S-1/A 1 d453690ds1a.htm AMENDMENT NO. 3 TO S-1 Amendment No. 3 to S-1
Table of Contents

As filed with the Securities and Exchange Commission on November 6, 2017

Registration No. 333-220384

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 3

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

MPM HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2860   47-1756080
(State or other jurisdiction of
Incorporation or organization)
 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

260 Hudson River Road

Waterford, NY 12188

(518) 237-3330

(Address, including zip code, and telephone number, including area code, of Registrant’s Principal Executive Offices)

 

 

John D. Moran, Esq.

MPM Holdings Inc.

260 Hudson River Road

Waterford, NY 12188

(518) 237-3330

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

David S. Huntington, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, New York 10019-6064
(212) 373-3000
 

Michael Kaplan, Esq.

Marcel R. Fausten, Esq.

Davis Polk & Wardell LLP

450 Lexington Avenue

New York, NY 10017

(212) 450-4000

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒   (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each Class of
Securities to be Registered
 

Amount to be
Registered(1)(2)

 

Proposed

Maximum

Offering Price

per Share

 

Proposed

Maximum
Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee(3)

Common Stock, par value $0.01 per share

  16,770,833   $25.00   $419,270,825   $52,200

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(2) Includes offering price of any additional shares that the underwriters have the option to purchase, if any. See “Underwriting.”
(3) The Registrant previously paid $11,590 of this amount.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated November 6, 2017

PRELIMINARY PROSPECTUS

14,583,333 Shares

 

LOGO

MPM Holdings Inc.

Common Stock

This is the initial public offering of shares of common stock of MPM Holdings Inc. We are offering 10,416,667 shares of our common stock and the selling stockholders identified in this prospectus are offering 4,166,666 shares of our common stock. We expect the initial public offering price to be between $23.00 and $25.00 per share. Our common stock is currently quoted on the OTCQX Marketplace under the symbol “MPMQ.” The share prices on the OTCQX may not be indicative of the market price of our common stock on a national securities exchange.

We have been approved to list our common stock on the New York Stock Exchange (the “NYSE”) under the symbol “MPMH.”

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 21 of this prospectus for a discussion of certain risks that you should consider before buying shares of our common stock.

 

 

 

     Per Share      Total  

Public offering price

   $                   $               

Underwriting discount(1)

   $      $  

Proceeds to us, before expenses

   $      $  

 

  (1) We refer you to the section “Underwriting” of this prospectus for additional information regarding underwriting compensation.

The underwriters may also purchase up to an additional 2,187,500 shares of our common stock from the selling stockholders at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus.

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.

The underwriters expect to deliver the shares against payment in New York, New York on                , 2017.

 

 

 

J.P. Morgan   Goldman Sachs & Co. LLC

 

Credit Suisse     Deutsche Bank Securities     UBS Investment Bank     Wells Fargo Securities     BMO Capital Markets

Prospectus dated                , 2017.

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     21  

Cautionary Statements Concerning Forward Looking Statements

     43  

Use of Proceeds

     45  

Market Prices and Dividend Policy

     46  

Capitalization

     47  

Dilution

     48  

Selected Historical Financial Information

     50  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     52  

Business

     79  

Management

     96  

Compensation Discussion and Analysis

     103  

Principal and Selling Stockholders

     117  

Certain Relationships and Related Party Transactions

     121  

Description of Indebtedness

     126  

Description of Capital Stock

     131  

Shares Eligible for Future Sales

     135  

Material U.S. Federal Income Tax Considerations

     137  

Underwriting

     142  

Legal Matters

     148  

Experts

     148  

Where You Can Find Additional Information

     148  

Index To Consolidated Financial Statements

     F-1  

We, the selling stockholders and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We, the selling stockholders and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. 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.

Until     , all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

i


Table of Contents

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 DESCRIPTIONS 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, including certain market and industry data provided on a subscription basis by The Freedonia Group, Inc., an independent research firm and industry consultant based in Cleveland, Ohio (“Freedonia”). We have not independently verified market and industry data provided by Freedonia or by other 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.

 

ii


Table of Contents

PROSPECTUS SUMMARY

This summary highlights the more detailed information contained elsewhere in this prospectus. This summary may not contain all the information that may be important to you. You should carefully read the entire prospectus before making an investment decision, especially the information presented under the heading “Risk Factors.” In this prospectus, except as otherwise indicated herein, or as the context may otherwise require, all references to “Momentive” refer to MPM Holdings Inc., “MPM” refer to Momentive Performance Materials Inc. and the “Company,” “we,” “us” and “our” refer to Momentive and its subsidiaries.

Our Company

Momentive is one of the world’s largest producers of specialty silicones and silanes and a global leader in fused quartz and specialty ceramics products. Momentive is based in Waterford, New York and has a long track record of creating innovative products and solutions designed to meet the complex requirements of our more than 4,000 customers in over 100 countries. Our strategic network of 24 production sites and 12 R&D facilities supports our global leadership positions and facilitates our ability to serve our blue-chip customer base across a diverse array of consumer, automotive and various industrial end-markets. We have invested significantly to develop and enhance our innovative and differentiated specialty product portfolio to address the evolving demands of the markets we serve and to maintain alignment with global megatrends.

We believe that our value-added business model focused on technical service, combined with our global footprint and long-term customer relationships, uniquely positions us as a key innovation partner to our customers. Over our 75-year operating history, which began with the invention of silicone technologies by GE and includes our acquisitions of the silicone-based businesses of Bayer, Toshiba and Union Carbide, we have focused on investing in and developing technology to enable high performance applications in attractive end-markets. Our silanes and specialty silicones are used as additives and formulated products that provide or enhance certain attributes of the end product. Our products have a range of attractive properties including heat and chemical resistance, lubrication, adhesion and viscosity. These properties position our specialty silicones and silanes products as critical materials in many automotive, industrial, construction, healthcare, personal care, electronic, consumer and agricultural applications. Momentive’s advanced materials are ubiquitous in daily life and are instrumental inputs in a wide range of products, including applications in consumer and personal care (e.g., cosmetics, electronic displays and foam mattresses), automotive (e.g., headlights, paneling and tires) and healthcare (e.g., medical tubing). The diverse molecular characteristics of specialty silicones and silanes continually lead to new applications, and as a result are increasingly being used as a substitute for other materials.

Our value-added, technical service-oriented business model enables us to identify and participate in high-margin and high-growth specialty markets. We are focused on investing in our R&D capabilities, which enable us to develop new products and applications. Over the last three years, we have invested over $200 million in R&D, dramatically upgrading our capabilities and facilities. For example, we implemented a full scale pilot line for our coatings business in Leverkusen, Germany and opened a new tire additives application development center in Charlotte, North Carolina. Our investments in strategically-located R&D centers of excellence enable us to quickly and effectively develop new products and maintain our technology leadership. We have long-term relationships with blue-chip customers which are leading innovations in their own industries, and work closely with their R&D teams to develop products uniquely suited to their needs.

We generate revenue in three of our segments, Performance Additives, Formulated and Basic Silicones and Quartz Technologies, using direct and indirect approaches to selling a broad base of products to our customers. We utilize technical and application support to enhance our value proposition to customers and drive penetration into attractive end-markets. We also work with original equipment manufacturers (“OEMs”) to achieve specification of our products into theirs, which results in higher pull-through demand.

 



 

1


Table of Contents

2016 Revenue by
End-market

  

2016 Revenue by
Geography

  

2016 Segment EBITDA by
Segment(1)

 

LOGO

 

(1) Excludes $(39) million of corporate charges that are not allocated to the segments.

Net revenues, net loss and Segment EBITDA (a non-GAAP financial measure) for the nine months ended September 30, 2017 were $1,732 million, $19 million, and $210 million, respectively, and for the year ended December 31, 2016 were $2,233 million, $163 million, and $238 million, respectively. For the last twelve months ended September 30, 2017, Momentive generated $2,276 million and $275 million of net revenue and Segment EBITDA, respectively, representing a Segment EBITDA margin of 12%. See “—Summary Historical Consolidated Financial Data” for the definitions of Segment EBITDA and Segment EBITDA margin and a reconciliation of net (loss) income to Segment EBITDA.

Our Operating Segments

In the third quarter of 2017, we changed the organization of our reporting segments from two to four segments. Our new segment structure consists of 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. We have organized the discussion below based upon our new segment structure. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Realignment” for additional information.

Performance Additives

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 and urethane additives Performance Additives product lines are developed using a range of raw material inputs and generally use less siloxane than Formulated and Basic Silicone products.

Our portfolio consists of technology driven, proprietary products that enable high performance applications:

 

   

Silanes are a group of additives that act as connectors or coupling agents. Our crosslinking agents form a three-dimensional network of siloxane bonds between constituents, which facilitates resistance to

 



 

2


Table of Contents
 

water or chemical intrusion, high temperatures, abrasion or other common deteriorating conditions, without compromising other important product features such as ductility. Examples include applications that enable stronger adhesion of rust-proof coatings to metal structures in construction and clear coat paints to automotive coatings. Our NXT silane product line connects silica-based fillers to the tire tread rubber, improving compound viscosity and resilience and maintaining dynamic properties at low temperatures, while simultaneously reducing mixing steps in the manufacturing process. Our NXT silane is uniquely positioned as a cost-effective patented solution that helps tire manufacturers meet U.S. and European green tire standards.

 

    Silicone fluids are liquid polymeric materials that act like chains and can vary in lengths to create liquids that are very thick and barely flow or relatively thin and flow like water. Silicone fluids are used in personal care products as an additive in shampoos and conditioners to improve the look and feel of hair. Silicone fluids are also used in a variety of industrial applications, including the production and refining of crude oil, to reduce the formation of foam or separate water from oil.

 

    Urethane additives include silicone stabilizers and tertiary amine catalysts, as well as organic-based foam property modifiers. Our products are essential ingredients in polyurethane foam processing, controlling the internal structure of the material to optimize properties such as the insulation performance of rigid foams in construction applications, the firmness and breathability of a foam mattress or the rebound and cushioning in a running shoe.

In 2016, our Performance Additives segment generated $849 million in net revenue and $187 million in Segment EBITDA, representing a Segment EBITDA margin of 22%. For the last twelve months ended September 30, 2017, our Performance Additives segment generated $881 million and $189 million of net revenue and Segment EBITDA, respectively, representing a Segment EBITDA margin of 21%. Our positioning as a strategic supplier of mission critical materials allows us to maintain long-standing, symbiotic relationships resulting in revenue generation while supporting the success of our customers.

Formulated and Basic Silicones

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 sealants, electronic materials and coatings product lines are generally applied to our customers’ products, in the form of a high-tech coating or adhesive, while our elastomers product 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.

Formulated silicones products, including sealants, coatings, electronic materials and elastomers, differ from basic silicones products in that they contain less siloxane and in final form end up as non-flowing rubber or gel type materials. Basic silicones products contain higher levels of siloxane than formulated silicones products and are typically formulated into our customers’ product.

Our portfolio consists of five product families:

 

    Sealants product lines: Our construction sealants are used in some of the world’s tallest skyscrapers to adhere and seal the windows into the frames on the sides of the building. Momentive is the exclusive global licensee of GE-branded silicone products, which are used in a wide range of construction and consumer applications.

 

   

Electronic materials product lines: Our thermal conductive adhesives have high thermal conductivity and can augment flow control across different substrates, while protecting from high impact and

 



 

3


Table of Contents
 

thermal shocks. These products can be used in a range of consumer electronics applications, as well as in critical aerospace and aviation applications with high temperature and stress resistance. In flat-panel displays, our hardcoat products provide protection and extend the exterior durability of plastics, while our ultra-clear liquid silicone rubber delivers high transmittance, low cure shrinkage, good elasticity and high stability in light emitting diodes (“LEDs”).

 

    Coatings product lines: Our silicone-based coatings offer UV, thermal, chemical, solvent and abrasion resistance, as well as improved adhesion to substrates for applications from automotive glazing, headlights and trim, to sensitive electronic components, tapes and labels. Our hard coat products replace traditional glass and metal applications in cars, thereby providing significant weight reduction in automotive applications.

 

    Elastomers product lines: Our chemically inert heat-cured elastomers have excellent mechanical properties for extrusion, molding and calendaring. Our low-viscosity, pumpable liquid silicone rubber (“LSR”) can promote easier injection molding of complex articles. Our Ultra Clear LSRs provide heat and UV resistance without sacrificing optical clarity and are molded into lenses or light guides for automotive or other applications. Elastomers are also used as gasket material to seal and protect systems in under-hood applications in automotive and in appliances. Our LSR products, including medical tubing, enable cost-efficient, high-quality end-products for our customers in various applications across automotive, consumer goods, healthcare and electronics.

 

    Basic silicones product lines: Basic silicones, comprised of silicone-based cyclic or linear polymers, were the earliest materials developed by the industry. They are still utilized in a wide range of applications, including industrial lubricants and additives in personal and home care products. Basic silicones are a core input into our other formulated products.

In 2016, our Formulated and Basic Silicones segment generated $1,212 million in net revenue and $70 million in Segment EBITDA, representing a Segment EBITDA margin of 6%. For the last twelve months ended September 30, 2017, our Formulated and Basic Silicones segment generated $1,197 million and $90 million of net revenue and Segment EBITDA, respectively, representing a Segment EBITDA margin of 8%. The Formulated silicones product lines represent a significant investment in innovation over recent years and comprise a specialty product set. We expect to continue to experience demand growth over the long term as our end-markets benefit from trends toward population growth, urbanization, energy efficiency and miniaturization. Further, as substitution for other materials continues, we expect to see incremental growth in demand for our products. We also expect to see margin expansion over the long term as we continue to focus on the differentiated specialty product lines within Formulated and Basic Silicones.

Quartz Technologies

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.

We have recently expanded into the primary pharmaceutical packaging market, producing fused quartz vials used for safely packaging, transporting and storing sensitive liquid-based parenteral drug formulations. Our Quartz Technologies segment has developed a new, state-of-the-art process to mass-produce fused quartz vials,

 



 

4


Table of Contents

which we are in the process of commercializing under the PurQ brand. Quartz vials are 99.995% pure SiO2, a level of purity which not only ensures unparalleled chemical durability, but also ensures exceptional inertness which can minimize a drug formulation’s physical interaction with the vial surface, resulting in superior liquid drug stability.

In 2016, our Quartz Technologies segment generated $172 million in net revenue and $20 million in Segment EBITDA, representing a Segment EBITDA margin of 12%. For the last twelve months ended September 30, 2017, our Quartz Technologies segment generated $198 million and $37 million of net revenue and Segment EBITDA, respectively, representing a Segment EBITDA margin of 19%. Our Quartz Technologies products comprise an attractive portfolio of assets participating across the entire value chain. We expect continued growth driven by further end-market penetration and expansion.

Operations Overview

We benefit from our global reach with 24 flexible production sites located around the world and numerous third party strategic manufacturers to provide additional capability and capacity. These facilities allow us to produce our key products regionally in the Americas, Europe and Asia. Through this network of production facilities, we serve more than 4,000 customers across segments in over 100 countries worldwide. We use our global presence to serve our customers efficiently and maintain a balanced geographic profile, with approximately 31%, 27%, 13% and 10% of our 2016 revenues generated in North America, Europe, China and Japan, respectively. This global manufacturing base allows us to serve customers quickly and efficiently and thus build strong customer relationships. A fundamental tenet of our business is to ensure and promote safe operations worldwide.

Global Operating Footprint

 

 

LOGO

We are focused on optimizing our operations and have taken significant steps to manage our cost structure and to align it with our focus on specialty markets. We are actively managing our siloxane supply, not only to improve security of supply, but also to take advantage of cost competitive positions of our network, including our operations in Asia and our joint venture in China. For example, in Leverkusen, Germany, we ceased siloxane production in the fourth quarter of 2016, reducing operating costs by approximately $10 million per year and right sizing our siloxane capacity. We carefully manage our raw material supply chain and have a diversified network of suppliers. One of our largest raw material purchases is silicon metal, which accounted for only 13%

 



 

5


Table of Contents

of raw material spending in 2016 and the rate of our purchases has declined in 2017 as a result of the actions described above. We are constantly evaluating ways to effectively drive cost down in order to improve profitability while maintaining safe and stable operations.

We strive to incorporate sustainability objectives into all aspects of our business. These objectives include increasing resource efficiency and reducing our environmental footprint, enhancing product development processes and sustainability and inspiring and building sustainable relationships with suppliers and customers for mutual growth. We engage in activities that promote energy efficiency, responsible carbon management, product development processes focused on “life-cycle thinking,” waste reduction and prevention and water conservation.

Industry Overview and Market Outlook

Specialty silicones and silanes are versatile materials that are generally comprised of fluids, elastomers and resins. These products impart favorable properties such as chemical and physical inertness, ability to withstand low and high temperatures, water repellency and ease of molding into different forms. They can also be easily modified to generate a broad range of specifications that meet the unique demands of many of our customers’ applications.

Global demand for silicones grew at a compound annual growth rate of 3.8% from 2006 to 2016, increasing to approximately $14.2 billion in 2016, according to Freedonia. Over the last 10 years, the growth of global silicones demand highlights the consistent long-term industry performance. Today, Freedonia estimates that global silicones demand will grow at 5.1% per year through 2021.

World Demand for Silicones (dollars in billions, 100% siloxane basis)

 

 

LOGO

Source: Freedonia

We believe specialty silicones and silanes growth will be fueled by global megatrends such as population growth, increasing demand for energy efficiency, new technologies in healthcare and growth in consumer electronics. Additionally, specialty silicones and silanes will continue to substitute for materials such as metals and plastics where they provide superior properties and performance. For example, we believe the use of specialty

 



 

6


Table of Contents

silicone and silane material will accelerate to help build new and eco-friendly residential and commercial properties to support growing populations. In automotive, specialty silicones and silanes are found in numerous vehicle components, including lighting and body coatings, seating and dashboards and gaskets and tires.

Momentive is a leader in the manufacture and sale of specialty silicones within the end-markets shown below, and we compete with companies such as Dow Corning, Wacker, Shin Etsu and Evonik. We believe we are well-positioned against competition because we have a strong global presence with specialty manufacturing assets, direct sales and marketing and application and technology development. We also have a highly diverse range of product groups where we believe we have leadership positions. Momentive also has a greater focus on downstream specialty applications relative to the larger silicone industry peers.

The table below highlights the key end-markets of our specialty silicones and silanes portfolio as well as the growth drivers for these markets.

 

LOGO

 

(1) Does not include industrial end-market as such market is broadly defined without specific market statistics or growth drivers
(2) Financials based on 2016
(3) Sources: Freedonia and Grand View Research, Inc.
(4) For the period of 2016-2021 for Consumer goods, Construction, Personal care, Electronics and Healthcare, and for the period of 2016-2025 for Automotive
(5) Represents silicone sales in plastics, textiles and paper end-markets
(6) According to Technavio for the period of 2016-2021
(7) According to MarketsandMarkets for the period of 2016-2021

 



 

7


Table of Contents

Our Strengths

Our Company has the following competitive strengths:

Leadership positions in each of our core markets. We are one of the world’s largest producers of specialty silicones and silanes and the largest global producer of fused quartz. Our products are used in a variety of market applications, including consumer, automotive, industrial, construction, personal care, electronics, agriculture and healthcare. As a leader, we are well-positioned to benefit from favorable growth trends impacting many of our end-markets. We maintain leading positions in various product lines and geographic areas. We believe our scale, global reach and breadth of product offerings provide us with significant advantages over many of our competitors. Momentive is the third largest industry participant in the global silicones market by sales, but has a particular focus on downstream specialty, where we have a higher share. Due to the breadth and differentiation of our specialty products, we believe we have no single competitor across all business lines within Performance Additives and Formulated and Basic Silicones. We believe we are also one of the largest industry participants in the global quartz market by sales.

 

Global Silicones Sales (All Products)1      Global Quartz Sales (All Products)2
LOGO      LOGO

 

(1) Source: Freedonia
(2) Management estimate

Strong industry fundamentals driven by global megatrends. Momentive is levered to large and growing markets in specialty silicones, silanes and quartz. According to Freedonia, the global silicones market, which is larger than $14.2 billion today, is projected to increase to over $18.3 billion by 2021, implying an annual growth rate higher than 5.1%. Drivers of growth include end-market expansion, new applications and increasing market penetration. We believe that increased substitution of traditional materials with silicones due to their versatility and high-performance characteristics will support continued growth trends in excess of GDP. Momentive possesses specialized technologies which enable high-performance in a range of diverse applications and high growth end-markets. Our specialty products are increasingly used as a value-added substitute for traditional materials or as functional additives, which yields new properties for our customers’ products. Further, we believe that our specialized technology portfolio and R&D capabilities support a growth pipeline that can allow us to maintain growth in excess of industry averages. This opportunity for continued outsized growth is driven primarily by new applications for silicones across end-markets from personal care products to automotive (including NXT). We continue to invest behind megatrends such as population growth, urbanization, alternative energy and sustainability and miniaturization to support growth via increased adoption and penetration in our product portfolio.

Value-added, customer-centric business model developing specialty product portfolio. Our market leadership has contributed to a longstanding history of strategic relationships with blue-chip customers across our end-markets. Our technical and service-oriented business model enables our customers to benefit from

 



 

8


Table of Contents

individualized solutions to develop products that uniquely suit their needs. Our R&D process is built upon core internal technologies and capabilities and is supported by input from and close collaboration with our customers to develop innovative products that are aligned with global megatrends. Our customers have relied upon Momentive’s technology and know-how when launching signature product lines. For instance, we entered into a joint development agreement to create a custom silicone additive that lends light, free-flowing properties to 2-in-1 shampoos and conditioners. Our ability to offer customization to over 4,000 customers in over 100 countries has generated a deep pipeline of new product launches in concert with our largest customers.

Global network of assets and customer relationships. We believe our scale and global infrastructure enables us to serve our customers with precision and efficiency. We have 24 production facilities and 12 research and development centers located across the Americas, Europe and Asia. In 2016, we generated 31% of our revenue from North America, 27% from Europe, a combined 23% from China and Japan and 19% from the rest of the world. This global footprint allows us to adapt our solutions to meet the growing needs of international markets as well as to optimize our cost structure through diversified sourcing and local distribution networks. Additionally, this footprint creates an additional benefit of being able to service multi-national customers locally and globally.

Our strategic network of assets and strong customer relationships enable us to take advantage of growth in these regions. For example, in 2016 we expanded our facility in Nantong, China to accommodate additional production capacity for urethane additives to better serve our local customers. Our application centers are positioned around the world to be close to our customers and the markets we serve. They are staffed with experts from respective industries, such as electronics, personal care, tire manufacturing and industrial coatings. These technical centers collaborate with our customers on new product development and process improvements and provide technical support.

Strong R&D platform with a rich pipeline to support future growth. Our business is supported by a leading intellectual property portfolio including over 3,400 patents. Our leadership in innovation is a result of sustained investment in technological advancement—over the last three years Momentive has invested over $200 million toward research and development. Momentive’s R&D practice is supported by 12 global facilities with focused centers of excellence. In recent years we have completed initiatives such as implementing a full scale pilot line for our coatings business in Leverkusen, Germany and opening a new tire additives application development center in Charlotte, North Carolina, both of which further complement our network of innovation centers strategically located to support our global customer base.

Focus on operating efficiency and production optimization, with history of achieving significant cost savings. Our business is managed with a long term cost-consciousness, as we regularly evaluate opportunities to drive production efficiencies and margin improvements. Most recently, we have implemented approximately $48 million in annual structural cost reduction initiatives through our previously announced global restructuring programs. All of these cost actions have been executed, and we have achieved approximately $42 million of savings under these programs to date, with the remainder expected to be realized by early 2018. In addition to our restructuring programs, we have taken action to reduce siloxane production in order to better align our production capability with our business model. Accordingly, in the fourth quarter of 2016, we ceased production of siloxane at our Leverkusen, Germany facility and shifted to local supply agreements to ensure security of supply. This proactive management of siloxane supply has resulted in $10 million of annual savings in our raw material input costs. Additionally, the Company has launched a continuous improvement / LEAN manufacturing initiative which should further improve operational efficiency.

Strong financial position with attractive free cash flow characteristics. Momentive has a robust financial profile and is well-positioned for sustainable, consistent growth. Between the full year ended 2015 and the last twelve months ended September 30, 2017, we experienced 26% average compounded annual growth in Segment

 



 

9


Table of Contents

EBITDA and approximately 400 basis points of Segment EBITDA margin expansion, as we have transitioned into higher margin products and executed various global restructuring programs. In addition to our improved profitability, our business has improved free cash flow potential due to limited maintenance capital expenditure requirements, lower net working capital requirements and net operating losses of $704 million across five jurisdictions as of December 31, 2016. We expect run-rate maintenance capital expenditures to be approximately $70 million per year, representing 25% of Segment EBITDA for the last twelve months ended September 30, 2017. Additionally, we have plans in place to drive further improvement in cash conversion from working capital.

Experienced management team with proven track record. Our senior management team has an average of over 25 years of manufacturing and industry experience in both public and private companies. The team’s collective expertise spans a wide range of applicable execution capabilities, including management and operations, research and product development, finance and administration and sales and marketing. In recent years, our senior management team has developed and implemented our new corporate strategy, shifting our portfolio toward specialty products and higher margin end-markets.

Growth and Strategy

Momentive has a clear corporate growth strategy and significant multi-dimensional earnings growth opportunities. We are focused on the following long-term strategies:

Increase shift to high-margin specialty products. Our strategy is to expand our product offerings in high-margin specialty silicones and silanes and optimize production to accommodate strategic investments in specialty growth products as the company rationalizes exposure to lower margin products. We are actively selling fewer lower-margin basic silicone products and redeploying capital resources to grow our specialty products. Accordingly, we have deployed approximately $100 million of growth capital over the last three years to exploit our rich new product pipeline in innovative market applications. Areas of investment focus include specialty silanes, automotive clear coats, optical displays and LSR. For example, construction of our recently announced approximately $30 million investment in NXT silane production capacity in Leverkusen, Germany is anticipated to be completed by the end of 2017. Simultaneously, we continue to expand our IP-protected leadership position in next generation silanes for low-roll resistance tires. With these actions, we are continuing to invest strategically in our specialty growth platforms while optimizing our siloxane capacity.

Expand our global reach in faster growing regions and markets. We intend to continue to grow by expanding our sales presence and application support around the world. We are focused on growing our business by making targeted investments in emerging markets, specifically certain areas of Asia Pacific, India and Latin America. In India, we have increased sales at an average annual growth rate of 7% over the last four years.

Develop new applications and market new products. We intend to maintain industry leadership through new product development and innovation initiatives. We aim to establish new relationships with customers and third parties to create next generation solutions. In the last five years, we generated approximately 13% of our revenue from new products, including several instances in which we co-developed applications with our customers.

In addition, we will continue to invest in R&D capabilities by upgrading our technology facilities and expanding our new product offerings. In 2016, 2015, and 2014, we invested $64 million, $65 million, and $76 million, respectively, in R&D. In recent years, we upgraded technology facilities at our Tarrytown, New York site, implemented a full scale pilot line for our coatings business in Leverkusen, Germany and opened a new tire additives application development center in Charlotte, North Carolina, all of which further complement our network of innovation centers strategically located to support our customers globally. Through these investments, we expect to continue to drive incremental revenue and earnings growth.

 



 

10


Table of Contents

Invest in high-return capital projects. We have a history of investing capital in high-ROI growth projects to expand product sets, customer penetration and increase capacity to service rapidly expanding sales. Over the last three years, we have invested approximately $100 million into growth capital projects. We constantly evaluate the highest and best use of each incremental growth capital dollar and consult with our partners to ensure we are prepared to efficiently get to market.

Continue portfolio optimization, targeted add-on acquisitions and joint ventures. We will continue to pursue acquisitions of attractive businesses and technologies that provide exposure to higher-end specialty products and services. For example, we recently acquired the operating assets of Sea Lion Technology, Inc. (“Sea Lion”) to further support the silanes business. Sea Lion was a contract manufacturer that worked with Momentive to produce silane products, including NXT silane, for more than 10 years. We believe the acquisition of Sea Lion will enable us to strategically leverage production assets in support of our high-growth NXT business.

We will continue to pursue other acquisitions and joint venture opportunities in the attractive specialty silicone and silane, quartz and specialty ceramics spaces. As a leading manufacturer of performance materials we have an advantage in pursuing add-on acquisitions and joint ventures in areas that allow us to build upon our core strengths and expand our product, technology and geographic portfolio to better serve our customers. We believe we will have the opportunity to consummate acquisitions at relatively attractive valuations due to the scalability of our existing global operations and deal-related synergies.

Identify and implement strategic cost reduction initiatives. We are committed to driving cost reductions and efficiencies throughout our global manufacturing footprint, including through implementing LEAN / Six Sigma initiatives and right sizing siloxane production. Our management team has a robust process to effectuate cost reduction plans and continuously reviews our operations to identify and evaluate further cost reduction opportunities. The team develops detailed process plans to facilitate staffing and execution, appoints a team leader and holds regular stage-gate reviews with a steering committee to remain on track. The cost reduction plan we have put in place over the last two years is just the latest example of our ability to effectively implement such initiatives. We plan on achieving the approximately $48 million in annual structural cost reduction initiatives by the end of 2017. Cumulatively through September 30, 2017, we have achieved approximately $42 million of savings under these initiatives.

Recent Developments

On October 30, 2017, we received commitments to extend the maturity of the senior secured asset-based revolving credit facility (the “ABL Facility”). Subject to the consummation of the offering that results in cash proceeds to us of at least $200 million and other customary closing conditions, the lenders providing the commitments agreed to extend the maturity of the ABL Facility from October 2019 to five years from the closing of this offering; provided that (x) if, on July 25, 2021, the date that is 91 days prior to the maturity date of the First Lien Notes (the “First Lien Notes Maturity Test Date”), the aggregate principal amount of the First Lien Notes outstanding exceeds $50 million, the extended maturity date for such commitments will be the First Lien Notes Maturity Test Date and (z) if, on January 23, 2022, the date that is 91 days prior to the maturity date of the Second Lien Notes (the “Second Lien Notes Maturity Test Date”), the aggregate principal amount of the Second Lien Notes outstanding exceeds $50 million, the extended maturity date for such commitments will be the Second Lien Notes Maturity Test Date. The availability for our borrowers under the ABL Facility will continue to be limited to the borrowing base of our borrowers and guarantors. As a result of the consummation of this offering, we expect that conditions to the commitments will be satisfied. In addition, we may request one or more incremental revolving commitments under the ABL Facility in an aggregate principal amount up to the greater of (a) $80 million and (b) the excess of the borrowing base over the amount of the then-effective commitments under the ABL Facility at the time of such increase (to the extent we can identify lenders willing to make such an increase available to us).

 



 

11


Table of Contents

Risks Associated with our Business

Investing in our common stock involves a number of risks, including:

 

    Any weakening or deterioration in global economic conditions could negatively impact our business, results of operations and financial condition;

 

    Natural or other disasters could disrupt our business and result in loss of revenue or higher expenses;

 

    Our substantial debt could adversely affect our operations and prevent us from satisfying our obligations under our debt obligations, and may have an adverse effect on our stock price. As of September 30, 2017, on an adjusted basis after giving effect to this offering (assuming a price per share at the midpoint of the range on the cover of this prospectus) and the use of the proceeds therefrom, we would have had approximately $1,109 million aggregate principal amount of consolidated outstanding indebtedness, and, based on our consolidated indebtedness, our annualized cash interest expense would be approximately $43 million based on interest rates at September 30, 2017; and

 

    We may be unable to achieve the cost savings or synergies that we expect to achieve from our strategic initiatives, which would adversely affect our profitability and financial condition.

For a discussion of the significant risks associated with our business, our industry and investing in our common stock, you should read the section entitled “Risk Factors.”

 



 

12


Table of Contents

Organizational Structure

The chart below is a summary of the organizational structure of the Company and illustrates the long-term debt outstanding as of September 30, 2017 after giving effect to this offering (assuming a price per share at the midpoint of the range on the cover of this prospectus and assuming no exercise of the underwriters’ option to purchase additional shares) and the use of proceeds as described under “Use of Proceeds.”

 

LOGO

 

(1) Guarantor under our senior secured asset-based revolving credit facility (the “ABL Facility”).
(2) MPM and the guarantors also provide guarantees under (or are borrowers under) the ABL Facility.
(3) Total estimated availability of $270 million, subject to borrowing base availability, of which approximately $215 million was available as of September 30, 2017, after giving effect to no outstanding borrowings and $55 million of outstanding letters of credit. The ABL Facility covenants include 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. On October 30, 2017, we received commitments to extend the maturity of the ABL Facility from October 2019 to five years from the closing of this offering, subject to certain conditions and exceptions. See “Description of Indebtedness—ABL Facility.”
(4) Certain of our non-U.S. subsidiaries provide guarantees under the ABL Facility but do not guarantee the 3.88% First-Priority Senior Secured Notes due 2021 (the “First Lien Notes”) or the 4.69% Second-Priority Senior Secured Notes due 2022 (the “Second Lien Notes”).

 



 

13


Table of Contents

Additional Information

Momentive was incorporated under the laws of the State of Delaware on September 2, 2014. Our principal executive offices are located at 260 Hudson River Road, Waterford, NY 12188, and our telephone number is (518) 233-3370. The address of our Internet site is www.momentive.com. This Internet address is provided for informational purposes only and is not intended to function as a hyperlink. Accordingly, no information contained in this Internet address is included or incorporated by reference herein.

 



 

14


Table of Contents

The Offering

The following summary highlights all material information contained elsewhere in this prospectus but does not contain all the information that you should consider before investing in our common stock. We urge you to read this entire prospectus, including the “Risk Factors” section and the consolidated financial statements and related notes.

 

Issuer

MPM Holdings Inc.

 

Common stock offered by us

10,416,667 shares of common stock.

 

Common stock offered by the selling stockholders

4,166,666 shares of common stock.

 

Underwriters’ option to purchase additional shares

The selling stockholders have granted the underwriters a 30 day option to purchase up to an additional 2,187,500 shares of common stock.

 

Common stock to be outstanding immediately after this offering

58,538,301 shares of common stock.

 

Use of proceeds

We will receive net proceeds from our sale of common stock in this offering of approximately $229 million, assuming an initial public offering price of $24.00 per share (the midpoint of the price range on the cover page of this prospectus) in each case after deducting assumed underwriters’ discounts and estimated offering expenses payable by us and arrangement and other fees incurred by us in connection with amending our ABL Facility. We intend to use the net proceeds received by us from this offering to (i) redeem approximately $193 million of our outstanding Second Lien Notes, (ii) repay approximately $36 million of outstanding debt (the “China bank loans”) of our indirect subsidiary Momentive Performance Materials (Nantong) Co., Ltd. and (iii) pay related fees and expenses. We will not receive any of the proceeds from the sale of shares offered by the selling stockholders.

 

Dividend policy

We have not paid any dividends on our common stock. We do not intend to declare or pay any cash dividends on our common stock for the foreseeable future. We plan to review our dividend policy periodically.

 

Directed share program

At our request, the underwriters have reserved up to 5% of the common stock being offered by this prospectus for sale at the initial public offering price to our directors, officers, employees and other individuals associated with us and members of their families. The sales will be made by UBS Financial Services Inc., a selected dealer affiliated with UBS Securities LLC, an underwriter of this offering, through a directed share program. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares

 



 

15


Table of Contents
 

available to the general public. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of common stock.

 

Listing

Our common stock is currently quoted on the OTCQX Marketplace under the symbol “MPMQ.” We have been approved to list our common stock on the NYSE under the symbol “MPMH.” The share prices on the OTCQX may not be indicative of the market price of our common stock on a national securities exchange.

 

Risk factors

You should carefully consider all of the information set forth in this prospectus and, in particular, the information under “Risk Factors” beginning on page 21 of this prospectus, prior to purchasing shares of our common stock offered hereby.

Unless we specifically state otherwise, all share information in this prospectus:

 

    is based on 48,121,634 shares outstanding as of October 31, 2017;

 

    assumes no exercise of the underwriters’ option to purchase 2,187,500 additional shares of common stock from the selling stockholders;

 

    does not include 2,276,456 shares issuable under outstanding options to purchase shares of common stock at a weighted average exercise price of $10.33, restricted stock units or other similar awards granted under the MPM Holdings Inc. Management Equity Plan (the “MPMH Equity Plan”), including 324,870 shares issuable pursuant to restricted stock units that will vest in connection with the consummation of this offering, or 1,448,686 additional shares reserved for future issuance under the MPMH Equity Plan; and

 

    assumes an initial public offering price of $24.00 per share (the midpoint of the price range on the cover page of this prospectus).

 



 

16


Table of Contents

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table presents the Company’s summary historical financial information as of and for the periods presented. Prior to our emergence from bankruptcy on October 24, 2014 (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. Refer to Note 2 to our audited consolidated financial statements included elsewhere herein for more information.

The summary historical financial information as of December 31, 2016 (successor) and December 31, 2015 (successor) and for the successor years ended December 31, 2016 and 2015; the successor period from October 25, 2014 through December 31, 2014; and the predecessor period from January 1, 2014 through October 24, 2014 have been derived from, and should be read in conjunction with, our audited consolidated financial statements included elsewhere in this prospectus. The summary historical financial information as of September 30, 2017 and for the nine months ended September 30, 2017 and 2016 has been derived from, and should be read in connection with, our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The results of operations for interim periods are not necessarily indicative of the operating results that may be expected for the entire year or any future period. The summary financial information for the twelve months ended September 30, 2017 has been derived by adding the consolidated financial data for the year ended December 31, 2016 to the condensed consolidated financial data for the nine months ended September 30, 2017 and then subtracting the condensed consolidated financial data for the nine months ended September 30, 2016. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair statement of our financial position and results of operations as of the dates and for the periods indicated have been included.

You should read the Summary Historical Consolidated Financial Data together with the sections entitled “Capitalization,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 



 

17


Table of Contents
    Successor     Predecessor  
    Last Twelve
Months
Ended

September 30,
2017
    Nine Months
Ended
September 30,
    Year Ended
December 31,
    Period from
October 25,
2014
through
December 31,
2014
    Period from
January 1,
2014
through
October 24,
2014
 
(dollars in millions, except per share data)     2017     2016     2016     2015      
    (unaudited)     (unaudited)                          

Statements of Operations

               

Net sales

  $ 2,276     $ 1,732     $ 1,689     $ 2,233     $ 2,289     $ 465     $ 2,011  

Costs and expenses:

    1,852       1,378       1,371       1,845       1,894       402    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

    424       354       318       388       395       63    

Cost of sales, excluding depreciation and amortization

                  1,439  

Selling, general and administrative expense

    361       252       238       347       285       80       434  

Depreciation and amortization expense

                  147  

Research and development expense

    62       48       50       64       65       13       63  

Restructuring and discrete costs

    37       6       11       42       32       5       20  

Other operating loss (income), net

    11       2       10       19       2       (1     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (47     46       9       (84     11       (34     (92

Interest expense, net

    79       60       57       76       79       15       162  

Non-operating (income) expense, net

    (16     (7     2       (7     3       8       —    

Gain on extinguishment and exchange of debt

    —         —         (9     (9     (7     —         —    

Reorganization items, net

    1       —         1       2       8       3       (1,972
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income tax and earnings (losses) from unconsolidated entities

    (111     (7     (42     (146     (72     (60     1,718  

Income tax expense

    25       11       4       18       13       —         36  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before earnings (losses) from unconsolidated entities

    (136     (18     (46     (164     (85     (60     1,682  

(Losses) earnings from unconsolidated entities, net of taxes

    (1     (1     1       1       2       —         3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (137   $ (19   $ (45   $ (163   $ (83   $ (60   $ 1,685  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share—basic and diluted

  $ (2.84   $ (0.39   $ (0.94   $ (3.39   $ (1.73   $ (1.25   $ 16,850,000  

Balance Sheet Data (at end of period):

               

Cash and cash equivalents

    $ 144       $ 228     $ 221        

Working capital(1)

      486         432       450        

Total assets

      2,686         2,606       2,663        

Total long-term debt

      1,185         1,167       1,169        

Total liabilities

      2,169         2,124       2,037        

Total equity

      517         482       626        

Cash Flow provided by (used in):

               

Operating activities

  $ 111     $ 46     $ 77     $ 142     $ 128     $ (3   $ (207

Investing activities

    (163     (130     (84     (117     (116     (17     (18

Financing activities

    (3     (1     (14     (16     (10     (1     390  

Other Financial Data:

               

Capital expenditures(2)

  $ 157     $ 123     $ 89     $ 123     $ 111     $ 24     $ 62  

Segment EBITDA(3)

    275       210       173       238       194       46       192  

 

(1) Working capital is defined as accounts receivable plus inventories less accounts payable.
(2) Capital expenditures are presented on an accrual basis.
(3)

We have provided Segment EBITDA in this prospectus because it 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 businesses. Segment EBITDA is also a profitability measure used to set management and executive incentive compensation goals. Segment EBITDA is the aggregate of the Segment EBITDA for our

 



 

18


Table of Contents
  Formulated and Basic Silicones segment, our Performance Additives segment and our Quartz Technologies segment, less our Corporate segment, which consists of corporate, general and administrative expenses that are not allocated to the three revenue-generating segments, such as certain shared service and other administrative functions. You are encouraged to evaluate each adjustment used in calculating Segment EBITDA and the reasons we consider Segment EBITDA appropriate for supplemental analysis. Segment EBITDA is not a presentation made in accordance with GAAP and our use of the term Segment EBITDA may vary from that of others in our industry. Segment EBITDA should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP. Segment EBITDA has important limitations as an analytical tool, including with respect to measuring our operating performance, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. For example, Segment EBITDA excludes certain restructuring and other costs; excludes certain income tax expense that may represent a future obligation to us; does not reflect any charges for the assets being depreciated and amortized that may have to be replaced in the future; does not reflect the interest expense on our indebtedness; and does not include certain non-cash and certain other income and expenses. Non-cash charges primarily represent stock-based compensation expense, unrealized derivative and foreign exchange gains and losses and asset disposal gains and losses. Restructuring and other costs primarily include expenses from MPM’s restructuring and cost optimization programs, and discrete costs related to one-time events.

 



 

19


Table of Contents

The following is a reconciliation of net (loss) income to Segment EBITDA.

 

    Successor     Predecessor  
    Last Twelve
Months
Ended
September 30,
2017
    Nine Months Ended
September 30,
    Year Ended
December 31,
    Period from
October 25,
2014
through
December 31

2014
          Period from
January 1,
2014
through
October 24,

2014
 
(dollars in millions,
except percentages)
      2017         2016       2016     2015            
    (unaudited)     (unaudited)     (unaudited)                                

Net (loss) income

  $ (137   $ (19   $ (45   $ (163   $ (83   $ (60       $ 1,685  

Interest expense, net

    79       60       57       76       79       15           162  

Income tax expense

    25       11       4       18       13       —             36  

Depreciation and amortization

    170       117       132       185       153       22           147  

Gain on extinguishment and exchange of debt

    —         —       $ (9     (9     (7     —             —    

Items not included in Segment EBITDA:

                 

Non-cash charges and other income and expense

  $ 15     $ 4     $ 15     $ 26     $ 15     $ 46         $ 114  

Unrealized gains (losses) on pension and postretirement benefits

    29       1       5       33       (16     15           —    

Restructuring and discrete costs

    93       36       13       70       32       5           20  

Reorganization items, net

    1       —         1       2       8       3           (1,972
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Segment EBITDA

  $ 275     $ 210     $ 173     $ 238     $ 194     $ 46         $ 192  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Segment EBITDA margin(a)

    12     12     10     11     8     10         10

Segment EBITDA(b):

                 

Performance Additives

  $ 189     $ 140     $ 138     $ 187     $ 176     $ 34         $ 157  

Formulated and Basic Silicones

    90       71       51       70       25       10           56  

Quartz Technologies

    37       30       13       20       27       6           17  

Corporate

    (41     (31     (29     (39     (34     (4         (38
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total

  $ 275     $ 210     $ 173     $ 238     $ 194     $ 46         $ 192  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

  (a) Segment EBITDA margin is defined as the ratio of Segment EBITDA to total revenues. We have provided Segment EBITDA margin in this prospectus because it is used by our senior management, the chief operating decision-maker and the Board of Directors to evaluate operating results and performance and allocate capital resources among businesses. Segment EBITDA margin is not a presentation made in accordance with GAAP and our use of the term Segment EBITDA margin may vary from that of others in our industry. See note 3 above for a discussion of Segment EBITDA as a non-GAAP measure and a reconciliation of net (loss) income to Segment EBITDA.
  (b) In the third quarter of 2017, we changed the organization of our operating segments from two to four segments. Our new segment structure consists of 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. Segment EBITDA for all periods presented was retrospectively revised to conform with the new segment structure.

 



 

20


Table of Contents

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:

 

    reduced demand in key customer end-markets, such as automotive, which accounted for 17% of our revenues in 2016, consumer goods, personal care, construction, electronics, oil and gas and healthcare;

 

    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;

 

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

 

    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

 

    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 addition, if the global economic environment deteriorates or remains slow for an extended period of time, the fair

 

21


Table of Contents

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:

 

    new or existing laws or regulations;

 

    suppliers’ allocations to other purchasers;

 

    interruptions in production by suppliers; and

 

    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 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 2009 and 2010, two of our competitors acquired silicon metal manufacturing assets in North America and Europe, respectively, becoming vertically integrated in silicon metal for a portion of their supply requirements and reducing the manufacturing base of certain independent silicon metal producers. 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.

 

22


Table of Contents

On October 4, 2017, the DOC issued affirmative preliminary 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 will now instruct U.S. Customs and Border Protection to collect cash deposits from importers of silicon metal from Australia (20.79%), Brazil (56.78% to 134.92%) and Norway (3.74%). The DOC is expected to announce its final anti-dumping determination on February 16, 2018. In August 2017, the DOC published the preliminary countervailing duties rates for silicon metal from Australia (16.23%), Brazil (3.69% to 52.07%) and Kazakhstan (120%). The ITC is also investigating whether there is 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 and is expected to make a determination as to whether there is material injury or threat to the domestic market by April 3, 2018. 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 silicones business also relies heavily on siloxane as an intermediate product. 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, regulation of siloxane producers can also affect the supply of siloxane. For example, in May 2009, China’s Ministry of Commerce concluded an anti-dumping investigation of siloxane manufacturers in Thailand and South Korea, which resulted in an imposition of a 5.4% duty against our supplier, ASM, in Thailand, a 21.8% duty against other Thailand companies and a 25.1% duty against Korean companies. In May 2014, China’s Ministry of Commerce announced that the duty imposed on imports of siloxane originating in South Korea and Thailand terminated since no application had been filled for an extension.

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

 

23


Table of Contents

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 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 2016, 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 $20 million in 2017. If we are unable to 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 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,

 

24


Table of Contents

liabilities and subsidiaries of GE that comprised GE Advanced Materials, an operating unit within the Industrial 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

 

25


Table of Contents

provided letters of credit in the following amounts: approximately $43 million for closure and post-closure care 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 in March 2016, which required us to provide approximately $26 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 reviewing 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 silicon industry generally, and may, pursuant to REACH, regulate the use of these two chemical substances in the European Union. The USEPA has also stated that they are reviewing the potential environmental risks posed by D4 to determine whether regulatory measures are warranted. We and other silicones 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. Finally, in March 2016, 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. Regulation of our products containing such substances by the European Union, Canada, the United States or parties to the 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

 

26


Table of Contents

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 such 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 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

 

27


Table of Contents

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, three appeals were filed relating to the confirmation of the Plan of Reorganization. Specifically, on September 15, 2014, U.S. Bank National Association (“U.S. Bank”) as trustee for our previously issued 11.5% Senior Subordinated Notes due 2016 (the “Subordinated Notes”) filed its appeal (the “U.S. Bank Appeal”) before the U.S. District Court for the Southern District of New York (the “District Court”) seeking a reversal of the Bankruptcy Court’s determination that the Plan of Reorganization properly denied recovery to holders of the Subordinated Notes on the basis that those debt securities are contractually subordinated to the 9.00% Second-Priority Springing Lien Notes due 2021 and 9.50% Second-Priority Springing Lien Notes due 2021 (collectively, the “Old Second Lien Notes”) (such determination, the “Subordinated Notes Determination”). In addition, on September 16, 2014, BOKF, NA, as trustee (“First Lien Trustee”) for the 8.875% First-Priority Senior Secured Notes due 2020 (the “Old First Lien Notes”), and Wilmington Trust, National Association, as trustee for the 10% Senior Secured Notes due 2020 (the “Old Secured Notes”) (“1.5 Lien Trustee” and together with U.S. Bank and First Lien Trustee, the “Appellants”) filed their joint appeal (together with the U.S. Bank Appeal, the “District Court Appeals”) before the District Court seeking reversal of the bankruptcy court’s determinations that (i) Old MPM Holdings 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 “Prepayment Premiums Determination”) and (ii) the interest rates on the First Lien Notes and 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”). On November 11, 2014, the Debtors filed a motion to dismiss the District Court Appeals (the “District Court Motion to Dismiss”) with the District Court asserting, inter alia, that granting the relief requested by the Appellants would be inequitable under the legal doctrine of equitable mootness. On May 5, 2015, the District Court dismissed the District Court Appeals (the “District Court Decision”) and affirmed the Bankruptcy Court rulings. Because the District Court Appeals were decided on their merits, the District Court also terminated the District Court Motion to Dismiss as moot. All the Appellants appealed the District Court Decision to the United States Court of Appeals for the Second Circuit (the “Second Circuit”, and the appeals, the “Second Circuit Appeals”). On September 3, 2015, the Debtors filed motions to dismiss the Second Circuit Appeals (the “Second Circuit Motions to Dismiss”) with the Second Circuit asserting, inter alia, that granting the relief requested by the Appellants would be inequitable under the legal doctrine of equitable mootness. On October 20, 2017, the Second Circuit issued its decision on the Second Circuit Appeals (the “Second Circuit Decision”). The

 

28


Table of Contents

Second Circuit Decision affirmed the Subordinated Notes Determination and the Prepayment Premiums Determination. However, the Second Circuit Decision reversed the Interest Rate Determination and remanded the issue to the Bankruptcy Court for further proceedings (the “Remand”). The Second Circuit Decision held that, on remand, the Bankruptcy Court should first assess whether an efficient market rate can be ascertained for the First Lien Notes and Second Lien Notes, and, if so, apply that rate to the First Lien Notes and Second Lien Notes. The Second Circuit Decision also declined to dismiss the Second Circuit Appeals as equitably moot. On November 3, 2017, First Lien Trustee and 1.5 Lien Trustee requested a rehearing en banc by the Second Circuit with respect to the Prepayment Premium Determination.

We cannot predict with certainty the timing or outcome of the Remand, or whether parties may file petitions of certiorari with the Supreme Court of the United States, with respect to the Second Circuit Decision. An adverse outcome could negatively affect our business, results of operations and financial condition by reducing our liquidity and/or increasing our interest costs (including by potentially requiring us to make a catch-up payment for past due interest, which payment could be material).

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:

 

    exchange controls and currency restrictions;

 

    currency fluctuations and devaluations;

 

    tariffs and trade barriers;

 

    export duties and quotas;

 

    changes in local economic conditions;

 

    changes in laws and regulations, including environmental, health and safety regulations;

 

    exposure to possible expropriation or other government actions;

 

    hostility from local populations;

 

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

 

    restrictions on our ability to repatriate dividends from our subsidiaries;

 

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

 

    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.

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.

 

29


Table of Contents

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 2016, approximately 67% 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 year ended December 31, 2016, 6% for the year ended December 31, 2015, and 7% for the year ended 2014, respectively.

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 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

 

30


Table of Contents

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.

For the nine months ended September 30, 2017 and the years ended December 31, 2016 and 2015, we generated net losses of $19 million, $163 million and $83 million, respectively. If we continue to suffer net losses, our liquidity may suffer and we may not be able to fund all of our obligations. As of September 30, 2017, on an adjusted basis after giving effect to this offering and the use of proceeds therefrom (assuming a price per share at the midpoint of the range on the cover of this prospectus), we would have had approximately $1,109 million aggregate principal amount of consolidated outstanding indebtedness. Our projected annualized cash interest expense on an adjusted basis after giving effect to this offering and the use of proceeds therefrom (assuming a price per share at the midpoint of the range on the cover of this prospectus), would be approximately $43 million based on our consolidated indebtedness and letters of credit outstanding and interest rates at September 30, 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. In addition, if we continue to experience net losses, the trading price of our common stock may decline significantly.

 

31


Table of Contents

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.

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

 

32


Table of Contents

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 September 30, 2017, approximately 44% 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, 2016, our U.S. and non-U.S. defined benefit pension plans were under-funded in the aggregate by $119 million and $172 million, respectively. We are legally required to make contributions to our 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

 

33


Table of Contents

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.

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.

 

34


Table of Contents

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 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 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

 

35


Table of Contents

the respective products. 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 September 30, 2017, on an adjusted basis after giving effect to this offering and the use of proceeds therefrom (assuming a price per share at the midpoint of the range on the cover of this prospectus), we would have had approximately $1,109 million aggregate principal amount of consolidated outstanding indebtedness. Our projected annualized cash interest expense, on an adjusted basis after giving effect to this offering and the use of proceeds therefrom (assuming a price per share at the midpoint of the range on the cover of this prospectus), would be approximately $43 million based on our consolidated indebtedness and letters of credit outstanding and interest rates at September 30, 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 September 30, 2017, the borrowing base (including various reserves) was determined to be approximately $301 million, and we had approximately $55 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.

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:

 

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

 

36


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

 

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

 

    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;

 

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

 

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

 

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

 

    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:

 

    incur or guarantee additional debt;

 

    pay dividends and make other distributions to our stockholders;

 

    create or incur certain liens;

 

    make certain loans, acquisitions, capital expenditures or investments;

 

    engage in sales of assets and subsidiary stock;

 

    enter into sale/leaseback transactions;

 

    enter into transactions with affiliates; and

 

    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.

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

 

37


Table of Contents

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.

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

 

38


Table of Contents

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. Our ratings were downgraded by Moody’s in January 2016. The ratings assigned by both ratings agencies to our debt issued in connection with our emergence from the Chapter 11 proceedings are currently below investment grade. Any decision by these ratings agencies to further 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 and an active trading market may not develop or be sustained following this offering.

Prior to this offering, there has been only a limited public market for our common stock. An active trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about us, our business or our market, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that equity research analysts publish about us and our business. We do not currently have and may never obtain research coverage by equity research analysts. Equity research analysts may elect not to provide research coverage of our common stock after this offering, and such lack of research coverage may adversely affect the market price of our common stock. In the event we do have equity research analyst coverage, we will not have any control over the analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

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;

 

39


Table of Contents
    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.

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.

We do not currently intend to pay dividends on our common stock so any returns will be limited to the value of our stock.

We have not paid any dividends since Momentive’s incorporation in 2014. For the foreseeable future, although we plan to review our dividend policy periodically, we currently intend to retain any earnings to finance our business and we do not anticipate paying any cash dividends on our common stock. Any return to stockholders will therefore be limited to the appreciation of their stock.

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 October 31, 2017, we had 48,121,634 shares of common stock issued and outstanding. Substantially all of these shares have been registered by the Company’s registration statement (File No. 333-201338) (the “Shelf Registration Statement”) or otherwise are freely tradable. The sale of all or a portion of the shares by the such stockholders under the Shelf Registration Statement or by 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 Company’s 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. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

We, each of our executive officers and directors, all of the selling stockholders and certain other stockholders, representing approximately 87.8% of common stock outstanding before this offering, and approximately 65.1% of common stock outstanding immediately following this offering (assuming no exercise of the underwriters’ option to purchase additional shares), have agreed with the underwriters that for a period of 180 days after the date of this prospectus, subject to extension under certain circumstances, we and they will not offer, sell, assign, transfer, pledge, contract to sell or otherwise dispose of or hedge any of our common stock or

 

40


Table of Contents

any options or warrants to purchase any of our common stock or any securities convertible into or exchangeable for our common stock, subject to specified exceptions. J.P. Morgan Securities LLC and Goldman Sachs & Co. LLC, as representatives of the underwriters, may, in their discretion, at any time without prior notice, release all or any portion of the common stock from the restrictions in any such agreement. See “Shares Eligible for Future Sale” and “Underwriting” for more information. Sales of a substantial number of such shares upon expiration of the lock-up, the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your common stock at a time and price that you deem appropriate. All of our common stock outstanding as of the date of this prospectus may be sold in the public market by existing stockholders after the date of this prospectus, subject to the contractual lock-ups described above. See “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our common stock after this offering. Sales by our existing stockholders of a substantial number of shares in the public market, or the perception that these sales might occur, could cause the market price of our common stock to decrease significantly.

