax expense is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax expense is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is probable that the related tax benefit will not be realized.
Deferred income and mining tax assets and deferred income and mining tax liabilities are offset, if a legally enforceable right exists to offset current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
The Company classifies exchange differences on deferred tax assets or liabilities in jurisdictions where the functional currency is different from the currency used for tax purposes as income tax expense.
(n) Stock-based payment transactions
Stock-based compensation
The Company applies the fair value method to all grants of stock options. The fair value of options granted is estimated at the date of grant using a Black-Scholes option pricing model incorporating assumptions regarding risk-free interest rates, dividend yield, volatility factor of the expected market price of the Company's stock, and a weighted average expected life of the options. When option awards vest in installments over the vesting period, each installment is accounted for as a separate arrangement. The estimated fair value of the options is recorded as an expense with an offsetting credit to shareholders' equity. Any consideration received on amounts attributable to stock options is credited to share capital.
Restricted and Deferred Share Unit Plans
The Restricted and Deferred Share Unit ('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. Under the prior RSU Plan, each RSU grant vests on the third anniversary of the grant date. Under the 2010 RSU Plan, each RSU grant vests equally over a three-year period. Vesting under both RSU Plans is subject to special rules for death, disability and change in control. Grants under the DSU Plan are awarded to non-executive directors of the Company. Each DSU grant vests immediately on the grant date. The expenses related to the RSUs and DSUs are accrued based on fair value. When a share-based payment award vests in installments over the vesting period, each installment is accounted for as a separate arrangement. These awards are accounted for as liabilities with the value of these liabilities being remeasured at each reporting date based on changes in the fair value of the awards, and at settlement date. Any changes in the fair value of the liability are recognized as employee benefit plan expense in net profit or loss.
(o) Employee benefit plans
The Company operates defined benefit pension plans, which require contributions to be made to separately administered funds. The cost of providing benefits under the defined benefit plans is determined separately using the projected unit credit valuation method by qualified actuaries. Actuarial gains and losses are recognized immediately in other comprehensive income.
The defined benefit asset or liability comprises the present value of the defined benefit obligation, plus any actuarial gains (less any losses) not recognized as a result of the treatment above, less past service cost not yet recognized and less the fair value of plan assets out of which the obligations are to be settled directly. The value of any asset is restricted to the sum of any past service cost not yet recognized and the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.
Contributions to defined contribution pension plans are expensed as incurred.
(p) Segment reporting
A segment is a distinguishable component of the Company that is engaged either in providing related products or services (business segment) or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and returns that are different from those of other segments. The Company's primary format for segment reporting is based on business segments. Each operating segment's operations are reviewed regularly by the Company's Chief Executive Officer to make decisions about resources to be allocated to the segment and to assess its performance, and for which discrete financial information is available.
(q) Operating leases
Minimum rent payments under operating leases, including any rent-free periods and/or construction allowances, are recognized on a straight-line basis over the term of the lease and included in net profit or loss.
(r) Impairment of non-financial assets
The carrying amounts of the Company's non-financial assets other than inventory and deferred taxes are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. For an intangible asset that has an indefinite life, the recoverable amount is estimated annually at the same time, or more frequently if events or changes in circumstances indicate that the asset may be impaired.
The recoverable amount of an asset is the greater of its fair value less costs to sell and its value in use. In the absence of a binding sales agreement, fair value is estimated on the basis of values obtained from an active market or from recent transactions or on the basis of the best information available that reflects the amount that the Company could obtain from the disposal of the asset. Value in use is defined as the present value of future pre-tax cash flows expected to be derived from the use of an asset, using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the 'cash-generating unit').
An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in the consolidated statement of income in those expense categories consistent with the function of the impaired asset. Impairment losses recognized in respect of cash-generating units would be allocated to reduce the carrying amounts of the assets in the unit (group of units) on a pro rata basis.
For property, plant and equipment, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Company makes an estimate of the recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognized. If this is the case, the carrying amount of the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statement of income.
(s) Basic and diluted earnings per share
Basic earnings per share are calculated by dividing net profit or loss by the weighted average number of shares outstanding during the period. Diluted earnings per share are determined using the treasury stock method to calculate the dilutive effect of options and warrants. The treasury stock method assumes that the exercise of any 'in-the-money' options with the option proceeds would be used to purchase common shares at the average market value for the period. Options with an exercise price higher than the average market value for the period are not included in the calculation of diluted earnings per share as such options are not dilutive.
(t) Use of estimates, judgments and assumptions
The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities and contingent liabilities at the date of the consolidated financial statements, and the reported amounts of sales and expenses during the reporting period. Estimates and assumptions are continually evaluated and are based on management's experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ from these estimates. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is as follows:
Mineral reserves, mineral properties and exploration costs
The estimation of mineral reserves is a subjective process. The Company estimates its mineral reserves based on information compiled by an appropriately qualified person. Forecasts are based on engineering data, projected future rates of production and the timing of future expenditures, all of which are subject to numerous uncertainties and various interpretations. The Company expects that its estimates of reserves will change to reflect updated information. Reserve estimates can be revised upward or downward based on the results of future drilling, testing or production levels, and diamond prices. Changes in reserve estimates may impact the carrying value of exploration and evaluation assets, mineral properties, property, plant and equipment, mine rehabilitation and site restoration provision, recognition of deferred tax assets, and depreciation charges. Estimates and assumptions about future events and circumstances are also used to determine whether economically viable reserves exist that can lead to commercial development of an ore body.
Estimated mineral reserves are used in determining the depreciation of mine-specific assets. This results in a depreciation charge proportional to the depletion of the anticipated remaining life of mine production. A units-of-production depreciation method is applied, and depending on the asset, is based on carats of diamonds recovered during the period relative to the estimated proven and probable reserves of the ore deposit being mined or to the total ore deposit. Changes in estimates are accounted for prospectively.
Impairment of long-lived assets
The Company assesses each cash-generating unit at least annually to determine whether any indication of impairment exists. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made, which is considered to be the higher of the fair value of an asset less costs to sell and its value in use. These assessments require the use of estimates and assumptions such as long-term commodity prices, discount rates, future capital requirements, exploration potential and operating performance. Financial results as determined by actual events could differ from those estimated.
Impairment of intangible assets with an indefinite life
The impairment assessment for trademark and drawings requires the use of estimates and assumptions. Financial results as determined by actual events could differ from those estimated.
Recovery of deferred tax assets
Judgment is required in determining whether deferred tax assets are recognized in the consolidated balance sheet. Deferred tax assets, including those arising from un-utilized tax losses, require management to assess the likelihood that the Company will generate taxable earnings in future periods in order to utilize recognized deferred tax assets. Estimates of future taxable income are based on forecasted income from operations and the application of existing tax laws in each jurisdiction. To the extent that future taxable income differs significantly from estimates, the ability of the Company to realize the deferred tax assets recorded at the consolidated balance sheet date could be impacted. Additionally, future changes in tax laws in the jurisdictions in which the Company operates could limit the ability of the Company to obtain tax deductions in future periods.
Mine rehabilitation and site restoration provision
The mine rehabilitation and site restoration provision has been provided by management of the Diavik Diamond Mine and is based on internal estimates. Assumptions, based on the current economic environment, have been made which DDMI management believes are a reasonable basis upon which to estimate the future liability. These estimates are reviewed regularly by management of the Diavik Diamond Mine to take into account any material changes to the assumptions. However, actual rehabilitation costs will ultimately depend upon future costs for the necessary decommissioning work required, which will reflect market conditions at the relevant time. Furthermore, the timing of rehabilitation is likely to depend on when the Diavik Diamond Mine ceases to produce at economically viable rates. This, in turn, will depend upon a number of factors including future diamond prices, which are inherently uncertain.
Commitments and contingencies
The Company has conducted its operations in the ordinary course of business in accordance with its understanding and interpretation of applicable tax legislation in the countries where the Company has operations. The relevant tax authorities could have a different interpretation of those tax laws that could lead to contingencies or additional liabilities for the Company. The Company believes that its tax filing positions as at the balance sheet date are appropriate and supportable. Should the ultimate tax liability materially differ from the provision, the Company's effective tax rate and its profit or loss could be affected positively or negatively in the period in which the matters are resolved.
(u) Standards issued but not yet effective
The following standards and interpretations have been issued but are not yet effective and have not been early adopted in these financial statements.
The IASB has issued a new standard, IFRS 9, 'Financial Instruments' ('IFRS 9'), which will ultimately replace IAS 39, 'Financial Instruments: Recognition and Measurement' ('IAS 39'). IFRS 9 provides guidance on the classification and measurement of financial assets and financial liabilities. This standard becomes effective for the Company's fiscal year end beginning February 1, 2015. The Company is currently assessing the impact of the new standard on its consolidated financial statements.
IFRS 10, 'Consolidated Financial Statements' ('IFRS 10'), was issued by the IASB on May 12, 2011, and will replace the consolidation requirements in SIC-12, 'Consolidation - Special Purpose Entities' and IAS 27, 'Consolidated and Separate Financial Statements'. The new standard establishes control as the basis for determining which entities are consolidated in the consolidated financial statements and provides guidance to assist in the determination of control where it is difficult to assess. IFRS 10 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is currently assessing the impact of IFRS 10 on its consolidated financial statements.
IFRS 11, 'Joint Arrangements' ('IFRS 11'), was issued by the IASB on May 12, 2011 and will replace IAS 31, 'Interest in Joint Ventures'. The new standard will apply to the accounting for interests in joint arrangements where there is joint control. Under IFRS 11, joint arrangements are classified as either joint ventures or joint operations. The structure of the joint arrangement will no longer be the most significant factor in determining whether a joint arrangement is either a joint venture or a joint operation. Proportionate consolidations will no longer be allowed and will be replaced by equity accounting. IFRS 11 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is currently assessing the impact of IFRS 11 on its results of operations and financial position.
IFRS 13, 'Fair Value Measurement' ('IFRS 13'), was also issued by the IASB on May 12, 2011. The new standard makes IFRS consistent with generally accepted accounting principles in the United States ('US GAAP') on measuring fair value and related fair value disclosures. The new standard creates a single source of guidance for fair value measurements. IFRS 13 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is assessing the impact of IFRS 13 on its consolidated financial statements.
Note 4:
Cash Resources
2012 2011 February 1, 2010
Cash on hand and balances with $ 76,030 $ 107,993 $ 61,449
banks
Short-term investments (a) 2,086 700 1,520
Total cash resources $ 78,116 $ 108,693 $ 62,969
((a)) Short-term investments are held in overnight deposits and money market instruments with a maturity of 30 days.
The Company's exposure to interest rate risk and sensitivity analysis is disclosed in Note 23.
Note 5:
Accounts Receivable
2012 2011 February 1, 2010
Luxury brand trade receivables $ 25,828 $ 20,672 $ 20,306
Mining other receivables 1,923 2,746 3,824
Luxury brand allowance for (841) (630) (532)
doubtful accounts
Total accounts receivable $ 26,910 $ 22,788 $ 23,598
The Company's exposure to interest rate risk and sensitivity analysis is disclosed in Note 23.
