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Harry Winston Diamond Corporation Reports Fiscal 2013 Second Quarter Results (2 of 2)

06.09.2012  |  PR Newswire

TORONTO, September 6, 2012 /PRNewswire/ --


Non-IFRS Measure

In addition to discussing earnings measures in accordance with IFRS, the MD&A provides the following non-IFRS measure, which is also used by management to monitor and evaluate the performance of the Company and its business segments.

The term EBITDA (earnings before interest, taxes, depreciation and amortization) does not have a standardized meaning according to IFRS and therefore may not be comparable to similar measures presented by other issuers. The Company defines EBITDA as sales minus cost of sales and selling, general and administrative expenses, meaning it represents operating profit before depreciation and amortization.

EBITDA is a measure commonly reported and widely used by investors and analysts as an indicator of the Company's operating performance and ability to incur and service debt and as a valuation metric. EBITDA margin is defined as the ratio obtained by dividing EBITDA by sales.

CONSOLIDATED

            (expressed in thousands of United States dollars)                    (quarterly results are unaudited)                         2013     2013     2012      2012       2012                           Q2       Q1       Q4        Q3         Q2    Operating profit    (loss)           $ 16,384 $ 18,658 $ 30,710 $ (1,963)   $ 23,100    Depreciation and    amortization       16,980   25,546   27,512    23,121     20,716    EBITDA           $ 33,364 $ 44,204 $ 58,222 $  21,158   $ 43,816


TABLE CONT'D

                                                          Six         Six                                                       months      months                                                        ended       ended                         2012      2011      2011    July 31,    July 31,                           Q1        Q4        Q3        2012        2011    Operating profit    (loss)           $  4,685  $ 21,245  $ 14,830  $   35,042  $   27,785    Depreciation and    amortization       20,291    24,635    18,657      42,527      41,007    EBITDA           $ 24,976  $ 45,880  $ 33,487  $   77,569  $   68,792


MINING SEGMENT

                   (expressed in thousands of United States dollars)                           (quarterly results are unaudited)                                2013       2013       2012        2012       2012                                  Q2         Q1         Q4          Q3         Q2    Operating profit (loss) $ 11,723   $ 16,385   $ 27,388   $ (1,147)   $ 18,506    Depreciation and    amortization              13,160     22,172     24,284      19,932     17,461    EBITDA                  $ 24,883   $ 38,557   $ 51,672   $  18,785   $ 35,967


TABLE CONT'D

                                                                 Six         Six                                                              months      months                                                               ended       ended                                2012      2011      2011    July 31,    July 31,                                  Q1        Q4        Q3        2012        2011    Operating profit (loss) $  3,962  $ 17,858  $ 12,638  $   28,108  $   22,468    Depreciation and    amortization              17,083    20,669    15,428      35,332      34,544    EBITDA                  $ 21,045  $ 38,527  $ 28,066  $   63,440  $   57,012


LUXURY BRAND SEGMENT

              (expressed in thousands of United States dollars)                      (quarterly results are unaudited)                         2013       2013      2012      2012       2012                           Q2         Q1        Q4        Q3         Q2    Operating profit $  8,019   $  7,106   $ 6,832   $ 1,464   $  6,926    Depreciation and    amortization        3,681      3,235     3,089     3,048      3,115    EBITDA           $ 11,700   $ 10,341   $ 9,921   $ 4,512   $ 10,041


TABLE CONT'D

                                                       Six         Six                                                    months      months                                                     ended       ended                        2012     2011     2011    July 31,    July 31,                          Q1       Q4       Q3        2012        2011    Operating profit $ 4,223  $ 5,277  $ 5,552  $   15,125  $   11,149    Depreciation and    amortization       3,069    3,688    2,882       6,916       6,184    EBITDA           $ 7,292  $ 8,965  $ 8,434  $   22,041  $   17,333


CORPORATE SEGMENT

                               (expressed in thousands of United States dollars)                                       (quarterly results are unaudited)                          2013         2013         2012         2012            2012                            Q2           Q1           Q4           Q3              Q2    Operating loss   $ (3,358)    $ (4,833)    $ (3,510)    $ (2,280)       $ (2,332)    Depreciation and    amortization          139          139          139          141             140    EBITDA           $ (3,219)    $ (4,694)    $ (3,371)    $ (2,139)       $ (2,192)


TABLE CONT'D

                                                             Six         Six                                                          months      months                                                           ended       ended                          2012       2011       2011    July 31,    July 31,                            Q1         Q4         Q3        2012        2011    Operating loss   $ (3,500) $  (1,890)  $ (3,360)  $  (8,191)  $  (5,832)    Depreciation and    amortization           139        278        347         279         279    EBITDA           $ (3,361) $  (1,612)  $ (3,013)  $  (7,912)  $  (5,553)


Risks and Uncertainties

Harry Winston Diamond Corporation is subject to a number of risks and uncertainties as a result of its operations. In addition to the other information contained in this MD&A and the Company's other publicly filed disclosure documents, readers should give careful consideration to the following risks, each of which could have a material adverse effect on the Company's business prospects or financial condition.

Nature of Mining

The operation of the Diavik Diamond Mine is subject to risks inherent in the mining industry, including variations in grade and other geological differences, unexpected problems associated with required water retention dikes, water quality, surface and underground conditions, processing problems, equipment performance, accidents, labour disputes, risks relating to the physical security of the diamonds, force majeure risks and natural disasters. Particularly with underground mining operations, inherent risks include variations in rock structure and strength as it impacts on mining method selection and performance, de-watering and water handling requirements, achieving the required crushed rock-fill strengths, and unexpected local ground conditions. Hazards, such as unusual or unexpected rock formations, rock bursts, pressures, collapses, flooding or other conditions, may be encountered during mining. Such risks could result in personal injury or fatality; damage to or destruction of mining properties, processing facilities or equipment; environmental damage; delays, suspensions or permanent reductions in mining production; monetary losses; and possible legal liability.

The Diavik Diamond Mine, because of its remote northern location and access only by winter road or by air, is subject to special climate and transportation risks. These risks include the inability to operate or to operate efficiently during periods of extreme cold, the unavailability of materials and equipment, and increased transportation costs due to the late opening and/or early closure of the winter road. Such factors can add to the cost of mine development, production and operation and/or impair production and mining activities, thereby affecting the Company's profitability.

