TORONTO, Dec. 10 /PRNewswire-FirstCall/ -- Highlights (All figures
are in United States dollars unless otherwise indicated) The
Company recorded consolidated net earnings of $71.9 million, or
$1.17 per share, for the third quarter compared to a net loss of
$7.4 million, or $0.13 per share, respectively, in the third
quarter of the prior year. Consolidated net earnings for the third
quarter included a $49.0 million net foreign exchange gain, or
$0.80 per share, as a result of the weakening of the Canadian
dollar relative to the US dollar, compared to a $40.6 million net
foreign exchange loss, or $0.70 per share, in the comparable
quarter of the prior year. Consolidated sales were $148.6 million
for the third quarter compared to $176.5 million for the comparable
quarter of the prior year, resulting in a 24% decrease in gross
margin and a 35% decrease in consolidated earnings from operations.
Earnings from operations for the mining segment decreased 33% to
$47.0 million compared to the comparable quarter of the prior year.
Rough diamond production for the third calendar quarter was down
26% to 0.9 million carats produced versus 1.25 million for the
comparable quarter of the prior year resulting from the continuing
grade variation in the A-154 South pipe, and the processing of a
higher volume of low grade mud-rich material from the top of the
A-418 pipe. Mining sales were down 26% to $90.7 million compared to
$122.7 million in the comparable quarter of the prior year due to
reduced production. Since September, rough diamond production has
returned to normal levels with grades in both A-154 South and A-418
returning to levels consistent with the ore reserve. However,
beginning in October, the rough diamond market has become subdued
as the diamond distribution chain seeks to deleverage by not
replenishing inventories. The retail segment recorded an 8%
increase in sales to $57.9 million, with a loss from operations of
$4.0 million compared to a loss from operations of $3.6 million in
the comparable quarter of the prior year. Retail segment SG&A
as a percentage of sales remained consistent with the comparable
quarter of the prior year at 53%. Management's Discussion and
Analysis Prepared as of December 10, 2008 (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 (the "Company")
for the three and nine months ended October 31, 2008, and its
financial position as at October 31, 2008. This MD&A is based
on the Company's consolidated financial statements prepared in
accordance with generally accepted accounting principles in Canada
("Canadian GAAP") and should be read in conjunction with the
unaudited consolidated financial statements and notes thereto for
the three and nine months ended October 31, 2008 and the audited
consolidated financial statements of the Company and notes thereto
for the year ended January 31, 2008. Unless otherwise specified,
all financial information is presented in United States dollars.
Unless otherwise indicated, all references to "third quarter" refer
to the three months ended October 31, 2008 and all references to
"international" for the retail segment refer to Europe and Asia.
Certain comparative figures have been reclassified to conform with
the current year's presentation. Caution Regarding Forward-Looking
Information Certain information included in this MD&A may
constitute forward-looking information within the meaning of
Canadian and United States securities laws. In some cases,
forward-looking information can be identified by the use of terms
such as "may", "will", "should", "expect", "plan", "anticipate",
"believe", "intend", "estimate", "predict", "potential", "continue"
or other similar expressions concerning matters that are not
historical facts. Forward-looking information may relate to
management's future outlook and anticipated events or results, and
may include statements or information regarding plans, timelines
and targets for construction, mining, development, production and
exploration activities at the Diavik Diamond Mine, future mining
and processing at the Diavik Diamond Mine, projected capital
expenditure requirements and the funding thereof, new salon
openings, liquidity and working capital requirements and sources,
estimated reserves and resources at, and production from, the
Diavik Diamond Mine, the number and timing of expected rough
diamond sales, expected diamond prices and expectations concerning
the diamond industry, expected cost of sales and gross margin
trends in the mining segment, and expected sales trends in the
retail segment. Actual results may vary. See "Risks and
Uncertainties" on page 18. 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, credit and general capital market conditions
and the ability of the Company to refinance or replace its existing
credit facilities, the level of worldwide diamond production and
world and US economic conditions and demand for luxury goods.
Specifically, in estimating Harry Winston Diamond Corporation's
projected share of the Diavik Diamond Mine capital expenditure
requirements over the next two years, Harry Winston Diamond
Corporation has used an average Canadian/US dollar exchange rate of
$0.96, and has assumed that construction will continue on schedule
and without undue disruption with respect to current underground
mining construction initiatives. In making statements regarding
estimated production at the Diavik Diamond Mine and future mining
activity and mine plans, including plans, timelines and targets for
construction, mining, development, production and exploration
activities at the Diavik Diamond Mine, and future rough diamond
sales, Harry Winston Diamond Corporation has assumed, among other
things, that mining operations and construction and exploration
activities will proceed in the ordinary course according to
schedule and consistent with past results. In making statements
regarding expected diamond prices and expectations concerning the
diamond industry and expected sales trends in the retail segment,
the Company has made assumptions regarding, among other things,
world and US economic conditions and demand for luxury goods. While
Harry Winston Diamond Corporation 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
18. Forward-looking information is subject to certain factors,
including risks and uncertainties, which could cause actual results
to differ materially from what we currently expect. These factors
include, among other things, the uncertain nature of mining
activities, including risks associated with underground
construction and mining operations, risks associated with joint
venture operations, risks associated with the remote location of
and harsh climate at the Diavik Diamond Mine site, risks associated
with regulatory requirements, fluctuations in diamond prices and
changes in US and world economic conditions, the risk of
fluctuations in the Canadian/US dollar exchange rate, financing and
credit market risk, risks relating to the Company's salon expansion
strategy and the risks of competition in the luxury jewelry
segment. Please see page 18 of this Interim Report, as well as the
Company's Annual Report, available at http://www.sedar.com/, for a
discussion of these and other risks and uncertainties involved in
Harry Winston Diamond Corporation's operations. Readers are
cautioned not to place undue importance on forward-looking
information, which speaks only as of the date of this Management's
Discussion and Analysis, and should not rely upon this information
as of any other date. Due to assumptions, risks and uncertainties,
including the assumptions, risks and uncertainties identified above
and elsewhere in this Management's Discussion and Analysis, actual
events may differ materially from current expectations. While Harry
Winston Diamond Corporation 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 Harry Winston Diamond Corporation's
filings with Canadian and United States securities regulatory
authorities and can be found at http://www.sedar.com/ and
http://www.sec.gov/, respectively. Summary Discussion Harry Winston
Diamond Corporation is a specialist diamond company focusing on the
mining and retail segments of the diamond industry. The Company
supplies rough diamonds to the global market from production
received from its 40% ownership interest in the Diavik Diamond
Mine, located off Lac de Gras in Canada's Northwest Territories.
The Company also owns a 100% interest in Harry Winston Inc., the
premier fine jewelry and watch retailer. Harry Winston Diamond
Corporation's mission is to deliver shareholder value through the
enhanced earning power and longevity of the Diavik Diamond Mine
asset as the cornerstone of a profitable synergy with the Harry
Winston(R) brand. In a changing diamond market-place, Harry Winston
Diamond Corporation has charted a unique course to continue to
build shareholder value. The Company's most significant asset is a
40% 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 Mines Ltd. (40%) where Harry Winston Diamond
Corporation owns an undivided 40% interest in the assets,
liabilities and expenses. DDMI is the operator of the Diavik
Diamond Mine. Both companies are headquartered in Yellowknife,
Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of
London, England, and Harry Winston Diamond Mines Ltd. is a wholly
owned subsidiary of Harry Winston Diamond Corporation of Toronto,
Canada. Market Commentary The Diamond Market The diamond industry
is being impacted by the current economic malaise resulting from
the global credit crisis. Prices in all rough diamond categories
have softened. The prices for polished diamonds have not declined
as much as for rough diamonds, as manufacturers continue to defend
the value of their polished diamond stocks. The continuing
lackluster market for polished diamonds in the US and Japan is in
part offset by positive demand from developing economies. In the
longer term, a continuing shrinkage of mine supply coupled with
expanded demand from these emerging economies is expected to
underpin future price increases, once the world economy recovers.
The Retail Jewelry Market Consumers have reduced discretionary
spending in response to the impact of deteriorating economies.
Demand for luxury diamond jewelry products continues to hold up in
the Middle Eastern market as well as parts of Asia, while other
regions have witnessed significant reductions. (R) Harry Winston is
a registered trademark of Harry Winston Inc. Consolidated Financial
Results The following is a summary of the Company's consolidated
quarterly results for the eight quarters ended October 31, 2008
following the basis of presentation utilized in the Company's
Canadian GAAP financial statements: (expressed in thousands of
United States dollars except per share amounts and where otherwise
noted) (quarterly results are unaudited)
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2009 2009 2009 2008 2008 Q3 Q2 Q1 Q4 Q3
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Sales $148,623 $186,119 $156,079 $188,195 $176,478 Cost of sales
71,679 73,542 73,149 83,637 74,591
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Gross margin 76,944 112,577 82,930 104,558 101,887 Gross margin (%)
51.8% 60.5% 53.1% 55.6% 57.7% Selling, general and administrative
expenses 33,998 39,194 43,285 45,494 35,539
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Earnings from operations 42,946 73,383 39,645 59,064 66,348
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Interest and financing expenses (4,678) (5,366) (5,453) (7,082)
(7,422) Other income (expense) 407 815 246 706 594 Insurance
settlement - - - 13,488 - Foreign exchange gain (loss) 48,982 5,301
155 22,270 (40,584)
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Earnings before income taxes 87,657 74,133 34,593 88,446 18,936
Income taxes (recovery) 15,685 24,185 13,336 (1,968) 26,197
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Earnings (loss) before minority interest 71,972 49,948 21,257
90,414 (7,261) Minority interest 81 1 1 (34) 90
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Net earnings (loss) $ 71,891 $ 49,947 $ 21,256 $ 90,448 $ (7,351)
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Basic earnings (loss) per share $ 1.17 $ 0.81 $ 0.35 $ 1.55 $
(0.13) Diluted earnings (loss) per share $ 1.17 $ 0.81 $ 0.35 $
1.54 $ (0.13) Cash dividends declared per share $ 0.05 $ 0.05 $
0.05 $ 0.05 $ 0.25 Total assets(i) $ 1,645 $ 1,637 $ 1,591 $ 1,494
$ 1,433 Total long-term liabilities(i) $ 562 $ 617 $ 634 $ 660 $
530
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Nine Nine Months Months Ended Ended 2008 2008 2007 Oct. 31, Oct.
31, Q2 Q1 Q4 2008 2007
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Sales $173,269 $141,365 $154,328 $490,821 $491,112 Cost of sales
81,827 71,132 78,559 218,370 227,550
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Gross margin 91,442 70,233 75,769 272,451 263,562 Gross margin (%)
52.8% 49.7% 49.1% 55.5% 53.7% Selling, general and administrative
expenses 35,201 34,211 38,590 116,477 104,951
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Earnings from operations 56,241 36,022 37,179 155,974 158,611
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Interest and financing expenses (7,222) (6,132) (6,441) (15,497)
(20,776) Other income (expense) 545 913 (111) 1,468 2,052 Insurance
settlement - - - - - Foreign exchange gain (loss) (11,785) (13,292)
9,831 54,438 (65,661)
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Earnings before income taxes 37,779 17,511 40,458 196,383 74,226
Income taxes (recovery) 17,747 14,118 13,169 53,205 58,062
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Earnings (loss) before minority interest 20,032 3,393 27,289
143,178 16,164 Minority interest (26) 140 (5) 83 204
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Net earnings (loss) $ 20,058 $ 3,253 $ 27,294 $143,095 $ 15,960
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Basic earnings (loss) per share $ 0.34 $ 0.06 $ 0.47 $ 2.35 $ 0.27
Diluted earnings (loss) per share $ 0.33 $ 0.05 $ 0.46 $ 2.34 $
0.27 Cash dividends declared per share $ 0.25 $ 0.25 $ 0.25 $ 0.15
$ 0.75 Total assets(i) $ 1,367 $ 1,315 $ 1,288 $ 1,645 $ 1,433
Total long-term liabilities(i) $ 486 $ 408 $ 536 $ 562 $ 530
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(i) Total assets and total long-term liabilities are expressed in
millions of United States dollars. The comparability of
quarter-over-quarter results is impacted by seasonality for both
the mining and retail segments. Harry Winston Diamond Corporation
expects that the quarterly results for its mining segment will
continue to fluctuate depending on the seasonality of production at
the Diavik Diamond Mine, the number of rough diamond sales events
conducted during the quarter, and the volume, size and quality
distribution of rough diamonds delivered from the Diavik Diamond
Mine in each quarter. The quarterly results for the retail segment
are also seasonal, with generally higher sales during the fourth
quarter due to the holiday season. See "Segmented Analysis" on page
8 for additional information. Three Months Ended October 31, 2008
Compared to Three Months Ended October 31, 2007 Consolidated Net
Earnings The third quarter net earnings of $71.9 million or $1.17
per share represent an increase of $79.2 million or $1.30 per share
as compared to the results of the third quarter of the prior year.
