Filed Pursuant to Rule 424(b)(3)
Registration No. 333-201338

 

PROSPECTUS

33,927,948 Shares

 

MPM Holdings Inc.

Common Stock

 

 

This prospectus relates to the offer and resale of up to an aggregate of 33,927,948 shares of common stock of MPM Holdings Inc. by the selling stockholders identified in this prospectus. We are not selling any shares under this prospectus. We will not receive any proceeds from the sale of shares being offered by the selling stockholders.

The selling stockholders may offer shares of our common stock from time to time, if and to the extent as they may determine, through public or private transactions or through other means described under “Plan of Distribution” at prevailing market prices or at privately negotiated prices. The selling stockholders may sell shares through agents they select or through underwriters and dealers they select. The selling stockholders also may sell shares directly to investors. If the selling stockholders use agents, underwriters or dealers to sell the shares, we will name such agents, underwriters or dealers and describe any applicable commissions or discounts in a supplement to this prospectus if required.

Our common stock is quoted on the OTCQX Marketplace (the “OTCQX”) under the symbol “MPMQ”. On May 8, 2018, the closing price of our common stock was $30.75 per share.

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 16 of this prospectus for a discussion of certain risks that you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

Prospectus dated May 9, 2018.

TABLE OF CONTENTS

 

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Presentation of Financial Information			ii
Market and Industry Data and Forecasts			ii
Trademarks			ii
Prospectus Summary			1
Risk Factors			16
Cautionary Statements Concerning Forward Looking Statements			37
Use of Proceeds			39
Market Prices and Dividend Policy			40
Offering Price			41
Capitalization			42
Selected Historical Financial Information			43
Management’s Discussion and Analysis of Financial Condition and Results of Operations			45
Business			67
Management			82
Compensation Discussion and Analysis			88
Principal and Selling Stockholders			103
Certain Relationships and Related Party Transactions			107
Description of Indebtedness			111
Description of Capital Stock			116
Plan of Distribution			119
Certain U.S. Federal Income Tax Considerations			121
Legal Matters			126
Experts			126
Where You Can Find Additional Information			126
Index to Consolidated Financial Statements			F-1

You should rely only on the information contained in this prospectus or to which we have referred you. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: We have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.

 

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PRESENTATION OF FINANCIAL INFORMATION

In the third quarter of 2017, we reorganized our segment structure and bifurcated our Silicones segment into Performance Additives and Formulated and Basic Silicones to better reflect our specialty chemical portfolio and related performance. The reorganization included a change in Momentive’s operating segments from two to four segments. As a result, this prospectus contains disclosure regarding four segments (Performance Additives, Formulated and Basic Silicones, Quartz Technologies and Corporate) and our segment profitability measure, Segment EBITDA. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Realignment.”

Prior to October 24, 2014, the date we emerged from bankruptcy (the “Emergence Date”), MPM Holdings Inc. (“Momentive”) had not conducted any business operations. Accordingly, unless otherwise noted or suggested by context, all financial information and data and accompanying financial statements and corresponding notes, as of and prior to the Emergence Date, as contained in this prospectus, reflect the actual historical consolidated results of operations and financial condition of Momentive Performance Materials Inc. (“MPM”) for the periods presented and do not give effect to our plan of reorganization (the “Plan of Reorganization”) or any of the transactions contemplated thereby or the adoption of “fresh-start” accounting. Such financial information may not be representative of our performance or financial condition after the Emergence Date.

MARKET AND INDUSTRY DATA AND FORECASTS

This prospectus includes estimates of market share and industry data and forecasts that we obtained from internal company sources and/or industry publications and surveys. We have not independently verified market and industry data provided by third-party sources, nor have we ascertained the underlying economic assumptions relied upon therein. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. Similarly, while we believe our internal estimates with respect to our industry are reliable, our estimates have not been verified by any independent sources. While we are not aware of any misstatements regarding any industry data presented in this prospectus, our estimates, in particular as they relate to market share and our general expectations, involve risks and uncertainties and are subject to change based on various factors, including those discussed under the section entitled “Risk Factors.” Unless otherwise noted, all information regarding our market share is based on the latest market data currently available to us, and all market share data is based on net sales in the applicable market. Discussions and descriptions of products, product lines, segments, business units, sectors, markets, market shares and similar terms are not intended to constitute market or product definitions for purposes of antitrust, antidumping, trade regulations or other regulatory purposes.

TRADEMARKS

We have proprietary rights to, or, for certain products, are exclusively licensed to, use a number of registered and unregistered trademarks that we believe are important to our business, including, without limitation, Momentive. We attempt to obtain registration of our key trademarks whenever possible or practicable and pursue any infringement of those trademarks. All other brand names, products names or trademarks, including GE, which is used pursuant to our license with GE, belong to their respective holders. Solely for convenience, the trademarks, service marks and tradenames referred to in this prospectus are without the “^®” and “TM” symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and tradenames.

 

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RISK FACTORS

You should carefully consider the risk factors set forth below, as well as the other information contained in this prospectus. The risks described below are not the only risks facing us. Any of the following risks could materially and adversely affect our business, financial condition or operating results. In such a case, you may lose all or a part of your original investment.

Risks Related to Our Business

If global economic conditions weaken or deteriorate, it will negatively impact our business, results of operations and financial condition.

Global economic and financial market conditions, including severe market disruptions and the potential for a significant and prolonged global economic downturn, have impacted or could continue to impact our business operations in a number of ways including, but not limited to, the following:

 

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reduced demand in key customer end-markets, such as automotive, which accounted for approximately 18% of our revenues in 2017, consumer goods, personal care, construction, electronics, oil and gas and healthcare;

 

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payment delays by customers and reduced demand for our products caused by customer insolvencies and/or the inability of customers to obtain adequate financing to maintain operations. This situation could cause customers to terminate existing purchase orders and reduce the volume of products they purchase from us and further impact our customers’ ability to pay our receivables, requiring us to assume additional credit risk related to these receivables or limit our ability to collect receivables from that customer;

 

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insolvency of suppliers or the failure of suppliers to meet their commitments resulting in product delays;

 

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more onerous credit and commercial terms from our suppliers such as shortening the required payment period for outstanding accounts receivable or reducing or eliminating the amount of trade credit available to us; and

 

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potential delays in accessing our ABL Facility or obtaining new credit facilities on terms we deem commercially reasonable or at all, and the potential inability of one or more of the financial institutions included in our ABL Facility to fulfill their funding obligations. Should a bank in our ABL Facility be unable to fund a future draw request, we could find it difficult to replace that bank in the facility.

Global economic conditions may weaken or deteriorate. In such event, we may become subject to the negative effects described above and our liquidity, as well as our ability to maintain compliance with the financial maintenance covenants, if in effect, in the ABL Facility could be significantly affected. See “Risks Related to Our Indebtedness––We may be unable to generate sufficient cash flows from operations to meet our consolidated debt service payments.” In April 2014, we sought protection under Chapter 11 of the United States Bankruptcy Code following our inability to restructure or refinance our significant indebtedness in light of the confluence of several negative economic and other factors, including the flat sales volumes, steep inflation in the cost of materials and significant price pressure stemming from an increase in overall global supply. A recurrence of such economic factors could have a material adverse effect on our business, results of operations and financial condition and may jeopardize our ability to service our debt obligations.

Weakening economic conditions may also cause us to defer needed capital expenditures, reduce research and development or other spending, defer costs to achieve productivity and synergy programs, sell assets or incur additional borrowings which may not be available or may only be available on terms significantly less advantageous than our current credit terms and could result in a wide-ranging and prolonged impact on general business conditions, thereby negatively impacting our business, results of operations and financial condition. In

 

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addition, if the global economic environment deteriorates or remains slow for an extended period of time, the fair value of our reporting units could be more adversely affected than we estimated in our analysis of reporting unit fair values at the Emergence Date of October 24, 2014. This could result in goodwill or other asset impairments, which could negatively impact our business, results of operations and financial condition.

Fluctuations in direct or indirect raw material costs could have an adverse impact on our business.

The prices of our direct and indirect raw materials have been, and we expect them to continue to be, volatile. If the cost of direct or indirect raw materials increases significantly and we are unable to offset the increased costs with higher selling prices, our profitability will decline. Increases in prices for our products could also hurt our ability to remain both competitive and profitable in the markets in which we compete.

The terms of some of our materials contracts limit our ability to purchase raw materials at favorable spot market prices. In addition, some of our customer contracts have fixed prices for a certain term, and as a result, we may not be able to pass on raw material price increases to our customers immediately, if at all. Due to differences in timing of the pricing trigger points between our sales and purchase contracts, there is often a “lead-lag” impact that can negatively impact our margins in the short term in periods of rising raw material prices and positively impact them in the short term in periods of falling raw material prices. Future raw material prices and transportation costs may be impacted by new laws or regulations, suppliers’ allocations to other purchasers, changes in our supplier manufacturing processes as some of our products are byproducts of these processes, interruptions in production by suppliers, natural disasters, volatility in the price of crude oil and related petrochemical products and changes in exchange rates.

An inadequate supply of direct or indirect raw materials and intermediate products could have a material adverse effect on our business.

Our manufacturing operations require adequate supplies of raw materials and intermediate products on a timely basis. The loss of a key source or a delay in shipments could have a material adverse effect on our business. Raw material availability may be subject to curtailment or change due to, among other things:

 

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new or existing laws or regulations;

 

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suppliers’ allocations to other purchasers;

 

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interruptions in production by suppliers; and

 

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natural disasters.

Many of our raw materials and intermediate products are available in the quantities we require from a limited number of suppliers.

For example, our Formulated and Basic Silicones business is highly dependent upon access to silicon metal, a key raw material, and siloxane, an intermediate product that is derived from silicon metal. While silicon is itself abundant, silicon metal is produced through a manufacturing process and, in certain geographic areas, is currently available through a limited number of suppliers. In North America, there is only one significant qualified silicon metal supplier, which in December 2015 completed a business combination with a significant European based silicon metal supplier. In addition, silicon metal producers face a number of regulations that affect the supply or price of silicon metal in some or all of the jurisdictions in which we operate. For example, significant anti-dumping duties of up to 139.5% imposed by the U.S. Department of Commerce (the “DOC”) and the International Trade Commission (the “ITC”) against producers of silicon metal in China and Russia effectively block the sale by all or most producers in these jurisdictions to U.S. purchasers, which restricts the supply of silicon metal and results in increased prices.

On February 27, 2018, the DOC issued its affirmative final determinations in the anti-dumping duty investigation on silicon metal, finding that imports of silicon metal from Australia, Brazil and Norway were sold at a price less than fair value. The DOC assigned dumping rates on producers/exporters of silicon metal in

 

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Australia (41.73% to 51.28%), Brazil (68.97% to 134.92%) and Norway (3.22%), and instructed U.S. Customs and Border Protection to collect corresponding cash deposits from importers of silicon metal from those countries. On February 27, 2018, the DOC also issued its affirmative determinations in the countervailing duties investigation on silicon metal from Australia, Brazil and Kazakhstan, assigning subsidy rates on producers/exporters of silicon metal in Australia (14.78%), Brazil (2.44% to 52.51%) and Kazakhstan (100%). On March 23, 2018, the ITC announced its negative final determination in the anti-dumping and countervailing duty investigations, finding that there is no material injury or threat of material injury to the domestic industry by reason of the dumped or subsidized imports from Australia, Brazil, Kazakhstan and Norway. As a result of the ITC’s negative determination, the anti-dumping and countervailing duty investigations on imports of silicon metal from Australia, Brazil, Norway and Kazakhstan will be terminated. The ITC’s negative determination is subject to appeal to be filed within 30 days of the publication of the ITC’s determination in the U.S. Federal Register. We currently purchase silicon metal under multi-year, one-year or short-term contracts and in the spot market. We typically purchase silicon metal under formal contracts for our United States’ operations from suppliers in the United States and for our Asia Pacific operations in the spot market from suppliers in Asia Pacific. Some of our formal contracts have pricing mechanisms tied to global silicon metal indices. Imposition of antidumping or countervailing duties in connection with the foregoing investigations could lead to higher duties on such imports.

Our Performance Additives and Formulated and Basic Silicones businesses also rely heavily on siloxane and related intermediate products. Our manufacturing capacity at our internal sites and at our joint venture in China is sufficient to meet the substantial majority of our current siloxane requirements. We also source a portion of our requirements from Asia Silicones Monomer Limited (“ASM”) under an existing long-term purchase and sale agreement. In addition, from time to time we enter into supply agreements with other third parties to take advantage of favorable pricing and minimize our cost. There are also a limited number of third-party siloxane providers, and the supply of siloxane may be limited from time to time. In addition, past regulation of siloxane producers has adversely affected the supply of siloxane. For example, from May 2009 until May 2014, antidumping duties were imposed by China on siloxane from Thailand and South Korea.

Should any of our key suppliers fail to deliver these or other raw materials or intermediate products to us or no longer supply us, we may be unable to purchase these materials in necessary quantities, which could adversely affect our volumes, or may not be able to purchase them at prices that would allow us to remain competitive. During the past several years, certain of our suppliers have experienced force majeure events rendering them unable to deliver all, or a portion of, the contracted-for raw materials. On these occasions, we were forced to purchase replacement raw materials in the open market at significantly higher costs or place our customers on an allocation of our products. In addition, we cannot predict whether new regulations or restrictions may be imposed in the future on silicon metal, siloxane or other key materials, which may result in reduced supply or further increases in prices. We cannot assure investors that we will be able to renew our current materials contracts or enter into replacement contracts on commercially acceptable terms, or at all. Fluctuations in the price of these or other raw materials or intermediate products, the loss of a key source of supply or any delay in the supply could result in a material adverse effect on our business.

Our production facilities are subject to significant operating hazards which could cause environmental contamination, personal injury and loss of life, and severe damage to, or destruction of, property and equipment.

Our production facilities are subject to significant operating hazards associated with the manufacturing, handling, use, storage and transportation of chemical materials and products, including human exposure to hazardous substances, pipeline, storage tank and equipment leaks and ruptures, explosions, fires, inclement weather and natural disasters, mechanical failures, unscheduled downtime, transportation interruptions, remedial complications, chemical spills, discharges or releases of toxic or hazardous substances or gases and other environmental risks. Additionally, a number of our operations are adjacent to operations of independent entities that engage in hazardous and potentially dangerous activities. Our operations or adjacent operations could result in personal injury or loss of life, severe damage to or destruction of property or equipment, environmental

 

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damage or a loss of the use of all or a portion of one of our key manufacturing facilities. Such events at our facilities or adjacent third-party facilities could have a material adverse effect on our business or operations.

We may incur losses beyond the limits or coverage of our insurance policies for liabilities that are associated with these hazards. In addition, various kinds of insurance for companies in the chemical industry have not been available on commercially acceptable terms, or, in some cases, have been unavailable altogether. In the future, we may not be able to obtain coverage at current levels or at all, and our premiums may increase significantly on coverage that we maintain.

Environmental obligations and liabilities could have a substantial negative impact on our financial condition, cash flows and profitability.

We and our operations involve the manufacture, use, handling, processing, storage, transportation and disposal of hazardous materials and are subject to extensive and complex U.S. federal, state, local and non-U.S. supra-national, national, provincial, and local environmental, health and safety laws and regulations. These environmental laws and regulations include those that govern the discharge of pollutants into the air and water, the generation, use, storage, transportation, treatment and disposal of, and exposure to, hazardous materials and wastes, the cleanup of contaminated sites, occupational health and safety and those requiring permits, licenses, or other government approvals for specified operations or activities. Our products are also subject to a variety of international, national, regional, state, local and provincial requirements and restrictions applicable to the manufacture, import, export, registration, labeling or subsequent use of such products. In addition, we are required to maintain, and may be required to obtain in the future, environmental, health and safety permits, licenses, or government approvals to continue current operations at most of our manufacturing and research facilities throughout the world.

Compliance with environmental, health and safety laws and regulations, and maintenance of permits, can be costly and complex, and we have incurred and will continue to incur costs, including capital expenditures and costs associated with the issuance and maintenance of letters of credit, to comply with these requirements. In 2017, we incurred capital expenditures of approximately $24 million to comply with environmental laws and regulations and to make other environmental improvements, and we expect to incur capital expenditures of approximately $16 million in 2018. If we do not comply with environmental, health and safety laws and regulations, or maintain our permits, we could incur substantial costs, including fines and civil or criminal sanctions, third party property or natural resource damage or personal injury claims or costs associated with upgrades to our facilities or changes in our manufacturing processes in order to achieve and maintain compliance, and may also be required to halt permitted activities or operations until any necessary permits can be obtained or complied with. In addition, future developments or increasingly stringent regulations could require us to make additional unforeseen environmental expenditures, which could have a material adverse effect on our business.