Nature of Interest in DDMI

HWDLP holds an undivided 40% interest in the assets, liabilities and expenses of the Diavik Diamond Mine and the Diavik group of mineral claims. The Diavik Diamond Mine and the exploration and development of the Diavik group of mineral claims is a joint arrangement between DDMI (60%) and HWDLP (40%), and is subject to the risks normally associated with the conduct of joint ventures and similar joint arrangements. These risks include the inability to exert influence over strategic decisions made in respect of the Diavik Diamond Mine and the Diavik group of mineral claims, including the inability to control the timing and scope of capital expenditures, risks that DDMI may decide not to proceed with the mining the A-21 pipe or may otherwise change the mine plan. By virtue of DDMI's 60% interest in the Diavik Diamond Mine, it has a controlling vote in virtually all Joint Venture management decisions respecting the development and operation of the Diavik Diamond Mine and the development of the Diavik group of mineral claims. Accordingly, DDMI is able to determine the timing and scope of future project capital expenditures, and therefore is able to impose capital expenditure requirements on HWDLP that the Company may not have sufficient cash to meet. A failure to meet capital expenditure requirements imposed by DDMI could result in HWDLP's interest in the Diavik Diamond Mine and the Diavik group of mineral claims being diluted. Rio Tinto plc, the parent of DDMI has recently announced a review of its diamond operations.

Diamond Prices and Demand for Diamonds

The profitability of the Company is dependent upon production from the Diavik Diamond Mine and on the results of the operations of its luxury brand operations. Each, in turn, is dependent in significant part upon the worldwide demand for and price of diamonds. Diamond prices fluctuate and are affected by numerous factors beyond the control of the Company, including worldwide economic trends, particularly in the US, Japan, China and India, worldwide levels of diamond discovery and production, and the level of demand for, and discretionary spending on, luxury goods such as diamonds and jewelry. Low or negative growth in the worldwide economy, renewed or additional credit market disruptions, natural disasters or the occurrence of terrorist attacks or similar activities creating disruptions in economic growth could result in decreased demand for luxury goods such as diamonds and jewelry, thereby negatively affecting the price of diamonds and jewelry. Similarly, a substantial increase in the worldwide level of diamond production or the release of stocks held back during recent periods of low demand could also negatively affect the price of diamonds. In each case, such developments could have a material adverse effect on the Company's results of operations.

Cash Flow and Liquidity

The Company's liquidity requirements fluctuate from quarter to quarter and year to year depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, the seasonality of mine operating expenses, exploration expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine and sold by the Company in each quarter, along with the seasonality of sales and salon refurbishment and expansion in the luxury brand segment. The Company's principal working capital needs include investments in inventory, prepaid expenses and other current assets, and accounts payable and income taxes payable. There can be no assurance that the Company will be able to meet each or all of its liquidity requirements. A failure by the Company to meet its liquidity requirements could result in the Company failing to meet its planned development objectives, or in the Company being in default of a contractual obligation, each of which could have a material adverse effect on the Company's business prospects or financial condition.

Economic Environment
The Company's financial results are tied to the global economic conditions and their impact on levels of consumer confidence and consumer spending. The global markets have experienced the impact of a significant US and international economic downturn since the fall of 2008. This has restricted the Company's growth opportunities both domestically and internationally, and a return to a recession or weak recovery, due to recent disruptions in financial markets in the US, the Eurozone or elsewhere, and political upheavals in the Middle East, could cause the Company to experience revenue declines across both of its business segments due to deteriorated consumer confidence and spending, and a decrease in the availability of credit, which could have a material adverse effect on the Company's business prospects or financial condition. The credit facilities essential to the diamond polishing industry are largely underwritten by European banks that are currently under stress with the European sovereign debt issue. The withdrawal or reduction of such facilities could also have a material adverse effect on the Company's business prospects or financial condition. The Company monitors economic developments in the markets in which it operates and uses this information in its continuous strategic and operational planning in an effort to adjust its business in response to changing economic conditions.

Currency Risk

Currency fluctuations may affect the Company's financial performance. Diamonds are sold throughout the world based principally on the US dollar price, and although the Company reports its financial results in US dollars, a majority of the costs and expenses of the Diavik Diamond Mine are incurred in Canadian dollars. Further, the Company has a significant deferred income tax liability that has been incurred and will be payable in Canadian dollars. The Company's currency exposure relates primarily to expenses and obligations incurred by it in Canadian dollars and, secondarily, to revenues of Harry Winston Inc. in currencies other than the US dollar. The appreciation of the Canadian dollar against the US dollar, and the depreciation of other currencies against the US dollar, therefore, will increase the expenses of the Diavik Diamond Mine and the amount of the Company's Canadian dollar liabilities relative to the revenue the Company will receive from diamond sales, and will decrease the US dollar revenues received by Harry Winston Inc. From time to time, the Company may use a limited number of derivative financial instruments to manage its foreign currency exposure.

Licences and Permits

The operation of the Diavik Diamond Mine and exploration on the Diavik property requires licences and permits from the Canadian government. The Diavik Diamond Mine Type "A" Water Licence was renewed by the regional Wek'eezhii Land and Water Board to October 31, 2015. While the Company anticipates that DDMI, the operator of the Diavik Diamond Mine, will be able to renew this licence and other necessary permits in the future, there can be no guarantee that DDMI will be able to do so or obtain or maintain all other necessary licences and permits that may be required to maintain the operation of the Diavik Diamond Mine or to further explore and develop the Diavik property.

Regulatory and Environmental Risks

The operation of the Diavik Diamond Mine, exploration activities at the Diavik property and the manufacturing of jewelry and watches are subject to various laws and regulations governing the protection of the environment, exploration, development, production, taxes, labour standards, occupational health, waste disposal, mine safety, manufacturing safety and other matters. New laws and regulations, amendments to existing laws and regulations, or more stringent implementation or changes in enforcement policies under existing laws and regulations could have a material adverse effect on the Company by increasing costs and/or causing a reduction in levels of production from the Diavik Diamond Mine and in the manufacture of jewelry and watches. As well, as the Company's international operations expand, it or its subsidiaries become subject to laws and regulatory regimes that could differ materially from those under which they operate in Canada and the US.

Mining and manufacturing are subject to potential risks and liabilities associated with pollution of the environment and the disposal of waste products occurring as a result of mining and manufacturing operations. To the extent that the Company's operations are subject to uninsured environmental liabilities, the payment of such liabilities could have a material adverse effect on the Company.

Climate Change

The Canadian government has established a number of policy measures in response to concerns relating to climate change. While the impact of these measures cannot be quantified at this time, the likely effect will be to increase costs for fossil fuels, electricity and transportation; restrict industrial emission levels; impose added costs for emissions in excess of permitted levels; and increase costs for monitoring and reporting. Compliance with these initiatives could have a material adverse effect on the Company's results of operations.

Resource and Reserve Estimates

The Company's figures for mineral resources and ore reserves on the Diavik group of mineral claims are estimates, and no assurance can be given that the anticipated carats will be recovered. The estimation of reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production and the timing of future expenditures, all of which are subject to numerous uncertainties and various interpretations. The Company expects that its estimates of reserves will change to reflect updated information as well as to reflect depletion due to production. Reserve estimates may be revised upward or downward based on the results of current and future drilling, testing or production levels, and on changes in mine design. In addition, market fluctuations in the price of diamonds or increases in the costs to recover diamonds from the Diavik Diamond Mine may render the mining of ore reserves uneconomical.