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.

Following this offering (assuming no exercise of the underwriters’ option to purchase additional shares), investment funds managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and its consolidated subsidiaries, “Apollo”) will beneficially own approximately 28.9% 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 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 you as a stockholder 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”), which will be effective upon the consummation of this offering, provides that we expressly renounce any interest or expectancy in any business opportunity, transaction or other matter in which Apollo or any of its affiliates, or Oaktree Capital Management, L.P. (“Oaktree”) or any of its affiliates, 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”), which will be effective upon the consummation of this offering, 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, those that:

 

    provide that the Board of Directors will be divided into three classes of directors, with staggered three-year terms, with the classes to be as nearly equal in number as possible for a classified board;

 

    provide that except for directors elected by the holders of any series of preferred stock, a director may only be removed for cause and upon the affirmative vote of at least 66 23% of the voting power of the outstanding shares;

 

41


Table of Contents
    provide that special meetings may only be called by the Board of Directors, the Chairman of the Board of Directors or the Chief Executive Officer;

 

    authorize our Board of Directors to issue preferred stock without stockholder approval;

 

    specify that the doctrine of “corporate opportunity” will not apply with respect to Apollo and Oaktree and their respective affiliates with respect to the Company;

 

    prohibit actions by written consent of the stockholders;

 

    give our Board of Directors the ability to increase the size of the Board of Directors and fill vacancies without a stockholder vote; and

 

    require advance notice for stockholder proposals and director nominations.

These provisions of our Certificate of Incorporation and By-laws 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. See “Description of Capital Stock—Forum for Adjudication of Disputes.” 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.

 

42


Table of Contents

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, health and safety hazards and regulations and related compliance and litigation costs and liabilities;

 

    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 our strategic initiatives;

 

    our holding company structure;

 

    intellectual property protection, enforcement 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.”

 

43


Table of Contents

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.

 

44


Table of Contents

USE OF PROCEEDS

We will receive net proceeds from our sale of common stock in this offering of approximately $229 million, assuming an initial public offering price of $24.00 per share (the midpoint of the price range on the cover page of this prospectus), after deducting assumed underwriters’ discounts and estimated offering expenses payable by us and arrangement and other fees incurred by us in connection with amending our ABL Facility. We intend to use the net proceeds received by us from this offering to (i) redeem approximately $193 million of our outstanding Second Lien Notes, (ii) repay approximately $36 million of our China bank loans and (iii) pay related fees and expenses. Our Second Lien Notes bear interest at a rate of 4.69% per annum and mature on April 24, 2022. As of September 30, 2017, our China bank loans bore interest at rates ranging from 3.5% to 4.35%, with a weighted-average interest rate of 4.06%. The China bank loans mature between December 2017 and September 2018. We will not receive any of the proceeds from the sale of shares offered by the selling stockholders.

A $1.00 change in price per share would change net proceeds to us by $10 million, which would correspondingly change the amount of Second Lien Notes to be repaid.

 

45


Table of Contents

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, 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      $ 7.65  

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 (through November 3, 2017)

   $ 17.50      $ 15.05  

Holders. As of October 31, 2017, there were 25 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 beneficial 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.

 

46


Table of Contents

CAPITALIZATION

The following table sets forth the Company’s cash and cash equivalents and capitalization as of September 30, 2017:

 

    on an actual basis; and

 

    on an as adjusted basis to reflect (i) the issuance and sale by us and the selling stockholders of 14,583,333 shares of our common stock in this offering (assuming no exercise of the underwriters’ option to purchase additional shares) at an assumed initial public offering price of $24.00 per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discount and estimated offering expenses payable by us, (ii) the redemption of approximately $193 million of our outstanding Second Lien Notes and (iii) the repayment of approximately $36 million of our China bank loans.

You should read this table in conjunction with our consolidated financial statements and the related notes which are included elsewhere in this prospectus as well as the sections entitled “Selected Historical Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of
September 30, 2017
 
(dollars in millions)    Actual     As Adjusted  

Cash and cash equivalents(1)

   $ 144     $ 144  
  

 

 

   

 

 

 

Debt outstanding:

    

ABL Facility(2)

     —         —    

First Lien Notes (includes $90 million of unamortized debt discount)

     1,010       1,010  

Second Lien Notes (includes $27 million and $1 million of unamortized debt discount, respectively)

     175       8  

China bank loans

     36       —    
  

 

 

   

 

 

 

Total debt

     1,221       1,018  
  

 

 

   

 

 

 

Common stock

     —         —    

Additional paid-in capital

     867       1,117  

Accumulated other comprehensive loss

     (25     (25

Accumulated deficit

     (325     (387
  

 

 

   

 

 

 

Total equity(3)

     517       705  
  

 

 

   

 

 

 

Total capitalization

   $ 1,738     $ 1,723  
  

 

 

   

 

 

 

 

(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) The ABL Facility has total maximum borrowing availability of $270 million, subject to a borrowing base, of which approximately $215 million was available as of September 30, 2017, after giving effect to no outstanding borrowings and $55 million of outstanding letters of credit. On October 30, 2017, we received commitments under the ABL Facility to extend the maturity of the ABL Facility from October 2019 to five years from the closing of this offering, subject to certain conditions and exceptions. See “Description of Indebtedness—ABL Facility.”
(3) “As Adjusted” reflects $26 million write-off of unamortized debt discount related to the Second Lien Notes, $21 million of estimated offering expenses and $15 million of stock-based compensation expense related to our outstanding stock options where the performance conditions will vest immediately upon completion of this offering.

 

47


Table of Contents

DILUTION

If you invest in our common stock, you will experience dilution to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock. Net tangible book value represents the amount of total tangible book value divided by the number of shares of our common stock outstanding. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the common stock held by us.

Our net tangible book value as of September 30, 2017 would have been a deficit of approximately $7 million, or $(0.15) per share of our common stock.

After giving effect to the sale of 10,416,667 shares of common stock in this offering at the assumed initial public offering price of $24.00 per share (the midpoint of the price range on the cover page of this prospectus) and the application of the net proceeds from this offering, our as adjusted net tangible book value would have been a surplus of approximately $181 million, or $3.10 per share, representing an immediate increase in net tangible book value of $3.25 per share to us and an immediate dilution in net tangible book value of $(20.90) per share to new investors in this offering.

The following table illustrates the dilution per share of our common stock, assuming the underwriters do not exercise their option to purchase additional shares of our common stock.

 

Initial public offering price per share

   $ 24.00  

Net tangible book value per share as of September 30, 2017

   $ (0.15

Increase in net tangible book value per share attributable to the adjustments described above

     3.25  

Net tangible book value per share after this offering

     3.10  
  

 

 

 

Dilution in net tangible book value per share

   $ (20.90
  

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $24.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the adjusted net tangible book value per share after this offering by $0.14 per share and increase (decrease) the immediate dilution in net tangible book value by $0.86 per share to new investors in this offering.

Dilution is determined by subtracting as adjusted net tangible book value per share after this offering from the initial public offering price per share of common stock.

 

48


Table of Contents

The following table sets forth, as of September 30, 2017, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by the existing equity holders and by new investors purchasing shares of common stock in this offering, at the assumed initial public offering price of $24.00 per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and arrangement and other fees incurred by us in connection with amending our ABL Facility.

 

     Shares Purchased     Total Consideration     Average
Price per

Share
 
     Number      Percent     Amount      Percent    

Existing equity holders(1)

     48,121,634        82.2   $ 977,683,943        81.0   $ 20.32  

New investors in this offering

     10,416,667        17.8     229,400,000        19.0     22.02  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     58,538,301        100   $ 1,207,083,943        100  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

(1) Total consideration reflects the Bankruptcy Court approved plan equity value of $20.33 per share for the 47,989,000 shares of the Company’s common stock issued in connection with our emergence from Chapter 11 and the consideration for subsequently issued shares and from restricted stock units since the Emergence Date.

We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

49


Table of Contents

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. Refer to Note 2 to our audited consolidated financial statements included elsewhere herein for more information.

The consolidated statement of operations data for the years ended December 31, 2016, December 31, 2015, the successor period from October 25, 2014 through December 31, 2014, the predecessor period from January 1, 2014 through October 24, 2014 and the years ended December 31, 2013 and 2012 and the consolidated balance sheet data as of December 31, 2016, 2015, 2014, 2013 and 2012 have been derived from our audited consolidated financial statements. The consolidated financial data as of September 30, 2017 and for the nine-month periods ended September 30, 2017 and 2016 have been derived from the unaudited condensed consolidated financial statements, included elsewhere in this prospectus, and include all adjustments that management considers necessary for a fair statement of our financial position and results of operations as of the dates and for the periods indicated. The results of operations for interim periods are not necessarily indicative of the operating results that may be expected for the entire year or any future period.

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.

 

50


Table of Contents
    Successor     Predecessor  
    Nine Months
Ended September 30,
    Year Ended
December 31,
   

Period from
October 25,
2014 through
December 31,
2014

   

Period from
January 1,
2014 through
October 24,
2014

    Year Ended December 31,  
(dollars in millions, except per share data)       2017             2016           2016         2015           2013     2012  
    (unaudited)                                      

Statement of Operations Data:

               

Net sales

  $ 1,732     $ 1,689     $ 2,233     $ 2,289     $ 465     $ 2,011     $ 2,398     $ 2,357  

Cost of sales

    1,378       1,371       1,845       1,894       402        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

Gross profit

    354       318       388       395       63        

Cost of sales, excluding depreciation and amortization

              1,439       1,732       1,705  

Selling, general and administrative expense

    252       238       347       285       80       434       373       392  

Depreciation and amortization expense

              147       171       187  

Research and development expense

    48       50       64       65       13       63       70       69  

Restructuring and discrete costs

    6       11       42       32       5       20       21       43  

Other operating expense (income), net

    2       10       19       2       (1     —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    46       9       (84     11       (34     (92     31       (39

Interest expense, net

    60       57       76       79       15       162       394       277  

Non-operating (income) expense, net

    (7     2       (7     3       8       —         —         (11

(Gain) loss on extinguishment and exchange of debt

    —         (9     (9     (7     —         —         —         57  

Reorganization items, net

    —         1       2       8       3       (1,972     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income tax and earnings (losses) from unconsolidated entities

    (7     (42     (146     (72     (60     1,718       (363     (362

Income tax expense

    11       4       18       13       —         36       104       8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before earnings (losses) from unconsolidated entities

    (18     (46     (164     (85     (60     1,682       (467     (370

(Losses) earnings from unconsolidated entities, net of taxes

    (1     1       1       2       —         3       3       5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (19   $ (45   $ (163   $ (83   $ (60   $ 1,685     $ (464   $ (365
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) earnings per share, basic and diluted

  $ (0.39   $ (0.94   $ (3.39   $ (1.73   $ (1.25   $ 16,850,000     $ (4,640,000   $ (3,650,000

Dividends declared per common share

  $ —       $ —       $ —       $ —       $ —       $ —       $ 4,600     $ 3,185  

Cash Flow provided by (used in):

               

Operating activities

  $ 46     $ 77     $ 142     $ 128     $ (3   $ (207   $ (150   $ (95

Investing activities

    (130     (84     (117     (116     (17     (18     (88     (102

Financing activities

    (1     (14     (16     (10     (1     390       220       111  

Balance Sheet Data (at end of period):

               

Cash and cash equivalents

  $ 144       $ 228     $ 221     $ 228       $ 94     $ 110  

Working capital(1)

    486         432       450       611         (2,884     290  

Total assets

    2,686         2,606       2,663       2,884         2,694       2,904  

Total long-term debt

    1,185         1,167       1,169       1,163         7       3,081  

Total liabilities

    2,169         2,124       2,037       2,115         4,174       4,052  

Total equity (deficit)

    517         482       626       769         (1,480     (1,148

 

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

 

51


Table of Contents

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 nine months ended September 30, 2017 and 2016, years ended December 31, 2016 and 2015, successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014 with corresponding 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.

Chapter 11 Bankruptcy and Emergence

On April 13, 2014, we filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. The Chapter 11 proceedings were jointly administered under the caption In re MPM Silicones, LLC, et al., Case No. 14-22503. During the bankruptcy proceedings, we continued to operate our business as “debtors-in-possession” under the jurisdiction of the court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the court until our emergence from the Chapter 11 proceedings on October 24, 2014 (the “Emergence Date”).

Upon emergence from bankruptcy on the Emergence Date, we adopted fresh-start accounting which resulted in the creation of a new entity (such entity, the “successor”) for financial reporting purposes. Accordingly, our consolidated financial statements on or after October 24, 2014 are not comparable with our consolidated financial statements prior to that date (such entity, the “predecessor”). Upon emergence, we reduced our total aggregate debt obligations from approximately $3.3 billion at December 31, 2013 to approximately $1.2 billion at December 31, 2014, and reduced our annual cash interest payments from nearly $300 million to approximately $58 million. As of December 31, 2016, we had $2,606 million of total assets, $2,122 million of total liabilities and $484 million of total equity.

Shared Services Agreement

In October 2010, we entered into a shared services agreement with Hexion (the “Shared Services Agreement”), pursuant to which we provide to Hexion, and Hexion provides to us, certain services. Historically,

 

52


Table of Contents

these services have included, but were not limited to, executive and senior management, administrative support, human resources, information technology support, accounting, finance, legal and procurement services. The parties have transitioned or are in the process of transitioning some of the shared services. The primary continuing services that are currently shared are procurement, certain information technology services and legal.

The Shared Services Agreement was renewed for one year starting in October 2017 and is subject to termination by either us or Hexion, without cause, on not less than 30 days’ written notice, and expires in October 2018 (subject to one-year renewals every year thereafter; absent contrary notice from either party). The Shared Services Agreement establishes certain criteria upon which the costs of such services are allocated between us and Hexion and requires that the Steering Committee formed under the agreement meet no less than annually to evaluate and determine an equitable allocation percentage. The allocation percentage is reviewed by the Steering Committee pursuant to the terms of the Shared Services Agreement.

The Shared Services Agreement has resulted in significant synergies for us, including shared services and logistics optimization, procurement savings, regional site rationalization and administrative and overhead savings. Despite the bankruptcy proceedings, the Shared Services Agreement has continued in effect along with substantial savings from these synergies. The Shared Services Agreement provides for (i) a transition assistance period at the election of the recipient following termination of the Shared Services Agreement of up to 12 months, subject to one successive renewal period of an additional 60 days and (ii) the use of an independent third-party audit firm to assist the Steering Committee with its annual review of billings and allocations.

Reportable Segments

The Company’s segments are based on the products that the Company offers and the markets that it serves. The Performance Additives business is engaged in the manufacture, sale and distribution of specialty silanes, silicone fluids and urethane additives. The Formulated and Basic Silicones business is engaged in the manufacture, sale and distribution of sealants, electronics materials, coatings, elastomers and basic silicone fluids. The Quartz Technologies business is engaged in the manufacture, sale and distribution of high-purity fused quartz and ceramic materials. In addition, Corporate consists of corporate, general and administrative expenses that are not fully allocated to the other segments, such as shared service and other administrative functions.

Third Quarter 2017 Overview

 

    Net Sales—Net sales increased approximately $43 million in the first nine months of 2017 as compared to the first nine months of 2016. The increase in net sales reflected an improved product mix in specialty silicone products and higher quartz business sales, which was partially offset by intentionally lower volumes of siloxane derivative products primarily as a result of ceasing siloxane production at our Leverkusen, Germany facility.

 

    Net (Loss) Income—During the first nine months of 2017, net loss decreased by $26 million, compared to the first nine months of 2016, primarily due to the increase in gross profit and the gain recognition from an insurance claim, offset by a gain on extinguishment of debt not recurring during the first nine months of 2017, an increase in selling, general and administrative expense, and an increase in income tax expense.

 

    Segment EBITDA—Segment EBITDA increased by $37 million in the first nine months of 2017, as compared to the first nine months of 2016. The increase in Segment EBITDA was driven primarily by improved demand in automotive, consumer products and electronics markets, as well as production efficiencies, and raw material deflation. In addition, Quartz Technologies Segment EBITDA improved by $17 million as compared to the first nine months of 2016 due to improved sales, cost controls and substantially improved manufacturing efficiencies.

 

53


Table of Contents

2016 Overview

 

    Net Sales—Net sales in 2016 were $2,233 million, a decrease of 2% compared with $2,289 million in 2015. This decrease was primarily due to volume decrease in line with our intentional efforts to reduce under-performing siloxane derivative products, as well as negative price and mix shift, caused by declines in oil and gas markets. In addition, there were favorable exchange rate fluctuations due to the weakening of the U.S. dollar against other currencies.

 

    Net Loss—Net loss in 2016 was $163 million, an increase of $80 million compared to $83 million in 2015. This was due to lower sales, higher selling, general and administrative expense, higher restructuring and discrete costs and higher other operating expense offset by lower cost of sales.

 

    Segment EBITDA—Segment EBITDA in 2016 was $238 million, an increase of $44 million compared to $194 million in 2015. This increase was primarily due to improved demand in automotive and electronics market, production efficiencies and raw material deflation.

 

    Recently completed initiatives include the expansion of our Leverkusen, Germany facility serving liquid silicone rubber customers throughout Europe in the automotive, aerospace, energy, healthcare and consumer products industries.

 

    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 will double our current NXT silane manufacturing capacity and is expected to be completed in 2017.

Short-term Outlook

As we look into the last quarter of 2017, we expect continued growth in demand for our specialty silicones products, particularly as we continue to benefit from investment in new product development and expanding our capabilities. We anticipate growth in the last quarter to be supported by continued strong global macroeconomic conditions and further bolstered by the execution of our strategic plan and pricing actions. Additionally, we expect 2017 sales results to reflect significant mix improvement as we intentionally reduced exposure to under-performing siloxane derivative products and replaced capacity with higher margin specialty products. We recently raised prices across our silicones portfolio, and our order book remains strong. Our strategic growth investments, including our NXT expansion, remain on track to be completed by year-end 2017 to drive growth in 2018 and beyond.

We are continuing to leverage our R&D capabilities and invest in high-growth product lines and geographical regions, positioning the Company for long-term success. We are also focused on gaining productivity efficiencies to reduce raw material costs and improve 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 have begun delivering significant savings. Cumulatively through September 30, 2017, we have achieved approximately $42 million of savings under this program.

We remain focused on driving free cash flow, defined as cash flows from operating activities less capital expenditures, and optimizing net working capital, as defined in the Liquidity and Capital Resources section below, in fiscal year 2017.

 

54


Table of Contents

Matters Impacting Comparability of Results

Fresh Start Accounting

Momentive became the indirect parent company of MPM in accordance with the Plan of Reorganization upon the Emergence Date. As a result of the application of fresh start accounting, at the Emergence Date, our assets and liabilities were recorded at their estimated fair values which, in some cases, are significantly different than amounts included in the Company’s financial statements prior to the Emergence Date. Accordingly, our financial condition and results of operations on and after the Emergence Date are not comparable to our financial condition and results of operations prior to the Emergence Date.

During the application of fresh start accounting, we re-evaluated our accounting policy with respect to which overhead costs were production-related, as well as the extent to which functional costs supported production-related activities. As a result, certain costs were recorded in cost of sales rather than selling, general and administrative expense in the successor period.

Periods before October 24, 2014 reflect the financial position and results of operations of MPM prior to the Emergence Date (the “predecessor”) and periods after October 24, 2014 reflect the financial position and results of operations of Momentive after the Emergence Date (the “successor”). For purposes of the following discussion, we have aggregated the results of operations for the predecessor period with the results of operations of the successor period for 2014. We believe the aggregated results of operations for the year ended December 31, 2014 provide a more meaningful perspective on our financial and operational performance than if we did not aggregate the results of operations of the predecessor period and successor period in this manner.

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. Prior to October 24, 2014, other comprehensive income included the impact of defined benefit pension and postretirement benefit adjustments. Upon the application of fresh start accounting, beginning on and after October 24, 2014, actuarial gains and losses resulting from pension and postretirement liability re-measurements are recognized immediately in the unaudited Condensed Consolidated Statements of Operations, compared to our prior policy of deferring such gains and losses in accumulated other comprehensive income and amortizing them over future periods. The impact of defined benefit pension and postretirement benefit adjustments prior to October 24, 2014 were primarily driven by unrecognized actuarial gains and losses related to our defined benefit and other postretirement benefit plans, as well as the subsequent amortization of gains and losses from accumulated other comprehensive income in periods following the initial recording of such items. These actuarial gains and losses were determined using various assumptions, the most significant of which were (i) the weighted average rate used for discounting the liability, (ii) the weighted average expected long-term rate of return on pension plan assets, (iii) the weighted average rate of future salary increases and (iv) the anticipated mortality rate tables.

Raw Materials

In 2016, we purchased approximately $1.1 billion of raw materials. The largest raw material used in our Silicones business is silicon metal and represented approximately 13% of our total raw material costs in 2016. Raw materials continue to trend favorably for us and we have continually worked to review our existing global supply agreements to seek more favorable terms and we expect to significantly benefit year on year from improved raw material pricing in 2017.

 

55


Table of Contents

We expect long-term raw material cost fluctuations to continue and 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. Although we can pass through may of the increases in such pricing, 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.

Results of Operations

Consolidated Statements of Operations

 

     Successor           Predecessor  
(dollars in millions, except percentages)    Nine Months Ended
September 30
    Year Ended
December 31,
    Period from
October 25,
2014 through
December 31,

2014
          Period from
January 1,
2014 through
October 24,

2014
 
         2017             2016         2016     2015            

Net sales

   $ 1,732     $ 1,689     $ 2,233     $ 2,289     $ 465         $ 2,011  

Cost of sales

     1,378       1,371       1,845       1,894       402        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Gross profit

     354       318       388       395       63        

Cost of sales, excluding depreciation and amortization

                   1,439  

Selling, general and administrative expense

     252       238       347       285       80           434  

Depreciation and amortization expense

                   147  

Research and development expense

     48       50       64       65       13           63  

Restructuring and discrete costs

     6       11       42       32       5           20  

Other operating expense (income), net

     2       10       19       2       (1         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Operating income (loss)

     46       9       (84     11       (34         (92

Operating income (loss) as a percentage of net sales

     3     1     (4 )%      —       (7 )%          (5 )% 

Interest expense, net

     60       57       76       79       15           162  

Non-operating (income) expense, net

     (7     2       (7     3       8           —    

Gain on extinguishment of debt

     —         (9     (9     (7     —             —    

Reorganization items, net

     —         1       2       8       3           (1,972
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total non-operating expense (income)

     53       51       62       83       26           (1,810
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

(Loss) income before income taxes and earnings (losses) from unconsolidated entities

     (7     (42     (146     (72     (60         1,718  

Income tax expense

     11       4       18       13       —             36  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

(Loss) income before earnings (losses) from unconsolidated entities

     (18     (46     (164     (85     (60         1,682  

(Losses) earnings from unconsolidated entities, net of taxes

     (1     1       1       2       —             3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net (loss) income

   $ (19   $ (45   $ (163   $ (83   $ (60       $ 1,685  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Other comprehensive income (loss)

   $ 51     $ 86     $ 16     $ (64   $ (28       $ (202
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

56


Table of Contents

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

Net Sales

Net sales in the first nine months of 2017 increased $43 million, or 3%, compared to the first nine months of 2016. This increase was primarily due to a favorable price/mix shift of $70 million, which was offset by a volume decrease of approximately $25 million, driven by our intentional shift toward higher-margin products versus less profitable commodity products and unfavorable exchange rate fluctuations of approximately $2 million.

Operating Income

During the first nine months of 2017, operating income increased by $37 million, compared to the first nine months of 2016. Cost of sales increased by $7 million compared to the first nine months of 2016, primarily due to higher net processing costs driven by the work stoppage in the first quarter of 2017 and our annual plant turnarounds, partially offset by savings related to favorable exchange rate fluctuations. Selling, general and administrative expense increased by $14 million, compared to the first nine months of 2016, primarily due to the impact of a merit increase implemented in 2016, timing of services, and unfavorable exchange rate fluctuations of $4 million offset by lower actuarial re-measurement loss of $4 million related to our pension and post retirement liabilities. Research and development expense for the first nine months of 2017 decreased by $2 million compared to the first nine months of 2016, primarily related to the timing of new projects. Restructuring and discrete costs decreased by $5 million, mainly due to the gain related to an insurance reimbursement of $15 million related to fire damage at our Leverkusen, Germany facility, partially offset by workforce reductions, impact of the fire at our Leverkusen, Germany facility, and impact of the hurricane at our Texas City, Texas facility. Other operating expense decreased by $8 million, mainly due to $4 million related to the non-recurrence of impairment of certain assets in 2017, a settlement gain of $2 million related to the resolution of a take or pay arrangement and certain sales and use tax refunds.

A summary of the geography of depreciation and amortization expense on our consolidated statements of operations for the nine months ended September 30, 2017 and 2016 is as follows:

 

     Nine Months
Ended September 30,
 
(dollars in millions)        2017              2016      

Cost of sales

   $ 84      $ 96  

Selling, general and administrative expense

     33        36  
  

 

 

    

 

 

 

Total depreciation and amortization expense

   $ 117      $ 132  
  

 

 

    

 

 

 

Non-Operating Expense

In the first nine months of 2017, total non-operating expense increased by $2 million, compared to the first nine months of 2016. The increase was primarily due to the gain on extinguishment of Second Lien Notes not recurring in 2017 offset by favorable foreign exchange fluctuations on certain intercompany arrangements.

Income Tax Expense

The effective tax rate was (157)% for the nine months ended September 30, 2017 and (10)% for the comparable prior year period. 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 rates were also impacted by operating losses generated in jurisdictions where no tax benefit was recognized due to the maintenance of a full valuation allowance, tax impact of recognition of net prior service benefit following certain plan provision changes (see Note 11 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus), legislative changes in Italy and Japan, and the resolution of certain tax matters in non-U.S. jurisdictions.

 

57


Table of Contents

For the nine months ended September 30, 2017, income taxes included favorable discrete tax adjustments of $8 million pertaining to benefits curtailment, legislative changes in Italy and Japan, and the resolution of certain tax matters in non-U.S. jurisdictions. For the nine months ended September 30, 2016, income taxes included favorable discrete tax adjustments of $11 million pertaining to a change in tax law in Japan and the resolution of certain tax matters in non-U.S. jurisdictions.

The Company is recognizing the earnings of non-U.S. operations currently in its U.S. consolidated income tax return as of September 30, 2017, and is expecting that all earnings, with the exception of Germany and Japan, will be repatriated to the United States. The Company has accrued the incremental tax expense expected to be incurred upon the repatriation of these earnings. In addition, the Company has certain intercompany arrangements that if settled may trigger taxable gains or losses based on currency exchange rates in place at the time of settlement. Since the currency translation impact is considered indefinite, the Company has not provided deferred taxes on gains of $10 million, which could result in a tax obligation of $3 million, based on currency exchange rates as of September 30, 2017. Should the intercompany arrangement be settled or the Company change its assertion, the actual tax impact will depend on the currency exchange rate at the time of settlement or change in assertion.

Other Comprehensive Income (Loss)

In the first nine months of 2017, foreign currency translation positively impacted other comprehensive income by $42 million, primarily due to the impact of the weakening of the U.S. dollar against other currencies. Also, for the first nine months of 2017, pension and postretirement benefit adjustments positively impacted other comprehensive income by $9 million, primarily due to the recognition of net prior service benefit related to the effect of certain plan provision changes.

In the first nine months of 2016, foreign currency translation positively impacted other comprehensive loss by $67 million, primarily due to the weakening of the U.S. dollar against other currencies. Also, for the first nine months of 2016, pension and postretirement benefit adjustments positively impacted other comprehensive income by $19 million, primarily due to the recognition of a 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.

2016 Compared to 2015

Net Sales

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 (Loss) Income

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

 

58


Table of Contents

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,
 
(dollars in millions)    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.

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 one-time settlement gain of $6 million related to the resolution of a customer dispute.

Non-Operating Expense (Gain)

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

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. 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.

For 2016, profits and losses incurred in foreign jurisdictions with statutory tax rates less than 35% (primarily 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, 2016 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 indefinite.

 

59


Table of Contents

Other Comprehensive (Loss) Income

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 $63 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.

2015 Compared to 2014

Net Sales

In 2015, net sales decreased by $187 million, or 8%, compared to 2014. This decrease was primarily due to unfavorable exchange rate fluctuations of $156 million due to the strengthening of the U.S. dollar against the euro and Japanese yen during 2015 as compared to 2014, as well as negative price and mix shift, which negatively impacted net sales by $41 million caused by economic downturns in China, slowness in Asian high end automotive markets and a downturn in the oil and gas market. These decreases were partially offset by volume increases of $10 million.

Operating (Loss) Income

In 2015, operating income increased $137 million, from an operating loss of $126 million to an operating income of $11 million. Cost of sales (excluding depreciation and amortization of $105 million and $14 million in the successor year ended December 31, 2015 and successor period from October 25, 2014 through December 31, 2014, respectively, due to the change in presentation of depreciation and amortization, as described in Note 1 to our audited consolidated financial statements) decreased by $38 million compared to 2014. In conjunction with the application of fresh start accounting, we re-evaluated our accounting policy with respect to which overhead costs were production-related, as well as the extent to which functional costs supported production-related activities. As a result, in the Successor period, certain costs were recorded in cost of sales rather than in selling, general and administrative expense. In addition, in 2014, $35 million of non-cash one-time costs related to fresh start accounting were recorded in cost of sales. Cost of sales was positively impacted by favorable exchange rate fluctuations of $115 million driven by the strengthening of the U.S. dollar against the euro and Japanese yen and production mix of $13 million. This reduction in cost of sales was partially offset by higher net processing costs of $15 million.

Selling, general and administrative expense (excluding depreciation and amortization of $48 million and $8 million in the successor year ended December 31, 2015 and period from October 25, 2014 through December 31, 2014, respectively, due to the presentation change discussed above) decreased by $269 million compared to 2014. As discussed above, in 2015, certain costs which previously had been recorded in selling, general and administrative expense are being recorded in cost of sales. Additionally, selling, general and administrative expense benefited from favorable exchange rate fluctuations of $25 million as discussed above and $31 million related to the re-measurement of our pension and other postretirement liabilities. Selling, general and administrative expense in 2014 included foreign currency losses of approximately $94 million related to certain intercompany arrangements for which we were unable to assert permanent reinvestment during the Predecessor period due to the substantial doubt about our ability to continue as a going concern under our prior capital structure.

Depreciation and amortization expense during 2015 was $153 million compared to $169 million in 2014. Depreciation and amortization expense in 2014 included $12 million of accelerated depreciation related to certain

 

60


Table of Contents

long-lived assets that were disposed of before the end of their estimated useful lives. Research and development expense for 2015 decreased by $11 million compared to 2014 primarily related to the timing of new projects. Restructuring and discrete costs for 2015 increased by $7 million compared to 2014 which was primarily due to severance benefits related to the global restructuring announced in November 2015.

Non-Operating Expense (Gain)

In 2015, total non-operating expense increased by $1,867 million, from an income of $1,784 million in 2014 to an expense of $83 million, compared to 2014. The increase was primarily driven by reorganization income items, net of $1,969 million in 2014 (see Note 4 to our audited consolidated financial statements included elsewhere in this prospectus for more information). This increase was offset by a decrease in interest expense of $98 million, which was primarily due to a reduction in total debt outstanding as a result of restructuring our capital structure in conjunction with the implementation of the Plan of Reorganization.

Income Tax Expense

In 2015, income tax expense decreased by $23 million compared to 2014. The effective income tax rate was (18%) for 2015 compared to 2% for 2014. 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 tax impact of the reorganization and fresh start accounting net of the movement in 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.

Other Comprehensive (Loss) Income

For the year ended December 31, 2015, foreign currency translation negatively impacted other comprehensive loss by $63 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 compared to $69 million in 2014 due to the recognition of prior service costs in 2014 following provision changes to our U.S. pension plan.

For the year ended December 31, 2014, foreign currency translation negatively impacted other comprehensive income by $2 million, primarily due to the impact of the strengthening of the U.S. dollar against the euro and Japanese yen. For the year ended December 31, 2014, pension and postretirement benefit adjustments negatively impacted other comprehensive income by $70 million, primarily due to net unrecognized actuarial losses driven by a decrease in the discount rate at October 24, 2014, partially offset by favorable asset experience. In connection with the application of fresh start accounting, on October 24, 2014, total accumulated unrecognized net gains of $162 million were eliminated from accumulated other comprehensive income (see Note 3 to our audited consolidated financial statements included elsewhere in this prospectus for more information).

Results of Operations by Segment

At September 30, 2017, we had four reportable segments: Performance Additives, Formulated and Basic Silicones, Quartz Technologies and Corporate.

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

 

61


Table of Contents

substitute for net (loss) income or other results reported in accordance with GAAP. Segment EBITDA may not be comparable to similarly titled measures reported by other companies.

 

     Successor           Predecessor  
     Nine Months Ended
September 30,
    Year Ended
December 31
    Period from
October 25,
2014 through
December 31,

2014
          Period from
January 1,
2014 through
October 24,

2014
 

(dollars in millions)

   2017     2016     2016     2015            

Net Sales(1):

                

Performance Additives

   $ 670     $ 638     $ 849     $ 835     $ 171         $ 738  

Formulated and Basic Silicones

     910       925       1,212       1,277       260           1,128  

Quartz Technologies

     152       126       172       177       34           145  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total

   $ 1,732     $ 1,689     $ 2,233     $ 2,289     $ 465         $ 2,011  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Segment EBITDA:

                

Performance Additives

   $ 140     $ 138     $ 187     $ 176     $ 34         $ 157  

Formulated and Basic Silicones

     71       51       70       25       10           56  

Quartz Technologies

     30       13       20       27       6           17  

Corporate

     (31     (29     (39     (34     (4         (38
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total

   $ 210     $ 173     $ 238     $ 194     $ 46         $ 192  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

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

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The following is an analysis of the percentage change in sales by business from the nine months ended September 30, 2016 to the nine months ended September 30, 2017:

 

     Volume      Price/Mix     Currency
Translation
     Total  

Performance Additives

     5%        —       —  %        5

Formulated and Basic Silicones

     (9)%                    7     —  %        (2 )% 

Quartz Technologies

     21%        —       —  %        21

Performance Additives

Net sales in the first nine months of 2017 increased $32 million, compared to the first nine months of 2016. This increase was primarily due to an increase in sales volume of $31 million related to demand in consumer, automotive, agriculture and personal care markets reflecting our growth initiatives across our entire portfolio.

Segment EBITDA in the first nine months of 2017 increased by $2 million to $140 million, compared to the first nine months of 2016. This increase was primarily due to higher sales, improved production efficiencies and raw material deflation, offset partially by the one-time impact of Hurricane Harvey, temporary lead/lag on raw materials, turnaround impacts, and temporary effects of destocking in Asia realized in the third quarter of 2017.

Formulated and Basic Silicones

Net sales in the first nine months of 2017 decreased $15 million, compared to the first nine months of 2016. This decrease was primarily due to volume decrease of $82 million related to our intentional efforts to reduce under-performing siloxane derivative products, offset by approximately $69 million driven by mix/price shift toward higher-margin products versus less profitable commodity products and unfavorable exchange rate fluctuations of approximately $2 million.

Segment EBITDA in the first nine months of 2017 increased by $20 million to $71 million, compared to the first nine months of 2016. This increase was primarily due to higher sales of higher margin products and improved demand in automotive, consumer products, and electronic markets, and improved production efficiencies and raw material deflation.

 

62


Table of Contents

Quartz Technologies

Net sales in the first nine months of 2017 increased $26 million, or 21%, compared to the first nine months of 2016. The increase was primarily due to an increase in sales volume of $26 million mainly due to improved market conditions in the electronics market.

Segment EBITDA in the first nine months of 2017 increased by $17 million to $30 million compared to the first nine months of 2016. This increase was primarily due to the sales volume increase, cost controls, and improved manufacturing efficiencies.

Corporate

Corporate charges are corporate, general and administrative expenses that are allocated to other segments, such as certain shared service and other administrative functions. Corporate charges increased by $2 million in the first nine months of 2017 as compared to the first nine months of 2016 mainly due to increase in employee headcount and related compensation expenses.

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.

 

63


Table of Contents

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.

2015 Compared to 2014 Segment Results

The following is an analysis of the percentage change in sales by segment from 2014 to 2015:

 

     Volume      Price/Mix      Currency
Translation
     Total  

Performance Additives

     —  %        (2)%        (6)%        (8)%  

Formulated and Basic Silicones

     —  %        (2)%        (6)%        (8)%  

Quartz Technologies

     4%                —  %        (5)%        (1)%  

Performance Additives

Net sales in 2015 decreased $74 million, or 8%, compared to 2014. The decrease was primarily due to unfavorable exchange rate fluctuations of $62 million due to the strengthening of the U.S. dollar against the euro and Japanese yen, as well as adverse price and mix shift of $14 million due to economic downturns in China and in the oil and gas market. These decreases were partially offset by an increase in sales volume of $2 million.

Segment EBITDA in 2015 decreased by $15 million to $176 million compared to 2014. The decrease was primarily due to net unfavorable exchange rate fluctuations, negative price and mix shift driven by the decline in oil and gas markets, and higher net processing costs.

Formulated and Basic Silicones

Net sales in 2015 decreased $111 million, or 8%, compared to 2014. The decrease was primarily due to unfavorable exchange rate fluctuations of $85 million due to the strengthening of the U.S. dollar against the euro and Japanese yen, as well as adverse price and mix shift of $27 million due to economic downturns in China and slowness in Asian high end automotive markets.

Segment EBITDA in 2015 decreased by $41 million to $25 million compared to 2014. The decrease was primarily due to net unfavorable exchange rate fluctuations, negative price and mix shift and higher net processing costs.

Quartz Technologies

Net sales in 2015 decreased $2 million, or 1%, compared to 2014. The decrease was primarily due to net unfavorable exchange rate fluctuations of $9 million, partially offset by an increase in sales volume of $7 million.

Segment EBITDA in 2015 increased by $4 million to $27 million compared to 2014. The increase was primarily due to a one-time settlement gain related to the resolution of a customer dispute in the first quarter of 2015, increase in sales volume and reductions in selling, general and administrative expenses partially offset by higher net processing costs.

 

64


Table of Contents

Corporate

Corporate charges are primarily general and administrative expenses that are not allocated to the segments, such as shared service and administrative functions. Corporate charges decreased by $8 million to $34 million compared to 2014, primarily due to net favorable exchange rate fluctuations and lower administrative costs to serve.

Reconciliation of Net (Loss) Income to Segment EBITDA:

 

     Successor           Predecessor  
(dollars in millions)    Nine Months Ended
September 30,
    Year Ended
December 31,
    Period from
October 25,
2014 through
December 31,
2014
          Period from
January 1,
2014 through
October 24,
2014
 
     2017         2016         2016         2015              

Net (loss) income

   $ (19   $ (45   $ (163   $ (83   $ (60       $ 1,685  

Interest expense, net

     60       57       76       79       15           162  

Income tax expense

     11       4       18       13       —             36  

Depreciation and amortization

     117       132       185       153       22           147  

Gain on extinguishment and exchange of debt

     —         (9     (9     (7     —             —    

Items not included in Segment EBITDA:

                

Non-cash charges and other income and expense

   $ 4     $ 15     $ 26     $ 15     $ 46         $ 114  

Unrealized gains (losses) on pension and postretirement benefits

     1       5       33       (16     15           —    

Restructuring and discrete costs

     36       13       70       32       5           20  

Reorganization items, net

     —         1       2       8       3           (1,972
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total adjustments

     41       34       131       39       69           (1,838
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Segment EBITDA

   $ 210     $ 173     $ 238     $ 194     $ 46         $ 192  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Items Not Included in Segment EBITDA

Not included in Segment EBITDA are certain non-cash and other income and expenses. For the nine months ended September 30, 2017 and September 30, 2016, non-cash charges primarily included asset impairment charges, loss due to the 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, 2016 and December 31, 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, these charges primarily represented net realized and unrealized foreign currency transaction losses and losses on the disposal and impairment of certain assets. For the years ended December 31, 2016 and December 31, 2015, these charges also include stock based compensation expenses.

Unrealized gains (losses) on pension and postretirement benefits represented non-cash actuarial losses recognized upon the re-measurement of our pension and postretirement benefit obligations, which after the Emergence Date, are recognized in the Consolidated Statements of Operations, and were driven by a decrease in discount rates, other demographic assumptions and asset performance.

Restructuring and discrete costs for all periods primarily included expenses from our restructuring and cost optimization programs. For the nine months ended September 30, 2017 and September 30, 2016, restructuring and discrete costs included expenses from restructuring and integration. In addition, for the nine months ended September 30, 2017, these costs also included costs arising from the work stoppage inclusive of unfavorable manufacturing variances at our Waterford, New York facility and a gain related to an insurance reimbursement

 

65


Table of Contents

of $15 million related to fire damage at our Leverkusen, Germany facility. For the year ended December 31, 2016, these amounts also included costs arising from the union strikes inclusive of unfavorable manufacturing variances at our Waterford, New York and Willoughby, Ohio facilities, costs due to a fire at our Leverkusen, Germany facility and recovery of Italian tax claims from GE. For the predecessor period from January 1, 2014 through October 24, 2014, these amounts also included costs associated with restructuring the Company’s capital structure incurred prior to the Bankruptcy Filing, and were partially offset by a gain related to a claim settlement.

Reorganization items, net represented incremental costs incurred directly as a result of the Bankruptcy Filing. For the successor years ended December 31, 2016 and December 31, 2015, successor period from October 25, 2014 through December 31 2014, these amounts were primarily related to certain professional fees. For the predecessor period from January 1, 2014 through October 24, 2014, these amounts included certain professional fees, the BCA Commitment Premium and financing fees related to our DIP Facilities, as well as the impact of the Reorganization Adjustments and the Fresh Start Adjustments (see Note 3 to our audited consolidated financial statements included elsewhere in this prospectus).

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 related performance. This reorganization included a change in the Company’s operating segments from two to four segments. The Company 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, manage the allocation of resources and assesses the performance of each of these segments.

The Company’s 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 September 30, 2017, we had $1,221 million of outstanding indebtedness (with a face value of $1,338 million). In addition, at September 30, 2017, we had $358 million in liquidity, consisting of the following:

 

    $143 million of unrestricted cash and cash equivalents (of which $119 million is maintained in foreign jurisdictions); and

 

66


Table of Contents
    $215 million of availability under the ABL Facility ($270 million borrowing base, less $55 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).

A summary of the components of our net working capital (defined as accounts receivable and inventories less accounts payable) at September 30, 2017 and December 31, 2016 is as follows:

 

(dollars in millions, except percentages)    September 30,
2017
     % of LTM
Net Sales
    December 31,
2016
     % of LTM
Net Sales
 

Accounts receivable

   $ 332        15   $ 280        13

Inventories

     428        19     390        17

Accounts payable

     (274      (12 )%      (238      (11 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Net working capital

   $ 486        22   $ 432        19
  

 

 

    

 

 

   

 

 

    

 

 

 

The increase in net working capital of $54 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 and normal seasonality, offset by an increase in accounts payable due to strategic efforts to improve payment terms. Exchange rate fluctuations of $19 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 2017 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 September 30, 2017, we had no outstanding borrowings under the ABL Facility.

On October 30, 2017, we received commitments to extend the maturity of the ABL Facility from October 2019 to five years from the closing of this offering by the Company, subject to certain conditions and exceptions. See “Description of Indebtedness.”

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.

2017 Outlook

Following, and as a result of, our emergence from the Chapter 11 proceedings, 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 $358 million of liquidity (and $358 million of liquidity after giving effect to this offering, assuming a price per share at the midpoint of the range on the cover of this prospectus) 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 (and $43 million after giving effect to this offering, assuming a price per share at the midpoint of the range on the cover of this prospectus), our business has adequate capital resources to meet material commitments coming due during the next 12-month period. The additional liquidity provided by the rights offerings in connection with the Chapter 11 process (the “Rights Offerings”) and the impact of the Plan of Reorganization on our capital structure, resulting in reduced annual debt service obligations of approximately $240 million, increased our future operational and financial flexibility and left us well-positioned to make strategic capital investments, leverage our leadership positions with both our customers and suppliers, optimize

 

67


Table of Contents

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 2017 is expected to be approximately $160 million, approximately $75 million of which relates to certain growth and productivity projects. We continue to focus on optimizing our working capital.

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 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:

 

     Successor           Predecessor  
     Nine Months Ended
September 30,
     Year Ended
December 31,
     Period from
October 25,
2014 through
December 31,

2014
          Period from
January 1,
2014 through
October 24,

2014
 
(dollars in millions)      2017          2016          2016          2015               

(Uses) sources of cash:

                    

Operating activities

   $ 46      $ 77      $ 142      $ 128      $ (3       $ (207

Investing activities

     (130      (84      (117      (116      (17         (18

Financing activities

     (1      (14      (16      (10      (1         390  

Effect of exchange rates on cash flows

     4        5        (2      (8      (4         (6
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Net (decrease) increase in cash and cash equivalents

   $ (81    $ (16    $ 7      $ (6    $ (25       $ 159  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Operating Activities

During the first nine months of 2017, the Company’s operations provided $46 million of cash. Net loss of $19 million included $134 million of net non-cash expense items, of which $117 million was for depreciation

 

68


Table of Contents

and amortization, $18 million was for the amortization of debt discount, stock based compensation expense of $3 million and $1 million for unrealized actuarial loss from other post retirement liabilities. These were offset by a $10 million change in deferred tax provisions and $4 million related to unrealized foreign exchange gains. Net working capital used $33 million of cash, primarily due to increases in accounts receivable and inventories of $40 million and $20 million, respectively, offset by a decrease in accounts payable of $27 million, primarily due to reasons stated in the preceding paragraphs. 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.

During the first nine months of 2016, the Company’s operations provided $77 million of cash. Net loss of $45 million included $140 million of net non-cash expense items, of which $132 million was for depreciation and amortization, $17 million was for the amortization of debt discount, and $5 million of unrealized actuarial loss from other post retirement liabilities. These were offset by a $14 million change in deferred tax provisions and $9 million related to gain from extinguishment of our Second Lien Notes. Net working capital used $56 million of cash, primarily due to increases in inventory of $31 million, accounts receivable of $13 million, and a decrease in accounts payable of $9 million. Changes in other assets and liabilities, driven by the timing of when items were expensed versus paid, primarily included interest expense, pension plan contributions and taxes.

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 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.

In 2014, operations used $210 million of cash. Net loss of $1,625 million included $1,755 million of net non-cash income items, of which $2,078 million was for non-cash reorganization items, which were partially offset by other various non-cash expenses. These other non-cash expenses included $169 million for depreciation and amortization, a $19 million reclassification of DIP Facility financing fees to “Financing Activities,” a $15 million non-cash charge for unrealized losses related to the re-measurement of our pension liabilities, $101 million of unrealized foreign currency losses, $10 million of deferred tax expense and $4 million for the amortization of debt discount. Net working capital used $80 million of cash primarily driven by increases in sales volumes and the related impact on accounts receivable and inventory, as well as a decrease in accounts payable of $14 million. Changes in other assets and liabilities, due to/from affiliates and income taxes payable remained flat. These changes are driven by the timing of when items were expensed versus paid, which primarily included interest expense, pension plan contributions and taxes.

 

69


Table of Contents

Investing Activities

During the first nine months of 2017, investing activities used $123 million of cash on ongoing capital expenditures related to growth, environmental, health and safety compliance and capital improvement projects and $9 million related to our acquisition of a business. We are on track in maintaining the fiscal year 2017 capital expenditure budget of approximately $160 million.

During the first nine months of 2016 investing activities used $84 million of cash on ongoing capital expenditures related to growth, environmental, health and safety compliance, capital improvement and maintenance projects.

In 2016, investing activities used $117 million. We spent $117 million for ongoing capital expenditures related to growth, environmental, health and safety compliance and maintenance projects (represented by $125 million in current year asset additions, reduced by the capital expenditure financed through accounts payable).

In 2015, investing activities used $116 million of cash. We spent $114 million for ongoing capital expenditures (including capitalized interest) related to environmental, health and safety compliance and maintenance projects (of which $111 million represented current year asset additions, with the remainder being the change in the accounts payable related to capital spending).

In 2014, investing activities used $88 million of cash. We spent $96 million for ongoing capital expenditures (including capitalized interest) related to environmental, health and safety compliance and maintenance projects (of which $87 million represented current year asset additions, with the remainder being the change in the accounts payable related to capital spending). We also spent $2 million on the acquisition of intangible assets. These expenditures were partially offset by the consolidation of Superholdco Finance Corp. (“Finco”), which provided a $50 million increase in cash, as well as $12 million in proceeds received from the sale of a subsidiary to Hexion.

Financing Activities

During the first nine months of 2017, our financing activities used $1 million related to net short-term debt borrowings.

During the first nine months of 2016, our financing activities used $14 million of cash, which primarily related to the extinguishment of $29 million aggregate principal amount of our Second Lien Notes.

In 2016, financing activities used $16 million, 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, mainly due to the buyback of $19 million in aggregate principal amount of our Second Lien Notes for $10 million.

In 2014, financing activities provided $389 million of cash. Proceeds from the Rights Offerings provided cash of $600 million. Net long-term debt repayments were $135 million, which primarily consisted of net repayments under the Old ABL Facility and a $75 million revolving credit facility (the “Cash Flow Facility”), and net short-term debt repayments were $7 million. Additionally, the repayment of an affiliated loan in conjunction with various transactions with Finco used cash of $50 million. We also paid $19 million in financing fees related to our DIP Facilities.

At September 30, 2017, there were $55 million in outstanding letters of credit and no outstanding borrowings under our ABL Facility, leaving unused borrowing capacity of $215 million.

 

70


Table of Contents

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 have recorded deferred taxes on the earnings of our foreign subsidiaries, as they are not considered to be permanently reinvested as those foreign earnings are needed for operations in the United States.

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 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 September 30, 2017, we were in compliance with all covenants under the credit agreement governing the ABL Facility and under the indentures governing the notes.

 

71


Table of Contents

Adjusted EBITDA referred to in the table below relates to MPM. 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 of MPM. As we are highly leveraged, 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 is not a defined term under 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 GAAP or operating cash flows determined in accordance with 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 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 loss 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:

 

(dollars in millions, except ratios)    Last Twelve
Months Ended
September 30, 2017
 

Net loss

   $ (136

Interest expense, net

     79  

Income tax expense

     25  

Depreciation and amortization

     170  
  

 

 

 

EBITDA

     138  

Adjustments to EBITDA:

  

Restructuring and discrete costs(a)

     93  

Reorganization items, net(b)

     1  

Unrealized gains losses on pension and postretirement benefits(c)

     29  

Pro forma cost savings(d)

     6  

Acquisitions(e)

     2  

Non-cash charges(f)

     15  
  

 

 

 

Adjusted EBITDA(g)

   $ 284  
  

 

 

 

Adjusted EBITDA less Capital Expenditures and Cash Taxes

   $ 95  
  

 

 

 

Pro forma fixed charges(h)

   $ 56  
  

 

 

 

Ratio of Adjusted EBITDA to Fixed Charges(i)

     5.07  
  

 

 

 

Pro forma Fixed Charge Coverage Ratio(j)

     1.70  
  

 

 

 

 

 

  (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 losses 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.

 

72


Table of Contents
  (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 Quarter ended September 30, 2017, Nantong, China subsidiary is no longer designated as Unrestricted Subsidiary under the ABL Facility and the indentures that govern our notes, resulting in an increase of $24 million in Adjusted EBITDA.
  (h) Reflects pro forma interest expense based on outstanding indebtedness and interest rates at September 30, 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 September 30, 2017, we were able to satisfy this test and incur additional indebtedness under these indentures.
  (j) Represents Pro forma Fixed Charge Coverage Ratio (the “FCCR”) 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 the FCCR must be greater than 1.0 to 1.0.

Contractual Obligations

The following table presents our contractual cash obligations at December 31, 2016. Our contractual cash obligations consist of legal commitments at December 31, 2016 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.

 

(dollars in millions)   Payments Due By Year  

Contractual Obligations

  2017     2018     2019     2020     2021     2022 and
beyond
    Total  

Operating activities:

             

Purchase obligations(1)

  $ 127     $ 111     $ 97     $ 91     $ 72     $ 352     $ 850  

Interest on fixed rate debt obligations

    53       52       52       52       44       3       256  

Operating lease obligations

    15       11       9       7       6       15       63  

Funding of pension and other postretirement obligations(2)

    33       29       30       31       33       —         156  

Financing activities:

             

Long-term debt, including current maturities(3)

    36       —         —         —         1,100       202       1,338  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 264     $ 203     $ 188     $ 181     $ 1,255     $ 572     $ 2,663  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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

 

73


Table of Contents
  approximately 6% for the years 2017—2021 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 15 to our audited 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, 2016, we recorded unrecognized tax benefits and related interest and penalties of $45 million. We estimate that we will pay approximately $25 million in 2017 for local, state and international income taxes. See Note 13 to our audited 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 5 to our audited 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, 2016 and 2015, we had valuation allowances of $484 million and $419 million, respectively, against our deferred income tax assets. At December 31, 2016, we had a $297 million valuation allowance against a portion 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. At December 31, 2015, we had a $243 million valuation allowance against all of our net U.S. federal and state deferred tax assets, as well as a valuation allowance of $176 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;

 

74


Table of Contents
    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.

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 our audited consolidated financial statements. Tax benefits are recognized in our audited 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, 2016 and 2015, we recorded unrecognized tax benefits and related interest and penalties of $45 million and $40 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.

 

75


Table of Contents

The following table presents the sensitivity of our projected pension benefit obligation (“PBO”), accumulated benefit obligation (“ABO”), and 2017 pension expense to the following changes in key assumptions:

 

     Increase /(Decrease) at
December 31, 2016
     Increase /
(Decrease)
 
         PBO              ABO          2017 Expense  

Assumption:

        

Increase in discount rate of 0.5%

   $ (37    $ (35    $ (1

Decrease in discount rate of 0.5%

     43        40        1  

Increase in estimated return on assets of 1.0%

           (2

Decrease in estimated return on assets of 1.0%

           2  

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 are the same as our operating segments: Performance Additives, Formulated and Basic Silicones, and Quartz Technologies.

At the time of the Segment Realignment, we performed an assessment 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

 

76


Table of Contents

reporting unit is less than the carrying amount of the reporting unit’s net assets. It is possible that the conclusions regarding the impairment or recoverability of goodwill 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.

The Quartz Technologies and Formulated and Basic Silicones reporting units, which had headroom of 9% and 18% respectively, had fair value in excess of carrying value of less than 30%. Management will continue to monitor these reporting units for changes in the business environment that could impact recoverability.

Recently Issued Accounting Standards

The nature and impact of recent accounting pronouncements is discussed in Note 5 to our audited 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 67% of our net sales in 2016, 66% in 2015 and 68% in 2014. 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 September 30, 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

 

77


Table of Contents

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. See additional discussion about interest rate risk in “Risk Factors.”

