5N Plus Annual Report 2011

Plain-text annual report

A pivotal year Annual Report 2011 Table of Contents 1 Our Vision 2 Letter to Shareholders 6 Our Values 7 At a Glance 8 Products 18 A Global Responsibility 20 Management’s Discussion and Analysis 40 Consolidated Financial Statements 44 Notes to Consolidated Financial Statements 66 Board of Directors 67 Management Team 68 Corporate Information 5N Plus is a leading producer of specialty metal and chemical products. Fully integrated with closed-loop recycling facilities, the company is headquartered in Montreal, Québec, Canada and operates manufacturing facilities and sales ofﬁ ces in several locations in Europe, North America and Asia. 5N Plus deploys a range of proprietary and proven technologies to produce products which are used in a number of advanced pharmaceutical, electronic and industrial applications. Typical products include puriﬁ ed metals such as bismuth, gallium, germanium, indium, selenium and tellurium, inorganic chemicals based on such metals and compound semiconductor wafers. Many of these are critical precursors and key enablers in markets such as solar, light-emitting diodes and eco-friendly materials. To grow together in an environmentally responsible way, through the innovation and product excellence made possible by our employees’ know-how and commitment, thereby enabling 5N Plus to become the world’s leading producer of specialty metal and chemical products. Our Vision 5 N P L U S A N N U A L R E P O R T 2 0 1 1 1 We are pleased to report our results for what we would argue constitutes a landmark year for 5N Plus. Indeed, while we continued to build on our track record of organic growth in 2011, with revenues and backlog reaching new heights, we also proceeded with the acquisition of MCP Group SA. This was a truly transformative event. Closing on April 8, 2011, this acquisition greatly expands our global footprint, strengthens our supply chain and diversiﬁ es our product portfolio. It thereby enables 5N Plus to increase critical mass, create new business opportunities and position itself as the leading producer worldwide of specialty metals and chemicals. 2 5 N P L U S A N N U A L R E P O R T 2 0 1 1 Message to Shareholders distributor of specialty metals and their chemicals, with an extensive sourcing, production and distribution network comprised of production sites and commercial ofﬁ ces on four continents. As a result, 5N Plus is now more than ever a world player in both the specialty metals and clean technology markets, with commanding shares of the bismuth, gallium, indium, selenium and tellurium markets, all of which have a sizeable corresponding footprint. For example, non-toxic bismuth is widely used in cosmetics, pharmaceuticals and pigments, Acquisitions designed to accelerate growth and is rapidly replacing lead in many Recognizing that organic growth alone applications, driven by stricter environmental could limit our company’s ambitions for regulations. Gallium is associated with rapid development, we have been seeking improved energy efﬁ ciency and is poised for additional growth opportunities through signiﬁ cant growth as gallium nitride-based strategic acquisitions for some time. In 2009 light emitting diodes (LEDs) are gradually we acquired Firebird Technologies and deployed in various display and lighting subsequently built a new plant in Trail, technologies. Gallium is also used with British Columbia. This new facility, which indium and selenium in CIGS-based thin-ﬁ lm began operating late in the year, will provide solar technologies. As for tellurium, its main mainly indium and germanium-bearing market is associated with CdTe-based solar products. In a series of related transactions, modules, which continue to provide the we also acquired a majority stake in a lowest cost solar electricity. germanium wafer manufacturer, Utah-based Sylarus Technologies, enabling us to further A four-way strategic rationale grow our germanium product offering and The acquisition of MCP is supported by address promising segments of the solar a four-way strategic rationale. First, MCP energy and electronics markets. gives us global critical mass while also delivering signiﬁ cant top and bottom line The MCP acquisition, however, elevates numbers, which will enable further business 5N Plus to a whole new level. Based in Belgium, MCP is a global producer and 5 N P L U S A N N U A L R E P O R T 2 0 1 1 3 diversiﬁ cation. MCP had sales of $350 million Materials is headed by Sebastian Voigt, in 2010 — nearly ﬁ ve times the sales of with Marc Binet and Frank Fache playing 5N Plus. These are immediately accretive to important roles in shared primary material earnings and cash ﬂ ow, before accounting for sourcing. MCP’s former co-CEOs — Laurent synergies and economies of scale. Raskin and Frank Fache — have joined our senior management team as executive Second, MCP is a good ﬁ t in terms of vice-presidents and are now also signiﬁ cant products, customers, production and logistics, shareholders, ensuring strong alignment strengthening our commercial and sourcing between shareholder and management networks. We will be able to share expertise, interests. We welcome their vast experience optimize a large sales and distribution and knowledge. Frank Fache joined our network and thereby capitalize on escalating Board this past April and Laurent Raskin demand for specialty metals and chemicals. will be appointed to the Board at our next annual meeting. Third, MCP is very well positioned in Asia, and in particular China, which is an important Metal Managers expand capabilities producer of specialty metals. MCP’s Chinese operations and commercial ofﬁ ces, together 5N Plus is currently endowed with some of the most knowledgeable specialty metals with the plant we have agreed to build and experts in the world. To better leverage this operate in Malaysia, provide for a greatly expertise, the executive team now includes expanded Asian footprint. This should four Senior Metals Managers: Laurent Raskin ultimately enable us to seize new sourcing (tellurium); Frank Fache (bismuth and and market opportunities, and reduce germanium); Dominic Boyle (indium and production costs. cadmium) and Sean Fuller (gallium and selenium). Supported by long experience and Finally, MCP shares many aspects of our a wealth of contacts, these senior executives own entrepreneurial culture. The integration will enable 5N Plus to make faster and is proceeding smoothly, aligned along two better informed decisions based on the latest main business units. Electronic Materials is global intelligence. headed by Nicholas Audet, while Eco-Friendly Dennis Wood Chairman of the Board of Directors Jacques L’Ecuyer President and Chief Executive Ofﬁ cer 4 5 N P L U S A N N U A L R E P O R T 2 0 1 1 Recycling a powerful differentiator As part of our efforts to bring greater Our commitment to closed-loop recycling long-term stability to 5N Plus’s future, remains undeterred. In fact, the MCP in August 2010 we entered into a long-term acquisition further strengthens 5N Plus’s supply agreement with Abound Solar, and competitive advantage in this area. Our now followed up in February 2011 with a new broader industrial and geographic base, long-term supply agreement with industry- together with additional acquired expertise, leading First Solar. The latter runs to 2015 enables us to extract high value from more and guarantees an increase of 30% in product complex feedstocks, residues and production shipments over current levels, such increase scraps. As more customers seek total rising to 60% by 2013. Abound Solar and lifecycle solutions for their production, they First Solar purchase cadmium telluride to are turning to 5N Plus for recycling services, produce thin-ﬁ lm solar modules, and also building relationships of trust that we expect use our recycling services. to further develop with time. A changing and exciting dynamic Building a sustainable business As 5N Plus begins its second decade The MCP acquisition, together with our other acquisitions and investments, are helping in business, it is also entering an era of signiﬁ cant growth potential. To prepare for to build a more stable, robust and therefore this new era, our president and most of the sustainable business for our shareholders. management team travelled extensively As a one-stop shop for a much wider range of throughout Europe, Asia and North America customers and suppliers, 5N Plus offers the to meet hundreds of employees and see convenience of one relationship for a wider ﬁ rst-hand the tremendous assets that now range of transactions. Signiﬁ cantly, no single serve the company’s operations. We welcome customer now commands more than 15% these new employees and thank our entire of 5N Plus’s consolidated revenues, and our team for their dedication to serving our ten largest customers together account for customers and to help usher in a period of less than 45% of revenues. This means we accelerated growth for 5N Plus. We look now have greater operational ﬂ exibility, an forward to very exciting times ahead. enhanced ability to control our own destiny, and are less vulnerable to market and cyclical forces. Jacques L’Ecuyer President and Chief Executive Ofﬁ cer Dennis Wood Chairman of the Board of Directors 5 N P L U S A N N U A L R E P O R T 2 0 1 1 5 Continuous Improvement We promote excellence in everything we do, with the ultimate goal of being recognized as the industry leader. We therefore continually seek to improve our skills, along with the quality of our products and services. Commitment Transforming our vision into reality is possible only through the commitment and effort of our employees. We therefore aim to develop a stimulating work environment that values teamwork and excellence. The past year’s signiﬁ cant gains in market reach and geographic scope have, if anything, made our values even more important to our future. These values are our ethical compass. They keep us grounded and connected to employees, customers and communities. More than ever, they are the foundation that supports our growth. Health and Safety Employee health and safety guides all our operations. We act responsibly to minimize risks and promote prevention, with the goal of continually improving our health and safety performance. Sustainable Development We encourage individual and corporate initiatives that help to protect the environment. This includes promoting — both internally and with clients and suppliers — the recycling of products and industrial waste, and setting objectives that reduce our environmental footprint. Our Values Customer Focus Our goal is to exceed customer expectations by delivering outstanding services and products shaped by the customer’s needs. To achieve this, we have the conﬁ dence and resourcefulness to propose solutions that establish lasting relationships of trust. Integrity We adhere to the highest standards of integrity, which means keeping our word, complying with the letter and spirit of the law, and treating every person with whom we do business with respect and dignity. 6 5 N P L U S A N N U A L R E P O R T 2 0 1 1 At a Glance A transformed 5N Plus 650 employees on four continents 14 manufacturing facilities, 18 sales ofﬁ ces Strategic supply chain with primary producers Strong recycling capabilities Financial highlights Operational highlights Revenues (in millions of Canadian dollars) EBITDA (in millions of Canadian dollars) Backlog (in millions of Canadian dollars) Shareholders’ equity (in millions of Canadian dollars) 178.8 36.8 253.8 348.9 28.7 22.9 69.4 70.8 52.2 52.6 112.4 125.7 2009 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011 • Acquired 100% of MCP Group SA, together with $125 million equity ﬁ nancing, to become a global leader in the production and distribution of specialty metals • Ofﬁ cially opened new facility in Trail, B.C., dedicated to advanced semiconductor processing, metal puriﬁ cation and recycling • Signed new long-term agreements with First Solar Inc., a global leader in solar photovoltaic technology, for the supply and recycling of cadmium telluride (CdTe) • Provided ﬁ nancing to Sylarus Technologies, a leading producer of germanium substrates for solar cells, and entered into a germanium supply and recycling agreement. Subsequently acquired 66.67% majority interest in Sylarus • Signed long-term supply agreement for CdTe with Abound Solar, a maker of next-generation thin-ﬁ lm solar modules • Won awards in multiple categories at 2010 Deloitte Technology Fast 50™ Awards • Announced plans for a new recycling facility in Malaysia 5 N P L U S A N N U A L R E P O R T 2 0 1 1 7 market potential The CdTe thin-ﬁ lm solar power industry, which operates on several continents, has experienced a 90% annual growth rate since 2005. Cd cadmium telluride We’re at the forefront of the thin-ﬁ lm solar cell value chain. #1 supplier to solar industry 5N Plus supplies the leading manufacturers of CdTe thin-ﬁ lm solar modules. Our recycling services add signiﬁ cant value to our Canadian and German production plants, with a new Malaysian recycling plant soon to capture market share in Asia Paciﬁ c as well. 8 5 N P L U S A N N U A L R E P O R T 2 0 1 1 end use CdTe-based solar cells have emerged as the world’s leading technology for large-scale installations — typically public or private utilities — that deliver high performance at low cost. Te As a supplier of high-purity CdTe and cadmium sulﬁ de (CdS) to the world’s leading producers of thin-ﬁ lm solar modules, our commitment to clean technologies remains undiminished. In fact, over the past year we solidiﬁ ed our relationship with these leading manufacturers by entering into long-term supply agreements. This will provide 5N Plus with a foundation of steady and predictable revenue for years to come. Indeed, this industry has a highly signiﬁ cant cost advantage over competing technologies, which will continue to fuel its global growth and therefore our revenue base. CdTe-based solar modules have experienced a 90% annual growth rate (based on GW) since 2005, which is forecast to continue into the coming years. Our ability to recover and recycle valuable materials from manufacturing scraps and spent solar cells adds signiﬁ cant value to our offering and strengthens customer relationships. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 9 global production Non-toxic bismuth is replacing lead in most applications in Europe. We currently serve global markets with bismuth, bismuth chemicals and bismuth alloys from production centres in Europe, Asia and North America. With a legacy in the production and sale of bismuth going back to 1863, we claim a long history in this versatile metal. Bismuth is typically recovered as a byproduct of lead and copper, however some dedicated mines and deposits also exist. Our main customers for bismuth products are in Europe, North America and Asia, with growth areas expected in Korea and China, driven by lead replacement. The gradual recognition of lead’s toxic properties is leading many jurisdictions to phase out lead in favour of bismuth. This transition is already underway in Europe, and we believe other parts of the world could follow suit. Bismuth’s greater weight within the 5N Plus product portfolio is opening up new consumer markets. Bismuth is the main ingredient in the popular antacid Pepto-Bismol™, and is used to produce yellow paints and cosmetics. Its pharmaceutical applications are mainly for treating ulcers and intestinal disorders. #1 producer in the world A market share of more than 50% makes 5N Plus the world’s leading supplier of bismuth and bismuth chemicals. 10 5 N P L U S A N N U A L R E P O R T 2 0 1 1 end uses Pepto-Bismol™ Pharmaceuticals Paints Electronics Coatings Optics 83 bismuth Bismuth ﬁ gures prominently in a growing number of industrial and consumer products. BiB5 N P L U S A N N U A L R E P O R T 2 0 1 1 11 #1 supplier worldwide We are the leading supplier of gallium to customers worldwide and are well positioned to capture growth opportunities in a range of high-technology industries, where this metal is indispensable. 1 3 a a G G gallium The use of gallium in gallium nitride (GaN) to make LEDs, in gallium arsenide (GaAs) for high frequency devices, including wireless handsets, and in CIGS solar cells, is driving signiﬁ cant growth. end uses LEDs (light emitting diodes) Flat-panel screens Integrated circuits Optoelectronic devices CIGS solar cells Specialty alloys Batteries Biomedical devices 5 N P L U S A N N U A L R E P O R T 2 0 1 1 12 gallium around the world Gallium is generally recovered as a byproduct during alumina production. We are the global leader for this metal, with production facilities in Europe, Asia and North America. Occupying the forefront of the gallium nitride (GaN) value chain, 5N Plus is in a prime strategic position to beneﬁ t from global growth in the LED market. That market is surging, as LEDs are ideally suited for display lighting, and as consumers, governments and industry seek alternative, more economical technologies to replace compact ﬂ uorescents and incandescent bulbs. We supply large customers with Ga feedstock, which they use to manufacture a precursor for MOCVD (metal organic chemical vapor deposition). This precursor is then sold to manufacturers of LEDs. Other high-growth markets include gallium arsenide (GaAs), which is extensively used in high frequency electronics and fast switching applications. As demand for wireless handsets increases, so does demand for GaAs, which remains the preferred material for these applications. Similarly, gallium is an essential component of copper indium gallium diselenide (CIGS) solar cells. This is among the most promising solar technologies, as CIGS solar cells are less material-intensive and more scalable in manufacturing. Their higher efﬁ ciency should ultimately produce lower cost solar electricity, spurring greater demand and production. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 13 positioning for leadership With its two production facilities in North America, 5N Plus is well positioned as an emerging supplier of germanium and semi-ﬁ nished optics and substrates. The annual growth rate of more than 40% since 2009 is forecast to remain constant until at least 2013. A long-term supply agreement with Teck Metals ensures that 5N Plus has a fully North American supply chain for its two production facilities. This will enable us to capture a signiﬁ cant portion of the fast-growing market for germanium semi-ﬁ nished optics and substrates. Our two germanium-production divisions address different portions of the market. Sylarus produces germanium substrates for manufacturers of high-efﬁ ciency CPV solar cells for both space and terrestrial applications. Firebird, in Trail, serves the semiconductor and optics industries. We expanded and upgraded our Trail-based division to add recycling, reﬁ ning, crystal growth and machining to its capabilities. North American production, world focus Our Sylarus division is located in St. George, Utah, while Firebird Technologies is in Trail, British Columbia. The latter also has complete recycling, reﬁ ning, crystal growth and machining capabilities. 14 5 N P L U S A N N U A L R E P O R T 2 0 1 1 2 3 e G5 N P L U S A N N U A L R E P O R T 2 0 1 1 G germanium A relatively scarce metal recovered from coal ashes and as a byproduct of zinc mining, germanium is expected to be a growth driver for 5N Plus. end uses Lenses for infrared light detectors Specialized solar cells for satellites Substrates for concentrated photovoltaics (CPV) 15 A diversiﬁ ed product portfolio A relatively rare metal extracted from zinc ores, indium is produced at our facilities in England and in Trail, British Columbia. We market indium in pure metal, chemical and low-melting-point alloy forms for use in electronics, solar cells and optics. Growth is largely driven by the popularity of LCD displays and touchscreens, for which indium is essential in forming transparent electrodes from indium tin oxide (ITO). end uses Flat panel displays Touchscreens CIGS solar cells Battery manufacture Ceramics Fuel cells market position We are a market leader in the supply of indium worldwide. A semi-metal or metalloid extracted primarily from residues of copper and lead reﬁ ning, high-purity tellurium is a key component of cadmium telluride (CdTe) solar cells. It is also used in medical imaging, thermoelectric devices, in various storage media applications, as well as in metallurgical alloys. 