Mineral resources that are not mineral reserves do not have demonstrated economic viability. Due to the uncertainty that may attach to inferred mineral resources, there is no assurance that mineral resources at the Diavik property will be upgraded to proven and probable ore reserves.

Insurance

The Company's business is subject to a number of risks and hazards, including adverse environmental conditions, industrial accidents, labour disputes, unusual or unexpected geological conditions, risks relating to the physical security of diamonds and jewelry held as inventory or in transit, changes in the regulatory environment, and natural phenomena such as inclement weather conditions. Such occurrences could result in damage to the Diavik Diamond Mine, personal injury or death, environmental damage to the Diavik property, delays in mining, the closing of Harry Winston Inc.'s manufacturing facilities or salons, monetary losses and possible legal liability. Although insurance is maintained to protect against certain risks in connection with the Diavik Diamond Mine and the Company's operations, the insurance in place will not cover all potential risks. It may not be possible to maintain insurance to cover insurable risks at economically feasible premiums.

Fuel Costs

The Diavik Diamond Mine's expected fuel needs are purchased periodically during the year for storage, and transported to the mine site by way of the winter road. These costs will increase if transportation by air freight is required due to a shortened "winter road season" or unexpected high fuel usage.

The cost of the fuel purchased is based on the then prevailing price and expensed into operating costs on a usage basis. The Diavik Diamond Mine currently has no hedges for its future anticipated fuel consumption.

Reliance on Skilled Employees

Production at the Diavik Diamond Mine is dependent upon the efforts of certain skilled employees of DDMI. The loss of these employees or the inability of DDMI to attract and retain additional skilled employees may adversely affect the level of diamond production from the Diavik Diamond Mine.

The Company's success in marketing rough diamonds and operating the business of Harry Winston Inc. is dependent on the services of key executives and skilled employees, as well as the continuance of key relationships with certain third parties, such as diamantaires. The loss of these persons or the Company's inability to attract and retain additional skilled employees or to establish and maintain relationships with required third parties may adversely affect its business and future operations in marketing diamonds and operating its luxury brand segment.

Expansion and Refurbishment of the Existing Salon Network

A key component of the Company's luxury brand strategy in recent years has been the expansion of its salon network. The Company currently expects to expand its retail salon network to a total of 35 salons and 300 wholesale doors worldwide by fiscal 2016. An additional objective of the Company in the luxury brand segment is to achieve a compound annual growth rate in sales in the mid-teens and an operating profit in the low to mid-teens, in each case by fiscal 2016. Although the Company considers these objectives to be reasonable, they are subject to a number of risks and uncertainties, and there can be no assurance that these objectives will be realized. This strategy requires the Company to make ongoing capital expenditures to build and open new salons, to refurbish existing salons from time to time, and to incur additional operating expenses in order to operate the new salons. To date, much of this expansion has been financed by Harry Winston Inc. through borrowings. The successful expansion of the Company's global salon network, and achieving an increase in sales and in operating profit, will depend on a variety of factors, including worldwide economic conditions, market demand for luxury goods, the strength of the Harry Winston brand and the availability of sufficient funding. There can be no assurance that the expansion of the salon network will continue or that the current expansion will prove successful in increasing annual sales or earnings from the luxury brand segment, and the increased debt levels resulting from this expansion could negatively impact the Company's liquidity and its results from operations in the absence of increased sales and earnings.

The Company has to date licensed five retail salons to operate under the Harry Winston name and currently expects to increase the number of licensed salons to 15 by fiscal 2016. There is no assurance that the Company will be able to find qualified third parties to enter into these licensing arrangements, or that the licensees will honour the terms of the agreements. The conduct of licensees may have a negative impact on the Company's distinctive brand name and reputation.

Competition in the Luxury Brand Segment

The Company is exposed to competition in the luxury brand market from other luxury goods, diamond, jewelry and watch retailers. The ability of Harry Winston Inc. to successfully compete with such luxury goods, diamond, jewelry and watch retailers is dependent upon a number of factors, including the ability to source high-end polished diamonds and protect and promote its distinctive brand name and reputation. If Harry Winston Inc. is unable to successfully compete in the luxury jewelry segment, the Company's results of operations will be adversely affected.

Cybersecurity

The Company and certain of its third-party vendors receive and store personal information in connection with human resources operations and other aspects of the business. Despite the Company's implementation of security measures, its IT systems are vulnerable to damage from computer viruses, natural disasters, unauthorized access, cyber attack and other similar disruptions. Any system failure, accident or security breach could result in disruptions to the Company's operations. A material network breach in the security of the IT systems could include the theft of intellectual property or trade secrets. To the extent that any disruption or security breach results in a loss or damage to the Company's data, or in inappropriate disclosure of confidential information, financial data, or credit cardholder data, it could cause significant damage to the Company's reputation, affect relationships with our customers, lead to claims against the Company and ultimately harm its business. In addition, the Company may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future. Although the Company believes that it has robust information security procedures and other safeguards in place, as cyber threats continue to evolve, the Company may be required to expend additional resources to continue to enhance its information security measures and/or to investigate and remediate any information security vulnerabilities.

Intellectual Property

The success of the luxury brand segment depends on the value and reputation of the Harry Winston brand and other proprietary property. The Company relies on various intellectual property rights, including copyrights, trademarks and trade secrets, to establish its proprietary rights. While the Company devotes considerable efforts and resources to protecting its intellectual property, if these efforts are not successful the value of the brand may be harmed, which could have a material adverse effect on the Company's financial position.

Changes in Disclosure Controls and Procedures and Internal Control over Financial Reporting

During the second quarter of fiscal 2013, there were no changes in the Company's disclosure controls and procedures or internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's disclosure controls and procedures or internal control over financial reporting.

Critical Accounting Estimates

Management is often required to make judgments, assumptions and estimates in the application of IFRS that have a significant impact on the financial results of the Company. Certain policies are more significant than others and are, therefore, considered critical accounting policies. Accounting policies are considered critical if they rely on a substantial amount of judgment (use of estimates) in their application or if they result from a choice between accounting alternatives and that choice has a material impact on the Company's reported results or financial position.

The critical accounting estimates applied in the preparation of the Company's unaudited interim condensed consolidated financial statements are consistent with those applied and disclosed in the Company's MD&A for the year ended January 31, 2012.

Changes in Accounting Policies

The International Accounting Standards Board ("IASB") has issued a new standard, IFRS 9, "Financial Instruments" ("IFRS 9"), which will ultimately replace IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"). IFRS 9 provides guidance on the classification and measurement of financial assets and financial liabilities. This standard becomes effective for the Company's fiscal year end beginning February 1, 2015. The Company is currently assessing the impact of the new standard on its financial statements.