Actual and alleged environmental violations have been identified at our facility in Waterford, New York. In May of 2017, we entered into a settlement with the New York State Department of Environmental Conservation (the “NYSDEC”), the U.S. Environmental Protection Agency (the “USEPA”) and the U.S. Department of Justice in connection with their respective investigations of that facility’s past compliance with certain applicable environmental requirements, including certain requirements governing the operation of the facility’s hazardous waste incinerators, under which we paid approximately $1 million. In addition, we are currently cooperating with the NYSDEC in its investigation of that facility’s compliance with certain applicable environmental requirements as identified in an administrative complaint filed by the NYSDEC in May 2017. Resolution of such enforcement action will likely require payment of a monetary penalty and/or the imposition of other civil sanctions.

We are currently conducting investigations and/or cleanup of known or potential contamination at several of our facilities. In connection with our creation on December 3, 2006, through the acquisition of certain assets, liabilities and subsidiaries of GE that comprised GE Advanced Materials, an operating unit within the Industrial

 

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Segment of GE, by Momentive Performance Materials Holdings Inc. (the parent company of MPM prior to its emergence from Chapter 11 bankruptcy) and its subsidiaries (the “GE Advanced Materials Acquisition”), GE has agreed to indemnify us for liabilities associated with contamination at former properties and with third-party waste disposal sites. GE has also agreed that if we suffer any losses that are the subject of an indemnification obligation under a third party contract with respect to which GE is an indemnitee, GE will pursue such indemnification on our behalf and provide us with any benefits received.

While we do not anticipate material costs in excess of current reserves and/or available indemnification relating to known or potential environmental contamination, the discovery of additional contamination or the imposition of more stringent cleanup requirements, could require us to make significant expenditures in excess of such reserves and/or indemnification. In addition, we cannot assure you that GE will continue to indemnify us for such liabilities.

Environmental, health and safety requirements change frequently and have tended to become more stringent over time. We cannot predict what environmental, health and safety laws and regulations or permit requirements will be enacted or amended in the future, how existing or future laws or regulations will be interpreted or enforced or the impact of such laws, regulations or permits on future production expenditures, operations, supply chain or sales. Our costs of compliance with current and future environmental, health and safety requirements could be material. Such future requirements include legislation designed to reduce emissions of carbon dioxide and other substances associated with climate change (“greenhouse gases”). The European Union has enacted greenhouse gas emissions legislation, and continues to expand the scope of such legislation. The USEPA has promulgated regulations applicable to projects involving greenhouse gas emissions above a certain threshold, and the United States and certain states within the United States have enacted, or are considering, limitations on greenhouse gas emissions. These requirements to limit greenhouse gas emissions could significantly increase our energy costs, and may also require us to incur material capital costs to modify our manufacturing facilities.

In addition, we are subject to liability associated with releases of hazardous substances in soil, groundwater and elsewhere at a number of sites. These include sites that we formerly owned, leased or operated and sites where hazardous wastes and other substances from our current and former facilities and operations have been sent, treated, stored or disposed of, as well as sites that we currently own, lease or operate. Depending upon the circumstances, our liability may be strict, joint and several, meaning that we may be held responsible for more than our proportionate share, or even all, of the liability involved regardless of our fault or whether we were aware of the conditions giving rise to the liability. Environmental conditions at these sites can lead to environmental cleanup liability and claims against us for personal injury or wrongful death, property and natural resource damages, as well as to claims and obligations for the investigation and cleanup of environmental conditions. The extent of any of these liabilities is difficult to predict, but in the aggregate such liabilities could be material.

We have been notified that we are or may be responsible for environmental remediation at certain sites in the United States. As the result of our former, current or future operations or properties, there may be additional environmental remediation or restoration liabilities or claims of personal injury by employees or members of the public due to exposure or alleged exposure to hazardous materials in connection with our operations, properties or products. Sites sold by us in past years may have significant site closure or remediation costs and our share, if any, may be unknown to us at this time. These environmental liabilities or obligations, or any that may arise or become known to us in the future, could have a material adverse effect on our financial condition, results of operations, cash flows and profitability.

In addition, in the normal course of our business, we are required to provide financial assurances for contingent future costs associated with certain hazardous waste management, post-closure and remedial activities. Pursuant to financial assurance requirements set forth in state hazardous waste permit regulations applicable to our manufacturing facilities in Waterford, New York and Sistersville, West Virginia, we have provided letters of credit in the following amounts: approximately $44 million for closure and post-closure care

 

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and accidental occurrences at the Waterford and the Sistersville facilities. A renewal of our Waterford facility’s hazardous waste permit was issued by the NYSDEC, which required us to provide approximately $27 million in financial assurances for our Waterford facility. The renewal permit also requires a re-evaluation of the financial assurance amount within the next three years. One or more of our facilities may also in the future be subject to additional financial assurance requirements imposed by governmental authorities, including the USEPA. In this regard, in January 2017, the USEPA identified chemical manufacturing as an industry for which it plans to develop, as necessary, proposed regulations identifying appropriate financial assurance requirements pursuant to §108(b) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”). Any increase in financial assurances required for our facilities in connection with environmental, health and safety laws or regulations or the maintenance of permits would likely increase our costs and could also materially impact our financial condition. For example, to the extent we issue letters of credit under our ABL Facility to satisfy any financial assurance requirements, we would incur fees for the issuance and maintenance of these letters of credit and the amount of borrowings that would otherwise be available to us under such facility would be reduced.

Future chemical regulatory actions may decrease our profitability.

Several governmental entities have enacted, are considering or may consider in the future, regulations that may impact our ability to sell certain chemical products in certain geographic areas. In December 2006, the European Union enacted a regulation known as Registration, Evaluation, Authorisation and Restriction of Chemicals (“REACH”). This regulation requires manufacturers, importers and consumers of certain chemicals manufactured in, or imported into, the European Union to register such chemicals and evaluate their potential impacts on human health and the environment. The implementing agency is currently in the process of determining if any chemicals should be further tested, regulated, restricted or banned from use in the European Union. Other countries have implemented, or are considering implementation of, similar chemical regulatory programs. When fully implemented, REACH and other similar regulatory programs may result in significant adverse market impacts on the affected chemical products. If we fail to comply with REACH or other similar laws and regulations, we may be subject to bans, sanctions, penalties or other enforcement actions, including fines, injunctions, recalls or seizures, which would have a material adverse effect on our financial condition, cash flows and profitability.

We cannot at this time estimate the impact of these regulations on our financial condition, results of operations, cash flows and profitability but it could be material. The European Union is conducting ongoing reviews of octamethylcyclotetrasiloxane (“D4”) and decamethylcyclopentasiloxane (“D5”) each of which are chemical substances we manufacture and are utilized as key ingredients in many of our products and by the silicone industry. In January, 2018 the European Union adopted a proposal by the United Kingdom to limit the levels of D4 and D5 in personal care products that are intended to be washed off. The European Commission has also recently directed the European Chemicals Agency to develop a proposal restricting the use of D4, D5 and dodecamethylcyclohexasiloxane (“D6”) in leave on personal care products. Additionally, competent authorities in Germany have completed a Risk Management Option Analysis (“RMOA”) on D4 and D5 and have proposed to designate D4 and D5 as a Substance of Very High Concern (“SVHC”) without intention for inclusion in REACH’s Annex XIV listing (“Authorization List”). The USEPA has also stated that they are reviewing the potential environmental risks posed by D4 to determine whether regulatory measures are warranted. Finally, in March 2016 and March 2017, the European Union Directorate General for Environment (“DG Environment”) proposed to the European Commission that D4 be nominated as a persistent organic pollutant pursuant to the Stockholm Convention on Persistent Organic Pollutants (the “Stockholm Convention”). This proposal was not acted upon by the European Commission, but continues to be evaluated by the DG Environment. The Stockholm Convention is an international treaty aimed at eliminating or minimizing the release of organic chemicals that are toxic, resistant to degradation in the environment, and transported and deposited far from the point of release. We and other silicone industry members have entered into a consent order with the USEPA to conduct certain studies to obtain relevant data, the results of which were submitted to the USEPA in September 2017. Regulation of our products containing such substances by the European Union, Canada, the United States or parties to the

 

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Stockholm Convention would likely reduce our sales within the respective jurisdiction and possibly in other geographic areas as well. These reductions in sales could be material depending upon the extent of any such additional regulations.

We participate with other companies in trade associations and regularly contribute to the research and study of the safety and environmental impact of our products and raw materials. These programs are part of a program to review the environmental impacts, safety and efficacy of our products. In addition, government and academic institutions periodically conduct research on potential environmental and health concerns posed by various chemical substances, including substances we manufacture and sell. These research results are periodically reviewed by state, national and international regulatory agencies and potential customers. Such research could result in future regulations restricting the manufacture or use of our products, liability for adverse environmental or health effects linked to our products, and/or de-selection of our products for specific applications. These restrictions, liability and product de-selection could have a material adverse effect on our business, financial condition, results of operations and/or liquidity.

Scientists periodically conduct studies on the potential human health and environmental impacts of chemicals, including products we manufacture and sell. Also, nongovernmental advocacy organizations and individuals periodically issue public statements alleging human health and environmental impacts of chemicals, including products we manufacture and sell. Based upon such studies or public statements, our customers may elect to discontinue the purchase and use of our products, even in the absence of any government regulation. Such actions could significantly decrease the demand for our products and, accordingly, have a material adverse effect on our business, financial condition, cash flows and profitability.

Because we manufacture and use materials that are known to be hazardous, we are subject to, or affected by, certain product and manufacturing regulations, for which compliance can be costly and time consuming. In addition, we may be subject to personal injury or product liability claims as a result of human exposure to such hazardous materials.

We produce hazardous chemicals which subject us to regulation by many U.S. and non-U.S. national, supra-national, state and local governmental authorities. In some circumstances, these authorities must review and, in some cases approve, our products and/or manufacturing processes and facilities before we may manufacture and sell some of these chemicals. To be able to manufacture and sell certain new chemical products, we may be required, among other things, to demonstrate to the relevant authority that the product does not pose an unreasonable risk during its intended uses and/or that we are capable of manufacturing the product in compliance with current regulations. The process of seeking any necessary approvals can be costly, time consuming and subject to unanticipated and significant delays. Approvals may not be granted to us on a timely basis, or at all. Any delay in obtaining, or any failure to obtain or maintain, these approvals would adversely affect our ability to introduce new products and to generate revenue from those products. New laws and regulations may be introduced in the future that could result in additional compliance costs, bans on product sales or use, seizures, confiscation, recall or monetary fines, any of which could prevent or inhibit the development, distribution or sale of our products and could increase our customers’ efforts to find less hazardous substitutes for our products. We are subject to ongoing reviews of our products and manufacturing processes.

Products we have made or used could be the focus of legal claims based upon allegations of harm to human health. We cannot predict the outcome of suits and claims, and an unfavorable outcome in these litigation matters could exceed reserves or have a material adverse effect on our business, financial condition, results of operations and/or profitability and cause our reputation to decline.

We are subject to claims from our customers and their employees, environmental action groups and neighbors living near our production facilities.

We produce and use hazardous chemicals that require appropriate procedures and care to be used in handling them or in using them to manufacture other products. As a result of the hazardous nature of some of the

 

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products we produce and use, we may face claims relating to incidents that involve our customers’ improper handling, storage and use of our products. Additionally, we may face lawsuits alleging personal injury or property damage by neighbors living near our production facilities. These lawsuits could result in substantial damage awards against us, which in turn could encourage additional lawsuits and could cause us to incur significant legal fees to defend such lawsuits, either of which could have a material adverse effect on our business, financial condition and/or profitability. In addition, the activities of environmental action groups could result in litigation or damage to our reputation.

We are subject to certain risks related to litigation filed by or against us, and adverse results may harm our business.

We cannot predict with certainty the cost of defense, of prosecution or of the ultimate outcome of litigation and other proceedings filed by or against us, including penalties or other civil or criminal sanctions, or remedies or damage awards, and adverse results in any litigation and other proceedings may materially harm our business. Litigation and other proceedings may include, but are not limited to, actions relating to intellectual property, international trade, commercial arrangements, product liability, toxic exposure, environmental, health and safety, joint venture agreements, labor and employment or other harms resulting from the actions of individuals or entities outside of our control. In the case of intellectual property litigation and proceedings, adverse outcomes could include the cancellation, invalidation or other loss of material intellectual property rights used in our business and injunctions prohibiting our use of business processes or technology that are subject to third-party patents or other third-party intellectual property rights. Any loss, denial or reduction in scope of any of our material intellectual property may have a material adverse effect on our business, financial condition and/or profitability. In addition, litigation based on environmental matters or exposure to hazardous substances in the workplace or based upon the use of our products could result in significant liability for us, which could have a material adverse effect on our business, financial condition, results of operations and/or profitability.

We remain subject to litigation relating to the Chapter 11 proceedings.

In connection with the bankruptcy cases, the following appeals were filed on September 16, 2014 relating to the confirmation of the Plan of Reorganization.

Make-Whole. BOKF, NA, as trustee (the “First Lien Trustee”) for our previously issued 8.875% First-Priority Senior Secured Notes due 2020 (the “Old First Lien Notes”), and Wilmington Trust, National Association, as trustee (the “1.5 Lien Trustee” and together with the First Lien Trustee, the “Appellants”) for our previously issued 10% Senior Secured Notes due 2020 (the “Old Secured Notes”) jointly appealed to the U.S. District Court for the Southern District of New York (the “District Court”) seeking reversal of the U.S .Bankruptcy Court of the Southern District of New York’s (the “Bankruptcy Court”) determinations that Momentive Performance Materials Holdings Inc. and certain of its domestic subsidiaries (the “Debtors”) were not required to compensate holders of the Old First Lien Notes and Old Secured Notes for any prepayment premiums (the “Make-Whole Determination”).

Interest rate. The Appellants also appealed to the District Court seeking reversal of the Bankruptcy Court’s determination that the interest rates on the 3.88% First Lien Notes due 2021 (the “First Lien Notes”) and the 4.69% Second Lien Notes due 2022 (the “Second Lien Notes”) provided to holders of the Old First Lien Notes and Old Secured Notes under the Plan of Reorganization was proper and in accordance with the Bankruptcy Code (the “Interest Rate Determination”).

In May 2015, the District Court denied both of the Appellants’ appeals and affirmed the Bankruptcy Court’s rulings. The Appellants appealed the District Court’s decision to the United States Court of Appeals for the Second Circuit (the “Second Circuit”).

On October 20, 2017, the Second Circuit affirmed the Make-Whole Determination. In November 2017, the Appellants petitioned for panel rehearing or, in the alternative, for rehearing en banc by the Second Circuit with

 

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respect to the Make-Whole Determination (the “Rehearing Request”). On December 11, 2017, the Second Circuit issued an order denying the Rehearing Request and upheld the Company’s position that no make-whole payments were due.

On October 20, 2017, the Second Circuit also reversed the Interest Rate Determination and remanded the issue to the Bankruptcy Court for further proceedings (the “Remand”). The Second Circuit held that, on remand, the Bankruptcy Court should assess whether an efficient market rate can be ascertained, and, if so, apply it to the First Lien Notes and Second Lien Notes. On December 22, 2017, the Second Circuit issued its mandate remanding the Interest Rate Determination to the Bankruptcy Court. No further proceedings have yet been held in the Bankruptcy Court regarding the Interest Rate Determination.

On March 12, 2018, the Appellants each filed a petition for a writ of certiorari with the Supreme Court of the United States (the “Supreme Court”) with respect to the Make-Whole Determination. An adverse outcome could negatively affect our business, results of operations, and financial condition by reducing our liquidity and/or increasing our interest costs.

We cannot predict with certainty the timing or outcome of the Remand. An adverse outcome could increase our interest costs (including by potentially requiring us to make a catch-up payment for past due interest).

As a global business, we are subject to numerous risks associated with our international operations that could have a material adverse effect on our business.

We have significant manufacturing and other operations outside the United States. Some of these operations are in jurisdictions with unstable political or economic conditions. There are numerous inherent risks in international operations, including, but not limited to:

 

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exchange controls and currency restrictions;

 

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currency fluctuations and devaluations;

 

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tariffs and trade barriers;

 

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export duties and quotas;

 

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changes in local economic conditions;

 

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laws and regulations, including tax, environmental, health and safety regulations;

 

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exposure to possible expropriation or other government actions;

 

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hostility from local populations;

 

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diminished ability to legally enforce our contractual rights in non-U.S. countries;

 

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restrictions on our ability to repatriate dividends from our subsidiaries;

 

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unsettled political conditions and possible terrorist attacks against U.S. interests; and

 

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natural disasters or other catastrophic events.