Note 6:
Inventory and Supplies
2012 2011 February 1, 2010
Luxury brand raw materials $ 62,188 $ 50,109 $ 43,139
Mining rough diamond inventory 62,472 30,451 25,318
124,660 80,560 68,457
Luxury brand work-in-progress 45,407 29,904 13,406
Luxury brand merchandise 218,844 226,358 161,104
inventory
Mining supplies inventory 68,916 66,390 68,221
Total inventory and supplies $ 457,827 $ 403,212 $ 311,188
Total inventory and supplies is net of a provision for obsolescence of $3.1 million ($2.9 million at January 31, 2011). Cost of sales includes inventory of $418.9 million sold during the year (2011 - $373.6 million), with another $33.1 million of non-inventoried costs (2011 - $14.1 million).
Note 7:
Other Current Assets
2012 2011 February 1, 2010
Luxury brand prepaid assets $ 10,264 $ 10,916 $ 10,704
Luxury brand other current assets 7,082 6,746 5,175
Mining prepaid assets 28,148 23,655 23,420
Total other current assets $ 45,494 $ 41,317 $ 39,299
Note 8:
Property, Plant and Equipment
MINING SEGMENT
Diavik
equipment Real Mine
and Furniture, property - Assets rehabilitation
Mineral leaseholds equipment land and under and site
properties(a) (b) and other(c) building(d) construction restoration(e) Total
Cost:
Balance at February 1, $ 250,047 $ 768,515 $ 7,927 $ 35,227 $ 82,135 $ 40,291 $ 1,184,142
2011
Additions - - 1,379 2,450 41,872 13,180 58,881
Disposals (942)
- - - - - (942)
Impairments for the year (13,193)
- - - - - (13,193)
Foreign exchange - - - (100) - - (100)
differences
Transfers and other (520) 100,833 - - (100,833) - (520)
movements
Balance at January 31, $ 249,527 $ 855,213 $ 9,306 $ 37,577 $ 53,471 $ 1,228,268
2012 $ 23,174
Accumulated
depreciation/amortization:
Balance at February 1, $ 149,814 $ 239,883 $ 5,677 $ 8,063 - $ 16,613 $ 420,050
2011 $
Depreciation and 12,254 58,304 351 1,293 - 2,833 75,035
amortization for the year
Disposals - (942) - - - -
(942)
Foreign exchange - - - (21) - -
differences (21)
Balance at January 31, 162,068 297,245 6,028 9,335 - 19,446 494,122
2012
Net book value at January $ 87,459 $ 557,968 $ 3,278 $ 28,242 $ 23,174 $ 34,025 $ 734,146
31, 2012
Real
Diavik property
equipment Furniture, - Mine
Mineral and equipment land and Assets rehabilitation
properties leaseholds and other building under and site
(a) (b) (c) (d) construction restoration(e) Total
Cost:
Balance at February 1, $ 250,415 $ 494,613 $ 7,742 $ 32,468 $ 321,245 $ 32,985 $ 1,139,468
2010
Additions - - 185 1,028 40,646 7,306 49,165
Disposals - (6,222) - - - - (6,222)
Foreign exchange - - - 1,731 - - 1,731
differences
Transfers and other (368) 280,124 - - (279,756) - -
movements
Balance at January 31, $ 250,047 $ $ 7,927 $ 35,227 $ 82,135 $ 40,291 $ 1,184,142
2011 768,515
Accumulated
depreciation/amortization:
Balance at February 1, $ 136,223 $ 196,587 $ 5,319 $ 6,696 $ - $ 11,211 $ 356,036
2010
Depreciation and 13,591 49,282 358 1,086 - 5,402 69,719
amortization for the year
Disposals - (5,986) - - - - (5,986)
Foreign exchange - - - 280 - - 280
differences
Transfers and other - - - - - - -
movements
Balance at January 31, 149,814 239,883 5,677 8,062 - 16,613 420,049
2011
Net book value at January $ 100,233 $ $ 2,250 $ 27,165 $ 82,135 $ 23,678 $ 764,093
31, 2011 528,632
LUXURY BRAND SEGMENT
Real
property
Furniture, -
equipment land and
and other building Assets under
(c) (d) construction Total
Cost:
Balance at February 1, $ 34,866 $ 85,430 $ 63 $ 120,359
2011
Additions 8,196 1,587 9,898 19,681
Disposals (765) (1,366) - (2,131)
Foreign exchange 727 2,177 - 2,904
differences
Balance at January 31, 43,024 87,828 9,961 140,813
2012
Accumulated
depreciation/amortization:
Balance at February 1, $ 23,879 $ 35,461 $ - $ 59,340
2011
Depreciation and 5,835 6,487 - 12,322
amortization for the year
Disposals (763) (1,358) - (2,121)
Foreign exchange 509 982 - 1,491
differences
Balance at January 31, 29,460 41,572 - 71,032
2012
Net book value at January $ 13,564 $ 46,256 $ 9,961 $ 69,781
31, 2012
Real
property
Furniture, -
equipment land and
and other building Assets under
(c) (d) construction Total
Cost:
Balance at February 1, $ 29,278 $ 77,244 $ 241 $ 106,763
2010
Additions 2,475 - 4,276 6,751
Disposals (266) - - (266)
Foreign exchange 1,673 5,438 - 7,111
differences
Transfers and other 1,706 2,748 (4,454) -
movements
Balance at January 31, $ 34,866 $ 85,430 $ 63 $ 120,359
2011
Accumulated
depreciation/amortization:
Balance at February 1, $ 18,139 $ 26,347 $ - $ 44,486
2010
Depreciation and 5,049 7,215 - 12,264
amortization for the year
Disposals (263) - - (263)
Foreign exchange 954 1,899 - 2,853
differences
Balance at January 31, 23,879 35,461 - 59,340
2011
Net book value at January $ 10,987 $ 49,969 $ 63 $ 61,019
31, 2011
((a)) The Company holds a 40% ownership interest in the Diavik group of mineral claims, which contains commercially mineable diamond reserves. DDMI, a subsidiary of Rio Tinto plc, is the operator of the Joint Venture and holds the remaining 60% interest. The claims are subject to private royalties, which are in the aggregate 2% of the value of production.
((b)) Diavik equipment and leaseholds are project related assets at the Joint Venture level.
((c)) Furniture, equipment and other includes equipment located at the Company's diamond sorting facility and at Harry Winston Inc. salons.
((d)) Real property is comprised of land and a building that houses the corporate activities of the Company, and various leasehold improvements to Harry Winston Inc. salons and corporate offices.
((e) )The Joint Venture has an obligation under various agreements (note 22) to reclaim and restore the lands disturbed by its mining operations.
Depreciation expense for 2012 was $87.4 million (2011 - $82.0 million).
Note 9:
Diavik Joint Venture
The following represents HWDLP's 40% interest in the Joint Venture at the period end as at December 31, 2011 and 2010:
2011 2010
Current assets $ 101,454 $ 92,487
Non-current assets 685,590 714,386
Current liabilities 31,745 31,493
Non-current liabilities and 755,298 775,380
participant's account
2011 2010
Expenses net of interest income of $0.1 $ 257,807 $ 205,541
million (2010 - interest income of $0.1
million)(a)
Cash flows resulting from (used in) (166,854) (129,851)
operating activities
Cash flows resulting from financing 214,834 168,045
activities
Cash flows resulting from (used in) (43,499) (40,105)
investing activities
((a)) The Joint Venture only earns interest income.
HWDLP is contingently liable for DDMI's portion of the liabilities of the Joint Venture, and to the extent HWDLP's participating interest has increased because of the failure of DDMI to make a cash contribution when required, HWDLP would have access to an increased portion of the assets of the Joint Venture to settle these liabilities. Additional information on commitments and contingencies related to the Diavik Joint Venture is found in Note 22.
During fiscal 2012, the Company recognized a non-cash $13.0 million charge in cost of sales related to the de-recognition of certain components of the backfill plant (the 'Paste Plant') associated with paste production at the Diavik Diamond Mine. The original mine plan envisioned the use of blasthole stoping and underhand cut and fill underground mining methods for the Diavik ore bodies using paste to preserve underground stability. It is now expected that the higher velocity and lower cost sub-level retreat mining method, which does not require paste, will be used for both the A-154 South and A-418 underground ore bodies. As a result, certain components of the Paste Plant necessary for the production of paste will no longer be required and accordingly were de-recognized during the year.
Note 10:
Intangible Assets
Wholesale
distribution
Trademark Drawings network Total
Cost:
Balance at February $ 112,995 $ 12,365 $ 5,575 $ 130,935
1, 2011
Additions - - - -
Balance at January 112,995 12,365 5,575 130,935
31, 2012
Accumulated
amortization:
Balance at February $ - $ - $ 3,041 $ 3,041
1, 2011
Amortization for - - 557 557
the year
Balance at January - - 3,598 3,598
31, 2012
Net book value at $ 112,995 $ 12,365 $ 1,977 $ 127,337
January 31, 2012
Wholesale
distribution Store
Trademark Drawings network leases Total
Cost:
Balance at $ 112,995 $ 12,365 $ 5,575 $ 5,639 $ 136,574
February 1,
2010
Additions - - - - -
Balance at 112,995 12,365 5,575 5,639 136,574
January 31,
2011
Accumulated
amortization:
Balance at $ - $ - $ 2,483 $ 4,878 $ 7,361
February 1,
2010
Amortization - - 558 761 1,319
for the year
Balance at - - 3,041 5,639 8,680
January 31,
2011
Net book $ 112,995 $ 12,365 $ 2,534 $ - $ 127,894
value at
January 31,
2011
Trademark and drawings are considered to have an indefinite life because it is expected that they will contribute to net cash inflows indefinitely. For purposes of impairment testing, trademark and drawings are tested for recoverability individually. The Company maintains a program to protect its trademark from unauthorized use by third parties. The Harry Winston drawings are closely related with the brand and have an enduring life expectancy. The archive of drawings includes unique designs for jewelry and watches that form the basis for newly inspired product designs that are exclusive to Harry Winston. The carrying amount of the trademark and drawings was determined to be lower than its recoverable amount.
The test for impairment for the drawings is to compare the replacement cost of the drawings to the carrying amount. Replacement cost is based on the cost the Company would incur to reproduce the drawings.
The test for impairment for the trademark is to compare the recoverable amount to the carrying amount. To determine the recoverable amount, the Company uses a fair value less cost to sell ('FVLCS') valuation premise, which is calculated using a relief-from-royalty approach. This approach conceptually recognizes that the trademark could be sold separately, and the purchaser could generate a future income stream through licensing agreements. Revenue projections are based on the most recent budget prepared by management. Key assumptions include those regarding the royalty rates, discount rate and terminal growth rate. The pre-tax discount rates are based on the weighted average cost of capital adjusted for specific company and market risk factors.