The increase is primarily due to a net foreign exchange gain of
$49.0 million, or $0.80 per share, in the current quarter related
principally to an unrealized non-cash gain on future income taxes
payable, compared to a $40.6 million net foreign exchange loss, or
$0.70 per share, recognized in the comparable quarter of the prior
year. For more detail on the impact of the foreign exchange gain on
future income taxes payable, see "Consolidated Income Taxes" below.
Consolidated Sales Sales for the third quarter totalled $148.6
million, consisting of rough diamond sales of $90.7 million and
retail segment sales of $57.9 million. This compares to sales of
$176.5 million in the comparable quarter of the prior year (rough
diamond sales of $122.7 million and retail segment sales of $53.8
million). The Company held three primary rough diamond sales in the
third quarter consistent with the comparable quarter of the prior
year. Ongoing quarterly variations in revenues are inherent in the
Company's business, resulting from the seasonality of the mining
and retail activities as well as from the variability of the rough
diamond sales schedule. Consolidated Cost of Sales and Gross Margin
The Company's third quarter cost of sales was $71.7 million for a
gross margin of 51.8% compared to $74.6 million cost of sales and a
gross margin of 57.7% for the comparable quarter of the prior year.
The Company's cost of sales includes costs associated with mining,
rough diamond sorting and retail sales activities. See "Segmented
Analysis" on page 8 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,
professional fees, rent and building related costs. The Company
incurred SG&A expenses of $34.0 million for the third quarter,
compared to $35.5 million in the comparable quarter of the prior
year. Included in SG&A expenses for the third quarter are $3.1
million for the mining segment as compared to $6.7 million for the
comparable quarter of the prior year, and $30.9 million for the
retail segment as compared to $28.8 million for the comparable
quarter of the prior year. For the mining segment, the decrease in
SG&A expenses was primarily due to a mark-to-market reduction
in stock-based compensation. For the retail segment, the increase
in SG&A expenses was as a result of our continued investment in
the Harry Winston brand, and reflected an increase in salaries and
benefits, rent and building related expenses and depreciation and
amortization expense. See "Segmented Analysis" on page 8 for
additional information. Consolidated Income Taxes The Company
recorded a tax expense of $15.7 million during the third quarter,
compared to a tax expense of $26.2 million in the comparable
quarter of the prior year. The Company's effective income tax rate
for the quarter, excluding the Company's retail segment, is 18%,
which is based on a statutory income tax rate of 31% adjusted for
various items including Northwest Territories mining royalty,
impact of foreign exchange, and earnings subject to tax different
than the statutory rate. The Company's functional and reporting
currency is US dollars; however, the calculation of income tax
expense is based on income in the currency of the country of
origin. As such, the Company is continually subject to foreign
exchange fluctuations, particularly as the Canadian dollar moves
against the US dollar. During the third quarter of fiscal 2009, the
Canadian dollar weakened by 15% relative to the US dollar. As a
result, the Company recorded a foreign exchange gain of $39.4
million on the revaluation of the Company's Canadian dollar
denominated future income tax liability. This compares to a foreign
exchange loss of $31.4 million in the comparable quarter of the
previous year when the Canadian dollar strengthened by 13% relative
to the US dollar. The unrealized foreign exchange gain is not
taxable for Canadian income tax purposes, and is the primary reason
for the decrease of the overall effective income tax rate in the
current period. The rate of income tax payable by Harry Winston
Inc. varies by jurisdiction. Net operating losses are available in
certain jurisdictions to offset future income taxes payable in such
jurisdictions. The net operating losses are scheduled to expire
through 2027. The Company has provided a table below summarizing
the movement from the statutory to the effective income tax rate as
a percentage of earnings before taxes: Three Months Three Months
Ended Oct. 31, Ended Oct. 31, 2008 2007
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Statutory income tax rate 31 % 34 % Stock compensation - % 2 %
Northwest Territories mining royalty (net of income tax relief) 5 %
33 % Impact of foreign exchange (19) % 69 % Earnings subject to tax
different than statutory rate 1 % (15) % Changes in valuation
allowance - % 10 % Assessments and adjustments 1 % - % Other items
(1) % 5 % Effective income tax rate 18 % 138 %
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Consolidated Interest and Financing Expenses Interest and financing
expenses of $4.7 million were incurred during the third quarter
compared to $7.4 million during the comparable quarter of the prior
year. The reduction in interest and financing expenses relates
primarily to the reduction in debt levels in the mining segment.
Consolidated Other Income Other income of $0.4 million was recorded
during the third quarter compared to other income of $0.6 million
in the comparable quarter of the prior year. Consolidated Foreign
Exchange Gain (Loss) A net foreign exchange gain of $49.0 million
was recognized during the quarter compared to a net foreign
exchange loss of $40.6 million in the comparable quarter of the
prior year. The gain in the current quarter relates principally to
the revaluation of the Company's Canadian dollar denominated
long-term future income tax liability as a result of the weakening
of the Canadian dollar against the US dollar at quarter end. The
Company's ongoing currency exposure relates primarily to expenses
and obligations incurred in Canadian dollars, as well as the
revaluation of certain Canadian monetary balance sheet amounts. The
Company does not currently have any significant derivative
instruments outstanding. Nine Months Ended October 31, 2008
Compared to Nine Months Ended October 31, 2007 Consolidated Net
Earnings Net earnings for the nine months ended October 31, 2008
were $143.1 million or $2.35 per share compared to $16.0 million or
$0.27 per share for the nine months ended October 31, 2007. The
increase is due primarily to a net foreign exchange gain of $54.4
million, or $0.89 per share, for the nine months ended October 31,
2008 compared to a $65.7 million net foreign exchange loss, or
$1.12 per share, recognized in the comparable period of the prior
year related principally to an unrealized non-cash loss on future
income taxes payable. Consolidated Sales Sales for the nine months
ended October 31, 2008 were $490.8 million, consistent with sales
of $491.1 million for the nine months ended October 31, 2007. Rough
diamond sales accounted for $277.1 million of total sales compared
to $310.5 million for the comparable period of the prior year.
Retail segment sales of $213.7 million accounted for the balance,
compared to $180.6 million for the comparable period of the prior
year. Consolidated Cost of Sales and Gross Margin The Company's
cost of sales for the nine months ended October 31, 2008 was $218.4
million for a gross margin of 55.5% compared to $227.6 million cost
of sales and a gross margin of 53.7% for the comparable period of
the prior year. Included in the nine months ended October 31, 2008
is a $4.3 million insurance settlement relating to an excavator
fire that occurred in the fourth quarter of fiscal 2006 at the
Diavik Diamond Mine. The settlement represents the recovery of the
cost of the excavator that was previously written off along with
incremental operating expenses relating to the procurement of a
replacement excavator. The Company's cost of sales includes costs
associated with mining, rough diamond sorting and retail sales
activities. See "Segmented Analysis" on page 8 for additional
information. Consolidated Selling, General and Administrative
Expenses The Company incurred SG&A expenses of $116.5 million
for the nine months ended October 31, 2008, compared to $105.0
million for the nine months ended October 31, 2007. Included in
SG&A expenses for the nine months ended October 31, 2008 are
$15.5 million for the mining segment as compared to $17.7 million
for the comparable period of the prior year, and $101.0 million for
the retail segment as compared to $87.3 million for the comparable
period of the prior year. For the mining segment, the decrease in
SG&A expenses was primarily due to a mark-to-market reduction
in stock-based compensation. For the retail segment, the increase
was as a result of our continued investment in the Harry Winston
brand, and reflected an increase in salaries and benefits, rent and
building related expenses and depreciation and amortization
expense. Retail segment SG&A expenses also included
approximately $2.0 million of non-recurring expenses related to
restructuring and improvements carried out at the Geneva watch
factory in the first quarter of fiscal 2009. See "Segmented
Analysis" on page 8 for additional information. Consolidated Income
Taxes The Company recorded a tax expense of $53.2 million during
the nine months ended October 31, 2008, compared to a tax expense
of $58.1 million in the comparable period of the prior year. The
Company's effective income tax rate for the quarter, excluding the
Company's retail segment, is 27%, which is based on a statutory
income tax rate of 31% adjusted for various items including
Northwest Territories mining royalty, impact of foreign exchange,
and earnings subject to tax different than the statutory rate.
During the nine months ended October 31, 2008, the Company recorded
an unrealized foreign exchange gain of $44.7 million on the
revaluation of the Canadian dollar denominated future income tax
liability, as compared to an unrealized foreign exchange loss of
$54.7 million recorded in the comparable period of the prior year.
The unrealized foreign exchange gain is not taxable for Canadian
income tax purposes. The rate of income tax payable by Harry
Winston Inc. varies by jurisdiction. Net operating losses are
available in certain jurisdictions to offset future income taxes
payable in such jurisdictions. The net operating losses are
scheduled to expire through 2027. The Company has provided a table
below summarizing the movement from the statutory to the effective
income tax rate as a percentage of earnings before taxes: Nine
Months Nine Months Ended Oct. 31, Ended Oct. 31, 2008 2007
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Statutory income tax rate 31 % 34 % Northwest Territories mining
royalty (net of income tax relief) 8 % 18 % Impact of change in
future income tax rate - % (1) % Impact of foreign exchange (11) %
27 % Earnings subject to tax different than statutory rate (1) %
(6) % Changes in valuation allowance - % 1 % Benefits of losses
recognized through reduction of goodwill - % 2 % Assessments and
adjustments 1 % - % Other items (1) % 3 % Effective income tax rate
27 % 78 %
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Consolidated Interest and Financing Expenses Interest and financing
expenses of $15.5 million were incurred during the nine months
ended October 31, 2008 compared to $20.8 million for the comparable
period of the prior year. The reduction in interest and financing
expenses relates primarily to the reduction in debt levels in the
mining segment. Consolidated Other Income Other income, which
includes interest income on the Company's various bank balances,
was $1.5 million during the nine months ended October 31, 2008
compared to $2.1 million for the comparable period of the prior
year. Consolidated Foreign Exchange Gain (Loss) A net foreign
exchange gain of $54.4 million was recognized during the nine
months ended October 31, 2008 compared to a net foreign exchange
loss of $65.7 million recorded during the nine months ended October
31, 2007. The current year-to-date gain relates principally to the
revaluation of the Company's Canadian dollar denominated long-term
future income tax liability as a result of the weakening of the
Canadian dollar against the US dollar at October 31, 2008. The
Company's ongoing currency exposure relates primarily to expenses
and obligations incurred in Canadian dollars, as well as the
revaluation of certain Canadian monetary balance sheet amounts. The
Company does not currently have any significant derivative
instruments outstanding. Segmented Analysis The operating segments
of the Company include mining and retail segments. Mining The
mining segment includes the production and sale of rough diamonds.
(expressed in thousands of United States dollars) (quarterly
results are unaudited)
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2009 2009 2009 2008 2008 Q3 Q2 Q1 Q4 Q3
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Sales $ 90,716 $105,014 $ 81,393 $103,238 $122,711 Cost of sales
40,617 32,390 32,150 36,962 45,985
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Gross margin 50,099 72,624 49,243 66,276 76,726 Gross margin (%)
55.2% 69.2% 60.5% 64.2% 62.5% Selling, general and administrative
expenses 3,114 5,151 7,208 5,663 6,748
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Earnings from operations $ 46,985 $ 67,473 $ 42,035 $ 60,613 $
69,978
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Nine Nine Months Months Ended Ended 2008 2008 2007 Oct. 31, Oct.
