TORONTO, June 4 /PRNewswire-FirstCall/ -- Harry Winston Diamond
Corporation (TSX: HW; NYSE: HWD) today reported first quarter
results for the period ending April 30, 2008. The Company recorded
an increase in consolidated sales for the quarter of 10%,
generating an 18% increase in gross margin and a 10% increase in
consolidated earnings from operations compared to the results of
the first quarter of the prior year. Consolidated quarterly sales
totalled $156.1 million with earnings from operations of $39.6
million compared to $141.4 million and $36.0 million, respectively,
for the comparable quarter of the prior year. Net earnings were
$21.3 million, or $0.35 per share, compared to net earnings of $3.3
million, or $0.06 per share, respectively, in the first quarter of
the prior year. Net earnings for the comparable quarter of the
prior year were reduced by a net $13.3 million foreign exchange
loss, or $0.23 per share, as a result of the strengthening of the
Canadian dollar relative to the US dollar during the quarter,
compared to a net $0.2 million foreign exchange gain in the current
quarter. Earnings from operations for the mining segment increased
13% to $42.0 million compared to the comparable quarter of the
prior year. Extreme cold temperatures, compounded by the mining of
a lower-grade section of the A-154 South ore body, caused a 31%
decrease in carat production, with 0.7 million being produced in
the quarter versus 1.0 million for the comparable quarter of the
prior year. Mining sales, however, were down only 2% to $81.4
million as higher diamond prices compensated for reduced volume.
The retail segment recorded a 27% increase in sales to $74.7
million. However, a $2.0 million non-recurring expense related to
restructuring and improvements carried out at the Geneva watch
factory resulted in the retail segment recording a loss from
operations of $2.4 million. Excluding the impact of the
restructuring charge, loss from operations would have been $0.3
million compared to a loss of $1.1 million in the comparable
quarter of the prior year. First Quarter Fiscal 2009 Financial
Highlights (US$ in millions except Earnings per Share amounts)
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Three months Three months Twelve months ended ended ended Apr. 30,
Apr. 30, Jan. 31, 2008 2007 2008
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Sales 156.1 141.4 679.4
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Earnings from operations 39.6 36.0 217.7
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Net earnings 21.3 3.3 106.4
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Earnings per share $0.35 $0.06 $1.82
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"This quarter has delivered improved operating results in both of
our business segments despite a rough diamond production shortfall
and a troubled economy in the principle diamond retail market of
the US. Robust pricing continues for the white rough diamonds that
are the signature of the Diavik Mine as production shortfalls meet
increased demand from emerging economies. Our jewelry business has
turned in exceptional sales growth, principally from global
customers beyond the US, as we continue to improve both revenues
and costs in this truly global brand," said Robert Gannicott,
Chairman and Chief Executive Officer. Thomas J. O'Neill, President
of Harry Winston Diamond Corporation added, "First quarter sales in
our retail segment were particularly strong as our strategy to
build market share through a growing network of salons and
strengthening our watch business progressed. Although gross margin
was impacted by high value individual sales at lower margins, this
was mitigated by lower SG&A as a percentage of the increased
sales base. Transactions to Asian, Russian and Middle Eastern
clients more than offset the decline in the US and continue to grow
as a proportion of our business. We look forward to a year of
continued sales growth and improved profitability." Dividend
Announcement Harry Winston Diamond Corporation is pleased to
declare an eligible quarterly dividend payment of US$0.05 per
share. Shareholders of record at the close of business on July 15,
2008, will be entitled to receive payment of this dividend on July
29, 2008. Annual Meeting of Shareholders and Webcast As previously
announced, Harry Winston Diamond Corporation will hold its Annual
Meeting of Shareholders on June 4th at 10:00AM EDT at the Fairmont
Royal York Hotel located at 100 Front Street West, Toronto,
Ontario. Interested parties unable to attend may listen to a
webcast of the meeting and a review of the first quarter results on
the company's web site at http://investor.harrywinston.com/. An
online archive of the webcast will be available on the company's
website at http://investor.harrywinston.com/ later the same day.
Information in this news release that is not current or historical
factual information may constitute forward-looking information or
statements within the meaning of applicable securities laws.