The following is a summary of our outstanding debt as of December 31, 2016 and 2015 (see Note 10 to our audited consolidated financial statements for additional information on our debt). The fair value of our publicly held debt is based on the price at which the bonds are traded or quoted at December 31, 2016 and 2015. 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)    2016      2015  

Year

   Debt
Maturities
     Weighted
Average
Interest
Rate
    Fair Value      Debt
Maturities
     Weighted
Average
Interest
Rate
    Fair Value  

2016

           $ 36        4.1   $ 36  

2017

   $ 36        4.1   $ 36        —          —       —    

2018

     —          —       —          —          —       —    

2019

     —          —       —          —          —       —    

2020

     —          —       —          —          —       —    

2021

     1,100        4.3     1,034        1,100        4.4     759  

2022 and beyond

     202        5.5     173        231        5.6     114  
  

 

 

      

 

 

    

 

 

      

 

 

 
   $ 1,338        $ 1,243      $ 1,367        $ 909  
  

 

 

      

 

 

    

 

 

      

 

 

 

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.

 

78


Table of Contents

BUSINESS

Our Company

Momentive is one of the world’s largest producers of specialty silicones and silanes and a global leader in fused quartz and specialty ceramics products. Momentive is based in Waterford, New York and has a long track record of creating innovative products and solutions designed to meet the complex requirements of our more than 4,000 customers in over 100 countries. Our strategic network of 24 production sites and 12 R&D facilities supports our global leadership positions and facilitates our ability to serve our blue-chip customer base across a diverse array of consumer, automotive and various industrial end-markets. We have invested significantly to develop and enhance our innovative and differentiated specialty product portfolio to address the evolving demands of the markets we serve and to maintain alignment with global megatrends.

We believe that our value-added business model focused on technical service, combined with our global footprint and long-term customer relationships, uniquely positions us as a key innovation partner to our customers. Over our 75-year operating history, which began with the invention of silicone technologies by GE and includes our acquisitions of the silicone-based businesses of Bayer, Toshiba and Union Carbide, we have focused on investing in and developing technology to enable high performance applications in attractive end-markets. Our silanes and specialty silicones are used as additives and formulated products that provide or enhance certain attributes of the end product. Our products have a range of attractive properties including heat and chemical resistance, lubrication, adhesion and viscosity. These properties position our specialty silicones and silanes products as critical materials in many automotive, industrial, construction, healthcare, personal care, electronic, consumer and agricultural applications. Momentive’s advanced materials are ubiquitous in daily life and are instrumental inputs in a wide range of products, including applications in consumer and personal care (e.g., cosmetics, electronic displays and foam mattresses), automotive (e.g., headlights, paneling and tires) and healthcare (e.g., medical tubing). The diverse molecular characteristics of specialty silicones and silanes continually lead to new applications, and as a result are increasingly being used as a substitute for other materials.

Our value-added, technical service-oriented business model enables us to identify and participate in high-margin and high-growth specialty markets. We are focused on investing in our R&D capabilities, which enable us to develop new products and applications. Over the last three years, we have invested over $200 million in R&D, dramatically upgrading our capabilities and facilities. For example, we implemented a full scale pilot line for our coatings business in Leverkusen, Germany, and opened a new tire additives application development center in Charlotte, North Carolina. Our investments in strategically-located R&D centers of excellence enable us to quickly and effectively develop new products and maintain our technology leadership. We have long-term relationships with blue-chip customers which are leading innovations in their own industries, and work closely with their R&D teams to develop products uniquely suited to their needs.

We generate revenue in each of our three operating segments, Performance Additives, Formulated and Basic Silicones and Quartz Technologies, using direct and indirect approaches to selling a broad base of products to our customers. We utilize technical and application support to enhance our value proposition to customers and drive penetration into attractive end-markets. We also work with OEMs to achieve specification of our products into theirs, which results in higher pull-through demand.

 

79


Table of Contents

2016 Revenue by

End-market

 

2016 Revenue by

Geography

 

2016 Segment EBITDA by

Segment(1)

LOGO

 

(1) Excludes $(39) million of corporate charges that are not allocated to the segments.

Net revenues, net loss and Segment EBITDA (a non-GAAP financial measure) for the nine months ended September 30, 2017 were $1,732 million, $19 million, and $210 million, respectively, and for the year ended December 31, 2016 were $2,233 million, $163 million, and $238 million, respectively. For the last twelve months ended September 30, 2017, Momentive generated $2,276 million and $275 million of net revenue and Segment EBITDA, respectively, representing a Segment EBITDA margin of 12%. See “Prospectus Summary—Summary Historical Consolidated Financial Data” for the definitions of Segment EBITDA and Segment EBITDA margin and a reconciliation of net (loss) income to Segment EBITDA.

Our Operating Segments

In the third quarter of 2017, we changed the organization of our reporting segments from two to four segments. Our new segment structure consists of 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. We have organized the discussion below based upon our new segment structure. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Realignment” for additional information.

Performance Additives

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 and urethane additives Performance Additives product lines are developed using a range of raw material inputs and generally use less siloxane than Formulated and Basic Silicone products.

Our portfolio consists of technology driven, proprietary products that enable high performance applications:

 

   

Silanes are a group of additives that act as connectors or coupling agents. Our crosslinking agents form a three-dimensional network of siloxane bonds between constituents, which facilitates resistance to water or chemical intrusion, high temperatures, abrasion or other common deteriorating conditions, without compromising other important product features such as ductility. Examples include

 

80


Table of Contents
 

applications that enable stronger adhesion of rust-proof coatings to metal structures in construction and clear coat paints to automotive coatings. Our NXT silane product line connects silica-based fillers to the tire tread rubber, improving compound viscosity and resilience and maintaining dynamic properties at low temperatures, while simultaneously reducing mixing steps in the manufacturing process. Our NXT silane is uniquely positioned as a cost-effective patented solution that helps tire manufacturers meet U.S. and European green tire standards.

 

    Silicone fluids are liquid polymeric materials that act like chains and can vary in lengths to create liquids that are very thick and barely flow or relatively thin and flow like water. Silicone fluids are used in personal care products as an additive in shampoos and conditioners to improve the look and feel of hair. Silicone fluids are also used in a variety of industrial applications, including the production and refining of crude oil, to reduce the formation of foam or separate water from oil.

 

    Urethane additives include silicone stabilizers and tertiary amine catalysts, as well as organic-based foam property modifiers. Our products are essential ingredients in polyurethane foam processing, controlling the internal structure of the material to optimize properties such as the insulation performance of rigid foams in construction applications, the firmness and breathability of a foam mattress or the rebound and cushioning in a running shoe.

In 2016, our Performance Additives segment generated $849 million in net revenue and $187 million in Segment EBITDA, representing a Segment EBITDA margin of 22%. For the last twelve months ended September 30, 2017, our Performance Additives segment generated $881 million and $189 million of net revenue and Segment EBITDA, respectively, representing a Segment EBITDA margin of 21%. Our positioning as a strategic supplier of mission critical materials allows us to maintain long-standing, symbiotic relationships resulting in revenue generation while supporting the success of our customers.

Formulated and Basic Silicones

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 sealants, electronic materials and coatings product lines are generally applied to our customers’ products, in the form of a high-tech coating or adhesive, while our elastomers product 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.

Formulated silicones products, including sealants, coatings, electronic materials and elastomers, differ from basic silicones products in that they contain less siloxane and in final form end up as non- flowing rubber or gel type materials. Basic silicones products contain higher levels of siloxane than formulated silicones products and are typically formulated into our customers’ product.

Our portfolio consists of five product families:

 

    Sealants product lines: Our construction sealants are used in some of the world’s tallest skyscrapers to adhere and seal the windows into the frames on the sides of the building. Momentive is the exclusive global licensee of GE-branded silicone products, which are used in a wide range of construction and consumer applications.

 

   

Electronic materials product lines: Our thermal conductive adhesives have high thermal conductivity and can augment flow control across different substrates, while protecting from high impact and thermal shocks. These products can be used in a range of consumer electronics applications, as well as in critical aerospace and aviation applications with high temperature and stress resistance. In flat-panel displays, our hardcoat products provide protection and extend the exterior durability of plastics, while

 

81


Table of Contents
 

our ultra-clear liquid silicone rubber delivers high transmittance, low cure shrinkage, good elasticity and high stability in LEDs.

 

    Coatings product lines: Our silicone-based coatings offer UV, thermal, chemical, solvent and abrasion resistance, as well as improved adhesion to substrates for applications from automotive glazing, headlights and trim, to sensitive electronic components, tapes and labels. Our hard coat products replace traditional glass and metal applications in cars, thereby providing significant weight reduction in automotive applications.

 

    Elastomers product lines: Our chemically inert heat-cured elastomers have excellent mechanical properties for extrusion, molding and calendaring. Our low-viscosity, pumpable LSRs can promote easier injection molding of complex articles. Our Ultra Clear LSRs provide heat and UV resistance without sacrificing optical clarity, and are molded into lenses or light guides for automotive or other applications. Elastomers are also used as gasket material to seal and protect systems in under-hood applications in automotive and in appliances. Our LSR products, including medical tubing, enable cost-efficient, high-quality end-products for our customers in various applications across automotive, consumer goods, healthcare and electronics.

 

    Basic silicones product lines: Basic silicones, comprised of silicone-based cyclic or linear polymers, were the earliest materials developed by the industry. They are still utilized in a wide range of applications, including industrial lubricants and additives in personal and home care products. Basic silicones are a core input into our other formulated products.

In 2016, our Formulated and Basic Silicones segment generated $1,212 million in net revenue and $70 million in Segment EBITDA, representing a Segment EBITDA margin of 6%. For the last twelve months ended September 30, 2017, our Formulated and Basic Silicones segment generated $1,197 million and $90 million of net revenue and Segment EBITDA, respectively, representing a Segment EBITDA margin of 8%. The Formulated silicones product lines represent a significant investment in innovation over recent years and comprise a specialty product set. We expect to continue to experience demand growth over the long term as our end-markets benefit from trends toward population growth, urbanization, energy efficiency and miniaturization. Further, as substitution for other materials continues, we expect to see incremental growth in demand for our products. We also expect to see margin expansion over the long term as we continue to focus on the differentiated specialty product lines within Formulated and Basic Silicones.

Quartz Technologies

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.

We have recently expanded into the primary pharmaceutical packaging market, producing fused quartz vials used for safely packaging, transporting and storing sensitive liquid-based parenteral drug formulations. Our Quartz Technologies segment has developed a new, state-of-the-art process to mass-produce fused quartz vials, which we are in the process of commercializing under the PurQ brand. Quartz vials are 99.995% pure SiO2, a level of purity which not only ensures unparalleled chemical durability, but also ensures exceptional inertness which can minimize a drug formulation’s physical interaction with the vial surface, resulting in superior liquid drug stability.

In 2016, our Quartz Technologies segment generated $172 million in net revenue and $20 million in Segment EBITDA, representing a Segment EBITDA margin of 12%. For the last twelve months ended

 

82


Table of Contents

September 30, 2017, our Quartz Technologies segment generated $198 million and $37 million of net revenue and Segment EBITDA, respectively, representing a Segment EBITDA margin of 19%. Our Quartz Technologies products comprise an attractive portfolio of assets participating across the entire value chain. We expect continued growth driven by further end-market penetration and expansion.

Operations Overview

We benefit from our global reach with 24 flexible production sites located around the world and numerous third party strategic manufacturers to provide additional capability and capacity. These facilities allow us to produce our key products regionally in the Americas, Europe and Asia. Through this network of production facilities, we serve more than 4,000 customers across segments in over 100 countries worldwide. We use our global presence to serve our customers efficiently and maintain a balanced geographic profile, with approximately 31%, 27%, 13% and 10% of our 2016 revenues generated in North America, Europe, China and Japan, respectively. This global manufacturing base allows us to serve customers quickly and efficiently and thus build strong customer relationships. A fundamental tenet of our business is to ensure and promote safe operations worldwide.

Global Operating Footprint

 

 

LOGO

We are focused on optimizing our operations and have taken significant steps to manage our cost structure and to align it with our focus on specialty markets. We are actively managing our siloxane supply, not only to improve security of supply, but also to take advantage of cost competitive positions of our network, including our operations in Asia and our joint venture in China. For example, in Leverkusen, Germany, we ceased siloxane production in the fourth quarter of 2016, reducing operating costs by approximately $10 million per year and right sizing our siloxane capacity. We carefully manage our raw material supply chain and have a diversified network of suppliers. One of our largest raw material purchases is silicon metal, which accounted for only 13% of raw material spending in 2016 and the rate of our purchases has declined in 2017 as a result of the actions described above. We are constantly evaluating ways to effectively drive cost down in order to improve profitability while maintaining safe and stable operations.

We strive to incorporate sustainability objectives into all aspects of our business. These objectives include increasing resource efficiency and reducing our environmental footprint, enhancing product development processes and sustainability and inspiring and building sustainable relationships with suppliers and customers for mutual growth. We engage in activities that promote energy efficiency, responsible carbon management, product development processes focused on “life-cycle thinking,” waste reduction and prevention and water conservation.

 

83


Table of Contents

Industry Overview and Market Outlook

Specialty silicones and silanes are versatile materials that are generally comprised of fluids, elastomers and resins. These products impart favorable properties such as chemical and physical inertness, ability to withstand low and high temperatures, water repellency and ease of molding into different forms. They can also be easily modified to generate a broad range of specifications that meet the unique demands of many of our customers’ applications.

Global demand for silicones grew at a compound annual growth rate of 3.8% from 2006 to 2016, increasing to $14.2 billion in 2016, according to Freedonia. Over the last 10 years, the growth of global silicones demand highlights the consistent long-term industry performance. Today, Freedonia estimates that global silicones demand will grow at 5.1% per year through 2021.

World Demand for Silicones (dollars in billions, 100% siloxane basis)

 

 

LOGO

Source: Freedonia

We believe specialty silicones and silanes growth will be fueled by global megatrends such as population growth, increasing demand for energy efficiency, new technologies in healthcare and growth in consumer electronics. Additionally, specialty silicones and silanes will continue to substitute for materials such as metals and plastics where they provide superior properties and performance. For example, we believe the use of specialty silicone and silane material will accelerate to help build new and eco-friendly residential and commercial properties to support growing populations. In automotive, specialty silicones and silanes are found in numerous vehicle components, including lighting and body coatings, seating and dashboards and gaskets and tires.

Momentive is a leader in the manufacture and sale of specialty silicones within the end-markets shown below, and we compete with companies such as Dow Corning, Wacker, Shin Etsu and Evonik. We believe we are well-positioned against competition because we have a strong global presence with specialty manufacturing assets, direct sales and marketing and application and technology development. We also have a highly diverse range of product groups where we believe we have leadership positions. Momentive also has a greater focus on downstream specialty applications relative to the larger silicone industry peers.

 

84


Table of Contents

The table below highlights the key end-markets of our specialty silicones and silanes portfolio as well as the growth drivers for these markets.

 

LOGO

 

(1) Does not include industrial end-market as such market is broadly defined without specific market statistics or growth drivers
(2) Financials based on 2016
(3) Sources: Freedonia and Grand View Research, Inc.
(4) For the period of 2016-2021 for Consumer goods, Construction, Personal care, Electronics and Healthcare, and for the period of 2016-2025 for Automotive
(5) Represents silicone sales in plastics, textiles and paper end-markets
(6) According to Technavio for the period of 2016-2021
(7) According to MarketsandMarkets for the period of 2016-2021

Our Strengths

Our Company has the following competitive strengths:

Leadership positions in each of our core markets. We are one of the world’s largest producers of specialty silicones and silanes and the largest global producer of fused quartz. Our products are used in a variety of market applications, including consumer, automotive, industrial, construction, personal care, electronics, agriculture and healthcare. As a leader, we are well-positioned to benefit from favorable growth trends impacting many of our end-markets. We maintain leading positions in various product lines and geographic areas. We believe our scale, global reach and breadth of product offerings provide us with significant advantages over many of our competitors. Momentive is the third largest industry participant in the global silicones market by sales, but has a particular focus on downstream specialty, where we have a higher share. Due to the breadth and differentiation of our specialty products, we believe we have no single competitor across all business lines within Performance

 

85


Table of Contents

Additives and Formulated and Basic Silicones. We believe we are also one of the largest industry participants in the global quartz market by sales.

 

Global Silicones Sales (All Products)1

 

Global Quartz Sales (All Products)2

LOGO   LOGO

 

 

(1) Source: Freedonia
(2) Management estimate

Strong industry fundamentals driven by global megatrends. Momentive is levered to large and growing markets in specialty silicones, silanes and quartz. According to Freedonia, the global silicones market, which is larger than $14.2 billion today, is projected to increase to over $18.3 billion by 2021, implying an annual growth rate higher than 5.1%. Drivers of growth include end-market expansion, new applications and increasing market penetration. We believe that increased substitution of traditional materials with silicones due to their versatility and high-performance characteristics will support continued growth trends in excess of GDP. Momentive possesses specialized technologies which enable high-performance in a range of diverse applications and high growth end-markets. Our specialty products are increasingly used as a value-added substitute for traditional materials or as functional additives, which yields new properties for our customers’ products. Further, we believe that our specialized technology portfolio and R&D capabilities support a growth pipeline that can allow us to maintain growth in excess of industry averages. This opportunity for continued outsized growth is driven primarily by new applications for silicones across end-markets from personal care products to automotive (including NXT). We continue to invest behind megatrends such as population growth, urbanization, alternative energy and sustainability and miniaturization to support growth via increased adoption and penetration in our product portfolio.

Value-added, customer-centric business model developing specialty product portfolio. Our market leadership has contributed to a longstanding history of strategic relationships with blue-chip customers across our end-markets. Our technical and service-oriented business model enable our customers to benefit from individualized solutions to develop products that uniquely suit their needs. Our R&D process is built upon core internal technologies and capabilities and is supported by input from and close collaboration with our customers to develop innovative products that are aligned with global megatrends. Our customers have relied upon Momentive’s technology and know-how when launching signature product lines. For instance, we entered into a joint development agreement to create a custom silicone additive that lends light, free-flowing properties to 2-in-1 shampoos and conditioners. Our ability to offer customization to over 4,000 customers in over 100 countries has generated a deep pipeline of new product launches in concert with our largest customers.

Global network of assets and customer relationships. We believe our scale and global infrastructure enable us to serve our customers with precision and efficiency. We have 24 production facilities and 12 research and development centers located across the Americas, Europe and Asia. In 2016, we generated 31% of our revenue from North America, 27% from Europe, a combined 23% from China and Japan and 19% from the rest of the world. This global footprint allows us to adapt our solutions to meet the growing needs of international markets as well as to optimize our cost structure through diversified sourcing and local distribution networks. Additionally, this footprint creates an additional benefit of being able to service multi-national customers locally and globally.

 

86


Table of Contents

Our strategic network of assets and strong customer relationships enable us to take advantage of growth in these regions. For example, in 2016 we expanded our facility in Nantong, China to accommodate additional production capacity for urethane additives to better serve our local customers. Our application centers are positioned around the world to be close to our customers and the markets we serve. They are staffed with experts from respective industries, such as electronics, personal care, tire manufacturing and industrial coatings. These technical centers collaborate with our customers on new product development and process improvements and provide technical support.

Strong R&D platform with a rich pipeline to support future growth. Our business is supported by a leading intellectual property portfolio including over 3,400 patents. Our leadership in innovation is a result of sustained investment in technological advancement—over the last three years Momentive has invested over $200 million toward research and development. Momentive’s R&D practice is supported by 12 global facilities with focused centers of excellence. In recent years we have completed initiatives such as implementing a full scale pilot line for our coatings business in Leverkusen, Germany, and opening a new tire additives application development center in Charlotte, North Carolina, both of which further complement our network of innovation centers strategically located to support our global customer base.

Focus on operating efficiency and production optimization, with history of achieving significant cost savings. Our business is managed with a long term cost-consciousness, as we regularly evaluate opportunities to drive production efficiencies and margin improvements. Most recently, we have implemented approximately $48 million in annual structural cost reduction initiatives through our previously announced global restructuring programs. All of these cost actions have been executed, and we have achieved approximately $42 million of savings under these programs to date, with the remainder expected to be realized by early 2018. In addition to our restructuring programs, we have taken action to reduce siloxane production in order to better align our production capability with our business model. Accordingly, in the fourth quarter of 2016, we ceased production of siloxane at our Leverkusen, Germany facility and shifted to local supply agreements to ensure security of supply. This proactive management of siloxane supply has resulted in $10 million of annual savings in our raw material input costs. Additionally, the Company has launched a continuous improvement / LEAN manufacturing initiative which should further improve operational efficiency.

Strong financial position with attractive free cash flow characteristics. Momentive has a robust financial profile and is well-positioned for sustainable, consistent growth. Between the full year ended 2015 and the last twelve months ended September 30, 2017, we experienced 26% average compounded annual growth in Segment EBITDA and approximately 400 basis points of Segment EBITDA margin expansion, as we have transitioned into higher margin products and executed various global restructuring programs. In addition to our improved profitability, our business has improved free cash flow potential due to limited maintenance capital expenditure requirements, lower net working capital requirements, and net operating losses of $704 million across five jurisdictions as of December 31, 2016. We expect run-rate maintenance capital expenditures to be approximately $70 million per year, representing 25% of Segment EBITDA for the last twelve months ended September 30, 2017. Additionally, we have plans in place to drive further improvement in cash conversion from working capital.

Experienced management team with proven track record. Our senior management team has an average of over 25 years of manufacturing and industry experience in both public and private companies. The team’s collective expertise spans a wide range of applicable execution capabilities, including management and operations, research and product development, finance and administration, and sales and marketing. In recent years, our senior management team has developed and implemented our new corporate strategy, shifting our portfolio toward specialty products and higher margin end-markets.

 

87


Table of Contents

Growth and Strategy

Momentive has a clear corporate growth strategy and significant multi-dimensional earnings growth opportunities. We are focused on the following long-term strategies:

Increase shift to high-margin specialty products. Our strategy is to expand our product offerings in high-margin specialty silicones and silanes and optimize production to accommodate strategic investments in specialty growth products as the company rationalizes exposure to lower margin products. We are actively selling fewer lower-margin basic silicone products and redeploying capital resources to grow our specialty products. Accordingly, we have deployed approximately $100 million of growth capital over the last three years to exploit our rich new product pipeline in innovative market applications. Areas of investment focus include specialty silanes, automotive clear coats, optical displays and LSR. For example, construction of our recently announced approximately $30 million investment in NXT silane production capacity in Leverkusen, Germany is anticipated to be completed by the end of 2017. Simultaneously, we continue to expand our IP-protected leadership position in next generation silanes for low-roll resistance tires. With these actions, we are continuing to invest strategically in our specialty growth platforms while optimizing our siloxane capacity.

Expand our global reach in faster growing regions and markets. We intend to continue to grow by expanding our sales presence and application support around the world. We are focused on growing our business by making targeted investments in emerging markets, specifically certain areas of Asia Pacific, India, and Latin America. In India, we have increased sales at an average annual growth rate of 7% over the last four years.

Develop new applications and market new products. We intend to maintain industry leadership through new product development and innovation initiatives. We aim to establish new relationships with customers and third parties to create next generation solutions. In the last five years, we generated approximately 13% of our revenue from new products, including several instances in which we co-developed applications with our customers.

In addition, we will continue to invest in R&D capabilities by upgrading our technology facilities and expanding our new product offerings. In 2016, 2015, and 2014, we invested $64 million, $65 million, and $76 million, respectively, in R&D. In recent years we upgraded technology facilities at our Tarrytown, New York site, implemented a full scale pilot line for our coatings business in Leverkusen, Germany, and opened a new tire additives application development center in Charlotte, North Carolina, all of which further complement our network of innovation centers strategically located to support our customers globally. Through these investments, we expect to continue to drive incremental revenue and earnings growth.

Invest in high-return capital projects. We have a history of investing capital in high-ROI growth projects to expand product sets, customer penetration and increase capacity to service rapidly expanding sales. Over the last three years, we have invested approximately $100 million into growth capital projects. We constantly evaluate the highest and best use of each incremental growth capital dollar and consult with our partners to ensure we are prepared to efficiently get to market.

Continue portfolio optimization, targeted add-on acquisitions and joint ventures. We will continue to pursue acquisitions of attractive businesses and technologies that provide exposure to higher-end specialty products and services. For example, we recently acquired the operating assets of Sea Lion Technology, Inc. (“Sea Lion”) to further support the silanes business. Sea Lion was a contract manufacturer that worked with Momentive to produce silane products, including NXT silane, for more than 10 years. We believe the acquisition of Sea Lion will enable us to strategically leverage production assets in support of our high-growth NXT business.

We will continue to pursue other acquisitions and joint venture opportunities in the attractive specialty silicone and silane, quartz and specialty ceramics spaces. As a leading manufacturer of performance materials we have an advantage in pursuing add-on acquisitions and joint ventures in areas that allow us to build upon our core

 

88


Table of Contents

strengths and expand our product, technology and geographic portfolio to better serve our customers. We believe we will have the opportunity to consummate acquisitions at relatively attractive valuations due to the scalability of our existing global operations and deal-related synergies.

Identify and implement strategic cost reduction initiatives. We are committed to driving cost reductions and efficiencies throughout our global manufacturing footprint, including through implementing LEAN / Six Sigma initiatives and right sizing siloxane production. Our management team has a robust process to effectuate cost reduction plans and continuously reviews our operations to identify and evaluate further cost reduction opportunities. The team develops detailed process plans to facilitate staffing and execution, appoints a team leader, and holds regular stage-gate reviews with a steering committee to remain on track. The cost reduction plan we have put in place over the last two years is just the latest example of our ability to effectively implement such initiatives. We plan on achieving the approximately $48 million in annual structural cost reduction initiatives by the end of 2017. Cumulatively through September 30, 2017, we have achieved approximately $42 million of savings under these initiatives.

Industry and Competitors

We compete with a variety of companies, including large global chemical companies and small specialty chemical companies, in each of our product lines. The principal factors of competition in our industry include product quality, customer service and breadth of product offerings, product innovation, manufacturing efficiency, distribution and price.

Raw Material Purchases

Overall, in 2016, we purchased approximately $1.1 billion of raw materials. Many of the raw materials we use to manufacture our products are available from more than one source, and are readily available in the open market. As discussed above, we currently purchase under short-term, one-year or multi-year contracts and in the spot market so as to ensure competitive pricing and adequate supply.

Performance Additives and Formulated and Basic Silicones

 

    Silicon Metal—Silicon metal is an inorganic material that is not derived from petrochemicals. Major silicon metal suppliers include Ferroglobe PLC, Elkem ASA, Lao Silicon Ltd., CBC Co. Ltd., and other vendors located around the world. We currently purchase silicon metal under short-term, one-year or multi-year contracts and in the spot market. We typically purchase silicon metal under formal contracts in the United States and in the spot market in Asia Pacific.

 

    Siloxane—Siloxane is a key intermediate required to produce silicone polymers. We produce siloxane for our internal use in the United States, Japan, Italy Brazil, China and Germany and source siloxane from our joint venture in China and third parties. We also source siloxane from Thailand under a purchase and sale agreement with ASM and routinely enter into supply agreements with other third parties to take advantage of favorable pricing and minimize our costs.

 

    Methanol—Methanol is a key raw material for the production of methyl chloride, which is used to produce chlorosilanes. Major methanol suppliers include Itochu Chemical Frontier Corporation, CBC Co. Ltd., Southern Chemical Corporation, and Mitsubishi Gas Chemicals. We typically enter into quarterly or annual contracts for methanol.

Quartz Technologies

Naturally occurring quartz sand is the key raw material for many of the products manufactured by our Quartz Technologies segment, which is currently available from a limited number of suppliers. Unimin, a major producer of natural quartz sand, controls a significant portion of the market for this sand. As a result, Unimin

 

89


Table of Contents

exercises significant control over quartz sand prices, which have been steadily increasing. In recent years, these increases have averaged approximately 5% per year. In April 2015, we entered into a purchase agreement with Unimin, which expired on December 31, 2016.    Since the expiration of our agreement with Unimin, purchases from Unimin have been handled through purchase orders without disruption of supply to our Quartz Technologies segment and we expect that process to continue if we are unable to enter into a new agreement. We also use quartz sand from other global sand suppliers.

Marketing, Customers and Seasonality

We market an extensive product line to meet a wide variety of customer needs. We focus on customers who are, or have the potential to be, leaders in their industries and have growth objectives that support our own growth objectives. In addition, we focus on customers who value our service-oriented business model. This approach includes high-quality, reliable products backed by local sales support and technical expertise. An important component of our strategy is to utilize our broad product capabilities to win high-end specialty business from our customers. These customers value these capabilities and, as a result, we are able to become a supplier of choice, given our relationship and ability to develop solutions to meet their precise needs.

In 2016, our largest customer accounted for less than 4% of our net sales, and our top twenty customers accounted for approximately 23% of our net sales. Neither our overall Company nor any of our businesses depends on any single customer or a particular group of customers; therefore, the loss of any single customer would not have a material adverse effect on any of our businesses or the Company as a whole.

We do not experience significant seasonality of demand, although sales have historically been slightly higher during the second and fourth quarters due to increased industrial activity. Seasonality trends, however, have been skewed in recent years primarily due to volatile global economic conditions.

Research and Development

Research and development expenses include wages and benefits for research personnel, including engineers and chemists; payments to consultants and outside testing services; costs of supplies and chemicals used in in-house laboratories; and costs of research and development facilities. Our research and development efforts focus on the development of new applications for our existing products and technological advances that we hope will lead to new products. For the years ended December 31, 2016, 2015 and 2014, we spent $64 million, $65 million and $76 million, respectively, on research and development.

Intellectual Property

We own, license or have rights to approximately 3,400 patents and approximately 170 trademarks registered in a variety of countries, along with various patent and trademark applications and other technology licenses around the world. These patents will expire between 2017 and 2035. Our rights under such patents and licenses are a significant strategic asset in the conduct of our business. Patents, patent applications, trademarks and trademark applications relating to our Velvesil, Silwet, Silsoft, Tospearl, SPUR+ and NXT brands, technologies and products are considered material to our business.

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.

Trademark License Agreement

On December 3, 2006, we and GE Monogram entered into a trademark license agreement, which was amended on May 17, 2013, pursuant to which GE Monogram grants us a limited right to, among other things, use

 

90


Table of Contents

the GE mark and monogram solely in connection with our sealant, adhesive and certain other products, subject to certain conditions. We also have the right to use numerous product specifications that contain the letters “GE” for the life of the respective products. These rights extend for a term of five years through December 3, 2018 with an option to extend the trademark license agreement for an additional five-year period through 2023, subject to certain terms and conditions, including the payment of royalties.

Industry Regulatory Matters

Domestic and international laws regulate the production and marketing of chemical substances. Although almost every country has its own legal procedure for registration and import, laws and regulations in the European Union, the United States, and China are the most significant to our business. These laws typically prohibit the import or manufacture of chemical substances unless the substances are registered or are on the country’s chemical inventory list, such as the European inventory of existing commercial chemical substances and the U.S. Toxic Substances Control Act inventory. Chemicals that are on one or more of these lists can usually be registered and imported without requiring additional testing in countries that do not have such lists, although additional administrative hurdles may exist. Under such laws, countries may also require toxicity testing to be conducted on chemicals in order to register them or may place restrictions on the import, manufacture and/or use of a chemical.

The European Commission enacted a regulatory system in 2006 known as REACH, which requires manufacturers, importers and consumers of certain chemicals to register these chemicals and evaluate their potential impact on human health and the environment. As REACH matures, significant market restrictions could be imposed on the current and future uses of chemical products that we use as raw materials, or that we sell as finished products in the European Union. Other countries may also enact similar regulations. See “Risk Factors—Risks Related to Our Business—Future chemical regulatory actions may decrease our profitability.”

Environmental Regulations

In the European Union and other jurisdictions committed to achieving the goals of the Paris Agreement under the United Nations Framework Convention on Climate Change, there is an increasing likelihood that our manufacturing sites will be affected in some way over the next few years by taxation of greenhouse gas emissions. In addition, although the Trump administration announced in June 2017 its intent to withdraw the United States from the Paris Agreement, numerous cities and businesses and several states, including California and New York, have made their own commitments towards reducing greenhouse gas emissions, and further enactment of federal climate change legislation in the United States is a possibility for the future. While only a small number of our sites are currently affected by existing greenhouse gas regulations, and none have experienced or anticipate significant cost increases as a result, it is likely that greenhouse gas emission restrictions will increase over time. Potential consequences of such restrictions include increases in energy costs above the level of general inflation, as well as direct compliance costs. Currently, however, it is not possible to estimate the likely financial impact of potential future regulation on any of our sites.

Our policy is to strive to operate our plants in a manner that protects the environment and the health and safety of our employees, customers and communities. We have implemented company-wide environmental, health and safety policies and practices managed by our Environmental, Health and Safety, or EH&S department, and overseen by the Environment, Health and Safety Committee of the Board of Directors. Our EH&S department has the responsibility to monitor and enforce the compliance of our operations worldwide with environmental, health and safety laws and regulations. This responsibility is executed via training, communication of environmental, health and safety policies, formulation of relevant policies and standards, environmental, health and safety audits and incident response planning and implementation. Our environmental, health and safety policies and practices include management systems and procedures relating to emissions to air, water and other media, waste generation, process safety management, handling, storage and disposal of hazardous substances, worker health and safety requirements, emergency planning and response and product stewardship.

 

91


Table of Contents

We and our operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials and are subject to extensive environmental, health and safety regulation at the federal, state, local and international level. Our production facilities require operating permits that are subject to renewal or modification. Violations of environmental, health or safety laws or permits may result in, among other things, restrictions being imposed on operating activities, substantial fines, penalties, damages or other costs. In addition, statutes such as CERCLA and comparable state and foreign laws impose strict, joint and several liability for investigating and remediating spills and other releases of hazardous materials, substances and wastes at current and former facilities and at third-party disposal sites. Other laws permit individuals to seek recovery of damages for alleged personal injury or property damage due to exposure to hazardous substances and conditions at or from our facilities or to hazardous substances otherwise owned, sold or controlled by us. Therefore, we may incur liabilities in the future, and these liabilities may result in a material adverse effect on our business, financial condition, results of operations or cash flows.

Although our environmental, health and safety policies and practices are designed to ensure compliance with international, federal, state and local laws and environmental, health and safety regulations, future developments and increasingly stringent regulation could require us to make additional unforeseen environmental, health and safety expenditures, which expenditures could be material.

We expect to incur future costs for capital improvements and general compliance under environmental, health and safety laws, including costs to acquire, maintain and repair pollution control equipment. In 2016, we incurred capital expenditures of approximately $24 million on an aggregate basis to comply with environmental, health and safety laws and regulations and to make other environmental, health and safety improvements. We estimate that our capital expenditures in 2017 for environmental, health and safety improvements at our facilities will be approximately $20 million. This estimate is based on current regulations and other requirements, but it is possible that a material amount of capital expenditures, in addition to those we currently anticipate, could be necessary if these regulations or other requirements or other facts change.

Employees

As of December 31, 2016, we had approximately 4,900 employees, flat compared to 2015. Approximately 44% (as of September 30, 2017) of our employees are members of a labor union or have collective bargaining agreements. 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.

Chapter 11 Bankruptcy Filing and Emergence

On April 13, 2014, we filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. The Chapter 11 proceedings were jointly administered under the caption In re MPM Silicones, LLC, et al., Case No. 14-22503. During the bankruptcy proceedings, we continued to operate our businesses as “debtors-in-possession” under the jurisdiction of the court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the court until our emergence from the Chapter 11 proceedings on October 24, 2014 (the “Emergence Date”).

Upon emergence from bankruptcy on the Emergence Date, we adopted fresh-start accounting which resulted in the creation of a new entity (such entity, the “successor”) for financial reporting purposes. Accordingly, our consolidated financial statements on or after October 24, 2014 are not comparable with our consolidated financial statements prior to that date (such entity, the “predecessor”).

Properties

Our headquarters is located in Waterford, New York. Our major manufacturing facilities are primarily located in North America, Europe and Asia. We operate 10 domestic production and manufacturing facilities in 6 states and 14 foreign production and manufacturing facilities, primarily in China, Germany, Italy and Japan. We also have 5 standalone technology research centers.

 

92


Table of Contents

We believe our production and manufacturing facilities are well maintained and effectively utilized and are adequate to operate our business. Following are our production and manufacturing facilities, executive offices and technology research centers:

 

Location

   Real Property
Interest
     Business in Which Property is Used  

Americas:

     

Waterford, NY(2)

     Owned       
Performance Additives, Formulated
and Basic Silicones
 
 

Tarrytown, NY(1)

     Leased        Performance Additives  

Sistersville, WV(2)

     Owned        Performance Additives  

Chino, CA

     Leased        Formulated and Basic Silicones  

Garrett, IN

     Leased        Formulated and Basic Silicones  

New Smyrna Beach, FL

     Owned        Formulated and Basic Silicones  

Charlotte, NC(1)

     Leased        Performance Additives  

Itatiba, Brazil

     Owned        Performance Additives  

Texas City, TX

     Owned        Performance Additives  

Strongsville, OH(2)

     Owned        Quartz Technologies  

Willoughby, OH

     Owned        Quartz Technologies  

Richmond Heights, OH(2)

     Owned        Quartz Technologies  

Newark, OH

     Owned        Quartz Technologies  

Europe:

     

Leverkusen, Germany(2)

     Leased       
Performance Additives, Formulated
and Basic Silicones
 
 

Bergen op Zoom, Netherlands

     Leased        Formulated and Basic Silicones  

Lostock, United Kingdom

     Leased        Formulated and Basic Silicones  

Termoli, Italy

     Owned        Performance Additives  

Antwerp, Belgium

     Leased        Performance Additives  

Geesthacht, Germany

     Owned        Quartz Technologies  

Asia Pacific:

     

Nantong, China

     Leased       
Performance Additives, Formulated
and Basic Silicones
 
 

Ohta, Japan(2)

     Owned       
Performance Additives, Formulated
and Basic Silicones
 
 

Rayong, Thailand

     Leased        Formulated and Basic Silicones  

Bangalore, India(1)

     Leased       
Performance Additives, Formulated
and Basic Silicones
 
 

Chennai, India

     Owned        Performance Additives  

Shanghai, China(1)

     Leased       

Performance Additives, Formulated
and Basic Silicones, Quartz
Technologies
 
 
 

Seoul, Korea(3)

     Leased       
Performance Additives, Formulated
and Basic Silicones
 
 

Kobe, Japan(2)

     Leased        Quartz Technologies  

Kozuki, Japan

     Owned        Quartz Technologies  

Wuxi, China

     Leased        Quartz Technologies  

 

  (1) Technology research center.
  (2) Manufacturing facility and technology research center.
  (3) Sales and technology research center.

 

93


Table of Contents

Legal Proceedings

Various claims, lawsuits and administrative proceedings are pending or threatened against us and/or our subsidiaries, arising from the ordinary course of business with respect to commercial, product liability, employee, environmental and toxic exposure matters. Historically, we have not faced any litigation matters or series of litigation matters that have had a material adverse impact on our business. In addition, we do not believe that there is any pending or threatened litigation, either individually or in the aggregate, that is likely to have a material adverse effect on our business. We cannot predict with certainty the outcome of any litigation or the potential for future litigation and any such matters, if they occur, could materially adversely affect our business and operations.

Appeals Relating to the Confirmation of the Plan of Reorganization in the Bankruptcy Cases

In connection with the bankruptcy cases, three appeals were filed relating to the confirmation of the Plan of Reorganization. Specifically, on September 15, 2014, U.S. Bank as trustee for the Subordinated Notes filed the U.S. Bank Appeal before the District Court seeking a reversal of the Subordinated Notes Determination. In addition, on September 16, 2014, the Appellants filed the District Court Appeals before the District Court seeking reversal of the Prepayment Premiums Determination and the Interest Rate Determination. On November 11, 2014, the Debtors filed the District Court Motion to Dismiss with the District Court asserting, inter alia, that granting the relief requested by the Appellants would be inequitable under the legal doctrine of equitable mootness. On May 5, 2015, the District Court entered into the District Court Decision and affirmed the Bankruptcy Court rulings. Because the District Court Appeals were decided on their merits, the District Court also terminated the District Court Motion to Dismiss as moot. All the Appellants appealed the District Court Decision to the Second Circuit. On September 3, 2015, the Debtors filed the Second Circuit Motions to Dismiss with the Second Circuit asserting, inter alia, that granting the relief requested by the Appellants would be inequitable under the legal doctrine of equitable mootness. On December 16, 2015, the Second Circuit denied the Second Circuit Motions to Dismiss but permitted the Debtors to raise issues of equitable mootness in their briefs on the merits of the Second Circuit Appeals. On October 20, 2017, the Second Circuit issued the Second Circuit Decision. The Second Circuit Decision affirmed the Subordinated Notes Determination and the Prepayment Premiums Determination. However, the Second Circuit Decision reversed the Interest Rate Determination and remanded the issue to the Bankruptcy Court for further proceedings. The Second Circuit Decision held that, on remand, the Bankruptcy Court should first assess whether an efficient market rate can be ascertained for the First Lien Notes and Second Lien Notes, and, if so, apply that rate to the First Lien Notes and Second Lien Notes. The Second Circuit Decision also declined to dismiss the Second Circuit Appeals as equitably moot. On November 3, 2017, First Lien Trustee and 1.5 Lien Trustee requested a rehearing en banc by the Second Circuit with respect to the Prepayment Premium Determination.

We cannot predict with certainty the timing or outcome of the Remand, or whether parties may file petitions of certiorari with the Supreme Court of the United States, with respect to the Second Circuit Decision. An adverse outcome could negatively affect our business, results of operations and financial condition by reducing our liquidity and/or increasing our interest costs (including by potentially requiring us to make a catch-up payment for past due interest, which payment could be material).

Environmental Matters

We and our operations are subject to extensive environmental, health and safety regulation at the federal, state, local and international level and our production facilities require operating permits that are subject to renewal or modification. Our operations also involve the use, handling, processing, storage, transportation and disposal of hazardous materials, and we may be exposed to the risk of claims for environmental remediation or restoration.

We have adopted and implemented environmental health and safety policies, which include systems and procedures governing emissions to air, water and other media, waste generation, process safety management, handling, storage and disposal of hazardous substances, worker health and safety requirements, emergency planning and response, and product stewardship. In order to comply with environmental, health and safety laws

 

94


Table of Contents

and regulations, including obtaining and maintaining permits, we have incurred and will continue to incur costs, including capital expenditures for projects related to environmental, health and safety improvements. In addition, pursuant to applicable hazardous waste regulations, we are required to provide financial assurances for contingent future costs associated with certain hazardous waste management 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 $43 million for closure and post-closure care 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 in March 2016, which required us to provide approximately $26 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, among others, as an industry for which it plans to develop, as necessary, proposed regulations identifying appropriate financial assurance requirements pursuant to §108(b) of CERCLA.

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 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.

We have been named as a defendant in a series of multi-defendant lawsuits based on our alleged involvement in the supply of allegedly hazardous materials. The plaintiffs seek damages for alleged personal injury resulting from exposure to various chemicals. These claims have not resulted in material judgments or settlements historically and we do not anticipate that these claims present any material risk to our business in the future. In addition, we have been indemnified by GE for any liability arising from any such claims existing prior to the consummation of the GE Advanced Materials Acquisition. However, we cannot predict with certainty the outcome of any such claims or the involvement we might have in such matters in the future.

In 2008, we became aware and disclosed to the NYSDEC that, in certain instances, our Waterford, New York, facility may have failed to comply with state and federal regulatory requirements governing the treatment of hazardous waste. During 2008, the NYSDEC initiated an investigation into these disclosures and issued a notice of violation alleging certain noncompliances. Subsequently, in the second quarter 2009, the USEPA and the U.S. Department of Justice sought, through search warrant and subpoena, additional information related to the alleged noncompliances. In May of 2017, we entered into a settlement with the NYSDEC, the USEPA and the U.S. Department of Justice with respect to such matters under which we paid approximately $1 million.

We are currently cooperating with the NYSDEC in its investigation of the Waterford, New York facility’s compliance with certain applicable environmental requirements as identified in an administrative complaint filed by the NYSDEC in May 2017. Although we currently believe that the costs and potential penalties associated with the investigation will not have a material adverse impact on our business, resolution of such enforcement action will likely require payment of a monetary penalty and/or the imposition of other civil sanctions.

 

95


Table of Contents

MANAGEMENT

The supervision of our management and the general course of Momentive affairs and business operations is entrusted to the Board of Directors. Set forth below are the names, ages and current positions of our executive officers of Momentive and the members of the Board of Directors as of October 31, 2017.

 

Name

   Age   

Title

John G. Boss    58    Chief Executive Officer and President and Director
Erick R. Asmussen    51    Senior Vice President and Chief Financial Officer
John D. Moran    59    Senior Vice President, General Counsel and Secretary
Mahesh Balakrishnan    34    Director
Bradley J. Bell    65    Director and Chairman of the Board
Theodore H. Butz    59    Director
John D. Dionne    53    Director
Samuel Feinstein    34    Director
Robert Kalsow-Ramos    31    Director
Scott M. Kleinman    44    Director
Julian Markby    65    Director
Jeffrey M. Nodland    62    Director
Marvin O. Schlanger    69    Director

John G. Boss was appointed Chief Executive Officer and President of Momentive on December 15, 2014, having served as a director and Interim President and Chief Executive Officer since October 24, 2014, pursuant to the Plan of Reorganization. He joined the Company as Executive Vice President and President of the Silicones and Quartz Division in March 2014. Mr. Boss was the former President of Honeywell Safety Products at Honeywell International from February 2012 to March 2014. He served in various leadership positions with Honeywell International since 2004, including Vice President and General Manager of Specialty Products from 2008 through 2012 and Vice President and General Manager of Specialty Chemicals from 2005 through 2008. Before joining Honeywell International, Mr. Boss was Vice President and General Manager of the Specialty and Fine Chemicals business of Great Lakes Chemical Corporation from 2000 through 2003 and Vice President and Business Director at Ashland Corporation (formerly International Specialty Products) from 1996 through 2000. Mr. Boss’ position as President and Chief Executive Officer, his extensive management experience and skills in business leadership qualify him to serve as a director of Momentive.

Erick R. Asmussen was appointed Chief Financial Officer and Senior Vice President of Momentive on May 26, 2015. Prior to joining Momentive, Mr. Asmussen served as Vice President and Chief Financial Officer of GrafTech International, Ltd. (NYSE:GTI) (“GrafTech”) from September 2013 to May 2015. Mr. Asmussen joined GrafTech in 1999 and held leadership positions as GrafTech’s Worldwide Controller, Treasurer, and Vice President of Strategy, Planning, Corporate Development. Prior to GrafTech, Mr. Asmussen worked in various financial positions with Corning Incorporated, AT&T Corporation, and Arthur Anderson LLP. Mr. Asmussen holds an M.S. in Tax from the State University of New York and a B.S. in Accounting from Rochester Institute of Technology.

John D. Moran was appointed Senior Vice President, General Counsel and Secretary for Momentive. Prior to joining Momentive, Mr. Moran served as General Counsel, Vice President and Secretary of GrafTech since April 2009, where his primary responsibilities included corporate governance, regulatory compliance, commercial and transactional matters and oversight of the legal and corporate secretary functions. Mr. Moran joined GrafTech in May 2006 as Deputy General Counsel and previously held senior legal positions at Corrpro Companies, Inc. and Sealy Corporation.

Mahesh Balakrishnan was appointed a director of Momentive on October 24, 2014, pursuant to the Plan of Reorganization. Mr. Balakrishnan is a Managing Director in Oaktree’s Opportunities Funds. He joined Oaktree

 

96


Table of Contents

in 2007 and has been focused on investing in the chemicals, energy, financial institutions, real estate and shipping sectors. Mr. Balakrishnan has worked with a number of Oaktree’s portfolio companies and currently serves on the board of Star Bulk Carriers Corp. Within the past five years, he also served on the board of STORE Capital Corp. (specialty REIT). He has been active on a number of creditors’ committees, including ad hoc committees, during the Lehman Brothers and LyondellBasell restructurings. Prior to Oaktree, Mr. Balakrishnan spent two years as an analyst in the Financial Sponsors & Leveraged Finance group at UBS Investment Bank. He is a member of the Compensation Committee of the Board of Directors of Momentive. Mr. Balakrishnan serves as a director of Momentive at the discretion of certain investment funds managed by Oaktree Capital Management, which funds hold a substantial equity interest in Momentive.

Bradley J. Bell was appointed a director of Momentive on October 24, 2014, pursuant to the Plan of Reorganization, and as Chairman of the Board on December 15, 2014. Mr. Bell also has served on the Board of Directors of Chemours Corporation since July 2015, chairing the Audit Committee, and of Hennessy Capital Acquisition Corp. III since June 2017 where he chairs the Audit Committee and is a member of the Nominating & Corporate Governance and Compensation Committees. During the past five years, Mr. Bell served on the Boards of Directors of IDEX Corporation from 2001 to 2015, Compass Minerals Corporation from 2003 to 2015, Hennessy Capital Acquisition Corp. II from 2015 to 2017 and Hennessy Capital Acquisition Corp. from 2014 to 2015. In addition, Mr. Bell has served as a director of Life Choice Crisis Pregnancy Center, a not-for-profit entity, since 2015. Mr. Bell was Executive Vice President and Chief Financial Officer at Nalco Holding Co. (formerly known as Nalco Chemical Co.) from November 2003 to September 2010. He also served as a Senior Vice President and Chief Financial Officer of Rohm & Haas Co. from 1997 to May 2003. He is a member and Chairman of both the Compensation Committee and the Nominating and Governance Committee of the Board of Directors of Momentive. In light of Mr. Bell’s extensive finance and business experience and over 20 years’ experience of serving on Boards of Directors of publicly traded companies, we believe it is appropriate for Mr. Bell to serve as a director of Momentive.

Theodore H. Butz was appointed a director of Momentive on August 4, 2016. Mr. Butz brings over 30 years of experience in building specialty chemicals businesses. He currently serves as Executive Chairman of the Board of Directors for Dixie Chemical Company, a leading supplier of specialty chemicals for paper making, thermoset materials and fluid and lubricants. From 2011 through 2016, Mr. Butz was President and Chief Executive Officer of Pinova Holdings, Inc., a leading supplier of essential natural and renewable materials for fragrance, food and specialty industrial applications. Prior to Pinova, Mr. Butz was Group President for the Specialty Chemicals business at FMC Corporation. During his tenure at FMC, Mr. Butz held a variety of domestic and international leadership positions serving diverse markets and had responsibility for corporate-wide strategy and development activities, as well as corporate health and safety functions. From 2008 to 2010, Mr. Butz was also a Board Member of Aventine Renewable Energy, the second largest publicly traded ethanol supplier. Mr. Butz holds an M.B.A. from the University of San Francisco and a B.S. in Finance from Arizona State University. He is a member of the Environment, Health and Safety Committee of the Board of Directors of Momentive. In light of Mr. Butz’s extensive finance and business experience, we believe it is appropriate for Mr. Butz to serve as a director of Momentive.

John D. Dionne was appointed as a director of Momentive on October 24, 2014, pursuant to the Plan of Reorganization. He has been a Senior Advisor of the Blackstone Group, L.P., an investment firm, since July 2013 and a Senior Lecturer in the Finance Unit of the Harvard Business School since January 2014. Until he retired from his position as a Senior Managing Director at Blackstone in June 2013, Mr. Dionne was Global Head of its Private Equity Business Development and Investor Relations Groups and served as a member of Blackstone’s Private Equity Investment and Valuation Committees. Mr. Dionne originally joined Blackstone in 2004 as the Founder and Chief Investment Officer of the Blackstone Distressed Securities Fund. Before joining Blackstone, Mr. Dionne was for several years a Partner and Portfolio Manager for Bennett Restructuring Funds, specializing in financially troubled companies, during which time he also served on several official and ad-hoc creditor committees. He is a Chartered Financial Analyst and Certified Public Accountant (inactive). Mr. Dionne also serves on the Board of Directors of Pelmorex Media Inc. since September 2013, on the Board of Directors and

 

97


Table of Contents

the Audit Committee of Cengage Learning Holdings II, Inc. since April 2014 and on the Board of Directors and as Chair of the Audit Committee of Caesars Entertainment Corporation since October 2017. He previously served as a member of the boards of directors of several companies and not-for-profit organizations. Mr. Dionne holds a Bachelor of Science degree from the University of Scranton and a Master of Business Administration from Harvard Business School. He is a member of the Audit Committee and the Nominating and Governance Committee of the Board of Directors of Momentive. Mr. Dionne’s extensive finance and business experience qualifies him to serve as a director of Momentive.

Samuel Feinstein was elected a director of the Company on November 3, 2016. Mr. Feinstein is a Partner in Apollo’s private equity business, having joined in 2007. He was previously a member of the Investment Banking Group at Morgan Stanley from September 2005 to May 2007. Mr. Feinstein currently serves on the board of CEVA Holdings LLC, Vectra Co., Pinnacle Agriculture Holdings, LLC and Hexion Holdings LLC. Within the past five years, he has served on the board of directors of Taminco Corporation. Mr. Feinstein graduated from the University of California, Los Angeles with a B.A. in Business Economics. In light of our ownership structure and his extensive finance and business experience, we believe it is appropriate for Mr. Feinstein to serve as a director of Momentive.

Robert Kalsow-Ramos was appointed a director of Momentive on October 24, 2014, pursuant to the Plan of Reorganization. Mr. Kalsow-Ramos is a Principal in Apollo Global Management’s Private Equity Group, where he has worked since 2010. Prior to joining Apollo, Mr. Kalsow-Ramos was a member of the Transportation Investment Banking Group at Morgan Stanley from 2008 to 2010. He also serves on the Board of Directors of Hexion Holdings LLC (“Hexion Holdings”) and Mount Olympus Holdings, Inc., each of which is affiliated with Apollo. Within the past five years, Mr. Kalsow-Ramos was a member of Noranda Aluminum Holding Corporation Board of Directors. Mr. Kalsow-Ramos graduated with High Honors from the University of Michigan’s Stephen M. Ross School of Business with a Bachelor of Business Administration. He is a member of the Audit Committee and the Compensation Committee of the Board of Directors of Momentive. Mr. Kalsow-Ramos’ position with Apollo and his extensive finance and business experience, which give him insights into strategic and financial matters, qualify him to serve as a director of Momentive.

Scott M. Kleinman was appointed a director of Momentive on October 24, 2014, pursuant to the Plan of Reorganization. He served as a director of the Company from October 1, 2010 to October 24, 2014. Mr. Kleinman is the Lead Partner for Private Equity at Apollo, where he has worked since February 1996. Prior to that time, Mr. Kleinman was employed by Smith Barney Inc. in its Investment Banking division. Mr. Kleinman is also a director of the following companies affiliated with Apollo: Hexion Holdings LLC, CH2M Hill Companies, Ltd., Vectra Co., and Constellis Holdings, LLC. Within the past five years, Mr. Kleinman was also a director of Verso Corporation, Realogy Holdings Corp., LyondellBasell Industries N.V. and Taminco Corporation. He is a member of the Nominating and Governance Committee of the Board of Directors of Momentive. In light of our ownership structure and Mr. Kleinman’s position with Apollo, and his extensive finance and business experience, we believe it is appropriate for Mr. Kleinman to serve as a director of Momentive.

Julian Markby was appointed a director of Momentive on October 24, 2014, pursuant to the Plan of Reorganization. He served as a director of the Company from April 2013 to October 2014. Mr. Markby has been an independent financial consultant and corporate director since 2005. Previously, Mr. Markby was an investment banker for over 25 years, most recently at Wasserstein Perella and Dresdner Kleinwort Wasserstein for over 8 years. He also serves as a member of the Board and Chair of the Audit Committee of Thiele Kaolin Company, a director and Chair of the Audit Committee of Siguler Guff Small Business Credit Opportunities Fund, Inc. and Board Observer and the Voting Proxy for JPMorgan’s interest in Ligado Networks. Within the past five years, Mr. Markby also served as a director of TwentyEighty, Inc., SP Fiber Holdings, Inc., Altegrity, Inc. and NewPage Corporation. He is Chair of the Audit Committee of the Board of Directors of Momentive. Mr. Markby’s extensive finance and business experience qualifies him to serve as a director of Momentive.