31, Q2 Q1 Q4 2008 2007
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Sales $105,071 $ 82,752 $ 81,035 $277,123 $310,534 Cost of sales
46,217 40,516 39,413 105,157 132,718
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Gross margin 58,854 42,236 41,622 171,966 177,816 Gross margin (%)
56.0% 51.0% 51.4% 62.1% 57.3% Selling, general and administrative
expenses 5,861 5,087 7,397 15,473 17,696
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Earnings from operations $ 52,993 $ 37,149 $ 34,225 $156,493
$160,120
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Three Months Ended October 31, 2008 Compared to Three Months Ended
October 31, 2007 Mining Sales Rough diamond sales for the third
quarter totalled $90.7 million compared to $122.7 million in the
comparable quarter of the prior year resulting primarily from lower
carat production. Rough diamond production decreased 26% in the
third calendar quarter from the prior year as a result of the
continuing grade variation in the A-154 South kimberlite pipe, and
the processing of a higher volume of low grade mud-rich material
from the top of the A-418 pipe. The Company held three primary
rough diamond sales in the third quarter consistent with the
comparable quarter of the prior year. The Company expects that
results for its mining segment will continue to fluctuate depending
on the seasonality of production at the Diavik Diamond Mine, the
number of primary and secondary sales events conducted at each
sales location during the quarter, and the volume, size and quality
distribution of rough diamonds delivered from the Diavik Diamond
Mine in each quarter. Mining Cost of Sales and Gross Margin The
Company's third quarter cost of sales was $40.6 million for a gross
margin of 55.2% compared to a $46.0 million cost of sales and a
gross margin of 62.5% in the comparable quarter of the prior year.
The reduction in gross margin percentage resulted from a
combination of reduced sales and a lower proportion of cost
attributable to development activity versus production activity in
the current quarter. The mining gross margin is anticipated to
fluctuate between quarters, resulting from variations in the
specific mix of product sold during each quarter and the nature of
the mining activities. A substantial portion of cost of sales is
mine operating costs, which are incurred at the Diavik Diamond
Mine. Cost of sales also includes rough diamond 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 $3.6 million
from the comparable period of the prior year primarily due to a
mark-to-market reduction to stock-based compensation. Nine Months
Ended October 31, 2008 Compared to Nine Months Ended October 31,
2007 Mining Sales Rough diamond sales for the nine months ended
October 31, 2008 totalled $277.1 million compared to $310.5 million
in the comparable period of the prior year resulting primarily from
lower carat production. Rough diamond production decreased 26%
during the first nine months of the calendar year compared to the
prior year as the result of the continuing grade variation in the
A-154 South kimberlite pipe, the stripping of low grade A-418 ore
mixed with waste overburden material and a higher volume of A-418
ore processed. The Company held seven primary rough diamond sales,
one of which was an open-market tender, during the nine months
ended October 31, 2008, compared to eight in the comparable period
of the prior year. Harry Winston Diamond Corporation expects that
results for its mining segment will continue to fluctuate depending
on the seasonality of production at the Diavik Diamond Mine, the
number of primary and secondary sales events conducted at each
sales location during the quarter, and the volume, size and quality
distribution of rough diamonds delivered from the Diavik Diamond
Mine in each quarter. Mining Cost of Sales and Gross Margin For the
nine months ended October 31, 2008, cost of sales was $105.2
million for a gross margin of 62.1% compared to $132.7 million cost
of sales and a gross margin of 57.3% in the comparable period of
the prior year. The increase in gross margin percentage resulted in
part from a greater proportion of cost attributable to development
activity versus production activity. Also included in the nine
months ended October 31, 2008, is a $4.3 million insurance
settlement relating to an excavator fire that occurred in the
fourth quarter of fiscal 2006 at the Diavik Diamond Mine. The
settlement represents the recovery of the cost of the excavator
that was previously written off along with incremental operating
expenses relating to the procurement of a replacement excavator.
Total proceeds of $5.0 million from the insurance settlement were
received in December 2008 and will result in a gain of
approximately $0.7 million in the fourth quarter. The mining gross
margin is anticipated to fluctuate between quarters, resulting from
variations in the specific mix of product sold during each quarter
and the nature of the mining activities. A substantial portion of
cost of sales is mine operating costs, which are incurred at the
Diavik Diamond Mine. Cost of sales also includes rough diamond
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 $2.2
million from the comparable period of the prior year primarily due
to a mark-to-market reduction to stock-based compensation. Retail
The retail segment includes sales from Harry Winston's salons,
which are located in prime markets around the world including eight
salons in the United States: New York, Beverly Hills, Bal Harbour,
Honolulu, Las Vegas, Dallas, Chicago and Costa Mesa; five salons in
Japan: Ginza, Roppongi Hills, Osaka, Omotesando and Nagoya; two
salons in Europe: Paris and London; and three salons in Asia
outside of Japan: Beijing, Taipei and Hong Kong. (expressed in
thousands of United States dollars) (quarterly results are
unaudited)
-------------------------------------------------------------------------
2009 2009 2009 2008 2008 Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Sales $ 57,907 $ 81,105 $ 74,686 $ 84,957 $ 53,767 Cost of sales
31,062 41,152 40,999 46,675 28,606
-------------------------------------------------------------------------
Gross margin 26,845 39,953 33,687 38,282 25,161 Gross margin (%)
46.4% 49.3% 45.1% 45.1% 46.8% Selling, general and administrative
expenses 30,884 34,043 36,077 39,831 28,791
-------------------------------------------------------------------------
Earnings (loss) from operations $ (4,039) $ 5,910 $ (2,390) $
(1,549) $ (3,630)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine Nine Months Months Ended Ended 2008 2008 2007 Oct. 31, Oct.
31, Q2 Q1 Q4 2008 2007
-------------------------------------------------------------------------
Sales $ 68,198 $ 58,613 $ 73,293 $213,698 $180,578 Cost of sales
35,610 30,616 39,146 113,213 94,832
-------------------------------------------------------------------------
Gross margin 32,588 27,997 34,147 100,485 85,746 Gross margin (%)
47.8% 47.8% 46.6% 47.0% 47.5% Selling, general and administrative
expenses 29,340 29,124 31,193 101,004 87,255
-------------------------------------------------------------------------
Earnings (loss) from operations $ 3,248 $ (1,127) $ 2,954 $ (519) $
(1,509)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended October 31, 2008 Compared to Three Months Ended
October 31, 2007 Retail Sales Sales for the third quarter were
$57.9 million compared to $53.8 million for the comparable quarter
of the prior year, an increase of 8%. Sales in the European market
increased 15% to $23.4 million, US sales increased 10% to $21.3
million, and Asian sales decreased 5% to $13.2 million. Retail Cost
of Sales and Gross Margin Cost of sales for Harry Winston Inc. for
the third quarter was $31.1 million compared to $28.6 million for
the comparable quarter of the prior year. Gross margin for the
quarter was $26.8 million or 46.4% compared to $25.2 million or
46.8% for the third quarter of the prior year. Excluding the impact
of sales of Harry Winston Inc. pre-acquisition inventory, gross
margin for the third quarter and the comparable quarter of the
prior year would have been 48.6% and 52.4%, respectively. This
decrease in gross margin is the result of the product mix sold in
the quarter, in particular a lower proportion of higher-margin
sales in the Japanese market, and higher research and development
costs to support the growing watch business. Retail Selling,
General and Administrative Expenses With the expansion of the new
international salon network, consistent with the Company's retail
growth strategy, SG&A expenses increased to $30.9 million from
$28.8 million in the comparable quarter of the prior year. The
increase, which was primarily due to the continued expansion of the
retail salon network, included an increase of $1.0 million in
depreciation and amortization, an increase of $0.7 million in
professional fees and $0.4 million in other expenses. SG&A
expenses include depreciation and amortization expense of $3.1
million compared to $2.1 million in the comparable quarter of the
prior year. SG&A as a percentage of sales remained consistent
with the comparable quarter of the prior year at 53%. Nine Months
Ended October 31, 2008 Compared to Nine Months Ended October 31,
2007 Retail Sales Sales for the nine months ended October 31, 2008
were $213.7 million compared to $180.6 million for the comparable
period of the prior year, an increase of 18%. Sales in the European
market increased 36% to $86.7 million, US sales increased 14% to
$75.2 million, and Asian sales increased 2% to $51.8 million.
Retail Cost of Sales and Gross Margin Cost of sales for the nine
months ended October 31, 2008 was $113.2 million compared to $94.8
million for the nine months ended October 31, 2007. Gross margin
for the nine months ended October 31, 2008 was $100.5 million or
47.0% compared to $85.7 million or 47.5% for the comparable period
of the prior year. Excluding the impact of sales of Harry Winston
Inc. pre-acquisition inventory, gross margin for the nine months
ended October 31, 2008 and the comparable period of the prior year
would have been 49.2% and 51.7%, respectively. Gross margin for the
nine months ended October 31, 2008 was impacted by three factors:
an increased contribution of high dollar value transactions in the
first quarter, which carry lower-than-average gross margins; an
increase in research and development costs to support the growing
watch business; and a lower proportion of higher-margin Japanese
sales in the third quarter. Retail Selling, General and
Administrative Expenses SG&A expenses increased to $101.0
million for the nine months ended October 31, 2008 as compared to
$87.3 million in the comparable period of the prior year. However,
SG&A as a percentage of sales decreased to 47% for the nine
months ended October 31, 2008 compared to 48% in the comparable
period of the prior year. The increase, which was primarily due to
the continued expansion of the retail salon network, included an
increase of $3.6 million in rent and building related expenses, an
increase of $3.3 million in depreciation and amortization, an
increase of $2.7 million in salaries and benefits and an increase
in professional fees of $2.1 million. Additionally, SG&A
expenses included approximately $2.0 million of non-recurring
expenses related to restructuring and improvements carried out at
the Geneva watch factory. SG&A expenses include depreciation
and amortization expense of $9.4 million compared to $6.1 million
in the comparable period of the prior year. Operational Update
Harry Winston Diamond Corporation's results of operations include
results from its mining and retail operations. Mining Segment
During the third calendar quarter of 2008, the Diavik Diamond Mine
produced 2.3 million carats from 0.69 million tonnes of ore sourced
from both the A-154 open pit and the A-418 kimberlite pipe. Rough
diamond production decreased 26% in the third calendar quarter from
the prior year as the result of the continuing grade variation in
the A-154 South kimberlite pipe, and the processing of a higher
volume of low grade mud-rich material from the top of the A-418
pipe. Kimberlite was recovered from the A-418 pipe as part of the
ongoing pre-stripping of waste overburden to prepare the pipe for
open pit production. This initial material is low grade, weathered
kimberlite capping the A-418 pipe, diluted with overlying glacial
till. Steady progress continues to be made in the new underground
mine. Approximately 10 kilometres of tunneling have been completed
underground, and work continues to progress on workshops, water
pumping stations, and ventilation facilities. On surface, work
continues on the new crusher and paste backfill plants, expanded
electrical generating and water treatment facilities, and
additional permanent accommodations. Harry Winston Diamond
Corporation's 40% Share of Diavik Diamond Mine Production (reported
on a one-month lag) Three Three Nine Nine Months Months Months
Months Ended Ended Ended Ended September September September
September 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Diamonds recovered (000s carats) 928 1,249 2,651 3,600 Grade
(carats/tonne) 3.36 4.75 3.59 4.95
-------------------------------------------------------------------------
Retail Segment For the three months ended October 2008, the retail
segment recorded a sales increase of 8% over the comparable quarter
of the prior year reflecting the strength of the Harry Winston
brand during a period of economic uncertainty and volatility. Sales
growth in the US and international markets outside of Japan more
than offset weak sales in the Japanese market. Sales for the third
quarter started off strong, consistent with the first half of the
fiscal year, but weakened as the economy declined in the latter
part of the quarter. Harry Winston Inc. operated a network of 18
retail salons during the quarter compared to 16 salons in the
comparable quarter of the prior year. A new salon was opened in
August 2008 in Costa Mesa, California. Liquidity and Capital
Resources Working Capital and Cash Flow from Operations As at
October 31, 2008, the Company had unrestricted cash and cash
equivalents of $40.5 million and contingency cash collateral and
reserves of $25.3 million as required under the Company's debt
arrangements, compared to $49.6 million and $25.6 million,
respectively, at January 31, 2008. The Company had cash on hand and
balances with banks of $40.5 million and no short-term investments
at October 31, 2008 compared to $33.0 million and $16.6 million,
respectively, at January 31, 2008. Short-term investments are held
in overnight deposits. Total cash resources at October 31, 2008
were $65.8 million, $9.4 million lower than the total cash
resources of $75.2 million at January 31, 2008. During the quarter
ended October 31, 2008, the Company generated $48.3 million in cash
from operations, compared to $61.4 million in the comparable
quarter of the prior year. Working capital decreased to $198.8
million at October 31, 2008 from $220.0 million at January 31,
2008. During the third quarter, the Company decreased accounts
receivable by $2.5 million, decreased prepaid expenses and other
current assets by $12.0 million, increased inventory by $23.0
million, decreased accounts payable and accrued liabilities by $6.0
million, and increased income taxes payable by $28.4 million. The
Company's liquidity requirements fluctuate from quarter to quarter
depending on, among other factors, the seasonality of production at
the Diavik Diamond Mine, seasonality of mine operating expenses,
capital expenditure programs, the number of sales events conducted
during the quarter and the volume, size and quality distribution of
rough diamonds delivered from the Diavik Diamond Mine in each
quarter, along with the seasonality of sales and salon expansion in
the retail segment. The Company's principal working capital needs
include investments in inventory, prepaid expenses and other
current assets, and accounts payable and income taxes payable. The
Company's mining and retail segments maintain separate financing
arrangements. Accordingly, the Company assesses liquidity and
capital resources on a segmented basis. The retail segment's cash
requirements are for cash operating expenses, working capital and
capital expenditures, including salon expansion. The Company
believes that cash on hand, cash generated from operations and
access to credit facilities will be sufficient to meet anticipated
cash requirements for the retail segment next fiscal year. The
mining segment's cash requirements are for cash operating expenses,
working capital, capital expenditures and contractual debt
repayments. The Company believes that cash on hand and cash
generated from the sale of rough diamonds will be sufficient to
meet anticipated cash requirements for the next fiscal year,
excluding certain debt repayments. The Company anticipates
refinancing of approximately $50 million by June 2009. However, the
weakening of the global economy could reduce the Company's ability
to generate cash from operations, which would require it to
refinance approximately $75 million by March 2009. The Company
expects to be able to refinance this debt on acceptable terms.