Implicit in this information, particularly in respect of statements
as to future operating results and economic performance of Harry
Winston Diamond Corporation, are assumptions regarding world
economic conditions, projected revenue and expenses, diamond
prices, and the Canadian/US dollar exchange rate. Specifically, in
estimating Harry Winston Diamond Corporation's share of the Diavik
Mine capital expenditure requirements, Harry Winston Diamond
Corporation has used a Canadian/US dollar exchange rate of $1.00,
and has assumed that construction will continue on schedule and
without undue disruption with respect to current underground mining
construction initiatives. These assumptions, although considered
reasonable by Harry Winston Diamond Corporation at the time of
preparation, may prove to be incorrect. 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 and mine development activities, risks
associated with underground construction activities, risks
associated with joint venture operations, risks associated with the
remote location of the Diavik Mine site, risks associated with
regulatory and financing requirements, fluctuations in diamond
prices, changes in world economic conditions, increased competition
from other luxury goods retailers, changes in consumer preferences
and tastes in jewelry, and the risk of continued fluctuations in
the Canadian/US dollar exchange rate. About Harry Winston Diamond
Corporation Harry Winston Diamond Corporation (TSX: HW; NYSE: HWD)
is a specialist diamond enterprise with assets in the mining and
retail segments of the diamond industry. The company supplies rough
diamonds to the global market from its 40% interest in the Diavik
Diamond Mine, located in Canada's Northwest Territories. The
company's retail division, Harry Winston, Inc., is a premier
jewelry and timepiece retailer with salons in key locations
including New York, Paris, London, Beijing, Tokyo and Beverly
Hills. For more information, please go to
http://www.harrywinston.com/ or for investor information, visit
investor.harrywinston.com. Highlights (All figures are in United
States dollars unless otherwise indicated) The Company recorded an
increase in consolidated sales for the quarter of 10%, generating
an 18% increase in gross margin and a 10% increase in consolidated
earnings from operations compared to the results of the first
quarter of the prior year. Consolidated quarterly sales totalled
$156.1 million with earnings from operations of $39.6 million
compared to $141.4 million and $36.0 million, respectively, for the
comparable quarter of the prior year. Net earnings were $21.3
million, or $0.35 per share, compared to net earnings of $3.3
million, or $0.06 per share, respectively, in the first quarter of
the prior year. Net earnings for the comparable quarter of the
prior year were reduced by a net $13.3 million foreign exchange
loss, or $0.23 per share, as a result of the strengthening of the
Canadian dollar relative to the US dollar during the quarter,
compared to a net $0.2 million foreign exchange gain in the current
quarter. Earnings from operations for the mining segment increased
13% to $42.0 million compared to the comparable quarter of the
prior year. Extreme cold temperatures compounded by the mining of a
lower-grade section of the A-154 South ore body, caused a 31%
decrease to 0.7 million carats produced versus 1.0 million for the
comparable quarter of the prior year. Mining sales, however, were
down only 2% to $81.4 million as higher diamond prices compensated
for reduced volume. The retail segment recorded a 27% increase in
sales to $74.7 million. Although the retail segment recorded a loss
from operations of $2.4 million compared to $1.1 million in the
comparable quarter of the prior year, the selling, general and
administrative expenses included approximately $2.0 million of
non-recurring expenses related to restructuring and improvements
carried out at the Geneva watch factory. Retail segment SG&A as
a percentage of sales decreased to 48% in the first quarter from
50% in the comparable quarter of the prior year. Excluding the
impact of the non-recurring expenses, SG&A as a percentage of
sales would have been 46%. Management's Discussion and Analysis
Prepared as of June 3, 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
months ended April 30, 2008, and its financial position as at April
30, 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 months ended April 30,
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 "first quarter" refer to the three months ended April
30, 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". 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 market conditions and the
ability of the Company to refinance its existing credit facilities,
the level of worldwide diamond production and world and US economic
conditions. 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 $0.99, 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. 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". 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 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 current quarter saw continuing price rises in
the larger, better-quality rough diamonds, while the price of
lower-quality rough diamonds remained unchanged in response to
softening US demand. The demand in the Asian markets remained
robust in all price ranges. The Retail Jewelry Market The global
luxury diamond jewelry market continued to show strength in the
first quarter of calendar 2008. Luxury retailers with operations
outside of the US have experienced solid sales results, especially
in the Asian, Russian and Middle Eastern markets. In the US, the
higher end of the retail jewelry market has been impacted by the
downturn in the economy but to a lesser extent than the broad-based
jewelry market, where Harry Winston does not conduct business.
Consolidated Financial Results The following is a summary of the
Company's consolidated quarterly results for the eight quarters
ended April 30, 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)
-------------------------------------------------------------------------
2009 2008 2008 2008 2008 Q1 Q4 Q3 Q2 Q1
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Sales $156,079 $188,195 $176,478 $173,269 $141,365 Cost of sales
73,149 83,637 74,591 81,827 71,132
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Gross margin 82,930 104,558 101,887 91,442 70,233 Gross margin (%)
53.1% 55.6% 57.7% 52.8% 49.7% Selling, general and administrative
expenses 43,285 45,494 35,539 35,201 34,211
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Earnings from operations 39,645 59,064 66,348 56,241 36,022
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Interest and financing expenses (5,453) (7,082) (7,422) (7,222)
(6,132) Other income (expense) 246 706 594 545 913 Insurance
settlement - 13,488 - - - Foreign exchange gain (loss) 155 22,270
(40,584) (11,785) (13,292)
