Harry Winston Diamond Corporation (HWD)

harry winston diamond corp
FY 2009 annual report show earnings of $1.15 / share, with $1.54 loss from goodwill writedowns, versus a $0.96 / share gain on foreign exchange, and a $0.16 per share gain on an insurance settlement.

for the future, we may consider future writedowns less likely, as well as considering future foreign exchange earnings and insurance settlements unlikely. Therefore, we could expect future earnings under comparable conditions of $1.55 / share.

company did a dilutive offering for $150 million (at $3 / share) on march 19, 2009, which amounts to a 19.9% stake after the transaction

had the transaction occurred as of jan 31, 2009, it would have posted a non-cash dilution loss of $30 million regarding their mine ($0.49 / share). taking this into account as well as other adjusted transactions, earnings for 2009 would have been $1.06 / share.


4q FY 2009 had particularly bad results, whereas the rest of FY2009 was pretty good, skewing the yearly results such that they make current conditions appear better than they are if you only look at the average for the year


q4 2009 gross margins were particularly weak, as were sales volume. Despite this, they still did make a profit in q4 2009 on an operating basis. Looking at the last two years, q1 is typically the low point of the year, leading me to believe that q1 FY 2010 is going to be especially challenging, which leads me to believe they may post a loss even on an operating basis in the next quarter. other than their impairment charge, insurance settlement, and foreign exchange gain, they earned only 5 million before taxes (2 million loss after taxes) for q4 2009, versus an after tax income of 21 million in q1 2009, a quarter that typically is a much weaker quarter. in comparison to 2008, it would seem that q4 should have been 20 million ahead of q1, whereas it was 30 million behind. it wouldn't be unreasonable then to expect a q1 2010 to be 50 million behind q4 2009, which would present a difficult position from which to generate a profit for FY 2010 even if things improve from there.

administrative expenses increased in fy 2009 despite a reduction in advertising and the market value of stock based compensation. reduced advertising budgets is not a good sign for a quick recovery or long term growth, and reducing market value of existing stock options is not a very effective means to judge real expenses, which may need to be made up by modifying options or increasing salaries.

the retail segment has only been profitable in 2007 in the last 3 years, with only one profitable quarter in each of 2008 and 2009, for a total of a loss in each FY, despite strong increases in sales in each of 2008 and 2009. gross margins also remain steady through all 3 years.

the debt payback position of the company looks good, with most outstanding debts having balances owed 4-5 years out. even in the weakened operating environment, the company should be able to handle debts owed for the next 3 years. If operations do not improve in that timeframe, or the access to debt restructuring is not possible within 3 years, the company may have trouble meeting its financing requirements. This seems like a low probability situation. That said, environmental obligations for the current year at their mining facility are substantial, especially compared with similar obligations 2-5 years out. supposedly, "actual cash outlay" for these concerns are supposed to happen later in the life of the mine, despite recognizing the costs along the way.

dividends have been suspended currently, as of a decision made march 19, 2009.

because the interest rates on their current loans are exceptionally low, there is inherent risk that, if the refinancing environment is worse than the environment in which the loans were originally obtained, interest rates would be substantially increased. As an example, they may be paying rates under 3%, whereas many businesses are having trouble getting loans at rates of 12%. if the perceived collateral value of the company is reduced, this would definitely affect interest rates on future debt placements. further, as the company's interest rates on some loans are floating at a fixed amount above libor or prime, an increase in interest rates generally would cause an equal increase in interest rates for the company specifically. this seems likely at some point as current base interest rates are near zero. currently, a 1% change in libor would have a 1.9 million / year change in net earnings.

bottom line: I would check on this company after q1 2010 and q2 2010 results are shown. if cash position, sales, and net earnings show the company to be in an apparently stronger position than shown in their yearly report, this company could be a buy. because of the luxury status of their product, continuing profitability of the company is contingent on a recovering economy generally, moreso than any other factor.