 

98


Table of Contents

Jeffrey M. Nodland was appointed a director of Momentive on December 7, 2015. He has an extensive track record of executive leadership within the specialty chemicals, industrial manufacturing and consumer products sectors. He currently serves as President and Chief Executive Officer of KIK Custom Products, a manufacturer of national and retailer brand consumer products throughout North America, and a leader in manufacturing of both chemicals for the pool and spa markets and antifreeze to the North American automotive industry. Mr. Nodland previously served as President of Hexion Specialty Chemicals Inc.’s Coatings & Inks Division from 2005 to May 2006, and President and Chief Operating Officer of Resolution Specialty Materials from 2004 to 2005. In addition, Mr. Nodland served as President and Chief Operating Officer of Resolution Performance Products from 2001 to 2004, CEO and President of McWhorter Technologies from 1999 to 2001 and held several management roles for The Valspar Corporation from 1977 to 1994. Mr. Nodland currently serves on the Board of Directors of Ecosynthetix, a renewable chemicals manufacturer of bio-based products. Mr. Nodland previously served as a member of the Board of Directors of California Products Corporation and TPC Group. He is a member of the Environment, Health and Safety Committee of the Board of Directors of Momentive. In light of Mr. Nodland’s extensive finance and business experience, we believe it is appropriate for Mr. Nodland to serve as a director of Momentive.

Marvin O. Schlanger was appointed a director of Momentive on October 24, 2014, pursuant to the Plan of Reorganization. Since October 1998, Mr. Schlanger has been a principal in the firm of Cherry Hill Chemical Investments, LLC, which provides management services and capital to the chemical and allied industries. Prior to October 1998, he held various positions with ARCO Chemical Company, serving as President and Chief Executive Officer from May 1998 to July 1998 and as Executive Vice President and Chief Operating Officer from 1994 to May 1998. He served as Chairman and Chief Executive Officer of Resolution Performance Products LLC and RPP Capital Corporation from November 2000 and Chairman of Resolution Specialty Materials Company from August 2004 until the formation of Hexion Specialty Chemicals Inc. in May 2005. Mr. Schlanger is also a director and the Chairman of the Board of CEVA Group Plc, Chairman of UGI Corporation and UGI Utilities and a director of UGI Corporation, UGI Utilities Inc., Amerigas Partners, LP, Vectra Corporation and Hexion Holdings. Mr. Schlanger was formerly Chairman of the Supervisory Board of LyondellBasell Industries N.V. and Chairman of Covalence Specialty Materials Corp. Mr. Schlanger previously served as a director of Taminco Corporation. He is Chair of the Environment, Health and Safety Committee of the Board of Directors of Momentive. Mr. Schlanger’s extensive finance and business experience qualifies him to serve as a director of Momentive.

Board of Directors

As of the date of this prospectus, our Board of Directors has eleven members. The number of directors may be changed by a resolution of a majority of the Board of Directors. Our Board of Directors may elect a director to fill a vacancy, including vacancies created by the expansion of the Board of Directors, upon the affirmative vote of a majority of the remaining directors then in office.

The business and affairs of the Company are managed under the direction of the Board of Directors, including through its committees. The Board of Directors receives reports from each committee chair regarding the committee’s considerations and actions. The Board of Directors and its committees are actively involved in overseeing the assessment and management of risk for the Company. The oversight function includes reviewing the Company’s processes with respect to enterprise risk management and receiving regular reports from members of senior management on areas of material risk, including operational, financial, legal and regulatory, cybersecurity and data protection and strategic and reputational risks. In support of these processes, among other things, our audit committee reviews and discusses with senior management the Company’s results of periodic corporate-wide risk assessments and related corporate guidelines and policies.

Our Certificate of Incorporation, which will be effective upon the consummation of this offering, provides that the Board of Directors will be divided into three classes of directors, with staggered three-year terms, with the classes to be as nearly equal in number as possible. Commencing with the directors elected at the 2018 annual meeting of stockholders, each director will serve a three-year term with one class being elected at each year’s

 

99


Table of Contents

annual meeting of stockholders. Messrs. Boss, Bell, Dionne and Feinstein will serve initially as Class I directors (with a term expiring in 2018). Messrs. Butz, Markby, Nodland and Schlanger will serve initially as Class II directors (with a term expiring in 2019). Messrs. Balakrishnan, Kalsow-Ramos and Kleinman will serve initially as Class III directors (with a term expiring in 2020).

Our Certificate of Incorporation and By-laws, each of which will be effective upon the consummation of this offering, provide that directors will be elected by a plurality of the votes, but do not provide for cumulative voting in the election of directors.

Director Independence

NYSE listing standards require that a majority of the Board of Directors be independent. The Board of Directors has determined that six of our eleven directors, Messrs. Bell, Butz, Dionne, Markby, Nodland and Schlanger, are “independent directors” as defined by the applicable NYSE rules.

Under the rules of NYSE, subject to specified exceptions, each member of our audit, compensation and nominating and governance committees must be independent. We intend to rely on the phase-in rules of the SEC and NYSE with respect to the independence of the audit, compensation and nominating and governance committees. In accordance with these phase-in provisions, our audit, compensation and nominating and governance committees will have at least one independent member by the effective date of the registration statement of which this prospectus is a part, at least two independent members within 90 days of the effective date of the registration statement of which this prospectus is a part, and all members will be independent within one year of the effective date of the registration statement of which this prospectus is a part.

Committees of the Board of Directors

Audit Committee

Upon the consummation of this offering, our audit committee will consist of Messrs. Butz, Dionne and Markby, with Mr. Markby serving as its chairman. Each of Messrs. Butz, Dionne and Markby qualifies as an audit committee financial expert as defined in Item 407(d) of Regulation S-K. Messrs. Butz, Dionne and Markby meet the independence and the experience requirements of the federal securities laws and NYSE.

The principal duties and responsibilities of our audit committee are as follows:

 

    to monitor our accounting, internal control and external reporting policies and practices;

 

    to oversee the integrity of our financial statements and any financial information included in earnings press releases or provided to analysts and/or ratings agencies;

 

    to oversee the independence, qualifications and performance of the independent auditor (including appointment, termination and compensation of the independent auditor and the hiring of current or former partners or employees of the independent auditor);

 

    to oversee our risk management procedures and risk exposure;

 

    to oversee the performance of our internal audit function; and

 

    to oversee our compliance with legal, ethical and regulatory matters as well as our compliance and ethics programs, including with respect to related persons transactions.

The audit committee has the authority to retain counsel and advisers to fulfill its responsibilities and duties.

 

100


Table of Contents

Compensation Committee

Our compensation committee consists of Messrs. Balakrishnan, Kalsow-Ramos and Bell, with Mr. Bell serving as its chairman. Mr. Bell meets the independence requirements of the federal securities laws and NYSE. We intend to rely on the phase-in rules of the SEC and NYSE with respect to the independence of the compensation committee. In accordance with such rules, our compensation committee will have at least two independent members within 90 days of the effective date of the registration statement of which this prospectus is a part, and all members will be independent within one year of the effective date of the registration statement of which this prospectus is a part. Each member of this committee is a non-employee director, as defined by Rule 16b-3 promulgated under the Exchange Act, and an outside director, as defined pursuant to Section 162(m) Internal Revenue Code of 1986, as amended.

The principal duties and responsibilities of our compensation committee are as follows:

 

    to provide oversight on the design and implementation of the compensation policies, strategies, plans and programs for our key employees and outside directors and disclosure relating to these matters;

 

    to review and make recommendations to the Board of Directors with respect to the compensation of our chief executive officer and other executive officers;

 

    to evaluate the performance of the chief executive officer and other executive officers;

 

    to approve or and make recommendations to the Board of Directors with respect to the employment agreements, separation packages and severance benefits of executive officers and other key employees;

 

    to monitor and make recommendations with respect to management succession planning; and

 

    to provide oversight on the regulatory compliance with respect compensation matters.

Nominating and Governance Committee

Our nominating and governance committee consists of Messrs. Bell, Dionne and Kleinman, with Mr. Bell serving as its chairman. Each of Messrs. Bell and Dionne meet the independence requirements of the federal securities laws and NYSE. We intend to rely on the phase-in rules of the SEC and NYSE with respect to the independence of the nominating and governance committee. In accordance with such rules, all members of the nominating and governance committee will be independent within one year of the effective date of the registration statement of which this prospectus is a part.

The principal duties and responsibilities of the nominating committee are as follows:

 

    to oversee the selection of members of the Board of Directors;

 

    to develop and recommend to the Board of Directors corporate governance guidelines, including making independence determinations;

 

    to oversee the evaluation of the Board of Directors, management and each Board committee;

 

    to review and make recommendations to the Board of Directors with respect to the compensation of our non-executive directors;

 

    to establish criteria for board and committee membership and recommend to the Board of Directors proposed nominees for election to the Board of Directors and for membership on committees of the Board of Directors;

 

    to oversee and review the policy and process for stockholder communication to the Board of Directors; and

 

    to review disclosures relating to independence, governance and director nomination matters.

 

101


Table of Contents

Environment, Health and Safety Committee

Our environment, health and safety committee consists of Messrs. Butz, Nodland and Schlanger, with Mr. Schlanger serving as its chairman.

The principal duties and responsibilities of the environmental, health and safety committee are as follows:

 

    to oversee the environmental, health and safety compliance programs and initiatives;

 

    to oversee compliance with environmental, health and safety indemnifications;

 

    to monitor our environmental, health and safety performance statistics;

 

    to recommend the general budget for environmental, health and safety capital spending;

 

    to oversee strategic planning and monitoring of environmental, health and safety regulations; and

 

    to oversee environmental, health and safety audit program.

Other Committees

Our By-laws, which will be effective upon the consummation of this offering, provide that our Board of Directors may establish one or more additional committees.

Code of Ethics

We have adopted a Code of Conduct that applies to our directors, officers and employees. These standards are designed to deter wrongdoing and to promote the honest and ethical conduct of all employees. The Code of Conduct is posted on our website: www.momentive.com under “Investor Relations—Corporate Governance” Any substantive amendment to, or waiver from, any provision of the Code of Conduct with respect to any senior executive or financial officer will be posted on this website.

 

102


Table of Contents

COMPENSATION DISCUSSION AND ANALYSIS

Overview

In this Compensation Discussion and Analysis, we describe our process of determining the compensation and benefits provided to our “Named Executive Officers” (“NEOs”). Our 2016 NEOs were: John G. Boss, President and Chief Executive Officer (our “CEO”); Erick R. Asmussen, Senior Vice President and Chief Financial Officer (our “CFO”); and John D. Moran, Senior Vice President, General Counsel and Secretary.

Oversight of the Executive Compensation Program

The Board of Directors is responsible for our governance. The Board of Directors established a compensation committee (the “Committee”) whose responsibility includes reviewing and making recommendations relevant to compensation and benefits of the CEO and other NEOs. The Board of Directors has delegated full authority to the Committee related to certain compensatory plans. All executive compensation decisions made during 2016 for our NEOs were made or approved by the Committee.

The Committee sets the principles and strategies that guide the design of our executive compensation program. The Committee annually evaluates the performance and compensation levels of the NEOs. This annual compensation review process includes an evaluation of key objectives and measurable contributions to ensure that incentives are not only aligned with our strategic goals, but also enable us to attract and retain a highly qualified and effective management team. Based on this evaluation, the Committee approves each executive officer’s compensation level, including base salary, as well as annual and long-term incentive opportunities.

Use of Compensation Data

In order to obtain a general understanding of compensation practices when setting total compensation levels for our NEOs, the Committee considers broad-based competitive market data on total compensation packages provided to executive officers with similar responsibilities at comparable companies. Such companies include those within the chemical industry, as well as those with similar revenues and operational complexity outside the chemical industry. As warranted, the Committee will use data obtained from third-party executive compensation salary surveys when determining appropriate total compensation levels for our NEOs.

Executive Summary

Executive Compensation Objectives and Strategy

Our executive compensation program has been designed to set compensation and benefits at a level that is reasonable, internally fair and externally competitive. Specifically, the Committee has been guided by the following objectives:

Pay for Performance. We emphasize pay for performance based on achievement of company operational and financial objectives and the realization of personal goals. We believe that a significant portion of each executive’s total compensation should be variable and contingent upon the achievement of specific and measurable financial and operational performance goals.

Align Incentives with Shareholders. Our executive compensation program is designed to focus our NEOs on our key strategic, financial and operational goals that will translate into long-term value-creation for our shareholders.

Balance Critical Short-Term Objectives and Long-Term Strategy. We believe that the compensation packages we provide to our NEOs should include a mix of short-term, cash-based incentive awards that encourage the achievement of annual goals and long-term cash and equity elements that reward long-term value-creation for the business.

 

103


Table of Contents

Attract, Retain and Motivate Top Talent. We design our executive compensation program to be externally competitive in order to attract, retain and motivate the most talented executive officers who will drive company objectives.

Pay for Individual Achievement. We believe that each executive officer’s total compensation should correlate to the scope of his or her responsibilities and relative contributions to our performance.

2016 Executive Compensation Highlights

The following summary highlights the key compensation decisions effective for 2016:

 

    The Company continues to focus on motivating our NEOs to deliver improved performance and talent-retention through short- and long-term incentives.

 

    On May 19, 2016, the Committee approved amendments to outstanding stock option agreements issued under the Company’s Management Equity Plan (the “Plan”), including stock options held by our NEOs. The amendments reduced the exercise price and performance thresholds of the stock options. Specifically, the options were amended to reduce the exercise price from $20.33 per share to $10.25 per share, which the Committee determined represented the current per-share Fair Market Value (as defined in the Plan of Reorganization) of a share of the Company’s common stock on the date of such re-pricing. Further, the amendment provided that the Tranche A Performance Threshold and Tranche B Performance Threshold (each as defined in the applicable award agreement) was reduced from $30.50 per share to $20.00 per share and from $40.66 per share to $25.00 per share, respectively. The repricing of the stock options did not result in additional compensation expense or otherwise trigger a charge to the Company’s earnings in 2016.

 

    No additional equity awards were granted to our NEOs under the Plan of Reorganization during 2016.

 

    We adopted an annual cash incentive plan for 2016 (the “2016 ICP”), which was designed to reward participants, including our NEOs for achieving specific financial and environmental, health and safety goals. Targets under our 2016 ICP were based on EBITDA and free cash flow metrics included in our annual operating plan as well as environmental, health and safety initiatives to align with shareholder interests.

 

    The Committee reviewed the base salaries of our NEOs in the first quarter of 2016. The Committee determined that increases were merited in light of their achievement of specific company, division and other goals. We implemented our annual merit increases to the base salaries of our NEOs in October 2016.

 

    In connection with our efforts to align with market practices and to reduce costs, we made changes to our medical and welfare benefits that impacted a broader population of our employees. Our NEOs were participants in those plans and all such changes applied equally to our NEOs. Specifically, we eliminated retiree medical and life insurance benefits, reduced by one percentage point the amount of annual retirement contribution to the MPM 401(k) Plan (with certain exceptions related to collective bargaining agreements) and removed the preferred provider option from our medical plan.

 

    We are not currently required to hold a shareholder advisory “say-on-pay” vote.

Evaluating Company and Individual Performance

In determining the 2016 compensation of our NEOs, in addition to taking into consideration market data for similarly situated executives in comparable companies and in other industries, the Committee considered the following individual accomplishments of our NEOs in 2015:

Mr. Boss, our President and Chief Executive Officer: The Committee considered his outstanding leadership during a challenging year in 2015. He built a strong foundation of financial credibility and established

 

104


Table of Contents

a clear vision and strategy for growth. Under his leadership, significant cost-out initiatives were launched and productivity programs were initiated.

Mr. Asmussen, our Senior Vice President and Chief Financial Officer: The Committee considered his strong leadership in contributing to our business strategy, managing our financial functions and enhancing the rigor of our key financial processes.

Mr. Moran, our Senior Vice President and General Counsel: The Committee considered his contributions as a strong legal advisor in corporate governance, strategic initiatives and compliance programs.

Components of Our Executive Compensation Program

The principal components of our executive compensation program in which NEOs were eligible to participate in during 2016 were as follows:

 

Type

  

Components

Annual Cash Compensation    Base Salary
   Annual Incentive Awards
Long-Term Incentives    Equity Award Adjustments
Benefits    Health, Welfare and Retirement Benefits
Other    Severance Benefits

Annual Cash Compensation

Base Salaries

The annual base salaries of our NEOs are designed to be commensurate with professional status, accomplishments, scope of responsibility, overall impact on the organization and size and complexity of the business or functional operations managed. The annual base salaries of our NEOs are also intended to be externally competitive with the market.

The Board of Directors, the Committee or the CEO, as applicable (the “Compensation Decision Maker”), reviews each NEOs base salary (i) annually, in conjunction with the annual performance review conducted globally for non-bargained salaried employees, and (ii) in conjunction with new hires, promotions or significant changes in job responsibilities. In approving increases to base salaries, the Compensation Decision Maker considers various factors, such as job performance, total target compensation, impact on value creation and the externally competitive marketplace.

In March 2016, the Committee reviewed market and benchmarking data for our NEOs with recommended compensation adjustments. In making individual recommendations, the Compensation Decision Makers took into account, amongst other variables, the performance ratings of the individuals, positions within the applicable salary range and the Company’s aggregate merit budget. Merit increases for NEOs were established to be below the overall Company’s merit increase budget. The Committee considered how the merit adjustments fit into the overall compensation package and the need to take into account key employee retention as the Company executes on its cost reduction initiatives. In addition, Mr. Boss received a greater base salary increase since, in reviewing a benchmarking analysis, the Committee determined that his existing base salary was not competitive.

Typically, annual performance reviews are conducted in the first or second quarter of the calendar year and determine whether any increase to base salary is merited based on the prior year’s performance. Base salary increases for our NEOs are generally made effective in July; however, in recognition of the unique challenges faced by us in late 2015, management recommended that such base salary increases be delayed from July 1 to October 1 (or a later date if the Company’s performance further deteriorated relative to the annual operating plan).

 

105


Table of Contents

In October 2016, each of Messrs. Boss, Asmussen and Moran received a merit increase in base salary in recognition of accomplishments in 2015 (described above under “Evaluating Company and Individual Performance”). As described in further detail above, Mr. Boss also received an additional base salary increase to ensure market competitiveness. The base salaries for 2015 and 2016 and the merit increases (as a % increase from the 2015 base salary) are shown in the table below.

 

Name

   2015 Base
Salary ($)
     2016 Base
Salary ($)(1)
     2016 Increase
(%)
 

John G. Boss

     605,500        675,000        11.48

Erick R. Asmussen

     425,000        439,875        3.50

John D. Moran

     390,000        401,700        3.00

 

  (1) 2016 Base Salary effective as of October 1, 2016

Annual Incentive Awards

Our annual incentive compensation plan is a short-term performance-based incentive designed to reward participants for delivering increased value to the organization against specific financial and other critical business objectives. Annual incentive compensation is targeted at a level that, when combined with base salary and other components of our total rewards program, is intended to yield total annual compensation that is competitive in the external marketplace. When business performance exceeds target levels, the annual incentive compensation, when combined with base salary and other components of our total rewards program, is intended to yield total annual compensation above the market median.

The performance target components of the annual incentive compensation plan are the same for executives and other eligible, salaried employees, with variations to account for the line of business in which the employee works. We strive to set annual incentive award targets that are achievable only through strong performance, believing that this motivates our executives and other participants to deliver ongoing value-creation, while allowing us to attract and retain highly talented senior executives. Performance measures typically include financial and operational objectives and may take into consideration a number of factors, such as our prior-year performance; current market trends; working capital projections; the realization of planned productivity initiatives; expansion plans; new product development; environmental, health and safety; and other strategic factors that could potentially impact operations.

The 2016 Annual Incentive Compensation Plan

In early 2016, the Committee approved the 2016 annual incentive compensation plan for employees of the Company and its subsidiaries, and the Board of Directors approved the 2016 Annual Incentive Compensation Plan (the “2016 ICP”) targets. Under the 2016 ICP, our NEOs and other eligible participants had the opportunity to earn annual cash incentive compensation based upon the achievement of certain financial and environmental health and safety (EH&S) goals.

 

106


Table of Contents

The performance goals were established based on the following measures:

 

Performance Goal

 

Description

 

2016 Target

Segment EBITDA  

Segment EBITDA (earnings before interest, taxes, depreciation and amortization, adjusted to exclude certain noncash items and certain other income and expenses) was used as the primary profitability measure for determining the level of financial performance for management and executive annual incentive compensation purposes.

 

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere herein.

  The Segment EBITDA target for 2016 was set based upon factors including, but not limited to, competitive business dynamics in the markets, raw material trends, restructuring initiatives, anticipated business unit growth and business unit budget projections. For the 2016 ICP, the target Segment EBITDA was $230 million.
Cash Flow   Operating cash flow is equal to Segment EBITDA less the sum of trading capital improvement and/or usage, capital spending and interest paid along with other operating cash flow items such as income taxes paid and pension contributions. For purposes of the 2016 ICP, the cash flow target is defined as operating cash flow less budgeted capital expenditures. The purpose of this metric is to increase focus on cost control and cost reduction actions to preserve an adequate amount of liquidity to fund operations and capital expenditures, service debt and ultimately sustain the business through difficult economic cycles.   The 2016 ICP cash flow goals were established in connection with the budget process. For the 2016 ICP, the target cash flow component (i.e., operating cash flow less budgeted capital expenditures) was $30 million.

Environmental Health & Safety (“EH&S”)

  As a chemical manufacturer, our operations involve the use of hazardous materials, and are subject to extensive environmental regulation. As a result, EH&S is a core value and a critical focus for all employees.  

For the 2016 ICP, we established metrics based upon five components: (1) Safety Contacts Training, (2) Occupational Injury & Illness Rate (OIIR), (3) High Risk Activity (HRA) injuries, (4) Fires, and (5) Environmental Incidents.

 

The EH&S goals established under the 2016 ICP for recurring EH&S metrics represented a significant improvement from prior year statistics relating to such metrics. The newly introduced Safety Contracts Training metric is intended to continue to drive focus and improvement in our ongoing commitment to the culture and communities in which we operate.

 

107


Table of Contents

Each of the 2016 performance goals was measured independently such that a payout of one element was not dependent upon the achievement of the others. This was intended to keep employees focused on driving continuous improvement in EH&S and cash flow, in addition to EBITDA.

Awards under the 2016 ICP were calculated as follows: A target award was identified for each participant under the 2016 ICP based on a percentage of his or her base salary, which varies per participant based on the scope of the participant’s responsibilities and externally competitive benchmarks. The Committee considered how Mr. Boss’s then-annual bonus opportunity compared to applicable benchmarking data and approved an increase to maintain market competitiveness for Mr. Boss. For 2016, the target bonus percentage for Mr. Boss was increased to 100% of his base salary. The target bonus percentage for Messrs. Asmussen and Moran in 2016 remained at 65% and 55% of their respective base salaries, which is unchanged from 2015, as a percentage of base salary.

Actual payout of the 2016 ICP bonus was determined based on the achievement of the performance goals described above, subject to a sliding scale and the relative weightings of the performance goals noted in the table below. 60% of the 2016 ICP Bonus was determined based on achievement of Segment EBITDA goals, with the threshold payout (i.e. payout of 25% of the portion of the 2016 ICP Bonus attributable to Segment EBITDA) requiring achievement of at least 87% of the Segment EBITDA target goal and the maximum payout (i.e. payout of 200% of the portion of the 2016 ICP Bonus attributable to Segment EBITDA) requiring achievement of 109% of the Segment EBITDA target goal. Similarly, the 30% and 10% of the 2016 ICP Bonus attributable to the Cash Flow and EH&S components, respectively, were subject to achievement of a threshold goal (in which case 25% of the portion of the 2016 ICP Bonus attributable to such component would be paid) and a maximum goal (in which 200% of the portion of the 2016 ICP Bonus attributable to such component would be paid). To the extent that 100% of the applicable target goal was achieved, the portion of the 2016 ICP Bonus payable in respect of the applicable component is 100%. If actual performance was to fall between the threshold and target or between the target and maximum goals for the applicable component of the 2016 ICP Bonus, then the amount payable in respect of such component would be subject to linear interpolation.

The following table summarizes the target awards, performance measures, weightings, achievements and payouts under the 2016 ICP for each our NEOs based on actual Segment EBITDA of $238 million and actual Cash Flow of $24 million for 2016. The amount paid to each of our NEOs in respect of their participation in the 2016 ICP is reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table shown below.

 

Name

   Incentive
Target (%
of
Base
Salary)
    Target
Award
($)
     Performance Criteria    Weight for
Calculation
  Performance
Achieved (%)
    2016 ICP
Payout ($)
     Total
Payout ($)
 

John G. Boss

     100     675,000      Segment EBITDA    60%     140     567,000        —    
        EH&S Goal    10%     102     68,621        —    
        Cash Flow    30%     89     180,833        816,454  

Erick R. Asmussen

     65     285,919      Segment EBITDA    60%     140     240,172        —    
        EH&S Goal    10%     102     29,067        —    
        Cash Flow    30%     89     76,598        345,837  

John D. Moran

     55     220,935      Segment EBITDA    60%     140     185,585        —    
        EH&S Goal    10%     102     22,460        —    
        Cash Flow    30%     89     59,188        267,233  

Long-Term Incentive Awards

Equity Awards

The Committee believes that equity awards play an important role in creating incentives to maximize Company performance, motivating and rewarding long-term value creation, and further aligning the interests of our NEOs with those of our shareholders.

 

108


Table of Contents

Our current long-term incentive strategy includes the use of periodic grants, rather than ongoing annual grants of equity. The Committee believes that periodic grants provide an incentive toward a long-term projected value. Our equity awards contain time, performance and service vesting requirements. Awards that are conditioned on time and service vesting requirements function as a retention incentive, while awards that are conditioned on performance and service vesting requirements are linked to the attainment of specific long-term objectives.

On March 12, 2015, the Board of Directors approved the MPMH Equity Plan pursuant to which Momentive can award stock options, restricted stock units, restricted stock and other stock-based awards. The purpose of the MPMH Equity Plan is to assist us in attracting, retaining, incentivizing and motivating employees and to promote the success of our business by aligning participant interests with those of our shareholders. In 2015, the Committee approved grants under the MPMH Equity Plan of restricted stock units and stock options to our NEOs. Other than the stock option repricing described above, no awards were granted to our NEOs under the Plan of Reorganization during 2016.

The MPMH Equity Plan is described further in the “Narrative to Outstanding Equity Awards Table” below.

Cash Awards

From time to time, the Committee approved long-term cash awards or plans for our key employees, including our NEOs. These awards were designed to pay over extended performance periods, subject to the achievement of specified, measurable performance goals, and were further conditioned upon continued employment. As such, these awards are useful in providing a defined value for achievement of our financial targets, as well as leadership stability. In addition, long-term cash awards help complement equity awards that are not yet liquid.

Annual Cash Incentive Plan

In October 2017, the Board of Directors approved the Company’s Annual Cash Incentive Plan (the “ACIP”), pursuant to which the Company may provide annual cash bonus opportunities to key employees of the Company and its affiliates based on the achievement of performance metrics as set forth in the ACIP and established by the Committee. The ACIP will be available for annual cash performance bonuses to be awarded in respect of the Company’s 2018, 2019, and 2020 fiscal years.

Benefits

The Company provides a comprehensive group of benefits to eligible employees, including our NEOs. These include health and welfare benefits as well as retirement benefits. Our benefit programs are designed to provide market competitive benefits for employees and their covered dependents.

Each of our NEOs participates in the Company’s qualified defined contribution retirement plan the “MPM 401(k) Plan”) on substantially the same terms as other participating employees. In addition, because individuals are subject to U.S. tax limitations on contributions to qualified retirement plans, MPM previously adopted a defined contribution Supplemental Executive Retirement Plan (the “MPM SERP”), a non-qualified plan, to provide these employees, including our NEOs, with an incremental benefit on eligible earnings above the U.S. tax limits for qualified plans. Our NEOs are eligible to participate in the MPM SERP on the same terms and conditions as our other highly compensated salaried employees.

Most of our U.S. employees are eligible to participate in (the “MPM 401(k) Plan”). This plan allows eligible exempt employees to make pre-tax contributions from 1% to 15% of eligible earnings for employees who meet the definition of highly compensated employees and 30% for all other employees up to the U.S. tax limits for qualified plans. Our NEOs are eligible to receive matching contributions from us equal to 100% of contributions

 

109


Table of Contents

of up to 5% of eligible earnings. In addition, we make an annual retirement contribution ranging from 2% to 6% of eligible compensation, depending on years of benefit service, to eligible employees actively employed on the last day of the year. As noted above, in 2016 we reduced by one percentage point the amount of annual retirement contribution to the MPM 401(k) Plan. An additional company matching contribution of up to 1.25% of the employee’s contribution may be made if we achieve specified annual financial goals established at the beginning of each plan year. In 2016, these financial goals were achieved.

These plans are described under the heading “Narrative to the Nonqualified Deferred Compensation Table” below.

Other

Change-in-Control and Severance Benefits

Our NEOs are generally entitled to certain limited change-in-control and severance protections. We believe that appropriate change-in-control and severance protections accomplish two objectives. First, they create an environment where key executives are able to take actions in the best interest of the Company without incurring undue personal risk. Second, they foster management stability during periods of potential uncertainty. We are also cognizant that excessive pay in the way of change-in-control and severance protection would not be in the best interest of the Company because such pay may encourage undue risk-taking. In an attempt to balance the delicate equation, the Committee has determined to provide these benefits very selectively. The change-in-control and severance benefits payable to our NEOs are discussed under the headings “Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table” and in the discussion on “Potential Payments Upon Termination or Change in Control,” below.

Summary Compensation Table—Fiscal 2016

The following table provides information about the compensation for the years ended December 31, 2016, 2015 and 2014 for our Chief Executive Officer, our Chief Financial Officer and our General Counsel and Secretary. We collectively refer to these three individuals as our NEOs. The compensation for those NEOs who provide services to us are shown regardless of the source of compensation.

SUMMARY COMPENSATION TABLE—FISCAL 2016

 

Name and Principal Position(a)

   Year
(b)
     Salary
($)
(c)
     Bonus
($)
(d)
     Stock
Awards
($)
(e)
     Options
Awards
($)
(f)(1)
     Non-Equity
Incentive Plan
Compensation
($)
(g)(2)
     All Other
Compensation
($)
(i)(3)
     Total
($)
(j)
 

John G. Boss

     2016        624,227        —          —          —          816,454        43,342        1,484,023  

President and Chief

Executive Officer

    

2015

2014

 

 

    

618,144

427,500

 

 

    

800,000

590,582

 

 

    

2,066,341

—  

 

 

    

1,843,919

—  

 

 

    

60,550

222,979

 

 

    

49,986

491,481

 

 

    

5,438,940

1,732,542

 

 

Erick R. Asmussen

     2016        429,005        —          —          —          345,837        31,444        806,286  

Senior Vice President and

Chief Financial Officer

     2015        258,269        —          1,024,632        914,340        27,625        49,353        2,274,219  

John D. Moran

     2016        393,150        —          —          —          267,233        29,346        689,729  

Senior Vice President,

General Counsel and

Secretary

     2015        112,500        —          597,702        533,365        5,363        46,315        1,295,245  

 

(1) Stock option awards fair values were determined to be $7.93 for Tranche A option awards and $7.62 for Tranche B option awards using the Monte Carlo option-pricing model. The repricing of the stock options in May of 2016 did not result in additional compensation expense or otherwise trigger a charge to the Company’s earnings in 2016.

 

110


Table of Contents
(2) The amounts shown in column (g) for 2016 reflect the amounts earned under the 2016 ICP, our annual incentive compensation plan, based on performance achieved for 2016. The material terms of the 2016 ICP are described in the Compensation Discussion and Analysis above. The amounts earned under the 2016 ICP were paid in April 2017.
(3) The amounts shown in column (h) for 2016 are detailed in the following table:

Grants of Plan-Based Awards—Fiscal 2016

The following table presents information about grants of awards during the year ended December 31, 2016 under the 2016 ICP. As noted above, the repricing of the stock options did not result in additional compensation expense or otherwise trigger a charge to the Company’s earnings in 2016, and the previously awarded stock options, as repriced, are therefore not reported in the table below.

 

     Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
 

Name(a)

   Threshold
($)

(b)(1)
     Target
($)
(c)
     Maximum
($)

(d)
 

John G. Boss

        

2016 ICP

     3,375        675,000        1,350,000  

Erick R. Asmussen

        

2016 ICP

     1,430        285,919        571,838  

John D. Moran

        

2016 ICP

     1,105        220,935        441,870  

 

(1) Threshold is calculated as the minimum level of achievement above zero, attainable within the Plan of Reorganization design

Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table

Employment Agreements

We have employment agreement letters with our NEOs, which provide for their terms of compensation and benefits, severance and certain restrictive covenants. Mr. Boss’s employment letter provided him a guaranteed sign-on bonus of $1.3 million to be paid over a two-year period beginning July 2014 and ending April 2015. This sign-on bonus compensated Mr. Boss for the estimated value of the long-term incentive awards he forfeited with his prior employer. All amounts under the sign-on bonus have been paid. Further details regarding the severance and restrictive covenant provisions are described below under “Potential Payments upon a Termination or Change in Control.”

2016 Annual Incentive Compensation Plan (2016 ICP)

Information on the 2016 ICP targets, performance components, weightings and payouts for each of our NEOs can be found in the Compensation Discussion and Analysis section of this prospectus.

Narrative to Outstanding Equity Awards Table

MPMH Equity Plan

On April 10, 2015, Mr. Boss received awards of service-based restricted stock units (“RSUs”) of Momentive and performance-based stock options of Momentive under the MPMH Equity Plan. On July 20, 2015 and September 24, 2015, Messrs. Asmussen and Moran, respectively, received awards of service-based restricted stock units of Momentive and performance-based options to purchase shares of Momentive under the MPMH Equity Plan.

The RSUs generally become 100% vested upon the fourth anniversary of the grant date. The RSUs may vest earlier upon a Sale and provide for ratable vesting in the event of an IPO (as such terms are defined in the MPMH Equity Plan). In connection with the completion of this offering, 50% of these RSUs will vest.

 

111


Table of Contents

The stock options generally vest based upon the achievement of certain price-per-share targets achieved in a Sale or an IPO.

The vesting terms of the RSUs and options described above are each conditioned on the NEO’s continued employment with us through an applicable vesting date. With respect to any RSUs that become vested, such RSUs will be settled in shares of Momentive within sixty (60) days following the applicable vesting date, subject to certain conditions and limitations. In addition to containing certain restrictions on transferability and other customary terms and conditions, the RSU and stock option award agreements include the following restrictive covenants: (i) a 2-year post-termination of employment or services non-compete; (ii) a 2 year post-termination of employment or services non-solicitation of customers, suppliers and employees; (iii) indefinite nondisclosure and non-disparagement covenants; and (iv) an assignment of intellectual property rights.

Outstanding Equity Awards—2016 Fiscal Year-End

The following table presents information about outstanding and unexercised stock options and outstanding and unvested stock awards held by our NEOs as of December 31, 2016. The securities underlying the awards are shares of common stock of Momentive and were granted under the MPMH Equity Plan. See the “Narrative to the Outstanding Equity Awards Table” below for a discussion of this plan and the vesting conditions applicable to the awards.

 

     Option Awards      Stock Awards  

Name(a)

   Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options

(#)
(b)
     Options
Exercise
Price
($)

(c)
     Option
Expiration
Date

(d)
     Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#)

(e)
     Market
Value
of Shares
or
Units of
Stock
That Have
Not
Vested
($)

(f)(1)
 

John G. Boss

              

MPMH Equity Plan

              

Tranche A Options(2)

     118,580        10.25        4/10/2025        

Tranche B Options(2)

     118,580        10.25        4/10/2025        

RSUs(3)

              101,640        813,120  

Erick R. Asmussen

              

MPMH Equity Plan

              

Tranche A Options(2)

     58,800        10.25        7/20/2025        

Tranche B Options(2)

     58,800        10.25        7/20/2025        

RSUs(3)

              50,400        403,200  

John D. Moran

              

MPMH Equity Plan

              

Tranche A Options(2)

     34,300        10.25        9/24/2025        

Tranche B Options(2)

     34,300        10.25        9/24/2025        

RSUs(3)

              29,400        235,200  

 

(1) The market values shown in columns (f) are based on an $8.00 per share value which is the value of one share of common stock of Momentive as of December 31, 2016, as quoted on the OTCQX.
(2) In May 2016, the Committee approved a repricing of the exercise price of the stock options from $20.33 per share to $10.25 per share. The Tranche A Option and Tranche B vest upon achievement of the Tranche A Performance Threshold ($20.00 per share) or the Tranche B Performance Threshold ($25.00 per share), as applicable.
(3) These awards vest upon the fourth anniversary of the applicable grant date.

 

112


Table of Contents

Option Exercises and Stock Vested—Fiscal 2016

There were no option exercises or RSUs that vested for our NEOs in fiscal 2016. Thus, the “Option Exercises and Stock Vested—Fiscal 2016” table has been omitted from this report.

Pension Benefits—Fiscal 2016

All of our NEOs were hired after MPM’s relevant qualified and non-qualified defined benefit pension plans were frozen and are therefore not eligible to participate in such plans.

Nonqualified Deferred Compensation—Fiscal 2016

The following table presents information with respect to each defined contribution plan that provides for the deferral of compensation on a basis that is not tax-qualified.

NONQUALIFIED DEFERRED COMPENSATION TABLE—FISCAL 2016

 

Name

(a)

   Executive
Contributions
in Last FY
($)
(b)
     Registrant
Contributions
in Last FY
($)
(c)(1)
     Aggregate
Earnings
(Loss)
in Last
FY
($)
(d)
     Aggregate
Withdrawals/
Distributions
($)
(e)
     Aggregate
Balance at
Last FYE
($)
(f)
 

John G. Boss

              

MPM SERP

     —          20,988        725        —          58,146  

Erick R. Asmussen

              

MPM SERP

     —          9,581        —          —          9,581  

John Moran

              

MPM SERP

     —          6,676        —          —          6,676  

 

(1) The amount shown in column (c) for the MPM SERP is included in the All Other Compensation column of the Summary Compensation Table for 2016. These amounts were earned in 2016 and credited to the accounts by the Company in 2017.

Narrative to the Nonqualified Deferred Compensation Table

MPM SERP

The MPM SERP was adopted by MPM in 2012 to provide certain of its executives and other highly compensated employees, including our NEOs, whose benefits under the MPM 401(k) Plan are limited by the benefit restrictions under the Internal Revenue Code. For such individuals, an annual contribution of 5% of eligible earnings above the maximum compensation that may be recognized under the MPM 401(k) Plan (in 2016, such amount was $265,000) is credited to the individuals MPM SERP account. The MPM SERP is an unfunded non-qualified plan. Account credits are made to the plan during the second quarter of each year. Interest credits are provided in the participant’s SERP accounts at an interest rate equal to the average annual return of the one year U.S. Treasury Notes, with a minimum credit at an annual rate of 2.5%. Any amount held in the MPM SERP is paid to an employee on the six month anniversary of such employee’s termination of employment.

Potential Payments Upon Termination or Change in Control

Termination Payments

As described above, we have employment agreements or employment letters with Messrs. Boss, Asmussen and Moran that provide for severance under certain circumstances as well as restrictive covenants.

 

113


Table of Contents

Mr. Boss has an employment letter, which provides him a guaranteed severance benefit equal to 18 months of base salary in the event of a termination without “cause” (as such term is defined in his employment letter). Mr. Boss is also eligible to receive executive outplacement and COBRA benefits continuation in accordance with the Company’s severance policy. None of the payments or benefits are subject to a tax gross-up.

Messrs. Asmussen and Moran are guaranteed severance equal to 12 months of base salary in the event that they are terminated without “cause” (as such term is defined in their respective employment letters). Each of Messrs. Asmussen and Moran is also eligible to receive executive outplacement and COBRA benefits continuation in accordance with the Company’s severance policy. None of the payments or benefits are subject to a tax gross-up.

In accordance with their receipt of equity awards, each of Messrs. Boss, Asmussen and Moran are subject to an obligation not to compete with us and not to solicit our associates (i.e. customers, suppliers, employees) for two years following termination of their employment for any reason, as well as a covenant not to disclose confidential information or disparage us or our affiliates.

Our equity awards provide for accelerated vesting upon the occurrence of certain change in control events if certain conditions are met, including those related to our stock price.

 

    Treatment of RSUs upon an IPO or a Sale (as such terms are defined in the MPMH Equity Plan):

 

    Upon an IPO occurring prior to the applicable vesting date, RSUs shall vest pro-rata in increments of 25% for each anniversary of the date of grant that has elapsed prior to the consummation of such IPO (e.g. if the IPO occurs on or after the second anniversary of the grant date but before the third anniversary, 50% of the RSUs would vest). Any remaining unvested RSUs following an IPO would remain outstanding, and eligible to vest in annual increments of 25% of the total RSUs originally granted, subject to a recipients continued employment through the applicable vesting date.

 

    Upon a Sale occurring prior to the applicable vesting date, the RSUs, to the extent unvested, shall become fully vested, subject to the Grantee’s continued employment through the date of such Sale.

 

    Stock option awards vest upon a Sale or IPO, but only if the price of Momentive’s share price exceeds the applicable performance thresholds, none of which would have been achieved as of December 31, 2016.

The following table describes payments our NEOs would have received had the individual’s employment been involuntarily terminated (other than for cause), including in connection with a change in control related to a Sale of the Company, as of December 31, 2016. The calculations are intended to provide reasonable estimates of the potential benefits, are based on numerous assumptions, and may not represent the actual amount an executive would receive if an eligible termination event were to occur.

 

Name

   Cash
Severance
($)(1)
     Estimated
Value of
Non-Cash
Benefits
($)(2)
     2015
ICP
($)(3)
     Restricted
Stock
Vesting
($)(4)
 

John G. Boss

     1,012,500        12,467        816,454        813,120  

Erick R. Asmussen

     439,875        10,224        345,837        403,200  

John Moran

     401,700        10,224        267,233        235,200  

 

  (1) This column reflects cash severance payments due under the NEOs employment arrangement or under applicable severance guidelines, as described above, based on salary as of December 31, 2016.
  (2) This column reflects the estimated value of health care benefits and outplacement services for the NEOs. The values are based upon the cost of such benefits at December 31, 2016.

 

114


Table of Contents
  (3) This column reflects the amount actually earned based on 2016 performance by each executive under the 2016 ICP, which would be paid if he was employed through December 31, 2016, but his employment was terminated by the Company without Cause or as a result of his death or disability prior to the scheduled payment date.
  (4) This column reflects the value of RSUs that would have vested assuming that a Sale had occurred as of December 31, 2016 and based on an $8.00 per share value which was the value of one share of common stock of Momentive as of December 31, 2016, as quoted on the OTCQX. This accelerated vesting of RSUs would occur at the time of a Sale and is not conditioned upon a termination of the NEOs employment.

Director Compensation—Fiscal 2016

The following table presents information regarding the compensation earned with respect to 2016 to our directors who are not also NEOs and who served on the Board of Directors during the year.

 

Name
(a)

   Fees Earned
or
Paid in Cash
($)
(b)
     Stock
Awards
($)
(c)
     Total
($)
(d)
 

Mahesh Balakrishnan

     82,500        75,000        157,500  

Bradley J. Bell

     122,500        75,000        197,500  

Theodore (Ted) Butz(1)

     32,391        43,758        76,149  

John D. Dionne

     85,115        75,000        160,115  

Samuel Feinstein(2)

     11,821        —          11,821  

Robert Kalsow-Ramos

     86,182        75,000        161,182  

Scott M. Kleinman

     80,000        75,000        155,000  

Julian Markby

     90,000        75,000        165,000  

Jason G. New

     50,584        —          50,584  

Jeffrey M. Nodland(4)

     80,000        93,750        173,750  

David B. Sambur(5)

     69,273        75,000        144,273  

Marvin O. Schlanger

     85,000        75,000        160,000  

 

  (1) Mr. Butz became a director on August 4, 2016 and he was awarded a prorated stock award in 2016.
  (2) Mr. Feinstein became a director on November 3, 2016. In lieu of a prorated stock award in 2016, Mr. Feinstein was granted an award equal to 125% of the 2017 annual grant amount to take into account his service in the fourth quarter of 2016.
  (3) Mr. New resigned his directorship on August 4, 2016. He had previously disclaimed receipt of his 2016 RSUs grants.
  (4) Mr. Nodland became a director in the fourth quarter of 2015. In lieu of a prorated stock award in 2015, Mr. Nodland was granted an award equal to 125% of the 2016 annual grant amount to take into account his service in the fourth quarter of 2015.
  (5) Mr. Sambur resigned his directorship on November 3, 2016 and his 2016 RSU grant was forfeited.

 

115


Table of Contents

Narrative to the Director Compensation Table

In March 2015, a new director compensation policy was adopted for Momentive directors. Under this policy, directors receive an annual retainer of $75,000 payable quarterly in arrears, and the Chairman of the Board of Directors receives an additional $25,000 annual retainer, also paid quarterly in arrears. Directors who serve on committees of the Board of Directors receive the following annual retainers for their services:

 

Committee

   Member
Retainer
     Chairperson
Retainer
 

Audit

   $ 10,000      $ 15,000  

Compensation

     7,500        12,500  

Environmental, Health & Safety

     5,000        10,000  

Nominating & Governance

     5,000        10,000  

Retainer amounts payable with respect to any partial quarter of service are prorated to reflect the number of days served by the director during such quarter. Directors are also entitled to receive an annual equity grant under the MPMH Equity Plan with a grant date Fair Market Value (as defined in the MPMH Equity Plan) equal to $75,000 annually, in the form and subject to the terms and conditions established by the Committee from time to time in accordance with the MPMH Equity Plan. As an administrative convenience, the Board of Directors typically does not make an award to directors joining in the fourth quarter of a year and provides an award of greater value in the following year to take into account the director’s service in the preceding fourth quarter.

Equity Compensation Plan Information

The following table show the securities authorized for issuance under Momentive’s equity compensation plans as of December 31, 2016.

 

Plan category

   Number of Securities
to Be Issued Upon the
Exercise of
Outstanding

Option and Rights
(a)
     Weighted-Average
Exercise Price of
Outstanding Options
and Rights ($)

(b)
     Number of
Securities
Remaining Available
for Future Issuance
under Equity
Compensation Plans
[Excluding
Securities

Reflected in Column
(a)]
(c)
 

Equity compensation plans approved by security holders

     —          —          —    

Equity compensation plans not approved by security holders

     2,297,920        10.33        1,490,742  

Compensation Committee Interlocks and Insider Participation

Messrs. Kalsow-Ramos and Balakrishnan, members of our Compensation Committee, are employed by Apollo Management, L.P. and Oaktree Capital Management, respectively, two of Momentive’s shareholders. Neither of these directors is or has been an executive officer of the Company. None of our executive officers served as a director or a member of a compensation committee (or other committee serving an equivalent function) of any other entity, the executive officers of which served as a director or member of our Committee during the fiscal year ended December 31, 2016.

 

116


Table of Contents

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth as of October 31, 2017 information regarding the beneficial ownership of our common stock and shows the number of shares of common stock and percentage owned by:

 

    each member of our Board of Directors and each of our named executive officers;

 

    all of the executive officers and members of the Board of Directors as a group;

 

    each person known to beneficially own more than 5% of our common stock; and

 

    each selling stockholder.

As of October 31, 2017, we had 48,121,634 shares of common stock outstanding. The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities as to which he has no economic interest. Except as otherwise indicated in the footnotes below, each of the beneficial owners has, to our knowledge, sole voting and investment power with respect to the indicated common stock and has not pledged any such stock as security.

 

                      Shares of Common Stock
Beneficially Owned After
This Offering
 
    Shares of Common
Stock
Beneficially Owned
Immediately Prior to
the Completion of
this Offering
    Shares of
Common
Stock
Being
Offered(2)
    No Exercise of
Underwriters’ Option
    Full Exercise of
Underwriters’ Option
 

Name of Beneficial Owner(1)

  Number of
Shares
    Percentage       Number of
Shares
    Percentage     Number of
Shares
    Percentage  

Directors and Named Executive Officers:

             

Mahesh Balakrishnan(3)(4)

    10,936       *       —         10,936       *       10,936       *  

Bradley J. Bell(3)

    23,436       *       —         23,436       *       23,436       *  

John G. Boss

    —         —         —         50,820       *       50,820       *  

Erick R. Asmussen

    —         —         —         25,200       *       25,200       *  

John D. Dionne(3)

    35,530       *       —         35,530       *       35,530       *  

Robert Kalsow-Ramos(3)(5)

    10,936       *       —         10,936       *       10,936       *  

Scott M. Kleinman(3)(5)

    10,936       *       —         10,936       *       10,936       *  

Julian Markby(3)

    13,436       *       —         13,436       *       13,436       *  

John D. Moran

    —         —         —         14,700       *       14,700       *  

Jeffrey M. Nodland(3)

    9,058       *       —         9,058       *       9,058       *  

Theodore Butz(3)

    3,740       *       —         3,740       *       3,740       *  

Marvin Schlanger(3)

    10,936       *       —         10,936       *       10,936       *  

Samuel Feinstein(5)

    —         —         —         —           —      

Named Executive Officers and Directors as a group(3)

    128,944       *       —         219,664       *       219,664       *  

 

117


Table of Contents
                      Shares of Common Stock
Beneficially Owned After
This Offering
 
    Shares of Common
Stock
Beneficially Owned
Immediately Prior to
the Completion of
this Offering
    Shares of
Common
Stock Being
Offered(2)
    No Exercise of
Underwriters’ Option
    Full Exercise of
Underwriters’ Option
 

Name of Beneficial Owner(1)

  Number of
Shares
    Percentage       Number of
Shares
    Percentage     Number of
Shares
    Percentage  

Selling Stockholders:

             

Euro VI (BC) S.à r.l.(6)

    19,084,996       39.66     2,152,814       16,932,182       28.92     15,792,971       26.98

OCM Opps MTIV Holdings, LLC(7)

    9,817,936       20.40     970,000       8,847,936       15.11     8,341,596       14.25

D. E. Shaw Galvanic Portfolios, L.L.C.(8)

    3,574,759       7.43     357,476       3,217,283       5.50     3,038,545       5.19

Pentwater Capital Management(9)

    3,128,572       6.50     352,907       2,775,665       4.74     2,588,916       4.42

Carlson Capital(10)

    2,632,716       5.47     56,401       2,576,315       4.40     2,546,470       4.35

Ares Management(11)

    2,206,243       4.58     248,867       1,957,376       3.34     1,825,682       3.12

Aristeia Capital(12)

    1,690,537       3.51     28,201       1,662,336       2.84     1,647,413       2.81

 

* Less than 1%.
(1) Unless otherwise noted, the address for each person listed in this table is c/o Momentive Performance Materials Inc., 260 Hudson River Road, Waterford, NY 12188. Information relating to stockholders has been based on information provided to the Company by such stockholders as of October 24, 2017.
(2) The shares of our common stock that may be offered for resale by the selling stockholders pursuant to this prospectus were acquired by the selling stockholders in connection with our emergence from the Chapter 11 proceedings pursuant to the Plan of Reorganization in transactions that were exempt from registration under Section 4(a)(2) of the Securities Act and Section 1145 of the Bankruptcy Code. See Note 2 to our audited consolidated financial statements included elsewhere in this prospectus for additional information regarding our emergence from Chapter 11 bankruptcy and how the selling stockholders acquired shares of our common stock. We have been advised that none of the selling stockholders is a broker-dealer and that each selling stockholder that is an affiliate of a broker-dealer acquired its shares of common stock in the ordinary course of its business and, at the time of acquisition, had no agreements or understandings, directly or indirectly, with any person to distribute the shares.
(3) Includes 63,520 shares of unvested restricted common stock scheduled to vest on February 22, 2017 for the following directors: Messrs. Balakrishnan (7,246), Bell (7,246), Butz (3,740), Dionne (7,246), Kalsow-Ramos (7,276), Kleinman (7,246), Markby (7,246), Nodland (9,058) and Schlanger (7,246).
(4) The address for Mr. Balakrishnan is 333 South Grand Avenue, 28th Floor, Los Angeles, CA 90071.
(5) The address of each of Messrs. Kalsow-Ramos, Kleinman and Feinstein is c/o Apollo Management, L.P., 9 West 57th Street, New York, New York 10019.
(6)

AIF VI Euro Holdings, L.P. (“AIF VI Euro”) is the sole shareholder of Euro VI (BC) S.à r.l. (“Euro VI BC”). Apollo Advisors VI (EH), L.P. (“Advisors VI (EH)”) is the general partner of AIF VI Euro, and Apollo Advisors VI (EH-GP), Ltd. (“Advisors VI (EH-GP)”) is the general partner of Advisors VI (EH). Apollo Principal Holdings III, L.P. (“Principal III”) is the sole shareholder of Advisors VI (EH-GP). Apollo Principal Holdings III GP, Ltd. (“Principal III GP”) is the general partner of Principal III. Apollo Management VI, L.P. (“Management VI”) is the manager of AIF VI Euro, and AIF VI Management, LLC (“AIF VI LLC”) is the general partner of Management VI. Apollo Management, L.P. (“Apollo Management”) is the sole member and manager of AIF VI LLC and Apollo Management GP, LLC (“Management GP”) is the general partner of Apollo Management. Apollo Management Holdings, L.P. (“Management Holdings”) is the sole member and manager of Management GP. Apollo Management Holdings GP, LLC (“Management Holdings GP”) is the general partner of Management Holdings. Leon Black, Joshua Harris and Marc Rowan are the managers, as well as executive officers, of Management Holdings GP, and the directors of Principal III GP, and as such may be deemed to have voting and dispositive control of the shares of common stock held of record by Euro VI (BC). The address of Euro VI (BC) is 2, Avenue Charles de Gaulle, L-1653, Luxembourg. The address of AIF VI Euro and Advisors VI (EH) is c/o Walkers Corporate Limited, Cayman Corporate Center, 27 Hospital Road, George Town, Grand Cayman KY1-9008, Cayman Islands. The address of Advisors VI (EH-GP), Principal III and Principal III GP is c/o Intertrust Corporate Services (Cayman) Limited, 190 Elgin Street,

 

118


Table of Contents
  George Town, KY1-9005 Grand Cayman, Cayman Islands. The address of each of Management VI, AIF VI LLC, Apollo Management, Management GP, Management Holdings and Management Holdings GP, and Messrs. Black, Harris and Rowan, is 9 West 57th Street, 43rd Floor, New York, New York 10019.
(7) The manager of OCM Opps MTIV Holdings, LLC (“Opps MTIV”) is Oaktree Fund GP, LLC (“GP LLC”). The managing member of GP LLC is Oaktree Fund GP I, L.P. (“GP I”). The general partner of GP I is Oaktree Capital I, L.P. (“Capital I”). The general partner of Capital I is OCM Holdings I, LLC (“Holdings I”). The managing member of Holdings I is Oaktree Holdings, LLC (“Holdings”). The managing member of Holdings is Oaktree Capital Group, LLC (“OCG”). The duly elected manager of OCG is Oaktree Capital Group Holdings GP, LLC. The members of Oaktree Capital Group Holdings GP, LLC are Howard Marks, Bruce Karsh, Jay Wintrob, John Frank, Sheldon Stone, Stephen Kaplan and David Kirchheimer. Each of the managing members, managers, general partners and members described above disclaims beneficial ownership of any shares of common stock beneficially or of record owned by Opps MTIV, except to the extent of any pecuniary interest therein. Mr. Balakrishnan, an employee of Oaktree Capital Management, L.P., an affiliate of Opps MTIV, has been a Director of the Company since October 24, 2014. The business address for each of the persons and entities named in this footnote is 333 South Grand Avenue, 28th Floor, Los Angeles, CA 90071.
(8) The investment adviser of D. E. Shaw Galvanic Portfolios, L.L.C. (“Portfolios”) is D. E. Shaw Adviser II, L.L.C. (“Adviser”) and the manager is D. E. Shaw Manager II, L.L.C. (“Manager”). The managing member of Adviser is D. E. Shaw & Co., L.P. (“DESCO LP”) and the managing member of Manager is D. E. Shaw & Co., L.L.C. (“DESCO LLC”). DESCO LP and DESCO LLC may be deemed to have the shared power to exercise voting and investment control with respect to the shares held by Portfolios. Julius Gaudio, Maximilian Stone and Eric Wepsic, or their designees, exercise voting and investment control over such shares on DESCO LP, and DESCO LLC’s behalf. D. E. Shaw & Co., Inc. (“DESCO Inc.”), as general partner of DESCO LP and D. E. Shaw & Co. II, Inc. (“DESCO II Inc.”), as managing member of DESCO LLC, may be deemed to have the shared power to exercise voting and investment control with respect to the shares. Each of DESCO LP, DESCO LLC, DESCO Inc., and DESCO II Inc. disclaims beneficial ownership of the shares. By virtue of David E. Shaw’s position as President and sole shareholder of DESCO Inc. and as President and sole shareholder of DESCO II Inc., he may be deemed to have the shared power to exercise voting and investment control with respect to the shares. David E. Shaw disclaims beneficial ownership of the shares held by Portfolios. The business address of each person and entity named in this footnote is 1166 Avenue of the Americas, Ninth Floor, New York, NY 10036.
(9) Number of shares beneficially owned prior to the completion of this offering includes (i) 495,719 shares held of record by Oceana Master Fund Ltd., (ii) 472,237 shares held of record by Amundi Absolute Return Pentwater Fund PLC, which is not a selling stockholder, (iii) 501,359 shares held of record by Pentwater Capital Management LP as investment advisor to LMA SPC for and on behalf of MAP98 Segregated Portfolio, (iv) 23,539 shares held of record by Pentwater Equity Opportunities Master Fund Ltd, (v) 1,625,707 shares held of record by PWCM Master Fund Ltd and (vi) 10,011 shares held of record by Pentwater Merger Arbitrage Master Fund Ltd. Matthew C. Halbower, CIO and CEO of Pentwater Capital Management LP, exercises voting and investment control with respect to the shares held by the entities named in this footnote. The business address for each person and entity named in this footnote is 614 Davis St., Evanston, IL 60201.
(10) Represents 2,632,716 shares held of record by Double Black Diamond Offshore Ltd. (“Double Black Diamond”) prior to the completion of this offering. The investment advisor of Double Black Diamond is Carlson Capital, L.P., and the general partner of Carlson Capital, L.P. is Asgard Investment Corp. II. The sole stockholder of Asgard Investment Corp. II is Asgard Investment Corp., and Clint D. Carlson is its controlling person. The business address of each person and entity named in this footnote is 2100 McKinney Ave, Suite 1800, Dallas, TX 75201.
(11)

Number of shares beneficially owned prior to the completion of this offering includes (i) 108,914 shares held of record by ASIP (Holdco) IV S.à.r.l. (“ASIP IV”), (ii) 54,455 shares held of record by Ares Multi-Strategy Credit Fund V (H), L.P. (“Multi-Strategy Fund”), (iii) 245,057 shares held of record by Transatlantic Reinsurance Company (“Transatlantic”), (iv) 117,990 shares held of record by RSUI

 

119


Table of Contents
  Indemnity Company (“RSUI”), (v) 811,002 shares held of record by Ares Special Situations Fund III, L.P. (“Special Situations Fund III”) and (vi) 868,825 shares held of record by Ares Special Situations Fund IV, L.P. (“Special Situations Fund IV”).