IFRS 10, "Consolidated Financial Statements" ("IFRS 10"), was issued by the IASB on May 12, 2011, and will replace the consolidation requirements in SIC-12, "Consolidation - Special Purpose Entities" and IAS 27, "Consolidated and Separate Financial Statements". The new standard establishes control as the basis for determining which entities are consolidated in the consolidated financial statements and provides guidance to assist in the determination of control where it is difficult to assess. IFRS 10 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is currently assessing the impact of IFRS 10 on its consolidated financial statements.

IFRS 11, "Joint Arrangements" ("IFRS 11"), was issued by the IASB on May 12, 2011 and will replace IAS 31, "Interest in Joint Ventures". The new standard will apply to the accounting for interests in joint arrangements where there is joint control. Under IFRS 11, joint arrangements are classified as either joint ventures or joint operations. The structure of the joint arrangement will no longer be the most significant factor in determining whether a joint arrangement is either a joint venture or a joint operation. Proportionate consolidations will no longer be allowed and will be replaced by equity accounting. IFRS 11 is effective for the Company's fiscal year-end beginning February 1, 2013, with early adoption permitted. The Company is currently assessing the impact of IFRS 11 on its results of operations and financial position.

IFRS 13, "Fair Value Measurement" ("IFRS 13"), was also issued by the IASB on May 12, 2011. The new standard makes IFRS consistent with generally accepted accounting principles in the United States ("US GAAP") on measuring fair value and related fair value disclosures. The new standard creates a single source of guidance for fair value measurements. IFRS 13 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is assessing the impact of IFRS 13 on its consolidated financial statements.

Amendments to IAS 19, "Employee Benefits" ("IAS 19"), was issued by the IASB on June 11, 2011. The amended standard eliminates the option to defer the recognition of actuarial gains and losses through the "corridor" approach, revises the presentation of changes in assets and liabilities arising from defined benefit plans and enhances the disclosures for defined benefit plans. IAS 19 is effective for the Company's fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is assessing the impact of IAS 19 on its consolidated financial statements.

Outstanding Share Information

        As at August 31, 2012    Authorized                      Unlimited    Issued and outstanding shares  84,874,781    Options outstanding             2,319,727    Fully diluted                  87,194,508


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.

                          Condensed Consolidated Balance Sheets               (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)                                                      January 31,           January 31,                                  July 31,                  2012                  2011                                      2012    (Recast - note 10)    (Recast - note 10)    ASSETS    Current assets             Cash and cash             equivalents             (note 3)          $    74,589  $             78,116  $            108,693             Accounts             receivable             29,031                26,910                22,788             Inventory and             supplies (note             4)                    486,129               457,827               403,212             Other current             assets                 42,309                45,494                41,317                                   632,058               608,347               576,010    Property, plant and    equipment -    Mining                         730,077               734,146               764,093    Property, plant and    equipment -    Luxury brand                    67,106                69,781                61,019    Intangible assets, net         127,058               127,337               127,894    Other non-current assets        13,916                14,165                14,521    Deferred income tax    assets                          89,338                82,955                65,833    Total assets               $ 1,659,553  $          1,636,731  $          1,609,370     LIABILITIES AND EQUITY    Current liabilities             Trade and other             payables          $   119,981  $            104,681  $            139,551             Employee benefit             plans                   7,025                 6,026                 4,317             Income taxes             payable                27,422                29,450                 6,660             Promissory note             -                     -                70,000             Current portion             of             interest-bearing             loans and             borrowings (note             6)                    235,743                29,238                24,215                                   390,171               169,395               244,743    Interest-bearing loans    and borrowings    (note 6)                        69,156               270,485               235,516    Deferred income tax    liabilities                    320,922               325,035               309,868    Employee benefit plans           9,391                 9,463                 7,287    Provisions                      61,557                65,245                50,130    Total liabilities              851,197               839,623               847,544    Equity             Share capital         507,975               507,975               502,129             Contributed             surplus                18,618                17,764                16,233             Retained             earnings              277,393               261,028               235,574             Accumulated             other             comprehensive             income                  4,117                10,086                 7,624             Total             shareholders'             equity                808,103               796,853               761,560             Non-controlling             interest                  253                   255                   266    Total equity                   808,356               797,108               761,826    Total liabilities and    equity                     $ 1,659,553  $          1,636,731  $          1,609,370    Subsequent events (note 6)          The accompanying notes are an integral part of these unaudited interim                       condensed consolidated financial statements. 


                            Condensed Consolidated Income Statements            (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS)                                           (UNAUDITED)                                         Three       Three            Six             Six                                       months      months         months          months                                        ended       ended          ended           ended                                     July 31,    July 31,        July 31,        July 31,                                         2012        2011            2012            2011    Sales                        $    176,897  $  222,378  $      369,358  $      366,310    Cost of sales                     104,694     150,177         223,828         246,629    Gross margin                       72,203      72,201         145,530         119,681    Selling, general and    administrative expenses            55,819      49,101         110,488          91,896    Operating profit                   16,384      23,100          35,042          27,785    Finance expenses                  (4,028)      (5,183)         (7,908)         (9,166)    Exploration costs                   (568)        (781)           (822)           (993)    Finance and other income               90          83             155             341    Foreign exchange gain    (loss)                                153         288           (211)             111    Profit before income taxes         12,031      17,507          26,256          18,078    Net income tax expense              7,278       7,519           9,893           4,492    Net profit                   $      4,753  $    9,988  $       16,363  $       13,586    Attributable to    shareholders                 $      4,755  $    9,986  $       16,365  $       13,582    Attributable to    non-controlling    interest                     $        (2)  $        2  $          (2)  $            4    Earnings per share                  Basic          $       0.06  $     0.12  $         0.19  $         0.16                  Diluted        $       0.06  $     0.12  $         0.19  $         0.16    Weighted average number of    shares outstanding             84,874,781      84,688,002  84,874,781      84,491,901        The accompanying notes are an integral part of these unaudited interim condensed                               consolidated financial statements. 


                      Condensed Consolidated Statements of Comprehensive Income                     (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)                                           Three        Three          Six             Six                                         months       months       months          months                                           ended        ended        ended           ended                                       July 31,     July 31,     July 31,        July 31,                                           2012         2011         2012            2011    Net profit                      $     4,753  $     9,988  $    16,363  $       13,586     Other comprehensive income    Net gain (loss) on translation    of net foreign operations    (net of tax of nil)                 (6,106)        8,531      (5,969)          15,777    Other comprehensive income,    net of tax                          (6,106)        8,531      (5,969)          15,777     Total comprehensive income      $   (1,353)  $    18,519  $    10,394  $       29,363    Attributable to shareholders    $   (1,351)  $    18,517  $    10,396  $       29,359    Attributable to    non-controlling    interest                        $       (2)  $         2  $       (2)  $            4        The accompanying notes are an integral part of these unaudited interim condensed                               consolidated financial statements. 