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Earnings before income taxes 34,593 88,446 18,936 37,779 17,511
Income taxes (recovery) 13,336 (1,968) 26,197 17,747 14,118
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Earnings (loss) before minority interest 21,257 90,414 (7,261)
20,032 3,393 Minority interest 1 (34) 90 (26) 140
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Net earnings (loss) $ 21,256 $ 90,448 $ (7,351) $ 20,058 $ 3,253
-------------------------------------------------
------------------------------------------------- Basic earnings
(loss) per share $ 0.35 $ 1.55 $ (0.13) $ 0.34 $ 0.06 Diluted
earnings (loss) per share $ 0.35 $ 1.54 $ (0.13) $ 0.33 $ 0.05 Cash
dividends declared per share $ 0.05 $ 0.05 $ 0.25 $ 0.25 $ 0.25
Total assets(i) $ 1,591 $ 1,494 $ 1,433 $ 1,367 $ 1,315 Total
long-term liabilities(i) $ 634 $ 660 $ 530 $ 486 $ 408
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Three Three months months ended ended 2007 2007 2007 April 30,
April 30, Q4 Q3 Q2 2008 2007
-------------------------------------------------------------------------
Sales $154,328 $145,232 $139,962 $156,079 $141,365 Cost of sales
78,559 74,636 68,458 73,149 71,132
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Gross margin 75,769 70,596 71,504 82,930 70,233 Gross margin (%)
49.1% 48.6% 51.1% 53.1% 49.7% Selling, general and administrative
expenses 38,590 33,480 27,171 43,285 34,211
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Earnings from operations 37,179 37,116 44,333 39,645 36,022
-------------------------------------------------------------------------
Interest and financing expenses (6,441) (5,570) (4,805) (5,453)
(6,132) Other income (expense) (111) 1,764 1,805 246 913 Insurance
settlement - - - - - Foreign exchange gain (loss) 9,831 (1,560)
2,619 155 (13,292)
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Earnings before income taxes 40,458 31,750 43,952 34,593 17,511
Income taxes (recovery) 13,169 13,005 9,692 13,336 14,118
-------------------------------------------------------------------------
Earnings (loss) before minority interest 27,289 18,745 34,260
21,257 3,393 Minority interest (5) (86) (5) 1 140
-------------------------------------------------------------------------
Net earnings (loss) $ 27,294 $ 18,831 $ 34,265 $ 21,256 $ 3,253
-------------------------------------------------
------------------------------------------------- Basic earnings
(loss) per share $ 0.47 $ 0.32 $ 0.59 $ 0.35 $ 0.06 Diluted
earnings (loss) per share $ 0.46 $ 0.32 $ 0.58 $ 0.35 $ 0.05 Cash
dividends declared per share $ 0.25 $ 0.25 $ 0.25 $ 0.05 $ 0.25
Total assets(i) $ 1,288 $ 1,246 $ 1,116 $ 1,591 $ 1,315 Total
long-term liabilities(i) $ 536 $ 530 $ 460 $ 634 $ 408
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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 April 30, 2008
Compared to Three Months Ended April 30, 2007 Consolidated Net
Earnings The first quarter earnings of $21.3 million or $0.35 per
share represent an increase of $18.0 million or $0.29 per share as
compared to the results of the first quarter of the prior year. The
increase is due in part to a net foreign exchange gain of $0.2
million in the current quarter compared to a $13.3 million net
foreign exchange loss, or $0.23 per share, recognized in the
comparable quarter of the prior year related principally to an
unrealized non-cash loss on future income taxes payable. For more
detail on the impact of the foreign exchange gain on future income
taxes payable and the future income tax recovery, see "Consolidated
Income Taxes" below. Consolidated Sales Sales for the first quarter
totalled $156.1 million, consisting of rough diamond sales of $81.4
million and retail segment sales of $74.7 million. This compares to
sales of $141.4 million in the comparable quarter of the prior year
(rough diamond sales of $82.8 million and retail segment sales of
$58.6 million). The Company held two primary rough diamond sales,
one of which was an open-market tender, in the first quarter
compared to the same number in 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 first quarter cost of sales was $73.1 million for a
gross margin of 53.1% compared to $71.1 million cost of sales and a
gross margin of 49.7% 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 (including
salon personnel), advertising, professional fees, rent and building
related costs. The Company incurred SG&A expenses of $43.3
million for the first quarter, compared to $34.2 million in the
comparable quarter of the prior year. Included in SG&A expenses
for the first quarter are $7.2 million for the mining segment as
compared to $5.1 million for the comparable quarter of the prior
year, and $36.1 million for the retail segment as compared to $29.1
million for the comparable quarter of the prior year. For the
mining segment, $0.9 million of the increase was due to a
mark-to-market adjustment to stock-based compensation, and $0.8
million of the increase related to higher salaries and benefits.
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. See "Segmented Analysis"
on page 8 for additional information. Consolidated Income Taxes The
Company recorded a tax expense of $13.3 million during the first
quarter compared to a tax expense of $14.1 million in the
comparable quarter of the prior year. The Company's effective
income tax rate for the quarter, excluding Harry Winston's retail
segment, is 38%, 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. The weakening of the Canadian dollar
during the first quarter resulted in an unrealized foreign exchange
gain of $0.9 million on the revaluation of the Canadian denominated
future income tax liability, compared to an unrealized foreign
exchange loss of $13.6 million recorded in the comparable quarter
of the prior year. This 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. Three months Three
months ended ended April 30, April 30, 2008 2007
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Statutory income tax rate 31% 34% Stock compensation 0% 1%
Northwest Territories mining royalty (net of income tax relief) 12%
16% Impact of foreign exchange (3)% 29% Earnings subject to tax
different than statutory rate (4)% (5)% Changes in valuation
allowance 1% 0% Benefits of losses recognized through reduction of
goodwill 0% 5% Assessments and adjustments 2% 0% Other items (1)%
1% Effective income tax rate 38% 81%
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Consolidated Interest and Financing Expenses Interest and financing
expenses of $5.5 million were incurred during the first quarter
compared to $6.1 million during the comparable quarter of the prior
year. Consolidated Other Income Other income of $0.2 million was
recorded during the quarter compared to other income of $0.9
million in the comparable quarter of the prior year. Consolidated
Foreign Exchange Gain A net foreign exchange gain of $0.2 million
was recognized during the quarter compared to a net loss of $13.3
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.