Our international operations expose us to different local political and business risks and challenges. For example, we face potential difficulties in staffing and managing local operations, and we have to design local solutions to manage credit risks of local customers and distributors. In addition, some of our operations are located in regions that may be politically unstable, having particular exposure to riots, civil commotion or civil unrests, acts of war (declared or undeclared) or armed hostilities or other national or international calamity. In some of these regions, our status as a U.S. company also exposes us to increased risk of sabotage, terrorist attacks, interference by civil or military authorities or to greater impact from the national and global military, diplomatic and financial response to any future attacks or other threats.

 

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Some of our operations are located in regions with particular exposure to natural disasters such as storms, floods, fires and earthquakes. It would be difficult or impossible for us to relocate these operations and, as a result, any of the aforementioned occurrences could materially adversely affect our business.

In addition, intellectual property rights may be more difficult to enforce in non-U.S. or non-Western Europe countries due to a number of factors, including less favorable intellectual property laws and increased vulnerability to the theft of, and reduced protection for, intellectual property rights including trade secrets in such countries.

Our overall success as a global business depends, in part, upon our ability to succeed under different economic, social and political conditions. We may fail to develop and implement policies and strategies that are effective in each location where we do business, and failure to do so could have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to foreign currency risk.

In 2017, approximately 66% of our net sales originated outside the United States. In our consolidated financial statements, we translate our local currency financial results into U.S. dollars based on average exchange rates prevailing during a reporting period or the exchange rate at the end of that period. During times of a strengthening U.S. dollar, at a constant level of business, our reported international revenues and earnings would be reduced because the local currency would translate into fewer U.S. dollars.

In addition to currency translation risks, we incur a currency transaction risk whenever one of our operating subsidiaries enters into a purchase or a sales transaction or indebtedness transaction using a different currency from the currency in which it records revenues. Given the volatility of exchange rates, we may not manage our currency transaction and/or translation risks effectively, and volatility in currency exchange rates may materially adversely affect our financial condition or results of operations, including our tax obligations. Since most of our indebtedness is denominated in U.S. dollars, a strengthening of the U.S. dollar could make it more difficult for us to repay our indebtedness.

We have entered and expect to continue to enter into various hedging and other programs in an effort to protect against adverse changes in the non-U.S. exchange markets and attempt to minimize potential material adverse effects. These hedging and other programs may be unsuccessful in protecting against these risks. Our results of operations could be materially adversely affected if the U.S. dollar strengthens against non-U.S. currencies and our protective strategies are not successful. Likewise, a strengthening U.S. dollar provides opportunities to source raw materials more cheaply from foreign countries.

Fluctuations in energy costs could have an adverse impact on our profitability and negatively affect our financial condition.

Oil and natural gas prices have fluctuated greatly over the past several years and we anticipate that they will continue to do so. Natural gas and electricity are essential to our manufacturing processes, which are energy-intensive. Our energy costs represented approximately 5% of our total cost of sales for the years ended December 31, 2017 and 2016, respectively, and 6% for the year ended December 31, 2015.

Our operating expenses will increase if our energy prices increase. Increased energy prices may also result in greater raw materials costs. If we cannot pass these costs through to our customers, our profitability may decline. In addition, increased energy costs may also negatively affect our customers and the demand for our products.

If our energy prices decrease, we expect benefits in the short-run with decreased operating expenses and increased operating income, but may face increased pricing pressure from competitors that are similarly impacted

 

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by energy prices and could see reduced demand for certain of our products that are sold to participants in the energy sector. As a result, profitability may decrease over an extended period of time of lower energy prices. Moreover, any future increases in energy prices after a period of lower energy prices may have an adverse impact on our profitability for the reasons described above.

We face increased competition from other companies and from substitute products, which could force us to lower our prices, which would adversely affect our profitability and financial condition.

The markets that we operate in are highly competitive, and this competition could harm our results of operations, cash flows and financial condition. Our competitors include major international producers as well as smaller regional competitors. We may be forced to lower our selling price based on our competitors’ pricing decisions, which would reduce our profitability. This has been further magnified by the impact of the recent global economic downturn, as companies have focused more on price to retain business and market share. In addition, we face competition from a number of products that are potential substitutes for our products. Growth in substitute products could adversely affect our market share, net sales and profit margins.

There is also a trend in our industries toward relocating manufacturing facilities to lower cost regions, such as Asia, which may permit some of our competitors to lower their costs and improve their competitive position. Furthermore, there has been an increase in new competitors based in these regions.

Some of our competitors are larger, have greater financial resources, have a lower cost structure, and/or have less debt than we do. As a result, those competitors may be better able to withstand a change in conditions within our industry and in the economy as a whole. If we do not compete successfully, our operating margins, financial condition, cash flows and profitability could be adversely affected. Furthermore, if we do not have adequate capital to invest in technology, including expenditures for research and development, our technology could be rendered uneconomical or obsolete, negatively affecting our ability to remain competitive.

We expect cost savings from our strategic initiatives, and if we are unable to achieve these cost savings, or sustain our current cost structure, it could have a material adverse effect on our business operations, results of operations and financial condition.

We have not yet realized all of the cost savings and synergies we expect to achieve from our strategic initiatives. A variety of risks could cause us not to realize the expected cost savings and synergies, including but not limited to, higher than expected severance costs related to staff reductions; higher than expected retention costs for employees that will be retained; higher than expected stand-alone overhead expenses; delays in the anticipated timing of activities related to our cost-saving plan; and other unexpected costs associated with operating our business. In addition, if the Shared Services Agreement is unexpectedly terminated, or if the parties to the agreement have material disagreements with its implementation, it could have an adverse effect on our business operations, results of operations and financial condition, as we would need to replace the services no longer being provided by Hexion Inc. (“Hexion”), and would lose a portion of the benefits being generated under the agreement at the time.

If we are unable to achieve these cost savings or synergies it could adversely affect our profitability and financial condition. In addition, factors may arise that may not allow us to sustain our current cost structure. As market and economic conditions change, we may also make changes to our operating cost structure.

Our history of operations includes periods of net losses, and we may incur net losses in the future. Such losses may impact our liquidity and the trading price of our common stock.

Although we did not generate a net loss for the year ended December 31, 2017, we generated net losses of $163 million and $83 million for the years ended December 31, 2016 and 2015, respectively. If we continue to

 

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suffer net losses, our liquidity may suffer and we may not be able to fund all of our obligations. Our ability to generate sufficient cash flows from operations to make scheduled debt service payments depends on a range of economic, competitive and business factors, many of which are outside of our control. In addition, if we continue to experience net losses, the trading price of our common stock may decline significantly.

Our success depends in part on our ability to protect our intellectual property rights, and our inability to enforce these rights could have a material adverse effect on our competitive position.

We rely on the patent, trademark, copyright and trade-secret laws of the United States and the countries where we do business to protect and enforce our intellectual property rights. We may be unable to prevent third parties from infringing or misappropriating our intellectual property or otherwise violating our intellectual property rights, which could reduce any competitive advantage we have developed, reduce our market share or otherwise harm our business. In the event of such infringement, misappropriation or other violation of our intellectual property rights, litigation to protect or enforce our rights could be costly, and we may not prevail.

Many of our technologies are not protected by any patent or patent application, and our issued and pending U.S. and non-U.S. patents may not provide us with any competitive advantage and could be challenged by third parties. Our inability to secure issuance of our pending patent applications may limit our ability to protect the intellectual property rights such pending patent applications were intended to cover. Our competitors may attempt to design around our patents to avoid liability for infringement and, if successful, our competitors could adversely affect our market share. Also, despite the steps taken by us to protect our intellectual property and technology, it may be possible for unauthorized third parties to copy or reverse-engineer aspects of our products, develop similar intellectual property or technology independently or otherwise obtain and use information that we regard as proprietary and we may be unable to successfully identify or enforce against unauthorized uses of our intellectual property and technology. Furthermore, the expiration of our patents may lead to increased competition.

Our pending trademark applications may not be approved by the responsible governmental authorities and, even if these trademark applications are granted, third parties may seek to oppose or otherwise challenge these trademark applications. A failure to obtain trademark registrations in the United States and in other countries could limit our ability to protect our products and their associated trademarks and impede our marketing efforts in those jurisdictions.

In addition, effective patent, trademark, copyright and trade secret protection may be unavailable or limited in some foreign countries. In some countries we do not apply for patent, trademark or copyright protection. We also rely on unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. While we generally enter into confidentiality agreements with our employees and third parties to protect our intellectual property, these confidentiality agreements are limited in duration and could be breached, and may not provide meaningful protection of our trade secrets or proprietary manufacturing expertise. Adequate remedies may not be available if there is an unauthorized use or disclosure of our trade secrets, manufacturing expertise and other proprietary information. In addition, others may obtain knowledge about our trade secrets through independent development or by legal means. The failure to protect our processes, apparatuses, technology, trade secrets and proprietary manufacturing expertise, methods and compounds could have a material adverse effect on our business by jeopardizing critical intellectual property.

Where a product formulation or process is kept as a trade secret, third parties may independently develop or invent and patent products or processes identical to our trade-secret products or processes. This could have an adverse impact on our ability to make and sell products or use such processes and could potentially result in costly litigation in which we might not prevail.

 

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We could face intellectual property infringement claims that could result in significant legal costs and damages and impede our ability to produce key products, which could have a material adverse effect on our business, financial condition and results of operations.

Our production processes and products are specialized; however, we may become subject to claims that we infringe, misappropriate or otherwise violate the intellectual property rights of our competitors or others in the future. Any claim of infringement, misappropriation or other violation could require us to pay substantial damages and change our processes or products or stop using certain technologies or producing the applicable product entirely. Additionally, an adverse judgment against us could require us to seek licenses of intellectual property from third parties, which may not be available on commercially reasonable terms or at all. Even if we ultimately prevail in such claims, the existence of the suit could cause our customers to seek other products that are not subject to such claims. Any claim of infringement, misappropriation or other violation could result in significant legal costs and damages and the diversion of significant management time, and impede our ability to produce key products, which could have a material adverse effect on our business, financial condition and results of operations.

If we fail to extend or renegotiate our collective bargaining agreements with our works councils and labor unions as they expire from time to time, if disputes with our works councils or unions arise, or if our unionized or represented employees were to engage in a strike or other work stoppage, our business and operating results could be materially adversely affected.

As of December 31, 2017, approximately 43% of our employees were unionized or represented by works councils that were covered by collective bargaining agreements. In addition, some of our employees reside in countries in which employment laws provide greater bargaining or other employee rights than the laws of the United States. These rights may require us to expend more time and money altering or amending employees’ terms of employment or making staff reductions. For example, most of our employees in Europe are represented by works councils, which generally must approve changes in conditions of employment, including restructuring initiatives and changes in salaries and benefits. A significant dispute could divert our management’s attention and otherwise hinder our ability to conduct our business or to achieve planned cost savings.

We may be unable to timely extend or renegotiate our collective bargaining agreements as they expire. For example, a majority of our manufacturing personnel at our Sistersville, West Virginia site are covered by a collective bargaining agreement that expires in July 2018. We also may be subject to strikes or work stoppages by, or disputes with, our labor unions in connection with these collective bargaining agreements or otherwise. In November 2016, approximately 600 workers at our Waterford, New York facility went on strike in response to not reaching agreement on the terms for a new contract after the existing agreement expired in June 2016. In November 2016, the union at our Willoughby, Ohio facility representing approximately 50 employees also went on strike for two weeks in response to not reaching agreement on the terms for a new contract. The new contract involving the Local 81359 and Local 81380 unions in our Waterford, New York site and Local 84707 union in our Willoughby, Ohio site was ratified by union membership in February 2017 and is effective until June 2019.

If we fail to extend or renegotiate our collective bargaining agreements, if additional disputes with our works councils or unions arise or if our unionized or represented workers engage in a further strike or other work stoppage, we could incur higher labor costs or experience a significant disruption of operations, which could have a material adverse effect on our business, financial position and results of operations.

Our pension plans are unfunded or under-funded and our required cash contributions could be higher than we expect, each of which could have a material adverse effect on our financial condition and liquidity.

We sponsor various pension and similar benefit plans worldwide.

As of December 31, 2017, our U.S. and non-U.S. defined benefit pension plans were under-funded in the aggregate by $105 million and $199 million, respectively. We are legally required to make contributions to our

 

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pension plans in the future, and those contributions could be material. See Note 15 to our audited consolidated financial statements included elsewhere in this prospectus for additional information regarding our unfunded and under-funded pension plans.

Our future funding obligations for our employee benefit plans depend upon the levels of benefits provided for by the plans, the future performance of assets set aside for these plans, the rates of interest used to determine funding levels, the impact of potential business dispositions, actuarial data and experience and any changes in government laws and regulations. In addition, certain of our funded employee benefit plans hold a significant amount of equity securities. If the market values of these securities decline, our pension expense and funding requirements would increase and, as a result, could have a material adverse effect on our business.

If the performance of assets in the funded plans does not meet our expectations, our cash contributions for these plans could be higher than we expect, which could have a material adverse effect on our financial condition and liquidity.

Natural or other disasters have, and could in the future disrupt our business and result in loss of revenue or higher expenses.

Any serious disruption at any of our facilities or our suppliers’ facilities due to hurricane, fire, earthquake, flood, terrorist attack or any other natural or man-made disaster could impair our ability to use our facilities and have a material adverse impact on our revenues and increase our costs and expenses. If there is a natural disaster or other serious disruption at any of our facilities or our suppliers’ facilities, it could impair our ability to adequately supply our customers and negatively impact our operating results.

For example, our manufacturing facility in Leverkusen, Germany was impacted by the effects of a fire on November 12, 2016. We produce a variety of finished silicone products at this plant, including highly specialized silicone products.

Also, our manufacturing facility in Ohta, Japan and the manufacturing facilities of certain of our suppliers were impacted by the effects of the earthquake and tsunami in Japan on March 11, 2011 and related events. Our Ohta facility is one of two facilities globally where we internally produce siloxane, a key intermediate required in our manufacturing process of silicones. We also produce a variety of finished silicone products at this plant, including highly specialized silicone products. We were able to shift only certain amounts of production to our other facilities throughout the world over the short term. Our Ohta plant, which is approximately 230 kilometers away from the nuclear power plant at Fukushima, Japan that incurred significant damage as a result of the earthquake, was our closest facility to the area affected by the earthquake and tsunami. We also have manufacturing and research facilities in Kozuki and Kobe, Japan that produce ceramic products, and administration offices in Tokyo, Nagoya and Fukuoka, Japan, none of which were significantly impacted by the earthquake. In addition, our manufacturing facilities, primarily those located in the Asia Pacific region, purchase certain raw materials from suppliers throughout Japan. Normal plant operations at our Ohta facility were restored in early May 2011, but uncertainty in Japan continued primarily with respect to the country’s energy infrastructure. To the extent further events or actions in Japan occur that impact its energy supply, including, but not limited to: rolling blackouts, restrictions on power usage, radiation exposure from nuclear power plants or the imposition of evacuation zones around such plants, it could materially and adversely affect our operations, operating results and financial condition.

In addition, many of our current and potential customers are concentrated in specific geographic areas. A disaster in one of these regions could have a material adverse impact on our operations, operating results and financial condition. Our business interruption insurance may not be sufficient to cover all of our losses from a disaster, in which case our unreimbursed losses could be substantial.

 

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Acquisitions and joint ventures that we pursue may present unforeseen integration obstacles and costs, increase our leverage and negatively impact our performance. Divestitures that we pursue also may present unforeseen obstacles and costs.

We have made acquisitions of related businesses, and entered into joint ventures in the past and we may do so in the future. Acquisitions may require us to assume or incur additional debt financing, resulting in additional leverage and complex debt structures. If such acquisitions are consummated, the risk factors we describe above and below, and for our business generally, may be intensified.

Our ability to implement our growth strategy is limited by covenants in our ABL Facility, indentures and other indebtedness, our financial resources, including available cash and borrowing capacity, and our ability to integrate or identify appropriate acquisition and joint venture candidates.

The expense incurred in consummating acquisitions of related businesses, or our failure to integrate such businesses successfully into our existing businesses, could result in our incurring unanticipated expenses and losses. Furthermore, we may not be able to realize any anticipated benefits, or we may incur unanticipated liabilities, from acquisitions or joint ventures. The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations.

In addition we may pursue divestitures of certain of our businesses as one element of our portfolio optimization strategy. Divestitures may require us to separate integrated assets and personnel from our retained businesses and devote our resources to transitioning assets and services to purchasers, resulting in disruptions to our ongoing business and distraction of management.

Security breaches and other disruptions to our information technology infrastructure could interfere with our operations, and could compromise our information and the information of our customers and suppliers, exposing us to liability which would cause our business and reputation to suffer.