                                  Condensed Consolidated Statements of Changes in Equity                                (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)                                                                  Six                   Six                                                        months ended          months ended                                                            July 31,              July 31,                                                                2012                  2011    Common shares:    Balance at beginning of period                   $       507,975       $       502,129    Issued during the period                                      -                  4,981    Transfer from contributed surplus    on exercise of options                                        -                  2,300    Balance at end of period                                507,975                509,410    Contributed surplus:    Balance at beginning of period                           17,764                 16,233    Stock-based compensation expense                            854                  1,110    Transfer from contributed surplus    on exercise of options                                        -                 (2,300)    Balance at end of period                                 18,618                 15,043    Retained earnings:    Balance at beginning of period    (Recast - note 10)                                      261,028                235,574    Net profit attributable to common shareholders           16,365                 13,582    Balance at end of period                                277,393                249,156    Accumulated other comprehensive income:    Balance at beginning of period                           10,086                  7,624    Other comprehensive income                  Net gain (loss) on                  translation of net foreign                  operations (net of tax of nil)             (5,969)                15,777    Balance at end of period                                   4,117                23,401    Non-controlling interest:    Balance at beginning of period                               255                   266    Non-controlling interest                                     (2)                     4    Balance at end of period                                     253                   270    Total equity                                     $       808,356       $       797,280             The accompanying notes are an integral part of these unaudited interim                            condensed consolidated financial statements. 


                      Condensed Consolidated Statements of Cash Flows                  (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)                                                           Three              Three                                                   months ended       months ended                                                       July 31,           July 31,                                                           2012               2011    Cash provided by (used in)    Operating    Net profit                                    $        4,753     $        9,988        Depreciation and        amortization                                      16,980             20,716        Deferred income tax        recovery                                         (1,068)              (771)        Current income tax        expense                                            8,346              8,290        Finance expenses                                   4,028              5,183        Stock-based        compensation                                         448                513        Other non-cash items                             (2,400)                  -        Foreign exchange loss        (gain)                                             (415)              (725)        Loss (gain) on        disposition of        assets                                                22                  -    Change in non-cash operating working    capital, excluding    taxes and finance expenses                           (10,462)           (16,302)    Cash provided from operating activities               20,232             26,892         Interest paid                                    (3,201)            (3,689)         Income and mining        taxes paid                                       (8,471)             13,165     Net cash from operating activities                    8,560             36,368      FINANCING    Decrease in interest-bearing loans    and borrowings                                         (185)              (180)    Increase in revolving credit                         24,998             67,719     Decrease in revolving credit                        (48,909)           (57,690)    Issue of common shares, net of issue costs                -              1,063     Cash provided from financing activities             (24,096)             10,912    Investing    Property, plant and equipment - Mining              (15,788)           (12,649)    Property, plant and equipment - Luxury    brand                                                (1,981)            (1,900)    Net proceeds from sale of property, plant    and equipment                                             -                  -     Other non-current assets                               (186)              (427)    Cash used in investing activities                   (17,955)           (14,976)    Foreign exchange effect on cash balances             (4,738)             6,363    Increase (decrease) in cash    and cash equivalents                                (38,229)             38,667    Cash and cash equivalents,    beginning of period                                 112,818            101,214     Cash and cash equivalents, end of period      $      74,589     $      139,881     Change in non-cash operating working capital,    excluding taxes and finance expenses    Accounts receivable                                  (3,032)            (2,845)    Inventory and supplies                                4,371             37,959     Other current assets                                  6,290              3,173     Trade and other payables                            (17,092)           (54,726)    Employee benefit plans                                 (999)                137                                                  $     (10,462)     $     (16,302)


    
                
TABLE CONT'D

                                                            Six                Six                                                   months ended       months ended                                                       July 31,           July 31,                                                           2012               2011    Cash provided by (used in)    Operating    Net profit                                    $       16,363     $       13,586        Depreciation and        amortization                                      42,527             41,007        Deferred income tax        recovery                                         (5,541)            (3,419)        Current income tax        expense                                           15,434              7,911        Finance expenses                                   7,908              9,166        Stock-based        compensation                                         854              1,110        Other non-cash items                             (2,518)                  -        Foreign exchange loss        (gain)                                               417               (192)        Loss (gain) on        disposition of        assets                                              (308)                  -    Change in non-cash operating working    capital, excluding    taxes and finance expenses                           (16,578)           (57,516)    Cash provided from operating activities               58,558             11,653        Interest paid                                    (6,014)            (5,197)        Income and mining        taxes paid                                      (19,038)             10,454    Net cash from operating activities                   33,506             16,910    FINANCING    Decrease in interest-bearing loans    and borrowings                                         (370)              (354)    Increase in revolving credit                        106,182             85,604    Decrease in revolving credit                       (101,185)           (58,007)    Issue of common shares, net of issue costs                -              4,981    Cash provided from financing activities               4,627             32,224    Investing    Property, plant and equipment - Mining              (33,937)           (25,084)    Property, plant and equipment - Luxury    brand                                                (6,423)            (3,289)    Net proceeds from sale of property, plant    and equipment                                         2,619                  -    Other non-current assets                               (633)              (823)    Cash used in investing activities                   (38,374)           (29,196)    Foreign exchange effect on cash balances             (3,286)             11,250    Increase (decrease) in cash    and cash equivalents                                 (3,527)             31,188    Cash and cash equivalents,    beginning of period                                  78,116            108,693    Cash and cash equivalents, end of period      $      74,589     $      139,881    Change in non-cash operating working capital,    excluding taxes and finance expenses    Accounts receivable                                  (2,106)            (8,226)    Inventory and supplies                              (32,587)           (24,436)    Other current assets                                  3,179              2,617    Trade and other payables                             13,927            (27,172)    Employee benefit plans                                1,009               (299)                                                  $     (16,578)     $     (57,516)        The accompanying notes are an integral part of these unaudited interim                        condensed consolidated financial statements. 


Notes to Condensed Consolidated Financial Statements
JULY 31, 2012 WITH COMPARATIVE FIGURES
(TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT AS OTHERWISE NOTED)

Note 1:

Nature of Operations

Harry Winston Diamond Corporation (the "Company") is a diamond enterprise with assets in the mining and luxury brand segments of the diamond industry.