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 2008 2008 2008 2008 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 81,393 $103,238 $122,711 $105,071 $ 82,752 Cost of sales
32,150 36,962 45,985 46,217 40,516
-------------------------------------------------------------------------
Gross margin 49,243 66,276 76,726 58,854 42,236 Gross margin (%)
60.5% 64.2% 62.5% 56.0% 51.0% Selling, general and administrative
expenses 7,208 5,663 6,748 5,861 5,087
-------------------------------------------------------------------------
Earnings from operations $ 42,035 $ 60,613 $ 69,978 $ 52,993 $
37,149 -------------------------------------------------
-------------------------------------------------
-------------------------------------------------------------------------
Three Three months months ended ended 2007 2007 2007 April 30,
April 30, Q4 Q3 Q2 2008 2007
-------------------------------------------------------------------------
Sales $ 81,035 $ 90,754 $ 91,476 $ 81,393 $ 82,752 Cost of sales
39,413 45,461 43,256 32,150 40,516
-------------------------------------------------------------------------
Gross margin 41,622 45,293 48,220 49,243 42,236 Gross margin (%)
51.4% 49.9% 52.7% 60.5% 51.0% Selling, general and administrative
expenses 7,397 4,665 4,373 7,208 5,087
-------------------------------------------------------------------------
Earnings from operations $ 34,225 $ 40,628 $ 43,847 $ 42,035 $
37,149 -------------------------------------------------
------------------------------------------------- Three Months
Ended April 30, 2008 Compared to Three Months Ended April 30, 2007
Mining Sales Rough diamond sales for the quarter totalled $81.4
million compared to $82.8 million in the comparable quarter of the
prior year resulting from a combination of lower carat production
offset by higher pricing. During the quarter, the persistent very
low temperatures that enabled an early start to a successful winter
road season made the challenges of winter mining in the open pit
more acute than usual, affecting equipment reliability and
productivity and resulting in lower processed ore and carats
recovered. This was further compounded by the mining of a lower
grade section of the A-154 South pipe. This section of the pipe
yielded a grade of approximately 4.0 carats per tonne versus a
global grade for the entire pipe of 5.2 carats per tonne based on
the April 2000 feasibility study. The Company held two primary
rough diamond sales, one of which was an open-market tender, in the
first quarter compared to the same number in the comparable quarter
of the prior year. With the Company's continued expansion of its
global rough diamond sales network, sales are now conducted
throughout the quarter in each of the Company's three selling
offices located in Belgium, Israel and India. 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 first quarter cost of sales was $32.2 million for a
gross margin of 60.5% compared to a $40.5 million cost of sales and
a gross margin of 51.0% in the comparable quarter of the prior
year. The reduction in cost of sales resulted primarily from a
greater proportion of cost attributable to development activity
versus production activity. 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 increased by $2.1 million
from the comparable period of the prior year due to a $0.9 million
mark-to-market adjustment to stock-based compensation and a $0.8
million increase in salaries and benefits. Retail The retail
segment includes sales from Harry Winston's salons, which are
located in prime markets around the world including seven salons in
the United States: New York, Beverly Hills, Bal Harbour, Honolulu,
Las Vegas, Dallas and Chicago; five salons in Japan: Ginza,
Roppongi Hills, Osaka, Omotesando and Nagoya; three salons in
Europe: Paris, London and Geneva; 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 2008 2008 2008 2008 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Sales $ 74,686 $ 84,957 $ 53,767 $ 68,198 $ 58,613 Cost of sales
40,999 46,675 28,606 35,610 30,616
-------------------------------------------------------------------------
Gross margin 33,687 38,282 25,161 32,588 27,997 Gross margin (%)
45.1% 45.1% 46.8% 47.8% 47.8% Selling, general and administrative
expenses 36,077 39,831 28,791 29,340 29,124
-------------------------------------------------------------------------
Earnings (loss) from operations $ (2,390) $ (1,549) $ (3,630) $
3,248 $ (1,127) -------------------------------------------------
-------------------------------------------------
-------------------------------------------------------------------------
Three Three months months ended ended 2007 2007 2007 April 30,
April 30, Q4 Q3 Q2 2008 2007
-------------------------------------------------------------------------
Sales $ 73,293 $ 54,478 $ 48,486 $ 74,686 $ 58,613 Cost of sales
39,146 29,175 25,202 40,999 30,616
-------------------------------------------------------------------------
Gross margin 34,147 25,303 23,284 33,687 27,997 Gross margin (%)
46.6% 46.4% 48.0% 45.1% 47.8% Selling, general and administrative
expenses 31,193 28,815 22,798 36,077 29,124
-------------------------------------------------------------------------
Earnings (loss) from operations $ 2,954 $ (3,512) $ 486 $ (2,390) $
(1,127) -------------------------------------------------
------------------------------------------------- Three Months
Ended April 30, 2008 Compared to Three Months Ended April 30, 2007
Retail Sales Sales for the first quarter were $74.7 million
compared to $58.6 million for the comparable quarter of the prior
year. The 27% increase in Harry Winston Inc. sales relative to the
comparable quarter of the prior year is primarily attributable to
strong momentum in Asia and Russia. Sales in the Asian market
increased 52% to $18.1 million, European sales increased 42% to
$31.7 million and US sales increased 2% to $24.9 million. Retail
Cost of Sales and Gross Margin Cost of sales for Harry Winston Inc.