In the ordinary course of business, we rely upon information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including supply chain, manufacturing, distribution, invoicing, and collection of payments from customers. We use information technology systems to record, process and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. Additionally, we collect and store sensitive data, including intellectual property, proprietary business information, the propriety business information of our customers and suppliers, as well as personally identifiable information of our customers and employees, in data centers and on information technology networks. The secure operation of these information technology networks, and the processing and maintenance of this information is critical to our business operations and strategy. Despite security measures and business continuity plans, our information technology networks and infrastructure may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers or breaches due to employee error or malfeasance or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures or natural disasters or other catastrophic events. The occurrence of any of these events could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information or failure to comply with applicable laws, directives, or regulations could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations, and damage our reputation, which could adversely affect our business, financial condition and results of operations.

Limitations on our use of certain product-identifying information, including the GE name and monogram, could adversely affect our business and profitability.

Prior to December 2006, substantially all of our products and services were marketed using the GE brand name and monogram, and we believe the association with GE provided our products and services with preferred

 

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status among our customers and employees due to GE’s globally recognized brands and perceived high quality. We and GE Monogram Licensing International (“GE Monogram”) are parties to a trademark license agreement, which was entered into in December 2006 and amended in May 2013, that grants us a limited right to, among other things, use the GE mark and monogram solely in connection with our sealant, adhesive and certain other products, subject to certain conditions. These rights extend through December 3, 2018, with options that allow us to renew the license through 2023, subject to certain terms and conditions, including the payment of royalties. We also have the right to use numerous specific product trademarks that contain the letters “GE” for the life of the respective products subject to the terms of the license. While we continue to use the GE mark and monogram on these products and continue to use these product specifications, we are not able to use the GE mark and monogram on other products, use GE as part of our name or advertise ourselves as a GE company. While we have not yet experienced any significant loss of business as a result of our limited use of the GE mark and monogram, our business could be disadvantaged in the future by the loss of association with the GE name on our sealant, adhesive and certain other products.

Risks Related to Our Indebtedness

We may be unable to generate sufficient cash flows from operations to meet our consolidated debt service payments.

We have substantial consolidated indebtedness. As of December 31, 2017, we had $1,228 million of consolidated outstanding indebtedness. Our projected annualized cash interest expense is approximately $55 million based on our consolidated indebtedness and letters of credit outstanding and interest rates at December 31, 2017 without giving effect to any subsequent borrowings under our ABL Facility, substantially all of which represents cash interest expense on fixed-rate obligations.

Our ability to generate sufficient cash flows from operations to make scheduled debt service payments depends on a range of economic, competitive and business factors, many of which are outside of our control. Continued or increased weakness in economic conditions and our performance beyond our expectations would exacerbate these risks. Our business may generate insufficient cash flows from operations to meet our debt service and other obligations, and currently anticipated cost savings, capital investment plans, working capital reductions and operating improvements may not be realized on schedule, or at all. To the extent our cash flow from operations is insufficient to fund our debt service obligations, aside from our current liquidity, we would be dependent on outside capital to meet the funding of our debt service obligations and to fund capital expenditures and other obligations. We were previously forced to take actions to restructure and refinance our indebtedness and there can be no assurance we will be able to meet our scheduled debt service obligations in the future.

If we are unable to meet our expenses and debt service obligations, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets or issue additional equity securities. We may be unable to refinance any of our indebtedness, sell assets or issue equity securities on commercially reasonable terms, or at all, which could cause us to default on our obligations and result in the acceleration of our debt obligations. Our inability to generate sufficient cash flows to satisfy our outstanding debt obligations, or to refinance our obligations on commercially reasonable terms, would have a material adverse effect on our business, financial condition and results of operations.

Availability under the ABL Facility is subject to a borrowing base based on a specified percentage of eligible accounts receivable and inventory and, in certain foreign jurisdictions, machinery and equipment. As of December 31, 2017, the borrowing base (including various reserves) was determined to be approximately $300 million, and we had approximately $56 million of drawn letters of credit and no revolver borrowings under the ABL Facility. The borrowing base (including various reserves) is updated on a monthly basis, so the actual borrowing base could be lower in the future. To the extent the borrowing base is lower than we expect, that could significantly impair our liquidity.

 

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Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry.

Our substantial consolidated indebtedness and other commitments and obligations could have other important consequences, including but not limited to the following:

 

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it may limit our flexibility in planning for, or reacting to, changes in our operations or business;

 

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we are more highly leveraged than many of our competitors, which may place us at a competitive disadvantage;

 

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it may make us more vulnerable to downturns in our business or the economy;

 

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a substantial portion of our cash flows from operations will be dedicated to the repayment of our indebtedness and will not be available for other purposes;

 

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it may restrict us from making strategic acquisitions, introducing new technologies, or exploiting business opportunities;

 

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it may make it more difficult for us to satisfy our obligations with respect to our existing indebtedness;

 

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it may adversely affect terms under which suppliers provide material and services to us; and

 

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it may limit our ability to borrow additional funds or dispose of assets.

There would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing, as needed.

Despite our substantial indebtedness, we may still be able to incur significant additional indebtedness. This could intensify the risks described above and below.

We may be able to incur substantial additional indebtedness in the future. Although the terms governing our indebtedness contain restrictions on our ability to incur additional indebtedness, these restrictions are subject to numerous qualifications and exceptions, and the indebtedness we may incur in compliance with these restrictions could be substantial. Increasing our indebtedness could intensify the risks described above and below.

The terms governing our outstanding debt, including restrictive covenants, may adversely affect our operations.

The terms governing our outstanding debt contain, and any future indebtedness we incur would likely contain, numerous restrictive covenants that impose significant operating and financial restrictions on our ability to, among other things:

 

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incur or guarantee additional debt;

 

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pay dividends and make other distributions to our stockholders;

 

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create or incur certain liens;

 

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make certain loans, acquisitions, capital expenditures or investments;

 

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engage in sales of assets and subsidiary stock;

 

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enter into sale/leaseback transactions;

 

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enter into transactions with affiliates; and

 

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transfer all or substantially all of our assets or enter into merger or consolidation transactions.

As a result of these covenants, we are limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.

 

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If the availability under the ABL Facility falls below certain thresholds, we will be subject to a minimum fixed charge coverage ratio. If we are unable to maintain compliance with such ratio or other covenants in the ABL Facility, an event of default could result.

The credit agreement governing the ABL Facility requires us to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 at any time when the availability is less than the greater of (a) 12.5% of the lesser of the borrowing base and the total ABL Facility commitments at such time and (b) $27 million. The fixed charge coverage ratio under the agreement governing the ABL Facility is generally defined as the ratio of (a) Adjusted EBITDA minus non-financed capital expenditures and cash taxes to (b) debt service plus cash interest expense plus certain restricted payments, each measured on a last twelve months, or LTM, basis.

A breach of our fixed charge coverage ratio, if in effect, would, if not waived, result in an event of default under our ABL Facility. Pursuant to the terms of the credit agreement governing the ABL Facility, our direct parent company will have the right, but not the obligation, to cure such default through the purchase of additional equity in up to three of any four consecutive quarters. If a breach of a fixed charge coverage ratio covenant is not cured or waived, or if any other event of default under the ABL Facility occurs, the lenders under such credit facility:

 

•

would not be required to lend any additional amounts to us;

 

•

could elect to declare all borrowings outstanding under such ABL Facility, together with accrued and unpaid interest and fees, due and payable and could demand cash collateral for all letters of credit issued thereunder;

 

•

could apply all of our available cash that is subject to the cash sweep mechanism of the ABL Facility to repay these borrowings; and/or

 

•

could prevent us from making payments on our notes;

any or all of which could result in an event of default under our notes.

The ABL Facility also provides for “springing control” over the cash in our deposit accounts constituting collateral for the ABL Facility, and such cash management arrangements include a cash sweep at any time that availability under the ABL Facility is less than the greater of (1) 12.5% of the lesser of the borrowing base and the total ABL Facility commitments at such time and (2) $27 million. Such cash sweep, if in effect, will cause all our available cash to be applied to outstanding borrowings under the ABL Facility. If we satisfy the conditions to borrowing under the ABL Facility while any such cash sweep is in effect, we may be able to make additional borrowings under the ABL Facility to satisfy our working capital and other operational needs. If we do not satisfy the conditions to borrowing, we will not be permitted to make additional borrowings under the ABL Facility, and we will not have sufficient cash to satisfy our working capital and other operational needs. The availability threshold for triggering a cash sweep is the same availability threshold for triggering the fixed charge coverage ratio covenant under the ABL Facility.

The terms governing our indebtedness limit our ability to sell assets and also restrict the use of proceeds from that sale. We may be unable to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations. Furthermore, a substantial portion of our assets is, and may continue to be, intangible assets. Therefore, it may be difficult for us to pay our consolidated debt obligations in the event of an acceleration of any of our consolidated indebtedness.

If the indebtedness under the ABL Facility or our existing notes were to be accelerated after an event of default, our respective assets may be insufficient to repay such indebtedness in full and our lenders could foreclose on the assets pledged under the applicable facility, which would have a material adverse effect on our business, financial condition and results of operations.

 

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Repayment of our debt, including required principal and interest payments, depends on cash flows generated by our subsidiaries, which may be subject to limitations beyond our control.

Our subsidiaries own a significant portion of our consolidated assets and conduct a significant portion of our consolidated operations. Repayment of our indebtedness depends, to a significant extent, on the generation of cash flows and the ability of our subsidiaries to make cash available to us by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments on our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from subsidiaries. While there are limitations on the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make intercompany payments, these limitations are subject to certain qualifications and exceptions. In the event that we are unable to receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

A downgrade in our debt ratings could restrict our access to, and negatively impact the terms of, current or future financings or trade credit.

S&P Global Ratings (“S&P”) and Moody’s Investors Service (“Moody’s”) maintain credit ratings on us and certain of our debt. While our ratings were upgraded by Moody’s in February 2018, the ratings assigned by both ratings agencies to our debt continue to be below investment grade. Any decision by these ratings agencies to downgrade such ratings or put them on negative watch in the future could restrict our access to, and negatively impact the terms of, current or future financings and trade credit extended by our suppliers of raw materials or other vendors.

Risks Related to Our Common Stock

There is a limited public market for our common stock.

There are substantial risks in investing in our common stock given the general illiquid nature of such securities. There is a limited public trading market for our securities. In March 2016, our common stock was approved to trade on the OTCQX market. Holders of our securities may nevertheless find it difficult or impossible to find a qualified purchaser for such securities at any price. Because of this, the quoted prices of our stock on the OTCQX may not reflect exactly the value of our common stock.

Our stock price may be volatile or may decline regardless of our operating performance, and stockholders may not be able to resell shares at or above the price at which the shares were acquired.

The price for our common stock may be volatile and may fluctuate significantly in response to a number of factors, most of which we cannot control, including, among others:

 

•

changes in economic trends or the continuation of current economic conditions;

 

•

industry cycles and trends;

 

•

changes in government and environmental regulation;

 

•

adverse resolution of new or pending litigation against us;

 

•

changes in laws or regulations governing our business and operations;

 

•

the sustainability of an active trading market for our common stock; and

 

•

future sales of our common stock by our stockholders.

These and other factors may lower the price of our common stock, regardless of our actual operating performance. In the event of a drop in the price of our common stock, you could lose a substantial part or all of your investment in our common stock.

 

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In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

Future sales of our common stock, or the perception that these sales may occur, may depress the price of our common stock.

Additional sales of a substantial number of our shares of common stock, or the perception that such sales may occur, could have a material adverse effect on the price of our common stock and could materially impair our ability to raise capital through the sale of additional shares. As of March 19, 2018, we had 48,121,634 shares of common stock issued and outstanding. Substantially all of these shares have been registered by our registration statement of which this prospectus forms a part or otherwise are freely tradable. The selling stockholders covered by the Form S-1 beneficially own a significant amount of our common stock. The sale of all or a portion of the shares by the selling stockholders or our other stockholders, or the perception that these sales may occur, could cause the price of our common stock to decrease significantly.

Pursuant to the Registration Rights Agreement, the selling stockholders have certain demand and piggyback rights that may require us to file additional registration statements registering their common stock or to include sales of such common stock in registration statements that we may file for ourselves or other stockholders. Any shares of common stock sold under these registration statements or this prospectus will be freely tradable. In the event such registration rights are exercised and a large number of shares of common stock is sold, such sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital. Additionally, we will bear all expenses in connection with this registration and any such registrations, except that the selling stockholders may be responsible for their pro rata shares of underwriters’ discounts and commissions, stock transfer taxes and certain legal expenses.

As a holding company, our only material assets will be our equity interests in our operating subsidiaries, and our principal source of revenue and cash flow will be distributions from such subsidiaries, which may be limited by law and/or contract in making such distributions.

As a holding company, our principal source of revenue and cash flow is distributions from our subsidiaries. Therefore, our ability to carry out our business plan, to fund and conduct our business, service our debt and pay dividends (if any) in the future will depend on the ability of our subsidiaries to generate sufficient net income and cash flows to make upstream cash distributions to us. Our subsidiaries are separate legal entities, and although they may be wholly owned or controlled by us, they have no obligation to make any funds available to us, whether in the form of loans, dividends or otherwise. The ability of our subsidiaries to distribute cash to us may also be subject to, among other things, future restrictions that are contained in our subsidiaries’ agreements (as entered into from time to time), availability of sufficient funds in such subsidiaries and applicable laws and regulatory restrictions. Claims of creditors of our subsidiaries generally will have priority as to the assets of such subsidiaries over our claims and claims of our creditors and stockholders. To the extent the ability of our subsidiaries to distribute dividends or other payments to us could be limited in any way, this could materially limit our ability to fund and conduct our business, service our debt and pay dividends (if any).

Apollo is our largest stockholder and has significant influence over us, and its interests may conflict with or differ from your interests as a stockholder.

As of December 31, 2017, Apollo beneficially owns approximately 39.7% of our common stock. In connection with our emergence from the Chapter 11 proceedings, Apollo designated four of our eleven directors. As a result of that representation, Apollo has the ability to exert significant influence over us. The interests of Apollo could conflict with or differ from the interests of our other stockholders. For example, the concentration

 

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of ownership held by Apollo could delay, defer, cause or prevent a change of control of us or impede a merger, takeover or other business combination that other stockholders may otherwise view favorably. Apollo is in the business of making or advising on investments in companies and holds, and may from time to time in the future acquire, interests in or provide advice to businesses that may directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. Apollo may also pursue acquisitions that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. Our Amended and Restated Certificate of Incorporation (“Certificate of Incorporation”) provides that we expressly renounce any interest or expectancy in any business opportunity, transaction or other matter in which Apollo, the Ad Hoc Group (as defined in the Certificate of Incorporation) or any of their respective affiliates (with respect to Apollo) participates or desires or seeks to participate in, even if the opportunity is one that we would reasonably be deemed to have pursued if given the opportunity to do so.

Provisions in our organizational documents may delay or prevent our acquisition by a third party.

Our Certificate of Incorporation and our Amended and Restated By-laws (“By-laws”), contain several provisions that may make it more difficult or expensive for a third party to acquire control of us without the approval of our Board of Directors. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. These provisions include, among others:

 

•

provisions relating to the appointment of directors for a period of time following the emergence from Chapter 11;

 

•

provisions requiring stockholders to hold at least 33% of our outstanding common stock in the aggregate to request special meetings;

 

•

provisions that provide that the doctrine of “corporate opportunity” will not apply with respect to Apollo, the Ad Hoc Group, and their respective affiliates with respect to the Company; and

 

•

provisions that require a non-interim Chief Executive Officer to review any business combination transaction.

These provisions of our Certificate of Incorporation and Bylaws could discourage potential takeover attempts and reduce the price that investors might be willing to pay for our common stock in the future, which could reduce the market price of our common stock.

Our designation of the Delaware Court of Chancery as the exclusive forum for certain types of stockholder legal proceedings could limit our stockholders’ ability to obtain a more favorable forum.

Our Certificate of Incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or stockholders to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (“DGCL”), our Certificate of Incorporation or our By-laws or (iv) any action asserting a claim governed by the internal affairs doctrine or as to which the DGCL otherwise confers jurisdiction upon the Court of Chancery. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our Certificate of Incorporation described in the preceding sentence. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our Certificate of Incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs that we do not currently anticipate associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition and results of operations.

 

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CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS

This prospectus contains “forward-looking statements” within the meaning of the federal securities laws, which involve substantial risks and uncertainties. You can identify forward-looking statements because they contain words such as “believe,” “project,” “might,” “expect,” “may,” “will,” “should,” “seek,” “approximately,” “intend,” “plan,” “estimate,” or “anticipate” or similar expressions that concern our strategy, plans or intentions. All statements we make in this prospectus relating to our estimated and projected revenue, margins, costs, expenditures, cash flows, growth rates, financial results, and prospects are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those we expect. We derive many of our forward-looking statements from our operating budgets and forecasts, which we base upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.