The key assumptions used in performing the trademark intangible test were as follows:
2012 2011
Royalty rate - watches 7% 7%
Royalty rate - jewelry 3.5% 3%
Terminal growth rate 3% 3%
Discount rate 12% 12%
Note 11:
Other Non-Current Assets
2012 2011 February 1, 2010
Prepaid pricing discount(a), net $ 1,680 $ 3,120 $ 4,560
of accumulated amortization of
$10.3 million (2011 -
$8.9 million)
Other assets 3,276 3,398 1,328
Refundable security deposits 9,209 8,003 9,741
$ 14,165 $ 14,521 $ 15,629
((a)) Prepaid pricing discount represents funds paid to Tiffany & Co. by the Company to amend its rough diamond supply agreement. The amendment eliminated all pricing discounts on future sales. The payment has been deferred and is being amortized on a straight-line basis over the remaining life of the contract.
Note 12:
Trade and Other Payables
2012 2011 February 1, 2010
Trade and other payables $ 41,031 $ 54,732 $ 25,949
Accrued expenses 17,835 17,635 15,837
Customer deposits 14,070 38,752 9,175
Payables and accruals at the 31,745 28,432 24,932
Diavik Joint Venture
$ 104,681 $ 139,551 $ 75,893
Note 13:
Employee Benefit Plans
The employee benefit obligation reflected in the consolidated balance sheet is as follows:
2012 2011 February 1, 2010
Defined benefit plan $ 11,381 $ 9,009 $ 7,104
obligation - Harry Winston
luxury brand segment (a)
Defined contribution plan 88 80 70
obligation - Harry Winston
luxury brand segment (b)
Deferred compensation plan - - 9,207
obligation - Harry Winston
luxury brand segment (b)
Post-retirement benefit plan 289 - -
- Diavik Diamond Mine (c)
RSU and DSU plans (note 17) 3,731 2,515 1,801
Total employee benefit plan $ 15,489 $ 11,604 $ 18,182
obligation
2012 2011 February 1, 2010
Non-current $ 9,463 $ 7,287 $ 6,898
Current 6,026 4,317 11,284
Total employee benefit plan $ 15,489 $ 11,604 $ 18,182
obligation
The amounts recognized in the consolidated income statement in respect of employee benefit plans are as follows:
2012 2011
Defined benefit pension plan - Harry Winston $ 2,074 $ 1,907
luxury brand segment (a)
Defined contribution plan - Harry Winston 1,065 783
luxury brand segment (b)
Defined contribution plan - Harry Winston 207 218
mining segment (b)
Defined contribution plan - Diavik Diamond Mine 2,081 1,061
(b)
Post-retirement benefit plan - Diavik Diamond 299 -
Mine (c)
RSU and DSU plans (note 17) 2,169 936
$ 7,595 $ 4,905
Cash settled share-based payment recovery 2,091 1,338
Total employee benefit plan expense $ 9,686 $ 6,243
Employee benefit plan expense has been included in the consolidated income statement as follows:
2012 2011
Cost of sales $ 3,135 $ 1,717
Selling, general and administrative expenses 6,551 4,526
$ 9,686 $ 6,243
(a) Defined benefit pension plan
The luxury brand segment sponsors three separate defined benefit pension plans covering employees in the United States, Japan and Switzerland. The principal pension plan is the Harry Winston Employee Retirement Plan for Harry Winston Inc. US employees. The benefits for the Harry Winston Inc. plan are based on years of service and the employee's compensation. In April 2001, Harry Winston Inc. amended its defined benefit pension plan. The amendment froze plan participation effective April 30, 2001. Harry Winston Inc.'s funding policy for the US plan is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974. Plan assets consist primarily of fixed income, equity and other short-term investments. The other two defined benefit pension plans are sponsored by luxury brand segment subsidiaries Harry Winston Japan, K.K. and Harry Winston S.A., which converted their previous pension plan arrangements into defined benefit plans effective February 1, 2007. Pension liabilities for these two non-US plans are funded in accordance with local laws and regulations.
(i) INFORMATION ABOUT HARRY WINSTON INC.'S US DEFINED BENEFIT PLAN IS AS FOLLOWS:
2012 2011
ACCRUED BENEFIT OBLIGATION
Balance, beginning of year $ 24,643 $ 20,700
Service costs 1,788 1,646
Interest cost 904 857
Employee contributions 496 372
Actuarial gain 904 1,825
Other net expenses (411) (387)
Benefits paid (1,544) (1,617)
Foreign exchange 690 1,247
Balance, end of year 27,460 24,643
PLAN ASSETS
Fair value, beginning of year 15,656 13,728
Actual return on plan assets (109) 1,355
Employee and employer contributions 1,968 1,556
Other net expenses (411) (387)
Benefits paid (1,112) (1,363)
Foreign exchange 87 745
Fair value, end of year 16,079 15,634
Funded status - plan deficit $ (11,381) $ (9,009)
The following table provides the components of the net periodic pension costs for the three plans for the years ended January 31:
2012 2011
Service cost $ (1,788) $ (1,646)
Interest cost (904) (857)
Expected return on plan assets 618 663
Amortization of prior service cost - (67)
Total $ (2,074) $ (1,907)
(ii) PLAN ASSETS
US plan assets represented approximately 47% of total luxury brand segment plan assets at January 31, 2012. The net unfunded status of the luxury brand segment plans of $11.4 million is comprised of $4.2 million attributed to the US-based Harry Winston Inc. plan, $5.2 million attributed to the Harry Winston Japan, K.K. plan, and $2.0 million attributed to the Harry Winston S.A. plan. The Harry Winston Japan, K.K. plan is non-funded with a benefit obligation of $5.2 million.
The asset allocation of luxury brand pension assets at January 31 was as follows:
2012 2011
ASSET CATEGORY
Cash equivalents 1% 1%
Equity securities 52% 57%
Fixed income securities 34% 36%
Other 13% 6%
Total 100% 100%
(iii) THE SIGNIFICANT ASSUMPTIONS USED FOR HARRY WINSTON INC.'S US PLAN ARE AS FOLLOWS:
2012 2011
ACCRUED BENEFIT OBLIGATION
Discount rate - HW Inc. 4.84% 5.24%
Expected long-term rate of return - HW Inc. 7.50% 7.50%
Discount rate - Harry Winston Japan, K.K. 1.46% 1.58%
Expected long-term rate of return - Harry Winston -% -%
Japan, K.K.
Discount rate - Harry Winston S.A. 2.50% 2.75%
Expected long-term rate of return - Harry Winston S.A. 3.50% 3.75%
BENEFIT COSTS FOR THE YEAR
Discount rate - HW Inc. 5.24% 5.56%
Expected long-term rate of return on plan assets - HW 7.50% 7.50%
Inc.
Rate of compensation increase - HW Inc. -% -%
Discount rate - Harry Winston Japan, K.K. 1.58% 1.84%
Expected long-term rate of return on plan assets - -% -%
Harry Winston Japan, K.K.
Rate of compensation increase - Harry Winston Japan, 4.21% 4.36%
K.K.
Discount rate - Harry Winston S.A. 2.50% 2.75%
Expected long-term rate of return on plan assets - 3.50% 3.75%
Harry Winston S.A.
Rate of compensation increase - Harry Winston S.A. 3.00% 3.00%
(b) Defined contribution plan
Harry Winston Inc. has a defined contribution 401(k) plan covering substantially all employees in the United States. For the fiscal years ended January 31, 2012 and 2011, Harry Winston Inc. elected to increase the employer-matching contribution to 100% of the first 6% of the employee's salary from 50% in fiscal 2007 and prior. Employees must meet minimum service requirements and be employed on December 31 of each year in order to receive this matching contribution.
The Joint Venture sponsors a defined contribution plan whereby the employer contributes 6% of the employee's salary.
Harry Winston Diamond Corporation sponsors a defined contribution plan for Canadian employees whereby the employer contributes to a maximum of 6% of the employee's salary to the maximum contribution limit under Canada's Income Tax Act. The total defined contribution plan liability at January 31, 2012 was $0.1 million ($0.1 million at January 31, 2011).
(c) Post-retirement benefit plan
The Joint Venture provides non-pension post-retirement benefits to retired employees. The post-retirement benefit plan liability was $0.3 million at January 31, 2012 ($nil at January 31, 2011).
Note 14:
Income Taxes
The deferred income tax asset of the Company is $77.2 million, of which $50.4 million relates to the luxury brand segment. Included in the deferred tax asset is $36.9 million that has been recorded to recognize the benefit of $125.0 million of net operating losses that the Company has available for carry forward to shelter income taxes for future years. Certain net operating losses are scheduled to expire between 2013 and 2032.
The deferred income tax liability of the Company is $325.0 million of which $100.6 million relates to the luxury brand segment. The luxury brand segment deferred income tax liabilities include $52.1 million from a previous purchase price allocation. The Company's deferred income tax asset and liability accounts are revalued to take into consideration the change in the Canadian dollar compared to the US dollar and the unrealized foreign exchange gain or loss is recorded as part of deferred tax expenses for each year.
(a) The income tax provision consists of the following:
2012 2011
CURRENT TAX EXPENSE
Current period $ 18,326 $ (8,616)
Adjustment for prior period (3,016) (121)
Total current tax expense 15,310 (8,737)
DEFERRRED TAX EXPENSE
Origination and reversal of temporary differences (45) 17,315
Change in unrecognized deductible temporary (525) (718)
differences
Current year losses for which no deferred tax asset 1,489 894
was recognized
Recognition of previously unrecognized tax losses (2,007) (674)
Total deferred tax expense (1,088) 16,817
Total income tax expenses $ 14,222 $ 8,080
(b) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at January 31, 2012 and 2011 are as follows:
2012 2011
DEFERRED INCOME TAX ASSETS:
Net operating loss carryforwards $ 36,935 $ 27,046
Property, plant and equipment 4,625 3,449
Future site restoration costs 23,161 16,450
Luxury brand inventory 6,211 6,169
Deferred mineral property costs 251 283
Other deferred income tax assets 5,977 6,641
Deferred income tax assets 77,160 60,038
DEFERRED INCOME TAX LIABILITIES:
Deferred mineral property costs (29,339) (31,781)
Property, plant and equipment (160,616) (159,936)
Future site restoration costs (12,078) (7,059)
Luxury brand inventory (47,927) (34,630)
Intangible assets (52,081) (52,365)
Other deferred income tax liabilities (22,994) (24,097)
Deferred income tax liabilities (325,035) (309,868)
Deferred income tax liabilities, net $ (247,875) $ (249,830)
Movement in net deferred tax liabilities:
2012 2011
Balance at the beginning of the year $ (249,831) $ (195,902)
Recognized in profit (loss) 1,088 (16,817)
Recognized in accumulated other comprehensive 606 (647)
income
Acquired on business combination - (36,464)
Other 262 -
Balance at the end of the year $ (247,875) $ (249,830)
(c) Unrecognized deferred tax assets and liabilities:
Deferred tax assets have not been recognized in respect of the following items:
2012 2011
Tax losses $ 6,460 $ 5,121
Deductible temporary differences 166 691
Total $ 6,626 $ 5,812
The tax losses not recognized expire as per the amount and years noted below. The deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Company can utilize the benefits therefrom.