for the first quarter was $41.0 million compared to $30.6 million
for the comparable quarter of the prior year. Gross margin for the
quarter was $33.7 million or 45.1% compared to $28.0 million or
47.8% for the first quarter of the prior year. Excluding the impact
of sales of Harry Winston Inc. pre-acquisition inventory, gross
margin for the first quarter and the comparable quarter of the
prior year would have been 47.3% and 51.6%, respectively. Gross
margin for the first quarter was impacted primarily by three
factors: an increased contribution of high dollar value
transactions, which carry lower-than-average gross margins; an
increase in costs related to precious metals and gem stones; and an
increase in research and development costs to support the growing
watch business. Retail Selling, General and Administrative Expenses
With the expansion of the new international salon activity
consistent with the Company's retail growth strategy, SG&A
expenses increased to $36.1 million from $29.1 million in the
comparable quarter of the prior year. However, SG&A as a
percentage of sales decreased to 48.3% in the first quarter from
49.7% 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 $2.3 million in rent and
building related expenses, an increase of $1.6 million in salaries
and benefits, and an increase of $1.3 million in depreciation and
amortization. These increases were partially offset by a $1.1
million decrease in advertising and selling expenses. 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 $3.2 million compared to
$1.9 million in the comparable quarter 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 first calendar quarter of 2008, the
Diavik Diamond Mine produced 1.8 million carats from 0.47 million
tonnes of ore sourced entirely from the A-154 South kimberlite
pipe. Extreme cold temperatures experienced in the first calendar
quarter affected equipment reliability and productivity, resulting
in lower processed ore and 31% less carats recovered. This was
further compounded by the mining of a lower-grade area of the A-154
pipe. Detailed sampling of the area already mined shows sample
grades ranging from as low as 2 carats per tonne to over 9 carats
per tonne, with an average of 4 carats per tonne. This short-range
grade variation within the longer range ore reserve is a common
feature of diamond mineralization due to the size range and
distribution of the diamonds within the host rock. This shortfall
is not expected to persist through the balance of the A-154 South
kimberlite pipe. A program of detailed drilling to confirm the
A-154 South underground reserve grade will be undertaken from the
pit floor after open pit mining finishes at year end. 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, which make up
the bulk of the underground mining reserve. The Diavik Diamond Mine
successfully completed its 2008 winter road program in April, with
4,174 loads transported to the site. In addition to supplies
required to support day-to-day mining operations of its open pits,
the Diavik Diamond Mine trucked additional loads of fuel, cement,
explosives, equipment and materials to support construction
currently underway to prepare for underground mining, expected to
begin in calendar 2009. Preparation of the new A-418 open pit is
continuing as planned, with sustainable diamond production expected
to begin towards the end of the calendar year. Construction of
surface infrastructure to support underground mining continues on
the crusher and the paste backfill plant, and on the expansion of
the water treatment and power plants. A fifth fuel tank was
commissioned to meet the increasing electricity requirements of
underground mining. Diamond production from underground is
scheduled to begin in calendar 2009, and is expected to replace
open pit mining by calendar 2012. In exploration, a large diameter
reverse circulation drilling program was successfully conducted
from the ice to obtain an additional bulk sample to better define
the A-21 kimberlite pipe, located near the existing mining
operations. The results of this drilling program are still pending.
In addition, an aggressive exploration program has been started on
the Joint Venture's substantial claim block around the mine site,
with a budget of CDN $10.0 million for calendar 2008. The Company's
expectations for capital expenditures to support the new mine
plan's underground development remain at approximately $221 million
over the next two years, assuming among other factors a Canadian/US
dollar average exchange rate of $0.99. It is expected that the
funds for this capital expenditure program will come from a
combination of cash from operations, proceeds from the recent
common share private placement and a refinancing of the Company's
credit facility. Harry Winston Diamond Corporation's 40% Share of
Diavik Diamond Mine Production (reported on a one-month lag) Three
months Three months Twelve months ended ended ended March 31, March
31, December 31, 2008 2007 2007
-------------------------------------------------------------------------
Diamonds recovered (000s carats) 714 1,034 4,777 Grade
(carats/tonne) 4.08 4.97 4.97
-------------------------------------------------------------------------
Retail Segment For the quarter ended April 2008, the retail segment
generated sales growth of 27% over the comparable period of the
prior year. Strong sales growth outside of the US more than offset
softer sales in the US market. Gross margin for the first quarter
was impacted primarily by three factors: an increased contribution
of high dollar value transactions, which carry lower-than-average
gross margins; an increase in costs related to precious metals and
gem stones; and an increase in research and development costs to
support the growing watch business. Harry Winston Inc. operated a
network of 18 salons during the quarter as compared to 14 salons in
the comparable quarter of the prior year. The next new salon
opening is scheduled for the second quarter of fiscal 2009 in Costa
Mesa, California. Harry Winston Inc. introduced its new watches at
the watch and jewelry fair in Basel, Switzerland, which was held in
April 2008. The new offerings were well received both by the press
and customers. The sales orders taken during the Basel Fair were
significantly higher than the prior year, a reflection of the
continued strength of the watch business. Liquidity and Capital
Resources Working Capital As at April 30, 2008, the Company had
unrestricted cash and cash equivalents of $61.8 million and
contingency cash collateral and reserves of $33.9 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 $61.8 million
and short-term investments of $nil at April 30, 2008 compared to
$33.0 million and $16.6 million, respectively, at January 31, 2008.