We disclose important factors that could cause actual results to differ materially from our expectations under “Risk Factors” and elsewhere in this prospectus, including, without limitation, in conjunction with the forward-looking statements included in this prospectus. Some of the factors that we believe could affect our revenue, margins, costs, expenditures, cash flows, growth rates, financial results, business, condition and prospects include:

 

•

global economic conditions;

 

•

raw material costs and supply availability;

 

•

environmental hazards and regulations and related compliance and litigation costs;

 

•

litigation costs;

 

•

manufacturing regulations and related compliance and litigation costs;

 

•

risks associated with international operations;

 

•

foreign currency fluctuations;

 

•

rising energy costs;

 

•

increased competition;

 

•

the success of the implementation of the Shared Services Agreement;

 

•

the success of our strategic initiatives;

 

•

our holding company structure;

 

•

intellectual property protection and litigation;

 

•

relations and costs associated with our workforce;

 

•

our pension liabilities;

 

•

disruptions to our information technology infrastructure;

 

•

natural disasters, acts of war, terrorism and other acts beyond our control;

 

•

the impact of our substantial indebtedness;

 

•

our incurring additional debt;

 

•

acquisitions, divestitures and joint ventures that we may pursue;

 

•

restrictive covenants related to our indebtedness; and

 

•

other factors presented under the heading “Risk Factors.”

 

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We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. There may be other factors that could cause our actual results to differ materially from the results referred to in the forward-looking statements. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this prospectus may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

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USE OF PROCEEDS

We will not receive any proceeds from the sale of shares of common stock that may be sold from time to time pursuant to this prospectus. The selling stockholders will receive all of the proceeds from the sale of the shares of common stock offered from time to time under this prospectus. We have agreed to pay certain expenses of the selling stockholders incurred in connection with the sale of common stock from time to time pursuant to this prospectus, but will not pay any underwriters’ discounts or commissions.

 

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MARKET PRICES AND DIVIDEND POLICY

Our common stock is quoted on the OTCQX under the symbol “MPMQ”. The following table sets forth the high and low bid quotations for our common stock for the period indicated below, as reported by the OTCQX for such period. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions in our common stock.

 

		High				Low
Year ended December 31, 2018
First Quarter		$	27.50			$	17.61
Second Quarter (through May 8, 2018)		$	30.75			$	26.20
Year ended December 31, 2017
First Quarter		$	10.12			$	8.00
Second Quarter		$	14.90			$	9.25
Third Quarter		$	16.35			$	13.75
Fourth Quarter		$	22.70			$	15.05
Year ended December 31, 2016
First Quarter (from March 4, 2016)		$	9.00			$	6.00
Second Quarter		$	9.50			$	7.00
Third Quarter		$	13.00			$	9.50
Fourth Quarter		$	10.60			$	7.20

Holders. As of March 19, 2018, there were 24 stockholders of record of our common stock, one of which was Cede & Co., a nominee for The Depository Trust Company. All of our common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are considered to be held of record by Cede & Co., who is considered to be one stockholder of record. A greater number of holders of our common stock are “street name” or beneficial holders, whose shares of common stock are held of record by banks, brokers and other financial institutions. Because such shares of common stock are held on behalf of stockholders, and not by the stockholders directly, and because a stockholder can have multiple positions with different brokerage firms, banks and other financial institutions, we are unable to determine the total number of stockholders we have.

Dividends and Dividend Policy. We have not paid any dividends since our incorporation in 2014. While we plan to review our dividend policy periodically, for the foreseeable future, we intend to retain any earnings to finance our business and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our Board of Directors in accordance with applicable law and will be dependent upon then-existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions, business prospects and other factors that our Board of Directors considers relevant.

 

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OFFERING PRICE

All the common stock being offered hereby will be offered or sold from time to time directly by the selling stockholders or alternatively through underwriters, broker dealers or agents. The shares of common stock may be sold in one or more transactions at prevailing market prices at the time of sale or privately negotiated prices.

 

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CAPITALIZATION

The following table sets forth the Company’s cash and cash equivalents and capitalization as of December 31, 2017. We have agreed to pay certain expenses of the selling stockholders incurred in connection with the sale of common stock from time to time pursuant to this prospectus, but will not pay any underwriters’ discounts or commissions. The selling stockholders will receive all of the proceeds from the sale of the shares of common stock offered from time to time under this prospectus. We will not receive any proceeds from the sale of common stock from time to time pursuant to this prospectus.

You should read the information set forth below in conjunction with the Company’s audited consolidated financial statements and the notes thereto and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and the notes thereto included elsewhere herein.

 

(dollars in millions)		As of December 31, 2017
Cash and cash equivalents(1)		$	174
Debt outstanding:
ABL Facility(2)			—
First Lien Notes (includes $85 million of unamortized debt discount)			1,015
Second Lien Notes (includes $25 million of unamortized debt discount)			177
China bank loans			36
Total debt			1,228
Total equity (deficit)			544
Total capitalization		$	1,772

 

(1)	Cash and cash equivalents consist of bank deposits, money market and other financial instruments with an initial maturity of three months or less.

(2)

After giving effect to the ABL Amendment, the ABL Facility has total maximum borrowing availability of $300 million, subject to a borrowing base, of which approximately $244 million was available as of December 31, 2017, after giving effect to no outstanding borrowings and $56 million of outstanding letters of credit. See “Description of Indebtedness—ABL Facility.”

 

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SELECTED HISTORICAL FINANCIAL INFORMATION

The following table presents the Company’s selected historical financial information as of and for the periods presented. Prior to the Emergence Date, Momentive had not conducted any business operations. Accordingly, unless otherwise noted or suggested by context, all financial information and data and accompanying financial statements and corresponding notes, as of and prior to the Emergence Date, as contained in this prospectus, reflect the actual historical consolidated results of operations and financial condition of MPM for the periods presented and do not give effect to the Plan of Reorganization or any of the transactions contemplated thereby or the adoption of “fresh-start” accounting.

Upon emergence from bankruptcy on the Emergence Date, we adopted fresh start accounting, which resulted in the creation of a new entity for financial reporting purposes. As a result of the application of fresh start accounting, as well as the effects of the implementation of the Plan of Reorganization, the consolidated financial statements on or after October 24, 2014 are not comparable with the consolidated financial statements prior to that date.

The consolidated statement of operations data for the years ended December 31, 2017, December 31, 2016, December 31, 2015, successor period from October 25, 2014 through December 31, 2014, the predecessor period from January 1, 2014 through October 24, 2014 and the year ended December 31, 2013 and the consolidated balance sheet data as of December 31, 2017, 2016, 2015, 2014, and 2013 have been derived from our audited consolidated financial statements. The selected historical financial information as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 have been derived from, and should be read in conjunction with, our audited consolidated financial statements included elsewhere in this prospectus. The selected historical financial information as of December 31, 2014 and 2013 and for the successor period from October 25, 2014 through December 31, 2014, the predecessor period from January 1, 2014 through October 24, 2014 and the year ended December 31, 2013 are not included in this prospectus.

 

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You should read the following selected historical financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and our consolidated financial statements and related notes and other financial information included elsewhere in this prospectus.

 

		Successor																Predecessor
(In millions, except per share data)		Year Ended December 31, 2017				Year Ended December 31, 2016				Year Ended December 31, 2015				Period from October 25, 2014 through December 31, 2014				Period from January 1, 2014 through October 24, 2014				Year Ended December 31, 2013
Statement of Operations Data:
Net sales		$	2,331			$	2,233			$	2,289			$	465			$	2,011			$	2,398
Cost of sales			1,831				1,845				1,894				402
Gross profit			500				388				395				63
Cost of sales, excluding depreciation and amortization																			1,439				1,732
Selling, general and administrative expense			333				347				285				80				434				373
Depreciation and amortization expense																			147				171
Research and development expense			64				64				65				13				63				70
Restructuring and discrete costs			6				42				32				5				20				21
Other operating loss (income), net			9				19				2				(1	)			—				—
Operating income (loss)			88				(84	)			11				(34	)			(92	)			31
Interest expense, net			80				76				79				15				162				394
Non-operating (income) expense, net			(8	)			(7	)			3				8				—				—
Gain on extinguishment and exchange of debt			—				(9	)			(7	)			—				—				—
Reorganization items, net			1				2				8				3				(1,972	)			—
Income (loss) before income tax and earnings from unconsolidated entities			15				(146	)			(72	)			(60	)			1,718				(363	)
Income tax expense			15				18				13				—				36				104
Income (loss) before earnings from unconsolidated entities			—				(164	)			(85	)			(60	)			1,682				(467	)
Earnings from unconsolidated entities, net of taxes			—				1				2				—				3				3
Net income (loss)			—				(163	)		$	(83	)			(60	)			1,685				(464	)
Earnings (loss) per share, basic and diluted		$	—			$	(3.39	)		$	(1.73	)		$	(1.25	)		$	16,850,000			$	(4,640,000	)
Dividends declared per common share		$	—			$	—			$	—			$	—			$	—			$	4,600
Cash Flow provided by (used in):
Operating activities		$	113			$	142			$	128			$	(3	)		$	(207	)		$	(150	)
Investing activities			(168	)			(117	)			(116	)			(17	)			(18	)			(88	)
Financing activities			(1	)			(16	)			(10	)			(1	)			390				220
Balance Sheet Data (at end of period):
Cash and cash equivalents		$	174			$	228			$	221			$	228							$	94
Working capital(1)			482				432				450				611								(2,884	)
Total assets			2,717				2,606				2,663				2,884								2,694
Total long term debt			1,192				1,167				1,169				1,163								7
Total liabilities			2,173				2,124				2,037				2,115								4,174
Total equity (deficit)			544				482				626				769								(1,480	)

 

(1)	Working capital is defined as accounts receivable plus inventories less accounts payable.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our results of operations and financial condition for the years ended December 31, 2017, December 31, 2016 and December 31, 2015 and with the audited consolidated financial statements and related notes included elsewhere herein. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs, and which involve numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements. See “Cautionary Statements Concerning Forward-Looking Statements.”

Overview and Outlook

We believe we are one of the world’s largest producers of silicones and silicone derivatives and a global leader in the development and manufacture of products derived from quartz and specialty ceramics. Silicones are a multi-functional family of materials used in a wide variety of products and serve as a critical ingredient in many construction, automotive, industrial, healthcare, personal care, electronic, consumer and agricultural uses. Silicones are generally used as an additive to or formulated product in a wide variety of, end products in order to provide or enhance certain of their attributes, such as resistance (temperature, ultraviolet light, and chemical), lubrication, adhesion or viscosity. Some of the most well-known end-use product applications include bath and shower caulk, pressure-sensitive adhesive labels, foam products, cosmetics and tires. Due to their versatility and high-performance characteristics, silicones are increasingly being used as a substitute for other materials. Our Quartz Technologies segment manufactures quartz and specialty ceramics for use in a number of high-technology industries, which typically require products made to precise specifications. The cost of our products typically represents a small percentage of the overall cost of our customers’ products.

We serve more than 4,000 customers between our Formulated and Basic Silicones, Performance Additives and Quartz Technologies segments in over 100 countries. Our customers include leading companies in their respective industries.

Reportable Segments

In the third quarter of 2017, we reorganized our segment structure and bifurcated our Silicones segment into Performance Additives and Formulated and Basic Silicones to better reflect our specialty chemical portfolio and related performance. This reorganization included a change in our reportable segments from two to four segments. Our operations were previously organized in two segments: Silicones and Quartz. Our reorganized segments are based on the products that we offer and the markets that we serve. At December 31, 2017, we had four reportable segments: Performance Additives, Formulated and Basic Silicones, Quartz Technologies, and Corporate.

Our Performance Additives segment is one of the leading manufacturers of specialty silanes, silicone fluids, and urethane additives. Our liquid additives are key ingredients in our customers’ products and are used to improve or enable the performance characteristics and processability of a variety of products across different end-markets including automotive, personal care, agriculture, consumer and construction. Our silicone fluids, silanes, and urethane additives Performance Additives product lines are developed using a range of raw material inputs and generally use more limited siloxane than Formulated and Basic Silicone products.

Our Formulated and Basic Silicones segment produces sealants, electronic materials, coatings, elastomers, and basic silicone fluids focused on automotive, consumer goods, construction, electronics and healthcare end-markets. Our products enable key design features, such as extended product life, wear resistance, biocompatibility and weight reduction. Our electronic materials, coatings and sealants product lines are generally applied to our customers’ products, in the form of a high-tech coating or adhesive, while our elastomers product

 

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lines are fashioned into parts by extruding or molding them in items such as gaskets or tubing. Formulated silicones product offerings are typically used to seal, protect or adhere, and often perform multiple functions at once.

Our Quartz Technologies segment is a global leader in the development and manufacturing of fused quartz and non-oxide based ceramic powders and shapes. Fused quartz products are manufactured from quartz sand and are used in processes requiring extreme temperature and high purity. Momentive’s high-purity fused quartz materials are used for a diverse range of applications in which optical clarity, design flexibility and durability in extreme environments are critical, such as semiconductor, lighting, healthcare and aerospace. Our product line includes tubing, rods and other solid shapes, as well as fused quartz crucibles for growing single crystal silicon. Our Quartz Technologies segment’s products are the material solution for silicon chip semiconductor manufacturing.

Our organizational structure continues to evolve. We are also continuing to refine our business and operating structure to better align our services to our customers and improve our cost position, while continuing to invest in global growth opportunities.

2017 Overview

 

•

Net Sales—Net sales in 2017 were $2,331 million, an increase of 4% compared with $2,233 million in 2016. The increase in net sales was driven by volume gains in our Performance Additives segment and the specialty portion of our Formulated and Basic Silicones product portfolio, partially offset by our strategic decision to deemphasize the sale of lower margin products. Volume gains were driven by increased demand in consumer, automotive, and electronics end markets.

 

•

Net Income (Loss)—Net income in 2017 was $0 million, an increase of $163 million compared to net loss $163 million in 2016. This was due to the increase in gross profit, the gain recognition from an insurance claim, and costs due to a fire at our Leverkusen, Germany facility not recurring during 2017, partially offset by a gain on extinguishment of debt also not recurring during 2017.

 

•

Segment EBITDA—Segment EBITDA in 2017 was $293 million, an increase of $55 million compared to $238 million in 2016. The increase in Segment EBITDA was driven by volume growth in the specialty portion of our Formulated and Basic Silicones product portfolio, operating leverage within the Quartz Technologies segment, and strategic capital investments.

 

•

Future growth initiatives include the expansion of our capability to manufacture NXT silane, which is an innovative product used in the production of tires, and can offer tire manufacturers the ability to reduce rolling resistance without loss of wet traction, as well as deliver benefits in the tire manufacturing process. This expansion has been completed and production is expected to ramp up in the second half of 2018.

2018 Outlook

As we look into 2018, we expect continued strong demand, solid and improved industry fundamentals, and growth as a result of the capital investments we have made in our specialty product portfolio over the last several years. We have implemented price increases across our entire silicones product portfolio which are expected to benefit us in 2018 and offset inflation we are experiencing for certain raw materials. We are well positioned to leverage our leadership positions, optimize our portfolio, and invest in and drive new growth programs. Additionally, we expect 2018 sales to continue to reflect a mix improvement as we reduce exposure to under-performing siloxane derivative products and grow our higher margin specialty products.

We are continuing to leverage our research and development capabilities and invest in high-growth product lines and geographical regions, positioning the Company for long-term success. We are also focused on gaining

 

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productivity efficiencies and improving margins through investments in improved operational reliability. We continue to evaluate additional actions, as well as productivity measures, that could support further cost savings. Such actions could include additional restructuring and incremental exit and disposal costs.

We have implemented approximately $48 million in annual structural cost reduction initiatives through our previously announced global restructuring program, which has begun delivering significant savings. Cumulatively through December 31, 2017, we have achieved approximately $45 million of savings under this program. In addition, in the first quarter of 2018, we announced a new restructuring program consisting primarily of additional selling, general and administrative expense reductions that we plan to implement in early 2018. We estimate that this program will result in $15 million of run-rate cost reductions and expect approximately half of these reductions to be realized through December 31, 2018.

We remain focused on driving free cash flow, defined as cash flows from operating activities less capital expenditures, and optimizing net working capital, as described in the “Liquidity and Capital Resources” section below, in fiscal year 2018.

Matters Impacting Comparability of Results

Other Comprehensive Income

Our other comprehensive income is significantly impacted by foreign currency translation. The impact of foreign currency translation is driven by the translation of assets and liabilities of our foreign subsidiaries which are denominated in functional currencies other than the U.S. dollar. The primary assets and liabilities driving the adjustments are cash and cash equivalents; accounts receivable; inventory; property, plant and equipment; goodwill and other intangible assets; accounts payable and pension and other postretirement benefit obligations. The primary currencies in which these assets and liabilities are denominated are the euro and Japanese yen.