However, considering the extreme conditions in credit and other
capital markets in recent months, there is no assurance that the
Company will be able to complete any refinancing on acceptable
terms, if at all, and the Company may be required to generate
liquidity from alternate sources, including the sale of certain
assets. Financing Activities During the third quarter, the Company
repaid $12.5 million of its senior secured term facilities. At
October 31, 2008, the Company had $36.7 million outstanding on its
senior secured term credit facilities and $50.0 million outstanding
on its senior secured revolving credit facility. In comparison, at
January 31, 2008, $76.4 million was outstanding on the term credit
facilities and $50.0 million was outstanding on the secured
revolving credit facility. As at October 31, 2008, Harry Winston
Inc. had $170.6 million outstanding on its $250.0 million secured
five-year revolving credit facility, which is used to fund salon
inventory and capital expenditure requirements. This represents an
increase of $16.6 million from the amount outstanding at January
31, 2008. Also included in long-term debt of the Company's retail
operations is a 25-year loan agreement for 17.5 million CHF used to
finance the construction of the new watch factory in Geneva,
Switzerland. At October 31, 2008, $14.8 million had been drawn
against the facility compared to $16.1 million at January 31, 2008.
The bank has a secured interest in the factory building. On June
26, 2008, the bank further extended a demand credit facility for
2.0 million CHF. The new facility is supported by a $2.0 million
standby letter of credit. At October 31, 2008, no amount was drawn
against this demand credit facility. Harry Winston Japan, K.K.
maintains secured and unsecured credit agreements with three banks
amounting to (Yen)2,075 million. At October 31, 2008, $21.1 million
had been drawn against these facilities, $5.1 million of which is
long term, payable on June 28, 2010, with the balance of $16.0
million classified as bank advances. At January 31, 2008, $19.4
million had been drawn against these facilities, $4.7 million of
which is long term with the balance of $14.7 million classified as
bank advances. At October 31, 2008, $13.5 million and $5.5 million
were drawn under the Company's revolving financing facilities
relating to its Belgian subsidiary, Harry Winston Diamond
International N.V., and its Israeli subsidiary, Harry Winston
Diamond (Israel) Limited, respectively. At January 31, 2008, $10.5
million and $9.4 million were drawn under the Company's revolving
financing facilities relating to Harry Winston Diamond
International N.V. and Harry Winston Diamond (Israel) Limited,
respectively. During the third quarter, the Company made dividend
payments of $3.1 million or $0.05 per share to its shareholders.
Investing Activities During the third quarter, the Company
purchased capital assets of $39.7 million, of which $38.3 million
were purchased for the mining segment and $1.4 million for the
retail segment. Contractual Obligations The Company has contractual
payment obligations with respect to long-term debt and, through its
participation in the Joint Venture, future site restoration costs
at the Diavik Diamond Mine. Additionally, at the Joint Venture,
contractual obligations exist with respect to operating purchase
obligations, as administered by DDMI, the operator of the mine. In
order to maintain its 40% ownership interest in the Diavik Diamond
Mine, the Company is obligated to fund 40% of the Joint Venture's
total expenditures on a monthly basis. Based on the current mine
plan, the Company'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 fiscal
years 2010 to 2014, is approximately $180 million assuming, among
other factors, a Canadian/US average exchange rate of $0.95 for the
five years. The most significant contractual obligations for the
ensuing five-year period can be summarized as follows: Contractual
Obligations (expressed in Less thousands of United than Year Year
After States dollars) Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Long-term debt(a)(b) $339,997 $ 84,681 $ 46,729 $ 17,561 $191,026
Environmental and participation agreements incremental
commitments(c) 81,142 63,756 3,321 1,661 12,404 Operating lease
obligations(d) 108,703 17,162 25,763 16,789 48,989 Capital lease
obligations(e) 1,622 852 770
-------------------------------------------------------------------------
Total contractual obligations $531,464 $166,451 $ 76,583 $ 36,011
$252,419
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Long-term debt presented in the foregoing table includes
current and long-term portions. The mining segment's credit
agreements are comprised of two senior secured term credit
facilities and a senior secured revolving credit facility. The
existing facilities have a maturity date of December 15, 2009. At
October 31, 2008, $36.7 million in total was outstanding on the
senior secured term credit facilities, and $50.0 million was
outstanding on the senior secured revolving credit facility.
Scheduled repayments on the senior secured term credit facilities
will be $12.5 million in the next two quarters, and decline
thereafter. The maximum amount permitted to be drawn under the
senior secured revolving credit facility will be reduced by $12.5
million on a quarterly basis commencing March 15, 2009. The
Company's first mortgage on real property has scheduled principal
payments of approximately $0.1 million quarterly, and may be
prepaid after 2009. On October 31, 2008, $7.0 million was
outstanding on the mortgage payable. On February 22, 2008, Harry
Winston Inc. entered into a new credit agreement with a syndicate
of banks for a $250.0 million, five-year revolving credit facility.
There are no scheduled repayments required before maturity. At
October 31, 2008, $170.6 million had been drawn against this
secured credit facility which expires on March 31, 2013. Also
included in long-term debt of Harry Winston Inc. is a 25-year loan
agreement for 17.5 million CHF used to finance the construction of
the new watch factory in Geneva, Switzerland. The bank has a
secured interest in the factory building. The loan agreement is
comprised of a 3.5 million CHF loan and a 14.0 million CHF loan.
The 3.5 million CHF loan bears interest at a rate of 3.9% and
matures on April 22, 2010. The 14.0 million CHF loan bears interest
at a rate of 3.55% and matures on January 31, 2033, with quarterly
payments commencing on June 30, 2008. At October 31, 2008, $14.8
million was outstanding on this loan agreement. On June 26, 2008,
the bank further extended a demand credit facility for 2.0 million
CHF. The new facility is supported by a $2.0 million standby letter
of credit and bears interest at a rate of 5.0% per annum. At
October 31, 2008, no amount was drawn against the demand credit
facility. (b) Interest on long-term debt is calculated at various
fixed and floating rates. Projected interest payments on the
current debt outstanding were based on interest rates in effect at
October 31, 2008 and have been included under long-term debt in the
table above. Interest payments for the next 12 months are estimated
to be $12.7 million. (c) The Joint Venture, under environmental and
other agreements, must provide funding for the Environmental
Monitoring Advisory Board. These agreements also state the Joint
Venture must provide security deposits for the performance by the
Joint Venture of its reclamation and abandonment obligations under
all environmental laws and regulations. The Joint Venture has
fulfilled its obligations for the security deposits by posting
letters of credit of which the Company's share as at October 31,
2008 was $62.6 million. 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 amounts reflected as contractual obligations in the
table above represent obligations that are in addition to the $62.6
million in letters of credit posted. 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. (e) Capital lease obligations
represent future minimum annual rentals under non-cancellable
capital leases for Harry Winston Inc. retail exhibit space. Outlook
Mining Overview Harry Winston has been advised that DDMI is
expected to announce changes to the Diavik Diamond Mine development
plan and schedule in the near future, which will likely reduce
operating and capital expenditure requirements for the Company.
Production Year-to-date rough diamond production decreased 26% from
the prior year as a result of the continuing grade variation in the
A-154 South kimberlite pipe, and the processing of a higher volume
of low grade mud-rich material from the top of the A-418 pipe.
Since the quarter end, the grade of the A-154 South kimberlite pipe
has recovered to levels consistent with the ore reserve. A program
of detailed drilling to confirm the A-154 South underground reserve
grade will be undertaken from the pit floor commencing in March
2009. Given that it has been the active mining area, there has been
less definition drilling on this pipe than on A-154 North and A-418
kimberlite pipes that make up the bulk of the underground mining
reserve. Although the estimated rough diamond production for
calendar 2008 remains at approximately 10.0 million carats, the
engineering challenges of mining the bottom of the A-154 pit and
the consequent greater proportion of mining A-418 ore results in
risks to achieving production goals. Pre-stripping of the A-418
kimberlite pipe has concluded and commercial production from the
A-418 open pit commenced in the third quarter. Initial processing
of A-418 ore indicates that the grade is in line with the ore
reserve estimate. It is expected that diamond production from
underground mining will be deferred to begin in the third calendar
quarter of 2009, and is expected to replace open pit mining by
calendar 2012. Rough Diamond Prices From a peak in August 2008, the
Company's rough diamond prices have declined to levels of the first
quarter of 2007. The rough diamond market remains nervous with
manufacturers reluctant to hold rough diamond inventory in the face
of the uncertainty of holiday season sales. The Company expects
uncertainty and volatility in the rough diamond market to persist
into the New Year. Rough Diamond Sales Cycle The Company is
expecting to hold two primary rough diamond sales in the fourth
quarter. Sales are now conducted throughout the quarter in each of
the Company's three selling offices located in Belgium, Israel and
India. Cost of Sales Cost of sales for the fourth quarter will be
impacted by the Canadian/US dollar exchange rate and production
levels. Cost of sales will also be impacted by the commencement of
commercial production in the A-418 open pit and the consequent
shift of a greater proportion of costs from development activity to
production activity. We continue to expect cost of sales for the
full year to be lower than previously anticipated. Fiscal 2010 cost
of sales are also expected to be lower than originally planned,
primarily due to the delay in the start-up of the underground
mining which is more costly than surface mining until the third
quarter. Capital Expenditures The capital budget for the Diavik
Diamond Mine is under active review. Year to date, the Company has
spent approximately $165 million at an average Canadian/US dollar
exchange rate of $0.99, $116 million of which relates to the
underground development project. Although the current mine plan
anticipates the Company's portion of planned capital expenditures
at the Diavik Diamond Mine for fiscal 2010 to 2014 to be
approximately $180 million at an average Canadian/US dollar
exchange rate of $0.95. This plan is currently under review with
the objective of reducing near-term capital expenditures, and it is
expected that the small diamond recovery project announced in the
second quarter will be put on hold. It is not anticipated, however,
that DDMI will announce significant changes to the underground
construction plans for the project. Retail Harry Winston Inc.
expects the luxury diamond jewelry market to be challenging
throughout the holiday season and into the next fiscal year. The
unprecedented economic challenges currently being faced throughout
the world could have a negative impact for luxury diamond jewelry,
however predicting the magnitude of this impact is difficult. The
Company believes the retail segment's strong brand and
international distribution network provide the strength to
withstand the impact of the current economic challenges, however
the recent robbery at the Paris salon in December 2008 is expected
to impact sales and SG&A expenses into fiscal 2010. The retail
segment continues to focus on strategies and products to drive
long-term growth. The retail segment opened one salon in Costa
Mesa, California, during August 2008 and plans a very selective
expansion of the network next year. Subsequent Event In December
2008, approximately $30.0 million in Company-owned and consigned
retail inventory at cost was stolen during a robbery at the Harry
Winston Paris salon. The Company has an insurance policy in place
and an insurance claim is subject to investigation by insurers.