The short-term investments were held in overnight deposits. Total
cash resources at April 30, 2008 were $20.5 million higher than
$75.2 million at January 31, 2008, resulting primarily from
additional funds relating to the recent private equity placement of
CDN $75.0 million. Working capital increased to $232.3 million at
April 30, 2008 from $220.0 million at January 31, 2008. The
Company's working capital and working capital requirements
fluctuate from quarter to quarter depending on, among other
factors, the seasonality of production at the Diavik Diamond Mine,
the number of sales events conducted during the quarter and the
volume, size and quality distribution of rough diamonds delivered
from the Diavik Diamond Mine in each quarter, along with the
seasonality of 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 cash requirements are driven by differences
in the timing of cash receipts and the cash outflows. The Company
has the ability to draw on its various credit facilities to finance
these timing differences. Cash Flow from Operations During the
quarter ended April 30, 2008, the Company generated $34.3 million
in cash from operations, compared to $14.3 million in the
comparable quarter of the prior year. During the quarter, the
Company increased accounts payable and accrued liabilities by $18.7
million, purchased inventory of $18.6 million, increased income
taxes payable by $9.6 million, decreased prepaid expenses and other
current assets by $4.4 million, and decreased accounts receivable
by $1.7 million. The liquidity and capital requirements of the
Company vary by quarter depending on the seasonal and production
variability of its mining and retail segments. Timing differences
in cash flow are financed by drawing down on the Company's credit
facilities. Over the course of a fiscal year, the Company does not
expect the fluctuations to be material. Over the next two fiscal
years, capital requirements for the mining segment are expected to
increase significantly in accordance with the expected investment
program at the Diavik Diamond Mine. Thereafter, capital
requirements for the mining segment are expected to moderate and
the mining segment is expected to generate sufficient cash flow to
finance its operations and capital expenditure requirements. The
capital requirements for the retail segment are ordinary in course
and are not expected to fluctuate materially over the next few
years. The retail segment will finance its operations and capital
requirements during these years from operating cash flow and its
credit facilities. Financing Activities During the quarter, the
Company repaid $12.5 million of its senior secured term facilities.
At April 30, 2008, the Company had $63.9 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. 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. As at April
30, 2008, Harry Winston Inc. had $160.1 million outstanding on its
$250.0 million secured credit facility, which is used to fund salon
inventory and capital expenditure requirements. This represents an
increase of $6.1 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 April 30, 2008, $16.7 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. Harry
Winston Japan, K.K. maintains secured and unsecured credit
agreements with three banks amounting to (Yen)2,075 million. At
April 30, 2008, $19.9 million had been drawn against these
facilities, $4.8 million of which is long term, payable on June 28,
2010, with the balance of $15.1 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 April 30,
2008, $0.6 million and $8.5 million was 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 first quarter, the
Company made dividend payments of $3.1 million or $0.05 per share
to its shareholders. On March 14, 2008, the Company completed a
private placement of 3 million common shares at a price of CDN $25
per share. The private placement was completed on a non-brokered
basis, with no fees or commissions payable. The private placement
generated net proceeds of CDN $75.0 million, and diluted the
Company's issued and outstanding shares by 5%. Investing Activities
During the quarter, the Company purchased capital assets of $68.1
million, of which $64.9 million were purchased for the mining
segment and $3.2 million for the retail segment. Also included in
deferred mineral property costs were expenditures of $1.7 million
made during the quarter. Contractual Obligations The Company has
contractual payment obligations with respect to long-term debt and,
through its participation in the Joint Venture, future site
restoration costs at the Diavik Diamond Mine level. Additionally,
at the Joint Venture level, contractual obligations exist with
respect to operating purchase obligations, as administered by DDMI,
the operator of the mine. In order to maintain its 40% ownership
interest in the Diavik Diamond Mine, the Company is obligated to
fund 40% of the Joint Venture's total expenditures on a monthly
basis. 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 calendar years 2008 to 2012, is
approximately $320 million assuming, among other factors, a
Canadian/US average exchange rate of $0.96 for the five years. The
most significant contractual obligations for the ensuing five-year
period can be summarized as follows: Contractual Obligations
(expressed in thousands Less of United States than Year Year After
dollars) Total 1 year 2-3 4-5 5 years
-------------------------------------------------------------------------
Long-term debt(a)(b) $370,557 $ 78,090 $ 84,326 $ 23,281 $184,860
Environmental and participation agreements incremental
commitments(c) 97,037 76,245 3,972 1,985 14,835 Operating lease
obligations(d) 121,030 16,642 28,332 18,029 58,027 Capital lease
obligations(e) 2,234 929 1,239 66 -
-------------------------------------------------------------------------
Total contractual obligations $590,858 $171,906 $117,869 $ 43,361
$257,722 -------------------------------------------------
------------------------------------------------- (a) Long-term
debt presented in the foregoing table includes current and
long-term portions. The Company'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 April 30, 2008, $63.9 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 commenced March 15, 2008 with $12.5 million in