The following table summarizes the Company's non-capital losses as at January 31, 2012 that may be applied against future taxable profit:
Jurisdiction Type Amount Expiry Date
Luxemburg Net operating losses $ 1,918 No expiry
France Net operating losses 5,837 No expiry
United Kingdom Net operating losses 9,021 No expiry
China Net operating losses 5,840 2013 - 2017
Taiwan Net operating losses 952 2022
Singapore Net operating losses 521 No expiry
The deductible temporary differences associated with investments in subsidiaries and joint ventures, for which a deferred tax asset has not been recognized, aggregate to $67.2 million (2011 - $71.2 million).
(d) The difference between the amount of the reported consolidated income tax provision and the amount computed by multiplying the earnings (loss) before income taxes by the statutory tax rate of 28% (2011 - 29%) is a result of the following:
2012 2011
Expected income tax expense $ 11,106 $ 16,030
Non-deductible (non-taxable) items 592 133
Impact of foreign exchange 1,153 (8,278)
Northwest Territories mining royalty (net of income 3,242 4,265
tax relief)
Earnings subject to tax different than statutory 1,687 918
rate
Assessments and adjustments (2,622) (2,254)
Current year losses for which no deferred tax asset 1,489 894
was recognized
Recognition of previously unrecognized tax losses (2,007) (674)
Change in unrecognized temporary differences (525) (718)
Other 107 (2,236)
Recorded income tax expense (recovery) $ 14,222 $ 8,080
(e) The mining segment has net operating loss carryforwards for Canadian income tax purposes of approximately $1.2 million and $1.9 million for other foreign jurisdictions' tax purposes. The luxury brand segment has net operating loss carryforwards for US income tax purposes of $95.7 million and $26.2 million for other foreign jurisdictions' tax purposes.
Note 15:
Interest-Bearing Loans and Borrowings
2012 2011
Mining segment credit facilities $ 48,460 $ 47,895
Mining segment promissory note - 70,000
Harry Winston Inc. credit facilities 217,071 181,715
First mortgage on real property 6,342 7,048
Bank advances 27,850 22,902
Finance leases - 171
Total interest-bearing loans and borrowings 299,723 329,731
Less current portion (29,238) (94,215)
$ 270,485 $ 235,516
Face
Carrying value
amount at
Nominal at January
interest Date of January 31,
Currency rate maturity 31, 2012 2012 Borrower
Secured
bank loan March 31, $200.5 $200.5
(b)(i) US 3.75% 2013 million million Harry Winston Inc.
Secured
bank loan April 22, $3.8 $3.8
(b)(ii) CHF 3.15% 2013 million million Harry Winston S.A.
Secured
bank loan January $12.8 $12.8
(b)(ii) CHF 3.55% 31, 2033 million million Harry Winston S.A.
Harry Winston Diamond
Secured Corporation and
bank loan June 24, $50.0 $50.0 Harry Winston Diamond
(a)(i) US 4.60% 2013 million million Mines Ltd.
First
mortgage
on real
property September $6.3 $6.3
(a)(iii) CDN 7.98% 1, 2018 million million 6019838 Canada Inc.
Secured
bank Harry Winston Diamond
advance Due on $4.3 $4.3 (India) Private
(d) US 12.00% demand million million Limited
Secured
bank
advance February $7.5 $7.5 Harry Winston Japan,
(d) YEN 2.50% 22, 2012 million million K.K.
Unsecured
bank
advance February $7.0 $7.0 Harry Winston Japan,
(d) YEN 2.98% 27, 2012 million million K.K.
Unsecured
bank
advance February $7.7 $7.7 Harry Winston Japan,
(d) YEN 2.98% 29, 2012 million million K.K.
Unsecured
bank
advance October $1.3 $1.3 Harry Winston Japan,
(d) YEN 2.00% 31, 2012 million million K.K.
(a) Mining segment credit facilities
(i) The mining segment maintains a senior secured revolving credit
facility with Standard Chartered Bank that was increased from
$100.0 million to $125.0 million on February 28, 2011. The
facility has an initial maturity date of June 24, 2013 with two
one-year extensions at the Company's option. There are no
scheduled repayments required before maturity. The facility is
available to the Company and Harry Winston Diamond Mines Ltd.
for general corporate purposes. Borrowings bear an interest
margin of 3.5% above the higher of LIBOR or lender cost of
funds. The Company is required to comply with financial
covenants at the mining segment level customary for a financing
of this nature, with change in control provisions at the Company
and Diavik Diamond Mines level. These provisions include
consolidated minimum tangible net worth, maximum mining segment
debt to equity ratio, maximum mining segment debt to EBITDA
ratio and minimum interest coverage ratio. At January 31, 2012,
the Company had $50.0 million outstanding on its mining segment
senior secured revolving credit facility.
(ii) On August 25, 2010, the Company issued a promissory note in the
amount of $70.0 million, maturing on August 25, 2011, as part of
the consideration for reacquiring its 9% indirect interest in
the Diavik Joint Venture from Kinross. The note bears interest
at a rate of 5% per annum and can be paid in cash. On August 25,
2011, the Company paid the $70.0 million promissory note plus
accrued interest to Kinross from cash on hand.
(iii) The Company's first mortgage on real property has scheduled
principal payments of approximately $0.2 million quarterly, and
may be prepaid at any time.
(b) Luxury brand segment credit facilities
(i) Harry Winston Inc. maintains a credit agreement with a syndicate
of banks for a $250.0 million five-year revolving credit
facility. In addition, Harry Winston Inc. may increase the credit
facility by an additional $50.0 million to $300.0 million during
the term of the facility. There are no scheduled repayments
required before maturity on March 31, 2013. The credit facility
is supported by a $20.0 million limited guarantee provided by
Harry Winston Diamond Corporation. The amount available under
this facility is subject to a borrowing base formula based on
certain assets of Harry Winston Inc.
The credit agreement contains affirmative and negative
non-financial and financial covenants, which apply to the luxury
brand segment. These provisions include consolidated minimum
tangible net worth, minimum coverage of fixed charges, and
leverage ratio limitations on capital expenditures and certain
investments, including the restriction to advance funds to the
parent company. The credit agreement also includes a change of
control provision, which would result in the entire unpaid
principal and all accrued interest of the facility becoming due
immediately upon change of control, as defined. Any material
adverse change, as defined, in the luxury brand segment's
business, assets, liabilities, consolidated financial position or
consolidated results of operations constitutes an event of
default under the agreement.
The luxury brand segment has pledged 100% of Harry Winston Inc.'s
common stock and 66⅔% of the common stock of its foreign
subsidiaries to the bank to secure the loan. Inventory, accounts
receivable and the trademark of Harry Winston Inc. are pledged as
collateral to secure the borrowings of Harry Winston Inc. In
addition, an assignment of proceeds on insurance covering pledged
collateral was made.
Loans under the credit facility can be either fixed rate loans or
revolving line of credit loans. The fixed rate loans will bear
interest within a range of 1.50% to 2.25% above LIBOR, based upon
a pricing grid determined by the fixed charge coverage ratio.
Interest under this option will be determined for periods of
either one, two, three or six months. The revolving line of
credit loans will bear interest within a range of 0.50% to 0.75%
above the bank's prime rate based upon a pricing grid determined
by the fixed charge coverage ratio as well.
(ii) Harry Winston S.A. maintains a 25-year loan agreement for CHF
17.5 million ($18.9 million) used to finance the construction of
the Company's watch factory in Geneva, Switzerland. The loan
agreement is comprised of a CHF 3.5 million ($3.8 million) loan
and a CHF 14.0 million ($15.1 million) loan. The bank has a
secured interest in the factory building.
(c) Required principal repayments
2013 $ 29,239
2014 255,738
2015 1,515
2016 1,587
2017 1,664
Thereafter 11,522
(d) Bank advances
The Company has available a $45.0 million (utilization in either US dollars or Euros) revolving financing facility 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 January 31, 2012, $4.3 million was drawn under the Company's revolving financing facility relating to Harry Winston Diamond (India) Private Limited and $nil was drawn by Harry Winston Diamond International N.V. The facility is guaranteed by Harry Winston Diamond Corporation.
Harry Winston Japan, K.K., maintains unsecured credit agreements with three banks, each amounting to ¥1,250 million ($16.1 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.
Note 16:
Provisions
(a) Future site restoration costs
2012 2011
At February 1, 2011 and 2010 $ 50,130 $ 43,691
Revision of previous estimates 13,179 4,435
Accretion of provision 1,936 2,004
At January 31, 2012 and 2011 $ 65,245 $ 50,130
The Joint Venture has an obligation under various agreements (Note 22) to reclaim and restore the lands disturbed by its mining operations.
The Company's share of the total undiscounted amount of the future cash flows that will be required to settle the obligation incurred at January 31, 2012 is estimated to be $84.7 million, of which approximately $23.7 million is expected to occur at the end of the mine life. The revision of previous estimates in fiscal 2012 is based on revised expectations of reclamation activity costs and changes in estimated reclamation timelines. The anticipated cash flows relating to the obligation at the time of the obligation have been discounted at an annualized rate of 1.5%.
(b) Provisions for litigation claims
By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. The Company is subject to various litigation actions, whose outcome could have an impact on the Company's results should it be required to make payments to the plaintiffs. Legal advisors assess the potential outcome of the litigation and the Company establishes provisions for future disbursements as required. At January 31, 2012, the Company does not have any material provisions for litigation claims.
Note 17:
Share Capital
(a) Authorized
Unlimited common shares without par value.
(b) Issued
Number of shares Amount
Balance, January 31, 2010 76,588,593 $ 426,593
SHARES ISSUED FOR:
Issued to Kinross 7,142,857 69,737
Exercise of options 428,401 5,799
Balance, January 31, 2011 84,159,851 502,129
SHARES ISSUED FOR:
Exercise of options 714,930 5,846
Balance, January 31, 2012 84,874,781 $ 507,975
(c) Stock options
Under the Employee Stock Option Plan, amended and approved by the shareholders on June 4, 2008, the Company may grant options for up to 6,000,000 shares of common stock. Options may be granted to any director, officer, employee or consultant of the Company or any of its affiliates. Options granted to directors vest immediately and options granted to officers, employees or consultants vest over three to four years. The maximum term of an option is ten years. The number of shares reserved for issuance to any one optionee pursuant to options cannot exceed 2% of the issued and outstanding common shares of the Company at the date of grant of such options.
The exercise price of each option cannot be less than the fair market value of the shares on the last trading day preceding the date of grant.