The investment manager of ASIP IV is ASIP Operating Manager IV LLC, the sole member of which is Ares Capital Management III LLC (“ACM III”). The manager of Multi-Strategy Fund is Ares MSCF V (H) Management LLC, the manager of which is ACM III. The portfolio manager of Transatlantic and RSUI is Ares ASIP VII Management, L.P., the general partner of which is Ares ASIP VII GP, LLC, the sole member of which is Ares Management LLC (“AM LLC”). The manager of Special Situations Fund III is ASSF Operating Manager III, LLC, the sole member of which is AM LLC. The manager of Special Situations Fund IV is ASSF Operating Manager IV, L.P., the general partner of which is AM LLC. The sole member of ACM III is AM LLC. The sole member of AM LLC is Ares Management Holdings L.P. (“Ares Management Holdings”) and the general partner of Ares Management Holdings is Ares Holdco LLC (“Ares Holdco”). The sole member of Ares Holdco is Ares Holdings Inc. (“Ares Holdings”), whose sole stockholder is Ares Management, L.P. (“Ares Management”). The general partner of Ares Management is Ares Management GP LLC (“Ares Management GP”) and the sole member of Ares Management GP is Ares Partners Holdco LLC (“Ares Partners” and, together with ASIP IV, Multi-Strategy Fund, Transatlantic, RSUI, Special Situations Fund III, Special Situations Fund IV, ASIP Operating Manager IV LLC, Ares MSCF V (H) Management LLC, Ares ASIP VII Management, L.P., Ares ASIP VII GP, LLC, ASSF Operating Manager III, LLC, ASSF Operating Manager IV, L.P., ACM III, AM LLC, Ares Management Holdings, Ares Holdco, Ares Holdings, Ares Management, and Ares Management GP, the “Ares Entities”). Ares Partners is managed by a board of managers, which is composed of Michael Arougheti, R. Kipp deVeer, David Kaplan, Antony Ressler and Bennett Rosenthal. Decisions by Ares Partners’ board of managers generally are made by a majority of the members, which majority, subject to certain conditions, must include Antony Ressler. Each of the Ares Entities (other than ASIP IV, Multi-Strategy Fund, Transatlantic, RSUI, Special Situations Fund III and Special Situations Fund IV with respect to the shares held directly by each of them) and the members of Ares Partners’ board of managers and the other directors, officers, partners, stockholders, members and managers of the Ares Entities expressly disclaims beneficial ownership of the shares of common stock. The address of each Ares Entity is 2000 Avenue of the Stars, 12th Floor, Los Angeles, California 90067.

(12) Number of shares beneficially owned prior to the completion of this offering includes (i) 1,384,132 shares held of record by Aristeia Horizons LP (“Horizons”), (ii) 77,927 shares held of record by Compass TSMA L.P. (“TSMA”), (iii) 54,016 shares held of record by Compass ESMA LP (“ESMA”), (iv) 82,202 shares held of record by Windermere Ireland Fund PLC (“Ireland Fund”) and (v) 92,260 shares held of record by ASIG International Limited (“ASIG”). Horizons, Ireland Fund and ASIG are not selling stockholders in this offering.

Aristeia Capital, L.L.C. and Aristeia Advisors, L.P. (collectively, “Aristeia”) may be deemed the beneficial owners of the securities described herein in their capacity as the investment manager and/or general partner, as the case may be, of Horizons, TSMA, ESMA, Ireland Fund and ASIG (each an “Aristeia Fund” and collectively, the “Aristeia Funds”), which are the holders of such securities. As investment manager, trading advisor and/or general partner of each Aristeia Fund, Aristeia has voting and investment control with respect to the securities held by each Aristeia Fund. Anthony M. Frascella is the Chief Investment Officer of Aristeia. Each of Aristeia and such individual disclaims beneficial ownership of the securities referenced herein except to the extent of its or his direct or indirect economic interest in the Aristeia Funds. The business address for each of the persons and entities is c/o Aristeia Capital L.L.C., One Greenwich Plaza, Greenwich, CT 06830.

Relationships with Selling Stockholders

None of the selling stockholders, other than Apollo, has had any material relationships with the Company within the past three years other than representation on our Board of Directors as described in the table above. See “Certain Relationships and Related Party Transactions.”

 

120


Table of Contents

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

We describe below transactions and series of similar transactions, during our last three fiscal years or currently proposed, to which we were a party or will be a party, in which:

 

    the amounts involved exceeded or will exceed $120,000; and

 

    any of our directors, executive officers or beneficial holders of more than 5% of any class of our capital stock had or will have a direct or indirect material interest.

Other than as described below, there have not been, nor are there any currently proposed, transactions or series of similar transactions meeting this criteria to which we have been or will be a party other than compensation arrangements, which are described where required under “Compensation Discussion and Analysis.”

We have entered into various agreements with Apollo and its affiliates on terms which management has concluded are fair to us. Agreements with Apollo and its affiliates were entered into primarily in connection with the GE Advanced Materials Acquisition and the prior combination with Hexion and we do not pay any fees to Apollo under such agreements.

Messrs. Feinstein, Kalsow-Ramos, Kleinman and Schlanger have been designated to our Board of Directors by Apollo, and Messrs. Feinstein, Kalsow-Ramos, Kleinman and Schlanger are directors of Hexion, an affiliate of Apollo.

Registration Rights Agreement

On October 24, 2014, in connection with our emergence from the Chapter 11 proceedings, we entered into a registration rights agreement with certain of our stockholders (the “Registration Rights Agreement”), which provides our stockholders party thereto certain registration rights.

Under the Registration Rights Agreement, we are required to file a shelf registration statement (on Form S-3 if permitted) and use our reasonable best efforts to cause the registration statement to become effective for the benefit of all stockholders party to the Registration Rights Agreement. Any individual holder or holders of our outstanding common stock party thereto can demand an unlimited number of “shelf takedowns,” which may be conducted in underwritten offerings so long as the total offering size is reasonably expected to exceed $50 million.

Each holder or holders party to the Registration Rights Agreement who own at least 10% of our outstanding common stock, or held at least 10% of our common stock as of the date of the Registration Rights Agreement and could reasonably be considered our affiliate, have Form S-1 demand registration rights, which may be conducted in an underwritten offering, as long as the total offering price is reasonably expected to be at least $50 million, and which may not exceed two in any six month period or eight in total, subject to certain exceptions and to customary cutback provisions. In addition, a holder of at least 10% of our common stock has unlimited Form S-3 demand registration rights, which may be conducted in underwritten offerings, as long as the total offering price is reasonably expected to be at least $50 million, subject to customary cutback provisions.

Each stockholder party to the Registration Rights Agreement has unlimited piggyback registration rights with respect to underwritten offerings, subject to certain exceptions and limitations. The selling stockholders named in this prospectus were included herein to satisfy our obligation under the Registration Rights Agreement.

The foregoing registration rights are subject to certain cutback provisions and customary suspension/blackout provisions. We have agreed to pay all registration expenses under the Registration Rights Agreement. We are paying the registration expenses for the registration statement of which this prospectus forms a part (including with respect to the shares being offered by the selling stockholders). In connection with the registrations described above, we have agreed to indemnify the stockholders against certain liabilities.

 

121


Table of Contents

The Registration Rights Agreement also contains certain holdback agreements that apply to each stockholder party to the Registration Rights Agreement. Generally, without our prior consent and subject to limited exceptions, the stockholders party to the Registration Rights Agreement have agreed to, if requested, enter into an agreement not to publicly sell or distribute our equity securities beginning ten days prior to the pricing of our initial public offering for the 180-day period following the closing date of our initial public offering and, if participating in a future shelf takedown or other underwritten public offering, beginning ten days prior to the pricing of that offering and for the 90-day period following the closing date of such offering.

Transactions with Hexion

Shared Services Agreement

On October 1, 2010, we entered into a shared services agreement with Hexion (which, from October 1, 2010 through October 24, 2014, was a subsidiary under a common parent) (the “Shared Services Agreement”). Under this agreement, we provide to Hexion, and Hexion provides to us, certain services. Historically, these services have included executive and senior management, administrative support, human resources, information technology support, accounting, finance, technology development, legal and procurement services. The parties have transitioned or are in the process of transitioning some of the shared services. The primary continuing services that are currently shared are procurement, certain information technology services and legal.

The Shared Services Agreement was renewed for one year starting in October 2017 and is subject to termination by either us or Hexion, without cause, on not less than 30 days’ written notice, and expires in October 2018 (subject to one-year renewals every year thereafter; absent contrary notice from either party). The Shared Services Agreement establishes certain criteria upon which the costs of such services are allocated between us and Hexion.

Pursuant to this agreement, for the years ended December 31, 2016, 2015 and 2014, we incurred approximately $50 million, $60 million and $99 million, respectively, of net costs for shared services and Hexion incurred approximately $63 million, $70 million and $131 million, respectively, of net costs for shared services. Included in the net costs incurred during the years ended December 31, 2016, 2015 and 2014, were net billings from Hexion to us of $30 million, $35 million and $49 million, respectively, to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to 56% for Hexion and 44% for us, as well as to reflect costs allocated 100% to one party.

The allocation percentages are reviewed by the Steering Committee pursuant to the terms of the Shared Services Agreement. The Company had accounts receivable of $0 as of December 31, 2016, 2015 and 2014, and accounts payable to Hexion of $5 million and $7 million at December 31, 2016 and 2015, respectively.

On March 17, 2011, we amended the Shared Services Agreement with Hexion to reflect the terms of the Master Confidentiality and Joint Development Agreement (the “JDA”) by and between Hexion and us entered into on the same date. The Shared Services Agreement incorporates by reference the terms of the JDA and provides that in the event of a conflict between such agreements, the terms of the JDA shall control. The JDA, which is effective as of October 1, 2010, sets forth the terms and conditions for (i) the disclosure, receipt and use of each party’s confidential information; (ii) any research and development (“R&D”) collaborations agreed to be pursued by Hexion and us; (iii) the ownership of products, technology and intellectual property (“IP”) resulting from such collaborations; (iv) licenses under each party’s respective IP; and (v) strategies for commercialization of products and/or technology developed under the agreement.

The Shared Services Agreement provides for (i) a transition assistance period at the election of the recipient following termination of the Shared Services Agreement of up to 12 months, subject to one successive renewal period of an additional 60 days and (ii) the use of an independent third-party audit firm to assist the Steering Committee with its annual review of billings and allocations.

 

122


Table of Contents

Purchases and Sales of Products and Services with Hexion

We also sell products to, and purchases products from, Hexion pursuant to a Master Buy/Sell Agreement dated as of September 6, 2012 (the “Master Buy/Sell Agreement”). Prices under the agreement are determined by a formula based upon certain third party sales of the applicable product, or in the event that no qualifying third party sales have taken place, based upon the average contribution margin generated by certain third party sales of products in the same or a similar industry. The standard terms and conditions of the seller in the applicable jurisdiction apply to transactions under the Master Buy/Sell Agreement. The Master Buy/Sell Agreement had an initial term of 3 years, and has been renewed through September 6, 2017 (subject to one-year renewals every year thereafter; absent contrary notice from either party), and may be terminated for convenience by either party thereunder upon 30 days’ prior notice. A subsidiary of ours also acted as a non-exclusive distributor in India for certain subsidiaries of Hexion pursuant to Distribution Agreements dated as of September 6, 2012 (the “Distribution Agreements”). Prices under the Distribution Agreements were determined by a formula based on the weighted average sales price of the applicable product less a margin. The Distribution Agreements had initial terms of three years and were terminated by mutual agreement on March 9, 2015. Pursuant to these agreements and other purchase orders, we sold $2 million, $3 million and $8 million of products to Hexion during 2016, 2015 and 2014, respectively, and purchased less than $1 million, less than $1 million, and $1 million, respectively, of products from Hexion in each year.

As of December 31, 2016, 2015 and 2014, we had less than $1 million, less than $1 million and $2 million, respectively, of accounts receivable from, and less than $1 million, in each year, of accounts payable to Hexion related to these agreements.

Other Transactions with Hexion

In March 2014, we entered into a ground lease with a Brazilian subsidiary of Hexion to lease a portion of our manufacturing site in Itatiba, Brazil, where the subsidiary of Hexion will construct and operate an epoxy production facility. In conjunction with the ground lease, we also entered into a site services agreement whereby it provides to the subsidiary of Hexion various services such as environmental, health and safety, security, maintenance and accounting, amongst others, to support the operation of this new facility. We received less than $1 million from Hexion under this agreement during the years ended December 31, 2016, 2015 and 2014, respectively.

In April 2014, we sold 100% of our interest in our Canadian subsidiary to a subsidiary of Hexion for a purchase price of $12 million. As a part of the transaction we also entered into a non-exclusive distribution agreement with a subsidiary of Hexion, whereby the subsidiary of Hexion will act as a distributor of certain of our products in Canada. The agreement has a term of 10 years (subject to one-year renewals every year thereafter; absent contrary notice from either party), and is cancelable by either party at any time after the initial 10-year term with six months’ notice. We compensate the subsidiary of Hexion for acting as distributor at a rate of 2% of the net selling price of the related products sold. During the years ended December 31, 2016, 2015 and 2014, the Company sold approximately $25 million, $27 million and $29 million, respectively, of products to Hexion under this distribution agreement, and paid less than $1 million to Hexion as compensation for acting as distributor of the products. As of December 31, 2016, 2015 and 2014, the Company had $2 million of accounts receivable from Hexion related to the distribution agreement.

Purchases and Sales of Products and Services with Affiliates other than Hexion

The Company sells products to various affiliates other than Hexion. These sales were less than $1 million, $1 million, and $11 million for the years ended December 31, 2016, 2015 and 2014, respectively. We had accounts receivable from these affiliates of $0, less than $1 million and less than $1 million at December 31, 2016, 2015 and 2014, respectively.

The Company also purchases products and services from various affiliates other than Hexion. These purchases were $3 million, $4 million and $14 million for the years ended December 31, 2016, 2015 and 2014,

 

123


Table of Contents

respectively. The Company had accounts payable to these affiliates of $0, less than $1 million and less than $1 million at December 31, 2016, 2015 and 2014, respectively.

Apollo Management Agreement

We were subject to a management consulting and advisory services agreement with Apollo and its affiliates for the provision of management and advisory services for an initial term of up to twelve years. We also agreed to indemnify Apollo and its affiliates and their directors, officers and representatives for potential losses relating to the services contemplated under these agreements. Terms of the agreement provided for annual fees of $4 million plus out of pocket expenses, payable in one lump sum annually, and provided for a lump-sum settlement equal to the net present value of the remaining annual management fees payable under the remaining term of the agreement in connection with a sale or initial public offering by us. This annual management fee was waived for 2014. In connection with our emergence from Chapter 11, the management agreement was terminated pursuant to the court order confirming the Plan of Reorganization.

Other Transactions and Arrangements

In April 2014, we entered into an accounts receivable purchase and sale agreement with Superholdco Finance Corp. (“Finco”) a newly formed subsidiary of Hexion Holdings. The agreement contains customary terms and conditions associated with such arrangements. On April 7, 2014, under this agreement, we sold approximately $51 million of accounts receivable to Finco, and received 95% of the proceeds in cash, with the remaining 5% to be received in cash when the sold receivables were fully collected by Finco. The agreement also appointed the Company to act as the servicer of the receivables on behalf of Finco.

In March 2014, we entered into an Employee Services Agreement with Hexion Holdings, Hexion and Momentive Performance Materials Holdings Employee Corporation (“Employee Corp”), a subsidiary of Hexion Holdings (the “Services Agreement”). The Services Agreement provided for the executive services of Mr. John G. Boss, an employee of Employee Corp., to be made available to us and set forth the terms with respect to payment for the cost of such services. Mr. Boss was elected Executive Vice President and President Silicones and Quartz Division effective March 31, 2014. Pursuant to the Services Agreement, we agreed to pay 100% of Mr. Boss’ costs of employment which are comprised of “covered costs” including an annual base salary of $585,000, a sign-on bonus of $1.3 million payable between 2014 and 2015, annual incentive compensation, relocation costs, severance and benefits and other standard reasonable business expenses.

In December 2014, Mr. Boss was appointed as Chief Executive Officer and President of the Company. In connection with the appointment, Momentive assumed from Hexion Holdings the terms of the accepted offer of employment with Mr. Boss. We paid approximately $1.4 million under this agreement during the year ended December 31, 2014.

In April 2015, we issued 39,594 shares of our common stock to certain of our directors (or their designated trusts), Messrs. Bradley J. Bell, John D. Dionne and Julian Markby, for aggregate proceeds of $0.8 million.

Review, Approval or Ratification of Transactions with Related Persons

Our Audit Committee Charter requires that the audit committee review and approve all transactions between related persons required to be reported under the provisions of Item 404 of Regulation S-K under the Securities Act and the Exchange Act.

The types of transactions that are covered by the policy include all transactions required to be so reported, including financial and other transactions, arrangements or relationships in which we or any of its subsidiaries is a participant and in which a related person has a direct or indirect material interest, where the amount involved exceeds $120,000. There were no transactions required to be reported under the provisions of Item 404 of Regulation S-K in the last three fiscal years where the above procedures did not require review, approval or ratification or where such procedures were not followed.

 

124


Table of Contents

Related persons include directors and director nominees, executive officers, stockholders beneficially owning more than 5% of our voting stock and immediate family members of any of the previously described persons. A related person could also be an entity in which a director, executive officer or 5% stockholder is an employee, general partner or 10% stockholder.

Our Certificate of Incorporation, which will be effective upon the consummation of this offering, also requires that any transaction between the Company and any stockholder or affiliate thereof be approved by a majority of the directors who are not appointed by and are not otherwise affiliated with the related party, subject to certain exceptions including for transactions that involve payments or value equal to or less than $1,750,000.

 

125


Table of Contents

DESCRIPTION OF INDEBTEDNESS

The Company has the following secured indebtedness outstanding:

 

    the ABL Facility;

 

    the First Lien Notes; and

 

    the Second Lien Notes.

Each of the foregoing are secured by separate collateral agreements with substantially identical terms and covering substantially identical collateral except with respect to foreign collateral, which is only pledged in favor of the lenders under the ABL Facility.

ABL Facility

Upon our emergence from the Chapter 11 proceedings, the debtor-in-possession and exit senior secured asset-based revolving credit facility converted into an exit senior secured asset-based revolving credit facility (the “ABL Facility”). The ABL Facility provides borrowing availability equal to the lesser of (a) $270 million and (b) the borrowing base described below. The commitments under the ABL Facility consist of a $200 million last-in, first-out tranche (the “Tranche A Commitments”) and a $70 million first-in, last-out tranche (the “Tranche B Commitments”). The ABL Facility currently has a five-year term and matures in October 2019.

On October 30, 2017, we received commitments to extend the maturity of the ABL Facility. Subject to the consummation of the offering that results in cash proceeds to us of at least $200 million and other customary closing conditions, the lenders providing the commitments agreed to extend the maturity of the ABL Facility from October 2019 to five years from the closing of this offering; provided that (x) if, on July 25, 2021, the date that is 91 days prior to the maturity date of the First Lien Notes (the “First Lien Notes Maturity Test Date”), the aggregate principal amount of the First Lien Notes outstanding exceeds $50 million, the extended maturity date for such commitments will be the First Lien Notes Maturity Test Date and (z) if, on January 23, 2022, the date that is 91 days prior to the maturity date of the Second Lien Notes (the “Second Lien Notes Maturity Test Date”), the aggregate principal amount of the Second Lien Notes outstanding exceeds $50 million, the extended maturity date for such commitments will be the Second Lien Notes Maturity Test Date. The availability for our borrowers under the ABL Facility will continue to be limited to the borrowing base of our borrowers and guarantors. As a result of the consummation of this offering, we expect that conditions to the commitments will be satisfied.

In addition, we may request one or more incremental revolving commitments under the ABL Facility in an aggregate principal amount up to the greater of (a) $80 million and (b) the excess of the borrowing base over the amount of the then-effective commitments under the ABL Facility at the time of such increase (to the extent we can identify lenders willing to make such an increase available to us).

The borrowing base for the Tranche A Commitments is, at any time of determination, an amount (net of reserves) equal to the sum of:

 

    85% of the amount of eligible accounts receivable (including trade receivables), plus

 

    the lesser of (i) 70% of the amount of eligible inventory and (ii) 85% of the net orderly liquidation value of eligible inventory.

The borrowing base for the Tranche B Commitments is, at any time of determination, an amount (net of reserves) equal to the sum of:

 

    5% of the amount of eligible accounts receivable (including trade receivables), plus

 

126


Table of Contents
    the lesser of (i) 5% of the amount of eligible inventory and (ii) 5% of the net orderly liquidation value of eligible inventory, plus

 

    the lesser of (i) 80% of the net orderly liquidation value of eligible machinery and equipment located in Canada, the United Kingdom, Germany and the Netherlands and (ii) $50 million.

The ABL Facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as swingline loans.

We may voluntarily repay outstanding loans under the ABL Facility at any time without premium or penalty, other than customary “breakage” costs with respect to eurocurrency loans.

The borrowings under the ABL Facility bear interest at a rate equal to an applicable margin (subject to adjustment based on average availability) plus, as determined at our option, either (a) a base rate (the “ABR Rate”) determined by reference to the highest of (1) the U.S. federal funds rate plus 0.50%, (2) the prime rate of the administrative agent or one of its affiliates, and (3) the adjusted LIBOR rate for a one-month interest period plus 1.0%, and (b) a eurocurrency rate (“LIBOR”) determined by reference to the costs of funds for eurocurrency deposits in dollars in the London interbank market for the interest period relevant to such borrowing adjusted for certain additional costs, with Canadian-equivalent options in the case of borrowings by our Canadian subsidiary.

The initial applicable margin for LIBOR rate borrowings under the ABL Facility was 2.00% for Tranche A Commitments and 2.75% for Tranche B Commitments. The initial applicable margin for ABR Rate borrowings under the ABL Facility was 1.00% for Tranche A Commitments and 1.75% for Tranche B Commitments. The foregoing applicable margins are adjusted depending on the availability under the ABL Facility. Following and during the continuance of a payment event of default, overdue amounts owing under our ABL Facility will bear interest at a rate per annum equal to the rate otherwise applicable thereto plus an additional 2.0%.

In addition to paying interest on outstanding principal under the ABL Facility, are required to pay a commitment fee to the lenders in respect of the unutilized commitments thereunder at an initial rate equal to 0.375% per annum, which could be adjusted to 0.25% per annum depending on the usage. We also pay a customary letter of credit fee, including a fronting fee of 0.125% per annum of the stated amount of each outstanding letter of credit, and customary agency fees.

Our ABL Facility contains customary covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of our material subsidiaries, to incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations and make dividends or other restricted payments. Our ABL Facility also contains certain customary affirmative covenants and events of default. The negative covenants in the ABL Facility include, among other things, limitations (none of which are absolute) on our ability to:

 

    sell assets;

 

    incur additional indebtedness;

 

    repay other indebtedness;

 

    pay dividends and distributions or repurchase our capital stock;

 

    create liens on assets;

 

    make investments, loans, guarantees or advances;

 

    make certain acquisitions;

 

    engage in mergers or consolidations;

 

    enter into sale leaseback transactions;

 

127


Table of Contents
    engage in certain transactions with affiliates;

 

    amend certain material agreements governing our indebtedness;

 

    amend our organizational documents; and

 

    change the business conducted by us and our subsidiaries.

In addition, the ABL Facility requires us to maintain a minimum fixed charge coverage ratio at any time when the average availability is less than the greater of (a) 12.5% of the lesser of (i) the borrowing base at such time and (ii) the aggregate amount of ABL Facility commitments at such time, and (b) $27 million. In that event (the “Availability Triggering Event”), we must satisfy a minimum fixed charge coverage ratio of 1.0 to 1.0. For purposes of determining compliance with the fixed charge coverage ratio maintenance covenant for any applicable fiscal quarter, we may exercise an equity cure by issuing certain permitted securities for cash or otherwise receive cash contributions that will, upon the receipt of such cash by us, be included in the calculation of EBITDA. As of September 30, 2017, the fixed charge coverage ratio was not in effect.

The events of default under our ABL Facility include, without limitation, nonpayment, misrepresentations, breach of covenants, insolvency, bankruptcy, certain judgments, change of control (as defined in our ABL Facility) and cross-defaults.

All obligations under the ABL Facility are unconditionally guaranteed by MPM’s parent, MPM Intermediate Holdings Inc., and, subject to certain exceptions, each of MPM’s existing and future direct and indirect U.S. subsidiaries, which we refer to collectively as “U.S. Guarantors.” In addition, all obligations of MPM GmbH, MPM Quartz and MPM Canada under the ABL Facility are guaranteed by MPM USA, the U.S. Guarantors and certain other direct and indirect foreign subsidiaries of the Company, which we collectively refer to as the “Foreign Guarantors.” The obligations of MPM USA under the ABL Facility and any hedging arrangements and cash management services and the guarantees in respect of those obligations are secured by substantially all of the assets and stock (but in the case of non-U.S. subsidiaries, limited to 65% of the voting equity of such subsidiaries) owned by MPM USA and the U.S. Guarantors, other than the intercompany note issued to the Company by Japan Acquisition Co. and subject to certain other exceptions. The obligations of MPM GmbH, MPM Quartz and MPM Canada under the ABL Facility and any hedging arrangements and cash management services and the guarantees in respect of those obligations are secured by substantially all of the assets and stock owned by MPM USA and the U.S. Guarantors and by the receivables, inventory and other current assets and the equipment and machinery (and proceeds thereof) and related assets of MPM GmbH, MPM Quartz, MPM Canada and certain of the Foreign Guarantors, subject to certain exceptions. Such security interest will consist, (1) with respect to the assets of MPM USA and the U.S. Guarantors constituting collateral, of a first-priority security interest with respect to the ABL priority collateral (with the First Lien Notes (as defined below) secured by second-priority security interests therein) and a second-priority security interest with respect to the non-ABL priority collateral (with the First Lien Notes (as defined below) secured by first-priority security interests therein) and (2) of a first-priority lien with respect to the assets of MPM GmbH, MPM Quartz, MPM Canada and the Foreign Guarantors constituting collateral.

Notes

First Lien Notes

General

The 3.88% First-Priority Senior Secured Notes due 2021 (the “First Lien Notes”) consist of $1,100 million original aggregate principal amount.

The First Lien Notes are fully and unconditionally guaranteed on a senior secured basis by each of MPM’s existing restricted U.S. subsidiaries that is a guarantor under the ABL Facility and MPM’s future restricted U.S.

 

128


Table of Contents

subsidiaries (other than receivables subsidiaries and U.S. subsidiaries of foreign subsidiaries) that guarantee any debt of MPM or any of the guarantor subsidiaries of MPM under the related indenture (the “Note Guarantors”). Pursuant to customary release provisions in the indenture governing the First Lien Notes, the Note Guarantors may be released from their guarantee of the First Lien Notes. The First Lien Notes are not guaranteed by MPM Intermediate Holdings Inc.

Rankings

The First Lien Notes rank equally in right of payment to all of MPM’s existing and future senior indebtedness and rank senior in right of payment to all of MPM’s existing and future subordinated indebtedness. The First Lien Notes rank effectively junior in priority to MPM’s obligations under the ABL Facility to the extent of the value of the ABL priority collateral (which generally includes most of the Registrant’s and its domestic subsidiaries’ inventory and accounts receivable and related assets); equal with holders of other obligations secured pari passu with the First Lien Notes including other first priority obligations (to the extent of the value of such collateral); effectively senior to any junior priority obligations (to the extent of the value of such collateral) including the Second Lien Notes and MPM’s obligations under the ABL Facility to the extent of the value of the collateral that is not ABL priority collateral; and effectively senior to any senior unsecured obligations (to the extent of the value of such collateral).

Second Lien Notes

General

The 4.69% Second-Priority Senior Secured Notes due 2022 (the “Second Lien Notes”) consist of $250 million original aggregate principal amount. In the fourth quarter of 2015 and first quarter of 2016, the Company 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.

The Second Lien Notes are fully and unconditionally guaranteed on a senior secured basis by each of MPM’s existing restricted U.S. subsidiaries that is a guarantor under the ABL Facility and MPM’s future restricted U.S. subsidiaries (other than receivables subsidiaries and U.S. subsidiaries of foreign subsidiaries) that guarantee any debt of MPM or any Note Guarantor. Pursuant to customary release provisions in the indenture governing the Second Lien Notes, the Note Guarantors may be released from their guarantee of the Second Lien Notes (the “Second Lien Note Guarantees”). The Second Lien Notes are not guaranteed by MPM Intermediate Holdings Inc.

We intend to use a portion of the proceeds from this offering to fund the redemption of approximately $193 million of our Second Lien Notes (assuming a price per share at the midpoint of the range on the cover of this prospectus).

Rankings

The Second Lien Notes rank equally in right of payment to all of MPM’s existing and future senior indebtedness and rank senior in right of payment to all of MPM’s existing and future subordinated indebtedness. The Second Lien Notes rank junior in priority as to collateral with respect to the First Lien Notes and the ABL Facility and holders of certain other obligations secured pari passu with other first-priority obligations (to the extent of the value of such collateral) and senior in priority as to collateral with respect to all of MPM’s existing and future obligations secured by a lien on the collateral that is junior to the Second Lien Notes.

 

129


Table of Contents

General Terms of our Notes

Optional Redemption

The First Lien Notes and Second Lien Notes (together, the “Notes”) may be redeemed at any time at a redemption price of 100% of the principal amount plus accrued and unpaid interest.

Mandatory Redemption

The Company is not required to make mandatory redemption or sinking fund payments with respect to the Notes.

Change in Control

In the event of a Change in Control (as defined in the applicable indenture), a holder has the right to require MPM to buy such holder’s First Lien Notes or Second Lien Notes, as applicable, at 100% of their principal amount, plus accrued and unpaid interest.

Covenants

Under the terms of the indentures governing the Notes, MPM is subject to covenants that, among other things, limit MPM’s ability and the ability of certain of MPM’s subsidiaries to (i) incur or guarantee additional indebtedness or issue preferred stock; (ii) grant liens on assets; (iii) pay dividends or make distributions to MPM’s stockholders; (iv) repurchase or redeem capital stock or subordinated indebtedness; (v) make investments or acquisitions; (vi) incur restrictions on the ability of MPM’s subsidiaries to pay dividends or to make other payments to us; (vii) enter into transactions with MPM’s affiliates; (viii) merge or consolidate with other companies or transfer all or substantially all of MPM’s assets; and (ix) transfer or sell assets.

Events of Default

The indentures governing the Notes specify events of default, including failure to pay principal and failure to pay interest on the Notes, subject to a 30-day grace period, a failure to comply with covenants, subject to a 60-day grace period in certain instances, and certain bankruptcy, insolvency or reorganization events with respect to us.

 

130


Table of Contents

DESCRIPTION OF CAPITAL STOCK

General

The following is a summary of information concerning our capital stock, including a summary of certain material terms and provisions of our Amended and Restated Certificate of Incorporation (“Certificate of Incorporation”) and our Amended and Restated By-laws (“By-laws”), which will become effective upon the consummation of this offering, as well as relevant sections of the Delaware General Corporation Law (the “DGCL”). The following summary is qualified in its entirety by the provisions of our Certificate of Incorporation and By-laws, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part, and by the applicable provisions of the DGCL.

Common Stock

Shares Outstanding. Upon the consummation of this offering, we will be authorized to issue up to 250,000,000 shares of common stock, par value $0.01 per share. We will have 58,538,301 shares of common stock issued and outstanding immediately following the offering.

Dividends. Subject to the prior dividend rights of holders of any of our preferred stock, holders of shares of our common stock are entitled to receive dividends when, as and if declared by our Board of Directors out of funds legally available for that purpose. Delaware law allows a corporation to pay dividends only out of surplus, as determined under Delaware law.

Voting Rights. Each share of common stock is entitled to one vote on all matters submitted to a vote of stockholders. Holders of shares of our common stock do not have cumulative voting rights in connection with the election of our directors. This means a holder of a single share of common stock cannot cast more than one vote for each position to be filled on our Board of Directors. It also means the holders of a majority of the voting power of our shares of capital stock entitled to vote in the election of directors can elect all directors standing for election and the holders of the remaining shares will not be able to elect any directors.

Other Rights. In the event of any liquidation, dissolution or winding up of our company, after the satisfaction in full of the liquidation preferences of holders of any of our preferred stock, holders of shares of our common stock are entitled to ratable distribution of the remaining assets available for distribution to stockholders. The shares of our common stock are not subject to redemption by operation of a sinking fund or otherwise. Holders of shares of our common stock are not entitled to pre-emptive rights.

Fully Paid. The issued and outstanding shares of our common stock are fully paid and non-assessable. This means the full purchase price for the outstanding shares of our common stock has been paid and the holders of such shares will not be assessed any additional amounts for such shares. Any additional shares of common stock that we may issue in the future will also be fully paid and non-assessable.

Preferred Stock

Upon the consummation of this offering, we will be authorized to issue up to 50,000,000 shares of preferred stock from time to time in one or more series and with such rights and preferences as determined by our Board of Directors with respect to each series. No shares of our preferred stock will be issued and outstanding immediately following the consummation of this offering.

Limitation on Liability of Directors and Officers

Our Certificate of Incorporation provides that, to the fullest extent permitted by the DGCL, no director will be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director. Currently, the DGCL does not permit eliminating or limiting liability of a director for:

 

    any breach of the director’s duty of loyalty to our company or our stockholders;

 

131


Table of Contents
    any act or omission not in good faith or which involved intentional misconduct or a knowing violation of law;

 

    unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL; or

 

    any transaction from which the director derived an improper personal benefit.

As a result, neither we nor our stockholders have the right, including through stockholders’ derivative suits on our behalf, to recover monetary damages against a director for breach of fiduciary duty as a director, including breaches resulting from grossly negligent behavior, except in the situations described above.

Our Certificate of Incorporation provides that, to the fullest extent permitted by law, we will indemnify any current or former officer or director of our company in connection with any threatened, pending or completed action, suit or proceeding to which such person is, or is threated to be made, a party, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was our director or officer, or while our director or officer served any other entity or enterprise at our request as its director, officer, manager, employee or agent, including service with respect to employee benefit plans, against all expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement (except for judgments, fines and amounts paid in settlement in any action or suit by or in the right of the Company to procure a judgment in our favor) actually and reasonably incurred or suffered by such person in connection with such action, suit or proceeding. This indemnification right includes the right of a covered person to be paid his or her expenses (including attorneys’ fees) incurred in defending any such action, suit or proceeding in advance of its final disposition. Amending this provision will not reduce our indemnification obligations relating to actions taken before an amendment.

We maintain insurance for our officers and directors against certain liabilities, including liabilities under the Securities Act, under insurance policies, the premiums of which are paid by us. The effect of these is to indemnify any officer or director of the Company against expenses, judgments, attorney’s fees and other amounts paid in settlements incurred by an officer or director arising from claims against such persons for conduct in their capacities as officers or directors of the Company.

Anti-Takeover Effects of Our Certificate of Incorporation and By-laws and Delaware Law

Some provisions of our Certificate of Incorporation and By-laws and Delaware law could make the following more difficult:

 

    acquisition of us by means of a tender offer;

 

    acquisition of us by means of a proxy contest or otherwise; or

 

    removal of our incumbent officers and directors.

These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our Board of Directors. We believe that the benefits of increased protection give us the potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us and outweigh the disadvantages of discouraging those proposals because negotiation of them could result in an improvement of their terms.

Size of Board and Vacancies

Our By-laws provide that our Board of Directors will have one or more members, which number will be determined by resolution of our Board of Directors. Our Certificate of Incorporation provides that our Board of Directors will be divided into three classes with the classes to be as nearly equal in number as possible. At each annual meeting of stockholders, directors will be elected to succeed the class of directors whose terms have expired. Directors are elected by a plurality of votes cast.

 

132


Table of Contents

Under our Certificate of Incorporation, any director may be removed at any time, but only for cause and only upon the affirmative vote of holders of 66 23% of the voting power of our outstanding shares entitled to vote generally in the election of directors (which, immediately following the consummation of this offering, will be only our common stock). This requirement of a supermajority vote to remove directors could enable a minority of our stockholders to prevent a change in the composition of our Board of Directors.

Under our Certificate of Incorporation, but subject to the rights of holders of any of our preferred stock, newly created directorships resulting from any increase in our authorized number of directors or any vacancies in our Board of Directors resulting from death, resignation, retirement, removal from office or other cause may be filled solely by the majority vote of our remaining directors in office, even though less than a quorum, or by a sole remaining director.

Elimination of Stockholder Action by Written Consent

Except as may be provided in the future with respect to any preferred stock, our Certificate of Incorporation eliminates the right of our stockholders to act by written consent, which means stockholder action must take place at the annual or a special meeting of our stockholders.

Classified Board

Our Certificate of Incorporation provides that our Board of Directors will be divided into three classes with the classes to be as nearly equal in number as possible. Except for the initial shorter terms served by the directors named in this prospectus, the directors in each class will serve for a three-year term, one class being elected each year by our stockholders.

Stockholder Meetings

Under our By-laws, only our chairman, chief executive officer or our Board of Directors may call special meetings of our stockholders.

Requirements for Advance Notification of Stockholder Nominations and Proposals

Our By-laws establish advance notice procedures with respect to stockholder proposals and nomination of candidates for election as directors other than nominations made by or at the direction of our Board of Directors or a committee of our Board of Directors.

No Cumulative Voting

Neither our Certificate of Incorporation nor our By-laws provides for cumulative voting in the election of directors.

Undesignated Preferred Stock

The authorization of our undesignated preferred stock makes it possible for our Board of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of our company.

Not Subject to Delaware Anti-Takeover Law

We have elected to opt out of the provisions of Section 203 of the DGCL, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder (defined generally as a person owning 15% or more of the corporation’s outstanding

 

133


Table of Contents

voting stock) for a period of three years following the date such person became an interested stockholder, unless certain statutory exceptions apply relating to how the business combination or the transaction in which such person became an interested stockholder is approved or consummated. Generally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder.

Corporate Opportunity

Our Certificate of Incorporation provides that the doctrine of “corporate opportunity” will not apply with respect to Apollo, Oaktree and their respective affiliates in a manner that would prohibit them from investing in, or having a relationship with, a competing businesses or pursuing business opportunities that are ones that the Company might reasonably be deemed to have pursued.

Forum for Adjudication of Disputes

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 be the sole and exclusive forum for any derivative action or proceeding brought on behalf of the Company, any action asserting breach of a fiduciary duty owed to us or our stockholders by any director, officer or other employee, any action asserting a claim arising pursuant to the DGCL or any action asserting a claim governed by the internal affairs doctrine. This provision does not affect the ability of our stockholders to seek remedies under the federal securities laws.

Amendment of our Certificate of Incorporation and By-laws

Our Certificate of Incorporation may be amended in accordance with the provisions of the DGCL, which requires a majority of the voting power of our outstanding stock entitled to vote on such amendments, except that the provisions relating to (i) prohibition on actions by written consent of the stockholders may not be amended or repealed without the affirmative vote of the holders of at least 80% of the voting power of the outstanding shares of capital stock, voting as a single class, and (ii) affiliate transactions may not be altered, amended or repealed without the affirmative vote of the holders of all the then outstanding shares of common stock, other than in connection with a listing or an initial public offering in which case the approval of both a majority of directors who were not appointed by and are not otherwise affiliated with Apollo (provided that independent directors appointed by Apollo are entitled to vote on such amendment so long as they remain independent) and the holders of a majority of the then outstanding shares of common stock, disregarding for purposes of such calculation any shares of common stock beneficially owned by Apollo or any of its affiliates.

Our By-laws may be amended by the Board of Directors without obtaining stockholder approval. Stockholders also may amend our By-laws by the affirmative vote of a majority of the voting power of the shares present in person or by proxy at a meeting at which a quorum is present.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is Wells Fargo Bank, National Association.

Listing

We have been approved to list our shares of common stock on the NYSE under the symbol “MPMH.”

 

134


Table of Contents

SHARES ELIGIBLE FOR FUTURE SALES

Prior to this offering, other than the OTCQX, there has been no public market for our common stock. Future sales of our common stock in the public market, or the availability of such shares for sale in the public market, could adversely affect the market price of our common stock prevailing from time to time.

Upon the completion of this offering, we will have outstanding an aggregate of 58,538,301 shares of common stock. Of these shares, all of the 14,583,333 shares of common stock to be sold in this offering (or 16,770,833 shares assuming the underwriters exercise the option to purchase additional shares in full) will be freely tradable without restriction unless the shares are held by any of our “affiliates” as such term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), and without further registration under the Securities Act.

In addition, in connection with our Plan of Reorganization, we relied on Section 1145(a)(1) of the Bankruptcy Code and Section 4(a)(2) of the Securities Act to exempt from the registration requirements of the Securities Act the offer and sale of 47,989,000 shares of common stock. These shares were subsequently registered by the Company’s Shelf Registration Statement and are freely tradable in the open market.

We also intend to file a registration statement on Form S-8 (the “S-8 Registration Statement”) under the Securities Act to register 3,725,142 shares of common stock issuable under MPMH Equity Plan. We expect to file the S-8 Registration Statement immediately following the effective date of the registration statement of which this prospectus is a part, and the S-8 Registration Statement will be effective upon filing. Shares registered under the S-8 Registration Statement will be freely tradable in the open market, unless such shares are subject to vesting restrictions with us, Rule 144 restrictions applicable to our affiliates or the lock-up restrictions described below.

Accordingly, the following shares will be available for sale in the public market as follows:

 

    20,440,264 shares will be freely tradable on the date of this prospectus;

 

    234,150 shares that are issuable pursuant to fully vested restricted stock units, 570,360 shares that are issuable pursuant to options that will fully vest if the trading price of our common stock exceeds $20.00 over ten consecutive trading days and 570,360 shares that are issuable pursuant to options that will fully vest if the trading price of our common stock exceeds $25.00 over the consecutive trading days, each of which will be freely tradable following the filing of the S-8 Registration Statement; and

 

    38,188,757 shares will be eligible for sale upon the expiration of the lock-up agreements beginning 180 days after the date of this prospectus and when permitted under Rule 144.

Lock-up Agreements

We, each of our executive officers and directors, all of the selling stockholders and certain other stockholders that will collectively own 65.1% of our outstanding common stock immediately following the consummation of the offering (assuming no exercise of the underwriters’ option to purchase additional shares) have agreed not to sell any common stock or securities convertible into or exercisable or exchangeable for shares of common stock for a period of 180 days from the date of this prospectus, subject to certain exceptions. Please see “Underwriting” for a description of these lock-up provisions. The representatives of the underwriters, in their sole discretion, may at any time release all or any portion of the shares from the restrictions in such agreements.

Rule 144

In general, under Rule 144 under the Securities Act as currently in effect, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of ours at any time during the six months preceding a sale, and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months (including any period of consecutive ownership of preceding non-affiliated holders) would be entitled to sell those shares, subject only to the availability of current public information about us. A non-affiliated person who has beneficially owned restricted securities within the meaning of Rule 144 for at least one year would be entitled to sell those shares without regard to the provisions of Rule 144.

 

135


Table of Contents

A person (or persons whose shares are aggregated) who is deemed to be an affiliate of ours and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the then outstanding shares of our common stock or the average weekly trading volume of our common stock reported by the NYSE during the four calendar weeks preceding the filing of notice of the sale. Such sales are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us.

 

136


Table of Contents

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following is a discussion of the material U.S. federal income tax consequences of the acquisition, ownership and disposition of common stock by beneficial owners of our common stock that acquire common stock pursuant to this offering and that hold such shares as capital assets (generally, for investment). This discussion is not a complete analysis or listing of all of the possible tax consequences of such transactions and does not address all tax considerations that might be relevant to particular stockholders in light of their personal circumstances or to persons that are subject to special tax rules. In addition, this description of the material U.S. federal income tax consequences does not address the tax treatment of special classes of stockholders, such as:

 

    financial institutions

 

    regulated investment companies

 

    real estate investment trusts

 

    tax-exempt entities

 

    insurance companies

 

    persons holding the shares as part of a hedging, integrated or conversion transaction, constructive sale or “straddle”

 

    persons who acquired common stock through the exercise or cancellation of employee stock options or otherwise as compensation for their services

 

    U.S. expatriates

 

    persons subject to the alternative minimum tax

 

    dealers or traders in securities or currencies

 

    holders whose functional currency is not the U.S. dollar.

This summary does not address estate and gift tax consequences (except to the extent specifically provided herein), the Medicare contribution tax on certain net investment income or tax consequences under any state, local or foreign laws.

For purposes of this section, you are a “U.S. Holder” if you are: (1) an individual citizen of the United States or a resident alien of the United States; (2) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States or any state thereof or the District of Columbia; (3) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (4) a trust (A) if a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have authority to control all substantial decisions of the trust or (B) that has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person.

If you are an individual, you may be treated as a resident alien of the United States, as opposed to a non-resident alien, for U.S. federal income tax purposes if you are present in the United States for at least 31 days in a calendar year and for an aggregate of at least 183 days during a three-year period ending in such calendar year. For purposes of this calculation, you would count all of the days that you were present in the then-current year, one-third of the days that you were present in the immediately preceding year and one-sixth of the days that you were present in the second preceding year. Resident aliens are subject to United States federal income tax as if they were U.S. citizens, and thus would constitute “U.S. Holders” for purposes of the discussion below. If you are a citizen or tax resident of a country with which the United States has a tax treaty, other rules may apply in determining whether you are a resident alien.

The term “Non-U.S. Holder” means any beneficial owner of common stock that is neither a U.S. Holder nor a partnership (including for this purpose any entity that is treated as a partnership for U.S. federal income tax purposes).

 

137


Table of Contents

If a partnership or other pass-through entity is a beneficial owner of common stock, the tax treatment of a partner or other owner will generally depend upon the status of the partner (or other owner) and the activities of the entity. If you are a partner (or other owner) of a pass-through entity that acquires common stock, you are urged to consult your tax advisor regarding the tax consequences of acquiring, owning and disposing of common stock.

The following discussion is based upon the Internal Revenue Code of 1986, as amended (the “Code”), U.S. judicial decisions, administrative pronouncements and existing and proposed Treasury regulations, all as in effect as of the date hereof. All of the preceding authorities are subject to change, possibly with retroactive effect, so as to result in U.S. federal income tax consequences different from those discussed below. We have not requested, and will not request, a ruling from the U.S. Internal Revenue Service (the “IRS”) with respect to any of the U.S. federal income tax consequences described below, and as a result there can be no assurance that the IRS will not disagree with or challenge any of the conclusions we have reached and describe herein.

The following discussion is for general information only and is not intended to be, nor should it be construed to be, legal or tax advice to any holder or prospective holder of common stock and no opinion or representation with respect to the U.S. federal income tax consequences to any such holder or prospective holder is made. Prospective purchasers are urged to consult their tax advisors as to the particular consequences to them under U.S. federal, state and local and applicable foreign tax laws of the acquisition, ownership and disposition of common stock.

U.S. Holders

The rules discussed in the following paragraphs will apply to your acquisition, ownership and disposition of common stock if you are a U.S. Holder, as defined above.

Distributions

Distributions of cash or property that we pay in respect of our common stock will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits (as determined under U.S. federal income tax principles) and will be includible in gross income by you when actually or constructively received in accordance with your regular method of accounting for U.S. federal income tax purposes. Any such dividend will generally be eligible for the dividends received deduction if you are a corporate U.S. Holder that meets the holding period and other requirements for the dividends received deduction. If you are a non-corporate U.S. Holder, dividends received may be eligible for U.S. federal income taxation at the long-term capital gains rates generally applicable to individuals, provided that the applicable holding period and other requirements are met. If the amount of a distribution exceeds our current and accumulated earnings and profits, such excess first will be treated as a tax-free return of capital to the extent of your tax basis in our common stock, and thereafter will be treated as capital gain.

Sale, Exchange or Other Taxable Disposition of Common Stock

You generally will recognize gain or loss upon the taxable sale, exchange or other disposition of common stock in an amount equal to the difference between (i) the amount realized upon the sale, exchange or other taxable disposition and (ii) your adjusted tax basis in the common stock. Generally, such gain or loss will be capital gain or loss and will be long-term capital gain or loss if, on the date of the sale, exchange or other taxable disposition, you have held the common stock for more than one year. Long-term capital gains are currently taxed, in the case of non-corporate taxpayers, at a maximum rate of 20%. The deductibility of capital losses is subject to limitations under the Code.

Information Reporting and Backup Withholding

In general, information reporting will apply to dividends paid to you in respect of common stock and the proceeds received by you from the sale, exchange or other disposition of common stock within the United States

 

138


Table of Contents

unless you are a corporation or other exempt recipient. Backup withholding may apply to such payments if you fail to provide a taxpayer identification number or certification of exempt status, or you fail to report in full dividend and interest income.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against your U.S. federal income tax liability, provided that you furnish the required information to the IRS.

Non-U.S. Holders

Distributions

Distributions of cash or property that we pay in respect of common stock will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Except as described below under “—Non-U.S. Holders—U.S. Trade or Business Income,” you generally will be subject to U.S. federal withholding tax at a 30% rate, or at a reduced rate prescribed by an applicable income tax treaty, on any dividends received in respect of our common stock. If the amount of the distribution exceeds our current and accumulated earnings and profits, such excess first will be treated as a return of capital to the extent of your tax basis in our common stock, and thereafter will be treated as capital gain. However, except to the extent that we elect (or the paying agent or other intermediary through which you hold your common stock elects) otherwise, we (or the intermediary) must generally withhold on the entire distribution, in which case you would be entitled to a refund from the IRS for the withholding tax on the portion of the distribution that exceeded our current and accumulated earnings and profits. In order to obtain a reduced rate of U.S. federal withholding tax under an applicable income tax treaty, you will be required to provide a properly executed IRS Form W-8BEN or W-8BEN-E (or successor form) certifying your entitlement to benefits under the treaty. If you are eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty, you may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the IRS. You are urged to consult your own tax advisor regarding your possible entitlement to benefits under an income tax treaty.

Sale, Exchange or Other Taxable Disposition of Common Stock

You generally will not be subject to U.S. federal income or withholding tax in respect of any gain on a sale, exchange or other disposition of common stock unless:

 

    the gain is U.S. trade or business income, in which case, such gain will be taxed as described in “U.S. Trade or Business Income,” below;

 

    you are an individual who is present in the United States for 183 or more days in the taxable year of the disposition and certain other conditions are met, in which case you will be subject to U.S. federal income tax at a rate of 30% (or a reduced rate under an applicable tax treaty) on the amount by which certain capital gains allocable to U.S. sources exceed certain capital losses allocable to U.S. sources; or

 

    we are or have been a “U.S. real property holding corporation” (a “USRPHC”) under section 897 of the Code at any time during the shorter of the five-year period ending on the date of the disposition and your holding period for the common stock, in which case, subject to the exception set forth in the second sentence of the next paragraph, such gain will be subject to U.S. federal income tax in the same manner as U.S. trade or business income.

In general, a corporation is a USRPHC if the fair market value of its “U.S. real property interests” equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business. In the event that we are determined to be a USRPHC, gain will not be subject to tax as U.S. trade or business income if your holdings (direct and indirect) at all times during the applicable period constituted 5% or less of our common stock, provided that our common stock were regularly

 

139


Table of Contents

traded on an established securities market during such period. We believe that we are not currently, and we do not anticipate becoming in the future, a “U.S. real property holding corporation” for U.S. federal income tax purposes.

U.S. Trade or Business Income

For purposes of this discussion, dividend income and gain on the sale, exchange or other taxable disposition of our common stock will be considered to be “U.S. trade or business income” if (A) such income or gain is (i) effectively connected with your conduct of a trade or business within the United States and (ii) if you are eligible for the benefits of an income tax treaty with the United States, attributable to a permanent establishment (or, if you are an individual, a fixed base) that you maintain in the United States or (B) we are or have been a USRPHC at any time during the shorter of the five-year period ending on the date of the disposition of your interest and your holding period for the common stock (subject to the exception set forth above in the second paragraph of “Sale, Exchange or Other Taxable Disposition of Common Stock”. Generally, U.S. trade or business income is not subject to U.S. federal withholding tax (provided that you comply with applicable certification and disclosure requirements, including providing a properly executed IRS Form W-8ECI (or successor form)); instead, you are subject to U.S. federal income tax on a net basis at regular U.S. federal income tax rates (in the same manner as a U.S. person) on your U.S. trade or business income. If you are a corporation, any U.S. trade or business income that you receive may also be subject to a “branch profits tax” at a 30% rate, or at a lower rate prescribed by an applicable income tax treaty.