repayments due every quarter. 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 April 30, 2008, $8.7 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
April 30, 2008, $160.1 million had been drawn against this secured
credit facility which expires on March 31, 2013. Also included in
long-term debt of Harry Winston Inc. is a 25-year loan agreement
for 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 April 30, 2008, $16.7 million was
outstanding on this loan agreement. (b) Interest on long-term debt
is calculated at various fixed and floating rates. Projected
interest payments on the current debt outstanding were based on
interest rates in effect at April 30, 2008 and have been included
under long-term debt in the table above. Interest payments for the
next 12 months are approximated to be $14.5 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 April 30, 2008 was $74.8
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 $74.8 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. Harry Winston Inc.'s New York salon lease
expires on December 17, 2010 with an option to renew. (e) Capital
lease obligations represent future minimum annual rentals under
non-cancellable capital leases for Harry Winston Inc. retail
exhibit space. Outlook Mining Production During the first calendar
quarter, the persistent very low temperatures that enabled an early
start to a successful winter road season at the Diavik Diamond Mine
made the challenges of winter mining in the open pit more acute
than usual, resulting in a lower tonnage of processed ore. This was
compounded by the mining of a lower-grade section of the A-154
South kimberlite pipe together resulting in 31% less carats
recovered than in the comparable period of the prior year. This
lower grade ore has a grade of approximately 4 carats per tonne
versus a global grade for the entire pipe of 5.2 carats per tonne
based on the April 2000 feasibility study. Detailed sampling of the
area already mined shows sample grades ranging from as low as 2
carats per tonne to over 9 carats per tonne, with an average of 4
carats per tonne. This short-range grade variation within the
longer range ore reserve is a common feature of diamond
mineralization due to the size range and distribution of the
diamonds within the host rock. This shortfall is not expected to
persist through the balance of the A-154 South kimberlite pipe. A
program of detailed drilling to confirm the A-154 South underground
reserve grade will be undertaken from the pit floor after open pit
mining finishes at year end. 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 that make up the bulk of the
underground mining reserve. The grade variance in the A-154 South
pipe has persisted, to some extent, into the second quarter. As a
result, the Company expects about a 10% shortfall in carat
production from the original forecast of approximately 12 million
carats although price increases are expected to significantly
offset this. Pre-stripping of the A-418 kimberlite pipe continues,
with sustainable production from the A-418 open pit anticipated
towards late in the calendar year. The expected start date of 2009
for underground production from A-154 South, A-154 North and A-418
remains unchanged. The Company expects diamond prices to remain
robust with softness in the US being offset by strong demand in the
world economy, especially in the Far East. Cost of Sales The
continuation of pre-stripping of the A-418 kimberlite pipe is
expected to result in lower cost of sales in calendar 2008 than
previously anticipated. Cost of sales will also be impacted by the
expected reduction in production from the original estimate of
approximately 12 million carats. The Company continues to expect
cost of sales to peak in calendar 2009, followed by an anticipated
decline in cost of sales over the following two years as the
overlap between open pit and underground mining diminishes. Capital
Expenditures The Company continues to expect capital contributions
of approximately $221 million over the next two years in support of
the underground development project. Financing for this capital
contribution is expected to be drawn from a combination of cash
from operations, proceeds from the recent common share private
placement and refinancing of the Company's credit facility. Based
on the current mine plan, the Company's portion of planned capital
expenditures at the Diavik Diamond Mine for calendar years 2008 to
2012 is expected to be approximately $320 million at a Canadian/US
dollar average exchange rate of $0.96. Rough Diamond Sales Cycle
The Company is expecting to hold two rough diamond sales in the
second quarter, two in the third quarter and three in the fourth.
Sales are now conducted throughout the quarter in each of the
Company's three selling offices located in Belgium, Israel and
India. Retail Harry Winston Inc. expects sales in the luxury
jewelry industry to remain robust. The retail segment is
strategically well positioned to withstand regional economic
disruptions as a result of its diverse global distribution network.
Continued strong demand for luxury diamond jewelry and watches from
markets in Asia, Russia and the Middle East is expected to offset
the difficult retail environment in the US market. The sales
performance in the first quarter leaves us well positioned to
achieve our annual sales growth objective of in excess of 15%.
Harry Winston Inc. will continue to strengthen its brand in mature
and emerging markets through the expansion of the salon network
over the next several years and introduction of new jewelry
offerings using the highest quality of diamonds and other
gemstones. One salon is scheduled to be opened in Costa Mesa,
California during the second quarter. Related Parties Transactions
with related parties for the three months ended April 30, 2008
include $0.4 million of rent relating to the New York salon,
payable to a Harry Winston Inc. employee. Changes in Internal
Control over Financial Reporting During the first quarter of fiscal
2009, there were no changes in the Company's internal control over
financial reporting that materially affected, or are reasonably
likely to materially affect, the Company's internal control over
financial reporting. 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.