5N Plus manufactures tellurium-based products in North America, Europe and Asia. end uses CdTe solar cells Medical imaging Thermoelectric devices Infrared detectors Optical storage market position We are the market leader in the supply of tellurium worldwide. In49 i m u d n I m u i r u l l e T Te52 North America Trail, Canada Head Ofﬁ ce Montreal, Canada Fairﬁ eld, USA DeForest, USA St. George, USA Ofﬁ ces Production sites 16 5 N P L U S A N N U A L R E P O R T 2 0 1 1 The non-metallic chemical element selenium is extracted from copper residues, along with tellurium and other precious metals, and is reﬁ ned at our plants in North America and Europe. 5N Plus sells selenium to manufacturers of the compound zinc selenide (ZnSe). As this compound is transparent under infrared light, it is used to make lenses for carbon dioxide lasers. Selenium is also used to manufacture CIGS and CIS solar cells, and for thermoelectric devices. end uses Lenses Animal feeds Electrolytic manganese Metallurgical additive CIGS solar cells Infrared optics Thermoelectric devices market position We are a market leader in the supply of selenium worldwide. A shiny silvery-white metalloid known since antiquity, antimony is chieﬂ y extracted from copper and lead residues. Reﬁ ned and marketed by our Montreal plant, antimony is also a constituent of indium antimonide (InSb), a semiconductor material manufactured by our Firebird plant in Trail, British Columbia. InSb is used to make high-sensitivity infrared detectors, including thermal imaging cameras. end uses InSb wafers Storage media Microelectronics market position We are a market leader in the supply of antimony worldwide. i m u n e l e S Se34 y n o m i t n A Sb51 Eisenhüttenstadt, Germany Stade, Germany Wellingborough, UK Lübeck, Germany Tilly, Belgium Shenzhen, China Shangyu, China Vientiane, Laos Hong Kong, China Kulim, Malaysia (1) (1) Facility currently in construction Europe & Asia 5 N P L U S A N N U A L R E P O R T 2 0 1 1 17 5N Plus Integrated Strategic Supply Electronic Materials Eco-Friendly Materials A Global Responsibility Our responsibility for implementing sustainable solutions has grown along with our size and scope. As a company that has focused on clean technologies and sustainable solutions since its founding, our larger size provides a better opportunity to have an even more positive impact on our communities. Valuing people In the wake of the recent transformative acquisition, the 5N Plus group has grown signiﬁ cantly in both size and geographic scope. The integration process is already well underway and proceeding smoothly. Currently, one of our highest priorities is to gain a better understanding of the differing values and cultures within our expanded organization, with the ultimate goal of leveraging this rich diversity in ways that support our corporate objectives. Recognizing that our people’s engagement will be essential to our future success, we have also begun to disseminate our core values, vision and mission, and to clearly set out how these will support our shared prosperity. We believe this speaks to our responsibility to build a sustainable business that advances the long-term interests of our shareholders, employees and other stakeholders. 18 5 N P L U S A N N U A L R E P O R T 2 0 1 1 Valuing the environment As a company that provides closed-loop recycling services to customers in the clean technologies ﬁ eld, we are making a positive difference to the environment. Indeed, our recycling services reduce the amount of waste our customers generate and lead to the recovery of limited resources, thereby reducing their overall environmental footprint. This remains a core activity for 5N Plus. It also contributes to the bottom line by generating more revenue through recycling, while adding value to customer partnerships. In 2009, we began using Life Cycle Assessment, a “cradle-to-cradle” evaluation of the environmental impact of our product manufacturing and recycling activities. More recently, we made major improvements to our Montreal facility that generated a signiﬁ cant reduction in total water consumption over the previous year, despite increased production. As a leader in sustainability, we also sit on various industry association working groups. All these efforts are regularly recognized by third-party industry watchers — as they were during the past year: • We were included for the third consecutive year on the Corporate Knights Cleantech 10 list, featuring Canada’s ten best publicly held companies in the cleantech technology. • We won in multiple categories at the 2010 Deloitte Technology Fast 50™ Awards. This included Cradle to Cradle Solutions Metallurgical Processes Other Materials Metals Re-Use Puriﬁ cation / Synthesis Collection Production Process Residue Customers Manufacturing Process Award, which showcases companies that create breakthroughs in green technology, and the Leadership Award for emerging technologies. Product the prestigious Deloitte Technology Green 15™ EOL Product Use Product 5 N P L U S A N N U A L R E P O R T 2 0 1 1 19 This Management’s Discussion and Analysis (MD&A) of the operating results and the ﬁ nancial position is intended to assist readers in understanding 5N Plus Inc. (“the Company”), its business environment and future prospects. This MD&A should be read while referring to the audited consolidated ﬁ nancial statements and the accompanying notes for the ﬁ scal year ended May 31, 2011. Information contained herein includes any signiﬁ cant developments to August 24, 2011, the date on which the MD&A was approved by the Company’s board of directors. The ﬁ nancial information presented in this MD&A is based on the Company’s accounting policies that are in compliance with Canadian generally accepted accounting principles (“GAAP”). It also includes some ﬁ gures that are not performance measures consistent with GAAP. Information regarding these non-GAAP ﬁ nancial measures is provided under the heading Non-GAAP Measures of this Management’s Discussion and Analysis. All amounts are expressed in millions of Canadian dollars. Unless otherwise indicated, the terms “we”, “us” and “our” as used herein refer to the Company together with its subsidiaries. Notice regarding forward-looking statements Certain statements in this MD&A may be forward-looking within the meaning of securities legislation. Forward-looking information and statements are based on the best estimates available to the Company at the time and involve known and unknown risks, uncertainties or other factors that may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors of uncertainty and risk that might result in such differences include the risk related to the possible failure to realize anticipated beneﬁ ts of acquisition, additional indebtedness, credit, interest rate, inventory pricing, currency ﬂ uctuation, fair value, source of supply, environmental regulations, competition, dependence on key personnel, business interruptions, protection of intellectual property, international operations and collective agreements. For more details, see the Risks and Uncertainties section. As a result, we cannot guarantee that any forward-looking statements will materialize. Forward-looking statements can generally be identiﬁ ed by the use of terms such as “may”, “should”, “would”, “believe”, “expect”, the negative of these terms, variations of them or any terms of similar terminology. The forward-looking statements set forth herein reﬂ ect our expectations as at the date of this MD&A and are subject to change after such date. Unless required by applicable securities legislation, management does not undertake to update these forward-looking statements as a result of new information, future events or other changes. In evaluating these statements, the reader should consider various factors, including the risks outlined above. The reader is warned against giving undue reliance on these forward-looking statements. Revenues (in millions of Canadian dollars) EBITDA (in millions of Canadian dollars) Backlog (in millions of Canadian dollars) Shareholders’ equity (in millions of Canadian dollars) Management’s Discussion and Analysis 69.4 70.8 178.8 36.8 253.8 348.9 28.7 22.9 52.2 52.6 112.4 125.7 2009 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011 20 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 Corporate Overview and Business 5N Plus is a leading producer of specialty metal and chemical products. Fully integrated with closed-loop recycling facilities, the Company is headquartered in Montreal, Quebec, Canada and operates manufacturing facilities and sales ofﬁ ces in several locations in Europe, North America and Asia. 5N Plus deploys a range of proprietary and proven technologies to produce products which are used in a number of advanced pharmaceutical, electronic and industrial applications. Typical products include puriﬁ ed metals such as bismuth, gallium, germanium, indium, selenium and tellurium, inorganic chemicals based on such metals and compound semiconductor wafers. Many of these are critical precursors and key enablers in markets such as solar, light-emitting diodes and eco-friendly materials. Selected yearly fi nancial information Years ended May 31 (in thousands of Canadian dollars except per share amounts) Consolidated Results Revenues Net earnings from continuing operations Basic earnings per share from continuing operations Diluted earnings per share from continuing operations Net loss from discontinued operations Net earnings Basic earnings per share Diluted earnings per share EBITDA1 Funds from Operations 1 Balance Sheet Data Total assets Long-term debt Net debt 1 Shareholders’ equity 1 See Non-GAAP Measures 2011 $ 178,828 21,641 0.44 0.44 – 21,641 0.44 0.44 36,771 29,569 783,638 126,385 238,381 348,918 2010 $ 70,763 15,143 0.33 0.33 496 14,647 0.32 0.32 22,926 20,391 2009 $ 69,373 20,868 0.46 0.45 – 20,868 0.46 0.45 28,680 23,127 138,521 4,198 (63,171) 125,678 128,169 3,997 (60,519) 112,369 Selected quarterly fi nancial information (in thousands of Canadian dollars except per share amounts) Revenues Gross proﬁ t1 EBITDA Net earnings Basic earnings per share Diluted earnings per share Net earnings from continuing activities Basic earnings per share from continuing activities Diluted earnings per share from continuing activities Backlog 1 1 See Non-GAAP Measures Q4 $ Q3 $ Q2 $ FY2011 Q1 $ Q4 $ Q3 $ Q2 $ FY2010 Q1 $ 119,808 20,582 19,668 18,770 19,730 19,227 15,753 16,053 26,459 19,170 10,049 0.17 0.17 10,049 8,652 5,956 3,540 0.08 0.08 3,540 8,862 5,958 4,019 0.09 0.08 4,019 8,352 5,665 4,033 0.09 0.08 4,033 8,671 6,209 4,339 0.09 0.09 4,363 8,204 6,262 4,076 0.09 0.08 4,362 7,359 5,506 3,217 0.07 0.07 3,403 7,618 4,949 3,015 0.07 0.06 3,015 0.17 0.08 0.09 0.09 0.10 0.10 0.07 0.07 0.17 253,840 0.08 71,245 0.08 62,596 0.08 57,424 0.09 52,651 0.09 53,791 0.07 53,268 0.06 56,964 5 N P L U S A N N U A L R E P O R T 2 0 1 1 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 21 Highlights of Fiscal Year 2011 and Fourth Quarter 2011 • On April 8, 2011, the Company proceeded with the acquisition of MCP Group SA (“MCP”), a leading producer and distributor of specialty metals and their chemicals, including bismuth, indium, gallium, selenium and tellurium. The strong increases on the ﬁ nancial results of 5N Plus primarily reﬂ ect the contribution of MCP from April 8, 2011 onwards. • Revenues, net earnings and EBITDA all reached record levels. For the ﬁ scal year, revenues increased by 153% to $178.8 million, net earnings by 43% to $21.6 million and EBITDA by 60% to $36.8 million, with funds from operations rising by 45% to $29.6 million. For the fourth quarter, revenues reached $119.8 million representing a ﬁ vefold increase over revenues of the fourth quarter of the last ﬁ scal year, with net earnings and EBITDA increasing by over 132% and 209% respectively to $10.0 million, or $0.17 per share, and $19.2 million. • The Company’s balance sheet remains strong, with shareholders’ equity now standing at $348.9 million up from $125.7 million one year earlier following the acquisition of MCP and the issuance on April 11, 2011 of 13.6 million shares at $9.20 per share for gross proceeds of $125.0 million. 2015 which includes increasing committed purchases. 5N Plus also announced plans to set up a new recycling facility in Malaysia. • In February 2011, 5N Plus entered into a new long-term supply and recycling agreement with First Solar, Inc. extending until December 31, • In addition to the MCP acquisition, the Company proceeded with a number of growth initiatives during the year, including; – the acquisition of a majority ownership position in Sylarus Technologies LLC (“Sylarus”), a leading producer of germanium substrates for solar cell applications; – the construction and commissioning of a new 40 000 sq. ft. production facility in Trail for advanced semiconductor processing, metal puriﬁ cation and recycling, and; – the development of a solar module recycling facility in DeForest, Wisconsin, for which the Company was awarded $0.5 million in funding from the State Energy Program of Wisconsin. $52.6 million one year ago. In the fourth quarter alone, backlog increased by over $180.0 million. • The outlook for the Company appears very promising with a 383% increase in backlog which now stands at $253.8 million up from • For the third consecutive year, the Company was listed on the Corporate Knights Cleantech 10 list featuring Canada’s ten best publicly held companies in the cleantech technology sector. The Company was also the winner in multiple categories at the 2010 Deloitte Technology Fast 50™ Awards, including winning the prestigious Deloitte Technology Green 15™ Award and the Leadership Award, emerging technologies, and ranking amongst the Deloitte Technology Fast 50™. Since September 2010, 5N Plus is listed on the S&P/TSX Small Cap and S&P/TSX Clean Technology indexes. Business Acquisition The Company acquired two businesses in 2011 and one in 2010. These acquisitions were recorded under the purchase method and the earnings of the acquired business were consolidated from the date of their acquisition. On April 8, 2011, the Company acquired MCP for the following consideration: cash consideration of $144 million (€105.8 million), promissory note and holdback to vendors of $85.5 million (€61.9 million) and 11,377,797 common shares of 5N Plus at $6.91 per share for consideration of $78.6 million. Transaction costs were approximately $2.1 million for a total consideration of $310.2 million. The price of $6.91 per share was established by taking the average market price of 5N Plus shares for three days before and after the announcement minus a 20% discount, based on the value of a put option estimated using the Black-Scholes pricing model to reﬂ ect the lock-up period on these shares. As part of the acquisition, the Company closed the Atlumin facilities owned by MCP located in Sunnyvale, California. 22 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 On June 21, 2010, the Company acquired, for an amount of US$3.0 million (approximately $3.1 million), a convertible note from Sylarus, a producer of germanium substrates for solar cells located in St. George, Utah. On January 10, 2011, the Company converted the debenture into a 66.67% majority interest of Sylarus. 5N Plus also agreed to provide additional funding of US$0.8 million in the form of secured debt to enable the repayment of short term debt contracted by Sylarus. On December 1, 2009, the Company acquired Firebird Technologies Inc. (“Firebird”) for an amount of $7.9 million including acquisition costs of $0.6 million. Firebird is a manufacturer of pure metals and semiconductor compounds. Firebird’s main products include indium antimonide wafers as well as puriﬁ ed metals such as antimony, indium and tin, sold worldwide and used in a number of electronic and optical applications. The following table summarizes the purchase allocation of the net assets acquired on a preliminary basis for 2011, and the ﬁ nal purchase price allocation for 2010: (in thousands of Canadian dollars) Assets acquired Temporary investments (restricted) Non-cash working capital Property, plant and equipment Intangible assets Goodwill (not deductible) Future income tax assets Other assets Liabilities assumed Non-cash working capital Bank indebtedness and short-term debt Long-term debt Future income tax liabilities Note payable to 5N Plus Non-controlling interest Total consideration Consideration Cash paid to the vendors Shares issued to the vendors Balance of purchase price and holdback Cash and cash equivalents acquired Acquisition costs Purchase consideration MCP $ 18,061 292,919 43,837 70,471 112,596 3,625 2,919 544,428 93,486 125,393 23,780 21,370 – – 264,029 280,399 144,027 78,621 85,455 (29,804) 2,100 280,399 Sylarus $ – 681 8,048 – – – 200 8,929 2,706 – 1,096 – 769 1,560 6,131 2,798 1 3,307 – – (509) – 2,798 2011 $ 18,061 293,600 51,885 70,471 112,596 3,625 3,119 553,357 96,192 125,393 24,876 21,370 769 1,560 270,160 283,197 147,334 78,621 85,455 (30,313) 2,100 283,197 2010 $ – 1,881 1,521 1,355 4,382 – – 9,139 16 – 858 517 – – 1,391 7,748 7,851 – – (164) 61 7,748 1 Book value of the loan and the embedded derivative (convertible option) at the date of the acquisition for this non-cash transaction. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 23 Results of Operations Results overview (in thousands of Canadian dollars except per share amounts) Revenues Gross proﬁ t Net earnings 1 Net earnings per share 1 EBITDA Bookings 2 1 Net earnings from continuing operations 2 See Non-GAAP Measures Three months ended May 31 Year ended May 31 2011 $ 119,808 26,459 10,049 0.17 19,170 302,403 2010 $ 19,730 8,671 4,363 0.09 6,209 18,589 Increase 507% 205% 130% 100% 209% 589% 2011 $ 178,828 52,325 21,641 0.44 36,771 380,017 2010 $ 70,763 31,853 15,143 0.33 22,926 71,184 Increase 153% 64% 43% 33% 60% 189% Revenues Revenues for the fourth quarter ended May 31, 2011 reached a record level of $119.8 million, a 507% increase over sales of $19.7 million for the same period last year. Included in the fourth quarter, for the ﬁ rst time, are revenues of MCP which contributed to our ﬁ nancial results for a period of 7 weeks and for an amount estimated to represent over $90.0 million. Sales of all main products were strong throughout the quarter with revenues being also positively impacted by an increase in average selling price following a general trend of commodity price increases. Revenues for the ﬁ scal year ended May 31, 2011 also reached a record level, for the very same reasons, lying at $178.8 million, representing a 153% increase over sales of $70.8 million for the previous ﬁ scal year. Gross proﬁ t Gross proﬁ t in the fourth quarter increased by 205% to $26.5 million or 22% of revenues compared to $8.7 million or 44% of revenues for the same period last year. For the ﬁ scal year ended May 31, 2011, gross proﬁ t increased by 64% to $52.3 million, or 29% of revenues, compared to $31.9 million or 45% of revenues for the previous ﬁ scal year. Both increases in gross proﬁ t are associated with an increase in revenues over the periods considered. As a percentage of revenues gross proﬁ t decreased because of the inclusion of the MCP ﬁ nancial results. MCP generally sells products for which the gross proﬁ t in terms of revenues is less than the Company’s historical levels. Rising raw material costs which impact both average selling price and cost of sales further contributed to this decrease as a percentage of revenues. Net earnings Net earnings from continuing operations for the fourth quarter reached a record level of $10.0 million or $0.17 per share, up by 130% over net earnings from continuing operations of $4.3 million or $0.09 per share for the same period last year. Net earnings from continuing operations for the ﬁ scal year ended May 31, 2011 also reached a record level at $21.6 million or $0.44 per share, representing a 43% increase over net earnings from continuing operations of $15.1 million or $0.33 per share, for the previous ﬁ scal year. These increases are mainly attributable to the contribution of the MCP activities which resulted in a higher gross proﬁ t. The impact of this increased gross proﬁ t on net earnings was partially offset by increases in selling, general and administrative expenses, and ﬁ nancial expenses. EBITDA (in thousands of Canadian dollars) Net earnings 1 Financial expenses and interest income Foreign exchange gain Amortization Income taxes EBITDA 1 Net earnings from continuing operations Three months ended May 31 Twelve months ended May 31 2011 $ 10,049 2,094 (366) 3,142 4,251 19,170 2010 Increase (Decrease) $ 4,363 (60) (533) 705 1,735 6,209 130% 3,590% −31% 346% 145% 209% 2011 $ 21,641 1,911 (1,007) 5,368 8,858 36,771 2010 Increase (Decrease) $ 15,143 (278) (1,184) 2,733 6,512 22,926 43% 787% −15% 96% 36% 60% EBITDA increased by 209% for the fourth quarter of ﬁ scal year 2011 when compared to the same period last year reaching $19.2 million up from $6.2 million. EBITDA for the ﬁ scal year ended May 31, 2011 increased by 60% when compared to the previous ﬁ scal year reaching $36.8 million up from $22.9 million. EBITDA was positively impacted by the contribution of MCP to our operational results to a greater extent than net earnings as both ﬁ nancial expenses and income taxes are not included in the EBITDA numbers. 