U.S. Federal Estate Tax

If you are an individual Non-U.S. Holder who is treated as the owner of or has made certain lifetime transfers of an interest in our common stock, you will be required to include the value thereof in your gross estate for U.S. federal estate tax purposes, and may be subject to U.S. federal estate tax unless an applicable estate tax treaty provides otherwise.

Information Reporting and Backup Withholding Tax

We must annually report to the IRS and to each Non-U.S. Holder any dividend income that is subject to U.S. federal withholding tax, or that is exempt from such withholding pursuant to an income tax treaty. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which a Non-U.S. Holder resides. Under certain circumstances, the Code imposes a backup withholding obligation on certain reportable payments. Dividends paid to you will generally be exempt from backup withholding if you provide a properly executed IRS Form W-8BEN or W-8BEN-E (or successor form) or otherwise establish an exemption and we do not have actual knowledge or reason to know that you are a U.S. person or that the conditions of such other exemption are not, in fact, satisfied.

The payment of the proceeds from the disposition of common stock to or through the U.S. office of any broker (U.S. or non-U.S.) will be subject to information reporting and possible backup withholding unless you certify as to your non-U.S. status under penalties of perjury or otherwise establish an exemption and the broker does not have actual knowledge or reason to know that you are a U.S. person or that the conditions of any other exemption are not, in fact, satisfied. The payment of proceeds from the disposition of our common stock to or through a non-U.S. office of a non-U.S. broker will not be subject to information reporting or backup withholding unless the non-U.S. broker has certain types of relationships with the United States (a “U.S. related financial intermediary”). In the case of the payment of proceeds from the disposition of our common stock to or through a non-U.S. office of a broker that is either a U.S. person or a U.S. related financial intermediary, the Treasury regulations require information reporting (but not backup withholding) on the payment unless the broker has documentary evidence in its files that the owner is a Non-U.S. Holder and the broker has no knowledge to the contrary. You are urged to consult your tax advisor on the application of information reporting and backup withholding in light of your particular circumstances.

 

140


Table of Contents

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to you will be refunded or credited against your U.S. federal income tax liability, if any, provided that the required information is furnished to the IRS.

Additional Withholding Requirements Under FATCA

Sections 1471 through 1474 of the Code, commonly referred to as FATCA, and applicable Treasury regulations impose or will impose withholding at a rate of 30% on payments of dividends on, and gross proceeds from the sale or redemption of, our common stock paid to “foreign financial institutions” (which is broadly defined for this purpose and in general includes investment vehicles) and certain other non-U.S. entities unless various U.S. information reporting and due diligence requirements (generally relating to ownership by U.S. persons of certain interests in or accounts with those entities) have been satisfied, or an exemption applies. An intergovernmental agreement between the United States and an applicable foreign country may modify these requirements. If FATCA withholding is imposed, a beneficial owner of our common stock that is not a foreign financial institution generally will be entitled to a refund of any amounts withheld in excess of otherwise applicable withholding tax by filing a U.S. federal income tax return (which may entail significant administrative burden). A beneficial owner that is a foreign financial institution but not a “participating foreign financial institution” (as defined under FATCA) will be able to obtain a refund only to the extent an applicable income tax treaty with the United States entitles such beneficial owner to an exemption from, or reduced rate of, tax on the payment that was subject to withholding under FATCA. These withholding requirements currently apply to any payments of dividends on our common stock, and will apply to payments of gross proceeds from a disposition of our common stock made on or after January 1, 2019. Non-U.S. Holders are urged to consult their tax advisers regarding the effects of FATCA on their investment in our common stock and their potential ability to obtain a refund of any FATCA withholding.

 

141


Table of Contents

UNDERWRITING

The underwriters named below, for whom J.P. Morgan Securities LLC and Goldman Sachs & Co. LLC are acting as representatives, have severally agreed to buy, subject to the terms of the underwriting agreement, the number of shares of common stock listed opposite their names below. The underwriters are committed to purchase and pay for all of the shares if any are purchased.

 

Underwriters

   Number of Shares  

J.P. Morgan Securities LLC

  

Goldman Sachs & Co. LLC

  

Credit Suisse Securities (USA) LLC

  

Deutsche Bank Securities Inc. 

  

UBS Securities LLC

  

Wells Fargo Securities, LLC

  

BMO Capital Markets Corp. 

  
  

 

 

 

Total

     14,583,333  
  

 

 

 

Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover page of this prospectus. The underwriters propose to offer the shares to certain dealers at the same price less a concession of not more than $        per share. The offering of the shares by the underwriters is subject to receipt and acceptance and subject to the underwriters’ right to reject any order in whole or in part. After the offering, these figures may be changed by the underwriters.

The selling stockholders have granted to the underwriters an option to purchase up to an additional 2,187,500 shares of common stock from the selling stockholders at the same price to the public, and with the same underwriting discount, as set forth in the table below. The underwriters may exercise this option at any time during the 30-day period after the date of this prospectus. To the extent the underwriters exercise this option, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of the additional shares as it was obligated to purchase under the underwriting agreement.

The following table shows the underwriting fees to be paid to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option.

 

     No Exercise      Full Exercise  

Per share

   $                   $               

Total

   $      $  

We have agreed to pay all underwriting discounts and commissions applicable to the sale of the common stock in this offering and certain expenses of the selling stockholders incurred in connection with the sale. We have also agreed to reimburse the underwriters for certain of their expenses, including the costs of qualifying the offering under Rule 5110 of the Financial Industry Regulatory Authority, in an amount up to $50,000. The underwriters have agreed to reimburse us for certain of their expenses associated with this offering.

We have agreed to indemnify the underwriters for certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make in respect of those liabilities.

The underwriters have informed us that they do not intend sales to discretionary accounts to exceed 5% of the total number of shares of common stock offered by them.

 

142


Table of Contents

The initial public offering price for the shares was determined by negotiations between us, selling stockholders and the representatives. Among the factors considered in determining the initial public offering price were the price of our common stock on the OTCQX, our results of operations, our current financial condition, our future prospects, our markets, the economic conditions in and future prospects for the industry in which we compete, our management, and currently prevailing general conditions in the equity securities markets, including current market valuations of publicly traded companies considered comparable to our company. We cannot assure you, however, that the price at which the shares will sell in the public market after this offering will not be lower than the initial public offering price or that an active trading market in our shares will develop and continue after this offering.

We have been approved to have our common stock listed on the NYSE under the trading symbol “MPMH.”

At our request, the underwriters have reserved up to 5% of the common stock being offered by this prospectus for sale at the initial public offering price to our directors, officers, employees and other individuals associated with us and members of their families. The sales will be made by UBS Financial Services Inc., a selected dealer affiliated with UBS Securities LLC, an underwriter of this offering, through a directed share program. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of common stock. Participants in the directed share program who purchase shares shall be subject to a 25-day lock-up with respect to any shares sold to them pursuant to that program. This lock-up will have similar restrictions to the lock-up agreements described below. Any shares sold in the directed share program to our directors, executive officers and certain other stockholders shall be subject to the lock-up agreements described below.

We, all of our directors and officers, the selling stockholders and certain other stockholders, have agreed that, without the prior written consent of J.P. Morgan Securities LLC and Goldman Sachs & Co. LLC, we and they will not, during the period ending 180 days after the date of this prospectus:

 

    offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock;

 

    file any registration statement with the SEC relating to the offering of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or

 

    enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. In addition, we and each such person agree that, without the prior written consent of J.P. Morgan Securities LLC and Goldman Sachs & Co. LLC, it will not, during the period ending 180 days after the date of this prospectus, make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock.

The restrictions described in the immediately preceding paragraph do not apply to the sale of shares to the underwriters and are subject to other customary exceptions.

In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under their option to purchase additional shares. The underwriters can close out a covered short sale by exercising their option to purchase additional shares or purchasing shares in the open market. In determining

 

143


Table of Contents

the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under their option to purchase additional shares. The underwriters may also sell shares in excess of their option, to purchase additional shares creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering. As an additional means of facilitating this offering, the underwriters may bid for, and purchase, shares of common stock in the open market to stabilize the price of the common stock. These activities may raise or maintain the market price of the common stock above independent market levels or prevent or retard a decline in the market price of the common stock. The underwriters are not required to engage in these activities and may end any of these activities at any time.

The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. We have agreed to indemnify the several underwriters, including their controlling persons, against certain liabilities, including liabilities under the Securities Act.

A prospectus in electronic format may be made available on websites maintained by one or more underwriters, or selling group members, if any, participating in this offering. The representatives may agree to allocate a number of shares of common stock to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters that may make Internet distributions on the same basis as other allocations.

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services. Certain of the underwriters and their respective affiliates have provided, and may in the future provide, a variety of these services to the issuer and to persons and entities with relationships with the issuer, including serving as lenders under our ABL Facility, for which they received or will receive customary fees and expenses. In the ordinary course of their various business activities, the underwriters and their respective affiliates, officers, directors and employees may purchase, sell or hold a broad array of investments and actively trade securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments for their own account and for the accounts of their customers, and such investment and trading activities may involve or relate to assets, securities and/or instruments of the issuer (directly, as collateral securing other obligations or otherwise) and/or persons and entities with relationships with the issuer. The underwriters and their respective affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments and may at any time hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments.

Notice to Prospective Investors in the European Economic Area

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State, no offer of shares may be made to the public in that Relevant Member State other than:

 

  A. to any legal entity which is a qualified investor as defined in the Prospectus Directive;

 

  B. to fewer than 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive), subject to obtaining the prior consent of the underwriters; or

 

  C.

in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of shares shall require the Company or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the

 

144


Table of Contents
  Prospectus Directive and each person who initially acquires any shares or to whom any offer is made will be deemed to have represented, acknowledged and agreed to and with the underwriter and the Company that it is a “qualified investor” within the meaning of the law in that Relevant Member State implementing Article 2(1)(e) of the Prospectus Directive.

In the case of any shares being offered to a financial intermediary as that term is used in Article 3(2) of the Prospectus Directive, each such financial intermediary will be deemed to have represented, acknowledged and agreed that the shares acquired by it in the offer have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer of any shares to the public other than their offer or resale in a Relevant Member State to qualified investors as so defined or in circumstances in which the prior consent of the underwriter has been obtained to each such proposed offer or resale.

For the purposes of this provision, the expression an “offer of shares to the public” in relation to any shares in any Relevant Member State means the communication in any form and by means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression “Prospectus Directive” means Directive 2003/71/EC (as amended, including by Directive 2010/73/EU), and includes any relevant implementing measure in the Relevant Member State.

Notice to Prospective Investors in the United Kingdom

In addition, in the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at persons who are “qualified investors” (as defined in the Prospectus Directive) (i) who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”) and/or (ii) who are high net worth companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”) or otherwise in circumstances which have not resulted and will not result in an offer to the public of the shares in the United Kingdom within the meaning of the Financial Services and Markets Act 2000.

Any person in the United Kingdom that is not a relevant person should not act or rely on the information included in this document or use it as basis for taking any action. In the United Kingdom, any investment or investment activity that this document relates to may be made or taken exclusively by relevant persons.

Notice to Prospective Investors in Canada

The shares may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.

Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.

Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.

 

145


Table of Contents

Notice to Prospective Investors in Hong Kong

The shares have not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No advertisement, invitation or document relating to the shares has been or may be issued or has been or may be in the possession of any person for the purposes of issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.

Notice to Prospective Investors in Japan

The shares have not been and will not be registered pursuant to Article 4, Paragraph 1 of the Financial Instruments and Exchange Act. Accordingly, none of the shares nor any interest therein may be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any “resident” of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to or for the benefit of a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Act and any other applicable laws, regulations and ministerial guidelines of Japan in effect at the relevant time.

Notice to Prospective Investors in Australia

This prospectus supplement:

 

    does not constitute a product disclosure document or a prospectus under Chapter 6D.2 of the Corporations Act 2001 (Cth) (the “Corporations Act”);

 

    has not been, and will not be, lodged with the Australian Securities and Investments Commission (“ASIC”), as a disclosure document for the purposes of the Corporations Act and does not purport to include the information required of a disclosure document under Chapter 6D.2 of the Corporations Act;

 

    does not constitute or involve a recommendation to acquire, an offer or invitation for issue or sale, an offer or invitation to arrange the issue or sale, or an issue or sale, of interests to a “retail client” (as defined in section 761G of the Corporations Act and applicable regulations) in Australia; and

 

    may only be provided in Australia to select investors who are able to demonstrate that they fall within one or more of the categories of investors, or Exempt Investors, available under section 708 of the Corporations Act.

The shares may not be directly or indirectly offered for subscription or purchased or sold, and no invitations to subscribe for or buy the shares may be issued, and no draft or definitive offering memorandum, advertisement or other offering material relating to any shares may be distributed in Australia, except where disclosure to investors is not required under Chapter 6D of the Corporations Act or is otherwise in compliance with all applicable Australian laws and regulations. By submitting an application for the shares, you represent and warrant to us that you are an Exempt Investor.

As any offer of shares under this document will be made without disclosure in Australia under Chapter 6D.2 of the Corporations Act, the offer of those securities for resale in Australia within 12 months may, under section 707 of the Corporations Act, require disclosure to investors under Chapter 6D.2 if none of the exemptions in section 708 applies to that resale. By applying for the shares you undertake to us that you will not, for a period of 12 months from the date of issue of the shares, offer, transfer, assign or otherwise alienate those securities to investors in Australia except in circumstances where disclosure to investors is not required under Chapter 6D.2 of the Corporations Act or where a compliant disclosure document is prepared and lodged with ASIC.

 

146


Table of Contents

Notice to Prospective Investors in Korea

The shares have not been and will not be registered under the Financial Investments Services and Capital Markets Act of Korea and the decrees and regulations thereunder (the “FSCMA”), and the shares have been and will be offered in Korea as a private placement under the FSCMA. None of the shares may be offered, sold or delivered directly or indirectly, or offered or sold to any person for re-offering or resale, directly or indirectly, in Korea or to any resident of Korea except pursuant to the applicable laws and regulations of Korea, including the FSCMA and the Foreign Exchange Transaction Law of Korea and the decrees and regulations thereunder (the “FETL”). Furthermore, the purchaser of the shares shall comply with all applicable regulatory requirements (including but not limited to requirements under the FETL) in connection with the purchase of the shares. By the purchase of the shares, the relevant holder thereof will be deemed to represent and warrant that if it is in Korea or is a resident of Korea, it purchased the shares pursuant to the applicable laws and regulations of Korea.

Notice to Prospective Investors in Switzerland

The shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document does not constitute a prospectus within the meaning of, and has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.

Neither this document nor any other offering or marketing material relating to the offering, the Company, the shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (FINMA), and the offer of shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (“CISA”). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of shares.

Notice to Prospective Investors in Singapore

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where the shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for six months after that corporation or that trust has acquired the shares under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.

 

147


Table of Contents

LEGAL MATTERS

The validity of the shares of common stock being offered hereby will be passed upon for us by Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, New York. Davis Polk & Wardwell LLP, New York, New York has acted as counsel for the underwriters in connection with certain legal matters related to this offering.

EXPERTS

The financial statements as of December 31, 2016 and 2015 and for each of the two years in the period ended December 31, 2016 and for the periods from October 25, 2014 through December 31, 2014 (successor) and from January 1, 2014 through October 24, 2014 (predecessor), included in this Prospectus have been so included in reliance on the reports (which each contain an emphasis of matter related to the emergence from bankruptcy and adoption of fresh start accounting) of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the SEC a registration statement under the Securities Act referred with respect to the shares of our common stock offered by this prospectus. This prospectus, filed as part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules thereto as permitted by the rules and regulations of the SEC. For further information about us and our common stock, you should refer to the registration statement. This prospectus summarizes provisions that we consider material of certain contracts and other documents to which we refer you. Because the summaries may not contain all of the information that you may find important, you should review the full text of those documents.

The SEC maintains a website at http://www.sec.gov from which interested persons can electronically access the registration statement, including the exhibits and schedules to the registration statement.

We have not authorized anyone to give you any information or to make any representations about us or the transactions we discuss in this prospectus other than those contained in this prospectus. If you are given any information or representations about these matters that is not discussed in this prospectus, you must not rely on that information. This prospectus is not an offer to sell or a solicitation of an offer to buy securities anywhere or to anyone where or to whom we are not permitted to offer or sell securities under applicable law.

 

148


Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page
Number
 
Consolidated Financial Statements   

Consolidated Balance Sheets at December 31, 2016 and 2015

     F-2  

Consolidated Statements of Operations; year ended December  31, 2016; year ended December 31, 2015; successor period from October 25, 2014 through December 31, 2014 and predecessor period from January 1, 2014 through October 24, 2014

     F-3  

Consolidated Statements of Comprehensive (Loss) Income; year ended December 31, 2016; year ended December 31, 2015; successor period from October 25, 2014 through December 31, 2014 and predecessor period from January 1, 2014 through October 24, 2014

     F-4  

Consolidated Statements of Cash Flows; year ended December  31, 2016; year ended December 31, 2015; successor period from October 25, 2014 through December 31, 2014 and predecessor period from January 1, 2014 through October 24, 2014

     F-5  

Consolidated Statements of Equity (Deficit); year ended December  31, 2016; year ended December 31, 2015; successor period from October 25, 2014 through December 31, 2014 and predecessor period from January 1, 2014 through October 24, 2014

     F-6  

Notes to Consolidated Financial Statements

     F-7  

Schedule I: Condensed Parent Company Financial Statements

     F-62  

Schedule II: Valuation and Qualifying Accounts

     F-64  

Reports of Independent Registered Public Accounting Firm

     F-65  

Condensed Consolidated Financial Statements (Unaudited)

 

Condensed Consolidated Balance Sheets at September  30, 2017 and December 31, 2016

     F-67  

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016

     F-68  

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016

     F-69  

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

     F-70  

Condensed Consolidated Statements of Equity for the nine months ended September 30, 2017

     F-71  

Notes to Condensed Consolidated Financial Statements

     F-72  

 

F-1


Table of Contents

CONSOLIDATED BALANCE SHEETS

 

(In millions, except share data)

   December 31,
2016
    December 31,
2015
 

Assets

    

Current assets:

    

Cash and cash equivalents (including restricted cash of $4 at both December 31, 2016 and 2015)

   $ 228     $ 221  

Accounts receivable (net of allowance for doubtful accounts of less than $1 at both December 31, 2016 and 2015)

     280       292  

Inventories:

    

Raw materials

     119       143  

Finished and in-process goods

     271       238  

Other current assets

     50       48  
  

 

 

   

 

 

 

Total current assets

     948       942  

Investment in unconsolidated entities

     20       19  

Deferred income taxes (see Note 13)

     9       9  

Other long-term assets

     20       19  

Property and equipment:

    

Land

     74       73  

Buildings

     307       293  

Machinery and equipment

     959       875  
  

 

 

   

 

 

 
     1,340       1,241  

Less accumulated depreciation

     (265     (134
  

 

 

   

 

 

 
     1,075       1,107  

Goodwill (see Note 9)

     211       211  

Other intangible assets, net (see Note 9)

     323       356  
  

 

 

   

 

 

 

Total assets

   $ 2,606     $ 2,663  
  

 

 

   

 

 

 

Liabilities and Equity

    

Current liabilities:

    

Accounts payable

   $ 238     $ 223  

Debt payable within one year (See Note 10)

     36       36  

Interest payable

     11       11  

Income taxes payable (see Note 13)

     8       5  

Accrued payroll and incentive compensation

     61       43  

Other current liabilities

     123       83  
  

 

 

   

 

 

 

Total current liabilities

     477       401  

Long-term liabilities:

    

Long-term debt (see Note 10)

     1,167       1,169  

Pension liabilities (see Note 15)

     341       333  

Deferred income taxes (see Note 13)

     66       70  

Other long-term liabilities

     73       64  
  

 

 

   

 

 

 

Total liabilities

     2,124       2,037  
  

 

 

   

 

 

 

Commitments and contingencies (see Note 14)

    

Equity

    

Common stock—$0.01 par value; 70,000,000 shares authorized; 48,058,114 and 48,028,594 shares issued and outstanding at December 31, 2016 and 2015, respectively

     —         —    

Additional paid-in capital

     864       861  

Accumulated other comprehensive loss

     (76     (92

Accumulated deficit

     (306     (143
  

 

 

   

 

 

 

Total equity

     482       626  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 2,606     $ 2,663  
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

F-2


Table of Contents

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Successor      Predecessor  

(In millions, except per share data)

   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
 

Net sales

   $ 2,233     $ 2,289     $ 465      $ 2,011  

Cost of sales

     1,845       1,894       402     
  

 

 

   

 

 

   

 

 

    

Gross profit

     388       395       63     

Cost of sales, excluding depreciation and amortization

            1,439  

Selling, general and administrative expense

     347       285       80        434  

Depreciation and amortization expense

            147  

Research and development expense

     64       65       13        63  

Restructuring and other costs (see Note 6)

     42       32       5        20  

Other operating loss (income), net

     19       2       (1      —    
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating (loss) income

     (84     11       (34      (92

Interest expense, net (see Note 10)

     76       79       15        162  

Other non-operating (income) expense, net

     (7     3       8        —    

Gain on extinguishment of debt (see Note 10)

     (9     (7     —          —    

Reorganization items, net (see Note 4)

     2       8       3        (1,972
  

 

 

   

 

 

   

 

 

    

 

 

 

(Loss) income before income taxes and earnings from unconsolidated entities

     (146     (72     (60      1,718  

Income tax expense (see Note 13)

     18       13              36  
  

 

 

   

 

 

   

 

 

    

 

 

 

(Loss) income before earnings from unconsolidated entities

     (164     (85     (60      1,682  

Earnings from unconsolidated entities, net of taxes

     1       2       —          3  
  

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income

   $ (163   $ (83   $ (60    $ 1,685  
  

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income per share:

         

Net (loss) income per common share—basic

   $ (3.39   $ (1.73   $ (1.25    $ 16,850,000  
  

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income per common share—diluted

   $ (3.39   $ (1.73   $ (1.25    $ 16,850,000  
  

 

 

   

 

 

   

 

 

    

 

 

 

Shares used in per-share calculation

         

Weighted average common shares outstanding—basic

     48,050,048       48,015,685       47,989,000        100  
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding—diluted

     48,050,048       48,015,685       47,989,000        100  
  

 

 

   

 

 

   

 

 

    

 

 

 

See Notes to Consolidated Financial Statements

 

F-3


Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

     Successor      Predecessor  

(In millions)

   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
 

Net (loss) income

   $ (163   $ (83   $ (60    $ 1,685  

Other comprehensive income (loss), net of tax:

         

Foreign currency translation

     (1     (63     (29      31  

Gain (loss) recognized from pension and postretirement benefits

     17       (1     1        (71

Reclassification adjustment for net fresh start gain related to accumulated other comprehensive income included in net (loss) income

     —         —         —          (162
  

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income (loss)

     16       (64     (28      (202
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive (loss) income

   $ (147   $ (147   $ (88    $ 1,483  
  

 

 

   

 

 

   

 

 

    

 

 

 

 

F-4


Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Successor      Predecessor  

(In millions)

   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
 

Cash flows provided (used) in operating activities

         

Net (loss) income

   $ (163   $ (83   $ (60    $ 1,685  

Adjustments to reconcile net (loss) income to net cash used in operating activities:

         

Depreciation and amortization

     185       153       22        147  

Non-cash reorganization items

     —          —         —          (2,078

Gain on the extinguishment of debt (see Note 10)

     (9     (7     —          —    

Amortization of debt discount and issuance costs

     23       22       4        —    

DIP Facility financing fees included in net income

     —         —         —          19  

Unrealized actuarial losses (gains)

     33       (13     15        —    

Deferred income tax (benefit) expense

     (17     (6     (10      20  

Stock-based compensation expense

     3       3       —          —    

Pension curtailment gain

     —         (3     —          —    

Unrealized foreign currency (gains) losses

     (3     (10     2        99  

Loss due to impaired assets

     12       4       —          —    

Other non-cash adjustments

     7       4       —          5  

Net change in assets and liabilities:

         

Accounts receivable

     11       17       4        (27

Inventories

     (12     2       52        (95

Accounts payable

     8       11       (82      68  

Income taxes payable

     7       (2     1        —    

Other assets, current and non-current

     (15     18       9        (6

Other liabilities, current and non-current

     72       18       40        (44
         

Net cash provided by (used in) operating activities

     142       128       (3      (207
         

Cash flows used in investing activities

         

Capital expenditures

     (115     (114     (17      (78

Capitalized interest

     (2     (1     —          (1

Proceeds from sale of business (see Note 7)

     —         —         —          12  

Consolidation of variable interest entity (see Note 7)

     —         —         —          50  

Purchases of intangible assets

     (2     (3     —          (2

Dividend from MPM

     1       —         —          —    

Proceeds from sale of assets

     1       2       —          1  
         

Net cash used in investing activities

     (117     (116     (17      (18
         

Cash flows (used in) provided by financing activities

         

Net short-term debt repayments

     —         (1     (1      (6

Borrowings of long-term debt

     —         —         —          180  

Repayments of long-term debt

     (16     (10     —          (315

Repayment of affiliated debt (see Note 7)

     —         —         —          (50

Common stock issuance proceeds (see Note 2)

     —         1       —          600  

DIP Facility financing fees

     —         —         —          (19
         

Net cash (used in) provided by financing activities

     (16     (10     (1      390  
         

Increase (decrease) in cash and cash equivalents

     9       2       (21      165  

Effect of exchange rate changes on cash

     (2     (8     (4      (6

Cash and cash equivalents, beginning of period

     217       223       248        89  
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 224     $ 217     $ 223      $ 248  
  

 

 

   

 

 

   

 

 

    

 

 

 

Supplemental disclosures of cash flow information

         

Cash paid for:

         

Interest

   $ 56     $ 57     $ 1      $ 250  

Income taxes, net of refunds

     27       21       3        12  

Non-cash investing activity:

         

Capital expenditures included in accounts payable

   $ 25     $ 17     $ 20      $ 13  

Non-cash financing activity:

         

Conversion of BCA Commitment Premium (see Note 2)

     —         —         —          30  

See Notes to Consolidated Financial Statements

 

F-5


Table of Contents

CONSOLIDATED STATEMENTS OF EQUITY

 

    Common Stock     Additional
Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
(Deficit)
Equity
 

(In millions)

  Shares     Amount          

Predecessor

   

Balance at December 31, 2013

    —       $ —       $ 716     $ (2,398   $ 202     $ (1,480

Net income

        1,685         1,685  

Other comprehensive loss

        (40     (40

Sale of business to related party (see Note 7)

        (3         (3

Cancellation of Predecessor Company equity (see Note 3)

        (713     713       (162     (162
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at October 24, 2014

    —       $ —       $ —       $ —       $ —       $ —    

Successor

   

Issuance of Successor Company common stock (see Notes 2 and 3)

    47,989,000         857           857  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at October 25, 2014

    47,989,000     $ —       $ 857     $ —       $ —       $ 857  

Net loss

        (60       (60

Other comprehensive loss

        (28     (28
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2014

    47,989,000     $ —       $ 857     $ (60   $ (28   $ 769  

Net loss

        (83       (83

Other comprehensive loss

        (64     (64

Stock-based compensation expense

        3           3  

Proceeds from sale of common stock

    39,594         1           1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2015

    48,028,594     $ —       $ 861     $ (143   $ (92   $ 626  

Net loss

        (163       (163

Other comprehensive income

        16       16  

Stock-based compensation expense

        3           3  

Proceeds from sale of common stock

    29,520         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2016

    48,058,114     $ —       $ 864     $ (306   $ (76   $ 482  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

F-6


Table of Contents

MPM HOLDINGS INC.

Notes to Consolidated Financial Statements

(In millions, except share data)

1. Business and Basis of Presentation

Based in Waterford, NY, MPM Holdings Inc. (“Momentive” or the “Company”) is comprised of two reportable segments: Silicones and Quartz. Silicones is a global business engaged in the manufacture, sale and distribution of silanes, specialty silicones and urethane additives. Quartz, also a global business, is engaged in the manufacture, sale and distribution of high-purity fused quartz and ceramic materials.

As a result of the reorganization and emergence from Chapter 11 bankruptcy of Momentive Performance Materials Inc. (“MPM”) on October 24, 2014 (the “Effective Date”), MPM’s direct parent became MPM Intermediate Holdings Inc., a holding company and wholly owned subsidiary of Momentive, the ultimate parent entity of MPM. Prior to its reorganization, the Company, through a series of intermediate holding companies, was controlled by investment funds managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and subsidiaries, “Apollo”).

Upon emergence from bankruptcy on the Effective Date, the Company 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, the Consolidated Financial Statements on or after October 24, 2014 are not comparable with the Consolidated Financial Statements prior to that date. Refer to Note 2 for additional information.

References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to October 24, 2014. References to “Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company prior to October 24, 2014.

During the three months ended December 31, 2015, the Company recorded out-of-period adjustments totaling approximately $3. A $2 adjustment related to property taxes should have been originally recorded in each of the second and third quarters of 2015 ($1). The remaining $1 adjustment related to income taxes and should have been originally recorded in the second quarter of 2015. The adjustments decreased pretax income and net income for the three months ended December 31, 2015 by $2 and $3, respectively. After evaluating the quantitative and qualitative aspects of the adjustments, the Company concluded the effect of these adjustments was not material to any previously issued consolidated financial statements or the annual results for 2015.

2. Emergence From Chapter 11 Bankruptcy

On April 13, 2014 (the “Petition Date”), Momentive Performance Materials Holdings Inc. (the Company’s direct parent prior to October 24, 2014, “Old MPM Holdings”), the Company, and certain of our U.S. subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization (the “Bankruptcy Filing”) under Chapter 11 (“Chapter 11”) of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Court”). The Chapter 11 proceedings were jointly administered under the caption In re MPM Silicones, LLC, et al., Case No. 14-22503. The Company continued to operate its businesses as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court.

On June 23, 2014, the Company filed with the Court an amended version of the Chapter 11 plan of reorganization proposed by the Debtors (as amended, supplemented, or modified, the “Plan”) and accompanying disclosure statement (the “Disclosure Statement”). On the Effective Date, the Plan became effective and the Company emerged from the Chapter 11 proceedings.

 

F-7


Table of Contents

On or following the Effective Date, and pursuant to the terms of the Plan, the following occurred:

 

    payment in full in cash to general unsecured creditors (including trade creditors) and holders of claims arising from the $75 senior secured revolving credit facility (the “Cash Flow Facility”) and the $300 senior secured debtor-in-possession term loan facility (the “DIP Term Loan Facility”);

 

    conversion of the Company’s then-existing asset-based revolving facility into an exit $270 asset-based revolving facility (the “ABL Facility”);

 

    issuance of new 3.88% First-Priority Senior Secured Notes due 2021 (the “First Lien Notes”) and new 4.69% Second-Priority Senior Secured Notes due 2022 (the “Second Lien Notes”) to holders of the Company’s 8.875% First-Priority Senior Secured Notes due 2020 (the “Old First Lien Notes”) and 10% Senior Secured Notes due 2020 (the “Old Secured Notes”), respectively, and the cancellation of the Old First Lien Notes and the Old Secured Notes;

 

    conversion of the Company’s 9.00% Springing Lien Dollar Notes due 2021 and 9.50% Springing Lien Euro Notes due 2021 (collectively, “Old Second Lien Notes”) into the new equity of the Successor Company (resulting in the issuance of 11,791,126 shares of common stock), subject to dilution by the management incentive plan and common stock issued in the rights offerings;

 

    issuance of 36,197,874 shares of Successor Company common stock (including shares issued in connection with the backstop commitment of the rights offerings (the “Backstop Commitment”)) resulting from the exercise of subscription rights issued to holders of the Old Second Lien Notes in the $600 rights offerings and the “commitment premium” paid in shares to the backstop parties in respect of their backstop commitment;

 

    exchange of all shares of Successor Company common stock for common stock of MPM Holdings Inc. and the contribution by MPM Holdings Inc. of all shares of the Successor Company common stock to its wholly-owned subsidiary, MPM Intermediate Holdings Inc., a result of which the Company became a wholly owned subsidiary of MPM Intermediate Holdings Inc.;

 

    cancellation of the equity of the Predecessor Company;

 

    cancellation of the Company’s 11.5% Senior Subordinated Notes due 2016 (the “Subordinated Notes”);

 

    a recovery to the holders of Old MPM Holdings’ 11% Senior Discount Note due June 4, 2017 (“PIK Notes”) of $9, which represents the amount of the cash available at Old MPM Holdings as of the Effective Date, after taking into account administrative expenses; and

 

    appointment of a new chief executive officer, chief financial officer and general counsel.

Backstop Commitment Agreement and Rights Offerings

Backstop Commitment Agreement

On May 9, 2014, the Company entered into the Backstop Commitment Agreement, as subsequently amended (the “BCA”), among the Company, Old MPM Holdings, and the commitment parties party thereto (the “Commitment Parties,” and each individually, a “Commitment Party”). The BCA provided that upon the satisfaction of certain terms and conditions, including the confirmation of the Plan, the Company would have the option to require each Commitment Party to purchase from the Company (on a several and not joint basis) its pro rata portion, based on such Commitment Party’s backstop commitment percentage, of the common stock of the reorganized Company (the “New Common Stock”) that is not otherwise purchased in connection with the Rights Offerings (described below) which were made in connection with the Plan (the “Unsubscribed Shares”). In consideration for their commitment to purchase the Unsubscribed Shares, the Commitment Parties received a commitment premium equal to $30 (the “BCA Commitment Premium”). The BCA Commitment Premium was payable in shares of New Common Stock; provided, that, if the BCA was terminated under certain circumstances, the BCA Commitment Premium would have been payable in cash. Pursuant to the terms of the BCA, the BCA Commitment Premium was deemed earned, nonrefundable and non-avoidable upon entry of the approval order by the Court.

 

F-8


Table of Contents

The Company had recognized a $30 liability for the BCA Commitment Premium under the guidance for accounting for liability instruments. This amount is included in “Reorganization items, net” in the Consolidated Statements of Operations. Upon application of fresh-start accounting (see Note 3), on October 24, 2014, the BCA Commitment Premium was converted to equity in the Consolidated Balance Sheets.

The Company has agreed to reimburse the Commitment Parties for all reasonable fees and expenses incurred in connection with, among other things, the negotiation, preparation and implementation of the Rights Offerings, the Plan and any related efforts. In addition, the BCA requires that the Company and the other Debtors indemnify the Commitment Parties for certain losses, claims, damages, liabilities, costs and expenses arising out of or in connection with the BCA, the Plan and the related transactions. On June 23, 2014, the Court found that the terms and conditions of MPM’s Restructuring Support Agreement were fair, reasonable and the best available to the Debtors under the circumstances, and issued an order authorizing and directing the Debtors to enter into, execute, deliver and implement the BCA. The Court’s Order approving the Plan, entered on September 11, 2014, also requires the Company and the Debtors to indemnify the Commitment Parties for all fees, expenses, costs and liabilities incurred in connection with certain cases. The indenture trustees for the Old First Lien Notes and the Old Secured Notes commenced actions against certain of the Commitment Parties for alleged breaches of the applicable intercreditor agreement governing the rights and priorities of such parties.

Rights Offerings

On the Effective Date, all previously issued and outstanding shares of the Predecessor Company’s common stock were canceled, as were all other previously issued and outstanding equity interests. On the Effective Date, the Company issued 7,475,000 shares (the “1145 Rights Offering Stock”) of a new class of common stock, par value $0.01 per share, of the Company (the “New Common Stock”) pursuant to the rights offering under Section 1145 of the Bankruptcy Code (the “Section 1145 Rights Offering”) and 26,662,690 shares (the “4(a)(2) Rights Offering Stock”) of New Common Stock pursuant to the rights offering under section 4(a)(2) (the “4(a)(2) Rights Offering”) of the Securities Act of 1933, as amended (the “Securities Act). Additionally, the Company issued 2,060,184 shares of New Common Stock pursuant to the Backstop Commitment, including 1,475,652 shares of New Common Stock issued as consideration for the BCA Commitment Premium. A portion of the 1145 Rights Offering Stock issued to the Commitment Parties, and all of the 4(a)(2) Rights Offering Stock, are restricted securities under the Securities Act, and may not be offered, sold or otherwise transferred except in accordance with applicable restrictions. In addition, upon effectiveness of the Plan, the Company issued 11,791,126 shares of New Common Stock to holders of the Second Lien Notes pursuant to the Second Lien Notes Equity Distribution. Collectively, the Section 1145 Rights Offering and the 4(a)(2) Rights Offering are referred to as the “Rights Offerings”.

In accordance with the Plan, all shares of New Common Stock were automatically exchanged for one share of common stock, par value $0.01 per share, of Momentive, which contributed the shares of New Common Stock to its wholly-owned subsidiary, MPM Intermediate Holdings. As a result, the Company is a wholly owned subsidiary of MPM Intermediate Holdings.

The shares of New Common Stock described above were exempt from registration under the Securities Act pursuant to (i) Section 1145 of the Bankruptcy Code, which generally exempts from such registration requirements the issuance of securities under a plan of reorganization, and/or (ii) Section 4(a)(2) of the Securities Act because the issuance did not involve any public offering.

Registration Rights Agreement

On October 24, 2014, in connection with the emergence from Chapter 11, Momentive entered into a registration rights agreement with certain of its stockholders (the “Registration Rights Agreement”), which provides the stockholders party thereto certain registration rights.

 

F-9


Table of Contents

Under the Registration Rights Agreement, Momentive is required to file a shelf registration statement (on Form S-3 if permitted) and use its reasonable best efforts to cause the registration statement to become effective for the benefit of all stockholders party to the Registration Rights Agreement. Any individual holder or holders of Momentive’s outstanding common stock party thereto can demand an unlimited number of “shelf takedowns,” which may be conducted in underwritten offerings so long as the total offering size is reasonably expected to exceed $50. To satisfy its obligations under the Registration Rights Agreement, Momentive filed a registration statement on Form S-1 (File No. 333-201338) on December 31, 2014, which became effective on July 2, 2015.

Each holder or holders party to the Registration Rights Agreement who own at least 10% of Momentive’s outstanding common stock, or held at least 10% of Momentive’s common stock as of the date of the Registration Rights Agreement and could reasonably be considered our affiliate, have Form S-1 demand registration rights, which may be conducted in an underwritten offering, as long as the total offering price is reasonably expected to be at least $50, and which may not exceed two in any six month period or eight in total, subject to certain exceptions and to customary cutback provisions. In addition, a holder of at least 10% of Momentive’s common stock has unlimited Form S-3 demand registration rights, which may be conducted in underwritten offerings, as long as the total offering price is reasonably expected to be at least $50, subject to customary cutback provisions.

Each stockholder party to the Registration Rights Agreement has unlimited piggyback registration rights with respect to underwritten offerings, subject to certain exceptions and limitations.

The foregoing registration rights are subject to certain cutback provisions and customary suspension/blackout provisions. We have agreed to pay all registration expenses under the Registration Rights Agreement. In connection with the registrations described above, Momentive has agreed to indemnify the stockholders against certain liabilities.

The Registration Rights Agreement also contains certain holdback agreements that apply to each stockholder party to the Registration Rights Agreement. Generally, without Momentive’s prior consent and subject to limited exceptions, the stockholders party to the Registration Rights Agreement have agreed to, if requested, enter into an agreement not to publicly sell or distribute Momentive’s equity securities beginning ten days prior to the pricing of Momentive’s initial public offering for the 180-day period following the closing date of Momentive’s initial public offering and, if participating in a future shelf takedown or other underwritten public offering, beginning ten days prior to the pricing of that offering and for the 90-day period following the closing date of such offering.

3. Fresh Start Accounting

In connection with the Company’s emergence from Chapter 11, the Company applied the provisions of fresh start accounting to its financial statements as (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the emerging entity and (ii) the reorganization value of the Company’s assets immediately prior to confirmation was less than the post-petition liabilities and allowed claims. The Company applied fresh start accounting as of October 24, 2014.

Upon the application of fresh start accounting, the Company allocated the reorganization value to its individual assets based on their estimated fair values. Reorganization value represented the fair value of the Successor Company’s assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets was reported as goodwill.

Reorganization Value

In support of the Plan, the enterprise value of the Successor Company was estimated to be in the range of $2.0 billion to $2.4 billion as of the Effective Date. Based on the estimates and assumptions used in determining the enterprise value, as further discussed below, the Company estimated the enterprise value to be $2.2 billion, which was approved by the Court.

 

F-10


Table of Contents

The Company estimated the enterprise value of the Successor Company utilizing the discounted cash flow method. To estimate fair value utilizing the discounted cash flow method, the Company established an estimate of future cash flows based on the financial projections and assumptions utilized in the Company’s disclosure statement, which were derived from earnings forecasts and assumptions regarding growth and margin projections. A terminal value was included, and was calculated using the constant growth method based on the projected cash flows of the final year of the forecast period.

The discount rate of 11% was estimated based on an after-tax weighted average cost of capital (“WACC”) reflecting the rate of return that would be expected by a market participant. The WACC also takes into consideration a company-specific risk premium, reflecting the risk associated with the overall uncertainty of the financial projections used to estimate future cash flows.

The fair value of debt obligations represents $36 of debt payable within one year and $1,166 of long-term debt. The fair value of long-term debt was determined based on a market approach utilizing current market yields, and was estimated to be approximately 87% of par value.

The fair value of pension liabilities was determined based upon assumptions related to discount rates and expected return on assets, as well as certain other assumptions related to various demographic factors.

The following table reconciles the enterprise value to the estimated reorganization value as of the Effective Date:

 

Enterprise value

   $ 2,200  

Plus: Excess cash and cash equivalents

     80  

Plus: Excess working capital

     124  

Plus: Fair value of non-debt and non-pension liabilities

     646  
  

 

 

 

Reorganization value of Successor assets

   $ 3,050  
  

 

 

 

The fair value of non-debt liabilities represents total liabilities of the Successor Company on the Effective Date, less debt payable within one year, long-term debt and pension and postretirement benefit obligations.

 

F-11


Table of Contents

Consolidated Statement of Financial Position

The adjustments set forth in the following consolidated Balance Sheet reflect the effect of the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh-start accounting (reflected in the column “Fresh Start Adjustments”). The explanatory notes highlight methods used to determine fair values or other amounts of the assets and liabilities as well as significant assumptions or inputs.

 

     Predecessor
Company
    Reorganization
Adjustments
    Fresh Start
Adjustments
    Successor
Company
 

Assets

        

Current assets:

        

Cash and cash equivalents

   $ 162     $ 91 (a)    $ —       $ 253  

Accounts receivable

     335       —         —         335  

Inventories:

        

Raw materials

     131       —         3 (a)      134  

Finished and in-process goods

     315       —         15 (a)      330  

Deferred income taxes

     9       56 (b)      (11 )(b)      54  

Other current assets

     74       —         —         74  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     1,026       147       7       1,180  

Investment in unconsolidated entities

     10       —         8 (c)      18  

Deferred income taxes

     4       —         5 (b)      9  

Other long-term assets

     24       —         —         24  

Property and equipment:

        

Land

     71       —         8 (d)      79  

Buildings

     371       —         (74 )(d)      297  

Machinery and equipment

     1,479       —         (684 )(d)      795  
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,921       —         (750     1,171  

Less accumulated depreciation

     (1,050     —         1,050 (d)      —    
  

 

 

   

 

 

   

 

 

   

 

 

 
     871       —         300       1,171  

Goodwill

     358       —         (134 )(e)      224  

Other intangible assets, net

     398       —         26 (f)      424  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,691     $ 147     $ 212     $ 3,050  
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and (Deficit) Equity

        

Current liabilities:

        

Accounts payable

   $ 260     $ 38 (c)    $ —       $ 298  

Debt payable within one year

     1,850       (1,814 )(d)      —         36  

Interest payable

     6       (6 )(e)      —         —    

Income taxes payable

     5       —         —         5  

Deferred income taxes

     9       —         9 (g)      18  

Accrued payroll and incentive compensation

     44       12 (f)      —         56  

Other current liabilities

     86       (25 )(g)      6 (h)      67  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     2,260       (1,795     15       480  

Long-term liabilities:

        

Long-term debt

     7       1,159 (h)      —         1,166  

Pension liabilities

     133       165 (i)      41 (h)      339  

Deferred income taxes

     55       57 (j)      28 (g)      140  

Other long-term liabilities

     54       9 (k)      5 (i)      68  

Liabilities subject to compromise

     2,026       (2,026 )(l)      —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     4,535       (2,431     89       2,193  
  

 

 

   

 

 

   

 

 

   

 

 

 

(Deficit) Equity

        

Common stock (Successor)

     —         —   (m)      —         —    

Additional paid-in capital (Successor)

     —         857 (m)      —         857  

Common stock (Predecessor)

     —         —   (n)      —         —    

Additional paid-in capital (Predecessor)

     713       (713 )(n)      —         —    

Accumulated other comprehensive income

     211       —         (211 )(j)      —    

(Accumulated deficit) retained earnings

     (2,768     2,434 (o)      334 (j)      —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total (deficit) equity

     (1,844     2,578       123       857  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and (deficit) equity

   $ 2,691     $ 147     $ 212     $ 3,050  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

F-12


Table of Contents

Reorganization Adjustments

(a) Reflects the net cash received as of the Effective Date from implementation of the Plan:

 

Sources:

  

Proceeds from the Rights Offerings

   $ 600  

Uses:

  

Claims paid at emergence

     (11

Repayment of DIP Term Loan

     (300

Repayment of DIP ABL Facility

     (144

Repayment of Cash Flow Facility

     (20

Other fees and expenses

     (34
  

Total uses

     (509
  

 

 

 

Net cash received

   $ 91  
  

 

 

 

Other fees and expenses primarily represent $6 of accrued and unpaid interest and $28 for success and other professional fees which is included in “Reorganization items, net” in the Consolidated Statements of Operations. A portion of the net cash received has been earmarked for future use and was not paid out on the Effective Date.

(b) Represents the deferred tax asset impact of the reorganization adjustments, resulting from recognizing certain reorganization costs deductible in future periods in addition to the change in valuation allowance resulting from the tax attribute reduction.

(c) Represents $53 of claims expected to be satisfied in cash that were reclassified from “Liabilities subject to compromise”. Also represents the payment of $21 of previously accrued professional fees related to the Bankruptcy Filing and the accrual of an additional $6 of success fees.

(d) On the Effective Date, the Company repaid $300 in outstanding DIP Term Loans, $144 in outstanding borrowings under the DIP ABL Facility and $20 in outstanding borrowings under the Cash Flow Facility in full, and issued replacement notes to holders of the $1,100 in outstanding Old First Lien Notes and $250 in outstanding Old Second Lien Notes (which are classified as “Long-term debt”). The Company’s Senior Subordinated Notes were canceled on account of the subordination provisions set forth in the indenture to such notes.

(e) On the Effective Date, the Company repaid $6 of accrued unpaid interest.

(f) Represents $12 of accrued incentive compensation expected to be satisfied in cash that was reclassified from “Liabilities subject to compromise”.

(g) Represents the reclassification of the BCA Commitment Premium of $30 to equity, partially offset by $5 of other current liabilities that were reclassified from “Liabilities subject to compromise”.

(h) Represents the issuance of replacement notes to holders of the $1,100 in outstanding Old First Lien Notes due 2021 and $250 in outstanding Old Second Lien Notes due 2022. The replacement notes were recorded at estimated fair value, which was determined based on a market approach utilizing current market yields.

(i) Represents $165 of pension liabilities that were reclassified from “Liabilities subject to compromise”.

(j) Represents the deferred tax liability impact of the reorganization adjustments, resulting from the reduction of the Company’s tax attributes and tax basis of fixed assets and intangibles as a result of the cancellation of debt excluded from taxable income, net of valuation allowance previously recorded.

 

F-13


Table of Contents

(k) Represents $9 of other long-term liabilities that were reclassified from “Liabilities subject to compromise”.

(l) Liabilities subject to compromise were settled as follows in accordance with the Plan:

 

Liabilities subject to compromise (“LSTC”)

   $ 2,026  

Cash payments at emergence from LSTC

     (11

Liabilities reinstated at emergence:

  

Pension liabilities

     (165

Accounts payable

     (53

Accrued payroll and incentive compensation

     (12

Other current liabilities

     (5

Other long-term liabilities

     (9
  

 

 

 

Total liabilities reinstated at emergence

     (244

Fair value of equity issued at emergence

     (227
  

 

 

 

Gain on settlement of LSTC

   $ 1,544  
  

 

 

 

(m) Reflects the issuance of 47,989,000 shares of New Common Stock pursuant to the Rights Offerings, Second Lien Notes Equity Distribution and Backstop Commitment.

(n) Reflects the cancellation of Predecessor Company equity to accumulated deficit.

(o) Reflects the cumulative impact of the reorganization adjustments discussed above:

 

Gain on settlement of LSTC

   $ 1,544  

Fair value adjustments to debt

     191  

Success and other fees recognized at emergence

     (13
  

 

 

 

Net gain on reorganization adjustments

     1,722  

Tax impact on reorganization adjustments

     (1

Cancellation of Predecessor Company equity

     713  
  

 

 

 

Net impact to Accumulated deficit

   $ 2,434  
  

 

 

 

The net gain on reorganization adjustments has been included in “Reorganization items, net” in the Consolidated Statements of Operations.

Fresh Start Adjustments

(a) Reflects the adjustments made to record inventories at their estimated fair value, which was determined as follows:

 

    Fair value of finished goods inventory was determined based on the estimated selling price less costs to sell, including disposal and holding period costs, and a reasonable profit margin on the selling and disposal effort.

 

    Fair value of in-process goods inventory was determined based on the estimated selling price once completed less total costs to complete the manufacturing effort, costs to sell, including disposal and holding period costs, and a reasonable profit margin on the remaining manufacturing, selling and disposal effort.

 

    Fair value of raw materials inventory was determined based on current replacement costs.

(b) Represents the deferred tax asset impact of the fresh start adjustments, resulting from the recognition of deductible goodwill in the U.S. and foreign jurisdictions, net of valuation allowance.

 

F-14


Table of Contents

(c) Reflects the adjustment made to record the Company’s ownership interest in Zhejiang Xinan Momentive Performance Materials Co., Ltd, a joint venture in China which manufactures siloxane, at its estimated fair value.

(d) Reflects the adjustments made to record property, plant and equipment at its estimated fair value. Depreciable lives were also revised to reflect the remaining estimated useful lives of the related property, plant and equipment which range from 1 to 40 years. Fair value was determined as follows:

 

    The market, sales comparison or trended cost approach was utilized to estimate fair value for land and buildings. This approach relies upon recent sales, offerings of similar assets or a specific inflationary adjustment to original purchase price to arrive at a probable selling price.

 

    The cost approach was utilized to estimate fair value for machinery and equipment. This approach considers the amount required to construct or purchase a new asset of equal utility at current market prices, with adjustments in value for physical deterioration and functional and economic obsolescence. Physical deterioration is an adjustment made in the cost approach to reflect the real operating age of an asset with regard to wear and tear, decay and deterioration that is not prevented by maintenance. Functional obsolescence is an adjustment made to reflect the loss in value or usefulness of an asset caused by inefficiencies or inadequacies of the asset, as compared to a more efficient or less costly replacement asset with newer technology. Economic obsolescence is an adjustment made to reflect the loss in value or usefulness of an asset due to factors external to the asset, such as the economics of the industry, reduced demand, increased competition or similar factors. The estimated fair value of machinery and equipment reflects an economic obsolescence adjustment of $343.

Depreciable lives were revised to reflect the remaining estimated useful lives as follows (in years):

 

Buildings

     10 to 40 years  

Machinery and equipment

     1 to 20 years  

(e) Reflects the adjustments made to record the elimination of the Predecessor goodwill balance of $358 and to record Successor goodwill of $224, which represents the reorganizational value of assets in excess of amounts allocated to identified tangible and intangible assets.

(f) Reflects the adjustments made to write-off Predecessor other intangible assets of $398 and to record $424 in estimated fair value of Successor other intangible assets. Fair value was comprised of the following:

 

    Trademarks of $60 were valued using the relief from royalty income approach based on the following significant assumptions:

 

  i) Forecasted net sales attributable to the trademarks for the period ranging from October 24, 2014 to December 31, 2033;

 

  ii) Royalty rates ranging from 0.25% to 1.5% of expected net sales determined with regard to comparable market transactions and profitability analysis;

 

  iii) Discount rates ranging from 12.0% to 14.0%, which were based on the after-tax weighted average cost of capital (“WACC”); and

 

  iv) Economic lives ranging from 6 to 11 years.

 

    Technology based intangible assets of $105 were valued using the relief from royalty income approach based on the following significant assumptions:

 

  i) Forecasted net sales attributable to the respective technologies for the period ranging from October 24, 2014 to December 31, 2033;

 

  ii) Royalty rates ranging from 1.0% to 3.5% of expected net sales determined with regard to expected cash flows of the respective technologies and the overall importance of respective technologies to product offering;

 

F-15


Table of Contents
  iii) Discount rates ranging from 12.0% to 14.0%, which were based on the after-tax WACC; and

 

  iv) Economic lives ranging from 8 to 11 years.

 

    Customer related intangible assets of $223 were valued using the multi-period excess earnings income approach, incorporating distributor inputs, and were based on the following significant assumptions:

 

  i) Forecasted net sales and profit margins attributable to the current customer base for the period ranging from October 24, 2014 to December 31, 2034;

 

  ii) Attrition rates ranging from 5.0% to 15.0%;

 

  iii) Discount rates ranging from 14.0% to 15.0%, which were based on the after-tax WACC; and

 

  iv) Economic lives ranging from 6 to 13 years.

 

    In-process research and development (“IPR&D”) of $36 was valued using a cost approach based on the following significant assumptions:

 

  i) The estimated cost to recreate the respective IPR&D projects, incorporating a margin based on a reasonable developer’s profit; and

 

  ii) An indefinite economic life until the respective IPR&D projects are completed and placed in service, at which time each project will be assigned an estimated useful life.

(g) Represents the deferred tax liability impact of the fresh start adjustments, resulting primarily from the book adjustment made to property, plant, and equipment that increases the future taxable temporary differences recorded net of valuation allowances.

(h) Reflects the adjustment made to remeasure pension liabilities, which was determined based upon assumptions related to discount rates and expected return on assets, as well as certain other assumptions related to various demographic factors. The resulting adjustment was recoded in “Other comprehensive loss” in the Predecessor Company’s Consolidated Statement of Other Comprehensive Income.

(i) Primarily reflects the adjustment made to record certain environmental liabilities at estimated fair value.

(j) Reflects the cumulative impact of the fresh start accounting adjustments discussed above and the elimination of the Predecessor Company’s accumulated other comprehensive income:

 

Establishment of Successor goodwill

   $ 224  

Elimination of Predecessor goodwill

     (358

Establishment of Successor other intangible assets

     424  

Elimination of Predecessor other intangible assets

     (398

Property, plant and equipment fair value adjustment

     300  

Pension liability remeasurement adjustment

     (47

Other assets and liabilities fair value adjustment

     21  

Elimination of Predecessor Company accumulated other comprehensive income

     211  
  

 

 

 

Net gain on fresh start adjustments

     377  

Tax impact on fresh start adjustments

     (43
  

 

 

 

Net impact on accumulated deficit

   $ 334  
  

 

 

 

The net gain on fresh start adjustments has been included in “Reorganization items, net” in the Consolidated Statements of Operations.