Raw Materials

In 2017, we purchased approximately $1.1 billion of raw materials. The largest raw material used in our business is silicon metal. The cost of silicon metal comprised approximately 9% of our total raw material costs in 2017. Heading into 2018, the environment for certain raw materials is inflationary. However, to limit and minimize exposure to inflation, we contracted directly or indirectly for much of our key raw material purchases.

Naturally occurring quartz sand is the key raw material for many of the products manufactured by our Quartz Technologies business, which is currently available from a limited number of suppliers. While we also use quartz sand from several global sand suppliers, one of our suppliers, Unimin Corporation (“Unimin”), a major producer of natural quartz sand, controls a significant portion of the market for this sand. As a result, Unimin exercises significant control over quartz sand prices, which have been steadily increasing. We entered into a purchase agreement with this supplier, effective as of January 1, 2017, which expires on December 31, 2021.

We expect long-term raw material cost fluctuations to continue because of price movements of key feedstocks. To help mitigate the fluctuations in raw material pricing, we have purchase and sale contracts and commercial arrangements with many of our vendors and customers that contain periodic price adjustment mechanisms. Due to differences in the timing of pricing mechanism trigger points between our sales and purchase contracts, there is often a “lead-lag” impact. In many cases this “lead-lag” impact can negatively impact our margins in the short term in periods of rising raw material prices and positively impact them in the short term in periods of falling raw material prices.

 

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Results of Operations

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Year Ended December 31,
(dollars in millions)		2017				2016				2015
Net sales		$	2,331			$	2,233			$	2,289
Cost of sales			1,831				1,845				1,894
Gross profit			500				388				395
Selling, general and administrative expense			333				347				285
Research and development expense			64				64				65
Restructuring and discrete costs			6				42				32
Other operating loss (income), net			9				19				2
Operating income (loss)			88				(84	)			11
Operating (loss) income as a percentage of net sales			4	%			(4	)%			—	%
Interest expense, net			80				76				79
Non-operating (income) expense, net			(8	)			(7	)			3
Gain on extinguishment of debt			—				(9	)			(7	)
Reorganization items, net			1				2				8
Total non-operating expense			73				62				83
Income (loss) before income taxes and earnings from unconsolidated entities			15				(146	)			(72	)
Income tax expense			15				18				13
Income (loss) before earnings from unconsolidated entities			—				(164	)			(85	)
Earnings from unconsolidated entities, net of taxes			—				1				2
Net income (loss)		$	—			$	(163	)		$	(83	)
Other comprehensive income (loss)		$	58			$	16			$	(64	)

Net Sales

In 2017, net sales increased by $98 million, or 4%, compared to 2016. This increase was primarily driven by our intentional shift toward higher-margin products due to increased demand in automotive, electronics, and consumer end markets versus less profitable commodity products, resulting in a volume increase of approximately $46 million, favorable price/mix shift of $46 million, and exchange rate fluctuations of approximately $6 million.

In 2016, net sales decreased by $56 million, or 2%, compared to 2015. This decrease was primarily due to volume decrease of $22 million in line with our intentional efforts to reduce under-performing siloxane derivative products, as well as negative price and mix shift of $36 million, caused by declines in agriculture and oil and gas markets. In addition, there were favorable exchange rate fluctuations of $2 million due to the weakening of the U.S. dollar against other currencies.

Operating Income (Loss)

2017 Compared to 2016 Operating Results

In 2017, operating income increased by $172 million, from an operating loss of $84 million, to an operating income of $88 million. Cost of sales decreased by $14 million compared to 2016, primarily due to lower accelerated depreciation of $29 million, favorable exchange rate fluctuations of $17 million and raw material deflation of $5 million, partially offset by the related impacts of increased sales and higher net processing costs.

 

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Selling, general and administrative expense decreased by $14 million, compared to 2016 primarily due to $38 million in favorable re-measurement of our pension liabilities offset by the impact of a merit increase implemented in 2016 and unfavorable exchange rate fluctuations of $5 million. Research and development expense for 2017 was flat compared to 2016.

A summary of the components of depreciation and amortization expense on our consolidated statements of operations for the years ended December 31, 2017 and 2016 is as follows:

 

		Year Ended December 31,
		2017				2016
Cost of sales		$	110			$	137
Selling, general and administrative expense			44				48
Total depreciation and amortization expense		$	154			$	185

Restructuring and discrete costs for 2017 decreased by $36 million compared to 2016 mainly due to the gain related to an insurance reimbursement of $24 million related to fire damage at our Leverkusen, Germany facility and $13 million for one-time costs in 2016 triggered by the siloxane capacity transformation programs not recurring in 2017.

Other operating expense decreased by $10 million, primarily due to a decrease of $8 million in impairments and disposals of certain assets and equipment and a settlement gain of $2 million related to the resolution of a take or pay arrangement and certain sales and use tax refunds.

2016 Compared to 2015 Operating Results

In 2016, operating income decreased by $95 million, from an operating income of $11 million to an operating loss of $84 million. Cost of sales decreased by $49 million compared to 2015 primarily due to a decrease in net processing costs of $80 million, partially offset by $35 million in accelerated depreciation primarily related to certain long-lived assets mainly triggered by siloxane capacity transformation programs in Germany.

Selling, general and administrative expense increased by $62 million, compared to 2015 primarily due to $49 million in re-measurement of our pension and other postretirement liabilities. The incremental increase was driven by increased merit and incentive compensation, partially offset by various cost reduction actions. Research and development expense for 2016 decreased by $1 million compared to 2015 primarily related to the timing of new projects.

A summary of the components of depreciation and amortization expense on our consolidated statements of operations for the years ended December 31, 2016 and 2015 is as follows:

 

		Year Ended December 31,
		2016				2015
Cost of sales		$	137			$	105
Selling, general and administrative expense			48				48
Total depreciation and amortization expense		$	185			$	153

Restructuring and discrete costs for 2016 increased by $10 million compared to 2015 mainly due to costs arising from a fire at our Leverkusen, Germany facility and $13 million for one-time costs triggered by the siloxane capacity transformation programs. These were partially offset by $11 million in reduced severance costs compared to 2015.

 

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Other operating expense increased by $17 million, primarily due to an increase of $11 million in impairments and disposals of certain assets and equipment. In addition, in 2015 there was a settlement gain of $6 million related to the resolution of a customer dispute.

Non-Operating Expense (Gain)

In 2017, total non-operating expense increased by $11 million, from an expense of $62 million to an expense of $73 million, compared to 2016. The increase was primarily due to the gain on extinguishment of Second Lien Notes not recurring in 2017.

In 2016, total non-operating expense decreased by $21 million, from an expense of $83 million to an expense of $62 million, compared to 2015. The decrease was primarily due to a gain of $9 million related to recovery of a tax claim from GE, $6 million due to lower reorganization expense in 2016 and $3 million in lower interest expense.

Income Tax Expense

On December 22, 2017, the Tax Cuts & Jobs Act (the “TCJA”) was enacted into law. The TCJA decreased the U.S. statutory tax rate for years beginning after December 31, 2017, and included other domestic and international tax provisions that affect the measurement of our deferred tax assets and liabilities. As a result, we revalued our deferred tax assets and liabilities as of December 31, 2017 and reduced our net deferred tax assets by $113 million, which was fully offset by a similar reduction in our valuation allowance. Please refer to detailed discussions on the TCJA in Note 10 to the Consolidated Financial Statements included elsewhere in this prospectus.

In 2017, income tax expense decreased by $3 million compared to 2016. The effective income tax rate was 100% for 2017 compared to (13%) for 2016. The change in the effective tax rate was primarily attributable to the amount and distribution of income and loss among the various jurisdictions in which we operate. The effective tax rate was also impacted by the movement in the valuation allowance. The valuation allowance, which relates principally to U.S. and certain non-U.S. deferred tax assets, was established and maintained based on our assessment that a portion of the deferred tax assets will likely not be realized. Due to fluctuations in pre-tax income or loss between jurisdictions with and without a valuation allowance established, our historical effective tax rates are likely not indicative of our future effective tax rates.

In 2016, income tax expense increased by $5 million compared to 2015. The effective income tax rate was (13%) for 2016 compared to (18%) for 2015. The change in the effective tax rate was primarily attributable to the amount and distribution of income and loss among the various jurisdictions in which we operate. The effective tax rate was also impacted by the movement in the valuation allowance. The valuation allowance, which relates principally to U.S. and certain non-U.S. deferred tax assets, was established and maintained based on our assessment that a portion of the deferred tax assets will likely not be realized.

For 2017, profits and losses incurred in foreign jurisdictions with statutory tax rates less than 35% (primarily China, Thailand and Japan) comprised the largest portion of the foreign rate differential. For 2016, China, Germany, and Thailand comprised the largest portion of the foreign rate differential. For 2015, China comprised the largest portion of the foreign rate differential.

We are recognizing the earnings of non-U.S. operations currently in our U.S. consolidated income tax return as of December 31, 2017 and are expecting that, with the exception of Germany and Japan, all earnings will be repatriated to the United States. We have accrued the incremental tax expense expected to be incurred upon the repatriation of these earnings. In addition, we have certain intercompany arrangements that, if settled, may trigger taxable gains or losses based on foreign currency exchange rates in place at the time of settlement. As a result, we are asserting permanent reinvestment with respect to certain intercompany arrangements considered

 

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indefinite. Since the currency translation impact is considered indefinite, we have not provided deferred taxes on gains of $9 million, which could result in a tax obligation of $3 million, based on currency exchange rates as of December 31, 2017. Should the intercompany arrangement be settled or we change our assertion, the actual tax impact will depend on the currency exchange rate at the time of settlement or change in assertion.

Other Comprehensive (Loss) Income

For the year ended December 31, 2017, foreign currency translation positively impacted other comprehensive income by $45 million, primarily due to the impact of the weakening of the U.S. dollar against other currencies. Also, for the year ended December 31, 2017, pension and postretirement benefit adjustments positively impacted other comprehensive income by $13 million, primarily due to the recognition of net prior service benefit related to the effect of certain plan provision changes.

For the year ended December 31, 2016, pension and postretirement benefit adjustments positively impacted other comprehensive income by $17 million, primarily due to the recognition of net prior service credit related to the effect of plan redesign triggered by certain changes to company sponsored post-retiree medical, dental, vision and life insurance benefit plans.

For the year ended December 31, 2015, foreign currency translation negatively impacted other comprehensive loss by $65 million, primarily due to the impact of the strengthening of the U.S. dollar against the euro. In 2015, pension and postretirement benefit negative impact on other comprehensive loss was $1 million due to the recognition of prior service costs in 2014 following provision changes to our U.S. pension plan.

Results of Operations by Segment

Following are net sales and Segment EBITDA by reportable segment. Segment EBITDA is defined as EBITDA (earnings before interest, income taxes, depreciation and amortization) adjusted for certain non-cash items and certain other income and expenses. Segment EBITDA is the primary performance measure used by our senior management, the chief operating decision-maker and the Board of Directors to evaluate operating results and allocate capital resources among segments. Segment EBITDA is also a principle profitability measure used to set management and executive incentive compensation goals. Segment EBITDA should not be considered a substitute for net income (loss) or other results reported in accordance with U.S. GAAP. Segment EBITDA may not be comparable to similarly titled measures reported by other companies.

 

		Year Ended December 31,
		2017				2016				2015
Net Sales(1):
Performance Additives		$	900			$	849			$	835
Formulated and Basic Silicones			1,229				1,212				1,277
Quartz Technologies			202				172				177
Total		$	2,331			$	2,233			$	2,289
Segment EBITDA:
Performance Additives		$	188			$	187			$	176
Formulated and Basic Silicones			105				70				25
Quartz Technologies			40				20				27
Corporate			(40	)			(39	)			(33	)
Total		$	293			$	238			$	194

 

(1)	Inter-segment sales are not significant and, as such, are eliminated within the selling segment.

 

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2017 Compared to 2016 Segment Results

Following is an analysis of the percentage change in sales by segment from 2016 to 2017:

 

		Volume				Price/Mix				Currency Translation				Total
Performance Additives			7	%			(1)%				—	%			6	%
Formulated and Basic Silicones			(4	)%			5%				—	%			1	%
Quartz Technologies			18	%			—  %				—	%			18	%

Performance Additives

Net sales in 2017 increased $51 million, or 6% compared to 2016. This increase was primarily due to a volume increase of $59 million related to demand in consumer, automotive, and personal care markets reflecting our growth initiatives across our entire portfolio, and $4 million due to the weakening of the U.S. dollar against other currencies, offset by adverse price/mix variance of $12 million.

Segment EBITDA in 2017 increased by $1 million to $188 million compared to 2016. The increase was impacted by a temporary raw material lead-lag being addressed by pricing actions and the one-time impact of Hurricane Harvey.

Formulated and Basic Silicones

Net sales in 2017 increased $17 million or 1%, compared to 2016. This increase was primarily driven by a favorable mix/price shift of $58 million towards higher-margin products versus less profitable commodity products and $2 million due to the weakening of the U.S. dollar against other currencies, offset by volume decrease of $43 million related to our intentional efforts to reduce under-performing siloxane derivative products. The intentional volume decline masked specialties growth, driven by increased demand in electronic materials, elastomers, sealants, and coatings end markets. The mix/price increase was substantially all due to mix, as the pricing actions taken in the fourth quarter of 2017 are expected to impact results in 2018.

Segment EBITDA in 2017 increased by $35 million to $105 million compared to 2016. This increase was primarily due to higher sales of higher margin products and improved demand in automotive, consumer products, and electronic markets, improved efficiencies and raw material deflation.

Quartz Technologies

Net sales in 2017 increased $30 million, or 18%, compared to 2016. The increase was primarily due to an increase in sales volume of $30 million, mainly driven by improved demand in semiconductor and aerospace end markets.

Segment EBITDA in 2017 increased by $20 million to $40 million compared to 2016. This increase was primarily due to the sales volume increase, operating leverage, and improved manufacturing efficiencies. Fiscal year 2017 also reflects full benefit of 2016 restructuring initiatives.

Corporate

Corporate charges are primarily general and administrative expenses that are not allocated to the segments, such as shared service and administrative functions. Compared to 2016, Corporate charges increased by $1 million to $40 million, mainly due to increase in employee headcount and related compensation expenses.

 

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2016 Compared to 2015 Segment Results

Following is an analysis of the percentage change in sales by segment from 2015 to 2016:

 

		Volume				Price/Mix				Currency Translation				Total
Performance Additives			6	%			(4)%				—	%			2	%
Formulated and Basic Silicones			(5	)%			—  %				—	%			(5	)%
Quartz Technologies			(4	)%			—  %				1	%			(3	)%

Performance Additives

Net sales in 2016 increased $14 million, or 2%, compared to 2015. This increase was primarily due to a volume increase of $47 million driven by demand in consumer, automotive, construction, and industrial markets, partially offset by negative price and mix shift of $32 million, caused by declines in agriculture and oil and gas markets, and $1 million due to the strengthening U.S. dollar.

Segment EBITDA in 2016 increased by $11 million to $187 million compared to 2015. This increase was primarily due to higher sales, production efficiencies and raw material deflation.

Formulated and Basic Silicones

Net sales in 2016 decreased $65 million, or 5%, compared to 2015. This decrease was primarily due to volume decrease of $62 million due to our intentional efforts to reduce under-performing siloxane derivative products and negative price and mix shift of $4 million partially offset by $1 million of exchange rate fluctuations.

Segment EBITDA in 2016 increased by $45 million to $70 million compared to 2015. This increase was primarily due to our intentional efforts to reduce under-performing siloxane derivative products, production efficiencies and raw material deflation.

Quartz Technologies

Net sales in 2016 decreased $5 million, or 3%, compared to 2015. The decrease was primarily due to a volume decrease of $7 million caused by softening of the end user demand primarily due to declines in the semiconductor market offset by favorable currency impacts.

Segment EBITDA in 2016 decreased by $7 million to $20 million compared to 2015. The decrease was primarily due to the inclusion of a one-time settlement gain of $6 million related to the resolution of customer dispute in the first quarter of 2015.

Corporate

Corporate charges are corporate, general and administrative expenses that are not allocated to the other segments, such as certain shared service and administrative functions. Compared to 2015, Corporate charges increased by $5 million to $39 million, mainly due to merit increase and higher incentive based compensation.

 

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Reconciliation of Net Income (Loss) to Segment EBITDA:

 

		Year Ended December 31,
(dollars in millions)		2017				2016				2015
Net income (loss)		$	—			$	(163	)		$	(83	)
Interest expense, net			80				76				79
Income tax expense			15				18				13
Depreciation and amortization			154				185				153
Gain on extinguishment and exchange of debt			—				(9	)			(7	)
Items not included in Segment EBITDA:
Non-cash charges and other income and expense		$	12			$	26			$	15
Unrealized (gains) losses on pension and postretirement benefits			(5	)			33				(16	)
Restructuring and discrete costs			36				70				32
Reorganization items, net			1				2				8
Segment EBITDA		$	293			$	238			$	194

Items Not Included in Segment EBITDA

Not included in Segment EBITDA are certain non-cash and other income and expenses.