24 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 Bookings and backlog Bookings were $302.4 million in the fourth quarter and $380.0 million in the year up from $18.6 million and $71.2 million for the corresponding periods of the previous ﬁ scal year. Such increases are attributable mainly to the contribution of the MCP backlog but also reﬂ ect a continuing trend of increasing bookings and backlog throughout the year as a result of important contract renewals and an expansion of the product portfolio. This increase in bookings led to an increase in backlog which stands at $253.8 million as at May 31, 2011 which is 382% higher than the corresponding backlog of $52.7 million as at May 31, 2010. In terms of quarterly revenues, backlog was lower reﬂ ecting the fact that MCP has a larger proportion of spot sales and as a result typically runs on a backlog which represents a lower proportion of revenues. Segment information The company has two reportable business segments, namely Electronic Materials and Eco-Friendly Materials. Corresponding operations and activities are managed accordingly by the Company’s key decision makers. Segmented operating and ﬁ nancial information, labelled key performance indicators, are available and used to manage these business segments, review performance and allocate resources. Financial performance of any given segment is evaluated primarily in terms of revenues and segment operating proﬁ t which is reconciled to consolidated numbers by taking into account corporate income and expenses. The Electronic Materials segment is headed by a Vice-President which oversees locally managed operations in North America, Europe and Asia. The Electronic Materials segment manufactures and sells reﬁ ned metals, compounds and alloys which are primarily used in a number of electronic applications. Typical end-markets include photovoltaics (solar energy), medical imaging, light emitting diodes (LED), displays, high-frequency electronics and thermoelectrics. Main products are associated with the following metals: cadmium, gallium, germanium, indium and tellurium. These are sold either in elemental or alloyed form as well as in the form of chemicals and compounds. Revenues and earnings associated with recycling services and activities provided to customers of the Electronic Materials segment are also included in the Electronic Materials segment and management of such activities is also the responsibility of the Electronic Materials Vice-President. The Eco-Friendly Materials segment is so labelled because it is mainly associated with bismuth, one of the very few heavy metals which has no detrimental effect on either human health or in the environment. As a result bismuth is being increasingly used in a number of applications as a replacement for more harmful metals and chemicals. The Eco-Friendly Materials segment is headed by a Vice-President which oversees locally managed operations in Europe and China. The Eco-Friendly Materials segment manufactures and sells reﬁ ned bismuth and bismuth chemicals, low melting point alloys as well as reﬁ ned selenium and selenium chemicals. These are used in the pharmaceutical and animal-feed industry as well as in a number of industrial applications including coatings, pigments, metallurgical alloys and electronics. Corporate expenses associated with the head ofﬁ ce and unallocated selling, general and administrative expenses together with ﬁ nancing costs, gain and/or losses on foreign exchange and the amortization of intangible assets have been regrouped under the heading Corporate and Other. The head ofﬁ ce is also responsible for managing businesses which are still in the development stage and corresponding costs are netted of any revenues. Revenues, EBITDA and bookings for the Company’s reportable segments are discussed below. Former MCP activities were carried out in both business segments and are accordingly split between the two. 5N Plus activities prior to the MCP transaction are entirely included in the Electronic Materials business segment. Electronic Materials division (in thousands of Canadian dollars) Revenues Cost of goods & expenses, before amortization Segmented EBITDA Bookings Three months ended May 31 Twelve months ended May 31 2011 $ 62,433 (45,085) 17,348 142,230 2010 $ 19,730 (13,167) 6,563 18,589 2011 $ 121,453 (86,528) 34,925 219,844 2010 $ 70,763 (46,427) 24,336 71,184 Revenues in the fourth quarter for the Electronic Materials division increased by 216% reaching $62.4 million up from $19.7 million in the fourth quarter of the previous ﬁ scal year. Revenues for the year increased by 72% to a level of $121.5 million, up from $70.8 million last year. Revenues in the quarter and the year included a contribution from the relevant MCP activities from April 8, 2011 onwards only. These increases in revenues are mainly associated with the contribution of MCP together with an increase in sales of solar products and an extension of the product portfolio following investments made throughout the year. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 25 EBITDA in the fourth quarter for the Electronic Materials division increased to $17.3 million up by 164% over the level of $6.6 million in the fourth quarter of the previous ﬁ scal year. EBITDA for the year reached a level of $34.9 million which represents a 44% increase over EBITDA for the previous ﬁ scal year. These increases are essentially related to the contribution of the relevant MCP activities. Bookings in the fourth quarter for the Electronic Materials division reached a level of 142.3 million, up from $18.6 million in the fourth quarter of the previous ﬁ scal year. Bookings increased by 209% to $219.8 million up from $71.2 million one year earlier. This increase is associated with the contribution of the MCP backlog together with an increase associated primarily with the renewal of the Company’s contract with First Solar. The backlog for the Electronic Materials division now stands at $151.0 million, increasing by $98.0 million during the year and by $80.0 million in the quarter. Eco-Friendly Material division (in thousands of Canadian dollars) Revenues Cost of goods & expenses, before amortization Segmented EBITDA Bookings Three months ended May 31 Twelve months ended May 31 2011 $ 57,375 (52,602) 4,773 160,173 2010 $ – – – – 2011 $ 57,375 (52,602) 4,773 160,173 2010 $ – – – – The Eco-Friendly Materials activities are entirely composed of prior MCP activities as the Company did not carry out any such activities prior to April 8, 2011. Accordingly there is no historical data to compare and discuss. In addition all data discussed represents, from a duration standpoint, only 55% of a normal quarter. Revenues reached $57.4 million during the quarter and were primarily composed of sales of bismuth metal and bismuth chemicals. The corresponding EBITDA associated with such revenues was $4.8 million. Bookings were $160.2 million and are entirely associated with the contribution of the MCP backlog. The backlog for the Eco-Friendly Materials division now stands at $102.8 million, which when compared with the Electronic Materials division backlog is lower in terms of percentage of revenues and in line with the larger proportion of spot or short-term sales associated with this business segment. Expenses (in thousands of Canadian dollars) Amortization Selling, General and Administrative Research & Development Financial Expenses, Interest Income and Foreign Exchange Gain Income taxes Three months ended May 31 Twelve months ended May 31 2011 $ 3,142 7,399 198 1,728 4,252 16,719 2010 Increase (Decrease) $ 705 1,783 679 (593) 1,735 4 ,309 346% 315% −71% 391% 145% 288% 2011 $ 5,368 13,309 2,577 904 8,858 31,016 2010 Increase (Decrease) $ 2,733 7,069 1,858 (1,463) 6,512 16,709 96% 88% 39% 162% 36% 86% Amortization Amortization expenses for the quarter ended May 31, 2011 were $3.1 million compared to $0.7 million for same period last year. For the ﬁ scal year ended May 31, 2011, amortization expenses were $5.4 million compared to $2.7 million in ﬁ scal year 2010. These increases reﬂ ect the larger amortizable asset base following the acquisition of MCP, including $70.0 million of intangible assets which now stand at approximately $72.0 million. Selling, General and Administrative Expenses Selling, General and Administrative Expenses increased to $7.4 million in the fourth quarter and $13.3 million for the ﬁ scal year ended May 31, 2011 compared to $1.8 million and $7.1 million for the corresponding periods last year. We inherited a larger management team and sales organization as a result of the acquisition of MCP which accounts for these increases. As a percentage of sales, selling, general and administrative expenses decreased from 9% to 6% in the fourth quarter and from 10% to 7% for the year. 26 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 Research & Development R&D expenses, net of tax credits were $0.2 million in the fourth quarter compared to $0.7 million in the same period last year, representing 0.2% and 3.4% of sales respectively. This decrease includes an adjustment of $0.2 million in R&D tax credits which would have otherwise been more in line with the R&D expense levels of last year’s fourth quarter. R&D expenses, net of tax credits for the year were $2.6 million compared to $1.9 million for the previous ﬁ scal year. We expect to see increases in our R&D expenses following the acquisition of MCP as we aim to leverage our global platform and develop new organic growth opportunities. Financial expenses, interest income and foreign exchange gain The combined ﬁ nancial expenses, interest income and foreign exchange gain netted an expense of $1.7 million for the fourth quarter and of $0.9 million for the ﬁ scal year ended May 31, 2011. This compares with a gain of $0.6 million and $1.5 million for the corresponding periods of the previous ﬁ scal year. Following the acquisition of MCP, we now hold a net debt of $238 million. Income taxes Income taxes were $4.3 million for the fourth quarter ended May 31, 2011, compared to $1.7 million for the same period last year, corresponding to effective tax rates of 30% and 28% respectively. Income taxes for the ﬁ scal year ended May 31, 2011 were $8.9 million compared to $6.5 million for the previous ﬁ scal year representing effective tax rates of 29% and 30% respectively. We expect to see some decrease in our effective tax rate moving forward as we optimize our ﬁ scal structure. Liquidity and Capital Resources Cash fl ows (in thousands of Canadian dollars) Funds from operations Net changes in non-cash working capital items Operating activities Investing activities Financing activities Effect of foreign exchange rate changes on cash and cash equivalents and designated cash Decrease from discontinued operations Net (decrease) increase in cash and cash equivalents Three months ended May 31 Twelve months ended May 31 2011 $ 13,189 (67,758) (54,569) (151,609) 191,758 (422) – (14,842) 2010 $ 5,682 529 6,211 (785) (169) (281) (23) (4,953) 2011 $ 29,569 (89,028) (59,459) (169,924) 193,359 (2,052) – (38,076) 2010 $ 20,391 (3,563) 16,828 (12,578) (295) (534) (496) 2,925 Cash consumed by operating activities was $54.6 million in the ﬁ rth quarter and $59.5 million during the year ended May 31, 2011. This compares with a cash generation of $6.2 million and 16.8 million for the corresponding periods of the previous ﬁ scal year. This increase in operating activities was driven primarily by an increase in accounts receivable ($23.6 million for the quarter and $29.2 million for the year) and inventories ($32.1 million in the quarter and $52.5 million in the year). Temporary investments also increased by $29.3 million in the quarter and the year being part of a ﬁ nancial instrument which also includes a loan for a nominally identical amount. Investing activities consumed $151.6 million in the fourth quarter and $170.0 million for the ﬁ scal year ended May 31, 2011 compared to $0.8 and $12.6 for the same periods last year. Investments in the quarter included the acquisition of MCP, for a total consideration net of cash of $280.4 million, which is captured in the cash ﬂ ow net of the issuance of shares, balance of purchase price and holdback amounts issued to the vendors for a total amount at $119.2 million. Investments in property, plant and equipment were $8.4 million in the quarter and $20.1 million for the year as we completed the construction of our facility in Trail and made incremental investments in other facilities of the group, including those of MCP. Cash provided by ﬁ nancing activities amounted to $191.8 million in the quarter and $193.4 million for the year as a result of the proceeds from the issuance of new shares for an amount of $125.9 million and an increase in bank indebtedness and short-term and long-term debt amounting to $73.6 million in the quarter and in the year. Cash provided by such activities was used primarily to ﬁ nance the MCP acquisition. For the corresponding periods of the previous ﬁ scal year, ﬁ nancing activities provided only $0.2 million and $0.3 million respectively resulting from the proceeds of the exercise of stock options. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 27 Working capital As at May 31 (in thousands of Canadian dollars) Inventories Others current assets Current liabilities Working capital 1 Current ratio 1 See Non-GAAP Measures 2011 $ 293,069 197,997 (264,950) 226,116 1.85 2010 $ 27,705 75,870 (5,758) 97,817 17.98 Working capital increased to $226.1 million as at May 31, 2011 reﬂ ecting a signiﬁ cant increase in both inventories and receivables following the acquisition of MCP. This represents more than twice the working capital level of one year ago and reﬂ ects a new dynamic for the Company. Current ratio As at May 31, 2011, the current ratio decreased to a level of 1.85 from 17.98 one year earlier. Previous current ratios were distorted by high levels of cash that had not yet been deployed and which were consumed by the MCP acquisition. Inventories As at May 31, 2011, inventories amounted to $293.1 million compared to $27.7 million as at May 31, 2010. This increase is the result of the acquisition of MCP and the consolidation of their inventories with ours. MCP has traditionally been operating with high inventory levels for strategic and operational considerations and is expected to continue doing so in the future. Current inventory levels are further increased due to the rising prices of most of our raw materials and operational considerations related to the start-up of our Trail facility. Net debt & funds from operations Years ended May 31 (in thousands of Canadian dollars) Bank indebtedness and short term debt Long term debt including current portion Balance of purchase price including current portion Debt Cash and cash equivalents and temporary investments (restricted) Net Debt 2011 $ 170,675 59,029 86,180 315,884 (77,503) 238,381 2010 $ – 4,821 – 4,821 (67,992) (63,171) Net debt after taking into account liquid assets such as cash and cash equivalents and temporary investments amounted to $238.4 million as at May 31, 2011. We are engaged with several ﬁ nancial institutions in Asia, Europe and North America through our respective subsidiaries. We expect to consolidate the majority of our debt into one syndicated facility with our head ofﬁ ce. In August 2011, the Company signed a new $250 million senior secured multi-currency revolving credit facility to replace its existing $50 million two-year senior secured revolving facility and most of MCP’s credit facilities. 28 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 Funds from operations amounted to $12.6 million for the quarter and $29.6 million for the ﬁ scal year. This is to be compared with $5.7 million and $20.4 million for the corresponding periods of the previous ﬁ scal year. The contribution of MCP to our results was responsible for this increase. Three months ended May 31 Twelve months ended May 31 (in thousands of Canadian dollars) Funds from Operations Acquisition of businesses Acquisition of property, plant and equipment and intangible assets Working capital changes Balance of purchase price and holdback Proceeds from issuance of shares net of share issue costs Debt assumed in business acquisitions Temporary investments acquired in business acquisition Others Effect of foreign exchange rate changes on cash movement and other non-cash items Total movement in net debt Net cash, beginning of period (Net Debt) net cash, end of period 2011 $ 13,189 (115,598) (8,710) (67,758) (85,455) 119,485 (149,173) 18,061 953 (288,195) 282 (274,724) 36,343 (238,381) 2010 $ 5,682 – (916) (585) – 16 – – 976 (509) 233 4,940 56,231 63,171 2011 $ 29,569 (119,158) (21,099) (89,028) (85,455) 120,269 (150,269) 18,061 (324) (327,003) (4,118) (301,552) 63,171 (238,381) 2010 $ 20,391 (7,748) (4,837) (3,563) – 332 – – 7 (15,809) 69 4,651 58,520 63,171 Net debt to annualized EBITDA for the fourth quarter ratio was 6.5. Annualized funds from operations generated in the fourth quarter represented 22.1% of our net debt. We expect both ratios to improve in the coming quarters as we beneﬁ t from the contribution of MCP for the full period considered and not only for 7 weeks out of 13 considered as was the case during this fourth quarter. Three months ended May 31 (annualized) Net debt to EBITDA ratio 1 Funds from operations to net debt (%) 1 Net cash only in 2010 2011 6.5 22.1 2010 N/A N/A Share Capital Authorized The Company has an unlimited number of common shares, participating, with no par value, entitling the holder to one vote per share. The Company has an unlimited number of preferred shares that may be issued in one or more series with speciﬁ c terms, privileges and restrictions to be determined for each class by the Board of Directors. Issued and fully paid As at May 31 (in thousands of Canadian dollars) Common shares Outstanding Number 2011 Amount $ Number 2010 Amount $ 70,892,627 287,464 45,627,450 82,390 As at August 24, 2011 a total of 70,918,378 common shares were issued and outstanding, and no preferred shares were issued or outstanding. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 29 Stock option plan On April 11, 2011, the Company adopted a new stock option plan (the “Plan”) replacing the previous plan (the”Old Plan”) in place since October 2007 with the same features, with the exception of a maximum number of options granted which cannot exceed 5 million options. No options were granted under this Plan as at May 31, 2011. The aggregate number of shares which could be issued upon the exercise of options granted under the Old Plan could not exceed 10% of the issued shares of the Company at the time of granting the options. Options granted under the Old Plan may be exercised during a period not exceeding ten years from the date of the grant. The stock options outstanding as at May 31, 2011 may be exercised during a period not exceeding six years from their date of grant. Options vest at a rate of 25% (100% for directors) per year, beginning one year following the grant date of the options. For the years ended May 31 Beginning of period Granted Cancelled Exercised End of period 2011 2010 Number of options Weighted average exercise price Number of options Weighted average exercise price 1,596,615 262,308 (177,518) (297,380) 1,384,025 4.24 4.95 5.12 3.07 4.52 1,439,055 436,500 (171,715) (107,225) 1,596,615 3.78 5.38 4.00 3.09 4.24 As at May 31, 2011, 628,765 stock options were exercisable, at a weighted average exercise price of $4.16. Restricted stock unit incentive plan On June 7, 2010, the Company adopted a Restricted Share Unit (“RSU”) Plan to complement the Plan. The RSU Plan enables the Company to award eligible participants phantom share units that vest after a three-year period. RSU is settled in cash and is recorded as liabilities. The measurement of the compensation expense and corresponding liability for these awards is based on the fair value of the award, and is recorded as a charge to SG&A over the vesting period of the award. At the end of each ﬁ nancial period, changes in the Company’s payment obligation due to changes in the market value of the common shares on the TSX are recorded as a charge to SG&A expenses. During the year ended May 31, 2011, the Company granted 33,129 RSU and recorded a provision of $0.09 million. Restricted stock unit incentive plan for foreign employees On June 7, 2010, the Company adopted a Restricted Share Unit for Foreign Employees (“RSUFE”) Plan. RSUFE granted under the RSUFE Plan may be exercised during a period not exceeding ten years from the date of the grant. The RSUFE outstanding as at May 31, 2011 may be exercised during a period not exceeding six years from their date of grant. RSUFE vest at a rate of 25% per year, beginning one year following the grant date of the award. During the year ended May 31, 2011, the Company granted 8,549 RSUFE and recorded a provision of $0.01 million. Off-Balance Sheet Arrangements The Company has certain off-balance sheet arrangements, consisting of leasing certain premises and equipment under the terms of operating leases. The Company is exposed to currency risk on sales of Canadian-made products in US dollars and in Euros and therefore periodically enters into foreign currency forward contracts to protect itself against currency ﬂ uctuation. The reader will ﬁ nd more details related to these contracts in Note 14 to the consolidated ﬁ nancial statements as well as in the Risks and Uncertainties section of this MD&A. 30 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 Contractual Obligations The following table summarizes our principal contractual obligations for our normal business operations as at May 31, 2011: Payment due by period (in thousands of Canadian dollars) Bank indebtedness and short-term debt 1 Long-term debt 1 Balance of purchase price and holdback to the vendors 1 Leases 1 Interest charges included 2012 $ 171,166 7,798 17,641 1,175 197,782 2013 $ – 40,199 33,375 1,136 74,710 2014 $ – 7,367 45,588 501 53,454 2015 $ – 6,458 – 325 6,783 2016 and thereafter $ – 10,033 – 649 10,682 Total $ 171,166 71,855 96,604 3,786 343,411 Critical Accounting Policies Use of estimates The preparation of the consolidated ﬁ nancial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated ﬁ nancial statements and the reported amounts of revenues and expenses during the reporting period. Signiﬁ cant areas requiring the use of management estimates include estimating the useful life of long-lived assets, as well as, the valuation of intangible assets, inventories, goodwill, other long-lived assets, provision for pension beneﬁ ts and provision for site remediation. Reported amounts and note disclosure reﬂ ect the overall economic conditions that are most likely to occur and anticipated measures to be taken by management. Actual results could differ from these estimates. Intangible assets Intangible assets are recorded at cost and amortized on a straight-line method over their estimated useful life at the following rates: Software Intellectual property Customer relationships Technology Development costs Trade name and non-compete agreements Periods 5 years 10 years 10 years 5 years not exceeding 10 years 2 to 5 years Goodwill Goodwill represents the excess of the purchase price of an acquired business over the fair value assigned to assets acquired and liabilities assumed. Goodwill is assessed for impairment at least annually or more frequently if events or changes in circumstances indicate that the goodwill might be impaired. The assessment of impairment is based on fair values derived from certain valuation models, which may consider various factors such as normalized and estimated future earnings, price earnings multiples, terminal values and discount rates. The Company has designated May 31 as the date for its annual impairment test. As at May 31, 2011, goodwill was not considered to be impaired. Cash fl ow hedges Derivative ﬁ nancial instruments designated as cash ﬂ ow hedges are measured at fair value. The effective portion of the change in fair value of the derivative ﬁ nancial instruments is recorded in other comprehensive income. The ineffective portion, if any, is recognized in net earnings. Revenue recognition Revenue from the sale of manufactured products is recognized and recorded in the accounts when the ownership and control of goods passes to the buyers, which generally occurs upon shipment and the ability to collect is reasonably assured. Revenue is reduced at the time it is recognized, for estimated customer returns and other allowances based on historical experience. Revenue from custom reﬁ ning activities is recognized when products are delivered and all the material risks and advantages inherent in ownership are transferred to the customers. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 31 Inventories Raw materials are valued at the lower of cost and net realizable value, cost being determined using the average cost method. Finished goods are valued at the lower of cost and net realizable value, cost being determined under the average cost method and representing the value of raw materials, direct labour and a reasonable proportion of factory overhead. Write-downs to net realizable value may be reversed, up to the amount previously written down when circumstances have changed to support an increased inventory value. From time to time, when substantially all required raw material is in inventory, the Company may choose to enter into long-term sales contracts at ﬁ xed prices. The quantity of raw material required to fulﬁ ll these contracts is speciﬁ cally assigned and the average cost of the raw material of this inventory is accounted for throughout the duration of the contract. Accounting standards issued but not yet adopted Section 1582, “Business Combinations” was published in January 2009 and replaces Section 1581 “Business Combinations”. It provides the Canadian equivalent to the IFRS standard, IFRS 3 (Revised), “Business Combinations”. The Section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the ﬁ rst annual reporting period beginning on or after January 1, 2011. Earlier application is permitted. Section 1601, “Consolidated Financial Statements” and Section 1602, “Non-controlling Interests”. These sections were published in January 2009 and replace Section 1600, “Consolidated Financial Statements”. Section 1601 establishes standards for the preparation of consolidated ﬁ nancial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated ﬁ nancial statements subsequent to a business combination. It is equivalent to the corresponding provisions of IFRS standard, IAS 27 (Revised),“Consolidated and Separate Financial Statements”. The Sections apply to interim and annual consolidated ﬁ nancial statements relating to ﬁ scal years beginning on or after January 1, 2011. Beginning on June 1, 2011, the Corporation will cease to prepare its consolidated ﬁ nancial statements in accordance with Canadian GAAP as set out in Part V of the CICA Handbook — Accounting (“Canadian GAAP”) and will apply as its primary basis of accounting, International Financial Reporting Standards as published by the International Accounting Standards Board as set out in Part I of the CICA Handbook — Accounting. Consequently, management has not determined the impact of the aforementioned future accounting changes to Canadian GAAP that are for periods beginning on or after June 1, 2011. Adoption of International Financial Reporting Standards (IFRS) On February 13, 2008, the Canadian Accounting Standards Board (“AcSB”) conﬁ rmed that publicly accountable entities will be required to prepare ﬁ nancial statements in accordance with IFRS, in full and without modiﬁ cation, for interim and annual ﬁ nancial statements for ﬁ scal years beginning on or after January 1, 2011. For the Company, this represents that its ﬁ nancial statements will be prepared in accordance with IFRS standards starting June 1, 2011 (the “Changeover date”). In the Company’s reporting for those periods following the Changeover date, comparative data for equivalent periods in the previous ﬁ scal year will be required, making June 1, 2010 (“date of transition”) for the Company. IFRS uses a conceptual framework similar to Canadian GAAP, but presents signiﬁ cant differences on certain recognition, measurement and disclosure principles. In the period leading up to the Changeover, the AcSB will continue to issue accounting standards that are better aligned with IFRS thus mitigating the impact of conversion to IFRS. Further, the International Accounting Standards Board (IASB) will also continue to issue new, or amend existing accounting standards during the conversion period, and as a result, the ﬁ nal impact on the Company’s consolidated ﬁ nancial statements of applying IFRS in full will only be entirely measurable once all applicable IFRS requirements at the ﬁ nal changeover date are known. To ensure adequate management of this process, the Company has developed a plan, assessed the resource requirements for its implementation, and commenced to work with its auditors to conﬁ rm positions. The Company continues to assess and make changes as necessary to the design of existing internal control processes and procedures, including disclosure controls and one-time changes for opening adjustments, as a result of implementing IFRS. The Company does not anticipate any signiﬁ cant changes to its internal control over ﬁ nancial reporting or disclosure controls as a result of the transition to IFRS. All entity-level, information technology, disclosure and business process controls will require updating and testing to reﬂ ect changes arising from the conversion to IFRS. Where material changes are identiﬁ ed, these changes will be mapped and tested to ensure that no material control deﬁ ciencies exist as a result of the Corporation’s conversion to IFRS. The Company expects a moderate impact to the IT systems as a result of the conversion to IFRS. System changes are currently underway to ensure that comparative 2010 IFRS data required for the ﬁ rst interim IFRS ﬁ ling in 2011-2012 will be available. The Company is in the process of making the necessary changes to the ﬁ nancial reporting system, creating the necessary tables and databases required to capture the data for IFRS. 32 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 The Company has continued to move forward with the Implementation Phase (“Phase 4”) of the Company’s IFRS conversion plan. As stated in the previous quarter, the IFRS project team has continued to work towards the quantiﬁ cation of impacts associated with the key areas that will affect the Company. The following outlines key milestones and updates for the year ended May 31, 2011: Functional currency IAS 1 and IAS 21 — According to IFRS, an entity must measure its assets, liabilities, revenues and expenses in its functional currency, which is the currency of the primary economic environment in which it operates. Preliminary assessment by management is that the functional currency will be the US dollar. Hedge accounting IAS 39 — Since the Company will change its functional currency, the actual hedge accounting will not be applicable since it was done based on a Canadian functional currency which will change under IFRS. See functional currency above. Property, plant and equipment IAS 16 — The Company has completed the identiﬁ cation and quantiﬁ cation of all components within each signiﬁ cant ﬁ xed asset class and the resulting impact on the Company’s annual depreciation and opening retained earnings under IFRS. Under this standard, each signiﬁ cant component is required to be depreciated over its estimated useful life. Estimated useful lives and costs of components have been determined by senior management throughout the Company. MCP Acquisition IFRS 3 — IFRS 1 allows the Company to elect not to apply this standard to past business combinations (business combinations that occurred before the date of transition to IFRS). The Company has elected to apply IFRS 3 to any historical business combinations prior to the transition date. Under IFRS 3, the Company must expense transaction costs as incurred unless they are related to the issue of debt or equity instruments to effect the business combination. The identiﬁ able assets acquired and liabilities assumed in a business combination are measured at fair value under IFRS, even if less than 100% of the equity interest in the acquiree is owned at the acquisition date. In addition, for each business combination, the Company can elect to measure any non-controlling interest in the acquiree using one of two options at the acquisition date. Under this option, the Company can elect to measure non-controlling interest at its proportionate interest in ﬁ rst the fair value of the identiﬁ able assets and liabilities of the acquiree, limiting goodwill only to the controlling interest acquired. The second option is to record noncontrolling interest at full fair value, including a portion of goodwill attributable to the non-controlling interest. The Company is currently still in the process of quantifying the effect of this Standard on its recent acquisition of MCP and is continuing to assess the overall impact during the transition year. Stock-based compensation IFRS 2 — IFRS requires a different method of amortization of the expense related to stock options. Also, in evaluating the fair value of the stock option issued, the Company has to determine the expected forfeiture of options. This will change the calculation of the fair value of the options issued. Impairment of assets Mainly IAS 36 — Impairment of assets. IFRS contains a single comprehensive impairment standard under which assets are tested for impairment either individually or within cash-generating units (CGUs). CGUs will have to be established and are typically identiﬁ ed at a lower level within the Company than an operating unit under Canadian GAAP. Differences also exist in the measurement methods of impairment charges and rules may more frequently conclude to an impairment charge. Provisions IAS 37 — Provisions, contingent liabilities and contingent assets, requires a provision to be recognized when: there is a present obligation as a result of a past transaction or event; it is probable that an outﬂ ow of resources will be required to settle the obligation; and a reliable estimate can be made of the obligation “Probable” in this context means more likely than not. Under Canadian GAAP, the criterion for recognition in the ﬁ nancial statements is “likely”, which is a higher threshold than “probable”. Therefore, it is possible that there may be some provisions or contingent liabilities which would meet the recognition criteria under IFRS that were not recognized under Canadian GAAP. Other differences between IFRS and Canadian GAAP exist in relation to the measurement of provisions, such as the methodology for determining the best estimate where there is a range of equally possible outcomes (IFRS uses the mid-point of the range, whereas Canadian GAAP uses the low-end of the range), and the requirement under IFRS for provisions to be discounted where material. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 33 The Company believes that the impacts of the transition from Canadian GAAP to IFRS on June 1, 2011 will not be signiﬁ cant with the exception that the functional currency of the Company will change. The Company believes that it will be prepared to adopt IFRS and meet the required disclosure requirements in time for the Company’s ﬁ rst quarter ended September 30, 2011. The information above is provided to allow users of the Company’s ﬁ nancial statements to obtain a better understanding of the status of the Company’s IFRS conversion plan and the resulting possible effects on the Company’s ﬁ nancial statements and operating performance measures. These estimates are based on the Company’s current understanding, and readers are cautioned that it may not be appropriate to use such information for any other purpose. This information also reﬂ ects our most recent assumptions and expectations; circumstances may arise, such as changes in IFRS, regulations or economic conditions, which could change these assumptions or expectations. Risks and Uncertainties The Company is subject to a number of risk factors which may limit our ability to execute our strategy and achieve our long-term growth objectives. Management analyses these risks and implements strategies in order to minimize their impact on the Company’s performance. Possible failure to realize anticipated benefi ts of acquisitions There is a risk that some of the expected beneﬁ ts will fail to materialize, or may not occur within the time periods anticipated by our management. The realization of such beneﬁ ts may be affected by a number of factors, many of which are beyond our control. These factors include achieving the beneﬁ ts of the acquisition and any future acquisitions that we may complete and will depend in part on successfully consolidating functions and integrating operations, procedures and personnel in a timely and efﬁ cient manner, as well as our ability to realize the anticipated growth opportunities and synergies from combining the acquired businesses and operations with ours. The integration of acquired businesses requires the dedication of substantial management effort, time and resources which may divert management’s focus and resources from other strategic opportunities and from operational matters during this process. The integration process may result in the loss of key employees, signiﬁ cant expenses and the disruption of ongoing business, customer and employee relationships that may adversely affect our ability to achieve the anticipated beneﬁ ts of these acquisitions. Inventory price risk The Company monitors its risk associated with the value of its inventories in relation to the market price of such inventories. Because of the highly illiquid nature of many of its inventories, we rely on a combination of standard risk measurement techniques, such as value at risk as well as a more empirical assessment of the market conditions. Decisions on appropriate physical stock levels are taken by considering both the value at risk calculations and the market conditions. Dependence on key personnel The Company relies on the expertise and know-how of its personnel to conduct its operations. The loss of any member of our senior management team could have a material adverse effect on us. Our future success also depends on our ability to retain and attract our key employees, train, retain and successfully integrate new talent into our management and technical teams. Recruiting and retaining talented personnel, particularly those with expertise in the specialty metals industry and reﬁ ning technology is vital to our success and may prove difﬁ cult. Sources of supply We may not be able to secure the critical raw material feedstock on which we depend for our operations. We currently procure our raw materials from a number of suppliers with whom we have had long-term commercial relationships. The loss of any one of these suppliers or a reduction in the level of deliveries to us may reduce our production capacity and impact our deliveries to customers. This would in turn negatively impact our sales, net margins and may lead to liabilities with respect to some of our supply contracts. Additional indebtedness We assumed the indebtedness of MCP upon the completion of the acquisition. The additional indebtedness will increase the interest payable by us from time to time until such amounts are repaid. In addition, we are required to pay to the selling shareholders the amounts set out in the promissory notes as well as the cash “holdback” described under “Acquisition Agreement and Related Agreements”, in the short form prospectus dated April 1, 2011. Although we have signed a $250 million senior secured multi-currency revolving credit facility, we may need to ﬁ nd additional sources of ﬁ nancing to pay the foregoing indebtedness when it becomes due. There can be no guarantee that we will be able to obtain ﬁ nancing on terms acceptable to us or at all at such time or times. 