Critical Accounting Estimates Management is often required to make
judgments, assumptions and estimates in the application of Canadian
generally accepted accounting principles that have a significant
impact on the financial results of the Company. Certain policies
are more significant than others and are, therefore, considered
critical accounting policies. Accounting policies are considered
critical if they rely on a substantial amount of judgment (use of
estimates) in their application or if they result from a choice
between accounting alternatives and that choice has a material
impact on the Company's reported results or financial position.
There have been no changes to the Company's critical accounting
policies or estimates from those disclosed in the Company's
MD&A for its fiscal year ended January 31, 2008. Goodwill The
Company reviews the carrying value of its goodwill for impairment
in the fourth quarter of each year or more frequently if an event
occurs that triggers an interim review. The Company's goodwill
relates to its retail segment, which was acquired through the
purchase of Harry Winston Inc. If the carrying value of the retail
segment exceeds its fair value, an impairment charge equal to the
difference in the carrying value of the goodwill and the implied
fair value of the goodwill would be recorded. Due to the
significant adverse changes in the global business climate during
the third quarter and the impact on sales forecasts, the retail
segment goodwill was reviewed for impairment as of October 31,
2008. The Company determined the fair values of the retail segment
relying primarily on the discounted cash flow method and sales
multiple analysis. The test for goodwill impairment involves the
use of significant accounting judgments and estimates as to future
operating results and discount rates. Changes in estimates or use
of different assumptions could produce significantly different
results. Based on its testing, the Company determined that the
goodwill relating to the retail segment was not impaired at October
31, 2008. Given the unprecedented market conditions, the Company
will continue to monitor the value of its retail segment for
impairment. The annual year-end review of goodwill will include
both internal analysis and an independent valuation of the retail
segment. If the current conditions worsen, and the estimated fair
value of the retail segment is reduced, it is possible that the
Company could record a non-cash goodwill impairment charge in the
fourth quarter of 2009. Changes in Accounting Policies Capital
Disclosures Effective February 1, 2008, the Company adopted new
accounting recommendations from the Canadian Institute of Chartered
Accountants ("CICA"), Handbook Section 1535, "Capital Disclosures".
This new standard specifies the requirements for disclosure of both
qualitative and quantitative information to enable users of
financial statements to evaluate the Company's objectives, policies
and processes for managing capital. This disclosure is contained in
note 11 to the interim consolidated financial statements.
Inventories Effective February 1, 2008, the Company adopted new
accounting recommendations from the CICA, Handbook Section 3031,
"Inventories", which supersedes the previously issued standard on
inventory. The new standard introduces significant changes to the
measurement and disclosure of inventory. The measurement changes
include: the elimination of LIFO, the requirement to measure
inventories at the lower of cost and net realizable value for
inventories that are not ordinarily interchangeable and goods or
services produced for specific purposes, the requirement for an
entity to use a consistent cost formula for inventory of a similar
nature and use, and the reversal of previous write-downs to net
realizable value when there is a subsequent increase in the value
of inventories. Disclosures of inventories have also been enhanced.
Inventory policies, carrying amounts, amounts recognized as an
expense, write-downs and the reversals of write-downs are required
to be disclosed. This standard has had no material impact on the
consolidated financial statements. Financial Instruments Effective
February 1, 2008, the Company adopted new accounting
recommendations from the CICA, Handbook Section 3862, "Financial
Instruments - Disclosures" and Handbook Section 3863, "Financial
Instruments - Presentation". Section 3862 provides guidance on
disclosure of risks associated with both recognized and
unrecognized financial instruments and how the Company manages
these risks. Section 3863 details financial instruments
presentation requirements, which are unchanged from those discussed
in Section 3861, "Financial Instruments - Disclosure and
Presentation". This disclosure is contained in notes 12 and 13 to
the interim consolidated financial statements. Recently Issued
Accounting Standards Goodwill and Intangibles On February 1, 2008
the CICA issued Handbook Section 3064, "Goodwill and Intangible
Assets". This Section establishes revised standards for the
recognition, measurement, presentation and disclosure of goodwill
and intangible assets. Concurrent with the introduction of this
standard, the CICA withdrew EIC 27, "Revenues and Expenses During
the Pre-operating Period," which eliminates the ability for
companies to defer costs and revenues incurred prior to commercial
production at new mine operations. The changes are effective for
interim and annual financial statements beginning January 1, 2009.
The Company is currently assessing the impact of this standard on
its consolidated financial statements. International Financial
Reporting Standards ("IFRS") The Company plans to report under
International Financial Reporting Standards ("IFRS") as of February
1, 2011. Changing from Canadian GAAP to IFRS could materially
affect the Company's reported financial position and results of
operations. During the second quarter of fiscal 2009, the Company
commenced preparation of its changeover plan. The Company intends
to engage a third party advisor to assist with the plan. Over the
next few months, specific actions include identifying the major
accounting differences between current Canadian GAAP and IFRS as
they affect the Company and determining resource requirements over
the next two years as the Company implements its transition plan.
Risks and Uncertainties Harry Winston Diamond Corporation is
subject to a number of risks and uncertainties as a result of its
operations. In addition to the other information contained in this
Management's Discussion and Analysis and the Company's other
publicly filed disclosure documents, readers should give careful
consideration to the following risks, each of which could have a
material adverse effect on the Company's business prospects or
financial condition: Nature of Mining The operation of the Diavik
Diamond Mine is subject to risks inherent in the mining industry,
including variations in grade and other geological differences,
unexpected problems associated with required water retention dikes,
water quality, surface and underground conditions, processing
problems, equipment performance, accidents, labour disputes, risks
relating to the physical security of the diamonds, force majeure
risks and natural disasters. Particularly with underground mining
operations, inherent risks include variations in rock structure and
strength as it impacts on mining method selection and performance,
de-watering and water handling requirements, achieving the required
paste backfill strengths, and unexpected local ground conditions.
Hazards, such as unusual or unexpected rock formations, rock
bursts, pressures, collapses, flooding or other conditions, may be
encountered during mining. Such risks could result in personal
injury or fatality; damage to or destruction of mining properties,
processing facilities or equipment; environmental damage; delays,
suspensions or permanent reductions in mining production; monetary
losses; and possible legal liability. The Diavik Diamond Mine,
because of its remote northern location and access only by winter
road or by air, is subject to special climate and transportation
risks. These risks include the inability to operate or to operate
efficiently during periods of extreme cold, the unavailability of
materials and equipment, and increased transportation costs due to
the late opening and/or early closure of the winter road. Such
factors can add to the cost of mine development, production and
operation and/or impair production and mining activities, thereby
affecting the Company's profitability. Nature of Joint Arrangement
with DDMI The Company owns 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 Harry Winston Diamond
Mines Ltd. (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 the Company that the Company may not have
sufficient cash to meet. The Company's contribution to capital
requirements to complete the underground development and supporting
infrastructure contemplated by the current mine plan is estimated
to be $83 million for fiscal 2010 at an average Canadian/US dollar
exchange rate of $0.98, with funding expected to be provided by
cash flow from operations and a refinancing of the Company's credit
facilities. There can be no assurance that the Company will be able
to refinance its current credit facilities on satisfactory terms
and conditions, or at all. A failure by the Company to meet capital
expenditure requirements imposed by DDMI could result in the
Company'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 retail operations. Each in turn is dependent in
significant part upon the worldwide demand for and price of
diamonds. Diamond prices fluctuate and are affected by numerous
factors beyond the control of the Company, including worldwide
economic trends, particularly in the US, Japan, China and India,
worldwide levels of diamond discovery and production and the level
of demand for, and discretionary spending on, luxury goods such as
diamonds and jewelry. Low or negative growth in the worldwide
economy, prolonged credit market disruptions or the occurrence of
terrorist or similar activities creating disruptions in economic
growth could result in decreased demand for luxury goods such as
diamonds and jewelry, thereby negatively affecting the price of
diamonds and jewelry. Similarly, a substantial increase in the
worldwide level of diamond production could also negatively affect
the price of diamonds. In each case, such developments could
materially adversely affect the Company's results of operations.
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, which are borne 40%
by the Company, are incurred in Canadian dollars. Further, the
Company has a significant future income tax liability that has been
incurred and will be payable in Canadian dollars. The Company's
currency exposure relates primarily to expenses and obligations
incurred by it in Canadian dollars and, secondarily, to revenues of
Harry Winston Inc. in currencies other than the US dollar. The
appreciation of the Canadian dollar against the US dollar, and the
depreciation of such other currencies against the US dollar,
therefore, will increase the expenses of the Diavik Diamond Mine
and the amount of the Company's Canadian dollar liabilities
relative to the revenue the Company will receive from diamond
sales, and will decrease the US dollar revenues received by Harry
Winston Inc. From time to time, the Company may use a limited
number of derivative financial instruments to manage its foreign
currency exposure. Licenses and Permits The operation of the Diavik
Diamond Mine and exploration on the Diavik property requires
licenses and permits from the Canadian government. Renewal of the
Diavik Diamond Mine Type "A" Water License was granted by the
regional Wek'eezhii Land and Water Board on November 1, 2007 for an
eight-year period. While the Company anticipates that DDMI, which
is also the operator of the Diavik Diamond Mine, will be able to
renew this license and other necessary permits in the future, there
can be no guarantee that DDMI will be able to do so or obtain or
maintain all other necessary licenses and permits that may be
required to maintain the operation of the Diavik Diamond Mine or to
further explore and develop the Diavik property. Regulatory and
Environmental Risks The operation of the Diavik Diamond Mine,
exploration activities at the Diavik Project and the manufacturing
of jewelry and watches are subject to various laws and regulations
governing the protection of the environment, exploration,
development, production, taxes, labour standards, occupational
health, waste disposal, mine safety, manufacturing safety and other
matters. New laws and regulations, amendments to existing laws and
regulations, or more stringent implementation or changes in
enforcement policies under existing laws and regulations could have
a material adverse impact on the Company by increasing costs and/or
causing a reduction in levels of production from the Diavik Diamond
Mine and in the manufacture of jewelry and watches. As well, as the
Company's international operations expand, it or its subsidiaries
become subject to laws and regulatory regimes which differ
materially from those under which they operate in Canada and the
US. Mining and manufacturing are subject to potential risks and
liabilities associated with pollution of the environment and the
disposal of waste products occurring as a result of mining and
manufacturing operations. To the extent that the Company's
operations are subject to uninsured environmental liabilities, the
payment of such liabilities could have a material adverse effect on
the Company. Climate Change Canada ratified the Kyoto Protocol to
the United Nations Framework Convention on Climate Change in late
2002 and the Kyoto Protocol came into effect in Canada in February
2005. The Canadian government is currently developing a number of
policy measures in order to meet its emission reduction guidelines.
While the impact of these measures cannot be quantified at this
time, the likely effect will be to increase costs for fossil fuels,
electricity and transportation, restrict industrial emission
levels, impose added costs for emissions in excess of permitted
levels and increase costs for monitoring and reporting. Compliance
with these initiatives could have a material adverse effect on the
Company's results of operations. Resource and Reserve Estimates The
Company's figures for mineral resources and ore reserves on the
Diavik group of mineral claims are estimates, and no assurance can
be given that the anticipated carats will be recovered. The
estimation of reserves is a subjective process. Forecasts are based
on engineering data, projected future rates of production and the
timing of future expenditures, all of which are subject to numerous
uncertainties and various interpretations. The Company expects that
its estimates of reserves will change to reflect updated
information. Reserve estimates may be revised upward or downward
based on the results of current and future drilling, testing or
production levels and on changes in mine design. In addition,
market fluctuations in the price of diamonds or increases in the
costs to recover diamonds from the Diavik Diamond Mine may render
the mining of ore reserves uneconomical. Mineral resources that are
not mineral reserves do not have demonstrated economic viability.