 

F-16


Table of Contents

4. Reorganization Items, Net

Incremental costs incurred directly as a result of the Bankruptcy Filing, gains on the settlement of liabilities under the Plan and the net impact of fresh start accounting adjustments are classified as “Reorganization items, net” in the Consolidated Statements of Operations. The following table summarizes reorganization items:

 

     Successor     Predecessor  
     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
 

Professional fees

   $ 2      $ 8      $ 3     $ 78  

DIP Facility financing costs

     —          —          —         19  

BCA Commitment Premium

     —          —          —         30  

Net gain on reorganization adjustments

     —          —          —         (1,722

Net gain on fresh start adjustments

     —          —          —         (377
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 2      $ 8      $ 3     $ (1,972
  

 

 

    

 

 

    

 

 

   

 

 

 

5. Summary of Significant Accounting Policies

Principals of ConsolidationThe Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries in which minority shareholders hold no substantive participating right, and variable interest entities in which the Company is the primary beneficiary. Intercompany accounts and transactions are eliminated in consolidation. The Company’s share of net earnings of 20% to 50% owned companies, for which it has the ability to exercise significant influence over operating and financial policies (but not control), are included in “Earnings from unconsolidated entities, net of taxes” in the Consolidated Statements of Operations. Investments in the other companies are carried at cost.

The Company’s unconsolidated investment accounted for under the equity method of accounting is a partial ownership interest in Zhejiang Xinan Momentive Performance Materials Co., Ltd, a joint venture in China which manufactures siloxane, one of our key intermediate materials. The Company’s current ownership interest in the joint venture is 25%.

Income Statement PresentationAs a result of the adoption of fresh start accounting upon the Company’s emergence from Chapter 11, management elected to change its accounting policy related to its income statement presentation of costs of goods sold beginning in the successor period from October 25, 2014 through December 31, 2014 and all periods thereafter. As a result, the “Depreciation and amortization expense” caption has been eliminated and the related expense has been allocated to “Cost of sales” and “Selling, general and administrative expense”.

Foreign Currency TranslationsAssets and liabilities of foreign affiliates are translated at the exchange rates in effect at the balance sheet date. Income, expenses and cash flows are translated at average exchange rates during the year. The Company recognized translation gain (losses) of $3, $(6), $(8), and $(99) for the years ended December 31, 2016, December 31, 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, respectively, which are included as a component of “Net loss.” In addition, gains or losses related to the Company’s intercompany loans payable and receivable denominated in a foreign currency other than the subsidiary’s functional currency that are deemed to be permanently invested are remeasured to cumulative translation and recorded in “Accumulated other comprehensive income” in the Consolidated Balance Sheets. The effect of translation is also included in “Accumulated other comprehensive income”.

 

F-17


Table of Contents

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and also the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, it requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. The most significant estimates that are included in the financial statements are legal liabilities, deferred tax assets and liabilities and related valuation allowances, income tax accruals, pension and postretirement assets and liabilities, valuation allowances for accounts receivable and inventories, general insurance liabilities, asset impairments, fair value of stock awards and fair values of assets acquired and liabilities assumed in business acquisitions. Actual results could differ from these estimates.

Cash and Cash EquivalentsThe Company considers all highly liquid investments that are purchased with an original maturity of three months or less to be cash equivalents. At December 31, 2016 and December 31, 2015, the Company had interest-bearing time deposits and other cash equivalent investments of $3 and $5, respectively. These amounts are included in the Consolidated Balance Sheets as a component of “Cash and cash equivalents”.

Allowance for Doubtful AccountsThe allowance for doubtful accounts is estimated using factors such as customer credit ratings and past collection history. Receivables are charged against the allowance for doubtful accounts when it is probable that the receivable will not be collected. Upon recording the assets of the Company at their estimated fair value in connection with the application of fresh start accounting, the amount of accounts receivable expected to be unrecoverable were written-off, resulting in the remeasurement of the allowance for doubtful accounts to $0 as of October 24, 2014 (see Note 3).

InventoriesInventories are stated at lower of cost or market using the first-in, first-out method. Costs include direct material, direct labor and applicable manufacturing overheads, which are based on normal production capacity. Abnormal manufacturing costs are recognized as period costs and fixed manufacturing overheads are allocated based on normal production capacity. An allowance is provided for excess and obsolete inventories based on management’s review of inventories on-hand compared to estimated future usage and sales. Inventories in the Consolidated Balance Sheets are presented net of an allowance for excess and obsolete inventory of $22 and $4 at December 31, 2016 and December 31, 2015, respectively. Upon recording the assets of the Company at their estimated fair value in connection with the application of fresh start accounting, the amount of excess and obsolete inventory was written-off, resulting in the re-measurement of the reserve for excess and obsolete inventory to $0 as of October 24, 2014 (see Note 3).

Deferred ExpensesDeferred debt financing costs are included in “Other long-term assets” in the Consolidated Balance Sheets and are amortized over the life of the related debt or credit facility using the effective interest method. Upon extinguishment of any debt, the related debt issuance costs are written off. At both December 31, 2016 and 2015, the Company had no unamortized deferred financing costs.

Property and Equipment—Land, buildings and machinery and equipment are stated at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of the properties (the average estimated useful lives for buildings and machinery are 20 years and 15 years, respectively). Assets under capital leases are amortized over the lesser of their useful life or the lease term. Major renewals and betterments are capitalized. Maintenance, repairs, minor renewals and turnarounds (periodic maintenance and repairs to major units of manufacturing facilities) are expensed as incurred. When property and equipment is retired or disposed of, the asset and related depreciation are removed from the accounts and any gain or loss is reflected in operating income. The Company capitalizes interest costs that are incurred during the construction of property and equipment. Property and equipment was recorded at its estimated fair value in connection with the application of fresh start accounting, resulting in the remeasurement of accumulated depreciation to $0 as of October 24, 2014 (see Note 3). Depreciation expense was $143, $117, $17, and $113 for the years ended December 31, 2016 and December 31, 2015; the successor period from October 25, 2014 through

 

F-18


Table of Contents

December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, respectively. Depreciation expense for the year ended included accelerated depreciation of $35 primarily related to certain long-lived assets mainly triggered by siloxane capacity transformation programs in Germany.

Capitalized Software—The Company capitalizes certain costs, such as software coding, installation and testing, that are incurred to purchase or create and implement computer software for internal use. Amortization is recorded on the straight-line basis over the estimated useful lives, which range from 1 to 5 years.

Goodwill and Intangibles—The excess of purchase price over net tangible and identifiable intangible assets of businesses acquired is carried as “Goodwill” in the Consolidated Balance Sheets. Separately identifiable intangible assets that are used in the operations of the business (e.g., patents and technology, customer lists and contracts) are recorded at cost (fair value at the time of acquisition) and reported as “Other intangible assets, net” in the Consolidated Balance Sheets. Costs to renew or extend the term of identifiable intangible assets are expensed as incurred. The Company does not amortize goodwill or indefinite-lived intangible assets. Intangible assets with determinable lives are amortized on a straight-line basis over the shorter of the legal or useful life of the assets, which range from 6 to 13 years (see Note 9).

The Company performs 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, the Company determines 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, the Company uses a probability weighted market and income approach to estimate the fair value of the reporting unit. The Company’s market approach is a comparable analysis technique commonly used in the investment banking and private equity industries based on the EBITDA (earnings before interest, income taxes, depreciation and amortization) 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. The Company’s income approach is a discounted cash flow model. When the carrying amount of the reporting unit’s goodwill is greater than the estimated fair value of the reporting unit’s goodwill, an impairment loss is recognized for the difference.

At the time of the Segment Realignment, we performed an assessment 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. It is possible that the conclusions regarding the impairment or recoverability of goodwill 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.

The Quartz Technologies and Formulated and Basic Silicones reporting units, which had headroom of 9% and 18% respectively, had fair value in excess of carrying value of less than 30%. Management will continue to monitor these reporting units for changes in the business environment that could impact recoverability.

ImpairmentThe Company reviews property and equipment and all amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability is based on estimated undiscounted cash flows or other relevant observable measures. The Company tests goodwill and indefinite-lived intangibles for impairment annually, or when events or changes in circumstances indicate impairment may exist, by comparing the estimated fair value of each reporting unit to its carrying value to determine if there is an indication that a potential impairment may exist.

 

F-19


Table of Contents

General InsuranceThe Company is generally insured for losses and liabilities for workers’ compensation, physical damage to property, business interruption and comprehensive general, product and vehicle liability under high-deductible insurance policies. The Company records losses when they are probable and reasonably estimable and amortizes insurance premiums over the life of the respective insurance policies.

Legal Claims and CostsThe Company accrues for legal claims and costs in the period in which a claim is made or an event becomes known, if the amounts are probable and reasonably estimable. Each claim is assigned a range of potential liability and the most likely amount is accrued. If there is no amount in the range of potential liability that is most likely, the low end of the range is accrued. The amount accrued includes all costs associated with the claim, including settlements, assessments, judgments, fines and incurred legal fees (see Note 14).

Environmental MattersAccruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Environmental accruals are reviewed on a quarterly basis and as events and developments warrant (see Note 14).

Asset Retirement ObligationsAsset retirement obligations are initially recorded at their estimated net present values in the period in which the obligation occurs, with a corresponding increase to the related long-lived asset. Over time, the liability is accreted to its settlement value and the capitalized cost is depreciated over the useful life of the related asset. When the liability is settled, a gain or loss is recognized for any difference between the settlement amount and the liability that was recorded.

Revenue RecognitionRevenue for product sales, net of estimated allowances and returns, is recognized as risk and title to the product transfer to the customer, which either occurs at the time shipment is made or upon delivery. In situations where product is delivered by pipeline, risk and title transfers when the product moves across an agreed-upon transfer point, which is typically the customers’ property line. Product sales delivered by pipeline are measured based on daily flow meter readings. The Company’s standard terms of delivery are included in its contracts of sale or on its invoices.

Shipping and HandlingFreight costs that are billed to customers are included in “Net sales” in the Consolidated Statements of Operations. Shipping costs are incurred to move the Company’s products from production and storage facilities to the customer. Handling costs are incurred from the point the product is removed from inventory until it is provided to the shipper and generally include costs to store, move and prepare the products for shipment. Shipping and handling costs are recorded in “Cost of sales” and “Cost of sales, excluding depreciation and amortization” in the Consolidated Statements of Operations.

Research and Development CostsFunds are committed to research and development activities for technical improvement of products and processes that are expected to contribute to future earnings. All costs associated with research and development are charged to expense as incurred. Research and development expense was $64, $65, $13, and $63 for the years ended December 31, 2016, December 31, 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, respectively.

Pension and Other Postretirement LiabilitiesPension assumptions are significant inputs to the actuarial models that measure pension benefit obligations and related effects on operations. Two assumptions—discount rate and expected return on assets—are important elements of plan expense and asset/liability measurement. The Company evaluates these critical assumptions at least annually on a plan and country-specific basis. The Company periodically evaluates other assumptions involving demographic factors, such as retirement age, mortality and turnover, and updates them to reflect the Company’s experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.

Accumulated and projected benefit obligations (“PBO”) are measured as the present value of future cash payments. The Company discounts those cash payments using the weighted average of market-observed yields for high quality fixed income securities with maturities that correspond to the payment of benefits.

 

F-20


Table of Contents

Effective January 1, 2016, the Company has adopted the granular spot rate approach wherein results are calculated by matching service cost and interest cost cash flows to the individual spot rates on the yield curve using the following methodology:

 

    Projected benefit payments related to participants’ benefit accruals for the upcoming year are determined. Spot rates are applied and a present value and single equivalent discount rates specifically related to service cost are calculated (as for projected benefit obligation).

 

    Interest cost is determined by (1) calculating a present value for each year’s projected benefit payments, then (2) applying the applicable year’s spot rate. Amounts for all years are then aggregated to determine total interest cost.

Lower discount rates increase present values resulting in a higher PBO; higher discount rates decrease present values resulting in a lower PBO. The effect of a discount rate change on the subsequent year’s pension expense is dependent on the individual plan.

To determine the expected long-term rate of return on pension plan assets, the Company considers current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. In developing future return expectations for the principal benefit plans’ assets, the Company evaluates general market trends as well as key elements of asset class returns such as expected earnings growth, yields and spreads across a number of potential scenarios.

As a result of the adoption of fresh start accounting upon the Company’s emergence from Chapter 11, management elected to change its accounting policy related to the recognition of actuarial gains and losses for defined benefit plans. Specifically, such actuarial gains and losses previously recognized as a component of other comprehensive income/(loss) in the Consolidated Balance Sheets will be recognized directly as a component of earnings in the Consolidated Statements of Operations under the new policy.

Income TaxesThe Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of the assets and liabilities.

Deferred tax balances are adjusted to reflect tax rates, based on current tax laws, which will be in effect in the years in which temporary differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized (see Note 13).

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 of being realized upon settlement. The Company classifies interest and penalties as a component of tax expense.

The majority of the Company’s non-U.S. operations have been treated as branches of the U.S. Company and are included in the MPM and MPM Holdings Inc.’s U.S. consolidated income tax return. For the purpose of the consolidated financial statements, for the years ended December 31, 2016, 2015 and 2014, the tax provision for all operations has been prepared on a consolidated basis.

Stock-Based CompensationThe Company measures and recognizes the compensation expense for all share-based awards made to employees based on estimated fair values, in accordance with ASC 718, Compensation—Stock Compensation. As described in Note 12, the Company adopted a new management equity plan on March 12, 2015. The fair value of stock options granted is calculated using a Monte Carlo option-pricing model on the date of the grant, and the fair value of Restricted Stock Units are valued using the fair market value

 

F-21


Table of Contents

of the Company’s common stock on the date of grant. Compensation expense is recognized net of estimated forfeitures over the employee’s requisite service period (generally the vesting period of the equity grant). See Note 12 for additional detail regarding stock-based compensation.

Concentrations of Credit RiskFinancial instruments that potentially subject the Company to concentrations of credit risk are primarily temporary investments and accounts receivable. The Company places its temporary investments with high quality institutions and, by policy, limits the amount of credit exposure to any one institution. Concentrations of credit risk for accounts receivable are limited due to the large number of customers in the Company’s customer base and their dispersion across many different industries and geographies. The Company generally does not require collateral or other security to support customer receivables.

Concentrations of Supplier RiskThe Company relies on long-term agreements with key suppliers for most of its raw materials. The loss of a key source of supply or a delay in shipments could have an adverse effect on its business. Should any of the suppliers fail to deliver or should any of the key long-term supply contracts be canceled, the Company would be forced to purchase raw materials at current market prices. The Company’s largest supplier provides approximately 10% of raw material purchases. In addition, several of the feedstocks at various facilities are transported through a pipeline from one supplier.

ReclassificationsCertain prior period balances have been reclassified to conform with current presentations.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Board Update No. 2014-09: Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 supersedes the existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. According to the new guidance, an entity will apply a principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Additionally, in March 2016, the FASB issued Accounting Standards Board Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued Accounting Standards Board Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and the licensing implementation guidance. In May 2016, the FASB issued Accounting Standards Board Update No. 2016-12, Revenue from Contracts with Customers (Topic 606):: Narrow-Scope Improvements and Practical Expedients, which provides clarifying guidance in certain narrow areas and adds some practical expedients. In December 2016, the FASB issued Accounting Standards Board Update No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which facilitates 13 technical corrections and improvements to Topic 606 and other Topics amended by ASU 2014-09 to increase stakeholders’ awareness of the proposals and to expedite improvements to ASU 2014-09. The effective dates for the ASUs issued in 2016 are the same as the effective date for ASU 2014-09. The revised effective date for ASU 2014-09 is for annual and interim periods beginning on or after December 15, 2017, and early adoption from the calendar year 2017 will be permitted. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance in ASU 2014-09. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In August 2014, the FASB issued Accounting Standards Board Update No. 2014-15: Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern (Topic 205), which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern (meet its obligations as they become due) within one year after the date that the financial statements are issued. If

 

F-22


Table of Contents

conditions or events raise substantial doubt about the entity’s ability to continue as a going concern, certain disclosures are required. This ASU is effective for annual reporting periods ending after December 15, 2016, and interim reporting periods thereafter. The adoption of this standard during 2016 did not impact our consolidated financial statements.

In January 2015, the FASB issued Accounting Standards Board Update No. 2015-01: Income Statement-Extraordinary and Unusual Items (Subtopic 225-20)—Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”). ASU 2015-01 eliminates from U.S. GAAP the concept of extraordinary items and removes the requirement to present extraordinary items separately on the income statement, net of tax. The guidance became effective for annual periods beginning after December 15, 2015, including interim periods within that reporting period. The adoption of this standard during 2016 did not significantly impact our consolidated financial statements.

In February 2015, the FASB issued Accounting Standards Board Update No. 2015-02: Consolidation (Topic 810)—Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 amends the existing consolidation guidance related to (i) limited partnerships and similar legal entities, (ii) the evaluation of fees paid to a decision maker or a service provider as variable interest, (iii) the effect of fee arrangements on the primary beneficiary determination, and (iv) the effect of related parties on the primary beneficiary determination. ASU 2015-02 simplifies the existing guidance by reducing the number of consolidation models from four to two, reducing the extent to which related party arrangements cause an entity to be considered a primary beneficiary, and placing more emphasis on the risk of loss when determining a controlling financial interest. The guidance became effective for annual periods beginning after December 15, 2015, including interim periods within that reporting period. The adoption of this standard during 2016 did not have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued Accounting Standards Board Update No. 2015-03: Interest-Imputation of Interest (Subtopic 835-30)- Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, and also requires that the amortization of such costs be reported as interest expense. In August 2015, the FASB issued Accounting Standards Board Update No. 2015-15: Interest-Imputation of Interest (Subtopic 835-30)- Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”). ASU 2015-15 provides additional guidance regarding the SEC staff’s position on presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. The guidance became effective for annual periods beginning after December 15, 2015, including interim periods within that reporting period, and early adoption is permitted. The adoption of the requirements of ASU 2015-03 and ASU 2015-15 during 2016 did not impact the Company’s financial statements.

In July 2015, the FASB issued Accounting Standards Board Update No. 2015-11: Inventory (Topic 330)—Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 has changed the measurement requirement of inventory within the scope of this guidance from lower of cost or market to the lower of cost and net realizable value. The guidance is also defining net realizable value as: the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period and amendments to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of ASU 2015-11 is not expected to have a significant impact on the Company’s financial statements.

In February 2016, the FASB issued Accounting Standards Board Update No. 2016-02: Leases (ASC 842) (“ASU 2016-02”). Lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. It will be critical to identify leases embedded in a contract to avoid misstating the lessee’s balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in

 

F-23


Table of Contents

current lease accounting, but without explicit bright lines. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In March 2016, the FASB issued Accounting Standards Board Update No. 2016-09: Compensation—Stock Compensation (Topic 718)—Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. Excess tax benefits for share-based payments will be recorded as a reduction of income taxes and reflected in operating cash flows upon the adoption of this ASU. Excess tax benefits are currently recorded in equity and as a financing activity under the current rules. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016 early adoption will be permitted. The Company early adopted ASU 2016-09, effective April 1, 2016, electing to account for forfeitures when they occur. The adoption of ASU 2016-09 did not have a significant impact on the Company’s financial statements. The impact from adoption of the provisions related to forfeiture rates was reflected in the Company’s condensed consolidated financial statements on a modified retrospective basis, resulting in an immaterial adjustment to retained earnings. Provisions related to income taxes have been adopted prospectively resulting in no tax benefit as of the quarter ended June 30, 2016.

In August 2016, the FASB issued Accounting Standards Board Update No. 2016-15: Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides new guidance designed to reduce existing diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU addresses eight specific cash flow issues, of which the following are expected to be applicable to the Company: 1) debt prepayment and extinguishment costs, 2) proceeds from settlement of insurance claims, 3) distributions received from equity method investments, and 4) separately identifiable cash flows and application of the predominance principle. In addition, in November 2016, the FASB issued Accounting Standards Board Update No. 2016-18: Statement of Cash Flows (Topic 230), Restricted Cash (“ASU 2016-18”). ASU 2016-18 clarifies certain existing principles in ASC 230, including providing additional guidance related to transfers between cash and restricted cash and how entities present, in their statement of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts. These ASUs will be effective for the Company’s fiscal year beginning January 1, 2018 and subsequent interim periods with retrospective application to each period presented is required and early adoption is permitted, The adoption of ASU 2016-15 and ASU 2016-18 will modify the Company’s current disclosures and reclassifications within the consolidated statement of cash flows but they are not expected to have a material effect on the Company’s consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Board Update No. 2017-01: Business Combinations (Topic 805)—Clarifying the Definition of a Business (“ASU 2017-01”). The ASU clarifies the definition of business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective for the Company’s fiscal year beginning January 1, 2018 and subsequent interim periods with prospective application with impacts on the Company’s consolidated financial statements that may vary depending on each specific acquisition. Early adoption is conditionally permitted.

Also, in January 2017, the FASB issued Accounting Standards Board Update No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying value, which eliminates the current requirement to calculate a goodwill impairment charge by comparing the implied fair value of goodwill with its carrying amount. The amendments in this ASU are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment

 

F-24


Table of Contents

tests performed on testing dates after January 1, 2017. The amendments in this ASU should be applied on a prospective basis. We do not expect the adoption of the amendments in this ASU to have a significant impact on our consolidated financial statements.

All other new accounting pronouncements issued but not yet effective or adopted have been deemed to be not relevant to the Company and, accordingly, are not expected to have an impact once adopted.

6. Restructuring Expenses and Other Costs

Included in restructuring and other costs are costs related to restructuring (primarily severance payments associated with work force reductions), loss due to fire at our Leverkusen, Germany site, and services and other expenses associated with cost optimization programs and transformation savings activities.

In November 2015 and as expanded in March and May 2016, the Company announced a global restructuring program to reduce costs through global selling, general and administrative expenses reductions and productivity actions at the Company’s operating facilities. The Company expected the program cost, primarily severance related, to be approximately $15. Substantially all of these charges resulted in cash expenditures throughout 2016 and into 2017. These costs primarily relate to the Silicones operating segment and are included in Other current liabilities on the Consolidated Balance Sheet and Restructuring and other costs on the Consolidated Statement of Operations.

In January 2016, the Company announced plans to exit siloxane production at its Leverkusen, Germany site to help optimize its manufacturing footprint in order to improve its long-term profitability once fully implemented. The planned reduction is expected to be fully implemented by mid-2017 and is incremental to our global restructuring program. This restructuring will result in an overall reduction of employment at the site. The Company recorded severance related costs of approximately $2, some of which was paid in late 2016 and the remaining to be paid in 2017.

The following table sets forth the changes in the restructuring reserve related to severance. Included in this table are also other minor restructuring programs that were undertaken by the Company in different locations, none of which were individually material. These costs are primarily related to workforce reductions:

 

Successor

   Total  

Accrued liability at January 1, 2015

   $ 2  

Restructuring charges

     15  

Payments

     (3
  

 

 

 

Accrued liability at December 31, 2015

   $ 14  

Restructuring charges

     4  

Adjustments

     (2

Payments

     (12
  

 

 

 

Accrued liability at December 31, 2016

   $ 4  

For the years ended December 31, 2016 and December 31, 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, the Company recognized other costs of $40, $17, $5, and $20 respectively. These costs are primarily comprised of one-time payments for services and integration expenses, and are included in “Restructuring and other costs” in the Consolidated Statements of Operations. For the year ended December 31, 2016, these amounts also included exit costs of $13 due to siloxane capacity transformation programs at our Leverkusen, Germany facility and a loss of $10 due to fire damage at our Leverkusen, Germany facility. For the predecessor period from January 1, 2014 through October 24, 2014 and the successor period from October 25, 2014 to December 31, 2014, these amounts also included costs associated with restructuring our capital structure incurred prior to the Company’s

 

F-25


Table of Contents

Bankruptcy Filing. In addition, as a result of the siloxane capacity transformation programs, the Company recognized $17 of accelerated depreciation associated with asset retirement obligations during the year ended December 31, 2016, $2 of which was paid in 2016.

7. Related Party Transactions

Administrative Services, Management and Consulting Agreement

The Company was subject to a management consulting and advisory services agreement with Apollo and its affiliates for the provision of management and advisory services for an initial term of up to twelve years. The Company also agreed to indemnify Apollo and its affiliates and their directors, officers, and representatives for potential losses relating to the services contemplated under these agreements. Terms of the agreement provided for annual fees of $4 plus out of pocket expenses, payable in one lump sum annually, and provided for a lump-sum settlement equal to the net present value of the remaining annual management fees payable under the remaining term of the agreement in connection with a sale or initial public offering by the Company.

In connection with the Company’s emergence from Chapter 11, the management agreement was terminated pursuant to the Confirmation Order, effective as of the Petition Date.

Transactions with Hexion

Shared Services Agreement

On October 1, 2010, the Company entered into a shared services agreement with Hexion (which, from October 1, 2010 through October 24, 2014, was a subsidiary under a common parent) (the “Shared Services Agreement”). Under this agreement, the Company provides to Hexion, and Hexion provides to the Company, certain services, including, but not limited to, executive and senior management, administrative support, human resources, information technology support, accounting, finance, legal, and procurement services. The Shared Services Agreement is subject to termination by either the Company or Hexion, without cause, on not less than 30 days’ written notice, and expires in October 2017 (subject to one-year renewals every year thereafter; absent contrary notice from either party). The Shared Services Agreement establishes certain criteria upon which the costs of such services are allocated between the Company and Hexion.

Pursuant to this agreement, for the years ended December 31, 2016, December 31, 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, the Company incurred approximately $50, $60, $17, and $82, respectively, of net costs for shared services. During the years ended December 31, 2016, December 31, 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, Hexion incurred approximately $63, $70, $23, and $108, respectively, of net costs for shared services. Included in the net costs incurred during the years ended December 31, 2016, December 31, 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, were net billings from Hexion to the Company of $30, $35, $17, and $32, respectively, to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to the applicable allocation percentage, as well as to reflect costs allocated 100% to one party. The allocation percentage was initially set at 51% for Hexion and 49% for the Company at the inception of the agreement. Following the required annual review by the Steering Committee in accordance with the terms of the Shared Service Agreement, the allocation percentage for 2016 was set at 44% for the Company and 56% for Hexion. The Company had accounts receivable of $0 at both December 31, 2016 and 2015, and accounts payable to Hexion of $5 and $7 at December 31, 2016 and 2015, respectively.

In conjunction with the consummation of the Plan, the Shared Services Agreement was amended to, among other things, (i) exclude the services of certain executive officers, (ii) provide for a transition assistance period at the election of the recipient following termination of the Shared Services Agreement of up to 12 months, subject

 

F-26


Table of Contents

to one successive renewal period of an additional 60 days and (iii) provide for the use of an independent third-party audit firm to assist the Steering Committee with its annual review of billings and allocations.

Purchases and Sales of Products and Services with Hexion

The Company also sells products to, and purchases products from, Hexion pursuant to a Master Buy/Sell Agreement dated as of September 6, 2012 (the “Master Buy/Sell Agreement”). Prices under the agreement are determined by a formula based upon certain third party sales of the applicable product, or in the event that no qualifying third party sales have taken place, based upon the average contribution margin generated by certain third party sales of products in the same or a similar industry. The standard terms and conditions of the seller in the applicable jurisdiction apply to transactions under the Master Buy/Sell Agreement. A subsidiary of the Company also acts as a non-exclusive distributor in India for certain of Hexion’s subsidiaries pursuant to Distribution Agreements dated as of September 6, 2012 (the “Distribution Agreements”). Prices under the Distribution Agreements are determined by a formula based on the weighted average sales price of the applicable product less a margin. The Master Buy/Sell Agreement and Distribution Agreements have initial terms of 3 years and may be terminated for convenience by either party thereunder upon 30 days’ prior notice in the case of the Master/Buy Sell Agreement and upon 90 days’ prior notice in the case of the Distribution Agreements. Pursuant to these agreements and other purchase orders, for the years ended December 31, 2016, December 31, 2015; the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, the Company sold $2, $3, $1, and $7, respectively, of products to Hexion and purchased less than $1 of products from Hexion. At both December 31, 2016 and 2015, the Company had less than $1 of accounts receivable from Hexion and less than $1 of accounts payable to Hexion related to these agreements.

Other Transactions with Hexion

In March 2014, the Company entered into a ground lease with a Brazilian subsidiary of Hexion to lease a portion of the Company’s manufacturing site in Itatiba, Brazil, where the subsidiary of Hexion will construct and operate an epoxy production facility. In conjunction with the ground lease, the Company also entered into a site services agreement whereby it will provide to the subsidiary of Hexion various services such as environmental, health and safety, security, maintenance and accounting, amongst others, to support the operation of this new facility. The Company received less than $1 from Hexion under this agreement during the years ended December 31, 2016 and 2015.

In April 2014, the Company sold 100% of its interest in its Canadian subsidiary to a subsidiary of Hexion for a purchase price of $12. As a part of the transaction the Company also entered into a non-exclusive distribution agreement with a subsidiary of Hexion, whereby the subsidiary of Hexion will act as a distributor of certain of the Company’s products in Canada. The agreement has a term of 10 years, and is cancelable by either party with 180 days’ notice. The Company compensates the subsidiary of Hexion for acting as distributor at a rate of 2% of the net selling price of the related products sold. During the years ended December 31, 2016, 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, the Company sold approximately $25, $27, $7 and $22, respectively, of products to Hexion under this distribution agreement, and paid less than $1 to Hexion as compensation for acting as distributor of the products. At both December 31, 2016 and 2015, the Company had $2 of accounts receivable from Hexion related to the distribution agreement.

Transactions with Affiliates Other Than Hexion

Purchases and Sales of Products and Services

The Company sells products to various Apollo and GE affiliates other than Hexion. Transactions with GE affiliates are included in the predecessor period only, as GE was a related party prior to the termination of the

 

F-27


Table of Contents

Cash Flow Facility. These sales were approximately less than $1, $1, $1 and $10 for the years ended December 31, 2016, 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, respectively. The Company had accounts receivable from these affiliates of $0 and less than $1 at December 31, 2016 and 2015, respectively. The Company also purchases products and services from various affiliates other than Hexion. These purchases were $3, $4, less than $1 and $13, for the years ended December 31, 2016, December 31, 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, respectively. The Company had accounts payable to these affiliates of $0 and less than $1 at December 31, 2016 and 2015, respectively.

Trademark License Agreement

Also on May 17, 2013, the Company entered into an amendment to the Trademark License Agreement, dated as of December 3, 2006, by and between GE Monogram Licensing International and the Company, to, among other things, revise the royalty payable to GE Monogram Licensing International and provide for an option to extend such agreement for an additional five-year period through 2023. In connection with the amendment, Old MPM Holdings recorded a gain and related intangible asset of $7. The intangible asset was subsequently contributed to the Company. As a result of the application of fresh start accounting, on October 24, 2014, the intangible asset related to the agreement was written-off.

Revolving Credit Facility

In April 2013, the Company entered into a $75 revolving credit facility with an affiliate of GE (the “Cash Flow Facility”) (see Note 10). Prior to entry into the Cash Flow Facility, an affiliate of GE was one of the lenders under the Company’s Old Revolver (as further described in Note 10), representing approximately $160 of the lenders’ $300 revolving credit facility commitment.

In connection with the consummation of the Plan, on October 24, 2014, the Company repaid in full all outstanding amounts under the Cash Flow Facility. Upon making these payments, the Company’s obligations under the Cash Flow Facility were satisfied in full and the Cash Flow Facility was immediately terminated.

Other Transactions and Arrangements

In March 2014, the Company entered into an Employee Services Agreement with Hexion Holdings, Hexion and Momentive Performance Materials Holdings Employee Corporation (“Employee Corp”), a subsidiary of Hexion Holdings (the “Services Agreement”). The Services Agreement provided for the executive services of Mr. John G. (Jack) Boss, an employee of Employee Corp., to be made available to the Company and set forth the terms with respect to payment for the cost of such services. Mr. Boss was elected Executive Vice President and President Silicones and Quartz Division of the Company effective March 31, 2014. Pursuant to the Services Agreement, the Company agreed to pay 100% of Mr. Boss’ costs of employment which are comprised of “covered costs” including an annual base salary of $0.585, a sign-on bonus of $1.3 payable between 2014 and 2015, annual incentive compensation, relocation costs, severance and benefits and other standard reasonable business expenses.

In December 2014, Mr. Boss was appointed as Chief Executive Officer and President of the Company, In connection with the appointment, Momentive assumed from Hexion Holdings the terms of the accepted offer of employment with Mr. Boss. The Company paid less than $1 under this agreement during the year ended December 31, 2016.

8. Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between

 

F-28


Table of Contents

market participants on the measurement date. A fair value hierarchy exists, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are:

 

    Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

    Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.

 

    Level 3: Unobservable inputs, that are supported by little or no market activity and are developed based on the best information available in the circumstances. For example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

Recurring Fair Value Measurements

At both December 31, 2016 and December 31, 2015, the Company had less than $1 notional amount of natural gas derivative contracts, which are measured using Level 2 inputs, and are included in “Other current assets” in the Consolidated Balance Sheets. The fair value of the natural gas derivative contracts generally reflects the estimated amounts that the Company would receive or pay, on a pre-tax basis, to terminate the contracts at the reporting date based on broker quotes for the same or similar instruments. Counterparties to these contracts are highly rated financial institutions, none of which experienced any significant downgrades in the year ended December 31, 2016 that would reduce the fair value receivable amount owed, if any, to the Company. There were no transfers between Level 1, Level 2 or Level 3 measurements during the year ended December 31, 2016.

The following table summarizes the carrying amount and fair value of the Company’s non-derivative financial instruments at December 31, 2016:

 

Successor

   Carrying
Amount
     Fair Value  
      Level 1      Level 2      Level 3      Total  

December 31, 2016

        

Debt

   $ 1,203      $ —        $ 1,243      $ —        $ 1,243  

Predecessor

        

December 31, 2015

        

Debt

   $ 1,205      $ —        $ 909      $ —        $ 909  

Fair values of debt classified as Level 2 are determined based on other similar financial instruments, or based upon interest rates that are currently available to the Company for the issuance of debt with similar terms and maturities. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities are considered reasonable estimates of their fair values due to the short-term maturity of these financial instruments.

 

F-29


Table of Contents

9. Goodwill and Intangible Assets

In connection with the Company’s emergence from Chapter 11 and application of fresh start accounting, and the resulting allocation of the reorganization value to its individual assets based on their estimated fair values, the Company recorded goodwill of $224 as of October 24, 2014. As described in Note 16, the Company changed its reportable segments in the third quarter of 2017. The Company’s gross carrying amount and accumulated impairments of goodwill consist of the following as of December 31:

 

    2016     2015  
    Gross
Carrying
Amount
    Accumulated
Impairments
    Accumulated
Foreign
Currency
Translation
    Net
Book
Value
    Gross
Carrying
Amount
    Accumulated
Impairments
    Accumulated
Foreign
Currency
Translation
    Net
Book
Value
 

Performance Additives

  $ 137     $ —       $ (8   $ 129     $ 137     $ —       $ (8   $ 129  

Formulated and Basic Silicones

    68       —         (4   $ 64       68       —         (4   $ 64  

Quartz Technologies

    19       —         (1     18       19       —         (1     18  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 224     $ —       $ (13   $ 211     $ 224     $ —       $ (13   $ 211  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The changes in the net carrying amount of goodwill by segment for the years ended December 31, 2016 and 2015 are as follows:

 

     Performance
Additives
     Formulated
and Basic
Silicones
     Quartz
Technologies
     Total  

Balance as of December 31, 2014

   $ 133      $ 66      $ 19      $ 218  

Foreign currency translation

     (4      (2      (1      (7
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of December 31, 2015

   $ 129      $ 64      $ 18      $ 211  

Foreign currency translation

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of December 31, 2016

   $ 129      $ 64      $ 18      $ 211  
  

 

 

    

 

 

    

 

 

    

 

 

 

In conjunction with fresh start accounting, the Company wrote-off existing intangibles assets, net and recorded $424 of new intangible assets, reflecting the estimated fair value of other intangible assets as of October 24, 2014 (see Note 3).

The Company’s finite and indefinite lived intangible assets consist of the following as of December 31:

 

    2016     2015  
    Gross
Carrying
Amount
    Accumulated
Impairments
    Accumulated
Amortization
    Net Book
Value
    Gross
Carrying
Amount
    Accumulated
Impairments
    Accumulated
Amortization
    Net Book
Value
 

Customer relationships

  $ 223     $ —       $ (49   $ 174     $ 223     $ —       $ (32   $ 191  

Trademarks

    60       —         (19     41       60       —         (12     48  

Technology

    105       —         (29     76       105       —         (16     89  

Patents and other

    41       (4     (5     32       39       (4     (7     28  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 429     $ (4   $ (102   $ 323     $ 427     $ (4   $ (67   $ 356  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The impact of foreign currency translation on intangible assets is included in accumulated amortization.

Total intangible amortization expense for the years ended December 31, 2016, December 31, 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014 was $38, $36, $6, and $34, respectively.

 

F-30


Table of Contents

Estimated annual intangible amortization expense for 2017 through 2021 is as follows:

 

2017

   $ 38  

2018

     38  

2019

     38  

2020

     38  

2021

     32  

10. Debt and Lease Obligations

Debt outstanding as of December 31, 2016 and 2015 is as follows:

 

     2016     2015  
     Long-Term      Due Within
One Year
    Long-Term      Due Within
One Year
 

Senior Secured Credit Facilities:

          

ABL Facility

   $ —        $ —       $ —        $ —    

Secured Notes:

          

3.88% First Lien Notes due 2021 (includes $105 and $123 of unamortized debt discount at December 31, 2016 and 2015, respectively)

     995        —         977        —    

4.69% Second Lien Notes due 2022 (includes $30 and $39 of unamortized debt discount at December 31, 2016 and 2015, respectively)

     172        —         192        —    

Other Borrowings:

          

China bank loans at 4.1% and 4.2% at December 31, 2016 and 2015, respectively

     —          36       —          33  

Other at 2.99% at December 31, 2015

     —          —         —          3  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total debt

   $ 1,167      $ 36     $ 1,169      $ 36  
  

 

 

    

 

 

   

 

 

    

 

 

 

ABL Facility

Upon consummation of the Plan by the Company on October 24, 2014, the Company exercised its option to convert the DIP ABL Facility into an exit asset-based revolving facility (the “ ABL Facility”). The ABL Facility has a five year term and a maximum availability of $270. The ABL Facility is also subject to a borrowing base that is based on a specified percentage of eligible accounts receivable and inventory and, in certain foreign jurisdictions, machinery and equipment.

The ABL Facility bears interest based on, at the Company’s option, (a) with respect to Tranche A Revolving Facility Commitments (as defined in the credit agreement governing the ABL Facility), an adjusted LIBOR rate plus an applicable margin of 2.00% or an alternate base rate plus an applicable margin of 1.00% and (b) with respect to Tranche B Revolving Facility Commitments (as defined in the credit agreement governing the ABL Facility), an adjusted LIBOR rate plus an applicable margin of 2.75% or an alternative base rate plus an applicable margin of 1.75%, in each case, subject to adjustment depending on usage. In addition to paying interest on outstanding principal under the ABL Facility, the Company will be required to pay a commitment fee to the lenders in respect of the unutilized commitments at an initial rate equal to 0.375% per annum, subject to adjustment depending on the usage. The ABL Facility does not have any financial maintenance covenants, other than a minimum fixed charge coverage ratio of 1.0 to 1.0 that only applies if 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. The fixed charge coverage ratio under the agreement governing the ABL Facility is 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 basis.

 

F-31


Table of Contents

The ABL Facility is secured by, among other things, first-priority liens on most of the inventory and accounts receivable and related assets of the Company, its domestic subsidiaries and certain of its foreign subsidiaries, and, in the case of certain foreign subsidiaries, machinery and equipment (and proceeds thereof) and certain related assets (the “ABL Priority Collateral”), and second-priority liens on certain collateral that generally includes most of the Company’s and its domestic subsidiaries’ assets other than ABL Priority Collateral, in each case subject to certain exceptions and permitted liens.

As of December 31, 2016, the Company had no outstanding borrowings under the ABL Facility. Outstanding letters of credit under the ABL Facility at December 31, 2015 were $55, leaving an unused borrowing capacity of $215 (without triggering the financial maintenance covenant under the ABL Facility).

Secured Notes

First Lien Notes and Old First Lien Notes

In October 2012, MPM Escrow LLC and MPM Finance Escrow Corp. (the “Escrow Issuers”), wholly owned special purpose subsidiaries of the Company, issued $1,100 principal amount of 8.875% First-Priority Senior Secured Notes due 2020 (the “Old First Lien Notes”) in a private offering.

Upon consummation of the Plan, on October 24, 2014, the Company issued $1,100 aggregate principal amount of 3.88% First Lien Notes due 2021 (the “First Lien Notes”). The First Lien Notes were issued as replacement for the Old First Lien Notes in connection with the Plan and the Company’s emergence from Chapter 11 bankruptcy.

The First Lien Notes are fully and unconditionally guaranteed on a senior secured basis by each of the Company’s existing U.S. subsidiaries that is a guarantor under the Company’s ABL Facility and the Company’s future U.S. subsidiaries (other than receivables subsidiaries and U.S. subsidiaries of foreign subsidiaries) that guarantee any debt of the Company or any of the guarantor subsidiaries of the Company under the related indenture (the “Note Guarantors”). Pursuant to customary release provisions in the indenture governing the First Lien Notes, the Note Guarantors may be released from their guarantee of the First Lien Notes (the “First Lien Note Guarantees”). The First Lien Notes are not guaranteed by MPM Intermediate Holdings Inc.

The First Lien Notes and First Lien Note Guarantees are senior indebtedness of the Company and the Note Guarantors, respectively, and rank equal in right of payment with all existing and future senior indebtedness of the Company and the Note Guarantors, respectively; senior in right of payment to all existing and future subordinated indebtedness of the Company and the Note Guarantors and guarantees thereof; and structurally subordinated to all existing and future indebtedness and other liabilities of any of the Company’s subsidiaries that do not guarantee the First Lien Notes.

The First Lien Notes and First Lien Note Guarantees have the benefit of first-priority liens on the collateral of the Company and the Note Guarantors other than the ABL Priority Collateral, with respect to which the First Lien Notes and First Lien Note Guarantees have the benefit of second-priority liens. Consequently, the First Lien Notes rank effectively junior in priority to the Company’s obligations under the ABL Facility to the extent of the value of the ABL Priority Collateral; equal with holders of other obligations secured pari passu with the First Lien Notes including other first priority obligations (to the extent of the value of such collateral); effectively senior to any junior priority obligations (to the extent of the value of such collateral) including the Second Lien Notes (further described below) and the Company’s obligations under the ABL Facility to the extent of the value of the collateral that is not ABL Priority Collateral; and effectively senior to any senior unsecured obligations (to the extent of the value of such collateral).

Interest on the First Lien Notes is payable at 3.88% per annum, semiannually to holders of record at the close of business on April 1st or October 1st immediately preceding the interest payment date on April 15th and October 15th of each year, commencing on April 15, 2015. The Company may redeem some or all of the First Lien Notes at any time at a redemption price of 100% of the principal amount plus accrued and unpaid interest.

 

F-32


Table of Contents

The First Lien Notes were recorded at their estimated fair value on the Effective Date, which was determined based on a market approach utilizing current market yields.

Senior Secured Notes and Second Lien Notes

In May 2012, the Company issued $250 in aggregate principal amount of 10% Senior Secured Notes due October 2020 (the “Senior Secured Notes”) at an issue price of 100%.

Upon consummation of the Plan, on October 24, 2014, the Company issued $250 aggregate principal amount of 4.69% Second Lien Notes due 2022 (the “Second Lien Notes”). The Second Lien Notes were issued as replacement for the Senior Secured Notes in connection with the Plan and the Company’s emergence from Chapter 11.

The Second Lien Notes are fully and unconditionally guaranteed on a senior secured basis by each of the Company’s existing U.S. subsidiaries that is a guarantor under the Company’s ABL Facility and the Company’s future U.S. subsidiaries (other than receivables subsidiaries and U.S. subsidiaries of foreign subsidiaries) that guarantee any debt of the Company or any Note Guarantor. Pursuant to customary release provisions in the indenture governing the Second Lien Notes, the Note Guarantors may be released from their guarantee of the Second Lien Notes (the “Second Lien Note Guarantees”). The Second Lien Notes are not guaranteed by MPM Intermediate Holdings Inc.

The Second Lien Notes and Second Lien Note Guarantees are senior indebtedness of the Company and the Note Guarantors, respectively, and rank equal in right of payment with all existing and future senior indebtedness of the Company and the Note Guarantors, respectively; senior in right of payment to all existing and future subordinated indebtedness of the Company and the Note Guarantors and guarantees thereof; and structurally subordinated to all existing and future indebtedness and other liabilities of any of the Company’s subsidiaries that do not guarantee the Second Lien Notes.

The Second Lien Notes and Second Lien Note Guarantees have the benefit of second-priority liens on the collateral of the Company and the Note Guarantors. Consequently, the Second Lien Notes rank effectively junior in priority to the Company’s obligations under the ABL Facility, the First Lien Notes and other first priority obligations (to the extent of the value of such collateral); equal with holders of other obligations secured pari passu with the Second Lien Notes (to the extent of the value of such collateral); effectively senior to any junior priority obligations (to the extent of the value of such collateral); and effectively senior to any senior unsecured obligations (to the extent of the value of such collateral).

Interest on the Second Lien Notes is payable at 4.69% per annum, semiannually to holders of record at the close of business on April 1st or October 1st immediately preceding the interest payment date on April 15th and October 15th of each year, commencing on April 15, 2015. The Company may redeem some or all of the Second Lien Notes at any time at a redemption price of 100% of the principal amount plus accrued and unpaid interest.

The Second Lien Notes were recorded at their estimated fair value on the Effective Date, which was determined based on a market approach utilizing current market yields.

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

At December 31, 2016, the weighted average interest rate of the Company’s long term debt was 4.47%.

 

F-33


Table of Contents

General

The indentures governing the First Lien Notes and the Second Lien Notes contain covenants that, among other things, limit the Company’s ability and the ability of certain of the Company’s subsidiaries to (i) incur or guarantee additional indebtedness or issue preferred stock; (ii) grant liens on assets; (iii) pay dividends or make distributions to the Company’s stockholders; (iv) repurchase or redeem capital stock or subordinated indebtedness; (v) make investments or acquisitions; (vi) enter into sale/leaseback transactions; (vii) incur restrictions on the ability of the Company’s subsidiaries to pay dividends or to make other payments to the Company; (viii) enter into transactions with the Company’s affiliates; (ix) merge or consolidate with other companies or transfer all or substantially all of the Company’s assets; and (x) transfer or sell assets.

As of December 31, 2016, the Company was in compliance with all the covenants included in the agreements governing its outstanding indebtedness.

Scheduled Maturities

Aggregate maturities of debt and minimum rentals under operating leases at December 31, 2016 for the Company are as follows:

 

Year

   Debt      Minimum Rentals
Under Operating
Leases
 

2017

   $ 36        15  

2018

     —          11  

2019

     —          9  

2020

     —          7  

2021

     1,100        6  

2022 and thereafter

     202        15  
  

 

 

    

 

 

 

Total

   $ 1,338      $ 63  
  

 

 

    

 

 

 

The Company’s operating leases consist primarily of vehicles, equipment, land and buildings. Rental expense under operating leases amounted to $15, $13, $4 and $16 for the years ended December 31, 2016, and December 31, 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, respectively.

11. Equity

Common Stock

On the Effective Date, all previously issued and outstanding shares of the Predecessor Company’s common stock were canceled, as were all other previously issued and outstanding equity interests. On the Effective Date, the Company issued 7,475,000 shares of New Common Stock pursuant to the Section 1145 Rights Offering and 26,662,690 shares of New Common Stock pursuant to the 4(a)(2) Rights Offering. Additionally, the Company issued 2,060,184 shares of New Common Stock pursuant to the Backstop Commitment, including 1,475,652 shares of New Common Stock issued as consideration for the BCA Commitment Premium. A portion of the 1145 Rights Offering Stock issued to the Commitment Parties, and all of the 4(a)(2) Rights Offering Stock, are restricted securities under the Securities Act, and may not be offered, sold or otherwise transferred except in accordance with applicable restrictions. In addition, upon effectiveness of the Plan, the Company issued 11,791,126 shares of New Common Stock to holders of the Second Lien Notes pursuant to the Second Lien Notes Equity Distribution.

In accordance with the Plan, all shares of New Common Stock were automatically exchanged for one share of common stock, par value $0.01 per share, of MPM Holdings, which contributed the shares of New Common Stock to its wholly-owned subsidiary, MPM Intermediate Holdings Inc. As a result, MPM is a wholly owned subsidiary of MPM Intermediate Holdings Inc.

 

F-34


Table of Contents

The shares of New Common Stock described above were exempt from registration under the Securities Act pursuant to (i) Section 1145 of the Bankruptcy Code, which generally exempts from such registration requirements the issuance of securities under a plan of reorganization, and/or (ii) Section 4(a)(2) of the Securities Act because the issuance did not involve any public offering. Momentive’s registration statement on Form S-1 (Registration No. 333-201338) initially filed December 31, 2014 (as amended, the “Form S-1”), which became effective on July 2, 2015, registered for resale 39,305,467 shares of the New Common Stock.

On November 7, 2014, the Company effected a reverse stock split and, as a result, 48 shares of the New Common Stock remained outstanding at December 31, 2014. At December 31, 2013, common stock consisted of 100 shares of Predecessor Company common stock issued and outstanding with a par value of one cent per share. At December 31, 2013, Old MPM Holdings represented the sole shareholder of the Company.

Paid-in Capital

Additional paid-in capital of the Successor Company at December 31, 2016 and December 31, 2015 primarily relates to the issuance of common stock in connection with the $600 Rights Offerings described above, $1 pertaining to issuance of company’s shares to certain Directors, as well as the conversion of the $30 BCA Commitment Premium and the Old Second Lien Notes into equity of the Successor Company (see Note 2).

12. Stock Option Plans and Stock Based Compensation

Management Equity Plan

On March 12, 2015, the Board of Directors of Momentive approved the MPM Holdings Inc. Management Equity Plan (the “MPMH Equity Plan”). Under the MPMH Equity Plan, Momentive can award no more than 3,818,182 shares which may consist of options, restricted stock units, restricted stock and other stock-based awards, qualifying as equity classified awards in accordance with ASC 718 “Compensation—Stock Compensation”. The restricted stock units are non-voting units of measurement which are deemed to be equivalent to one common share of Momentive. The options are options to purchase common shares of Momentive. The awards contain restrictions on transferability and other typical terms and conditions. The purpose of the MPMH Equity Plan is to assist the Company in attracting, retaining, incentivizing and motivating employees and Directors and to promote the success of the Company’s business by providing such participating individuals with a proprietary interest in the performance of the Company.

On April 10, 2015, the Compensation Committee of the Board of Directors of Momentive approved grants under the MPMH Equity Plan of restricted stock units and options to certain of the Company’s key managers, including the Company’s named executive officers and directors.

 

F-35


Table of Contents

The following is a summary of key terms of the stock-based awards granted under the MPMH Equity Plan.

 

Award

  

Vesting Terms

  

Option/Unit
Terms

Stock Options—Tranche A

   Performance-based and market-based upon achievement of targeted common stock prices either through a sale or an IPO with certain conditions as such terms are defined by the MPMH Equity Plan    10 years

Stock Options—Tranche B

   Performance-based and market-based upon achievement of targeted common stock prices either through a sale or an IPO with certain conditions as such terms are defined by the MPMH Equity Plan    10 years

Restricted Stock Units

   Cliff vest four years after grant date; Immediate vesting upon a change in control event and ratable vesting in the event of an IPO as defined in the MPMH Equity Plan    NA

Directors Restricted Stock Units grant

   Cliff vest annually after grant date; Immediate vesting upon a change in control event and ratable vesting in the event of an IPO as defined in the MPMH Equity Plan    NA

Stock Options

The estimated fair values of Stock Options granted and the assumptions used for the Monte Carlo option-pricing model were as follows:

 

     Year Ended
December 31, 2016
    Year Ended
December 31, 2015
 
     Tranche A     Tranche B     Tranche A     Tranche B  

Estimated fair values

   $ 9.83     $ 8.93     $ 7.93     $ 7.62  

Assumptions:

        

Strike Price

   $ 10.25     $ 10.25     $ 20.33     $ 20.33  

Risk-free interest rate

     0.80     0.80     0.48     0.48

Expected term

     1.62 years       1.62 years       1.73 years       1.73 years  

Expected volatility

     60.00     60.00     47.00     47.00

Tranche Market Threshold

   $ 20.00     $ 25.00     $ 30.50     $ 40.66  

The fair market value of the underlying stock price for the purpose of determining strike prices were derived mainly from a discounted cash-flow model. The risk-free interest rate has been determined on the yields for U.S. Treasury securities for a period approximating the expected term compounded continuously which changed from 0.48% on original grant date to 0.80% on modification. The expected term represents the average of anticipated exit scenarios which changed from 1.73 years on original grant date to 1.62 years on modification. The expected volatility, which changed from 47.00% on original grant date to 60.00% on modification, has been estimated based on the volatilities using a weighted peer group of companies which are deemed to be similar to our Company and is calculated using the expected term of the stock options granted. The Tranche Market Thresholds are the average targeted expected closing prices over 10 days in the event of the underlying stocks trading publicly.

 

F-36


Table of Contents

Information on stock option activity is as follows:

 

     Year Ended December 31, 2016  
     Tranche A      Tranche B  
     Units      Weighted-
Average

Exercise Price
per Share
     Units      Weighted-
Average

Exercise Price
per Share
 

Balance at beginning of the period

     792,820      $ 20.33        792,820      $ 20.33  

Granted

     26,460        12.47        26,460        12.47  

Exercised

     —             —       

Forfeited

     (37,240      10.25        (37,240      10.25  

Expired

     —             —       
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of the period

     782,040      $ 10.33        782,040      $ 10.33  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Year Ended December 31, 2015  
     Tranche A      Tranche B  
     Units      Weighted-
Average

Exercise Price
per Share
     Units      Weighted-
Average

Exercise Price
per Share
 

Balance at beginning of the period

     —             —       

Granted

     910,420      $ 20.33        910,420      $ 20.33  

Exercised

     —             —       

Forfeited

     (117,600      20.33        (117,600      20.33  

Expired

     —             —       
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of the period

     792,820      $ 20.33        792,820      $ 20.33  
  

 

 

    

 

 

    

 

 

    

 

 

 

As there have been no performance and market based achievements since the date of the original grant, there has been no compensation expense recorded during the fiscal year ended December 31, 2016 and fiscal year ended December 31, 2015. At December 31, 2016 and December 31, 2015, unrecognized compensation expense related to non-vested stock options was $15 and $12, respectively. Stock-based compensation cost related to stock options will be recognized once the satisfaction of the performance and market conditions becomes probable.

Restricted Stock Units

Information on Restricted Stock Units (“RSU”) activity is as follows:

 

     Year Ended
December 31, 2016
     Year Ended
December 31, 2015
 
     Units      Grant date fair
per Share
     Units      Grant date fair
per Share
 

Balance at beginning of the year

     712,762      $ 20.33        —       

Granted

     93,446        10.92        817,251      $ 20.33  

Vested

     (29,520      20.33        —       

Forfeited

     (42,848      18.64        (104,489      20.33  

Expired

     —             —       
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of the year

     733,840      $ 19.23        712,762      $ 20.33  
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair market values related to the RSUs at the different grant dates were derived from material financial weighted analysis of the Company’s value as implied at emergence from Chapter 11 Bankruptcy or by the sales of stock completed with related parties and adjusted to reflect current and future market conditions and the

 

F-37


Table of Contents

expected Company’s financial performances at the grant date. The material financial weighted analysis consisted of (i) a discounted cash flow analysis, (ii) a selected publicly traded company analysis and (iii) a selected transactions analysis. The employees’ and named executive officers’ RSUs are 100% vested upon the fourth anniversary of the date of grant (“Scheduled Vesting Date”) provided that the grantee remains continuously employed in active service by the Company or one of its affiliates from the date of grant through the Scheduled Vesting Date. The directors’ RSUs are 100% vested upon the first anniversary of the date of grant.