34 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 Environmental regulations Our operations involve the use, handling, generation, processing, storage, transportation, recycling and disposal of hazardous materials and are subject to extensive environmental laws and regulations at the national, provincial, local and international level. These environmental laws and regulations include those governing the discharge of pollutants into the air and water, the use, management and disposal of hazardous materials and wastes, the clean-up of contaminated sites and occupational health and safety. We have incurred and will continue to incur capital expenditures in order to comply with these laws and regulations. In addition, violations of, or liabilities under, environmental laws or permits may result in restrictions being imposed on our operating activities or in our being subject to substantial ﬁ nes, penalties, criminal proceedings, third party property damage or personal injury claims, clean-up costs or other costs. While we believe that we are currently in compliance with applicable environmental requirements, future developments such as more aggressive enforcement policies, the implementation of new, more stringent laws and regulations, or the discovery of currently unknown environmental conditions may require expenditures that could have a material adverse effect on our business, results of operations and ﬁ nancial condition. Credit risk Credit risk corresponds to the risk of loss due to the client’s inability to fulﬁ ll its obligations with respect to trade and other receivables as well as contracts. The Company has a large number of clients and is no longer dependent on a speciﬁ c client. We reduce credit risk by ensuring that credit is granted only to clients after a credit analysis is performed. The Company conducts ongoing evaluation of its clients and establishes provisions for doubtful accounts should an account be considered non recoverable. Interest rate risk The Company is exposed to interest rate ﬂ uctuations on its multi-currency revolving credit facility which bears interest at either prime rate, U.S. base rate, LIBOR or EURO LIBOR plus a margin based on 5N Plus’ senior consolidated debt to EBITDA ratio. Currency risk We report our ﬁ nancial results in Canadian dollars while most of our revenues and a signiﬁ cant portion of our operating costs are realized in local currencies, such as euro, U.S. dollars and pounds sterling. Even though, the purchases of raw materials are denominated in U.S. dollars, which reduces to some extent exchange rate ﬂ uctuations, we are subject to currency translation risk which can negatively impact our results. Management has implemented a policy for managing foreign exchange risk against the relevant functional currency. The Company manages the foreign exchange risk by entering into various foreign exchange forward contracts. Fair value The Company has determined that the carrying value of its short-term ﬁ nancial assets and liabilities, including cash and cash equivalents, accounts receivable and other receivable, as well as accounts payable and accrued liabilities, approximates their carrying value due to the short-term maturities of these instruments. Competition We are the leading producer of specialty metal and chemical products and competition could arise from new low-cost metal reﬁ ners or from certain of our customers who could decide to backward integrate. The forecasted growth in demand for our main products may attract more metal reﬁ ners into this industry and increase competition. Although we believe that our operations and our commercial network are important competitive advantages, our competitors may gain market share, which could have an adverse effect on our revenues and operating margins, should we not be able to compensate for the volume lost to our competition. Business interruptions We may incur losses resulting from business interruptions. In many instances, especially those related to our long-term contracts, we have contractual obligations to deliver product in a timely manner. Any disruption in our activities which leads to a business interruption could harm our customers’ conﬁ dence level and lead to the cancellation of our contracts and legal recourse against us. Although we believe that we have taken the necessary precautions to avoid business interruptions and carry business interruption insurance, we could still experience interruptions which would adversely impact our ﬁ nancial results. Protection of intellectual property Protection of our proprietary processes, methods and other technologies is important to our business. We rely almost exclusively on a combination of trade secrets and employee conﬁ dentiality agreements to safeguard our intellectual property. We have deliberately chosen to limit our patent position to avoid disclosing valuable information. Failure to protect and monitor the use of our existing intellectual property rights could result in the loss of valuable technologies and processes. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 35 International operations We operate in a number of countries, including China, and, as such, face risks associated with international business activities. We could be signiﬁ cantly affected by such risks, which include the integration of international operations, challenges associated with dealing with numerous legal systems, the potential for volatile economic and labor conditions, political instability, expropriation, and changes in taxes, tariffs and other regulatory costs. Although we operate primarily in countries with relatively stable economic and political climates, there can be no assurance that our business will not be adversely affected by the risks inherent in international operations. Collective agreements A portion of our workforce is unionized and we are party to collective agreements that are due to expire at various times in the future. If we are unable to renew these collective agreements on similar terms as they become subject to renegotiation from time to time, this could result in work stoppages or other labour disturbances, such as strikes, walk-outs or lock-outs, potentially affecting our performance. Controls and Procedures As required by Multilateral Instrument 52-109 of the Canadian Securities Administrators (“MI 52-109”), 5N Plus has ﬁ led certiﬁ cates signed by the Chief Executive Ofﬁ cer and that Chief Financial Ofﬁ cer that, among others, attest to the design and effectiveness of the disclosure controls and procedures and the design and effectiveness of internal control over ﬁ nancial reporting. This attestation limits the scope of our disclosure controls, procedures and internal controls over ﬁ nancial reporting so that controls, policies and procedures of MCP are excluded as permitted under multilateral Instrument 52-109. Disclosure controls and procedures The Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer have designed disclosure controls and procedures, or have caused them to be designed under their supervision, in order to provide reasonable assurance, with the exception of MCP, that: • material information relating to the Company has been made known to them; and • information required to be disclosed in the Company’s ﬁ lings is recorded, processed, summarized and reporting within the time periods speciﬁ ed in securities legislation. An evaluation was carried out, under the supervision of the Chief Executive Ofﬁ cer and Chief Financial Ofﬁ cer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer concluded that the disclosure controls and procedures are effective. Internal control over fi nancial reporting The Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer have also designed internal controls over ﬁ nancial reporting, or have caused them to be designed under their supervision, in order to provide reasonable assurance regarding the reliability of ﬁ nancial reporting and the preparation of ﬁ nancial statements for external purposes in accordance with Canadian GAAP. An evaluation was carried out, under the supervision of the Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer, of the design and effectiveness of the Company’s internal controls over ﬁ nancial reporting. Based on this evaluation, the Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer concluded that the internal controls over ﬁ nancial reporting are effective, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Changes in internal control over fi nancial reporting No changes were made to the Company’s internal controls over ﬁ nancial reporting that occurred during the fourth quarter ended May 31, 2011 that have materially affected, or are reasonably likely to materially affect, its internal controls over ﬁ nancial reporting. 36 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 Non-GAAP Measures In this Management’s Report, the Company’s management uses certain measures which are not in accordance with GAAP. Non-GAAP measures are useful supplemental information but may not have a standardized meaning according to GAAP. Backlog represents the expected value of orders we have received but have not yet executed and that are expected to translate into sales within the next 12 months. Bookings represents the value of orders received during the period considered and is calculated by adding revenues to the increase or decrease in backlog for the period considered. We use backlog to provide an indication of expected future revenues, and bookings to determine our ability to sustain and increase our revenues. EBITDA means earnings from continuing operations before ﬁ nancing costs, interest income, gain and loss on foreign exchange, income taxes and amortization. We use EBITDA because we believe it is a meaningful measure of the operating performance of our ongoing business without the effects of certain expenses. The deﬁ nition of this non-GAAP measure used by the Company may differ from that used by other companies. Funds from operations means the amount of cash generated from operating activities before changes in non-cash working capital. We consider funds from operations to be a key measure as it demonstrates the Company’s ability to generate cash necessary for future growth and debt repayment. Gross proﬁ t is a ﬁ nancial measure equivalent to the sales less cost of sales. The gross proﬁ t ratio is displayed as a percentage of sales. We use gross proﬁ t and gross proﬁ t ratio as measures of our ability to operate effectively and generate value. Net debt is a measure we use to monitor how much debt we have after taking into account liquid assets such as cash and cash equivalents and temporary investments. We use it as an indicator of our overall ﬁ nancial position, and calculate it by taking our total debt, including the current portion, and subtracting cash and cash equivalents and temporary investments. Working capital is a measure that shows us how much cash we have available for the growth of our Company. We use it as an indicator of our ﬁ nancial strength and liquidity. We calculate it by taking current assets and subtracting current liabilities. Comparative Figures Certain comparative ﬁ gures have been reclassiﬁ ed to conform to the current period presentation. Additional Information Our common shares trade on the Toronto Stock Exchange (TSX) under the ticker symbol VNP. Additional information relating to the Company, including the Company’s annual information form is available under the Company’s proﬁ le on SEDAR at www.sedar.com. Subsequent Events In August 2011, the Company signed a new $250 million senior secured multi-currency revolving credit facility to replace its existing $50 million two-year senior secured revolving facility with National Bank of Canada. The new credit facility will be used to reﬁ nance existing indebtedness and for other corporate purposes, including capital expenditures and growth opportunities. The new credit facility has a four-year term and bears interest at either prime rate, U.S. base rate, LIBOR or EURO LIBOR plus a margin based on 5N Plus’ senior consolidated debt to EBITDA ratio. 5N Plus also has US$35 million of credit facilities in Asia. At any time, 5N Plus has the option to request that the new credit facility be expanded to $350 million through the exercise of an additional $100 million accordion feature, subject to review and approval by the lenders. In connection with the new credit facility, National Bank of Canada and HSBC Bank acted as co-lead arrangers and joint book runners, and ﬁ ve other banks as lenders. On August 24, 2011, we announced the approval from our Board of Directors to change our ﬁ nancial year-end from May 31 to December 31. This change will align the ﬁ nancial year ends of 5N Plus and MCP, simplifying internal processes as all business units will use the same reporting periods. The ﬁ rst quarter ending September 30, 2011 will include four months of results and the annual period ending December 31, 2011 will contain seven months of 5N Plus’ results. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 37 Management’s Report to the Shareholders of 5N Plus Inc. The accompanying consolidated ﬁ nancial statements are the responsibility of the management of 5N Plus Inc., and have been reviewed by the Audit Committee and approved by the Board of Directors. The consolidated ﬁ nancial statements have been prepared in accordance with accounting principles generally accepted in Canada and include certain estimates that reﬂ ect management’s best judgment. Management is also responsible for all other information included in this Annual Report and for ensuring that this information is consistent with the Company’s consolidated ﬁ nancial statements and business activities. Management is responsible for the design, establishment and maintenance of appropriate internal controls and procedures for ﬁ nancial reporting, to ensure that ﬁ nancial statements for external purposes are fairly presented in conformity with generally accepted accounting principles. Such internal control systems are designed to provide reasonable assurance on the reliability of the ﬁ nancial information and the safeguarding of assets. The Company’s external auditors have free and independent access to the Audit Committee, which is comprised of independent directors. The Audit Committee, which meets regularly throughout the year with members of management, reviews the consolidated ﬁ nancial statements and recommends their approval to the Board of Directors. The consolidated ﬁ nancial statements have been audited by PricewaterhouseCoopers LLP. SIGNED Jacques L’Ecuyer President and Chief Executive Ofﬁ cer SIGNED David Langlois, CA Chief Financial Ofﬁ cer Montréal, Canada August 24, 2011 38 5 N P L U S A N N U A L R E P O R T 2 0 1 1 Independent Auditor’s Report to the Shareholders of 5N Plus Inc. We have audited the accompanying consolidated ﬁ nancial statements of 5N Plus Inc., which comprise the consolidated balance sheet as at May 31, 2011 and the consolidated statement of income, statement of comprehensive income, statement of shareholders’ equity and statement of cash ﬂ ows for the year then ended, and the related notes, which comprise a summary of signiﬁ cant accounting policies and other explanatory information. Management’s responsibility for the consolidated ﬁ nancial statements Management is responsible for the preparation and fair presentation of these consolidated ﬁ nancial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated ﬁ nancial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated ﬁ nancial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated ﬁ nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated ﬁ nancial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated ﬁ nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated ﬁ nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated ﬁ nancial statements. We believe that the audit evidence we have obtained is sufﬁ cient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated ﬁ nancial statements present fairly, in all material respects, the ﬁ nancial position of 5N Plus Inc. as at May 31, 2011 and the results of its operations and its cash ﬂ ows for the year then ended in accordance with Canadian generally accepted accounting principles. Other matter The consolidated ﬁ nancial statements of 5N Plus Inc. for the year ended May 31, 2010 were audited by another auditor who expressed an unqualiﬁ ed opinion on those statements, dated July 23, 2010. 1 Montréal, Canada August 24, 2011 1 Chartered accountant auditor permit No. 19042 5 N P L U S A N N U A L R E P O R T 2 0 1 1 39 Consolidated Statements of Income Years ended May 31 (in thousands of Canadian dollars, except weighted average number of shares and per share amount) Note Revenues Cost of goods sold Gross proﬁ t Expenses Selling, general and administrative Amortization of property, plant and equipment Amortization of intangible assets Research and development, net of tax credit of $754 ($574 in 2010) Foreign exchange gain Financial Interest income Earnings before income taxes from continuing operations and non-controlling interest Income taxes Current Future Net earnings from continuing operations before non-controlling interest Non-controlling interest Net loss from discontinued operations Net Earnings Earnings per share from continuing operations Basic Diluted Earnings per share Basic Diluted Weighted average number of common shares outstanding Basic Diluted 13 13 15 16 12 21 19 19 19 The accompanying notes are an integral part of these consolidated ﬁ nancial statements. 2011 $ 178,828 126,503 52,325 13,309 3,974 1,394 2,577 (1,007) 2,515 (604) 22,158 2010 $ 70,763 38,911 31,852 7,069 2,545 188 1,858 (1,184) 185 (464) 10,197 30,167 21,655 7,896 962 8,858 21,309 332 – 21,641 0.44 0.44 0.44 0.44 6,442 70 6,512 15,143 – (496) 14,647 0.33 0.33 0.32 0.32 49,205,470 49,673,087 45,578,992 45,833,291 Years ended May 31, 2011 and 2010 (in Canadian dollars) Consolidated Financial Statements 40 C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 Consolidated Statements of Comprehensive Income Years ended May 31 (in thousands of Canadian dollars) Net Earnings Other comprehensive income Note 2011 $ 21,641 2010 $ 14,647 Cash ﬂ ow hedges, net of income taxes of $561 (($561) in 2010) 15 (1,255) 1,255 Gain (loss) on translating ﬁ nancial statements of self-sustaining foreign operations Other comprehensive income Comprehensive Income 1,622 367 22,008 (3,675) (2,420) 12,227 The accompanying notes are an integral part of these consolidated ﬁ nancial statements. Consolidated Statements of Shareholders’ Equity Years ended May 31 (in thousands of Canadian dollars) Share Capital Beginning of year Shares issued under stock option plan Shares issued for cash Shares issued for the acquisition of MCP Group SA End of year Contributed Surplus Beginning of year Stock option compensation cost Shares issued under stock option plan End of year Accumulated Other Comprehensive Loss Beginning of year Note 11 6 11 Cash ﬂ ow hedges, net of income taxes of $561 (($561) in 2010) 15 Gain (loss) on translating ﬁ nancial statements of self-sustaining foreign operations End of year Retained Earnings Beginning of year Net earnings Share issue costs, net of income taxes of $1,526 End of year Shareholders’ Equity The accompanying notes are an integral part of these consolidated ﬁ nancial statements. 