The Company's mining asset is an ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the "Joint Venture") is an unincorporated joint arrangement between Diavik Diamond Mines Inc. ("DDMI") (60%) and Harry Winston Diamond Limited Partnership ("HWDLP") (40%) where HWDLP holds an undivided 40% ownership interest in the assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is the operator of the Diavik Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England, and Harry Winston Diamond Limited Partnership is a wholly owned subsidiary of Harry Winston Diamond Corporation of Toronto, Canada.

The Company also owns Harry Winston Inc., the premier fine jewelry and watch retailer with select locations throughout the world. Its head office is located in New York City, United States.

The Company's operations fluctuate from quarter to quarter depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, seasonality of mine operating expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter. The quarterly results for the luxury brand segment are also seasonal, with generally higher sales during the fourth quarter due to the holiday season.

The Company is incorporated and domiciled in Canada and its shares are publicly traded on the Toronto Stock Exchange and the New York Stock Exchange. The address of its registered office is Toronto, Ontario.

Note 2:

Basis of Preparation

    (a)                        Statement of compliance         These unaudited interim condensed consolidated financial statements            have been prepared in accordance with International Financial        Reporting Standards ("IFRS") International Accounting Standard ("IAS")                          34, "Interim Financial Reporting".         These unaudited interim condensed consolidated financial statements do         not include all disclosures required by IFRS for annual consolidated          financial statements and accordingly should be read in conjunction        with the Company's audited consolidated financial statements and notes          thereto for the year ended January 31, 2012. 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, 2012.     (b)                          Basis of measurement         These unaudited interim condensed consolidated financial statements            have been prepared on the historical cost basis except for the                                      following:         - financial instruments held for trading are measured at fair value                               through profit and loss         - liabilities for Restricted Share Unit and Deferred Share Unit plans                              are measured at fair value     (c) Currency of presentation         These unaudited interim condensed consolidated financial statements             are expressed in United States dollars, consistent with the           predominant functional currency of the Company's operations. All          financial information presented in United States dollars has been                           rounded to the nearest thousand.


Note 3:

Cash Resources

                                             July 31,     January 31,                                                 2012            2012    Cash on hand and balances with banks $     69,303   $      76,030    Short-term investments (a)                  5,286           2,086    Total cash resources                 $     74,589   $      78,116


           Short-term investments are held in overnight deposits and money    (a)            market instruments with a maturity of 30 days.


Note 4:

Inventory and Supplies

                                                   July 31,     January 31,                                                       2012            2012    Luxury brand raw materials                 $     65,131   $      62,188    Mining rough diamond inventory                   70,181          62,472                                                    135,312         124,660    Luxury brand work-in-progress                    51,333          45,407    Luxury brand merchandise inventory              227,987         218,844    Mining supplies inventory                        71,497          68,916    Total inventory and supplies               $    486,129   $     457,827


Total inventory and supplies is net of a provision for obsolescence of $3.0 million ($3.1 million at January 31, 2012).

Note 5:

Diavik Joint Venture

The following represents HWDLP's 40% proportionate interest in the Joint Venture as at June 30, 2012 and December 31, 2011:

                                                                 July 31,     January 31,                                                                     2012            2012    Current assets                                           $    101,670   $     101,454    Non-current assets                                            679,507         685,590    Current liabilities                                            29,568          31,745    Non-current liabilities and participant's account             751,609         755,298


                                    Three      Three          Six          Six                                   months     months       months       months                                    ended      ended        ended        ended                                 July 31,   July 31,     July 31,     July 31,                                     2012       2011         2012         2011    Expenses net of interest    income (a) (b)             $   58,585 $   62,775   $  115,323   $  123,658    Cash flows resulting from    (used in)    operating activities         (55,022)   (46,872)     (97,375)     (89,896)    Cash flows resulting from    financing activities           50,668     61,101      112,200      115,084    Cash flows resulting from    (used in)    investing activities          (3,958)   (10,044)     (19,141)     (22,221)


    (a)             The Joint Venture only earns interest income.         Expenses net of interest income for the three months and six months             ended July 31, 2012 of $nil and $0.1 million, respectively         (three and six months ended July 31, 2011 of $nil and $0.1 million,    (b)                            respectively).


HWDLP is contingently liable for DDMI's portion of the liabilities of the Joint Venture, and to the extent HWDLP's participating interest has increased because of the failure of DDMI to make a cash contribution when required, HWDLP would have access to an increased portion of the assets of the Joint Venture to settle these liabilities. Additional information on commitments and contingencies related to the Diavik Joint Venture is found in Note 7.

Note 6:

Interest-Bearing Loans and Borrowings

                                                     July 31,     January 31,                                                         2012            2012    Mining segment credit facilities            $      49,010   $      48,460    Harry Winston Inc. credit facilities              219,199         217,071    First mortgage on real property                     5,971           6,342    Bank advances                                      30,285          27,850    Finance leases                                        434               -    Total interest-bearing loans and borrowings       304,899         299,723    Less current portion                            (235,743)        (29,238)                                                $      69,156   $     270,485


                                        Nominal                             Carrying                                       interest                            amount at                           Currency        rate    Date of maturity    July 31, 2012    Secured bank loan            US       3.74%      March 31, 2013   $204.0 million    Secured bank loan           CHF       3.15%      April 22, 2013     $3.5 million    Secured bank loan           CHF       3.55%    January 31, 2033    $11.7 million    Secured bank loan            US       3.96%       June 24, 2013    $49.0 million    First mortgage on real    property                    CDN       7.98%   September 1, 2018     $6.0 million    Secured bank advance         US       4.80%       Due on demand     $6.6 million    Secured bank advance        YEN       2.55%     August 22, 2012     $7.4 million    Unsecured bank advance      YEN       2.98%     August 31, 2012     $6.6 million    Unsecured bank advance      YEN       2.98%     August 31, 2012     $7.2 million    Unsecured bank advance      YEN       2.00%    October 31, 2012     $1.3 million    Unsecured bank advance      YEN       1.88%   November 22, 2012     $1.3 million    Finance lease               CHF       1.97%       April 1, 2017     $0.4 million


TABLE CONT'D

                                     Face value at                                     July 31, 2012                           Borrower    Secured bank loan               $204.0 million                 Harry Winston Inc.    Secured bank loan                 $3.5 million                 Harry Winston S.A.    Secured bank loan                $11.7 million                 Harry Winston S.A.                                                                Harry Winston Diamond                                                                      Corporation and    Secured bank loan                $50.0 million   Harry Winston Diamond Mines Ltd.    First mortgage on real property   $6.0 million                6019838 Canada Inc.                                                                Harry Winston Diamond                                                                   International N.V.                                                        Harry Winston Diamond (India)    Secured bank advance              $6.6 million                    Private Limited    Secured bank advance              $7.4 million          Harry Winston Japan, K.K.    Unsecured bank advance            $6.6 million          Harry Winston Japan, K.K.    Unsecured bank advance            $7.2 million          Harry Winston Japan, K.K.    Unsecured bank advance            $1.3 million          Harry Winston Japan, K.K.    Unsecured bank advance            $1.3 million          Harry Winston Japan, K.K.    Finance lease                     $0.4 million                 Harry Winston S.A.