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 12 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 method,
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
Company's 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 note 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") In 2006, the Canadian Accounting
Standards Board ("AcSB") published a new strategic plan that will
significantly impact financial reporting requirements for Canadian
companies. The AcSB strategic plan outlines the convergence of
Canadian GAAP with IFRS over an expected five-year transitional
period. In February 2008, the AcSB announced that 2011 is the
changeover date for public accountable companies to convert from
Canadian GAAP to IFRS. The transition date is for interim and
annual financial statements relating to fiscal years beginning on
or after January 1, 2011. Accordingly, this new standard will apply
to the Company effective for the fiscal year commencing February 1,
2011. While the Company has begun assessing the adoption of IFRS
for 2011, the financial reporting impact of the transition to IFRS
cannot be reasonably estimated at this time. 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 limited ability 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 new mine plan is estimated to be
$221 million over the next two years, with funding expected to be
provided in part from a CDN $75 million private placement completed
on March 14, 2008, cash flow from operations and a refinancing of
the Company's existing 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 require
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 generally, 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. 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 existing
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 April 30, 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) April 30, 2008
January 31, (unaudited) 2008
-------------------------------------------------------------------------
Assets Current assets: Cash and cash equivalents (note 3) $ 61,776
$ 49,628 Cash collateral and cash reserves (note 3) 33,938 25,615
Accounts receivable 23,726 25,505 Inventory and supplies (note 4)
340,805 322,228 Prepaid expenses and other current assets 59,484
58,617
-------------------------------------------------------------------------
519,729 481,593 Deferred mineral property costs 177,549 179,990
Capital assets 610,180 548,827 Intangible assets, net (note 6)
131,986 132,628 Goodwill 93,780 93,780 Other assets 17,587 16,167
Future income tax asset 39,920 40,963 $ 1,590,731 $ 1,493,948
---------------------------- ----------------------------
Liabilities and Shareholders' Equity Current liabilities: Accounts
payable and accrued liabilities $ 141,871 $ 124,426 Income taxes
payable 57,684 48,118 Bank advances 24,228 34,928 Current portion
of long-term debt (note 7) 63,618 54,137
-------------------------------------------------------------------------
287,401 261,609 Long-term debt (note 7) 240,007 255,212 Future
income tax liability 359,100 370,500 Other long-term liability
1,931 1,730 Future site restoration costs 33,404 32,980 Minority
interest 256 255 Shareholders' equity: Share capital (note 8)
381,541 305,502 Contributed surplus 15,769 15,614 Retained earnings
243,521 225,334 Accumulated other comprehensive income 27,801
25,212
-------------------------------------------------------------------------
668,632 571,662 Commitments and guarantees (note 9)
-------------------------------------------------------------------------
$ 1,590,731 $ 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 Months Three Months Ended Ended April
30, April 30, 2008 2007
-------------------------------------------------------------------------
Sales $ 156,079 $ 141,365 Cost of sales 73,149 71,132
-------------------------------------------------------------------------
Gross margin 82,930 70,233 Selling, general and administrative
expenses 43,285 34,211
-------------------------------------------------------------------------
Earnings from operations 39,645 36,022
-------------------------------------------------------------------------
Interest and financing expenses (5,453) (6,132) Other income 246
913 Foreign exchange gain (loss) 155 (13,292)
-------------------------------------------------------------------------
Earnings before income taxes 34,593 17,511 Income tax expense -
Current 21,501 17,440 Income tax recovery - Future (8,165) (3,322)
-------------------------------------------------------------------------
Earnings before minority interest 21,257 3,393 Minority interest 1
140
-------------------------------------------------------------------------
Net earnings $ 21,256 $ 3,253 ----------------------------
---------------------------- Earnings per share Basic $ 0.35 $ 0.06
---------------------------- ---------------------------- Fully
diluted $ 0.35 $ 0.05 ----------------------------
---------------------------- Weighted average number of shares
outstanding 59,905,424 58,362,128 ----------------------------
---------------------------- See accompanying notes to consolidated
financial statements. Consolidated Statements of Comprehensive
Income (expressed in thousands of United States dollars)
(unaudited) Three Months Three Months Ended Ended April 30, April
30, 2008 2007
-------------------------------------------------------------------------
Net earnings $ 21,256 $ 3,253 Other comprehensive income Net gain
on translation of foreign operations (net of tax - nil) 2,589 1,991
-------------------------------------------------------------------------
---------------------------- Total comprehensive income $ 23,845 $
5,244 ---------------------------- ---------------------------- See
accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
(expressed in thousands of United States dollars) (unaudited) Three
Months Three Months Ended Ended April 30, April 30, 2008 2007
-------------------------------------------------------------------------
Common shares: Balance at beginning of period $ 305,502 $ 305,165
Issued during the period 76,039 43
-------------------------------------------------------------------------
Balance at end of period 381,541 305,208
-------------------------------------------------------------------------
Contributed surplus: Balance at beginning of period 15,614 14,922
Stock option expense 155 185
-------------------------------------------------------------------------
Balance at end of period 15,769 15,107
-------------------------------------------------------------------------
Retained earnings: Balance at beginning of period 225,334 165,625
Net earnings 21,256 3,253 Dividends paid (3,069) (14,593)
-------------------------------------------------------------------------
Balance at end of period 243,521 154,285
-------------------------------------------------------------------------
Accumulated other comprehensive income: Balance at beginning of
period 25,212 16,016 Other comprehensive income Net gain on
translation of foreign operations (net of tax - nil) 2,589 1,991
-------------------------------------------------------------------------
Balance at end of period 27,801 18,007
-------------------------------------------------------------------------
Total shareholders' equity $ 668,632 $ 492,607
---------------------------- ---------------------------- See
accompanying notes to consolidated financial statements.
DATASOURCE: Harry Winston Diamond Corporation CONTACT: Kelley
Stamm, , (416) 362-2237 ext.223
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