2011 $ 82,390 1,425 125,028 78,621 287,464 1,372 816 (511) 1,677 (2,531) (1,255) 1,622 (2,164) 44,447 21,641 (4,147) 61,941 348,918 2010 $ 81,882 508 – – 82,390 797 751 (176) 1,372 (111) 1,255 (3,675) (2,531) 29,800 14,647 – 44,447 125,678 5 N P L U S A N N U A L R E P O R T 2 0 1 1 C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 41 Consolidated Balance Sheets As at May 31 (in thousands of Canadian dollars) Assets Current assets Cash and cash equivalents Temporary investments (restricted) Accounts receivable Inventories Prepaid expenses and deposits Derivative ﬁ nancial instruments Income taxes recoverable Future income taxes Property, plant and equipment Intangible assets Goodwill Future income taxes Other assets Liabilities Current liabilities Bank indebtedness and short-term debt Accounts payable and accrued liabilities Derivative ﬁ nancial instruments Income taxes payable Current portion of long-term debt and balance of purchase price Future income taxes Long-term debt Balance of purchase price Other payables Future income taxes Non-controlling interest Shareholders’ Equity Share capital Contributed surplus Accumulated other comprehensive loss Retained earnings Commitments and contingencies Subsequent events Note 2011 $ 2010 $ 27,916 49,587 114,099 293,069 1,387 321 2,831 1,856 491,066 97,223 71,888 116,203 5,051 2,207 65,992 2,000 4,774 27,705 1,073 1,363 517 151 103,575 26,437 1,771 4,382 2,311 45 783,638 138,521 170,675 67,492 441 6,992 18,824 526 264,950 54,106 72,279 18,590 23,202 433,127 1,593 287,464 1,677 (2,164) 61,941 348,918 783,638 – 4,646 – 44 623 445 5,758 4,198 – 553 2,334 12,843 – 82,390 1,372 (2,531) 44,447 125,678 138,521 7 2 3 14 12 4 5 6 12 7 8 14 9 12 9 9 10 12 6 11 18 24 The accompanying notes are an integral part of these consolidated ﬁ nancial statements. On behalf of the Board of Directors: SIGNED: SIGNED: Jacques L’Ecuyer Director Jean-Marie Bourassa Director 42 C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 Consolidated Statements of Cash Flows Years ended May 31 (in thousands of Canadian dollars) Operating activities Net earnings Net loss from discontinued operations Net earnings from continuing operations Non-cash items: Amortization of property, plant and equipment Amortization of intangible assets Future income taxes Realized (loss) gain on cash ﬂ ow hedges, net of taxes of $123 ($364 in 2010) Deferred revenues Stock option compensation cost Other Net changes in non-cash working capital items Accounts receivable Inventories Prepaid expenses and deposits Income taxes recoverable Accounts payable and accrued liabilities Income taxes payable Investing activities used for continuing operations Acquisition of property, plant and equipment Acquisition of intangible assets Acquisition of businesses net of cash acquired Temporary investments (restricted) Other payables Other Financing activities from continuing operations Net change in bank indebtedness and short-term debts Increase of long-term debt Repayment of long-term debt Net change in other long-term liabilities Proceeds from issuance of shares Share issue costs Realized exchange loss on cash designated Effect of foreign exchange rate changes on cash and cash equivalents from continuing operations Net (decrease) increase from continuing operations in cash and cash equivalents Net decrease from discontinued operations in cash and cash equivalents Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplementary information Property, plant and equipment unpaid and included in accounts payables and accrued liabilities Reclassiﬁ cation to inventories of foreign exchange loss on designated cash Interest paid Income taxes paid Future income taxes included in retained earnings The accompanying notes are an integral part of these consolidated ﬁ nancial statements. Note 21 11 6 11 21 6 2011 $ 21,641 – 21,641 3,974 1,394 2,488 (420) (12) 816 (312) 29,569 (26,322) (52,497) 331 (2,312) (15,150) 6,922 (89,028) (59,459) (20,063) (1,036) (119,158) (29,343) (1,088) 764 (169,924) 44,620 28,970 (500) – 125,942 (5,673) 193,359 (2,214) 162 (2,052) (38,076) – (38,076) 65,992 27,916 2,108 (1,324) 1,777 3,850 1,526 2010 $ 14,647 496 15,143 2,545 188 70 1,177 (3) 751 520 20,391 2011 (290) (398) (1,292) (616) (2,978) (3,563) 16,828 (4,588) (249) (7,748) – – 7 (12,578) – – (585) (42) 332 – (295) – (534) (534) 3,421 (496) 2,925 63,067 65,992 200 – 121 8,903 – 5 N P L U S A N N U A L R E P O R T 2 0 1 1 C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 43 1 Summary of Signifi cant Accounting Policies The consolidated ﬁ nancial statements of 5N Plus Inc., the (“Company”) are expressed in Canadian dollars and have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). Basis of consolidation The consolidated ﬁ nancial statements include the accounts of the Company, its subsidiaries and its joint ventures. All signiﬁ cant intercompany transactions and balances have been eliminated. Use of estimates The preparation of the consolidated ﬁ nancial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated ﬁ nancial statements and the reported amounts of revenues and expenses during the reporting period. Signiﬁ cant areas requiring the use of management estimates include estimating the useful life of long-lived assets, as well as, the valuation of intangible assets, inventories, goodwill, provision for pension beneﬁ ts and provision for site remediation. Reported amounts and note disclosure reﬂ ect the overall economic conditions that are most likely to occur and anticipated measures to be taken by management. Actual results could differ from these estimates. Foreign exchange Revenues and expenses denominated in foreign currencies are recorded at the rate of exchange prevailing at the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated at exchange rates prevailing at the balance sheet date. Realized and unrealized translation gains and losses are reﬂ ected in net earnings. All assets and liabilities of self-sustaining foreign subsidiaries are accounted for using the current rate method. Under this method, assets and liabilities of subsidiaries denominated in a foreign currency are translated into Canadian dollars at exchange rates in effect at the consolidated balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the period. Foreign exchange gains and losses on translation of self-sustaining subsidiaries’ ﬁ nancial statements are presented under “Accumulated other comprehensive income” which have no impact on the consolidated statements of income, unless the Company reduces its net investment in these foreign operations. Cash and cash equivalents Cash and cash equivalents consist of cash and highly liquid investments having an initial maturity of 90 days or less. Cash and cash equivalents are designated as held for trading and accounted for at fair value. Temporary investments Temporary investments are classiﬁ ed as loans and receivables and accounted for at amortized cost. Inventories Raw materials are valued at the lower of cost and net realizable value, cost being determined using the average cost method. Finished goods are valued at the lower of cost and net realizable value, cost being determined under the average cost method and representing the value of raw materials, direct labour and a reasonable proportion of factory overhead. Writedown to net realizable value may be reversed, limited to the original writedown, when circumstances have changed to support an increased inventory value. From time to time, when substantially all required raw material is in inventory, the Company may choose to enter into long-term sales contracts at ﬁ xed prices. The quantity of raw material required to fulﬁ ll these contracts is speciﬁ cally assigned and the average cost of the raw material of this inventory is accounted for throughout the duration of the contract. Years ended May 31, 2011 and 2010 (in thousands of Canadian dollars) Notes to Consolidated Financial Statements 44 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 1 Summary of signifi cant accounting policies (continued) Property, plant and equipment Property, plant and equipment are recorded at cost, net of government assistance. Amortization is calculated under the straight-line method at the following annual rates: Buildings Leasehold improvements Production equipment Furniture, ofﬁ ce equipment and rolling stock Periods 25 years over the lease terms 10 years 3 and 10 years Construction in process is not amortized until the asset is put into use. Intangible assets Intangible assets are recorded at cost and amortized on a straight-line method over their estimated useful life at the following rates: Software Intellectual property Customer relationships Technology Development costs Trade name and non-compete agreements Periods 5 years 10 years 10 years 5 years not exceeding 10 years 2 to 5 years Goodwill Goodwill represents the excess of the purchase price of an acquired business over the fair value assigned to assets acquired and liabilities assumed. Goodwill is assessed for impairment at least annually or more frequently if events or changes in circumstances indicate that the goodwill might be impaired. The assessment of impairment is based on fair values derived from certain valuation models, which may consider various factors such as normalized and estimated future earnings, price earnings multiples, terminal values and discount rates. The Company has designated May 31 as the date for its annual impairment test. As at May 31, 2011, goodwill was not considered to be impaired. Impairment and disposal of long-lived assets Long-lived assets, including property, plant and equipment and intangible assets subject to amortization and depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying value of an asset to the estimated undiscounted future cash ﬂ ows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash ﬂ ows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group classiﬁ ed as held-for-sale would be presented separately in the appropriate asset and liability section of the balance sheet. Revenue recognition Revenues from the sale of manufactured products are recognized and recorded in the accounts when the ownership and control of goods passes to the buyers, which generally occurs upon shipment and the ability to collect is reasonably assured. Revenue from custom reﬁ ning activities are recognized when products are delivered and all the material risks and advantages inherent in ownership are transferred to the customers. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 45 1 Summary of signifi cant accounting policies (continued) Research and development Research expenditures are expensed as incurred. They include a reasonable proportion of indirect costs. Development expenditures are deferred when they meet the capitalization criteria provided for by Canadian GAAP, and it is considered reasonably certain that future advantages will be realized. Income taxes The Company uses the liability method of accounting for income taxes. Under this method, temporary differences between carrying amount and the income tax bases of assets and liabilities are recorded using the substantively enacted tax rates expected to be in effect for the year in which the temporary differences are expected to reverse. The effect of a change in income tax rates on future income tax assets and liabilities is recognized in income in the period that the change occurs. A valuation loss allowance is recorded against any future tax asset if it is more likely than not that the asset will not be realized. Guarantees In the normal course of business, the Company enters into various agreements that may contain features that meet the deﬁ nition of a guarantee. A guarantee is deﬁ ned to be a contract (including an indemnity) that contingently requires the Company to make payments to a third party based on (i) changes in an underlying interest rate, foreign exchange rate, equity or commodity instrument, index or other variable that is related to an asset, a liability or an equity security of the guaranteed party, (ii) failure of another party to perform under an obligating agreement, or (iii) failure of another party to pay its indebtedness when due. Stock-based compensation and other stock-based payments All awards granted to employees and directors are recorded using the fair value method. Under this method, the estimated fair value of the options is determined using the Black-Scholes option pricing model. The value of the compensation expense is recognized on a straight-line basis over the vesting period of the stock options with a corresponding increase in contributed surplus. The Company accounts for restricted share units at fair value based on the closing stock price at the date of grant. The units are to be settled for cash and are marked to the current market price at each balance sheet date. Share issue costs Share issue costs are accounted for as a reduction of the retained earnings. Earnings per share Basic and diluted earnings per share have been determined by dividing the consolidated net earnings for the year by the basic and diluted weighted average number of shares outstanding, respectively. The diluted weighted average number of common shares outstanding is calculated as if all dilutive options had been exercised and that proceeds from the exercise of such dilutive options were used to repurchase common shares at the average market price for the period. Government assistance Government assistance, consisting of research tax credits and grants, is recorded as a reduction of the related expense or cost of the asset acquired. Government grants are recognized when there is reasonable assurance that the Company has met the requirements of the approved grant program. Research tax credits are recorded when there is reasonable assurance of realization. 46 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 1 Summary of signifi cant accounting policies (continued) Financial instruments Financial instruments are contracts that give rise to a ﬁ nancial asset or a ﬁ nancial liability. Financial assets and liabilities are recognized on the consolidated balance sheet at fair value and their subsequent measurement depends on their classiﬁ cation, as described in Note 14. Classiﬁ cation depends on the purpose for which the ﬁ nancial instruments were acquired or issued, their characteristics and the Company’s designation of such instruments. The accounting policy the Company has elected to apply to each of its categories of ﬁ nancial instruments is as follows: Assets and liabilities Cash and cash equivalents Temporary investments Trade accounts receivable Derivative ﬁ nancial instruments Bank indebtedness and short-term debt Accounts payable and accrued liabilities Long-term debt Balance of purchase price Category Held for trading Loans and receivables Loans and receivables Held for trading Other liabilities Other liabilities Other liabilities Other liabilities Measurement Fair value Amortized cost Amortized cost Fair value Amortized cost Amortized cost Amortized cost Amortized cost The amortized cost is established using the effective interest method. The Company has elected to account for transaction costs related to the issuance of the ﬁ nancial instruments as a reduction of the carrying value of the related ﬁ nancial instruments. Transaction costs related to credit facilities are amortized using the straight-line method over the expected life of the facilities. Derivative instruments The Company enters into derivative instruments, namely forward exchange contracts, interest rate swaps and forward contracts on the price of certain metals to manage risk against the ﬂ uctuations in foreign exchange rates, interest rates and metal prices. These ﬁ nancial instruments are valued at fair value at each balance sheet date. Hedging Cash ﬂ ow hedges Derivative ﬁ nancial instruments designated as cash ﬂ ow hedges are measured at fair value. The effective portion of the change in fair value of the derivative ﬁ nancial instruments is recorded in other comprehensive income. The ineffective portion, if any, is recognized in net earnings. Cash ﬂ ow hedges related to the purchase of raw materials The Company also designated as cash ﬂ ow hedges a portion of its cash denominated in US dollar for future purchases of raw materials. The designated cash denominated in US dollar is accounted for at fair value in the Company’s balance sheet. Foreign exchange gain or loss on this designated US cash and cash equivalents is recorded in other comprehensive income. When raw material is purchased, the foreign exchange gain or loss is accounted as part of the cost of the raw material in the inventory. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 47 1 Summary of signifi cant accounting policies (continued) Employee future benefi ts The Company contributes to a deﬁ ned beneﬁ t pension plan. The signiﬁ cant policies related to employee future beneﬁ ts are as follows: • The cost of pension and other post-retirement beneﬁ ts earned by employees is actuarially determined using the projected beneﬁ t method prorated on service, market interest rates and management’s best estimate of expected plan investment performance, retirement ages of employees and expected health care costs. • Fair value is used to value the plan assets for the purpose of calculating the expected return on plan assets. Under this method, the differences between the actual returns and the expected returns, in excess of 10% of the greater of the accrued beneﬁ t obligation or market-related value of plan assets, are amortized over the average future expected lifetime of plan participants. • Cumulative unrecognized net actuarial gains and losses in excess of 10% of the greater of the accrued beneﬁ t obligation or market-related value of plan assets at the beginning of the year are amortized over the estimated average remaining service life of plan participants. Accounting standards issued but not yet adopted Business Combinations and Consolidated Financial Statements Section 1582, “Business Combinations and Consolidated Financial Statements” was published in January 2009 and replaces Section 1581 “Business Combinations”. It provides the Canadian equivalent to the IFRS standard, IFRS 3 (Revised), “Business Combinations”. The Section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the ﬁ rst annual reporting period beginning on or after January 1, 2011. Earlier application is permitted. Section 1601, “Consolidated Financial Statements” and Section 1602, “Non-controlling Interests”. These sections were published in January 2009 and replace Section 1600, “Consolidated Financial Statements”. Section 1601 establishes standards for the preparation of consolidated ﬁ nancial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated ﬁ nancial statements subsequent to a business combination. It is equivalent to the corresponding provisions of IFRS standard, IAS 27 (Revised),“Consolidated and Separate Financial Statements”. The Sections apply to interim and annual consolidated ﬁ nancial statements relating to ﬁ scal years beginning on or after January 1, 2011. Beginning on June 1, 2011, the Corporation will cease to prepare its consolidated ﬁ nancial statements in accordance with Canadian GAAP as set out in Part V of the CICA Handbook — Accounting and will apply as its primary basis of accounting, International Financial Reporting Standards as published by the International Accounting Standards Board as set out in Part I of the CICA Handbook — Accounting. Consequently, management has not determined the impact of the aforementioned future accounting changes to Canadian GAAP that are for periods beginning on or after June 1, 2011. 48 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 2 Accounts Receivable As at May 31 Trade accounts receivable Commodity taxes Other Allowance for doubtful accounts Chronological history of trade accounts receivable: As at May 31 Current 0 to 60 days overdue 60 to 120 days overdue More than 120 days overdue 3 Inventories As at May 31 Raw materials Finished goods and work in process 4 Property, Plant and Equipment As at May 31 Land and buildings Production equipment Furniture, ofﬁ ce equipment, leasehold improvements and rolling stock As at May 31 Land and buildings Production equipment Furniture, ofﬁ ce equipment, leasehold improvements and rolling stock Cost $ 37,534 67,403 10,050 114,987 Cost $ 12,174 19,717 2,420 34,311 2011 $ 108,220 4,769 1,294 (184) 114,099 2011 $ 68,724 30,031 3,678 5,787 2010 $ 3,913 416 470 (25) 4,774 2010 $ 3,758 78 77 – 108,220 3,913 2011 $ 92,623 200,446 293,069 Accumulated amortization $ 1,783 14,397 1,584 17,764 Accumulated amortization $ 1,209 5,878 787 7,874 2010 $ 15,634 12,071 27,705 2011 Net book value $ 35,751 53,006 8,466 97,223 2010 Net book value $ 10,965 13,839 1,633 26,437 As at May 31, 2011, property, plant and equipment that were not being amortized amounted to $16.5 million. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 49 5 Intangible Assets As at May 31 Software Customer relationships Technology Development costs Intellectual property Trade name and non-compete agreements As at May 31 Software Intellectual property Cost $ 1,052 46,223 17,413 1,016 3,287 5,489 74,480 Cost $ 604 1,355 1,959 Accumulated amortization $ 559 671 506 49 560 247 2,592 Accumulated amortization $ 120 68 188 2011 Net book value $ 493 45,552 16,907 967 2,727 5,242 71,888 2010 Net book value $ 484 1,287 1,771 6 Business Acquisitions The Company acquired two businesses in 2011 and one in 2010. These acquisitions were recorded under the purchase method and the earnings of the acquired business were consolidated from the date of their acquisition. 2011 MCP Group SA On April 8, 2011, the Company acquired MCP Group SA (“MCP”) for the following consideration: Cash consideration: $144,027 (€105,794), Promissory note and holdback to vendors: $85,455 (€61,879) and common shares of 5N Plus: 11,377,797 common shares at $6.91 per share for consideration of $78,621. Transaction costs were approximately $2,100 for a total consideration of $310,203. The price of $6.91 per share was established by taking the average market price of 5N Plus shares for three days before and after the announcement on April 11, 2011 minus a 20% discount, based on the value of a put option estimated using the Black-Scholes pricing model to reﬂ ect the lock-up period on these shares. The purchase price was allocated on a preliminary basis. The Company is in the process of evaluating mainly the fair value of the intangible assets and of the property, plant and equipment. Sylarus Technologies LLC On June 21, 2010, the Company acquired, for an amount of US$3,000 (approximately $3,072), a convertible note from Sylarus Technologies (“Sylarus”), a producer of germanium substrates for solar cells located in St. George, Utah. This convertible note was bearing interest at 6% annually and was repayable on May 31, 2015 at the latest. This note, including accrued interest, was convertible at the Company’s option, into 18% of voting and participating units of Sylarus. This convertible debenture was a hybrid ﬁ nancial instrument, for which the loan and the embedded derivative components included therein are measured separately. The loan component was classiﬁ ed as a loan and receivable and the embedded derivative representing the conversion option included therein was classiﬁ ed as held for trading. 50 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 6 Business acquisitions (continued) On January 10, 2011, the Company converted the debenture into a 66.67% majority interest of Sylarus. 5N Plus also agreed to provide additional funding of US$766 in the form of secured debt to enable the repayment of short term debt contracted by Sylarus. The following table summarizes the purchase allocation of the net assets acquired on a preliminary basis for 2011, and the ﬁ nal purchase allocation for 2010: Assets acquired Temporary investments (restricted) Non-cash working capital Property, plant and equipment Intangible assets Goodwill (not deductible) Future income tax assets Other assets Liabilities assumed Non-cash working capital Bank indebtedness and short-term debt Long-term debt Future income tax liabilities Note payable to 5N Plus Non-controlling interest Total consideration Consideration Cash paid to the vendors Shares issued to the vendors Balance of purchase price and holdback Cash and cash equivalents acquired Acquisition costs Purchase consideration MCP $ 18,061 292,919 43,837 70,471 112,596 3,625 2,919 544,428 93,486 125,393 23,780 21,370 – – 264,029 280,399 144,027 78,621 85,455 (29,804) 2,100 280,399 Sylarus $ – 681 8,048 – – – 200 8,929 2,706 – 1,096 – 769 1,560 6,131 2,798 1 3,307 – – (509) – 2,798 2011 $ 18,061 293,600 51,885 70,471 112,596 3,625 3,119 553,357 96,192 125,393 24,876 21,370 769 1,560 270,160 283,197 147,334 78,621 85,455 (30,313) 2,100 283,197 2010 $ – 1,881 1,521 1,355 4,382 – – 9,139 16 – 858 517 – – 1,391 7,748 7,851 – – (164) 61 7,748 1 Book value of the loan and the embedded derivative (convertible option) at the date of the acquisition for this non-cash transaction. 2010 Firebird Technologies Inc. On December 1, 2009, the Company acquired Firebird Technologies Inc. (“Firebird”) for an amount of $7,912 including acquisition costs of $61. Firebird is a manufacturer of pure metals and semiconductor compounds. Firebird’s main products include indium antimonide wafers as well as puriﬁ ed metals such as antimony, indium and tin, sold worldwide and used in a number of electronic and optical applications. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 51 7 Bank Indebtedness and Short-Term Debt The Company has various credit lines with many ﬁ nancial institutions around the world. Some are related to the level of accounts receivable and inventories, others are guaranteed by other group companies and others are guaranteed by the assets of the related company that borrowed the money. Credit available under these lines totalled 140 million dollars as at May 31, 2011 to which a line of credit of approximately 50 million dollars (390 million Hong Kong dollars) was added relating to a temporary investment. (See below). As at May 31, 2011, 170.7 million dollars was drawn under these lines (see the table for the split by currency). As at May 31, 2011 Facility available Amount drawn As at May 31, 2011 Facility available Amount drawn Hong Kong Dollar 390,000 390,000 CDN 48,550 48,550 Sterling Pound 10,000 7,855 CDN 15,970 12,545 USD 40,000 35,941 CDN 38,726 34,797 Euro 42,789 39,185 CDN 59,592 54,573 RMB 192,500 135,260 CDN 28,307 20,210 Total N/A N/A CDN 191,145 170,675 The loan in Hong Kong dollars bears interest at HIBOR 3 months plus 1.00%. This rate is covered by an instrument to ﬁ x the rate at 2.48% until maturity. The loan in sterling pounds bears interest at the Bank of England Base Rate plus 2.00%. Loans in US dollars bear interest ranging from LIBOR plus 1.10% to LIBOR plus 1.25% and others bear interest at the cost of funds of the lender bank from which the funds were borrowed plus 1.40% to 1.70%. Certain Euro loans bear interest at variable rates ranging from 1.80% to 2.60%. Other Euro loans bear interest at a rate of Eurobor plus 2.05% to 4.00%. RMB loans bear interest from 105% to 110% of the Chinese rate. Certain loans have maintenance fees of 0.50% on the undrawn amount. Hong Kong dollar loans are secured by deposits in Chinese currency (RMB) which are recorded on the balance sheet in the line temporary investments. The deposits have the same maturity as the loans. At maturity, in May 2012 at the latest, the deposits will be cashed in and converted into Hong Kong dollars and the proceeds will reimburse the related loans. The Company has derivative instruments to ﬁ x the conversion between RMB and the Hong Kong dollar to cover itself against the currency risk. The deposits of $47,587 bear interest at a rate of 2.55%. The loans in Hong Kong dollar mature between February 2012 and May 2012. The loans in RMB mature between October 2011 and March 2012. All other loans will be reimbursed with the new credit facility signed in August 2011 (note 24). 8 Accounts Payable and Accrued Liabilities As at May 31 Trade accounts payable and accrued liabilities Salaries and vacations Commodity taxes 2011 $ 62,925 3,537 1,030 67,492 2010 $ 3,564 1,082 – 4,646 52 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 9 Long-Term Debt and Balance of Purchase Price As at May 31 Unsecured balance of purchase price and holdback to the former shareholders of MCP for an amount of €61,879 (€46,908 as promissory note and €14,971 as holdback), bearing interest at Interest Rate Swap 3 year rate plus 3.00%. The promissory note is repayable in three annual instalments beginning April 2012 (note 6) and the holdback is repayable in April 2014. The balance of purchase price and holdback include an amount of €31,925 payable to one board member and an executive vice president of the Company. Senior secured revolving facility with a Canadian bank for $50 million maturing in April 2013. 1 Unsecured term loan of US$13 million, maturing in January 2017 bearing interest at LIBOR plus 2.3%. The term loan is subject to convenants. Term loan in Euro, bearing interest at 6.23%, secured by a mortgage on assets on a plant in Germany for an amount of €1,534 and maturing in December 2014. Loan from an employee pension plan in Germany, bearing interest at Euribor plus 2% and with no terms of repayment. Subordinated loan of €1 million, maturing in 2017, bearing interest at a rate of 5.50%, not secured. Term loan at authorized amount of £450, reimbursed in August 2011. Term loans bearing interest at ﬂ oating rates as determined on a regular basis with the banks, maturing in 2014 and 2015, secured by assets of the Belgium plant for an amount of €3,814. Term loan at the lender’s ﬂ oating rate less 1.40%, monthly repayments of $41.66, principal only, maturing in June 2018, secured by a land and building in Canada 2011 $ 2010 $ 86,180 27,847 12,197 2,611 2,641 1,393 719 3,763 – – – – – – – – with a carrying amount of $4.5 million. 3,500 3,998 Term loan, non-interest bearing, repayable under certain conditions, maturing in 2023. If the loan has not been repaid in full by the end of 2023, the remaining balance will be forgiven. 1,063 773 Debt in the amount of US$1,541 bearing interest at a rate of the three-month LIBOR plus 3.00%, repayable in two equal instalments of 50% on January 11, 2012 and December 31, 2012. Obligation under a capital lease bearing interest at 12.30%, repayable in monthly instalments of $12.5. Other loans prevailing from joint ventures and others Current portion of long-term debt and balance of purchase price 1,873 1,422 145,209 (18,824) 126,835 – 50 4,821 (623) 4,198 1 This revolving credit facility can be drawn in USD, Canadian dollars or in Euro. The interest rate depends on a Debt/EBITDA ratio and can vary from LIBOR, banker acceptance or Euribor plus 2.75% to 3.50% or US base rate or prime rate plus 1.75% to 2.50%. This revolving line of credit is guaranteed by a pledge on all the assets of certain entities of the group (note 24). 5 N P L U S A N N U A L R E P O R T 2 0 1 1 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 53 9 Long-term debt and balance of purchase price (continued) Principal repayments of the long-term debt over the forthcoming years are as follows: 2012 2013 2014 2015 2016 Thereafter Total principal payments on long-term debt $ 18,824 66,568 48,005 3,804 2,991 5,017 145,209 Term loans contain restrictive covenants that require the Company to maintain ﬁ nancial ratios. As at May 31, 2011 these restrictive covenants were respected. 10 Other Amounts Payable As at May 31 Provision for pension beneﬁ ts Provision for site remediation Other Note 22 2011 $ 10,071 4,320 4,199 18,590 2010 $ – – 553 553 Provision for site remediation The facility acquired from MCP in Tilly, Belgium is currently undergoing corrective measures under a remediation plan as a result of industrial legacy at this site, which has been in industrial use for more than 100 years, and in order to comply with more stringent environmental regulations. The remediation plan has been approved by the local authorities and estimated resulting costs have been properly accounted for. 11 Share Capital a) Authorized An unlimited number of common shares, participating, with no par value, entitling the holder to one vote per share. An unlimited number of preferred shares may be issued in one or more series with speciﬁ c terms, privileges and restrictions to be determined for each class by the Board of Directors. b) Issued and fully paid Common shares Outstanding as at May 31, 2009 Shares issued under stock option plan Outstanding as at May 31, 2010 Shares issued for the acquisition of MCP Shares issued for cash Shares issued under stock option plan Outstanding as at May 31, 2011 Number $ 45,520,225 107,225 45,627,450 11,377,797 13,590,000 297,380 70,892,627 Amount 81,882 508 82,390 78,621 125,028 1,425 287,464 On April 11, 2011, the Company issued 13,590,000 common shares at a price of $9.20 per share for gross proceeds of $125,028 pursuant to a bought-deal agreement. 54 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 11 Share capital (continued) c) Stock option plan On April 11, 2011, the Company adopted a new stock option plan (the ”Plan”) replacing the previous plan (the “Old Plan”) in place since October 2007 with the same features as the old plan, with the exception of a maximum number of options granted which cannot exceed 5 million options. No options were granted under the new plan as at May 31, 2011. The aggregate number of shares which could be issued upon the exercise of options granted under the Old Plan could not exceed 10% of the issued shares of the Company at the time of granting the options. Options granted under the Old Plan may be exercised during a period not exceeding ten years from the date of the grant. The stock options outstanding as at May 31, 2011 may be exercised during a period not exceeding six years from their date of grant. Options vest at a rate of 25% (100% for directors) per year, beginning one year following the grant date of the options. The following table presents the weighted average assumptions used to establish the fair value of the options granted during the year, using the Black-Scholes option pricing model: Expected stock price volatility Dividend Risk-free interest rate Expected option life Fair value — weighted average of options issued For the years ended 2011 2011 40% None 2.325% 4 years 1.70 2010 40% None 2.325% 4 years 1.89 2010 Number of options Weighted average exercise price Number of options Weighted average exercise price Beginning of period Granted Cancelled Exercised End of period 1,596,615 262,308 (177,518) (297,380) 1,384,025 The outstanding stock options as at May 31, 2011 are as follows: Maturity December 2013 October 2014 January 2015 to October 2016 June and August 2014 $ 4.24 4.95 5.12 3.07 4.52 Low $ 3.00 3.81 4.87 9.13 1,439,055 436,500 (171,715) (107,225) 1,596,615 $ 3.78 5.38 4.00 3.09 4.24 Exercise Price Number of options High $ 3.00 3.81 6.16 10.32 478,475 2,500 888,050 15,000 1,384,025 As at May 31, 2011, 628,765 stock options were exercisable, at a weighted average exercise price of $4.16. Stock-based compensation cost is allocated as follows: Years ended May 31 Cost of goods sold Selling and administrative Research and development 2011 $ 185 577 54 816 2010 $ 251 352 148 751 5 N P L U S A N N U A L R E P O R T 2 0 1 1 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 55 11 Share capital (continued) Restricted stock unit incentive plan On June 7, 2010, the Company adopted a Restricted Share Unit (“RSU”) Plan to complement the stock option plan. The RSU Plan enables the Company to award eligible participants phantom share units that vest after a three-year period. RSU is settled in cash and is recorded as liabilities. The measurement of the compensation expense and corresponding liability for these awards is based on the fair value of the award, and is recorded as a charge to selling, general and administrative expenses (“SG&A”) over the vesting period of the award. At the end of each ﬁ nancial period, changes in the Company’s payment obligation due to changes in the market value of the common shares on the TSX are recorded as a charge to SG&A expenses. During the year ended May 31, 2011, the Company granted 33,129 RSU and recorded a provision of $92. Restricted stock unit incentive plan for foreign employees On June 7, 2010, the Company adopted a Restricted Share Unit for Foreign Employees (“RSUFE”) Plan. RSUFE granted under the RSUFE Plan may be exercised during a period not exceeding ten years from the date of the grant. The RSUFE outstanding as at May 31, 2011 may be exercised during a period not exceeding six years from their date of grant. RSUFE vest at a rate of 25% per year, beginning one year following the grant date of the award. During the year ended May 31, 2011, the Company granted 8,549 RSUFE and recorded a provision of $15. 12 Income Taxes The following table presents the reconciliation between the income tax expense calculated using statutory Canadian tax rates to the effective income tax expense in the Company’s consolidated statements of income. Years ended May 31 Income tax expense at statutory tax rates Increase (decrease) resulting from: Losses of subsidiaries for which no tax beneﬁ t is recognized Non-deductible expenses Beneﬁ ts araising from a ﬁ nancing structure Effect of difference of foreign tax rates compared to Canadian tax rates Others $ 8,833 40 206 (260) (42) 81 8,858 2011 29.3% 0.1% 0.7% −0.9% −0.1% 0.3% 29.4% $ 6,602 – 112 (260) (27) 85 6,512 2010 30.5% 0.0% 0.5% −1.2% −0.1% −0.4% 30.1% 56 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 12 Income taxes (continued) Signiﬁ cant components of the Company’s future income tax assets and liabilities were as follows: As at May 31 Future income tax assets Inventory Property, plant and equipment Share issue expenses and professional fees Others Future income tax liabilities Inventory Property, plant and equipment Intangible assets Unrealized foreign exchange gain Others Net future income tax liabilities Future income taxes are classiﬁ ed as follows: As at May 31 Current future income tax assets Long-term future income tax assets Current future income tax liabilities Long-term future income tax liabilities Net future income taxes 2011 $ 2,314 2,674 1,906 13 6,907 (197) (3,864) (19,300) – (367) (23,728) (16,821) 2011 $ 1,856 5,051 (526) (23,202) (16,821) 2010 $ 432 995 1,035 – 2,462 – (1,972) (359) (35) (413) (2,779) (317) 2010 $ 151 2,311 (445) (2,334) (317) Loss carry forward The Company has non-capital losses of approximately $13.5 million available to reduce future taxable income all of which were incurred in the U.S. The future tax beneﬁ t of $5.4 million of these losses has not been recognized. These non-capital losses will start to expire in 2029. 13 Cost of Goods Sold The following table presents the inventories recognized as cost of sales: Years ended May 31 Cost of goods sold Amortization of property, plant and equipment related to the transformation of inventories 2011 $ 126,503 3,171 129,674 2010 $ 38,911 2,365 41,276 5 N P L U S A N N U A L R E P O R T 2 0 1 1 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 57 14 Financial Instruments Fair value All ﬁ nancial assets classiﬁ ed as loans and receivables, as well as ﬁ nancial liabilities classiﬁ ed as other liabilities, are initially measured at their fair values and subsequently at their amortized cost using the effective interest rate method. All ﬁ nancial assets and liabilities classiﬁ ed as held for trading are measured at their fair values. Gains and losses related to periodic revaluations are recorded in net earnings. The Company has determined that the carrying value of its short-term ﬁ nancial assets and liabilities, including cash and cash equivalents, temporary investments, accounts receivable, bank indebtedness, as well as accounts payable and accrued liabilities, approximates their carrying value due to the short-term maturities of these instruments. As at May 31, 2011, the fair value of the long-term debt and balance of purchase price payable is approximately $145,209 ($4,821 as at May 31, 2010) and is calculated using the present value of future cash ﬂ ows at year-end rate for similar debt with same terms and maturities. The fair value of ﬁ nancial assets and liabilities by level of hierarchy was as follows as at May 31, 2011: Cash and cash equivalents Derivative ﬁ nancial instruments 1 Level 1 $ 27,916 – Level 2 Level 3 $ – (120) $ – – Total ﬁ nancial assets and liabilities $ 27,916 (120) 1 Derivative ﬁ nancial instruments consist of forward exchange contracts and interest rate swaps. Financial risk management In the normal course of its operations, the Company is exposed to credit risk, liquidity and funding risk, interest rate risk as well as currency risk. Management analyses these risks and implements strategies in order to minimize their impact on the Company’s performance. Credit risk and signifi cant customer The Company has policies in place with regards to the management of its cash and cash equivalents and temporary investments. Its investment policy requires funds to be entirely guaranteed by the ﬁ nancial institution and to be allocated amongst numerous recognized ﬁ nancial institutions. The Company is exposed to credit risk associated with its accounts receivable, arising from its normal commercial activities. The Company considers its credit risk to be limited for the following reasons: a) The Canadian Company concluded an agreement with Export Development Canada under which it will assume a portion of the risk of losses for certain export clients in case of non-payment, for an annual amount up to a maximum of $1,500; b) The Company does not require additional guarantees or other securities from its clients in regards to its accounts receivable. However, credit is granted only to clients after a credit analysis is performed. The Company conducts ongoing evaluations of its clients and establishes provisions for doubtful accounts should an account be considered non recoverable; c) One customer represented approximately 29% (74% in 2010) of the sales in the ﬁ scal year 2011 and 4.6% of accounts receivable as of May 31, 2011 (33% in 2010). 