On August 30, 2012, the Company's luxury brand subsidiary, Harry Winston Inc., refinanced its senior secured revolving credit facility by entering into a new secured five-year credit agreement with a consortium of banks led by Standard Chartered Bank establishing a $260 million facility for revolving credit loans. The facility has a maturity date of August 30, 2017.

Note 7:

Commitments and Guarantees

    (a)                        Environmental agreements        Through negotiations of environmental and other agreements, the Joint        Venture must provide funding for the Environmental Monitoring Advisory        Board. HWDLP anticipates its share of this funding requirement will be        approximately $0.3 million for calendar 2012. Further funding will be        required in future years; however, specific amounts have not yet been         determined. These agreements also state that the Joint Venture must        provide security deposits for the performance by the Joint Venture of         its reclamation and abandonment obligations under all environmental             laws and regulations. HWDLP's share of the letters of credit         outstanding posted by the operator of the Joint Venture with respect            to the environmental agreements as at July 31, 2012, was $81.1           million. The agreement specifically provides that these funding        requirements will be reduced by amounts incurred by the Joint Venture                      on reclamation and abandonment activities.     (b)                        Participation agreements          The Joint Venture has signed participation agreements with various          native groups. These agreements are expected to contribute to the        social, economic and cultural well-being of the Aboriginal bands. The         agreements are each for an initial term of twelve years and shall be           automatically renewed on terms to be agreed upon for successive          periods of six years thereafter until termination. The agreements         terminate in the event that the mine permanently ceases to operate.           Harry Winston Diamond Corporation's share of the Joint Venture's            participation agreements as at July 31, 2012 was $1.5 million.     (c)                      Operating lease commitments        The Company has entered into non-cancellable operating leases for the          rental of luxury brand salons and office premises, which expire at        various dates through 2029. The leases have varying terms, escalation        clauses and renewal rights. Any renewal terms are at the option of the            lessee at lease payments based on market prices at the time of           renewal. Certain leases contain either restrictions relating to            opening additional salons within a specified radius or contain        additional rents related to sales levels. Minimum rent payments under        operating leases are recognized on a straight-line basis over the term        of the lease, including any periods of free rent. Future minimum lease         payments under non-cancellable operating leases as at July 31, 2012                                   are as follows: 


        Within one year                                $   26,581       After one year but not more than five years       102,092       More than five years                              132,774                                                      $  261,447 


    (d)            Capital commitments related to the Joint Venture            At July 31, 2012, Harry Winston Diamond Corporation's share of        approved capital expenditures at the Joint Venture was $23.4 million.            At July 31, 2012, Harry Winston Diamond Corporation's current          projected share of the planned capital expenditures at the Diavik        Diamond Mine for the calendar years 2012 to 2016 is approximately $140        million assuming a Canadian/US average exchange rate of $1.00 for the                                     five years.


Note 8:

Capital Management

The Company's capital includes cash and cash equivalents, current and non-current interest-bearing loans and borrowings and equity, which includes issued common shares, contributed surplus and retained earnings.

The Company's primary objective with respect to its capital management is to ensure that it has sufficient cash resources to maintain its ongoing operations, to provide returns to shareholders and benefits for other stakeholders, and to pursue growth opportunities. To meet these needs, the Company may from time to time raise additional funds through borrowing and/or the issuance of equity or debt or by securing strategic partners, upon approval by the Board of Directors. The Board of Directors reviews and approves any material transactions out of the ordinary course of business, including proposals on acquisitions or other major investments or divestitures, as well as annual capital and operating budgets.

The Company assesses liquidity and capital resources on a consolidated basis. The Company's requirements are for cash operating expenses, working capital, contractual debt requirements and capital expenditures. The Company believes that it will generate sufficient liquidity to meet its anticipated requirements for the next twelve months.

On August 30, 2012, the Company's luxury brand subsidiary, Harry Winston Inc., refinanced its secured revolving credit facility by entering into a new secured five-year credit agreement with a consortium of banks led by Standard Chartered Bank establishing a $260.0 million facility for revolving credit loans. The new facility expires on August 30, 2017. As with the previous agreement, the new credit facility is supported by a $20.0 million limited guarantee provided by Harry Winston Diamond Corporation. The amount available under this facility is subject to a borrowing base formula based on certain assets of the luxury brand segment.

Note 9:

Segmented Information

The Company operated in three segments within the diamond industry - mining, luxury brand and corporate - for the three months ended July 31, 2012.

The mining segment consists of the Company's rough diamond business. This business includes the 40% ownership interest in the Diavik group of mineral claims and the sale of rough diamonds.

The luxury brand segment consists of the Company's ownership in Harry Winston Inc. This segment consists of the marketing of fine jewelry and watches on a worldwide basis.

The corporate segment captures costs not specifically related to operations of the mining or luxury brand segments.