Due to the uncertainty that may attach to inferred mineral
resources, there is no assurance that mineral resources at the
Diavik property will be upgraded to proven and probable ore
reserves. Insurance The Company's business is subject to a number
of risks and hazards, including adverse environmental conditions,
industrial accidents, labour disputes, unusual or unexpected
geological conditions, risks relating to the physical security of
diamonds and jewelry held as inventory or in transit, changes in
the regulatory environment and natural phenomena such as inclement
weather conditions. Such occurrences could result in damage to the
Diavik Diamond Mine, personal injury or death, environmental damage
to the Diavik property, delays in mining, closing of Harry Winston
Inc.'s manufacturing facilities or salons, monetary losses and
possible legal liability. Although insurance is maintained to
protect against certain risks in connection with the Diavik Diamond
Mine and the Company's operations, the insurance in place will not
cover all potential risks. It may not be possible to maintain
insurance to cover insurable risks at economically feasible
premiums. Fuel Costs The Diavik Diamond Mine's expected fuel needs
are purchased periodically during the year for storage, and
transported to the mine site by way of the winter road. These costs
will increase if transportation by air freight is required due to a
shortened "winter road season" or unexpectedly high fuel usage. The
cost of the fuel purchased is based on the then prevailing price
and expensed into operating costs on a usage basis. The Diavik
Diamond Mine currently has no hedges for its future anticipated
fuel consumption. Reliance on Skilled Employees Production at the
Diavik Diamond Mine is dependent upon the efforts of certain
skilled employees of DDMI. The loss of these employees or the
inability of DDMI to attract and retain additional skilled
employees may adversely affect the level of diamond production from
the Diavik Diamond Mine. Currently, there is significant
competition for skilled workers in remote northern operations due
to the significant number of large-scale construction projects
ongoing and planned in Canada's north, including the various
construction projects relating to the development of the oil sands
in northern Alberta. The Company's success at marketing rough
diamonds and in operating the business of Harry Winston Inc. is
dependent on the services of key executives and skilled employees,
as well as the continuance of key relationships with certain third
parties, such as diamantaires. The loss of these persons or the
Company's inability to attract and retain additional skilled
employees or to establish and maintain relationships with required
third parties may adversely affect its business and future
operations in marketing diamonds and in operating its retail
segment. Expansion of the Existing Salon Network A key component of
the Company's retail strategy is the expansion of its salon
network. This strategy requires the Company to make ongoing capital
expenditures to build and open new salons, to refurbish existing
salons from time to time, and to incur additional operating
expenses in order to operate the new salons. To date, much of this
expansion has been financed through borrowings by Harry Winston
Inc. There can be no assurance that the expansion of the salon
network will prove successful in increasing annual sales or
earnings from the retail segment, and the increased debt levels
resulting from this expansion could negatively impact the Company's
liquidity and its results from operations in the absence of
increased sales and earnings. Competition in the Luxury Jewelry
Segment The Company is exposed to competition in the retail diamond
market from other luxury goods, diamond, jewelry and watch
retailers. The ability of Harry Winston Inc. to successfully
compete with such luxury goods, diamond, jewelry and watch
retailers is dependent upon a number of factors, including the
ability to source high-end polished diamonds and protect and
promote its distinctive brand name and reputation. If Harry Winston
Inc. is unable to successfully compete in the luxury jewelry
segment, then the Company's results of operations will be adversely
affected. Outstanding Share Information As at October 31, 2008
-------------------------------------------------------------------------
Authorized Unlimited Issued and outstanding shares 61,372,091
Options outstanding 1,619,338 Fully diluted 62,991,429
-------------------------------------------------------------------------
Additional Information Additional information relating to the
Company, including the Company's most recently filed annual
information form, can be found on SEDAR at http://www.sedar.com/,
and is also available on the Company's website at
http://investor.harrywinston.com/. Consolidated Balance Sheets
(expressed in thousands of United States dollars) October 31,
January 31, 2008 2008 (unaudited)
-------------------------------------------------------------------------
Assets Current assets: Cash and cash equivalents (note 3) $ 40,538
$ 49,628 Cash collateral and cash reserves (note 3) 25,257 25,615
Accounts receivable 25,977 25,505 Inventory and supplies (note 4)
368,241 322,228 Prepaid expenses and other current assets 43,314
58,617
-------------------------------------------------------------------------
503,327 481,593 Mining capital assets 788,792 658,200 Retail
capital assets 69,726 70,617 Intangible assets, net (note 6)
131,164 132,628 Goodwill 93,780 93,780 Other assets 15,925 16,167
Future income tax asset 42,245 40,963
-------------------------------------------------------------------------
$ 1,644,959 $ 1,493,948 --------------------------
-------------------------- Liabilities and Shareholders' Equity
Current liabilities: Accounts payable and accrued liabilities $
123,427 $ 124,426 Income taxes payable 74,030 48,118 Bank advances
35,073 34,928 Current portion of long-term debt (note 7) 71,991
54,137
-------------------------------------------------------------------------
304,521 261,609 Long-term debt (note 7) 211,958 255,212 Future
income tax liability 309,092 370,500 Other long-term liability
2,224 1,730 Future site restoration costs 39,206 32,980 Minority
interest 338 255 Shareholders' equity: Share capital (note 8)
381,541 305,502 Contributed surplus 15,993 15,614 Retained earnings
359,220 225,334 Accumulated other comprehensive income 20,866
25,212
-------------------------------------------------------------------------
777,620 571,662 Commitments and guarantees (note 9)
-------------------------------------------------------------------------
$ 1,644,959 $ 1,493,948 --------------------------
-------------------------- See accompanying notes to consolidated
financial statements. Consolidated Statements of Earnings
(expressed in thousands of United States dollars, except per share
amounts) (unaudited) Three Three Nine Nine Months Months Months
Months Ended Ended Ended Ended October 31, October 31, October 31,
October 31, 2008 2007 2008 2007
-------------------------------------------------------------------------
Sales $ 148,623 $ 176,478 $ 490,821 $ 491,112 Cost of sales (note
14) 71,679 74,591 218,370 227,550
-------------------------------------------------------------------------
Gross margin 76,944 101,887 272,451 263,562 Selling, general and
administrative expenses 33,998 35,539 116,477 104,951
-------------------------------------------------------------------------
Earnings from operations 42,946 66,348 155,974 158,611
-------------------------------------------------------------------------
Interest and financing expenses (4,678) (7,422) (15,497) (20,776)
Other income 407 594 1,468 2,052 Foreign exchange gain (loss)
48,982 (40,584) 54,438 (65,661)
-------------------------------------------------------------------------
Earnings before income taxes 87,657 18,936 196,383 74,226 Income
tax expense (recovery) - Current 23,804 (4,856) 72,893 37,675
Income tax expense (recovery) - Future (8,119) 31,053 (19,688)
20,387
-------------------------------------------------------------------------
Earnings (loss) before minority interest 71,972 (7,261) 143,178
16,164 Minority interest 81 90 83 204
-------------------------------------------------------------------------
Net earnings (loss) $ 71,891 $ (7,351) $ 143,095 $ 15,960
----------------------------------------------------
---------------------------------------------------- Earnings
(loss) per share Basic $ 1.17 $ (0.13) $ 2.35 $ 0.27
----------------------------------------------------
---------------------------------------------------- Fully diluted
$ 1.17 $ (0.13) $ 2.34 $ 0.27
----------------------------------------------------
---------------------------------------------------- Weighted
average number of shares outstanding 61,372,091 58,371,004
60,894,313 58,368,409
----------------------------------------------------
---------------------------------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income (expressed in
thousands of United States dollars) (unaudited) Three Three Nine
Nine Months Months Months Months Ended Ended Ended Ended October
31, October 31, October 31, October 31, 2008 2007 2008 2007
-------------------------------------------------------------------------
Net earnings (loss) $ 71,891 $ (7,351) $ 143,095 $ 15,960 Other
comprehensive income (loss) Net gain (loss) on translation of
foreign operations (net of tax - nil) (6,281) 3,390 (4,346) 5,990
-------------------------------------------------------------------------
Total comprehensive income (loss) $ 65,610 $ (3,961) $ 138,749 $
21,950 ----------------------------------------------------
---------------------------------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(expressed in thousands of United States dollars) (unaudited) Three
Three Nine Nine Months Months Months Months Ended Ended Ended Ended
October 31, October 31, October 31, October 31, 2008 2007 2008 2007
-------------------------------------------------------------------------
Common shares: Balance at beginning of period $ 381,541 $ 305,502 $
305,502 $ 305,165 Issued during the period - - 76,039 337
-------------------------------------------------------------------------
Balance at end of period 381,541 305,502 381,541 305,502
-------------------------------------------------------------------------
Contributed surplus: Balance at beginning of period 15,906 15,239
15,614 14,922 Stock option expense 87 158 379 475
-------------------------------------------------------------------------
Balance at end of period 15,993 15,397 15,993 15,397
-------------------------------------------------------------------------
Retained earnings: Balance at beginning of period 290,398 159,752
225,334 165,625 Net earnings (loss) 71,891 (7,351) 143,095 15,960
Dividends paid (3,069) (14,593) (9,209) (43,777)
-------------------------------------------------------------------------
Balance at end of period 359,220 137,808 359,220 137,808
-------------------------------------------------------------------------
Accumulated other comprehensive income: Balance at beginning of
period 27,147 18,616 25,212 16,016 Other comprehensive income
(loss) Net gain (loss) on translation of foreign operations (net of
tax - nil) (6,281) 3,390 (4,346) 5,990
-------------------------------------------------------------------------
Balance at end of period 20,866 22,006 20,866 22,006
-------------------------------------------------------------------------
Total shareholders' equity $ 777,620 $ 480,713 $ 777,620 $ 480,713
----------------------------------------------------
---------------------------------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows (expressed in thousands of
United States dollars) (unaudited) Three Three Nine Nine Months
Months Months Months Ended Ended Ended Ended October 31, October
31, October 31, October 31, 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided by (used in): Operating Net earnings (loss) $ 71,891
$ (7,351) $ 143,095 $ 15,960 Items not involving cash: Amortization
and accretion 21,707 20,704 52,440 60,361 Future income tax expense
(recovery) (8,119) 31,053 (19,688) 20,387 Stock-based compensation
and pension expense 296 158 875 1,563 Foreign exchange loss (gain)
(51,331) 41,639 (57,582) 66,540 Loss on disposal of assets 3 - 491
- Minority interest 81 90 83 204 Change in non-cash operating
working capital 13,815 (24,925) 9,144 (59,651)
-------------------------------------------------------------------------
48,343 61,368 128,858 105,364
-------------------------------------------------------------------------
Financing Decrease in long-term debt (12,558) (7,626) (39,725)
(16,620) Increase (decrease) in revolving credit (5,530) (1,790)
174,895 52,955 Repayment of Harry Winston Inc. revolving credit - -
(159,109) - Dividends paid (3,069) (14,593) (9,209) (43,777) Issue
of common shares - - 76,039 337
-------------------------------------------------------------------------
(21,157) (24,009) 42,891 (7,105)
-------------------------------------------------------------------------
Investing Cash collateral and cash reserve 46 (31) 358 25,907
Mining capital assets (38,350) (48,580) (168,258) (121,209) Retail
capital assets (1,384) (11,947) (9,040) (28,983) Other assets -
(48) (1) (793)
-------------------------------------------------------------------------
(39,688) (60,606) (176,941) (125,078)
-------------------------------------------------------------------------
Foreign exchange effect on cash balances (3,278) (150) (3,898) 896
Increase (decrease) in cash and cash equivalents (15,780) (23,397)
(9,090) (25,923) Cash and cash equivalents, beginning of period
(note 3) 56,318 51,648 49,628 54,174
-------------------------------------------------------------------------
Cash and cash equivalents, end of period (note 3) $ 40,538 $ 28,251
$ 40,538 $ 28,251
----------------------------------------------------
---------------------------------------------------- Change in
non-cash operating working capital Accounts receivable 2,503
(22,549) (2,224) (27,827) Prepaid expenses and other current assets
11,963 (16,037) 13,497 (30,172) Inventory and supplies (23,027)
(9,477) (46,013) (57,053) Accounts payable and accrued liabilities
(5,985) (12,471) 8,850 28,040 Income tax payable 28,361 35,609
35,034 27,361
-------------------------------------------------------------------------
$ 13,815 $ (24,925) $ 9,144 $ (59,651)
-------------------------------------------------------------------------
Supplemental cash flow information Cash taxes paid (recovered) $
(5,864) $ 3,805 $ 36,704 $ 6,846 Cash interest paid $ 4,165 $ 6,282
$ 12,963 $ 17,488
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Notes
to Consolidated Financial Statements October 31, 2008 with
comparative figures (tabular amounts in thousands of United States
dollars, except as otherwise noted) NOTE 1: Nature of Operations
Harry Winston Diamond Corporation (the "Company") is a specialist
diamond company focusing on the mining and retail segments of the
diamond industry. The Company's most significant asset is a 40%
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 Mines Ltd. (40%). DDMI is the operator of the
Diavik Diamond Mine. Both companies are headquartered in
Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto
plc of London, England, and Harry Winston Diamond Mines Ltd. is a
wholly owned subsidiary of Harry Winston Diamond Corporation of
Toronto, Canada. The Diavik Diamond Mine is located 300 kilometres
northeast of Yellowknife in the Northwest Territories. The Company
records its proportionate interest in the assets, liabilities and
expenses of the Joint Venture in the Company's financial statements
with a one-month lag. The Company also owns a 100% interest in
Harry Winston Inc., the premier fine jewelry and watch retailer.