The Company's shares are primarily traded on a Canadian dollar based exchange, and accordingly stock option information is presented in Canadian dollars, with conversion to US dollars at the average exchange rate for the year.
Compensation expense for stock options was $2.1 million for fiscal 2012 (2011 - $1.3 million) and is presented as a component of both cost of sales and selling, general and administrative expenses. The amount credited to share capital for the exercise of the options is the sum of (a) the cash proceeds received and (b) the amount debited to contributed surplus upon exercise of stock options by optionees (2012 - $0.6 million; 2011 - $2.8 million).
Changes in share options outstanding are as follows:
2012 2011
Weighted Weighted
average average
Options exercise Options exercise
price price
000s CDN $ US $ 000s CDN $ US $
Outstanding, 2,868 $ 12.58 $ 12.26 3,234 $ 12.89 $ 7.61
beginning of
year
Granted 350 16.70 17.44 300 12.35 11.78
Exercised (715) 7.26 7.43 (428) 7.14 6.92
Expired (102) 25.54 26.14 (238) 26.34 25.79
Outstanding, 2,401 $ 14.21 $ 14.34 2,868 $ 12.58 $ 12.26
end of year
Exercisable options totaled 1.9 million at January 31, 2012 (2.2 million at January 31, 2011).
The following summarizes information about stock options outstanding at January 31, 2012:
Options Options
outstanding exercisable
Weighted
average
remaining Weighted Weighted
Number contractual average Number average
Range of outstanding life in exercise exercisable exercise
exercise years price price
prices
CDN $ 000s CDN $ 000s CDN $
$3.78 1,015 7.2 $ 3.78 1,016 $ 3.78
12.35-16.70 650 6.8 14.69 100 12.35
23.35-29.25 600 0.6 25.21 600 25.21
41.45 136 2.2 41.45 136 41.45
2,401 $ 14.21 1,852 $ 13.94
(d) Stock-based compensation
The Company applies the fair value method to all grants of stock options.
The fair value of options granted during the years ended January 31, 2012 and 2011 was estimated using a Black-Scholes option pricing model with the following weighted average assumptions:
2012 2011
Risk-free interest rate 2.41% 2.13%
Dividend yield 0.00% 0.00%
Volatility factor 50.00% 50.00%
Expected life of the options 3.5 years 5.9 years
Average fair value per option, CDN $ 6.51 $ 5.90
Average fair value per option, US $ 6.80 $ 5.63
Expected volatility is estimated by considering historic average share price volatility based on the average expected life of the options.
(e) RSU and DSU Plans
RSU Number of units
Balance, January 31, 2010 45,880
Awards and payouts during the year (net)
RSU awards 145,880
RSU payouts (35,814)
Balance, January 31, 2011 155,946
Awards and payouts during the year (net)
RSU awards 66,991
RSU payouts (46,963)
Balance, January 31, 2012 175,974
DSU Number of units
Balance, January 31, 2010 159,475
Awards and payouts during the year (net)
DSU awards 33,739
DSU payouts -
Balance, January 31, 2011 193,214
Awards and payouts during the year (net)
DSU awards 38,781
DSU payouts (17,127)
Balance, January 31, 2012 214,868
During the fiscal year, the Company granted 66,931 RSUs (net of forfeitures) and 38,781 DSUs under an employee and director incentive compensation program, respectively. The RSU and DSU Plans are full value phantom shares that mirror the value of 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. The Company recognized an expense of $2.2 million (2011 - $0.9 million) for the year ended January 31, 2012. The total carrying amount of liabilities for cash settled share-based payment arrangements is $3.7 million (2011 - $2.5 million). The amounts for obligations and expense (recovery) for cash settled share-based payment arrangements have been grouped with Employee Benefit Plans in Note 13 for presentation purposes.
Note 18:
Segmented Information
The Company operates in three segments within the diamond industry - mining, luxury brand and corporate, for the years ended January 31, 2012 and 2011.
The mining segment consists of the Company's rough diamond business. This business includes the 40% ownership interest in the Diavik group of mineral claims and the sale of rough diamonds.
The luxury brand segment consists of the Company's ownership in Harry Winston Inc. This segment consists of the marketing of fine jewelry and watches on a worldwide basis.
The corporate segment captures costs not specifically related to operations of the mining or luxury brand segments.
For the year
ended January Luxury
31, 2012 Mining brand Corporate Total
Sales
North America $ 15,018 $ 133,024 $ - $ 148,042
Europe 231,722 94,309 - 326,031
Asia excluding 43,374 103,815 - 147,189
Japan
Japan - 80,781 - 80,781
Total sales 290,114 411,929 - 702,043
Cost of sales
Depreciation 76,052 262 - 76,314
and
amortization
All other 151,899 223,611 136 375,646
costs
Total cost of 227,951 223,873 136 451,960
sales
Gross margin 62,163 188,056 (136) 250,083
Gross margin (%) 21.4% 45.7% -% 35.6%
Selling, general
and
administrative
expenses
Selling and 3,412 129,445 - 132,857
related
expenses
Administrative 10,042 39,166 11,487 60,695
expenses
Total selling, 13,454 168,611 11,487 193,552
general and
administrative
expenses
Operating profit
(loss) 48,709 19,445 (11,623) 56,531
Finance expenses (10,787) (5,900) - (16,687)
Exploration
costs (1, 770) - - (1, 770)
Finance and
other income 462 124 - 586
Foreign exchange
gain 834 171 - 1,005
Segmented profit $
(loss) before
income taxes 37,448 $ 13,840 $ (11,623) $ 39,665
Segmented assets
as at January
31, 2012
Canada $ 936,723 $ - $ - $ 936,723
United States - 347,430 116,076 463,506
Other foreign 19,759 210,948 - 230,707
countries
$ 956,482 $ 558,378 $ 116,076 $ 1,630,936
Capital $
expenditures 45,165 $ 19,681 $ - $ 64,846
Other
significant
non-cash items:
Deferred (2,291) 1,486 (283) (1,088)
income tax
expense
(recovery) $ $ $ $
Operating profit (loss) for the year ended January 31, 2012 includes
the following items of expense:
Luxury
Mining Brand Corporate Total
Research and $
development 4,147 $ 2,412 $ - $ 6,559
Operating lease 317 30,269 - 30,586
Employee
compensation
expense 43,500 68,782 4,089 116,371
Depreciation and
amortization 78,760 12,321 558 91,639
For the year
ended January Luxury
31, 2011 Mining brand Corporate Total
Sales
North America $ 10,418 $ 108,500 $ - $ 118,918
Europe 247,677 78,624 - 326,301
Asia excluding 21,059 92,504 - 113,563
Japan
Japan - 65,181 - 65,181
Total sales 279,154 344,809 - 623,963
Cost of sales
Depreciation 60,923 320 - 61,243
and
amortization
All other 144,489 181,729 204 326,422
costs
Total cost of 205,412 182,049 204 387,665
sales
Gross margin 73,742 162,760 (204) 236,298
Gross margin (%) 26.4% 47.2% -% 37.9%
Selling, general
and
administrative
expenses
Selling and 2,786 106,498 - 109,284
related
expenses
Administrative 8,692 41,358 8,616 58,666
expenses
Total selling, 11,478 147,856 8,616 167,950
general and
administrative
expenses
Operating profit
(loss) 62,264 14,904 (8,820) 68,348
Finance expenses (7,136) (6,291) - (13,427)
Exploration
costs (666) - - (666)
Finance and
other income 280 389 - 669
Foreign exchange
gain (loss) (1,644) 2,001 - 357
Segmented profit $
(loss) before
income taxes 53,098 $ 11,003 $ (8,820) $ 55,281
Segmented assets
as at January
31, 2011
Canada $ 954,072 $ - $ - $ 954,072
United States - 331,138 106,767 437,905
Other foreign 25,413 186,185 - 211,598
countries
$ 979,485 $ 517,323 $ 106,767 $ 1,603,575
Capital $
expenditures 41,859 $ 6,751 $ - $ 48,610
Other
significant
non-cash items:
Deferred 12,380 5,060 (623) 16,817
income tax
expense
(recovery) $ $ $ $
Operating profit (loss) for the year ended January 31, 2011 includes
the following items of expense:
Luxury
Mining Brand Corporate Total
Research and $
development 5,165 $ 1,719 $ - $ 6,884
Operating lease 317 21,244 - 21,561
Employee
compensation
expense 38,557 58,786 3,334 100,677
Depreciation and
amortization 63,424 12,264 1,319 77,007
Note 19:
Earnings per Share
The following table presents the calculation of diluted earnings per share:
2012 2011
NUMERATOR
Net earnings for the year attributable to $ 25,454 $ 41,530
shareholders
DENOMINATOR (000s SHARES)
Weighted average number of shares 84,661 79,858
outstanding
Dilutive effect of employee stock options 871 1,083
85,532 80,941
Note 20:
Related Party Disclosure
(a) Operational information
The Company had the following investments in significant subsidiaries at January 31, 2012:
Name of company Effective interest Country of
incorporation
Harry Winston Diamond 100% Canada
Mines Ltd.
Harry Winston Diamond 100% Canada
Limited Partnership
Harry Winston Diamond 100% India
(India) Private Limited
Harry Winston Diamond 100% Belgium
International N.V.
Harry Winston Technical 100% Canada
Services Inc.
6019838 Canada Inc. 100% Canada
Harry Winston Inc. 100% US
Harry Winston SARL 100% France
Harry Winston Japan, 100% Japan
K.K.
Harry Winston (UK) 100% UK
Limited
Harry Winston Inc. 100% Taiwan
Taiwan Branch
Harry Winston S.A. 100% Switzerland
Harry Winston (Hong 100% Hong Kong
Kong) Limited
Harry Winston 100% China
Commercial (Beijing)
Co., Ltd
Harry Winston N.A. Pte 100% Singapore
Ltd.
Note 21:
Reclassifications
Certain comparative figures have been reclassified to conform with the current year's presentation.
Note 22:
Commitments and Guarantees
(a) Environmental agreements
Through negotiations of environmental and other agreements, the Joint Venture must provide funding for the Environmental Monitoring Advisory Board. HWDLP anticipates its share of this funding requirement will be approximately $0.3 million for calendar 2012. Further funding will be required in future years; however, specific amounts have not yet been determined. These agreements also state that the Joint Venture must provide security deposits for the performance by the Joint Venture of its reclamation and abandonment obligations under all environmental laws and regulations. HWDLP's share of the letters of credit outstanding posted by the operator of the Joint Venture with respect to the environmental agreements as at January 31, 2012, was $81.1 million. The agreement specifically provides that these funding requirements will be reduced by amounts incurred by the Joint Venture on reclamation and abandonment activities.
(b) Participation agreements
The Joint Venture has signed participation agreements with various native groups. These agreements are expected to contribute to the social, economic and cultural well-being of the Aboriginal bands. The agreements are each for an initial term of twelve years and shall be automatically renewed on terms to be agreed upon for successive periods of six years thereafter until termination. The agreements terminate in the event that the mine permanently ceases to operate. Harry Winston Diamond Corporation's share of the Joint Venture's participation agreements as at January 31, 2012 was $1.5 million.