For the years ended December 31, 2017, 2016 and 2015, non-cash charges primarily included asset impairment charges, loss due to scrapping of certain assets, stock based compensation expense, and net foreign exchange transaction gains and losses related to certain intercompany arrangements.

For the years ended December 31, 2017, 2016 and 2015, unrealized (gains) on pension and postretirement benefits represented non-cash actuarial losses recognized upon the re-measurement of our pension and postretirement benefit obligations.

Restructuring and discrete costs for all periods primarily included expenses from restructuring and integration. For the years ended December 31, 2017 and 2016, these amounts included costs arising from the work stoppage inclusive of unfavorable manufacturing variances at our Waterford, New York facility. For the year ended December 31, 2017, these costs also included a gain of $24 million related to insurance reimbursement related to fire damage at our Leverkusen, Germany facility and $3 million related to a postponed offering of our securities. For the year ended December 31, 2016, these costs also included exit costs due to siloxane capacity transformation programs at our Leverkusen, Germany facility, loss of $10 million due to a fire at our Leverkusen, Germany facility, and recovery of Italian tax claims from GE.

Reorganization items, net represent incremental costs incurred directly as a result of the Bankruptcy Filing. For the years ended December 31, 2017, 2016 and 2015 these amounts were primarily related to certain professional fees.

Segment Realignment

The Financial Standards Accounting Board Accounting Standards Codification Topic 280, Segment Reporting, defines operating segments as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

In the third quarter of 2017, we reorganized our segment structure and bifurcated our Silicones segment into Performance Additives and Formulated and Basic Silicones to better reflect our specialty chemical portfolio and

 

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related performance. This reorganization included a change in our operating segments from two to four segments. We reorganized to the new four segments model, by implementing the following:

 

•

financial information is prepared separately and regularly for each of the four segments; and

 

•

the CEO would regularly review the results of operations and assesses the performance of each of these segments.

Our operations were previously organized in two segments: Silicones and Quartz. The four segments model is composed of the following:

 

•

a new Performance Additives segment realigned from the former Silicones Segment;

 

•

a new Formulated and Basic Silicones segment realigned from the former Silicones segment;

 

•

a Quartz Technologies segment, which has been renamed from the existing Quartz segment; and

 

•

a Corporate segment.

Liquidity and Capital Resources

Our primary sources of liquidity are cash on hand, cash flows from operations and funds available under the ABL Facility. Our primary continuing liquidity needs are to finance our working capital, debt service and capital expenditures.

At December 31, 2017, we had $1,228 million of outstanding indebtedness (with a face value of $1,338 million). In addition, at December 31, 2017, we had $387 million in liquidity consisting of the following:

 

•

$173 million of unrestricted cash and cash equivalents (of which $158 million is maintained in foreign jurisdictions); and

 

•

$214 million of availability under the ABL Facility ($270 million borrowing base, less $56 million of outstanding letters of credit and subject to a fixed charge coverage ratio of 1.0 to 1.0 that will only apply if our availability is less than the greater of (a) 12.5% of the lesser of the borrowing base and the total ABL Facility commitments at such time and (b) $27 million).

In the fourth quarter of 2015 and first quarter of 2016, we initiated a debt buyback program and repurchased $48 million in aggregate principal amount of our Second Lien Notes for approximately $26 million, resulting in a net gain of $16 million. All repurchased notes were canceled at the time of repurchase, reducing the aggregate principal amount of these notes outstanding from $250 million at the end of third quarter of 2015 to $202 million as of December 31, 2016.

Our net working capital (defined as accounts receivable and inventories less accounts payable) at December 31, 2017 and 2016 was $482 million and $432 million, respectively. A summary of the components of our net working capital as of December 31, 2017 and 2016 is as follows:

 

		December 31, 2017				% of LTM Net Sales				December 31, 2016				% of LTM Net Sales
Accounts receivable		$	323				14	%		$	280				13	%
Inventories			445				19	%			390				17	%
Accounts payable			(286	)			(12	)%			(238	)			(11	)%
Net working capital		$	482				21	%		$	432				19	%

The increase in net working capital of $50 million from December 31, 2016 was due to an increase in accounts receivable because of timing of sales in the period and increased inventory to meet forecast volume,

 

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offset by an increase in accounts payable due to strategic efforts to improve payment terms. Exchange rate fluctuations of $21 million due to the weakening of the U.S. dollar against the euro and Japanese yen also contributed to this increase in net working capital.

We remain focused on driving positive free cash flow in 2018 through our global cost control initiatives and aggressively managing net working capital. To minimize the impact of net working capital on cash flows, we continue to review inventory safety stock levels where possible. We also continue to focus on receivable collections by accelerating receipts through the sale of receivables at a discount.

We have the ability to borrow from the ABL Facility to support our short-term liquidity requirements, particularly when net working capital requirements increase in response to seasonality of our volumes in the summer months. As of December 31, 2017, we had no outstanding borrowings under the ABL Facility.

On March 2, 2018, we amended the ABL Facility to increase the commitments under the ABL Facility by $30 million for an aggregate principal total of $300 million and extend the maturity of the ABL Facility from October 2019 to March 2, 2023, subject to a springing maturity 91 days prior to the scheduled maturity date for each of the First Lien Notes and the Second Lien Notes if the principal amount outstanding for such series of notes exceeds $50 million.

2018 Outlook

We believe we are favorably positioned to fund our ongoing liquidity requirements. We believe that due to our businesses operating cash flows as well as our $387 million of liquidity in the form of cash and our ABL facility, our long-term debt maturities in 2021 and 2022, and our annual debt service costs of approximately $55 million, our business has adequate capital resources to meet material commitments coming due during the next 12-month period. We are well positioned to make strategic capital investments, leverage our leadership positions with both our customers and suppliers, optimize our portfolio and drive new growth programs. Our business is impacted by general economic and industrial conditions, including general industrial production, automotive builds, housing starts, construction activity, consumer spending and semiconductor capital equipment investment, and these factors could have negative effects to our liquidity. Our business has both geographic and end market diversity, which often reduces the impact of any one of these factors on our overall performance.

Capital spending in 2018 is expected to be approximately $125 million, approximately $45 million of which relates to certain growth and productivity projects. We remain focused on continuing to balance opportunistic and accretive growth investments with our commitment to continued de-leveraging and maintaining significant financial flexibility.

We expect to have adequate liquidity to fund our operations for the foreseeable future from cash on our balance sheet, cash flows provided by operating activities and amounts available for borrowings under the ABL Facility.

Debt Repurchases and Other Transactions

From time to time, depending upon market, pricing and other conditions, as well as on our cash balances and liquidity, we or our affiliates may seek to acquire (and have acquired) our outstanding equity and/or debt securities or other indebtedness of the Company through open market purchases, privately negotiated transactions, tender offers, redemption or otherwise, upon such terms and at such prices as we or our affiliates may determine (or as may be provided for in the indentures governing our notes if applicable), for cash or other consideration. For example, in the fourth quarter of 2015 and first quarter of 2016, we repurchased $48 million in aggregate principal amount of our Second Lien Notes for approximately $26 million, resulting in a net gain of $16 million. All repurchased notes were canceled at the time of repurchase, reducing the aggregate principal amount of these notes outstanding from $250 million at the end of third quarter of 2015 to $202 million as of

 

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December 31, 2016. In addition, we have considered and will continue to evaluate potential transactions to reduce net debt, such as debt for debt exchanges and other transactions. There can be no assurance as to which, if any, of these alternatives or combinations thereof we or our affiliates may choose to pursue in the future as the pursuit of any alternative will depend upon numerous factors such as market conditions, our financial performance and the limitations applicable to such transactions under our financing documents.

Sources and Uses of Cash

Following are highlights from our Consolidated Statements of Cash Flows:

 

		Year Ended December 31,
		2017				2016				2015
Sources (uses) of cash:
Operating activities		$	113			$	142			$	128
Investing activities			(168	)			(117	)			(116	)
Financing activities			(1	)			(16	)			(10	)
Effect of exchange rates on cash flow			5				(2	)			(8	)
Net (decrease) increase in cash and cash equivalents		$	(51	)		$	7			$	(6	)

Operating Activities

In 2017, operations generated $113 million of cash. Net income of $0 million, included $168 million net non-cash items, of which $154 million was for depreciation and amortization, $25 million for amortization of debt discount costs, $4 million related to stock-based compensation expense, and $14 million due to loss on impaired and scrapped assets offset by: $5 million of unrealized losses related to the re-measurement of our retirement benefit obligations, $6 million of unrealized foreign currency gains, $9 million related to capital reimbursed from insurance proceeds and $9 million related to deferred income tax benefit. Net working capital used $25 million of cash primarily, due to an increase of $30 million in accounts receivable because of timing of sales in the period and an increase in inventories of $36 million to meet forecast volume, offset by an increase in accounts payable of $41 million due to strategic efforts to improve payment terms. Changes in other assets and liabilities that primarily included interest expense, taxes and pension plan contributions were driven by the timing of when items were expensed versus paid and impact of foreign currency fluctuations.

In 2016, operations generated $142 million of cash. Net loss of $163 million, included $234 million of net non-cash items, of which $185 million was for depreciation and amortization, $33 million of unrealized losses related to the re-measurement of our pension benefit liabilities, $23 million for amortization of debt discount costs, offset by: $12 million due to loss on impaired assets, $3 million of unrealized foreign currency gains, and $9 million related to gain on the extinguishment of debt. Net working capital generated $7 million of cash primarily driven by customer mix and timing of collections and strategic investment in profitable products, safety stock increase to support our Leverkusen, Germany site transformation and due to the strike at our Waterford, New York site. Changes in other assets and liabilities, due to/from affiliates and income taxes payable are driven by the timing of when items were expensed versus paid, which primarily included incentive compensation, certain liabilities related to siloxane capacity transformation programs, interest expense, pension plan contributions and taxes.

In 2015, operations generated $128 million of cash. Net loss of $83 million included $147 million of net non-cash items, of which mainly $153 million was for depreciation and amortization and $22 million was for amortization of debt discount costs, offset primarily by $10 million of unrealized foreign currency gains, $16 million of unrealized gains related to the re-measurement and curtailment related to our pension liabilities and $7 million related to gain on the extinguishment of debt. Net working capital generated $30 million of cash driven by customer mix and timing of collections as well as a decrease in accounts payable due to longer

 

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payment terms with vendors following our emergence from Chapter 11. Changes in other assets and liabilities, due to/from affiliates and income taxes payable are driven by the timing of when items were expensed versus paid, which primarily included interest expense, pension plan contributions and taxes.

Investing Activities

In 2017, investing activities used $168 million of cash, primarily due to $161 million related to ongoing capital expenditures, net of $9 million of capital reimbursed from insurance proceeds and $9 million related to our acquisition of a business. Capital expenditures used $73 million related to growth and productivity initiatives and the remaining $88 million related to maintenance, environmental, health and safety compliance.

In 2016, investing activities used $117 million of cash. We spent $117 million for ongoing capital expenditures, out of which $46 million related to growth and productivity initiatives and the remaining $71 million related to maintenance, environmental, health and safety compliance.

In 2015, investing activities used $116 million of cash. We spent $115 million for ongoing capital expenditures, out of which $29 million related to growth and productivity initiatives and the remaining $86 million related to maintenance, environmental, health and safety compliance.

Financing Activities

In 2017, Momentive used $1 million related to net short-term debt.

In 2016, financing activities used $16 million of cash, mainly due to the buyback of $29 million in aggregate principal amount of our Second Lien Notes for $16 million.

In 2015, financing activities used $10 million of cash, mainly due to the buyback of $19 million in aggregate principal amount of our Second Lien Notes for $10 million.

At December 31, 2017, there were $56 million in outstanding letters of credit and no borrowings outstanding under our ABL Facility, leaving unused borrowing capacity of $214 million.

The credit agreement governing the ABL Facility contains various restrictive covenants that prohibit us and/or restrict our ability to prepay indebtedness, including our First Lien Notes and Second Lien Notes (collectively, the “notes”). In addition, the credit agreement governing the ABL Facility and the indentures governing our notes, among other things, restrict our ability to incur indebtedness or liens, make investments or declare or pay any dividends. However, all of these restrictions are subject to exceptions.

There are certain restrictions on the ability of certain of our subsidiaries to transfer funds to the parent of such subsidiaries in the form of cash dividends, loans or otherwise, which primarily arise as a result of certain foreign government regulations or as a result of restrictions within certain subsidiaries’ financing agreements that limit such transfers to the amounts of available earnings and profits or otherwise limit the amount of dividends that can be distributed. In either case, we have alternative methods to obtain cash from these subsidiaries in the form of intercompany loans and/or returns of capital in such instances where payment of dividends is limited to the extent of earnings and profits.

We are recognizing the earnings of non-U.S. operations currently in our U.S. consolidated income tax return as of December 31, 2017 and are expecting that, with the exception of Germany and Japan, all earnings will be repatriated to the United States. We have accrued the incremental tax expense expected to be incurred upon the repatriation of these earnings. In addition, we have certain intercompany arrangements that, if settled, may trigger taxable gains or losses based on foreign currency exchange rates in place at the time of settlement. As a result, we are asserting permanent reinvestment with respect to certain intercompany arrangements considered

 

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indefinite. Since the currency translation impact is considered indefinite, we have not provided deferred taxes on gains of $9 million, which could result in a tax obligation of $3 million, based on currency exchange rates as of December 31, 2017. Should the intercompany arrangement be settled or we change our assertion, the actual tax impact will depend on the currency exchange rate at the time of settlement or change in assertion.

Covenants Under the ABL Facility and the Notes

The instruments that govern our indebtedness contain, among other provisions, restrictive covenants (and incurrence tests in certain cases) regarding indebtedness, dividends and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and, under certain circumstances, the maintenance of a fixed charge coverage ratio, as further described below. Payment of borrowings under the ABL Facility and our notes may be accelerated if there is an event of default as determined under the governing debt instrument. Events of default under the credit agreement governing the ABL Facility include the failure to pay principal and interest when due, a material breach of a representation or warranty, events of bankruptcy, a change of control and most covenant defaults. Events of default under the indentures governing our notes include the failure to pay principal and interest, a failure to comply with covenants, subject to a 30-day grace period in certain instances, and certain events of bankruptcy.

The ABL Facility does not have any financial maintenance covenant other than a minimum fixed charge coverage ratio of 1.0 to 1.0 that would only apply if our availability under the ABL Facility at any time was less than the greater of (a) 12.5% of the lesser of the borrowing base and the total ABL Facility commitments at such time and (b) $27 million. The fixed charge coverage ratio (the “Fixed Charge Coverage Ratio”) is generally defined as the ratio of (a) Adjusted EBITDA minus non-financed capital expenditures and cash taxes to (b) debt service plus cash interest expense plus certain restricted payments, each measured on a last twelve months, or LTM, basis and calculated as of the last day of the applicable fiscal quarter.

In addition to the financial maintenance covenant described above, we are also subject to certain incurrence tests under the indentures governing our notes that restrict our ability to take certain actions if we are unable to meet specified ratios. For instance, the indentures governing our notes contain an incurrence test that restricts our ability to incur indebtedness or make investments, among other actions, if we do not maintain an Adjusted EBITDA to Fixed Charges ratio (measured on a LTM basis) of at least 2.0 to 1.0. The Adjusted EBITDA to Fixed Charges ratio under the indentures is generally defined as the ratio of (a) Adjusted EBITDA to (b) net interest expense excluding the amortization or write-off of deferred financing costs, each measured on a LTM basis. The restrictions on our ability to incur indebtedness or make investments under the indentures that apply as a result, however, are subject to exceptions, including exceptions that permit indebtedness under the ABL Facility.

At December 31, 2017, we were in compliance with all covenants under the credit agreement governing the ABL Facility and under the indentures governing the notes.

Adjusted EBITDA is defined as EBITDA adjusted for certain non-cash and certain non-recurring items and other adjustments calculated on a pro-forma basis, including the expected future cost savings from business optimization or other programs and the expected future impact of acquisitions, in each case as determined under the governing debt instrument. We believe that including the supplemental adjustments that are made to calculate Adjusted EBITDA provides additional information to investors about our ability to comply with our financial covenants and to obtain additional debt in the future. Adjusted EBITDA, like EBITDA and Segment EBITDA, is not a defined term under U.S. GAAP. Adjusted EBITDA is not a measure of financial condition, liquidity or profitability, and should not be considered as an alternative to net income (loss) determined in accordance with U.S. GAAP or operating cash flows determined in accordance with U.S. GAAP. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not take into account certain items such as interest and principal payments on our indebtedness, depreciation and amortization expense (because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue), working capital needs, tax payments (because the payment of taxes is part of our

 

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operations, it is a necessary element of our costs and ability to operate), non-recurring expenses and capital expenditures. Fixed Charges under the indentures should not be considered as an alternative to interest expense.