The results of Harry Winston Inc., located in New York City, US,
are consolidated in the financial statements of the Company.
Certain comparative figures have been reclassified to conform with
the current year's presentation. NOTE 2: Significant Accounting
Policies The interim consolidated financial statements are prepared
by management in accordance with accounting principles generally
accepted in Canada. The interim consolidated financial statements
include the accounts of the Company and all of its subsidiaries as
well as its proportionate interest in the assets, liabilities and
expenses of joint arrangements. Intercompany transactions and
balances have been eliminated. The interim consolidated financial
statements should be read in conjunction with the consolidated
financial statements and the notes thereto in the Company's Annual
Report for the year ended January 31, 2008, since these interim
financial statements do not include all disclosures required by
Canadian generally accepted accounting principles ("GAAP").
Excluding adoption of the new accounting standards described below,
these statements have been prepared following the same accounting
policies and methods of computation as the consolidated financial
statements for the year ended January 31, 2008. Adoption of New
Accounting Standards and Developments Capital Disclosures Effective
February 1, 2008, the Company adopted new accounting
recommendations from the Canadian Institute of Chartered
Accountants ("CICA"), Handbook Section 1535, "Capital Disclosures".
This new standard specifies the requirements for disclosure of both
qualitative and quantitative information to enable users of
financial statements to evaluate the Company's objectives, policies
and processes for managing capital. This disclosure is contained in
note 11 to the interim consolidated financial statements.
Inventories Effective February 1, 2008, the Company adopted new
accounting recommendations from the CICA, Handbook Section 3031,
"Inventories", which supersedes the previously issued standard on
inventory. The new standard introduces significant changes to the
measurement and disclosure of inventory. The measurement changes
include: the elimination of LIFO, the requirement to measure
inventories at the lower of cost and net realizable value for
inventories that are not ordinarily interchangeable and goods or
services produced for specific purposes, the requirement for an
entity to use a consistent cost formula for inventory of a similar
nature and use, and the reversal of previous write-downs to net
realizable value when there is a subsequent increase in the value
of inventories. Disclosures of inventories have also been enhanced.
Inventory policies, carrying amounts, amounts recognized as an
expense, write-downs and the reversals of write-downs are required
to be disclosed. This standard has had no material impact on the
consolidated financial statements. Financial Instruments Effective
February 1, 2008, the Company adopted new accounting
recommendations from the CICA, Handbook Section 3862, "Financial
Instruments - Disclosures" and Handbook Section 3863, "Financial
Instruments - Presentation". Section 3862 provides guidance on
disclosure of risks associated with both recognized and
unrecognized financial instruments and how the Company manages
these risks. Section 3863 details financial instruments
presentation requirements, which are unchanged from those discussed
in Section 3861, "Financial Instruments - Disclosure and
Presentation". This disclosure is contained in notes 12 and 13 to
the interim consolidated financial statements. Recently Issued
Accounting Standards Goodwill and Intangibles On February 1, 2008
the CICA issued Handbook Section 3064, "Goodwill and Intangible
Assets". This Section establishes revised standards for the
recognition, measurement, presentation and disclosure of goodwill
and intangible assets. Concurrent with the introduction of this
standard, the CICA withdrew EIC 27, "Revenues and Expenses During
the Pre-operating Period," which eliminates the ability for
companies to defer costs and revenues incurred prior to commercial
production at new mine operations. The changes are effective for
interim and annual financial statements beginning January 1, 2009.
The Company is currently assessing the impact of this standard on
its consolidated financial statements. International Financial
Reporting Standards ("IFRS") The Company plans to report under
International Financial Reporting Standards ("IFRS") as of February
1, 2011. Changing from Canadian GAAP to IFRS could materially
affect the Company's reported financial position and results of
operations. During the second quarter of fiscal 2009, the Company
commenced preparation of its changeover plan. The Company intends
to engage a third party advisor to assist with the plan. Over the
next few months, specific actions include identifying the major
accounting differences between current Canadian GAAP and IFRS as
they affect the Company and determining resource requirements over
the next two years as the Company implements its transition plan.
NOTE 3: Cash Resources October 31, January 31, 2008 2008
-------------------------------------------------------------------------
Cash on hand and balances with banks $ 40,538 $ 33,028 Short-term
investments(a) - 16,600
-------------------------------------------------------------------------
Total cash and cash equivalents 40,538 49,628 Cash collateral and
cash reserves 25,257 25,615
-------------------------------------------------------------------------
Total cash resources $ 65,795 $ 75,243 --------------------------
-------------------------- (a) Short-term investments are held in
overnight deposits. NOTE 4: Inventory and Supplies October 31,
January 31, 2008 2008
-------------------------------------------------------------------------
Rough diamond inventory $ 30,112 $ 17,097 Merchandise inventory
263,062 254,101 Supplies inventory 75,067 51,030
-------------------------------------------------------------------------
Total inventory and supplies $ 368,241 $ 322,228
-------------------------- -------------------------- NOTE 5:
Diavik Joint Venture The following represents Harry Winston Diamond
Corporation's 40% proportionate interest in the Joint Venture as at
September 30, 2008 and December 31, 2007: October 31, January 31,
2008 2008
-------------------------------------------------------------------------
Current assets $ 108,223 $ 110,199 Long-term assets 740,765 605,300
Current liabilities 37,058 40,631 Long-term liabilities and
participant's account 811,930 674,868
-------------------------------------------------------------------------
Three Three Nine Nine Months Months Months Months Ended Ended Ended
Ended October 31, October 31, October 31, October 31, 2008 2007
2008 2007
-------------------------------------------------------------------------
Expenses net of interest income of $0.1 million (2007 - $0.1
million)(a)(b) 61,168 48,118 138,798 135,828 Cash flows resulting
from (used in) operating activities (47,434) (14,044) (108,655)
(98,027) Cash flows resulting from financing activities 68,220
64,007 243,721 207,733 Cash flows resulting from (used in)
investing activities (31,365) (54,409) (146,337) (122,222)
-------------------------------------------------------------------------
(a) The Joint Venture only earns interest income. (b) Expenses net
of interest income for the nine months ended October 31, 2008 of
$0.3 million (2007 - $0.3 million). The Company is contingently
liable for the other participant's portion of the liabilities of
the Joint Venture and to the extent the Company's participating
interest has increased because of the failure of the other
participant to make a cash contribution when required, the Company
would have access to an increased portion of the assets of the
Joint Venture to settle these liabilities. NOTE 6: Intangible
Assets Accum- ulated October January Amortization Amorti- 31, 31,
Period Cost zation 2008 net 2008 net
-------------------------------------------------------------------------
Trademark indefinite life $ 112,995 $ - $ 112,995 $ 112,995
Drawings indefinite life 12,365 - 12,365 12,365 Wholesale
distribution network 120 months 5,575 (1,786) 3,789 4,206 Store
leases 65 to 105 months 5,639 (3,624) 2,015 3,062
-------------------------------------------------------------------------
Intangible assets $ 136,574 $ (5,410) $ 131,164 $ 132,628
--------------------------------------------
-------------------------------------------- Amortization expense
for the nine months ended October 31, 2008 was $1.5 million (2007 -
$1.3 million). NOTE 7: Long-Term Debt October 31, January 31, 2008
2008
-------------------------------------------------------------------------
Mining credit facilities $ 86,449 $ 125,677 Retail credit
facilities and loans 190,490 174,850 First mortgage on real
property 7,010 8,822
-------------------------------------------------------------------------
Total long-term debt 283,949 309,349
-------------------------------------------------------------------------
Less current portion (71,991) (54,137)
-------------------------------------------------------------------------
$ 211,958 $ 255,212 --------------------------
-------------------------- On February 22, 2008, Harry Winston Inc.
entered into a new credit agreement with a syndicate of banks for a
$250.0 million, five-year revolving credit facility. There are no
scheduled repayments required before maturity. At October 31, 2008,
$170.6 million had been drawn against this secured credit facility,
which expires on March 31, 2013. NOTE 8: Share Capital (a)
Authorized Unlimited common shares without par value. (b) Issued
Number of Shares Amount
---------------------------------------------------------------------
Balance, January 31, 2008 58,372,091 $ 305,502 Shares issued for:
Cash 3,000,000 76,039
---------------------------------------------------------------------
Balance, October 31, 2008 61,372,091 $ 381,541
------------------------- ------------------------- (c) RSU and DSU
Plans RSU Number of Units
---------------------------------------------------------------------
Balance, January 31, 2008 143,715 Awards and payouts during the
period (net): RSU awards (net of forfeitures) (9,620) RSU payouts
(32,616)
---------------------------------------------------------------------
Balance, October 31, 2008 101,479 -----------------
----------------- DSU Number of Units
---------------------------------------------------------------------
Balance, January 31, 2008 72,198 Awards during the period (net):
DSU awards 32,252
---------------------------------------------------------------------
Balance, October 31, 2008 104,450 -----------------
----------------- Three Three Nine Nine Months Months Months Months
Ended Ended Ended Ended Expense for the October 31, October 31,
October 31, October 31, Period 2008 2007 2008 2007
---------------------------------------------------------------------
RSU $ (995) $ 629 $ (660) $ 1,089 DSU (659) 362 (422) 365
---------------------------------------------------------------------
$ (1,654) $ 991 $ (1,082) $ 1,454
----------------------------------------------------
---------------------------------------------------- During the
nine months ended October 31, 2008, the Company granted (9,620)
RSUs (net of forfeitures) and 32,252 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.
In addition, 32,616 RSUs vested during the nine months ended
October 31, 2008, resulting in a payout of $0.8 million. Grants
under the RSU Plan are on a discretionary basis to employees of the
Company subject to Board of Director approval. Each RSU grant vests
on the third anniversary of the grant date, subject to special
rules for death and disability. The Company anticipates paying out
cash on maturity of RSUs and DSUs. Only non-executive directors of
the Company are eligible for grants under the DSU Plan. Each DSU
grant vests immediately on the grant date. The expenses related to
RSUs and DSUs are accrued based on the price of Harry Winston
Diamond Corporation's common shares at the end of the period and on
the probability of vesting. This expense is recognized on a
straight-line basis over the term of vesting. NOTE 9: Commitments
and Guarantees (a) Environmental Agreement Through negotiations of
environmental and other agreements, the Joint Venture must provide
funding for the Environmental Monitoring Advisory Board. The
Company's share of this funding requirement was $0.2 million for
calendar 2008. 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. The Company's share of the Joint Venture's
letters of credit outstanding with respect to the environmental
agreements as at October 31, 2008 was $62.6 million. The agreement
specifically provides that these funding obligations will be
reduced by amounts incurred by the Joint Venture on reclamation and
abandonment activities. (b) Participation Agreements The Joint
Venture has signed participation agreements with various native
groups. These agreements are expected to contribute to the social,
economic and cultural well-being of the Aboriginal bands. The
agreements are each for an initial term of twelve years and shall
be automatically renewed on terms to be agreed for successive
periods of six years thereafter until termination. The agreements
terminate in the event the mine permanently ceases to operate. (c)
Commitments Commitments include the cumulative maximum funding
commitments secured by letters of credit of the Joint Venture's
environmental and participation agreements at the Company's 40%
share, before any reduction of future reclamation activities, and
future minimum annual rentals under non-cancellable operating and
capital leases for retail salons and corporate office space, and
are as follows: 2009 $ 81,770 2010 81,185 2011 77,842 2012 77,048
2013 76,553 Thereafter 130,131
---------------------------------------------------------------------
NOTE 10: Employee Benefit Plans Three Three Nine Nine Months Months
Months Months Ended Ended Ended Ended Expenses for the Oct. 31,
Oct. 31, Oct. 31, Oct. 31, Period 2008 2007 2008 2007
-------------------------------------------------------------------------
Defined benefit pension plan - Harry Winston retail segment $ 413 $
6 $ 1,227 $ 18 Defined contribution plan - Harry Winston retail
segment 235 210 705 810 Defined contribution plan - Diavik Diamond
Mine 236 218 733 619
-------------------------------------------------------------------------
$ 884 $ 434 $ 2,665 $ 1,447
----------------------------------------------------
---------------------------------------------------- NOTE 11:
Capital Management The Company's capital includes cash and cash
equivalents, short-term debt, long-term debt and equity, which
includes issued common shares, contributed surplus and retained
earnings. The Company's primary objective with respect to its
capital management is to ensure that it has sufficient cash
resources to maintain its ongoing operations, to provide returns to
shareholders and benefits for other stakeholders, and to pursue
growth opportunities. To meet these needs, the Company may from
time to time raise additional funds through borrowing and/or the
issuance of equity or debt or by securing strategic partners, upon
approval by the Board of Directors. The Board of Directors reviews
and approves any material transactions out of the ordinary course
of business, including proposals on acquisitions or other major
investments or divestitures, as well as annual capital and
operating budgets. The Company is subject to externally imposed
capital requirements related to its senior secured term and
revolving credit facilities, whereby it is required to maintain a
consolidated tangible net worth in excess of $250 million. There
has been no change with respect to the Company's overall capital
risk management strategy. At October 31, 2008, the Company is in
compliance with this covenant. NOTE 12: Financial Instruments The
Company has various financial instruments comprised of cash and
cash equivalents, cash collateral and cash reserves, accounts
receivable, accounts payable and accrued liabilities, bank advances
and long-term debt. Cash and cash equivalents consist of cash on
hand and balances with banks and short-term investments held in
overnight deposits with a maturity on acquisition of less than 90
days. Cash and cash equivalents are designated as held-for-trading
and are carried at fair value. The fair value of accounts
receivable is determined by the amount of cash anticipated to be
received in the normal course of business from the financial asset.