(c) Operating lease commitments
The Company has entered into leases for the rental of luxury brand salons and office premises. The leases have varying terms, escalation clauses and renewal rights. Any renewal terms are at the option of the lessee at lease payments based on market prices at the time of renewal. Certain leases contain either restrictions relating to opening additional salons within a specified radius or contain additional rents related to sales levels. Future minimum lease payments under non-cancellable operating leases as at January 31 are as follows:
2012 2011
Within one year $ 22,439 $ 18,720
After one year but not more than five 75,285 49,973
years
More than five years 122,628 35,856
$ 220,352 $ 104,549
(d) Capital commitments related to the Joint Venture
At January 31, 2012, Harry Winston Diamond Corporation's share of approved capital expenditures at the Joint Venture was $23.4 million (2011 - $14.6 million). At January 31, 2012, Harry Winston Diamond Corporation's current projected share of the planned capital expenditures at the Diavik Diamond Mine for the calendar years 2012 to 2016, is approximately $140 million (2011 - $170 million) assuming a Canadian/US average exchange rate of $1.00 for the five years (2011 - $1.00).
Note 23:
Financial Risk Management Objectives and Policies
The Company is exposed, in varying degrees, to a variety of financial-instrument-related risks by virtue of its activities. The Company's overall financial risk-management program focuses on the preservation of capital and protecting current and future Company assets and cash flows by minimizing exposure to risks posed by the uncertainties and volatilities of financial markets.
The Company's Audit Committee has responsibility to review and discuss significant financial risks or exposures and to assess the steps management has taken to monitor, control, report and mitigate such risks to the Company.
Financial risk management is carried out by the Finance department, which identifies and evaluates financial risks and establishes controls and procedures to ensure financial risks are mitigated.
The types of risk exposure and the way in which such exposures are managed are as follows:
(i) Currency risk
The Company's sales are predominantly denominated in US dollars. As the Company operates in an international environment, some of the Company's financial instruments and transactions are denominated in currencies other than the US dollar. The results of the Company's operations are subject to currency transaction risk and currency translation risk. The operating results and financial position of the Company are reported in US dollars in the Company's consolidated financial statements.
The Company's primary foreign exchange exposure impacting pre-tax profit arises from the following sources:
Net Canadian dollar denominated monetary assets and liabilities
- The Company's functional and reporting currency is US
dollars; however, many of the mining segment's monetary assets
and liabilities are in Canadian dollars. As such, the Company
is continually subject to foreign exchange fluctuations,
particularly as the Canadian dollar moves against the US
dollar. The weakening/strengthening of the Canadian dollar
versus the US dollar results in an unrealized foreign exchange
gain/loss on the revaluation of the Canadian dollar denominated
assets and liabilities.
Committed or anticipated foreign currency denominated
transactions - primarily Canadian dollar costs at the Diavik
Diamond Mine.
Based on the Company's net exposure to Canadian dollar monetary assets and liabilities at January 31, 2012, a one-cent change in the exchange rate would have impacted pre-tax profit for the year by $0.5 million (2011 - $0.2 million).
The Company also has foreign exchange exposure impacting accumulated other comprehensive income arising from assets recorded in currencies other than the US dollar at its luxury brand salons and watch factory. A one percent change in these underlying currencies at January 31, 2012 would have impacted accumulated other comprehensive income by $0.5 million.
(ii) Interest rate risk
Interest rate risk is the risk borne by an interest-bearing asset or liability as a result of fluctuations in interest rates. Financial assets and financial liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company's most significant interest rate risk arises from its various credit facilities, which bear variable interest based on LIBOR. Based on the Company's LIBOR-based credit facilities at January 31, 2012, a 100 basis point change in LIBOR would have impacted pre-tax net profit for the year by $2.3 million (2011 - $1.9 million).
(iii) Concentration of credit risk
Credit risk is the risk of a financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligation.
Financial instruments that potentially subject the Company to credit risk consist of trade receivables from luxury brand segment clients. While economic factors can affect credit risk, the Company manages risk by providing credit terms on a case-by-case basis only after a review of the client's financial position and credit history. The Company has not experienced significant losses in the past from its customers.
The Company's exposure to credit risk in the mining segment is minimized by its sales policy, which requires receipt of cash prior to the delivery of rough diamonds to its customers.
The Company manages credit risk, in respect of short-term investments, by maintaining bank accounts with Tier 1 banks and investing only in term deposits or banker's acceptances with highly rated financial institutions that are capable of prompt liquidation. The Company monitors and manages its concentration of counterparty credit risk on an ongoing basis.
At January 31, 2012, the Company's maximum counterparty credit exposure consists of the carrying amount of cash and cash equivalents and accounts receivable, which approximates fair value.
The Company considers any accounts receivables outstanding more than 30 days to be past due. At January 31, 2012, past due accounts receivable were as follows:
2012 2011
31- 60 days $ 4,651 $ 531
61 - 90 days 1,692 338
Over 90 days 2,115 10,329
$ 8,458 $ 11,198
(iv) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due.
The Company manages its liquidity by ensuring that there is sufficient capital to meet short-term and long-term business requirements, after taking into account cash flows from operations and the Company's holdings of cash and cash equivalents. The Company also strives to maintain sufficient financial liquidity at all times in order to participate in investment opportunities as they arise, as well as to withstand sudden adverse changes in economic circumstances. The Company assesses liquidity and capital resources on a consolidated basis. Management forecasts cash flows for its current and subsequent fiscal years to predict future financing requirements. Future financing requirements are met through a combination of committed credit facilities and access to capital markets.
At January 31, 2012, the Company had $78.2 million of cash and cash equivalents and $116.0 million available under credit facilities.
The following table summarizes the aggregate amount of contractual undiscounted future cash outflows for the Company's financial liabilities:
Less
than Year Year After
Total 1 year 2-3 4-5 5 years
Trade and other
payables $ 104,681 $ 104,681 $ - $ - $ -
Income taxes
payable 29,450 29,450 - - -
Interest-bearing
loans and
borrowings(a) 321,751 39,578 260,954 4,852 16,367
Environmental
and
participation
agreement
incremental
commitments 93,330 82,676 4,844 - 5,810
Operating lease
obligations 220,352 22,439 39,288 35,997 122,628
((a)) Includes projected interest payments on the current debt outstanding based on interest rates in effect at January 31, 2012.
(vi) Capital management
The Company's capital includes cash and cash equivalents, current and non-current interest-bearing loans and borrowings and equity, which includes issued common shares, contributed surplus and retained earnings.
The Company's primary objective with respect to its capital management is to ensure that it has sufficient cash resources to maintain its ongoing operations, to provide returns to shareholders and benefits for other stakeholders, and to pursue growth opportunities. To meet these needs, the Company may from time to time raise additional funds through borrowing and/or the issuance of equity or debt or by securing strategic partners, upon approval by the Board of Directors. The Board of Directors reviews and approves any material transactions out of the ordinary course of business, including proposals on acquisitions or other major investments or divestitures, as well as annual capital and operating budgets.
The Company assesses liquidity and capital resources on a consolidated basis. The Company's requirements are for cash operating expenses, working capital, contractual debt requirements and capital expenditures. The Company believes that it will generate sufficient liquidity to meet its anticipated requirements for the next twelve months.
Note 24:
Financial Instruments
The Company has various financial instruments comprising cash and cash equivalents, accounts receivable, trade and other payables, and interest-bearing loans and borrowings.
Cash and cash equivalents consist of cash on hand and balances with banks and short-term investments held in overnight deposits with a maturity on acquisition of less than 90 days. Cash and cash equivalents, which are designated as held-for-trading, are carried at 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 Company's interest-bearing loans and borrowings are for the most part fully secured; hence the fair values of these instruments at January 31, 2012 are considered to approximate their carrying value.
The carrying values and estimated fair values of these financial instruments are as follows:
January 31, 2012 January 31, 2011
Estimated Estimated
fair Carrying fair Carrying
value value value value
Financial assets
Cash and cash
equivalents $ 78,116 $ 78,116 $ 108,693 $ 108,693
Accounts
receivable 26,910 26,910 22,788 22,788
$ 105,026 $ 105,026 $ 131,481 $ 131,481
Financial
liabilities
Trade and other
payables $ 104,681 $ 104,681 $ 139,551 $ 139,551
Promissory note - - 70,000 70,000
Interest-bearing
loans and
borrowings 299,723 299,723 259,731 259,731
$ 404,404 $ 404,404 $ 469,282 $ 469,282
Note 25:
Explanation of Transition to IFRS
As stated in Note 2(a), these are the Company's first audited consolidated financial statements prepared in accordance with IFRS.
The preparation of these first consolidated financial statements in accordance with IFRS has resulted in changes to the accounting policies as compared with the most recent annual financial statements prepared under generally accepted accounting principles in Canada ('Canadian GAAP'). Canadian GAAP differs in some areas from IFRS. IFRS 1, 'First-time Adoption of International Financial Reporting Standards', generally requires full retrospective application of the standards and interpretations in force assuming that the IFRS accounting policies had always been applied. However, IFRS 1 allows certain exemptions in the application of particular standards to prior periods in order to assist companies with the transition process. The Company has elected to take the following significant optional exemptions as permitted under IFRS 1 in preparing its opening IFRS balance sheet.
Business Combinations - IFRS 1 allows the Company not to apply
IFRS 3, 'Business Combinations' ('IFRS 3 (Revised)'),
retrospectively to past acquisitions.
Leases - The Company has utilized this exemption, which allows
an entity not to have to reassess contracts that have already
been assessed under Canadian GAAP, and which would have
resulted in a similar conclusion as International Financial
Reporting Interpretations Committee ('IFRIC') 4, 'Determining
Whether an Arrangement Contains a Lease'.
Cumulative Translation Differences - Retrospective application
of IFRS would require the Company to determine cumulative
currency translation differences in accordance with IAS 21,
'The Effects of Changes in Foreign Exchange Rates' ('IAS 21'),
from the date a subsidiary or associate was formed or acquired.
This exemption permits the Company to reset existing cumulative
translation differences to zero at transition date.
Borrowing Costs - This exemption allows the Company to adopt
IAS 23, 'Borrowing Costs' ('IAS 23'), which requires the
capitalization of borrowing costs on all qualifying assets,
prospectively from the date of the opening IFRS balance sheet.
The alternative to this exemption requires the Company to
retrospectively restate borrowing costs in accordance with IFRS
requirements, in addition to capitalizing borrowing costs from
the date of transition.
Decommissioning Liabilities Included in the Cost of Property,
Plant and Equipment - IFRS 1 provides an optional exemption
from the full retrospective application of decommissioning
liabilities, which allows an entity to re-measure provisions on
the transition date under IAS 37, 'Provisions, Contingent
Liabilities and Contingent Assets' ('IAS 37'), and estimate the
amount to be included in the cost of the related asset by
discounting the liability to the date at which it first arose.