58 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 14 Financial instruments (continued) Liquidity and fi nancing risk Liquidity risk is the risk that the Company is not able to meet its ﬁ nancial obligations as they fall due or can do so only at excessive cost. One of management’s primary goals is to maintain an optimal level of liquidity through the active management of its assets and liabilities as well as the cash ﬂ ows. As at May 31, 2011, the Company’s cash and cash equivalents amounted to $27,916 ($65,992 as at May 31, 2010). The Company also has credit availability of approximately $191,604 (Note 7). Given the Company’s available liquid resources, credit availability and the new credit facility as compared to the timing of the payments of liabilities, management assesses the Company’s liquidity risk to be moderate. The contractual maturities of ﬁ nancial liabilities as May 31, 2011 are as follows: Accounts payable and accrued liabilities Bank indebtedness and short-term debt Derivative ﬁ nancial instruments Balance of purchase price and holdback Long-term debt Carrying Amount Contractual Cash Flows 0 to 6 months 6 to 12 months 12 to 24 months After 24 months $ $ $ 67,492 67,492 67,492 $ – 170,675 171,166 122,126 49,040 441 441 441 – $ – – – $ – – – 86,180 59,030 96,604 71,855 2,495 2,898 383,818 407,558 195,452 15,148 4,900 69,088 33,375 40,199 73,574 45,586 23,858 69,444 Contractual cash ﬂ ows include interest charges. Interest rate risk The Company’s debt mainly bears interest at ﬂ oating rates (Notes 7 and 9). The Company is therefore exposed to interest rate risk variations. The Company entered into interest rate swaps in order to reduce the impact of interest rate ﬂ uctuations. As at May 31, 2011, the Company has USD$27 million, €8.5 million and HK$390,000 of nominal value of interest rate swaps. The fair value of these interest rate swaps was ($153) as at May 31, 2011. The interest rate swaps mature between January 2012 and January 2018. The company has $315 million of ﬁ nancing on which approximately $86 million are covered by interest rate swaps and $8 million at ﬁ xed rate. A 1% change in the interest rate would have an effect of $2.2 million on the consolidated earnings before income tax. Interest revenue on cash and cash equivalents are at variable rates. For each $10,000 in cash and cash equivalents, a ﬂ uctuation of interest rate of 0.50% would annually impact interest income by $50. Therefore, management believes that the impact on net earnings would not be signiﬁ cant on its operating results. Exchange risk The Company is exposed to risk from changes in foreign currency rates on sales around the world for its products manufactured in its different plants. The Company mitigates this risk principally through forward contracts and by the natural hedges provided by purchasing raw materials in US dollar. The Company designated as a cash ﬂ ow hedge a portion of its cash denominated in US dollar for future purchases of raw materials. The designated US demoninated dollar cash is accounted for at fair value in the Company’s balance sheet. Foreign exchange gains or losses arising on the US cash and cash equivalents designated are recorded in other comprehensive income. When raw material is purchased, which is anticipated to be recorded in the next months, the foreign exchange gain or loss is accounted for as part of raw materials in the inventory. No amount of cash and cash equivalents was designated under this strategy as at May 31, 2011. Foreign exchange gains related to this cash and cash equivalents included in the other comprehensive income amounted to nil as at May 31, 2011. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 59 14 Financial instruments (continued) The Company had the following currency exposures on May 31, 2011: Financial assets and liabilities 1: Cash and cash equivalents Accounts receivable Receivable from wholly-owned subsidiaries Accounts payable and accrued liabilities Total exposure from above USD $ 8,808 41,925 972 (51,808) (103) EUR € 244 856 1,917 (88) 2,929 GBP £ 2 25 – (933) (906) RMB ¥ 314 – – – 314 HKD $ 2,257 – – 390 2,647 1 Amounts above do not include the subsidiaries’ account balances of their related functional currency. Impact of exchange rate ﬂ uctuations with regards to gross amount at risk: Exchange rates as at May 31, 2011 Impact on net earnings based on a ﬂ uctuation $CA/$US 0.9688 €/$US 1.4385 £/$US 1.6439 ¥/$US 0.1495 $US/$HK 0.1286 of ﬁ ve cents of the exposes currencies (3) 146 (51) 2 12 US dollar exposure is against the euro and the Chinese renminbi. Euro exposure is against the US dollar, sterling pound and the Chinese renminbi. Sterling pound exposure is against the US dollar and the euro. The Chinese renminbi exposure is against the US dollar and the euro. Hong Kong dollar exposure is against the US dollar. 15 Foreign exchange (gain) loss Years ended May 31 Foreign exchange (gain) loss related to operations Realized foreign exchange gain on derivative ﬁ nancial instruments Unrealized foreign exchange gain on derivative ﬁ nancial instruments A) Included in the consolidated statement of income Years ended May 31 Realized foreign exchange loss (gain) on designated derivative ﬁ nancial instruments Realized foreign exchange loss (gain) on designated cash Realized foreign exchange gain on designated cash transferred to inventories Unrealized foreign exchange loss (gain) on derivative ﬁ nancial instruments Income tax on the above B) Included in the consolidated statement of comprehensive income 2011 $ (408) (6) (593) (1,007) 2011 $ 491 2,214 (1,005) 116 1,816 (561) 1,255 2010 $ 194 (132) (1,246) (1,184) 2010 $ (491) (1,209) – (116) (1,816) 561 (1,255) 60 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 16 Financial Expenses Years ended May 31 Interest and bank fees Interest on long-term debt Amortization of other assets 17 Capital Management The Company’s objectives when managing its capital are: 2011 $ 2,022 426 67 2,515 2010 $ 185 – – 185 strategic opportunities; • To optimize its capital structure in order to reduce costs and strengthen its ability to seize • To ensure that operations remain competitive and stable and to sustain future development of the Company, including research and development activities, expansion of existing facilities or construction of new facilities and potential acquisitions of complementary businesses or products and; • To provide the Company’s shareholders an appropriate return on their investment. The Company deﬁ nes its capital as its shareholder’s equity. The capital of the Company amounted to $348,918 as at May 31, 2011 and $125,678 as at May 31, 2010. The increase reﬂ ects the net earnings as well as shares issued through a bought-deal and for the acquisition of MCP. The Company manages its capital structure based on the relationship between the net debt and capital. Net debt represents the sum of short-term and long-term debt, for both current and long-term portions, net of cash and cash equivalents and temporary investments. 18 Commitments and Contingencies Commitments The Company rents certain premises and equipment under the terms of operating leases. The maturity of the leases on the premises range from May 2011 to May 2017 with options to extend, and June 2013 on the equipment. The rental expenses related to operating leases for the year ended May 31, 2011 were $1,145. Future minimum payments excluding operating costs for the next years are as follows: 2012 2013 2014 2015 2016 and thereafter $ 1,175 1,136 501 325 649 3,786 Contingencies In the normal course of operations, the Company is exposed to events that could give rise to contingent liabilities or assets. As at the date of issue of the ﬁ nancial statements, the Company was not aware of any signiﬁ cant events that would have a material effect on its ﬁ nancial statements. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 61 19 Earnings Per Share Years ended May 31 Numerator Net earnings from continuing operations Net earnings Denominator 2011 $ 21,641 21,641 2010 $ 15,143 14,647 Weighted average number of common shares outstanding 49,205,470 45,578,992 Effect of dilutive securities Stock options Earnings per share from continuing operations Basic Diluted Earnings per share Basic Diluted 467,617 254,299 49,673,087 45,833,291 0.44 0.44 0.44 0.44 0.33 0.33 0.32 0.32 20 Segment Information The Company has two reportable business segments, namely Electronic Materials and Eco-Friendly Materials. Corresponding operations and activities are managed accordingly by the Company’s key decision makers. Segmented operating and ﬁ nancial information, labeled key performance indicators, are available and used to manage these business segments, review performance and allocate resources. Financial performance of any given segment is evaluated primarily in terms of revenues and segment operating proﬁ t which are reconciled to consolidated numbers by taking into account corporate income and expenses. The Electronic Materials segment is headed by a Vice-President which oversees locally managed operations in North America, Europe and Asia. The Electronic Materials segment manufactures and sells reﬁ ned metals, compounds and alloys which are primarily used in a number of electronic applications. Typical end-markets include photovoltaics (solar energy), medical imaging, light emitting diodes (LED), displays, high-frequency electronics and thermoelectrics. Main products are associated with the following metals: cadmium, gallium, germanium, indium and tellurium. These are sold either in elemental or alloyed form as well as in the form of chemicals and compounds. Revenues and earnings associated with recycling services and activities provided to customers of the Electronic Materials segment are also included in the Electronic Materials segment and management of such activities is also the responsibility of the Electronic Materials Vice-President. The Eco-Friendly Materials segment is so labeled because it is mainly associated with bismuth, one of the very few heavy metals known for having no detrimental effect on either human health or in the environment. As a result bismuth is being increasingly used in a number of applications as a replacement for more harmful metals and chemicals. The Eco-Friendly Materials segment is headed by a Vice-President which oversees locally managed operations in Europe and China. The Eco-Friendly Materials segment manufactures and sells reﬁ ned bismuth and bismuth chemicals, low melting point alloys as well as reﬁ ned selenium and selenium chemicals. These are used in the pharmaceutical and animal-feed industry as well as in a number of industrial applications including coatings, pigments, metallurgical alloys and electronics. Corporate expenses associated with the head ofﬁ ce and unallocated selling, general and administrative expenses together with ﬁ nancing costs, gains and/or losses on foreign exchange and the amortization of intangible assets have been regrouped under the heading Corporate. The head ofﬁ ce is also responsible for managing businesses which are still in the development stage and corresponding costs are netted of any revenues. All inter-segment transactions between the Electronic Materials and Eco-Friendly Materials have been eliminated on consolidation. 62 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 20 Segment information (continued) A comparative breakdown of business segment information for the year ended May 31, 2011 and 2010 is as follows: Year ended May 31, 2011 Revenues Operating proﬁ t Foreign exchange gain Financial Interest income Amortization Earnings before non-controling interest and income taxes Property plant and equipment and intangible assets expenditures Year ended May 31, 2010 Revenues Operating proﬁ t Foreign exchange gain Financial Interest income Amortization Earnings from continuing operations before income taxes Property plant and equipment and intangible assets expenditures As at May 31, 2011 Total assets, excluding goodwill and intangibles Goodwill As at May 31, 2010 Total assets, excluding goodwill and intangibles Goodwill Geographical information Years ended May 31 Electronic Materials Eco-Friendly Materials Corporate Total 121,453 34,925 – – – 3,562 N/A 57,375 4,772 – – – 412 N/A – (3,258) (1,007) 2,515 (604) 1,394 178,828 36,439 (1,007) 2,515 (604) 5,368 N/A 30,167 17,985 3,114 1,036 20,063 70,763 24,336 – – – 2,545 N/A 4,588 – – – – – N/A – – (1,411) (1,184) 185 (464) 188 N/A 249 70,763 22,925 (1,184) 185 (464) 2,733 21,654 4,837 Electronic Materials Eco-Friendly Materials Corporate Total 259,358 104,571 132,368 4,382 331,104 11,656 – – 5,084 – – – 2011 $ 62,559 61,620 50,428 1,561 2,660 178,828 595,546 116,203 132,368 4,382 2010 $ 3,654 47,393 18,969 669 78 70,763 Revenues with customers located in the following geographical areas: Asia United States Europe Canada Other countries Revenues are geographically allocated based on the customer’s country of origin with whom the agreement has been signed. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 63 20 Segment information (continued) As at May 31 Property, plant and equipment, intangible assets and goodwill in the following countries: 1 Canada Belgium Hong Kong Germany China United Kingdom Unites States Others 2011 $ 59,666 12,394 93 16,726 5,839 5,003 13,218 4,690 2010 $ 22,695 – – 9,895 – – – – 117,629 32,590 1 Excluding the intangible assets and goodwill of MCP as the allocation purchase price is not completed. 21 Discontinued Operations On September 1, 2009, the Company had established a joint venture called ZT Plus with BSST, a subsidiary of Amerigon Incorporated. The Company had a 50% ownership interest in ZT Plus. The contribution of each partner in cash or in kind was expected to be US$5,500. ZT Plus was accounted for using the proportionate consolidation method. On March 26, 2010, the commercial progress of ZT Plus was slower to develop than anticipated and the Company sold its interest for an amount of US$1,600 ($1,632). This sale was classiﬁ ed as discontinued operation. Year ended May 31 Loss of discontinued operations Revenues Research and development expenses Loss before income tax Recovery of income taxes Net loss Loss on sale of a discontinued operation net of tax of $134 Net loss from a discontinued operation 2010 $ – 887 887 (545) 342 154 496 ZT Plus had $10,964 of assets and $105 of cash and cash equivalents at the time that the Company sold its participation, 50% were part of the Company’s consolidated assets. 64 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 5 N P L U S A N N U A L R E P O R T 2 0 1 1 22 Pension Benefi ts Defi ned benefi t pension plan The Company has one deﬁ ned beneﬁ t pension plan that covers certain employees of a German subsidiary. This plan loaned €1,896 (approximately $2,640) to the German subsidiary where the employees are located. The plan is updated each year for the calculation of the deﬁ ned beneﬁ t obligations and the fair value of the assets. The Company has a liability of €6,586 (approximately $9,172) relating to the plan. As at May 31, 2011, the plan assets totalled €2,644 (approximately $3,862) and the Company’s expense relating to this plan totalled €70 (approximately $98) for the year ended May 31, 2011. The deﬁ ned beneﬁ t obligation of the plan totalled €6,636 (approximately $9,241) as at May 31, 2011. 23 Comparative Figures Certain comparative ﬁ gures have been reclassiﬁ ed to conform to the presentation adopted in the current year. 24 Subsequent Events In August 2011, the Company signed a new $250 million senior secured multi-currency revolving credit facility to replace its existing $50 million two-year senior secured revolving facility with National Bank of Canada. The new credit facility will be used to reﬁ nance existing indebtedness and for other corporate purposes, including capital expenditures and growth opportunities. The new credit facility has a four-year term and bears interest at either prime rate, U.S. base rate, LIBOR or EURO LIBOR plus a margin based on 5N Plus’ senior consolidated debt to EBITDA ratio. 5N Plus also has a US$35 million credit facilities in Asia. At any time, 5N Plus has the option to request that the new credit facilities be expanded to $350 million through the exercise of an additional $100 million accordion feature, subject to review and approval by the lenders. In connection with the new credit facility, National Bank of Canada and HSBC Bank acted as colead arrangers and joint book runners, and ﬁ ve other banks as lenders. On August 24, 2011, we announced the approval from our Board of Directors to change our ﬁ nancial year-end from May 31 to December 31. This change will align the ﬁ nancial year ends of 5N Plus and MCP, simplifying internal processes as all business units will use the same reporting periods. The ﬁ rst quarter ending September 30, 2011 will include four months of results and the annual period ending December 31, 2011 will contain seven months of 5N Plus’ results. 5 N P L U S A N N U A L R E P O R T 2 0 1 1 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 65 Board of Directors John H. Davis President of the Compensation Committee Jacques L’Ecuyer Frank Fache Member of the President and Executive Vice President Audit Committee Chief Executive Ofﬁ cer Strategic Supply Pierre Shoiry Dennis Wood Jean-Marie Bourassa Member of the Compensation Committee Chairman of the Board Member of the Audit and Compensation Committees President of the Audit Committee 66 5 N P L U S A N N U A L R E P O R T 2 0 1 1 Management Team Sebastian Voigt Vice President Business Unit Jacques L’Ecuyer Laurent Raskin President and Executive Vice President Frank Fache Executive Vice President Eco-Friendly Materials Chief Executive Ofﬁ cer Business Development Strategic Supply Nicholas Audet Vice President Business Unit Electronic Materials David Langlois Chief Financial Ofﬁ cer Jean Bernier Vice President Marc Binet Vice President Human Resources Secondary Materials Marc Suys Vice President Corporate Affairs Sean Fuller Metals Manager Dominic Boyle Metals Manager 5 N P L U S A N N U A L R E P O R T 2 0 1 1 67 Corporate Information Stock Exchange 5N Plus is listed on the Toronto Stock Exchange, under the symbol VNP. Transfer Agent and Registrar Computershare Investor Services Inc. Auditors PricewaterhouseCoopers LLP Head Ofﬁ ce 4385 Garand Street Montreal, Québec H4R 2B4 Annual Meeting The annual shareholders meeting will be held on Thursday, October 6, 2011 at 2:00 p.m. Club Saint-James 1145 Union Avenue Montreal, Québec For more information, please contact: INVESTOR RELATIONS 5N Plus Inc. 4385 Garand Street Montreal, Québec H4R 2B4 T: 514-856-0644 F: 514-856-9611 invest@5nplus.com Si vous souhaitez obtenir une copie en français de ce rapport annuel, communiquez avec : Relations avec les investisseurs 5N Plus inc. 4385, rue Garand Montréal (Québec) H4R 2B4 Aussi disponible à l’adresse : www.5nplus.com 68 5 N P L U S A N N U A L R E P O R T 2 0 1 1 100% Printed in Canada design: www.ardoise.com 5N Plus Inc. 4385 Garand Street Montreal, Québec H4R 2B4 Canada www.5nplus.com

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