    For the three months    ended July 31, 2012                        Mining   Luxury brand   Corporate     Total    Sales               America                    $    2,269 $      35,759  $         - $   38,028               Europe                         50,514         15,636           -     66,150               Asia excluding Japan            8,690         33,956           -     42,646               Japan                               -         30,073           -     30,073               Total sales                    61,473        115,424           -    176,897    Cost of sales               Depreciation and               amortization                   12,449            277           -     12,726               All other costs                34,335         57,633           -     91,968               Total cost of sales            46,784         57,910           -    104,694    Gross margin                              14,689         57,514           -     72,203    Gross margin (%)                           23.9%          49.8%          -%      40.8%    Selling, general and    administrative expenses               Selling and related               expenses                          817         39,474           -     40,291               Administrative expenses         2,149         10,021       3,358     15,528               Total selling, general and               administrative expenses         2,966         49,495       3,358     55,819    Operating profit (loss)                   11,723          8,019     (3,358)     16,384    Finance expenses                         (2,151)        (1,877)           -    (4,028)    Exploration costs                          (568)              -           -      (568)    Finance and other income                      67             23           -         90    Foreign exchange gain (loss)               1,048          (895)           -        153    Segmented profit (loss)    before income taxes                   $   10,119 $        5,270 $   (3,358) $   12,031    Segmented assets as    at July 31, 2012               Canada                     $  937,687 $            - $         - $  937,687               United States                       -        367,751     115,797    483,548               Other foreign countries        22,682        215,636           -    238,318                                          $  960,369 $      583,387 $   115,797 $1,659,553    Capital expenditures                  $   15,788 $        1,981 $         - $   17,769    Other significant non-cash items:               Deferred income tax               recovery                   $  (1,592) $          581 $      (57) $  (1,068)     For the three months    ended July 31, 2011                       Mining   Luxury brand   Corporate      Total    Sales               America                    $      447 $       27,183 $         - $   27,630               Europe                         80,131         26,098           -    106,229               Asia excluding Japan (a)        9,030         59,056           -     68,086               Japan                               -         20,433           -     20,433               Total sales                    89,608        132,770           -    222,378    Cost of sales               Depreciation and               amortization                   16,802             77           -     16,879               All other costs                50,811         82,436          51    133,298               Total cost of sales            67,613         82,513          51    150,177    Gross margin                              21,995         50,257        (51)     72,201    Gross margin (%)                           24.5%          37.9%          -%      32.5%    Selling, general and    administrative expenses               Selling and related               expenses                          777         32,977           -     33,754               Administrative expenses         2,712         10,354       2,281     15,347               Total selling, general and               administrative expenses         3,489         43,331       2,281     49,101    Operating profit (loss)                   18,506          6,926     (2,332)      23,100    Finance expenses                         (3,787)        (1,396)           -    (5,183)    Exploration costs                          (781)              -           -      (781)    Finance and other income                      78              5           -         83    Foreign exchange gain (loss)                 846          (558)           -        288    Segmented profit (loss)    before income taxes                   $   14,862 $        4,977 $   (2,332) $   17,507    Segmented assets as    at July 31, 2011               Canada                     $  983,625 $            - $         - $  983,625               United States                       -        320,333     106,388    426,721               Other foreign countries        33,536        221,457           -    254,993                                         $ 1,017,161 $      541,790 $   106,388 $1,665,339    Capital expenditures                  $   12,649 $        1,900 $         - $   14,549    Other significant non-cash items:               Deferred income tax               expense               (recovery)                 $   (3,408) $        2,714 $      (77) $    (771) 


            Sales to one significant customer in the luxury brand segment    (a)   totalled $45.0 million for the three months ended July 31, 2011. 


    For the six months    ended July 31, 2012                     Mining   Luxury brand   Corporate       Total    Sales            America                    $     9,701 $       68,045 $         - $    77,746            Europe                         104,884         45,690           -     150,574            Asia excluding Japan            35,897         54,341           -      90,238            Japan                                -         50,800           -      50,800            Total sales                    150,482        218,876           -     369,358    Cost of sales            Depreciation and            amortization                    33,954            660           -      34,614            All other costs                 82,929        106,285           -     189,214            Total cost of sales            116,883        106,945           -     223,828    Gross margin                            33,599        111,931           -     145,530    Gross margin (%)                         22.3%          51.1%          -%       39.4%    Selling, general and    administrative expenses            Selling and related            expenses                         1,710         76,933           -      78,643            Administrative expenses          3,781         19,873       8,191      31,845            Total selling, general and            administrative expenses          5,491         96,806       8,191     110,488    Operating profit (loss)                 28,108         15,125     (8,191)      35,042    Finance expenses                       (4,393)        (3,515)           -     (7,908)    Exploration costs                        (822)              -           -       (822)    Finance and other income                   119             36           -         155    Foreign exchange gain (loss)               678          (889)           -       (211)    Segmented profit (loss)    before income taxes                $    23,690 $       10,757 $   (8,191) $    26,256    Segmented assets as    at July 31, 2012            Canada                     $   937,687 $            - $         - $   937,687            United States                        -        367,751     115,797     483,548            Other foreign countries         22,682        215,636           -     238,318                                       $   960,369 $      583,387 $   115,797 $ 1,659,553    Capital expenditures               $    33,937 $        6,423 $         - $    40,360    Other significant non-cash items:            Deferred income tax            recovery                   $   (4,159) $      (1,268) $     (114) $   (5,541)     For the six months    ended July 31, 2011                     Mining   Luxury brand   Corporate       Total    Sales            America                    $     3,456 $       62,670 $         - $    66,126            Europe                         130,883         43,544           -     174,427            Asia excluding Japan (a)        17,304         73,410           -      90,714            Japan                                -         35,043           -      35,043            Total sales                    151,643        214,667           -     366,310    Cost of sales            Depreciation and            amortization                    33,232            157           -      33,389            All other costs                 87,824        125,315         101     213,240            Total cost of sales            121,056        125,472         101     246,629    Gross margin                            30,587         89,195       (101)     119,681    Gross margin (%)                         20.2%          41.6%          -%       32.7%    Selling, general and    administrative expenses            Selling and related            expenses                         1,426         59,298           -      60,724            Administrative expenses          6,693         18,748       5,731      31,172            Total selling, general and            administrative expenses          8,119         78,046       5,731      91,896    Operating profit (loss)                 22,468         11,149     (5,832)      27,785    Finance expenses                       (6,480)        (2,686)           -     (9,166)    Exploration costs                        (993)              -           -       (993)    Finance and other income                   155            186           -         341    Foreign exchange gain (loss)             (131)            242           -         111    Segmented profit (loss)    before income taxes                $    15,019 $        8,891 $   (5,832) $    18,078    Segmented assets as    at July 31, 2011            Canada                     $   983,625 $            - $         - $   983,625            United States                        -        320,333     106,388     426,721            Other foreign countries         33,536        221,457           -     254,993                                       $ 1,017,161 $      541,790 $   106,388 $ 1,665,339    Capital expenditures               $    25,084 $        3,289 $         - $    28,373    Other significant    non-cash items:            Deferred income tax            expense            (recovery)                 $   (7,963) $        4,699 $     (155) $   (3,419) 


            Sales to one significant customer in the luxury brand segment    (a)    totalled $45.0 million for the six months ended July 31, 2011.


Note 10:

Recast

During the preparation of the income tax provision for the quarter ended April 30, 2012, the Company noted a historical difference related to the accounting for Northwest Territories mining royalty taxes in connection with the Company's rough diamond inventory. For Northwest Territories mining royalty tax purposes, the Company is subject to mining royalty taxes, which includes a requirement to treat the rough diamond inventory when it comes out of the Diavik Diamond Mine as taxable. This results in an accounting timing difference between the mining and extraction of the diamonds and when they are sold. The Company did not previously record the corresponding deferred tax asset on the rough diamond inventory related to royalty taxes payable. The Company has revised the comparative figures to correct the immaterial impact of this item with the offset recorded in retained earnings, amounting to $5.8 million as at January 31, 2011.

For further information:

Mr. Richard Chetwode, Vice President, Corporate Development - +44 (0) 7720-970-762 or rchetwode@harrywinston.com
 Ms. Laura Kiernan, Director, Investor Relations - (212) 315-7934 or lkiernan@harrywinston.com
Ms. Kelley Stamm, Manager, Investor Relations - (416) 205-4380 or kstamm@harrywinston.com

(HW. HWD)


SOURCE Harry Winston Diamond Corporation


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