The alternative to this election, retrospective application,
would require the Company to estimate its provision for
reclamation and remediation at the original date incurred and
reflect changes in estimate and discount rates through to the
date of transition to IFRS.
The accounting policies described in Note 3 of the audited consolidated financial statements have been applied in preparing: the financial statements for the year ended January 31, 2012, the comparative information presented in these financial statements for both the year ended January 31, 2011, and in the preparation of an opening IFRS balance sheet at February 1, 2010 (the Company's date of transition).
An explanation of how the transition to IFRS has affected the reported financial position and financial performance of the Company is shown below, including reconciliations of equity, profit and loss and comprehensive income for the comparative periods and of equity at the date of transition reported under previous Canadian GAAP to those reported for those periods and at the date of transition under IFRS.
Explanation of transition to IFRS: Reconciliation of equity
(in thousands of
United States
dollars)
(unaudited) February 1, 2010 January 31, 2011
Effect of Effect of
Canadian transition Canadian transition
Ref. GAAP to IFRS IFRS GAAP to IFRS IFRS
ASSETS
Current assets:
Cash and cash
equivalents $ 62,969 $ - $ 62,969 $ 108,693 $ - $ 108,693
Accounts
receivable (a) 23,520 78 23,598 22,723 65 22,788
Inventory and
supplies 311,188 - 311,188 403,212 - 403,212
Other current
assets (b) 44,220 (4,921) 39,299 45,681 (4,364) 41,317
441,897 (4,843) 437,054 580,309 (4,299) 576,010
Property, plant
and equipment
- Mining (c) 802,984 (19,552) 783,432 777,807 (13,714) 764,093
Property, plant
and equipment
- Luxury brand 62,277 - 62,277 61,019 - 61,019
Intangible assets,
net 129,213 - 129,213 127,894 - 127,894
Other non-current
assets (a) 15,629 - 15,629 16,626 (2,105) 14,521
Deferred income
tax assets (a) 42,805 7,719 50,524 53,857 6,181 60,038
Total assets $ 1,494,805 $ (16,676) $ 1,478,129 $ 1,617,512 $ (13,937) $ 1,603,575
LIABILITIES AND
EQUITY
Current
liabilities:
Trade and other
payables (d) $ 87,448 $ (11,555) $ 75,893 $ 142,339 $ (2,788) $ 139,551
Employee benefit
plans (d) - 11,284 11,284 - 4,317 4,317
Income taxes
payable 46,297 - 46,297 6,660 - 6,660
Bank advances (d) 22,485 (22,485) - 22,902 (22,902) -
Promissory note - - - 70,000 - 70,000
Current portion
of
interest-bearing
loans and
borrowings (d) 1,154 22,677 23,831 1,313 22,902 24,215
157,384 (79) 157,305 243,214 1,529 244,743
Interest-bearing
loans and
borrowings (d) 161,538 153 161,691 237,450 (1,934) 235,516
Employee benefit
plans (e) 2,201 4,697 6,898 3,001 4,286 7,287
Provisions (f) 41,275 2,416 43,691 43,390 6,740 50,130
Deferred income
tax liabilities (g) 271,822 (25,424) 246,398 355,531 (45,663) 309,868
Total liabilities 634,220 (18,237) 615,983 882,586 (35,042) 847,544
Equity:
Share capital 426,593 - 426,593 502,129 - 502,129
Contributed
surplus 17,730 - 17,730 16,233 - 16,233
Retained
earnings (h) 210,001 32,056 242,057 176,620 53,159 229,779
Accumulated
other
comprehensive
income (i) 28,445 (31,016) (2,571) 39,678 (32,054) 7,624
Total
shareholders'
equity 682,769 1,040 683,809 734,660 21,105 755,765
Non-controlling
interest (j) 177,816 521 178,337 266 - 266
Total equity 860,585 1,561 862,146 734,926 21,105 756,031
Total liabilities
and equity $ 1,494,805 $ (16,676) $ 1,478,129 $ 1,617,512 $ (13,937) $ 1,603,575
Explanation of transition to IFRS: Reconciliation of profit
(in thousands of
United States
dollars)
(unaudited) For the fiscal year ended January 31, 2011
Effectof
transition
Canadian to
Ref. GAAP IFRS IFRS
Sales $ 623,963 $ - $ 623,963
Cost of sales (k) 391,562 (3,897) 387,665
Gross margin 232,401 3,897 236,298
Selling, general
and
administrative
expenses 167,950 - 167,950
Operating profit 64,451 3,897 68,348
Finance expenses (l) (11,527) (1,900) (13,427)
Exploration costs (m) - (666) (666)
Finance and other
income (m) 486 183 669
Foreign exchange
gain (loss) (n) (14,406) 14,763 357
Profit before
income taxes 39,004 16,277 55,281
Current income
tax recovery (8,737) - (8,737)
Deferred income
tax expense (o) 21,121 (4,304) 16,817
Net profit $ 26,620 $ 20,581 $ 47,201
Attributable to:
Shareholders $ 21,669 $ 19,861 $ 41,530
Non-controlling
interest 4,951 720 5,671
Net profit $ 26,620 $ 20,581 $ 47,201
Earnings per
share
Basic $ 0.27 $ 0.25 $ 0.52
Diluted $ 0.27 $ 0.24 $ 0.51
Weighted average
number of shares
outstanding 79,858,018 79,858,018 79,858,018
Explanation of transition to IFRS: Reconciliation of comprehensive income
(in thousands of
UnitedStates
dollars)
(unaudited) For the fiscal year ended January 31, 2011
Effect of
transition
Canadian to
Ref. GAAP IFRS IFRS
Net profit - as
above $ 26,620 $ 20,581 $ 47,201
Other
comprehensive
income
Net gain (loss)
on translation
of net foreign
operations 10,879 - 10,879
Change in fair
value of
derivative
financial
instruments 354 - 354
Actuarial loss
on employee (e)
benefit plans (i) - (1,038) (1,038)
Total
comprehensive
income $ 37,853 $ 19,543 $ 57,396
Attributable to:
Shareholders $ 32,902 $ 18,823 $ 51,725
Non-controlling
interest 4,951 720 5,671
Total
comprehensive
income $ 37,853 $ 19,543 $ 57,396
References to the Reconciliation of Equity and Profit
(a) Reclassification of assets
To conform to IFRS presentation requirements, certain asset balances have been reclassified.
(b) Other current assets
Twelve
monthsended
February January 31,
Ref. 1,2010 2011
Reclassification
of assets See (a) $ (7,797) $ (6,246)
Deferred tax
impact on
intra-group
transfer of
assets (i) 2,876 1,882
Net decrease in
other current
assets $ (4,921) $ (4,364)
(i) Under IFRS, deferred taxes are recognized for the difference in
tax bases between jurisdictions as a result of an intra-group
transfer of assets. The deferred tax component under IFRS is
computed using the tax rate applicable to the purchaser, whereas
the seller's tax rate was applied under Canadian GAAP. On
transition to IFRS at February 1, 2010, deferred income tax asset
increased by $2.9 million along with a corresponding increase in
retained earnings.
For the fiscal year ended January 31, 2011, the accounting under
IFRS resulted in a reduction of $1.0 million in both deferred
income tax asset and deferred income tax recovery.
(c) Property, plant and equipment - Mining
Twelvemonths
ended
February1, January 31,
Ref. 2010 2011
Derecognition
of exploration
costs
capitalized (i) $ (18,632) $ (17,072)
Remeasurement
of the asset
retirement
obligation See (f)(i) (920) 3,358
Net decrease
in property,
plant and
equipment -
Mining $ (19,552) $ (13,714)
(i) Under Canadian GAAP, the Company's policy on exploration
expenditures incurred is to capitalize and to amortize using the
units-of-production method. For IFRS purposes, the Company's
accounting policy on exploration expenditures is to expense unless
the exploration activity relates to proven and probable reserves.
The retrospective application of this new accounting policy at the
date of transition has resulted in the $18.6 million write-off of
the net book value of capitalized exploration costs, and a
decrease in deferred income tax liability, non-controlling
interest and retained earnings by $5.5 million, $0.9 million and
$12.2 million, respectively.
For the fiscal year ended January 31, 2011, the accounting under
IFRS increased mining property, plant and equipment, deferred
income tax liabilities and non-controlling interest by $1.6
million, $0.6 million and $0.2 million, respectively. Cost of
sales decreased by $2.0 million, and exploration costs, deferred
income tax expense and profit attributable to non-controlling
interest increased by $0.5 million, $0.6 million and $0.2 million,
respectively.
(d) Reclassification of liabilities
To conform to IFRS presentation requirements, various liability balances have been reclassified.
(e) Employee benefit plans
Twelve months
ended
February1, January 31,
Ref. 2010 2011
Retrospective $
application of
IAS 19,
'Employee
Benefits' (i) 4,771 $ 5,986
Reclassification
of liabilities See (d) (74) (1,700)
Net increase in $
employee benefit
plans 4,697 $ 4,286
(i) Under Canadian GAAP, actuarial gains or losses for defined benefit
plans that exceeded the corridor threshold (10% of the greater of
the obligation and fair value of plan assets at the beginning of
the period) were recognized over the remaining average service
life of active employees. For IFRS purposes, the Company's
accounting policy is to recognize its actuarial gains and losses
immediately in other comprehensive income, and has retrospectively
applied this approach at the date of transition. As a result, $2.2
million in previously unrecognized cumulative actuarial losses at
February 1, 2010 were recognized in accumulated other
comprehensive income within equity, along with a $4.8 million
increase in the defined benefit plan obligation and a $2.6 million
decrease in deferred income tax liabilities.
For the fiscal year ended January 31, 2011, the accounting under
IFRS resulted in a $1.2 million increase to the defined benefit
plan obligation, a $1.0 million charge to other comprehensive
income, and a $0.2 million decrease in deferred income tax
liabilities.
(f) Provisions
Twelve months
ended
Ref. February 1, 2010 January 31,2011
Remeasurement
of the asset
retirement
obligation (i) $ 2,416 $ 6,740
(i) The Company has elected to utilize the IFRS 1 optional exemption
relating to 'Changes in decommissioning, restoration and similar
liabilities' in preparing its opening balance sheet under IFRS.
Through application of this IFRS exemption, the site restoration
provision under Canadian GAAP has been increased by $2.4 million
along with reductions in mining capital assets, deferred income
tax liability, non-controlling interest and retained earnings by
$0.9 million, $1.0 million, $0.2 million and $2.2 million,
respectively.
For the fiscal year ended January 31, 2011, the accounting under
IFRS resulted in increases of $4.3 million in both mining capital
assets and restoration site provision. Nominal changes were also
made to deferred income tax liabilities, cost of sales, finance
expenses and deferred income tax recovery.