The following table reconciles MPM’s Net income to EBITDA and Adjusted EBITDA, and calculates the ratio of Adjusted EBITDA to Fixed Charges and Pro forma Fixed Charge Coverage Ratio as calculated under our indentures and the ABL Facility for the period presented:

 

		Year Ended December 31, 2017
Net income		$	1
Interest expense, net			80
Income tax expense			15
Depreciation and amortization			154
EBITDA			250
Adjustments to EBITDA:
Restructuring and discrete costs(a)			36
Reorganization items, net(b)			1
Unrealized gains on pension and postretirement benefits(c)			(5	)
Pro forma cost savings(d)			3
Acquisitions(e)			1
Non-cash charges(f)			12
Adjusted EBITDA(g)		$	298
Adjusted EBITDA less Capital Expenditures and Cash Taxes		$	113
Pro forma fixed charges(h)		$	56
Ratio of Adjusted EBITDA to Fixed Charges(i)			5.32
Pro forma Fixed Charge Coverage Ratio(j)			2.02

 

(a)	Primarily includes expenses related to our global restructuring program, siloxane production transformation, work stoppage and certain other non-operating income and expenses.

(b)	Represents professional fees related to our reorganization.

(c)	Represents non-cash actuarial gains resulting from pension and postretirement liability curtailment and re-measurements.

(d)	Represents estimated cost savings, on a pro forma basis, from initiatives implemented or being implemented by management.

(e)	Reflects pro forma unrealized EBITDA related to Momentive’s acquisition of the operating assets of Sea Lion Technology, Inc. as if the business was acquired at the beginning of the LTM period.

(f)	Non-cash charges primarily include the effects of foreign exchange gains and losses and impacts of asset impairments and disposals, and stock-based compensation expense.

(g)	Effective September 30, 2017, our Nantong, China subsidiary was no longer designated as an Unrestricted Subsidiary under the ABL Facility and the indentures that govern our notes, resulting in an increase of $15 million in Adjusted EBITDA.

(h)	Reflects pro forma interest expense based on outstanding indebtedness and interest rates at December 31, 2017 adjusted for applicable restricted payments.

(i)

MPM’s ability to incur additional indebtedness, among other actions, is restricted under the indentures governing our notes, unless MPM has an Adjusted EBITDA to Fixed Charges ratio of at least 2.0 to 1.0. As of December 31, 2017, we were able to satisfy this test and incur additional indebtedness under these indentures.

 

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(j)

Represents Pro forma Fixed Charge Coverage Ratio as defined in the credit agreement for the ABL Facility. If the availability under the ABL Facility is less than the greater of (a) 12.5% of the lesser of the borrowing base and the total ABL Facility commitments at such time and, (b) $27 million, then such ratio must be greater than 1.0 to 1.0.

Off-Balance Sheet Arrangements

At December 31, 2017, we had no off-balance sheet arrangements.

Contractual Obligations

The following table presents our contractual cash obligations at December 31, 2017. Our contractual cash obligations consist of legal commitments at December 31, 2017 that require us to make fixed or determinable cash payments, regardless of the contractual requirements of the specific vendor to provide us with future goods or services. This table does not include information about most of our recurring purchases of materials used in our production; our raw material purchase contracts do not meet this definition since they generally do not require fixed or minimum quantities. Contracts with cancellation clauses are not included, unless a cancellation would result in a major disruption to our business. These contractual obligations are grouped in the same manner as they are classified in the Consolidated Statements of Cash Flows in order to provide a better understanding of the nature of the obligations.

 

		Payments Due By Year
Contractual Obligations		2018				2019				2020				2021				2022				2023 and beyond				Total
Operating activities:
Purchase obligations(1)		$	146			$	143			$	110			$	85			$	82			$	328			$	894
Interest on fixed rate debt obligations			53				52				52				44				3				—				204
Operating lease obligations			18				14				12				10				7				10				71
Funding of pension and other postretirement obligations(2)			25				26				26				28				31				—				136
Financing activities:
Long-term debt, including current maturities(3)			36				—				—				1,100				202				—				1,338
Total		$	278			$	235			$	200			$	1,267			$	325			$	338			$	2,643

 

(1)

Purchase obligations are comprised of the fixed or minimum amounts of goods and/or services under long-term contracts and assumes that certain contracts are terminated in accordance with their terms after giving the requisite notice which is generally two to three years for most of these contracts; however, under certain circumstances, some of these minimum commitment term periods could be further reduced which would significantly decrease these contractual obligations.

(2)

Pension and other postretirement contributions have been included in the above table for the next five years. These amounts include estimated benefit payments to be made for unfunded foreign defined benefit pension plans as well as estimated contributions to our funded defined benefit plans. The assumptions used by our actuaries in calculating these projections includes a weighted average annual return on pension assets of approximately 6% for the years 2018-2022 and the continuation of current law and plan provisions. These estimated payments may vary based on the actual return on our plan assets or changes in current law or plan provisions. See Note 12 to the Consolidated Financial Statements included elsewhere in this prospectus for more information on our pension and postretirement obligations.

(3)	Long-term debt amounts above represent gross repayments, and are exclusive of any unamortized debt discounts.

The table above excludes payments for income taxes and environmental obligations since, at this time, we cannot determine either the timing or the amounts of all payments beyond 2017. At December 31, 2017, we

 

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recorded unrecognized tax benefits and related interest and penalties of $39 million. We estimate that we will pay approximately $25 million in 2018 for local, state and international income taxes. See Notes 10 and 11 to the Consolidated Financial Statements included elsewhere in this prospectus for more information on these obligations.

Critical Accounting Estimates

In preparing our financial statements in conformity with accounting principles generally accepted in the United States, we have to make estimates and assumptions about future events that affect the amounts of reported assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Some of these accounting policies require the application of significant judgment by management to select the appropriate assumptions to determine these estimates. By their nature, these judgments are subject to an inherent degree of uncertainty; therefore, actual results may differ significantly from estimated results. We base these judgments on our historical experience, advice from experienced consultants, forecasts and other available information, as appropriate. Our significant accounting policies are more fully described in Note 2 to the Consolidated Financial Statements included elsewhere in this prospectus.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment dates. Deferred tax assets are subject to valuation allowances based upon management’s estimates of realizability.

At December 31, 2017 and 2016, we had valuation allowances of $371 million and $484 million, respectively, against our deferred income tax assets. At December 31, 2017, we had a $181 million valuation allowance against a portion of our net U.S. federal and state deferred tax assets, as well as a valuation allowance of $190 million against a portion of our net foreign deferred income tax assets, primarily in Germany and Japan. At December 31, 2016, we had a $297 million valuation allowance against all of our net U.S. federal and state deferred tax assets, as well as a valuation allowance of $187 million against a portion of our net foreign deferred income tax assets, primarily in Germany and Japan. The valuation allowances require an assessment of both negative and positive evidence, such as operating results during the most recent three-year period. This evidence is given more weight than our expectations of future profitability, which are inherently uncertain.

We considered all available evidence, both positive and negative, in assessing the need for a valuation allowance for deferred tax assets. The Company evaluated four possible sources of taxable income when assessing the realization of deferred tax assets:

 

•

Taxable income in prior carryback years;

 

•

Future reversal of existing taxable temporary differences;

 

•

Tax planning strategies; and

 

•

Future taxable income exclusive of reversing temporary differences and carryforwards.

The accounting guidance for uncertainty in income taxes is recognized in the financial statements. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in its tax return. We also apply the guidance relating to de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

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The calculation of our income tax liabilities involves dealing with uncertainties in the application of complex domestic and foreign income tax regulations. Unrecognized tax benefits are generated when there are differences between tax positions taken in a tax return and amounts recognized in the Consolidated Financial Statements. Tax benefits are recognized in the Consolidated Financial Statements when it is more likely than not that a tax position will be sustained upon examination. Tax benefits are measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective income tax rate in a given period could be materially impacted. An unfavorable income tax settlement would require the use of cash and result in an increase in our effective income tax rate in the year it is resolved. A favorable income tax settlement would be recognized as a reduction in the effective income tax rate in the year of resolution. At December 31, 2017 and 2016, we recorded unrecognized tax benefits and related interest and penalties of $39 million and $45 million, respectively.

Pensions

The amounts that we recognize in our financial statements for pension benefit obligations are determined by actuarial valuations. Inherent in these valuations are certain assumptions, the more significant of which are:

 

•

The weighted average rate used for discounting the liability;

 

•

The weighted average expected long-term rate of return on pension plan assets;

 

•

The method used to determine market-related value of pension plan assets;

 

•

The weighted average rate of future salary increases; and

 

•

The anticipated mortality rate tables.

The discount rate reflects the rate at which pensions could be effectively settled. When selecting a discount rate, our actuaries provide us with a cash flow model that uses the yields of high-grade corporate bonds with maturities consistent with our anticipated cash flow projections.

The expected long-term rate of return on plan assets is determined based on the various plans’ current and projected asset mix. To determine the expected overall long-term rate of return on assets, we take into account the rates on long-term debt investments that are held in the portfolio, as well as expected trends in the equity markets, for plans including equity securities.

The rate of increase in future compensation levels is determined based on salary and wage trends in the chemical and other similar industries, as well as our specific compensation targets.

The mortality tables that are used represent the best estimated mortality projections for each particular country and reflect projected mortality improvements.

We believe the current assumptions used to estimate plan obligations and pension expense are appropriate in the current economic environment. However, as economic conditions change, we may change some of our assumptions, which could have a material impact on our financial condition and results of operations.

 

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The following table presents the sensitivity of our projected pension benefit obligation (“PBO”), accumulated benefit obligation (“ABO”), and 2018 pension expense to the following changes in key assumptions:

 

		Increase / (Decrease) at December 31, 2017								Increase / (Decrease)
		PBO				ABO				2018 Expense
Assumption:
Increase in discount rate of 0.5%		$	(42	)		$	(40	)		$	(1	)
Decrease in discount rate of 0.5%			48				45				1
Increase in estimated return on assets of 1.0%											(2	)
Decrease in estimated return on assets of 1.0%										$	2

For the relative asset allocations of plan assets in each investment category see Note 12 to the Consolidated Financial Statements included elsewhere in this prospectus.

Impairment of Long-Lived Assets, Goodwill and Other Intangible Assets

As events warrant, we evaluate the recoverability of long-lived assets, other than goodwill and other indefinite-lived intangibles, by assessing whether the carrying value can be recovered over their remaining useful lives through the expected future undiscounted operating cash flows of the underlying asset groups. Impairment indicators include, but are not limited to, a significant decrease in the market price of a long-lived asset; a significant adverse change in the manner in which the asset is being used or in its physical condition; a significant adverse change in legal factors or the business climate that could affect the value of a long-lived asset; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; current period operating or cash flow losses combined with a history of operating or cash flow losses associated with the use of the asset; or a current expectation that it is more likely than not that a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. As a result, future decisions to change our manufacturing process, exit certain businesses, reduce excess capacity, temporarily idle facilities and close facilities could result in material impairment charges. Long-lived assets are grouped together at the lowest level for which identifiable cash flows are largely independent of cash flows of other groups of long-lived assets. Any impairment loss that may be required is determined by comparing the carrying value of the assets to their estimated fair value.

We perform an annual assessment of qualitative factors to determine whether the existence of any events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than the carrying amount of the reporting unit’s net assets. If, after assessing all events and circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than the carrying amount of the reporting unit’s net assets, we use a probability weighted market and income approach to estimate the fair value of the reporting unit. Our market approach is a comparable analysis technique commonly used in the investment banking and private equity industries based on the EBITDA multiple technique. Under this technique, estimated fair value is the result of a market based EBITDA multiple that is applied to an appropriate historical EBITDA amount, adjusted for the additional fair value that would be assigned by a market participant obtaining control over the reporting unit. Our income approach is a discounted cash flow model. The discounted cash flow model requires management to project revenues, operating expenses, working capital investment, capital spending and cash flows over a multiyear period, as well as determine the weighted average cost of capital to be used as a discount rate. Applying this discount rate to the multiyear projections provides an estimate of fair value for the reporting unit. The discounted cash flow model does not include cash flows related to interest payments and debt service, as the related debt has not been pushed down to the reporting unit level. Our reporting units for the evaluation of our goodwill recoverability are our following operating segments: Performance Additives, Formulated and Basic Silicones, and Quartz Technologies.

 

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At October 1, 2017, the fair value of all reporting units exceeded the carrying value by more than 10%. It is possible that the conclusions regarding the impairment or recoverability of goodwill at either reporting unit could change in future periods if, for example, the reporting unit does not perform as projected, the results of strategic plans and certain cost saving initiatives are not fully achieved, or the overall economic or business conditions are worse than current assumptions (including inputs to the discount rate or market based EBITDA multiples). If our assumptions and related estimates change in the future, or if we change our reporting structure or other events and circumstances change, we may be required to record impairment charges in future periods. Any impairment charges that we may take in the future could be material to our results of operations and financial condition.

Recently Issued Accounting Standards

The nature and impact of recent accounting pronouncements is discussed in Note 2 to the Consolidated Financial Statements included elsewhere in this prospectus, which is incorporated herein by reference.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks arising from our normal business activities. These market risks principally involve the possibility of changes in interest rates, currency exchange rates or commodity prices that would adversely affect the value of our financial assets and liabilities or future cash flows and earnings. Market risk is the potential loss arising from adverse changes in market rates and prices.

Foreign Exchange Risk

Our international operations accounted for approximately 66% of our net sales in 2017, 67% in 2016 and 66% in 2015. As a result, we have significant exposure to foreign exchange risk related to transactions that can potentially be denominated in many foreign currencies, which are offset by the Company’s global manufacturing presence throughout the world. These transactions include foreign currency denominated imports and exports of raw materials and finished goods (both intercompany and third party) and loan repayments. The functional currency of our operating subsidiaries is generally the related local currency.

We aim to reduce foreign currency cash flow exposure due to exchange rate fluctuations by hedging foreign currency transactions when economically feasible. Our use of forward and option contracts is designed to protect our cash flows against unfavorable movements in exchange rates, to the extent of the amount under contract. We do not attempt to hedge foreign currency exposure in a manner that would entirely eliminate the effect of changes in foreign currency exchange rates on net income and cash flow. We do not speculate in foreign currency, nor do we hedge the foreign currency translation of our international businesses to the U.S. dollar for purposes of consolidating our financial results or other foreign currency net asset or liability positions. The counter-parties to our hedge contracts are financial institutions with investment-grade credit ratings.

Our foreign exchange risk is also mitigated because we operate in many foreign countries, which reduces the concentration of risk in any one currency. In addition, certain of our foreign operations have limited imports and exports, which reduces the potential impact of foreign currency exchange rate fluctuations.

Interest Rate Risk

As of December 31, 2017, none of our borrowings were at variable interest rates. If we make borrowings at variable interest rates in the future, we will be subject to the variations in interest rates in respect of our variable rate debt. While we may enter into agreements intending to limit our exposure to higher interest rates, any such agreements may not offer complete protection from this risk.

Following is a summary of our outstanding debt as of December 31, 2017 and 2016. The fair value of our publicly held debt is based on the price at which the bonds are traded or quoted at December 31, 2017 and 2016.

 

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All other debt fair values are based on other similar financial instruments, or based upon interest rates that are currently available to us for the issuance of debt with similar terms and maturities.

 

(dollars in millions, except percentages)		2017												2016
Year		Debt Maturities				Weighted Average Interest Rate(1)				Fair Value				Debt Maturities				Weighted Average Interest Rate(1)				Fair Value
2017														$	36				4.1	%		$	36
2018		$	36				4.1	%		$	36				—				—	%			—
2019			—				—	%			—				—				—	%			—
2020			—				—	%			—				—				—	%			—
2021			1,100				4.2	%			1,144				1,100				4.3	%			1,034
2022			202				5.3	%			211				202				5.5	%			173
		$	1,338							$	1,391			$	1,338							$	1,243

Commodity Risk

We are exposed to price risks on raw material purchases. We pursue ways to diversify and minimize material costs through strategic raw material purchases, and through commercial and contractual pricing agreements and customer price adjustments. For our commodity raw materials, we have purchase contracts that have periodic price adjustment provisions. We rely on key suppliers for most of our raw materials. The loss of a key source of supply or a delay in shipments could have an adverse effect on our business. Should any of our suppliers fail to deliver or should any key supply contracts be canceled, we would be forced to purchase raw materials in the open market, and no assurances can be given that we would be able to make these purchases or make them at prices that would allow us to remain competitive. Also, we will consider hedging strategies that minimize risk or reduce volatility when available.

 

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