The carrying values of these financial instruments are as follows:
October 31, 2008 January 31, 2008 Estimated Carrying Estimated
Carrying Fair Value Value Fair Value Value
-------------------------------------------------------------------------
Financial Assets: Cash and cash equivalents $ 40,538 $ 40,538 $
49,628 $ 49,628 Cash collateral and cash reserves 25,257 25,257
25,615 25,615 Accounts receivable 25,977 25,977 25,505 25,505
-------------------------------------------------------------------------
$ 91,772 $ 91,772 $ 100,748 $ 100,748
----------------------------------------------------
---------------------------------------------------- Financial
Liabilities: Accounts payable and accrued liabilities $ 123,427 $
123,427 $ 124,426 $ 124,426 Bank advances 35,073 35,073 34,928
34,928 Long-term debt 283,949 283,949 309,349 309,349
-------------------------------------------------------------------------
$ 442,449 $ 442,449 $ 468,703 $ 468,703
----------------------------------------------------
---------------------------------------------------- NOTE 13:
Financial Risk Exposure and Risk Management 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
predominately 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 earnings arises from the following sources: Net
Canadian dollar denominated monetary assets and liabilities. The
most significant exposure relates to its Canadian dollar future
income tax liability. 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. 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 future income tax liability. 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
October 31, 2008, a one-cent change in the exchange rate would have
impacted pre-tax net earnings for the quarter by $2.4 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. 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 retail 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 past 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 October 31, 2008, the Company's maximum counterparty credit
exposure consists of the carrying amount of cash and cash
equivalents and accounts receivable, which approximates fair value.
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 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.
Management forecasts cash flows for its current and subsequent
fiscal years to predict future financing requirements. Future
requirements are met through a combination of committed credit
facilities and access to capital markets. At October 31, 2008, the
Company had $40.5 million of cash and cash equivalents and $43.6
million available under credit facilities. The following table
summarizes the aggregate amount of contractual future cash outflows
for the Company's financial liabilities: (expressed in thousands of
United Less than Year Year After States dollars) Total 1 year 2-3
4-5 5 years
-------------------------------------------------------------------------
Accounts payable and accrued liabilities $123,427 $123,427 $ - $ -
$ - Income taxes payable 74,030 74,030 - - - Bank advances 35,073
35,073 - - - Long-term debt(a) 339,997 84,681 46,729 17,561 191,026
Environmental and participation agreements incremental commitments
81,142 63,756 3,321 1,661 12,404 Operating lease obligations
108,703 17,162 25,763 16,789 48,989 Capital lease obligations 1,622
852 770 - -
-------------------------------------------------------------------------
(a) Includes projected interest payments on the current debt
outstanding based on interest rates in effect at October 31, 2008.
NOTE 14: Insurance Claim Included in cost of sales for the mining
segment is a $4.3 million insurance settlement relating to an
excavator fire that occurred in the fourth quarter of fiscal 2006
at the Diavik Diamond Mine. The settlement represents the recovery
of the cost of the excavator that was previously written off along
with incremental operating expenses relating to the procurement of
a replacement excavator. Total proceeds of $5.0 million from the
insurance settlement were received in December 2008, which will
result in a gain of approximately $0.7 million in the fourth
quarter. NOTE 15: Subsequent Event In December 2008, approximately
$30.0 million in Company-owned and consigned retail inventory at
cost was stolen during a robbery at the Harry Winston Paris salon.
The Company has an insurance policy in place and an insurance claim
is subject to investigation by insurers. NOTE 16: Segmented
Information The Company operates in two segments within the diamond
industry, mining and retail, for the three months ended October 31,
2008. The mining segment consists of the Company's rough diamond
business. This business includes the 40% interest in the Diavik
group of mineral claims and the sale of rough diamonds in the
market-place. The retail segment consists of the Company's
ownership in Harry Winston Inc. This segment consists of the
marketing of fine jewelry and watches on a worldwide basis. For the
three months ended October 31, 2008 Mining Retail Total
-------------------------------------------------------------------------
Sales Canada $ 90,716 $ - $ 90,716 United States - 21,278 21,278
Europe - 23,433 23,433 Asia - 13,196 13,196 Cost of sales 40,617
31,062 71,679
-------------------------------------------------------------------------
Gross margin 50,099 26,845 76,944 Gross margin (%) 55.2% 46.4%
51.8% Selling, general and administrative expenses 3,114 30,884
33,998
-------------------------------------------------------------------------
Earnings (loss) from operations 46,985 (4,039) 42,946
-------------------------------------------------------------------------
Interest and financing expenses (1,898) (2,780) (4,678) Other
income 303 104 407 Foreign exchange gain (loss) 49,592 (610) 48,982
-------------------------------------------------------------------------
Segmented earnings (loss) before income taxes $ 94,982 $ (7,325) $
87,657 ---------------------------------------
--------------------------------------- Segmented assets as at
October 31, 2008 Canada $ 981,791 $ - $ 981,791 United States -
469,130 469,130 Other foreign countries 33,108 160,930 194,038
-------------------------------------------------------------------------
$ 1,014,899 $ 630,060 $ 1,644,959
-------------------------------------------------------------------------
Goodwill as at October 31, 2008 $ - $ 93,780 $ 93,780 Capital
expenditures $ 38,350 $ 1,384 $ 39,734 Other significant non-cash
items: Income tax recovery - Future $ (5,662) $ (2,457) $ (8,119)
Amortization and accretion $ 18,611 $ 3,096 $ 21,707
-------------------------------------------------------------------------
Sales to one customer in the mining segment totalled $5.5 million
for the three months ended October 31, 2008 ($6.6 million for the
three months ended October 31, 2007). For the three months ended
October 31, 2007 Mining Retail Total
-------------------------------------------------------------------------
Sales Canada $ 122,711 $ - $ 122,711 United States - 19,413 19,413
Europe - 20,400 20,400 Asia - 13,954 13,954 Cost of sales 45,985
28,606 74,591
-------------------------------------------------------------------------
Gross margin 76,726 25,161 101,887 Gross margin (%) 62.5% 46.8%
57.7% Selling, general and administrative expenses 6,748 28,791
35,539
-------------------------------------------------------------------------
Earnings (loss) from operations 69,978 (3,630) 66,348
-------------------------------------------------------------------------
Interest and financing expenses (3,862) (3,560) (7,422) Other
income (expense) 606 (12) 594 Foreign exchange gain (loss) (41,502)
918 (40,584)
-------------------------------------------------------------------------
Segmented earnings (loss) before income taxes $ 25,220 $ (6,284) $
18,936 ---------------------------------------
--------------------------------------- Segmented assets as at
October 31, 2007 Canada $ 784,468 $ - $ 784,468 United States -
493,494 493,494 Other foreign countries 12,855 142,087 154,942
-------------------------------------------------------------------------
$ 797,323 $ 635,581 $ 1,432,904
-------------------------------------------------------------------------
Goodwill as at October 31, 2007 $ - $ 96,575 $ 96,575 Capital
expenditures $ 48,580 $ 11,947 $ 60,527 Other significant non-cash
items: Income tax expense (recovery) - Future $ 31,764 $ (711) $
31,053 Amortization and accretion $ 18,575 $ 2,129 $ 20,704
-------------------------------------------------------------------------
For the nine months ended October 31, 2008 Mining Retail Total
-------------------------------------------------------------------------
Sales Canada $ 277,123 $ - $ 277,123 United States - 75,188 75,188
Europe - 86,699 86,699 Asia - 51,811 51,811 Cost of sales 105,157
113,213 218,370
-------------------------------------------------------------------------
Gross margin 171,966 100,485 272,451 Gross margin (%) 62.1% 47.0%
55.5% Selling, general and administrative expenses 15,473 101,004
116,477
-------------------------------------------------------------------------
Earnings (loss) from operations 156,493 (519) 155,974
-------------------------------------------------------------------------
Interest and financing expenses (7,025) (8,472) (15,497) Other
income (expense) 1,751 (283) 1,468 Foreign exchange gain (loss)
54,853 (415) 54,438
-------------------------------------------------------------------------
Segmented earnings (loss) before income taxes $ 206,072 $ (9,689) $
196,383 ---------------------------------------
--------------------------------------- Segmented assets as at
October 31, 2008 Canada $ 981,791 $ - $ 981,791 United States -
469,130 469,130 Other foreign countries 33,108 160,930 194,038
-------------------------------------------------------------------------
$ 1,014,899 $ 630,060 $ 1,644,959
-------------------------------------------------------------------------
Goodwill as at October 31, 2008 $ - $ 93,780 $ 93,780 Capital
expenditures $ 168,258 $ 9,040 $ 177,298 Other significant non-cash
items: Income tax recovery - Future $ (15,401) $ (4,287) $ (19,688)
Amortization and accretion $ 43,039 $ 9,401 $ 52,440
-------------------------------------------------------------------------
Sales to one customer in the mining segment totalled $15.8 million
for the nine months ended October 31, 2008 ($19.3 million for the
nine months ended October 31, 2007). For the nine months ended
October 31, 2007 Mining Retail Total
-------------------------------------------------------------------------
Sales Canada $ 310,534 $ - $ 310,534 United States - 65,917 65,917
Europe - 63,994 63,994 Asia - 50,667 50,667 Cost of sales 132,718
94,832 227,550
-------------------------------------------------------------------------
Gross margin 177,816 85,746 263,562 Gross margin (%) 57.3% 47.5%
53.7% Selling, general and administrative expenses 17,696 87,255
104,951
-------------------------------------------------------------------------
Earnings (loss) from operations 160,120 (1,509) 158,611
-------------------------------------------------------------------------
Interest and financing expenses (11,519) (9,257) (20,776) Other
income 1,728 324 2,052 Foreign exchange gain (loss) (66,798) 1,137
(65,661)
-------------------------------------------------------------------------
Segmented earnings (loss) before income taxes $ 83,531 $ (9,305) $
74,226 ---------------------------------------
--------------------------------------- Segmented assets as at
October 31, 2007 Canada $ 784,468 $ - $ 784,468 United States -
493,494 493,494 Other foreign countries 12,855 142,087 154,942
-------------------------------------------------------------------------
$ 797,323 $ 635,581 $ 1,432,904
-------------------------------------------------------------------------
Goodwill as at October 31, 2007 $ - $ 96,575 $ 96,575 Capital
expenditures $ 121,209 $ 28,983 $ 150,192 Other significant
non-cash items: Income tax expense (recovery) - Future $ 21,959 $
(1,572) $ 20,387 Amortization and accretion $ 54,234 $ 6,127 $
60,361
-------------------------------------------------------------------------
DATASOURCE: Harry Winston Diamond Corporation CONTACT: Investor
Relations - (416) 362-2237 ext 290 or
Copyright