(g) Deferred income tax liabilities
Twelve months
ended
February 1, January 31,
Ref. 2010 2011
Recognition of
new deferred
tax balances (i) $ (16,363) $ (34,749)
Derecognition
of exploration
costs
capitalized See (c)(i) (5,521) (4,887)
Retrospective
application of
IAS 19,
'Employee
Benefits' See (e)(i) (2,555) (2,732)
Remeasurement
of the asset
retirement
obligation See (f)(i) (985) (1,002)
Revaluation of
deferred
income tax
liabilities (ii) - (2,293)
Total decrease
in deferred
income tax
liabilities $ (25,424) $ (45,663)
(i) Under IFRS, in the determination of temporary differences, the
carrying value of non-monetary assets and liabilities is
translated into the functional currency at the historical rate
and compared to its tax value translated into the functional
currency at the current rate. The resulting temporary difference
(measured in the functional currency) is then multiplied by the
appropriate tax rate to determine the related deferred tax
balance.
Under Canadian GAAP, in the determination of temporary
differences related to non-monetary assets and liabilities, the
temporary differences computed in local currency are multiplied
by the appropriate tax rate. The resulting future income tax
amount is then translated into the Company's functional currency
if it is different from the local currency.
On transition, the accounting under IFRS related to the
determination of temporary differences of foreign currency
non-monetary assets and liabilities and other temporary
differences that were treated as permanent under Canadian GAAP
has reduced deferred tax liability by $24.4 million and increased
retained earnings and non-controlling interest by $22.8 million
and $1.6 million, respectively.
In addition, upon finalizing the IFRS adjustments, the Company
recorded an additional deferred tax liability of $8.0 million,
with a corresponding impact on retained earnings related to
immaterial adjustments of prior period balances, which were not
previously recorded in the April 30, 2011 unaudited interim
condensed consolidated financial statements. The Company has
determined that these amounts were not material to its
consolidated financial statements for any prior interim or annual
periods.
For the fiscal year ended January 31, 2011, the accounting under
IFRS resulted in an $18.4 million decrease in deferred income tax
liabilities and an $18.4 million increase in deferred income tax
recovery. Net profit attributable to non-controlling interest
also increased by $0.5 million.
(ii) For the fiscal year ended January 31, 2011, the above IFRS
adjustments to deferred income tax liabilities required a
revaluation of the account balance resulting in a $2.3 million
reduction in deferred income tax liabilities and a corresponding
increase in deferred income tax recovery. Nominal changes were
also made to non-controlling interest.
(h) Retained earnings
The effect of all IFRS adjustments has increased (decreased) retained earnings as follows:
Twelve
months
ended
February1, January 31,
Ref. 2010 2011
Reset of
cumulative
translation
differences See (i)(i) $ 28,800 $ 28,800
Recognition
of new
deferred tax
balances See (g)(i) 14,775 32,692
Derecognition
of
exploration
costs
capitalized See (c)(i) (12,243) (11,496)
Deferred tax
impact on
intra-group
transfer of
assets See (b)(i) 2,876 1,882
Remeasurement
of the asset
retirement
obligation See (f)(i) (2,152) (2,181)
Revaluation
of deferred
income tax See (g)
liabilities (ii) - 2,221
Reacquisition
of
partnership
units See (i)(i) - 1,241
Net increase
in retained
earnings $ 32,056 $ 53,159
(i) Accumulated other comprehensive income
Twelvemonths
ended
February 1, January 31,
Ref. 2010 2011
Reset of
cumulative
translation
differences (i) $ (28,800) $ (28,800)
Retrospective
application
of IAS 19,
'Employee
Benefits' See (e)(i) (2,216) (3,254)
Total
decrease in
accumulated
other
comprehensive
income $ (31,016) $ (32,054)
(i) The Company has elected to utilize the IFRS 1 optional exemption
relating to 'Cumulative translation differences' in preparing its
opening balance sheet under IFRS. Through application of this
exemption on transition date, existing cumulative translation
differences have been reset to zero and retained earnings has been
increased by $28.8 million.
(j) Non-controlling interest
Twelvemonths
ended
February January 31,
Ref. 1, 2010 2011
Derecognition
of exploration
costs
capitalized See (c)(i) $ (868) $ (689)
Remeasurement
of the asset
retirement
obligation See (f)(i) (199) (199)
Recognition of
new deferred
tax balances See (g)(i) 1,588 2,057
Revaluation of
deferred income See (g)
tax liabilities (ii) - 72
Reacquisition
of partnership
units (i) - (1,241)
Net change in
non-controlling
interest $ 521 $ -
(i) During the third quarter of fiscal 2011, the Company reacquired
its 9% indirect interest in the Diavik Joint Venture from Kinross
resulting in the reversal of previously recorded profit
adjustments attributable to non-controlling interest.
(k) Cost of sales
Twelve months ended
Ref. January 31, 2011
Reclassification of $
accretion expense (i) (2,004)
Derecognition of
exploration costs
capitalized See (c)(i) (2,043)
Remeasurement of the
asset retirement
obligation See (f)(i) 150
Net decrease in cost of $
sales (3,897)
(i) In accordance with IFRIC 1, 'Changes in Existing Decommissioning,
Restoration and Similar Liabilities', accretion expense is treated
as interest expense whereas under Canadian GAAP it had been
recorded as a component of cost of sales.
(l) Finance expenses
Twelve months ended
Ref. January 31, 2011
Reclassification of $
accretion expense See (k)(i) (2,004)
Remeasurement of the
asset retirement
obligation See (f)(i) 104
Net increase in finance $
expenses (1,900)
(m) Exploration costs
Twelvemonths ended
Ref. January 31, 2011
Derecognition of $
exploration costs
capitalized See (c)(i) (483)
Reclassification of
exploration costs See (m) (183)
Increase in exploration $
costs (666)
(n) Decrease in foreign exchange loss
Twelve months ended
Ref. January 31, 2011
Reclassification of foreign
exchange loss (i) $ 14,763
(i) Under Canadian GAAP, the foreign exchange difference from the
translation of deferred taxes was presented within the foreign
exchange gain/loss account. For IFRS reporting purposes, these
foreign exchange differences have been reclassified to deferred
income tax recovery/expense.
(o) Deferred income tax recovery
Twelve months ended
Ref. January 31, 2011
Derecognition of
exploration costs
capitalized See (c)(i) $ 634
Recognition of new
deferred income tax
liability balances See (g)(i) (18,385)
Deferred tax impact on
intra-group transfer of
assets See (b)(i) 994
Remeasurement of the
asset retirement
obligation See (f)(i) (17)
Reclassification of
foreign exchange loss See (n)(i) 14,763
Revaluation of deferred
income tax liabilities See (g)(ii) (2,293)
Net increase in
deferred income tax
recovery $ (4,304)
Diavik Diamond Mine Mineral Reserve and
Mineral Resource Statement
AS OF DECEMBER 31, 2011
Proven and Probable Reserves
Proven Probable Proven and Probable
Open pit and Millions Carats Millions Millions Carats Millions Millions Carats Millions
underground of per of of per of of per of
mining tonnes tonne carats tonnes tonne carats tonnes tonne carats
A-154 South
Open Pit - - - - - - - - -
Underground 1.6 4.0 6.3 1.4 3.4 4.7 2.9 3.7 10.9
Total A-154 1.6 4.0 6.3 1.4 3.4 4.7 2.9 3.7 10.9
South
A-154 North
Open Pit - - - - - - - - -
Underground 3.1 2.3 7.1 4.9 2.2 10.7 8.0 2.2 17.8
Total A-154 3.1 2.3 7.1 4.9 2.2 10.7 8.0 2.2 17.8
North
A-418
Open Pit 0.7 4.0 2.8 0.6 3.8 2.3 1.3 3.9 5.0
Underground - - - 6.7 3.8 25.1 6.7 3.8 25.1
Total A-418 0.7 4.0 2.8 7.3 3.8 27.4 8.0 3.8 30.2
Total
Open Pit 0.7 4.0 2.8 0.6 3.8 2.3 1.3 3.9 5.0
Underground 4.7 2.8 13.3 12.9 3.1 40.5 17.6 3.1 53.8
Total 5.4 3.0 16.1 13.5 3.2 42.8 18.9 3.1 58.9
Reserves
Note: Totals may not add up due to rounding.
Additional Indicated and Inferred Resources
Measured Resources Indicated Resources Inferred Resources
Millions Carats Millions Millions Carats Millions Millions Carats Millions
Kimberlite of per ofcarats of per of of per of
pipe tonnes tonne tonnes tonne carats tonnes tonne carats
A-154 - - - - - - 0.04 3.5 0.1
South
A-154 - - - - - - 2.2 2.4 5.3
North
A-418 - - - - - - 0.3 2.7 0.8
A-21 3.6 2.8 10.0 0.4 2.6 1.0 0.8 3.0 2.3
Total 3.6 2.8 10.0 0.4 2.6 1.0 3.3 2.6 8.5
Note: Totals may not add up due to rounding.
Cautionary Note to United States Investors Concerning Disclosure of Mineral Reserves and Resources: The Company is organized under the laws of Canada. The mineral reserves and resources described herein are estimates, and have been prepared in compliance with NI 43-101. The definitions of proven and probable reserves used in NI-43-101 differ from the definitions in the United States Securities and Exchange Commission ('SEC') Industry Guide 7. In addition, the terms 'mineral resource', 'measured mineral resource', 'indicated mineral resource' and 'inferred mineral resource' are defined in and required to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7, and normally are not permitted to be used in reports and registration statements filed with the SEC. Accordingly, information contained in this financial report [or this MD&A] containing descriptions of the Diavik Diamond Mine's mineral deposits may not be comparable to similar information made public by US companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder. United States investors are cautioned not to assume that all or any part of Measured or Indicated Mineral Resources will ever be converted into Mineral Reserves. United States investors are also cautioned not to assume that all or any part of an Inferred Mineral Resource exists, or is economically or legally mineable.
The above mineral reserve and mineral resource statement was prepared by Diavik Diamond Mines Inc., operator of the Diavik Diamond Mine, under the supervision of Calvin Yip, P.Eng., Principal Advisor, Strategic Planning of Diavik Diamond Mines Inc., a Qualified Person within the meaning of National Instrument 43-101 of the Canadian Securities Administrators. For further details and information concerning Harry Winston Diamond Corporation's Mineral Reserves and Resources, readers should reference Harry Winston Diamond Corporation's Annual Information Form available through www.sedar.com and http://investor.harrywinston.com.
Harry Winston Diamond Corporation
CONTACT: Mr. Richard Chetwode, Vice President, Corporate Development - +44
(0)
7720-970-762 or rchetwode@harrywinston.com
Ms. Laura Kiernan, Director, Investor Relations - (212) 315-7934
or lkiernan@harrywinston.com
Ms. KelleyStamm, Manager, Investor Relations - (416) 205-4380
or kstamm@harrywinston.com