Additionally, vesting of the RSU grants could be accelerated: (i) upon a Sale of the Company occurring prior to the Scheduled Vesting Date, the RSUs, to the extent unvested, shall become fully vested, subject to the grantee’s continued employment through the effective date of such Sale; or (ii) upon an IPO occurring prior to the Scheduled Vesting Date, a graded percentage of the RSUs, shall become vested subject to the grantee’s continued employment through the effective date of the IPO.

There have been no performance and market based achievements since the date of the original grant. The fair value of the Company’s RSUs, net of forfeitures is expensed on a straight-line basis over the required service period.

Stock-based compensation expense related to the RSU awards was approximately $3 for both the fiscal year ended December 31, 2016 and fiscal year ended December 31, 2015. As of December 31, 2016 and December 31, 2015, unrecognized compensation related to RSU awards was $8 with weighted average remaining vesting period of 2.4 years and $10 with weighted average remaining vesting period of 3.2 years, respectively. Stock-based compensation cost related to RSU awards may be accelerated once the satisfaction of one of the performance conditions outlined becomes probable.

Although the MPMH Equity Plan, under which the above awards were granted, is sponsored by Momentive, the underlying compensation costs represent compensation costs paid for by Momentive on MPM’s behalf, as a result of the employees’ services to MPM. The Company intends to issue new stock to deliver shares under the MPMH Equity Plan.

Cancellation and Expiration of MPM’s Outstanding Old Equity Awards

As of the Effective Date, in conjunction with the MPM’s emergence from Chapter 11, all outstanding unvested unit options and restricted deferred units were canceled, effective immediately. In addition, all vested unit options to purchase units of Hexion Holdings (the Company’s prior ultimate parent) were modified to have an expiration date 90 days subsequent to the Effective Date, and on January 22, 2015, all such unit options expired unexercised.

Financial Statement Impact Old Equity Awards on MPM

Share-based compensation expense was recognized, net of estimated forfeitures, over the requisite service period on a graded-vesting basis, and is included in “Selling, general and administrative expense” in the Consolidated Statements of Operations. The Company adjusted compensation expense periodically for forfeitures.

The Company recognized share-based compensation expense of $0, less than $1, and $1 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 years ended December 31, 2013, respectively, related to the old Equity Awards.

 

F-38


Table of Contents

MPM Unit Option Activity

Following is a summary of activity under the Company’s unit option plans for the fiscal year ended December 31, 2014:

 

     Hexion
Holdings
Common Units
     Weighted
Average
Exercise Price
 

Outstanding at December 31, 2013

     10,933,986      $ 2.69  

Forfeited

     (14,184    $ 4.85  
  

 

 

    

Outstanding at December 31, 2014

     10,919,802      $ 2.68  
  

 

 

    

All outstanding options as of December 31, 2014 subsequently expired on January 22, 2015.

The total amount of cash received and total intrinsic value (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) of options exercised during 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 was $0.

MPM’s Restricted Unit Activity

Following is a summary of activity under the Company’s restricted unit plan for the year ended December 31, 2014:

 

     Hexion
Holdings
Common Units
     Weighted
Average
Grant Date
Fair Value
 

Nonvested at December 31, 2013

     1,174,860      $ 1.92  

Restricted units forfeited

     (2,955    $ 4.85  

Restricted units canceled

     (1,171,905    $ 1.91  
  

 

 

    

Nonvested at December 31, 2014

     —          N/A  
  

 

 

    

13. Income Taxes

For the years ended December 31, 2016 and 2015, successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, the Company’s tax provision was computed based on the legal entity structure, as described in Note 1. Any tax benefit or valuation allowance related to net operating losses (“NOL”) was recognized and evaluated on a stand-alone basis.

The domestic and foreign components of (loss) income before income taxes are as follows:

 

     Successor     Predecessor  
     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
 

Domestic

   $ (118    $ (92    $ (9   $ 1,983  

Foreign

     (28      20        (51     (265
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ (146    $ (72    $ (60   $ 1,718  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

F-39


Table of Contents

There were no material differences in the remaining Income Taxes items between Momentive and MPM.

Income tax expense (benefit) attributable to loss from operations consists of:

 

Successor

   Current      Deferred      Total  

Year ended December 31, 2016:

        

United States federal

   $ —        $ (10    $ (10

State and local

     —          —          —    

Non-U.S. jurisdictions

     35        (7      28  
  

 

 

    

 

 

    

 

 

 
   $ 35      $ (17    $ 18  
  

 

 

    

 

 

    

 

 

 

Year ended December 31, 2015:

        

United States federal

   $ —        $ —        $ —    

State and local

     —          —          —    

Non-U.S. jurisdictions

     19        (6      13  
  

 

 

    

 

 

    

 

 

 
   $ 19      $ (6    $ 13  
  

 

 

    

 

 

    

 

 

 

Period from October 25, 2014 through December 31, 2014:

        

United States federal

   $ —        $ —        $ —    

State and local

     —          —          —    

Non-U.S. jurisdictions

     10        (10      —    
  

 

 

    

 

 

    

 

 

 
   $ 10      $ (10    $ —    
  

 

 

    

 

 

    

 

 

 

Predecessor

        

Period from January 1, 2014 through October 24, 2014:

        

United States federal

   $ 2      $ —        $ 2  

State and local

     —          —          —    

Non-U.S. jurisdictions

     14        20        34  
  

 

 

    

 

 

    

 

 

 
   $ 16      $ 20      $ 36  
  

 

 

    

 

 

    

 

 

 

 

F-40


Table of Contents

Income tax expense attributable to (loss) income before income taxes was $18, $13, $0 and $36 for the year ended December 31, 2016 and 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, respectively, and differed from the amounts computed by applying the U.S. federal income tax rate of 35% to pre-tax loss from continuing operations as a result of the following:

 

     Successor     Predecessor  
     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
 

Income tax expense:

        

Computed expected tax (benefit) expense

   $ (50   $ (25   $ (21   $ 603  

State and local income taxes, net of federal income tax benefit

     —         —         —         —    

Increase (reduction) in income taxes resulting from:

        

Tax rate changes

     (6     (3     —         1  

Non-U.S. tax rate differential

     (4     (1     4       (1

Branch accounting effect

     (17     7       (23     (22

Withholding taxes

     3       3       —         —    

Valuation allowance

     76       33       38       (695

Reorganization and Fresh Start

     —         —         —         101  

Permanent differences

     (1     3       1       27  

Bankruptcy costs

     —         —         1       40  

Change in permanent reinvestment assertion

     —         —         (5     (20

Reserves for uncertain tax positions

     17       (4     5       2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 18     $ 13     $ —       $ 36  
  

 

 

   

 

 

   

 

 

   

 

 

 

A significant portion of the Company’s foreign operations are conducted through entities which are treated as branches of the U.S. and thus subject to current U.S. taxation. As a result, the income or loss of each such branch operation is subject to taxation in its foreign jurisdiction of operation, as well as subject to current taxation in the U.S.

The rate reconciling item, “Valuation allowance” principally relates to the maintenance of a full valuation allowance for jurisdictions in which a valuation allowance had already been established based on the current year increase or decrease in net deferred tax assets in those jurisdictions.

The rate reconciling item, “Reserves for uncertain tax positions” for 2016 includes a payment of $9 related to the Company’s Italian tax court claim that was settled in 2016. In 2016, the Company also received a reimbursement of $9 under a tax indemnification agreement and included this in other non-operating expenses (net) in the Company’s Consolidated Statement of Operations.

 

F-41


Table of Contents

The rate reconciling item, “Non-U.S. rate differential”, reflects the difference between the tax expense or benefit on pre-tax foreign income or loss at the local statutory rate, which is typically lower than 35%, after consideration of permanent differences, and the tax impact of the same pre-tax income or loss as computed at the U.S. statutory rate of 35%. The impact of the rate differential by jurisdiction was as follows:

 

Successor

   Pre-Tax
Income
(Loss)
     Statutory
Rate(1)
    Rate Effect  

December 31, 2016:

     

China

   $ 30        25.0   $ (3

Germany

     (86      32.0     3  

Thailand

     12        20.0     (2

Other(2)

     16          (2
       

 

 

 
        $ (4

December 31, 2015:

     

China

   $ 12        25.0   $ (1

Other(2)

     8          —    
       

 

 

 
        $ (1

December 31, 2014:

     

Germany

   $ (61      31.2   $ 2  

Switzerland

     (6      14.4     1  

Japan

     (14      37.8     —    

Other(2)

     6          1  
       

 

 

 
        $ 4  

Predecessor

     

October 24, 2014:

     

Germany

   $ (56      31.2   $ 1  

Switzerland

     3        14.4     (1

Japan

     (25      37.8     (1

Other(2)

     32          —    
       

 

 

 
        $ (1

 

(1) The statutory rates included in the table above reflect the total statutory rates applied in each jurisdiction, including the impact of surcharges and local trade or enterprise taxes.
(2) Other significant jurisdictions (and statutory rates) impacting the “Non-U.S. rate differential” includes: Korea 22% in 2016, 24% in 2015 and 2014), Thailand (20%), Hong Kong (16.5%), China (25%), Italy (27.5%), Switzerland (24% in 2015), and Germany (31.2%).

Due to the disregarded branch structure described above, an additional adjustment for “Branch accounting effect” records the tax impact of the foreign pre-tax income required to be included in the U.S. tax return at the U.S. statutory rate. This amount does not directly offset the “Non-U.S. rate differential” due primarily to the tax effect of inclusion of permanent GAAP to local tax differences in the “Non-U.S. rate differential”.

In the successor period from October 25, 2014 through December 31, 2014, the Company was able to assert permanent reinvestment and recorded the rate impact of the reversal of deferred tax recorded. During the predecessor period from January 1, 2014 through October 24, 2014, the Company reflected the change in foreign currency translation in the period due to the continued inability to assert permanent reinvestment. In 2013, due to going concern considerations, the Company changed its assertion with respect to its intention to permanently reinvest earnings outside the U.S. Accordingly, the tax effect of such change in assertion had been recorded in that year. As many of the Company’s operations are conducted in branch form, the impact of the change in this assertion primarily relates to the recognition of the tax effect of foreign currency gains and losses.

 

F-42


Table of Contents

Under the Plan, a substantial portion of the Company’s pre-petition debt securities, revolving credit facilities and other obligations were extinguished. Absent an exception, a debtor recognizes cancellation of indebtedness income (“CODI”) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The Internal Revenue Code of 1986, as amended (“IRC”), provides that a debtor in a bankruptcy case may exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is the adjusted issue price of any indebtedness discharged less the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued and (iii) the fair market value of any other consideration, including equity, issued. As a result of the market value of equity upon emergence from chapter 11 bankruptcy proceedings, the amount of U.S. CODI is approximately $1,733, which reduced the value of the Company’s U.S. NOL that had a value of $0 after valuation allowance. The amount of CODI in excess of the Company’s NOL reduced the tax basis in fixed assets and intangibles by $73. The actual reduction in tax attributes occurred on the first day of the Company’s tax year subsequent to the date of emergence.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2016 and 2015 after adoption of ASU 2015-17 are presented below:

 

     Domestic      Foreign  
   2016      2015      2016      2015  

Deferred tax assets:

           

Inventory

   $ 12      $ 13      $ 5      $ 2  

Employee compensation

     12        5        3        2  

Unrealized foreign currency loss

     13        19        1        2  

Amortization

     14        43        14        19  

Depreciation

     —          —          2        2  

Pension

     131        128        40        37  

Net operating losses

     132        87        102        103  

Branch accounting future benefit

     26        26        —          —    

Reserves and accruals

     23        13        8        6  

Deferred interest deductions

     —          —          61        65  

Amortizable financing costs

     8        10        —          —    

Other

     —          —          3        2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross deferred tax assets

     371        344        239        240  

Less valuation allowance

     (297      (243      (187      (176
  

 

 

    

 

 

    

 

 

    

 

 

 

Net deferred tax assets

     74        101        52        64  
  

 

 

    

 

 

    

 

 

    

 

 

 

Deferred tax liabilities:

           

Inventory

     —          —          3        5  

Reserves and accruals

     —          —          1        1  

Amortization

     —          —          32        38  

Depreciation

     72        101        54        65  

Withholding taxes and other

     2        —          19        16  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total deferred tax liabilities

     74        101        109        125  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net deferred tax liability

   $ —        $ —        $ (57    $ (61
  

 

 

    

 

 

    

 

 

    

 

 

 

 

F-43


Table of Contents

In 2016, $6 of U.S. deferred tax assets related to unrealized foreign currency losses, and related valuation allowance, were removed from the deferred tax table due to management’s expectation that the realization of a future tax benefit for these losses was remote.

NOL Schedule

 

Country

   NOL Value  

United States

   $ 368  

Germany

     245  

Japan

     45  

Thailand

     28  

Other

     18  
  

 

 

 

Total

   $ 704  
  

 

 

 

For the year ended December 31, 2016 and 2015, successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, the Company had available approximately $704, $585, $423, and $376 of gross NOL carryforwards with expiration dates ranging from one year to indefinite that may be applied against future taxable income, respectively. In addition, none of the $368 U.S. NOL carryforwards are subject to dual consolidated loss rules. The NOL for the United States and Japan will begin to expire in 2034 and 2017, respectively. The NOL for Thailand will begin to expire in 2017. The NOL for Germany has no expiration date.

As a result of exiting bankruptcy, there was a change of ownership for the Company’s German entity. For German tax purposes, a change of ownership would trigger a limitation on the NOL carryforwards as of the date of the change in ownership. The limitation would disallow the entire NOL except for any amount that could be offset against any built in gain that existed at the ownership change. The Company has estimated the built in gain and concluded there is enough to support the NOL at the ownership change which is supported by a completed valuation of the German business. Since there is a valuation allowance against the German NOL deferred tax asset, a change in NOL would decrease the deferred tax asset and corresponding valuation allowance.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the net deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the benefit of most of their net deferred tax assets. As of December 31, 2016 and 2015, in some jurisdictions in which there is a net deferred tax asset, the Company has established a full valuation allowance. However, there are exceptions for certain non-U.S. jurisdictions where, based on management’s assessment, it is more likely than not the net deferred tax asset will be realized.

For the year ended December 31, 2016, the company recorded an increase in valuation allowance of $65, comprised of an increase in the U.S. valuation allowances of $54 and an increase in the foreign valuation allowance of $11. The change in the U.S. and non-U.S. valuation allowances recorded to reflect current activity of the U.S. and non-U.S. entities that have previously established valuation allowances. For the year ended December 31, 2015, the Company recorded a decrease in valuation allowances of $110, comprised of a increase in the U.S. valuation allowances of $137, partially offset by a decrease in the foreign valuation allowances of $27. The change in U.S. valuation allowances was primarily attributable to the impact of the reorganization adjustments to reflect the reduction in tax attributes as a result of the Company’s emergence from bankruptcy (see Note 2), as well as the application of fresh start accounting (see Note 3). The decrease in foreign valuation allowances of $27 was primarily attributable to valuation allowances of $21 recorded to reflect current activity of the non-U.S. entities that have previously established valuation allowances, partially offset by the reversal of the valuation allowance previously established against net deferred tax assets in China.

 

F-44


Table of Contents

Under branch accounting, the inclusion of the non-U.S. operations in the U.S. income tax return requires the establishment of a deferred tax asset or liability to offset the foreign affiliates’ tax consequences; eliminating a duplicative deferred tax benefit or expense. The branch accounting future benefit deferred tax asset of $26 at both December 31, 2016 and 2015, principally represents the offset to the non-U.S. affiliates deferred tax liabilities of $57 and $61 as of December 31, 2016 and 2015, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

Successor Balance at December 31, 2014

   $ 51  

Additions for tax positions of the current year

     4  

Additions for tax positions of the prior years

     3  

Reductions for tax positions of prior years

     (9

Settlements

     (1

Statute of limitations expiration

     (11

Foreign currency translation

     (1
  

 

 

 

Successor Balance at December 31, 2015

   $ 36  

Additions for tax positions of the current year

     6  

Additions for tax positions of the prior years

     8  

Reductions for tax positions of prior years

     (2

Settlements

     (5

Statute of limitations expiration

     (4

Foreign currency translation

     —    
  

 

 

 

Successor Balance at December 31, 2016

   $ 39  
  

 

 

 

Liabilities for unrecognized tax benefits as of December 31, 2016 relate to various domestic and foreign jurisdictions. If recognized, all of the unrecognized tax benefits as of December 31, 2016 would reduce the Company’s effective tax rate.

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2016 and 2015, the Company has recorded a liability of approximately $6 and $4, respectively, for interest and penalties.

In 2016, the Company settled tax-related claims in an Italian court for $9 which included $4 of interest and penalties. In 2016, the Company also received a reimbursement of $9 under a tax indemnification agreement and included this in other non-operating expenses (net) in the Company’s Consolidated Statement of Operations.

The Company files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world with examinations ongoing in a few of those jurisdictions including Canada, Germany, India, Italy and Korea. Such major jurisdictions with open tax years are as follows: United States 2006-2016, China, 2006-2016, Germany 2006-2016, Italy 2011-2016, India 2011-2016, Switzerland 2016, Singapore 2012-2016, Japan 2010-2016, Thailand 2011-2016, Hong Kong 2011-2016, Canada 2009-2014 and Brazil 2011-2016. Unrecognized tax benefits are not expected to change significantly over the next 12 months.

The Company is recognizing the earnings of non-U.S. operations currently in its U.S. consolidated income tax return as of December 31, 2016 and is expecting that, with the exception of Germany and Japan, all earnings will be repatriated to the U.S. The Company has accrued the incremental tax expense expected to be incurred upon the repatriation of these earnings. In addition, the Company has 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.

 

F-45


Table of Contents

14. Commitments and Contingencies

Non-Environmental Legal Matters

The Company is involved in various legal proceedings in the ordinary course of business and had reserves of $3 and $3 at December 31, 2016 and December 31, 2015, respectively, for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable, all of which are included in “Other current liabilities” in the Consolidated Balance Sheets.

Purchase Commitments

The Company has signed multi-year agreements with vendors in order to obtain favorable pricing and terms on products that are necessary for the ongoing operation of its business. Under the terms of these agreements, the Company has committed to contractually specified minimums over the contractual periods. A majority of these contractual commitments are related to the off-take agreement with ASM (see Note 7). As of December 31, 2016, future contractual minimums are as follows:

 

Year

   Total  

2017

   $ 127  

2018

     111  

2019

     97  

2020

     91  

2021

     72  

2022 and beyond

     352  
  

Total minimum payments

     850  
  

Less: Amount representing interest

     (94
  

 

 

 

Present value of minimum payments

   $ 756  
  

 

 

 

Environmental Matters

The Company is involved in certain remediation actions to clean up hazardous wastes as required by federal and state laws. Liabilities for remediation costs at each site are based on the Company’s best estimate of discounted future costs. As of both December 31, 2016 and December 31, 2015, the Company had recognized obligations of $13 for remediation costs at the Company’s manufacturing facilities and offsite landfills. These amounts are included in “Other long-term liabilities” in the Consolidated Balance Sheets.

Waterford, NY Site

The Company currently owns and operates a manufacturing site in Waterford, NY. In 1988, a consent decree was signed with the State of New York which requires recovery of groundwater at the site to contain migration of specified contaminants in the groundwater. A groundwater pump and treat system and groundwater monitoring program are currently operational to implement the requirements of this consent decree.

Due to the long-term nature of the project and the uncertainty inherent in estimating future costs of implementing this program, this liability was recorded at its net present value of $8, which assumes a 3% discount rate and a time period of 50 years. The undiscounted liability, which is expected to be paid over the next 50 years, is approximately $17. Over the next five years the Company expects to make ratable payments totaling $2.

15. Pension and Postretirement Benefits

Domestic Pension Plans

Most U.S. employees participate in the Company’s U.S. defined benefit plan, with a pension formula based on years of service and final average earnings. The plan was frozen for salaried exempt employees in 2012.

 

F-46


Table of Contents

Effective December 31, 2013 the plan was frozen for non-grandfathered employees covered by a collective bargaining agreement negotiated in 2013. Effective December 31, 2014, benefits in the U.S. pension plan were frozen for all non-grandfathered employees covered by a collective bargaining agreement negotiated in 2014, and the plan was frozen to all new entrants.

Substantially all U.S. employees may also participate in the Company’s defined contribution plan. Under this plan, eligible employees may invest a portion of their earnings on a before or after tax basis, with the Company matching between 50% of the first 7% of eligible earnings and 100% of the first 5% of eligible earnings. In conjunction with the freeze of the U.S. pension benefit, the Company enhanced its defined contribution plan for impacted employees by providing a Company match up to 5% of the eligible compensation. The Company also provides an annual retirement contribution to employees not eligible to earn pension benefits, which is a contribution ranging from 3% to 7% of eligible compensation that is be deposited in the accounts of eligible employees each year based on years of service. Finally, the Company also instituted an achievement match for employees not eligible to earn pension benefits, which is an additional employer match up to 1.25% that will be deposited into the accounts of eligible employees each year if global incentive targets are achieved.

Foreign Pension Plans

Outside the U.S., the Company maintains its principal defined benefit pension plans in Germany, Japan, the Netherlands and Switzerland (collectively, Foreign or Foreign Pension Plans). The Company maintains additional defined benefit pension plans in various other locations.

The Company’s defined benefit pension plans in Germany cover substantially all of its employees. These plans are not funded and benefits are paid directly by the Company to retirees. The benefit is based on a cumulative benefit earned over the employee’s service period. Benefits vest upon five years of service and the attainment of age 25.

The Company’s defined benefit pension plan in Japan covers most employees, but was frozen to new entrants in 2012. The benefits of the Company’s Japanese pension plan are based on years of service and the employee’s three highest years of compensation during the last 10 years of employment. The pension plan assets are managed by a variety of Japanese financial institutions. Employees hired after 2012 are eligible for benefits under a defined contribution plan.

In Switzerland, the Company’s defined benefit plan provides pension, death and disability benefits to substantially all employees. Benefits are based on participants’ accumulated account balances plus an annuity conversion factor established by the Swiss government. The pension liability is administered through a collective foundation.

The Company also offers a defined benefit pension plan to its employees in the Netherlands. The plan has a career average formula and is funded through an insurance company. The Company’s pension expense associated with contributions to these pension plans was less than $1 for the successor year ended December 31, 2016, successor period from October 25, 2014 to December 31, 2014, the predecessor period from January 1, 2014 through October 24, 2014, and for the predecessor year ended December 31, 2014.

Postretirement Plans

The Company’s U.S. health and welfare plan provides benefits to pay medical expenses, dental expenses, flexible spending accounts for otherwise unreimbursed expenses, short-term disability benefits, and life and accidental death and dismemberment insurance benefits. Retirees share in the cost of healthcare benefits. The Company funds retiree healthcare benefits on a pay-as-you-go basis. The Company uses a December 31 measurement date for this plan. The Company also provides non-pension postretirement benefit plans to certain Brazilian associates. The Brazilian plan became effective in 2012 as a result of a change in certain regulations,

 

F-47


Table of Contents

and provides retirees that contributed towards coverage while actively employed, with access to medical benefits, with the retiree being responsible for 100% of the premiums. In 2014, the plan was amended such that 100% of the premiums of active employees are paid by the Company.

The following table presents the change in benefit obligation, change in plan assets and components of funded status for the Company’s defined benefit pension and non-pension postretirement benefit plans for the years ended December 31:

 

    Pension Benefits     Non-Pension Postretirement Benefits  
    2016     2015     2016     2015  
    U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
 

Change in Benefit Obligation

               

Benefit obligation at beginning of period

  $ 216     $ 184     $ 223     $ 190     $ 86     $ —       $ 88     $ —    

Service cost

    6       10       9       10       1       —         2       —    

Interest cost

    9       3       9       3       2       —         4       —    

Actuarial (gains) losses

    14       18       (21     (1     (1     1       (4     —    

Foreign currency exchange rate changes

    —         (3     —         (14     —         —         —         —    

Benefits paid

    (4     (5     (3     (4     (4     —         (4     —    

Plan amendments

    —         —         2       —         (31     —         —         —    

Plan curtailments

    —         —         (3     —         —         —         —         —    

Plan settlements

    —         —         —         —         —         —         —         —    

Other

    —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefit obligation at end of period

    241       207       216       184       53       1       86       —    

Change in Plan Assets

               

Fair value of plan assets at beginning of period

    114       34       116       32       —         —         —         —    

Actual return on plan assets

    7       —         (4     1       —         —         —         —    

Foreign currency exchange rate changes

    —         —         —         (1     —         —         —         —    

Employer contributions

    5       6       5       6       4       —         4       —    

Benefits paid

    (4     (5     (3     (4     (4     —         (4     —    

Plan settlements

    —         —         —         —         —         —         —         —    

Other

    —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets at end of period

    122       35       114       34       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Funded status of the plan at end of period

  $ (119   $ (172   $ (102   $ (150   $ (53   $ (1   $ (86   $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-48


Table of Contents
    Pension Benefits     Non-Pension Postretirement Benefits  
    2016     2015     2016     2015  
    U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
 

Amounts recognized in the Consolidated Balance Sheets at December 31 consist of:

               

Other current liabilities

  $ (1   $ (2   $ —       $ (1   $ (3   $ —       $ (4   $ —    

Long-term pension and post employment benefit obligations

    (118     (170     (102     (149     (50     (1     (82     —    

Accumulated other comprehensive (income) loss

    1       (1     1       (1     (17     —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net amounts recognized

  $ (118   $ (173   $ (101   $ (151   $ (70   $ (1   $ (86   $ —    

Amounts recognized in Accumulated other comprehensive income at December 31 consist of:

               

Net actuarial (gain) loss

  $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ —    

Net prior service (benefit) cost

    1       (1     1       (1     (28     —         —         —    

Deferred income taxes

    —         —         —         —         11       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net amounts recognized

  $ 1     $ (1   $ 1     $ (1   $ (17   $ —       $ —       $ —    

Accumulated benefit obligation

  $ 227     $ 198     $ 204     $ 175          

Accumulated benefit obligation for funded plans

    (241     (207     (217     (184        

Pension plans with underfunded or non-funded accumulated benefit obligations at December 31:

               

Aggregate projected benefit obligation

  $ 241     $ 207     $ 216     $ 184          

Aggregate accumulated benefit obligation

    227       198       204       175          

Aggregate fair value of plan assets

    122       35       114       34          

Pension plans with projected benefit obligations in excess of plan assets at December 31:

               

Aggregate projected benefit obligation

  $ 241     $ 207     $ 216     $ 184          

Aggregate fair value of plan assets

    122       35       114       34          

The net unrecognized actuarial losses were eliminated and remeasured to $0 at October 24, 2014 as a result of the application of fresh start accounting (see Note 3).

Beginning in the successor period from October 25, 2014 through December 31, 2014, as a result of certain accounting policy changes adopted in connection with fresh start accounting, actuarial gains and losses previously recognized in accumulated other comprehensive income are recognized directly as a component of earnings in the Consolidated Statements of Operations.

The foreign currency impact reflected in these rollforward tables are primarily for changes in the euro versus the U.S. dollar.

 

F-49


Table of Contents

Following are the components of net pension and postretirement expense recognized for the successor years ended December 31, 2016, December 31, 2015, successor period from October 25, 2014 through December 31, 2014; and the predecessor period from January 1, 2014 through October 24, 2014, respectively:

 

     Pension Benefits  
     U.S. Plans  
     Successor           Predecessor  
     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
 

Service cost

   $ 6     $ 9     $ 2          $ 7  

Interest cost on projected benefit obligation

     9       9       1            7  

Expected return on assets

     (9     (9     (1          (7

Curtailment gain1

     —         (3     —              —    

Recognized actuarial loss (gain)2

     15       (8     4            —    

Amortization of net losses

     —         —         —              —    
  

 

 

   

 

 

   

 

 

        

 

 

 

Net expense

   $ 21     $ (2   $ 6          $ 7  
  

 

 

   

 

 

   

 

 

        

 

 

 

 

     Pension Benefits  
     Non-U.S. Plans  
     Successor             Predecessor  
     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
 

Service cost

   $ 10     $ 10     $ 1           $ 6  

Interest cost on projected benefit obligation

     3       3       1             4  

Expected return on assets

     (1     (1     —               (1

Recognized actuarial loss (gain)2

     18       (1     11             —    

Amortization of net losses

     —         —         —               1  

Curtailment gain

     —         —         —               —    

Settlement loss

     —         —         —               —    
  

 

 

   

 

 

   

 

 

         

 

 

 

Net expense

   $ 30     $ 11     $ 13           $ 10  
  

 

 

   

 

 

   

 

 

         

 

 

 

 

(1) The curtailment gain recognized on pension benefits during the fiscal year ended December 31, 2015 relates to the re-measurement of the pension benefit obligation in conjunction with plan provision changes for non-exempt employees not subject to a collective bargaining agreement (“impacted employees”). The Company recorded this gain in Selling, general and administrative expense in the Consolidated Statements of Operations.

 

F-50


Table of Contents
(2) The actuarial loss (gain) recognized on pension benefits during the fiscal year ended December 31, 2016, December 31, 2015 and December 31, 2014 mainly relates to the increase/decrease in projected benefit obligation due to the decrease in discount rate as a result of the annual re-measurement. The Company recorded this gain in Selling, general and administrative expense in the Consolidated Statements of Operations.

 

     Non-Pension Postretirement Benefits  
     U.S. Plans  
     Successor             Predecessor  
     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
 

Service cost

   $ 1     $ 2     $ —             $ 2  

Interest cost on projected benefit obligation

     2       4       1             3  

Amortization of prior service benefit

     (3     —         —               —    

Amortization of net gain

     —         (4     —               —    
  

 

 

   

 

 

   

 

 

         

 

 

 

Net expense

   $ —       $ 2     $ 1           $ 5  
  

 

 

   

 

 

   

 

 

         

 

 

 

Expense related to non-U.S. non-pension postretirement benefits was less than $1 each for the years ended December 31, 2016, December 31, 2015, successor period from October 25, 2014 through December 31, 2014; and the predecessor period from January 1, 2014 through October 24, 2014, respectively.

The following amounts were recognized in “Other comprehensive loss” during the period from January 1, 2016 through December 31, 2016:

 

     Pension Benefits     Non-Pension
Postretirement Benefits
    Total  
     U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
 

Net actuarial losses arising during the year

   $ 15     $ 18     $ (1   $ 1     $ 14     $ 19  

Prior service cost from plan amendments

     (1     —         (30     —         (31     —    

Amortization of prior service (cost) benefit

     —         —         3       —         3       —    

Amortization of net losses

     (15     (18     1       (1     (14     (19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gain loss recognized in other comprehensive loss

     (1     —         (27     —         (28     —    

Deferred income taxes

     —         —         11       —         11       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gain recognized in other comprehensive loss, net of tax

   $ (1   $ —       $ (16   $ —       $ (17   $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following amounts were recognized in “Other comprehensive loss” during the period from January 1, 2015 through December 31, 2015:

 

     Pension Benefits      Non-Pension
Postretirement Benefits
     Total  
     U.S.
Plans
     Non-U.S.
Plans
     U.S.
Plans
     Non-U.S.
Plans
     U.S.
Plans
     Non-U.S.
Plans
 

Prior service cost from plan amendments

   $ 1      $ —        $ —        $ —        $ 1      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loss recognized in other comprehensive loss

     1        —          —          —          1        —    

Deferred income taxes

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loss recognized in other comprehensive loss, net of tax

   $ 1      $ —        $ —        $ —        $ 1      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

F-51


Table of Contents

The amounts in “Accumulated other comprehensive income” at December 31, 2016 that are expected to be recognized as components of net periodic benefit cost during the next fiscal year is approximately $4.

Determination of Actuarial Assumptions

The Company’s actuarial assumptions are determined based on the demographics of the population, target asset allocations for funded plans, regional economic trends, statutory requirements and other factors that could impact the benefit obligation and plan assets. For our European plans, these assumptions are set by country, as the plans within these countries have similar demographics, and are impacted by the same regional economic trends and statutory requirements.

The discount rates selected reflect the rate at which pension obligations could be effectively settled. The Company selects the discount rates based on cash flow models using the yields of high-grade corporate bonds or the local equivalent with maturities consistent with the Company’s anticipated cash flow projections.

The expected rates of future compensation level increases are based on salary and wage trends in the chemical and other similar industries, as well as the Company’s specific long-term compensation targets by country. Input is obtained from the Company’s internal Human Resources group and from outside actuaries. These rates include components for wage rate inflation and merit increases.

The expected long-term rates of return on plan assets are determined based on the plans’ current and projected asset mix. To determine the expected overall long-term rate of return on assets, the Company takes into account the rates on long-term debt investments held within the portfolio, as well as expected trends in the equity markets, for plans including equity securities. Peer data and historical returns are reviewed and the Company consults with its actuaries, as well as the Plan’s investment advisors, to confirm that the Company’s assumptions are reasonable.

The weighted average rates used to determine the benefit obligations were as follows at December 31:

 

     Pension Benefits     Non-Pension Postretirement Benefits  
     2016     2015     2016     2015  
     U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
 

Discount rate

     4.2     1.5     4.5     1.9     4.1     11.2     4.4     12.6

Rate of increase in future compensation levels

     3.0     2.9     3.3     2.9     —         —         —         —    

The weighted average assumed health care cost trend rates are as follows at December 31:

                

Health care cost trend rate assumed for next year

     —         —         —         —         6.8     11.1     6.8     11.3

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)

     —         —         —         —         4.5     7.0     4.5     7.1

Year that the rate reaches the ultimate trend rate

     —         —         —         —         2023       2024       2023       2023  

 

F-52


Table of Contents

The weighted average rates used to determine net periodic pension expense (benefit) were as follows for the years ended December 31, 2016, December 31, 2015, successor period from October 25, 2014 through December 31, 2014; and the predecessor period from January 1, 2014 through October 24, 2014, respectively:

 

    Pension Benefits  
    U.S. Plans     Non-U.S. Plans  
    Successor           Predecessor     Successor           Predecessor  
    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,
2016
    Year Ended
December 31,
2015
    Period from
October 25,
2014 through
December 31,
2014
          Period from
January 1,
2014 through
October 24,
2014
 

Discount rate

    4.5     4.2     4.4         5.1     2.2     1.9     2.6         2.8

Rate of increase in future compensation levels

    3.3     3.3     3.5         3.5     3.1     2.9     2.9         2.6

Expected long-term rate of return on plan assets

    7.5     7.5     7.5         7.5     2.4     1.9     2.1         2.3
    Non-Pension Postretirement Benefits  
    U.S. Plans     Non-U.S. Plans  
    Successor           Predecessor     Successor           Predecessor  
    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,
2016
    Year Ended
December 31,
2015
    Period from
October 25,
2014 through
December 31,
2014
          Period from
January 1,
2014 through
October 24,
2014
 

Discount rate

    4.4     4.1     4.2         4.8     12.6     11.3     12.0         12.2

A one-percentage-point change in the assumed health care cost trend rates would change the projected benefit obligation for U.S. non-pension postretirement benefits by $1 and service cost and interest cost by a negligible amount. The impact on non-U.S. plans is negligible.

Pension Investment Policies and Strategies

The Company’s investment strategy for the assets of its North American defined benefit pension plans is to maximize the long-term return on plan assets using a mix of equities and fixed income investments with a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and expected timing of future cash flow requirements. The investment portfolio contains a diversified blend of equity and fixed-income investments. For U.S. plans, equity investments are also diversified across U.S. and international stocks, as well as growth, value and small and large capitalization investments. Investment risk and performance is measured and monitored on an ongoing basis through periodic investment portfolio reviews, annual liability measurements and periodic asset and liability studies.

The Company periodically reviews its target allocation of North American plan assets among the various asset classes. The targeted allocations are based on anticipated asset performance, discussions with investment professionals and on the projected timing of future benefit payments.

 

F-53


Table of Contents

The Company observes local regulations and customs governing its European pension plans in determining asset allocations, which generally require a blended weight leaning toward more fixed income securities, including government bonds.

 

     Actual         Target      
         2016             2015        

Weighted average allocations of U.S. pension plan assets at December 31:

      

Equity securities

     53     52     59

Debt securities

     47     48     41

Cash, short-term investments and other

     —       —       —  
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

Weighted average allocations of non-U.S. pension plan assets at December 31:

      

Equity securities

     25     27     22

Debt securities

     20     20     19

Cash, short-term investments and other

     55     53     59
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

Fair Value of Plan Assets

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This guidance describes three levels of inputs that may be used to measure fair value:

 

    Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

    Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 equity securities are primarily in pooled asset and mutual funds and are valued based on underlying net asset value multiplied by the number of shares held.

 

    Level 3: Unobservable inputs that are supported by little or no market activity and are developed based on the best information available in the circumstances. For example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

 

F-54


Table of Contents

The following table presents U.S. pension plan investments measured at fair value on a recurring basis as of December 31, 2016 and 2015:

 

    Fair Value Measurements Using  
    2016     2015  
    Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs

(Level 2)
    Unobservable
Inputs
(Level 3)
    Total     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs

(Level 2)
    Unobservable
Inputs
(Level 3)
    Total  

Large cap equity funds(a)

  $ —       $ 30     $ —       $ 30     $ —       $ 33     $ —       $ 33  

Small/mid cap equity funds(a)

    —         10       —         10       —         4       —         4  

Other international equity(a)

    —         24       —         24       —         21       —         21  

Debt securities/fixed income(b)

    —         58       —         58       —         56       —         56  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —       $ 122     $ —       $ 122     $ —       $ 114     $ —       $ 114  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents non-U.S. pension plan investments measured at fair value on a recurring basis as of December 31, 2016 and 2015:

 

    Fair Value Measurements Using  
    2016     2015  
    Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs

(Level 2)
    Unobservable
Inputs
(Level 3)
    Total     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs

(Level 2)
    Unobservable
Inputs
(Level 3)
    Total  

Other international equity(a)

  $ —       $ 15     $ —       $ 15     $ —       $ 15     $ —       $ 15  

Debt securities/fixed income(b)

    —         14       —         14       —         14       —         14  

Pooled insurance products with fixed income guarantee(a)

    —         5       —         5       —         4       —         4  

Cash, money market and other(c)

    —         1       —         1       —         1       —         1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —       $ 35     $ —       $ 35     $ —       $ 34     $ —       $ 34  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Level 2 equity securities are primarily in pooled asset and mutual funds and are valued based on underlying net asset value multiplied by the number of shares held.
(b) Level 2 fixed income securities are valued using a market approach that includes various valuation techniques and sources, primarily using matrix/market corroborated pricing based on observable inputs including yield curves and indices.
(c) Cash, money market and other securities include mutual funds, certificates of deposit and other short-term cash investments for which the share price is $1 or book value is assumed to equal fair value due to the short duration of the investment term.

Projections of Plan Contributions and Benefit Payments

The Company expects to make contributions totaling $21 to its defined benefit pension plans in 2017.

 

F-55


Table of Contents

Estimated future plan benefit payments as of December 31, 2016 are as follows:

 

     Pension Benefits      Non-Pension
Postretirement Benefits
 

Year

   U.S.
Plans
     Non-U.S.
Plans
     U.S.
Plans
     Non-U.S.
Plans
 

2017

   $ 5      $ 4      $ 3      $ —    

2018

     6        5        3        —    

2019

     7        5        3        —    

2020

     8        6        3        —    

2021

     10        6        3        —    

2022-2026

     66        35        15        —    

16. Segment and Geographic Information

In the third quarter of 2017, the Company reorganized its segment structure and bifurcated its Silicones segment into Performance Additives and Formulated and Basic Silicones to better reflect the Company’s specialty chemical portfolio and related performance. This reorganization included a change in the Company’s operating segments from two to four segments. The Company reorganized to the new four segment model, by implementing the following:

 

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

 

    having the CEO regularly review the results of operations, manage the allocation of resources and assesses the performance of each of these segments

The Company’s operations were previously organized in two segments: Silicones, Quartz. The four segment 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.

The Performance Additives business is engaged in the manufacture, sale and distribution of specialty silanes, silicone fluids and urethane additives. The Formulated and Basic Silicones business is engaged in the manufacture, sale and distribution of sealants, electronics materials, coatings, elastomers and basic silicone fluids. The Quartz Technologies business is engaged in the manufacture, sale and distribution of high-purity fused quartz and ceramic materials. In addition, Corporate consists of general and administrative expenses that are not fully allocated to the segments, such as shared service and other administrative functions.

Following are net sales and Segment EBITDA (earnings before interest, income taxes, depreciation and amortization) by segment. Segment EBITDA is defined as EBITDA adjusted for certain non-cash items and certain other income and expenses. Segment EBITDA is the primary performance measure used by the Company’s 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 the profitability measure used to set management and executive incentive compensation goals.

In accordance with the segment realignment, the Company reassigned goodwill to the new reportable segments on a fair value allocation basis. Refer to Note 9 for further details.

 

F-56


Table of Contents

Net Sales(1):

 

     Successor           Predecessor  
     Year Ended
December 31,
     Period from
October 25,
2014 through
December 31,

2014
          Period from
January 1,
2014 through
October 24,

2014
 
     2016      2015             

Performance Additives

   $ 849      $ 835      $ 171         $ 738  

Formulated and Basic Silicones

     1,212        1,277        260           1,128  

Quartz Technologies

     172        177        34           145  
  

 

 

    

 

 

    

 

 

       

 

 

 

Total

   $ 2,233      $ 2,289      $ 465         $ 2,011  
  

 

 

    

 

 

    

 

 

       

 

 

 

Segment EBITDA(2):

 

     Successor           Predecessor  
     Year Ended
December 31,
     Period from
October 25,
2014 through
December 31,

2014
          Period from
January 1,
2014 through
October 24,

2014
 
     2016      2015             

Performance Additives

   $ 187      $ 176      $ 34         $ 157  

Formulated and Basic Silicones

     70        25        10           56  

Quartz Technologies

     20        27        6           17  

Corporate

     (39      (34      (4         (38
  

 

 

    

 

 

    

 

 

       

 

 

 

Total

   $ 238      $ 194      $ 46         $ 192  
  

 

 

    

 

 

    

 

 

       

 

 

 

 

     Successor      Predecessor  
     Year Ended
December 31,
     Period from
October 25,
2014 through
December 31,
2014
     Period from
January 1,
2014 through
October 24,
2014
 
     2016      2015        
Depreciation and Amortization:            

Performance Additives

   $ 62      $ 54      $ 5      $ 61  

Formulated and Basic Silicones

     94        73        13        66  

Quartz Technologies

     29        26        4        20  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 185      $ 153      $ 22      $ 147  
  

 

 

    

 

 

    

 

 

    

 

 

 

Capital Expenditures(3):

           

Performance Additives

   $ 57      $ 35      $ 9      $ 23  

Formulated and Basic Silicones

     52        61        11        29  

Quartz Technologies

     14        15        4        10  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 123      $ 111      $ 24      $ 62  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     2016      2015  
Total Assets as of December 31(4) :      

Performance Additives

   $ 1,150      $ 1,136  

Formulated and Basic Silicones

     1,174        1,228  

Quartz Technologies

     273        290  

Corporate

     9        9  
  

 

 

    

 

 

 

Total

   $ 2,606      $ 2,663  
  

 

 

    

 

 

 

 

F-57


Table of Contents
(1) Inter-segment sales are not significant and, as such, are eliminated within the selling segment.
(2) Included in the Formulated and Basic Silicones segment’s Segment EBITDA are “Earnings from unconsolidated entities, net of taxes” of $1, $2, $0, and $3 for the years ended December 31, 2016, December 31, 2015, successor period from October 25, 2014 through December 31, 2014 and predecessor period from January 1, 2014 through October 24, 2014, respectively.
(3) Capital expenditures are presented on an accrual basis.
(4) Cash and cash equivalents that were originated by the Performance Additives, Formulated and Basic Silicones and Quartz Technologies operating segments are included within the total assets of the Performance Additives, Formulated and Basic Silicones and Quartz Technologies segments, respectively. Deferred income tax assets are included within Corporate as reconciling amounts to the Company’s total assets as presented on the Consolidated Balance Sheets.

Reconciliation of Net (Loss) Income to Segment EBITDA:

 

     Successor     Predecessor  
     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
 

Net (loss) income

   $ (163   $ (83   $ (60   $ 1,685  

Interest expense, net

     76       79       15       162  

Income tax expense

     18       13       —         36  

Depreciation and amortization

     185       153       22       147  

Gain on extinguishment and exchange of debt

     (9     (7     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 107     $ 155     $ (23   $ 2,030  

Items not included in Segment EBITDA:

        

Non-cash charges and other income and expense

   $ 26     $ 15     $ 46     $ 114  

Unrealized gains (losses) on pension and postretirement benefits

     33       (16     15       —    

Restructuring and other costs

     70       32       5       20  

Reorganization items, net

     2       8       3       (1,972
  

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

     131       39       69       (1,838
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment EBITDA

   $ 238     $ 194     $ 46     $ 192  

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, 2016 and December 31, 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014, these charges primarily represented net realized and unrealized foreign currency transaction losses and losses on the disposal and impairment of certain assets. For the years ended December 31, 2016 and December 31, 2015, these charges also include stock based compensation expenses.

Unrealized gains (losses) on pension and postretirement benefits represented non-cash actuarial losses recognized upon the re-measurement of our pension and postretirement benefit obligations, which after the Effective Date, are recognized in the Consolidated Statements of Operations, and were driven by a decrease in discount rates, other demographic assumptions and asset performance. Restructuring and other costs for all periods primarily included expenses from our restructuring and cost optimization programs. For the year ended December 31, 2016, these amounts also included costs arising from the union strikes inclusive of unfavorable manufacturing variances at our Waterford, NY and Willoughby, OH facilities, costs due to a fire at our Leverkusen, Germany facility, and recovery of Italian tax claims from GE. For the predecessor period from

 

F-58


Table of Contents

January 1, 2014 through October 24, 2014, these amounts also included costs associated with restructuring the Company’s capital structure incurred prior to the Bankruptcy Filing, and were partially offset by a gain related to a claim settlement. Reorganization items, net represented incremental costs incurred directly as a result of the Bankruptcy Filing. For the successor years ended December 31, 2016 and December 31, 2015, successor period from October 25, 2014 through December 31 2014, these amounts were primarily related to certain professional fees. For the predecessor period from January 1, 2014 through October 24, 2014, these amounts included certain professional fees, the BCA Commitment Premium and financing fees related to our DIP Facilities, as well as the impact of the Reorganization Adjustments and the Fresh Start Adjustments (see Note 3).

Geographic Information:

The following tables show data by geographic area. Net sales are based on the location of the operation recording the final sale to the customer. Total long-lived assets consist of property and equipment, net of accumulated depreciation, intangible assets, net of accumulated amortization and goodwill.

Net Sales(1):

 

     Successor     Predecessor  
     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
 

United States

   $ 741      $ 771      $ 187     $ 617  

Germany

     620        636        105       629  

China

     208        302        37       174  

Japan

     273        184        67       254  

Other International

     391        396        69       337  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 2,233      $ 2,289      $ 465     $ 2,011  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Sales are attributed to the country in which the individual business locations reside.

Long-Lived Assets as of December 31:

 

     2016      2015  

United States

   $ 765      $ 777  

Germany

     203        232  

China

     157        178  

Japan

     322        321  

Other International

     162        166  
  

 

 

    

 

 

 

Total

   $ 1,609      $ 1,674  
  

 

 

    

 

 

 

 

F-59


Table of Contents

17. Changes in Accumulated Other Comprehensive Income

Following is a summary of changes in “Accumulated other comprehensive income” for the year ended December 31, 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014:

 

     Defined
Benefit
Pension and
Postretirement
Plans
    Foreign
Currency
Translation
Adjustments
    Total  

Balance at December 31, 2014

   $ 1     $ (29   $ (28

Other comprehensive (loss) income before reclassifications, net of tax

     (1     (63     (64

Amounts reclassified from Accumulated other comprehensive income, net of tax(1)

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Net other comprehensive loss

     (1     (63     (64
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

   $ —       $ (92   $ (92

Other comprehensive (income) loss before reclassifications, net of tax

     20       (1     19  

Amounts reclassified from Accumulated other comprehensive income (loss), net of tax(1)

     (3     —         (3
  

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     17       (1     16  
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

   $ 17     $ (93   $ (76
  

 

 

   

 

 

   

 

 

 

 

(1) Other comprehensive income related to defined benefit pension and postretirement plans for the fiscal year ended December 31, 2016 represents the recognition of net prior service benefit following certain plan provision changes, reduced by amortization of net prior service benefit during fiscal year ended December 31, 2016 (see Note 15).

 

     Amount Reclassified From Accumulated Other
Comprehensive Income
       
     Successor            Predecessor        

Amortization of defined

benefit pension and

other postretirement

benefit items:

   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
   

Location of
Reclassified

Amount in Income

 

Prior service costs

   $ 4     $ —        $ 1               (1)   

Actuarial losses

     —         —          —                 (1)   
  

 

 

   

 

 

    

 

 

        

 

 

   

Total before income tax

     4       —          1            —      

Income tax benefit

     (1     —          —                Income tax expense  
  

 

 

   

 

 

    

 

 

        

 

 

   

Total

   $ 3     $ —        $ 1          $ —      
  

 

 

   

 

 

    

 

 

        

 

 

   

 

(1) These accumulated other comprehensive income components are included in the computation of net pension and postretirement benefit expense (see Note 15).

 

F-60


Table of Contents

18. Net Loss per Share

The following table presents the calculation of basic and diluted net loss per share attributable to Momentive for the years ended December 31, 2016, December 31, 2015, the successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014:

 

     Successor     Predecessor  

(in millions, except share data)

   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
 

Net loss

   $ (163   $ (83   $ (60   $ 1,685  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares—basic

     48,050,048       48,015,685       47,989,000       100  

Effect of dilutive potential common shares

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding—diluted

     48,050,048       48,015,685       47,989,000       100  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share—basic

   $ (3.39   $ (1.73   $ (1   $ 16,850,000  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income loss per share—diluted

   $ (3.39   $ (1.73   $ (1   $ 16,850,000  
  

 

 

   

 

 

   

 

 

   

 

 

 

Potentially dilutive employee share-based awards, excluded

     —         181,869       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Employee equity share options, unvested shares and similar equity instruments granted by the Company are treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options, unvested restricted stock, and restricted stock units. The dilutive effect of such equity awards is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are collectively assumed to be used to repurchase shares.

Due to the net loss recognized for the fiscal year ended December 31, 2015, there is no effect for potentially dilutive 181,869 shares.

19. Subsequent Events

Between the beginning of November 2016 and the middle of February 2017, approximately 600 workers at our Waterford, NY facility were on strike in response to not reaching agreement on the terms for a new contract after the previous contract expired in June 2016. The new contract involving the Local 81359 and Local 81380 unions in our Waterford, NY site and the Local 84707 union in our Willoughby, OH site was ratified by union membership in February 2017 and is effective until June 2019.

 

F-61


Table of Contents

Schedule I—Condensed Parent Company Financial Statements

MPM HOLDINGS INC.

CONDENSED PARENT COMPANY BALANCE SHEETS

 

(In millions)    December 31,
2016
     December 31,
2015
 

Assets

     

Investment in subsidiaries

     484        626  
  

 

 

    

 

 

 

Total assets

   $ 484      $ 626  
  

 

 

    

 

 

 

Liabilities and Equity (Deficit)

     

Current liabilities:

     

Other current liabilities

     1        —    
  

 

 

    

 

 

 

Total current liabilities

     1        —    
  

 

 

    

 

 

 

Long-term liabilities:

     

Other long-term liabilities

     1        —    
  

 

 

    

 

 

 

Total liabilities

     2        —    
  

 

 

    

 

 

 

Total equity (deficit)

     482        626  
  

 

 

    

 

 

 

Total liabilities and equity (deficit)

   $ 484      $ 626  
  

 

 

    

 

 

 

 

F-62


Table of Contents

MPM HOLDINGS INC.

CONDENSED PARENT COMPANY STATEMENTS OF OPERATIONS

 

     Successor     Predecessor  
(In millions)    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
 

Net sales

   $ —       $ —       $ —       $ —    

Cost of sales

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

       —         —         —    

Selling, general and administrative expense

     2       1       —         33  

Restructuring and other costs

       —         —         5  

Operating loss

     (2     (1     —         (38

Interest expense, net

     —         —         —         155  

Other non-operating expense, net

     —         —         —         —    

Loss on extinguishment and exchange of debt

     —         —         —         —    

Reorganization items, net

     —         —         —         (1,688
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and equity (losses) earnings from unconsolidated subsidiaries

     (2     (1     —         1,495  

Income tax expense

       —         —         8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity (losses) earnings of unconsolidated subsidiaries

     (2     (1     —         1,487  

Equity (losses) earnings of unconsolidated subsidiaries, net of tax

     (161     (82     (60     198  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (163   $ (83   $ (60   $ 1,685  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (147   $ (147   $ (88   $ 1,483  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

F-63


Table of Contents

MPM HOLDINGS INC.

CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS

 

     Successor     Predecessor  
     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
 

Cash flows used in operating activities

   $ (1   $ (1   $ —       $ (258
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows used in investing activities:

        

Dividend from MPM

     1       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows used in investing activities

     1       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided by financing activities:

        

Net short-term debt borrowings

     —         —         —         4  

Common stock issuance proceeds

     —         1       —         600  

DIP Facility financing fees

     —         —         —         (19

Net intercompany loan repayments

     —         —         —         (258
  

 

 

   

 

 

   

 

 

   

 

 

 
     —         1       —         327  
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     —         —         —         69  

Cash and cash equivalents at beginning of period

     —         —         —         2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ —       $ —       $ —       $ 71  
  

 

 

   

 

 

   

 

 

   

 

 

 

Schedule II—Valuation and Qualifying Accounts

 

Column A

   Column B      Column C      Column D     Column E  

Description

   Balance at
Beginning
of Period
     Additions(1)      Deductions     Balance at
End of
Period
 

Deferred Tax Asset Valuation Allowance:

          

Successor

                          

Year Ended December 31, 2016

   $ 419      $ 70      $ (5   $ 484  

Year Ended December 31, 2015

   $ 309      $ 125      $ (15   $ 419  

Period from October 25, 2014 through December 31, 2014

   $ 270      $ 52      $ (13   $ 309  

Predecessor

  

 

    

 

    

 

   

 

 

Period from January 1, 2014 through October 24, 2014

   $ 972      $ 127      $ (829   $ 270  

 

(1) Charged to cost and expenses. Includes the impact of foreign currency translation.

 

F-64


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

MPM Holdings Inc.

In our opinion, the accompanying consolidated statements of operations, of comprehensive (loss) income, of equity (deficit) and of cash flows for the period from January 1, 2014 through October 24, 2014 of MPM Holdings Inc. and its subsidiaries (Predecessor), present fairly, in all material respects, the results of their operations and their cash flows for the period from January 1, 2014 through October 24, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company filed a petition on April 13, 2014 with the United States Bankruptcy Court for the Southern District of New York for reorganization under the provisions of Chapter 11 of the Bankruptcy Code. The Plan was substantially consummated on October 24, 2014 and the Company emerged from bankruptcy. In connection with its emergence from bankruptcy, the Company adopted fresh start accounting.

 

 

/s/ PricewaterhouseCoopers LLP

Columbus, Ohio

April 14, 2015, except for the effects of the change in the composition of reportable segments disclosed in Note 16, as to which the date is October 31, 2017.

 

F-65


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

MPM Holdings Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive (loss) income, of equity (deficit) and of cash flows present fairly, in all material respects, the financial position of MPM Holdings Inc. and its subsidiaries (Successor) as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2016 and for the period from October 25, 2014 through December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the United States Bankruptcy Court for the Southern District of New York confirmed the Company’s Plan on September 11, 2014. Confirmation of the Plan resulted in the discharge of certain claims against the Company that arose before April 13, 2014 and substantially alters rights and interests of equity security holders as provided for in the Plan. The Plan was substantially consummated on October 24, 2014 and the Company emerged from bankruptcy. In connection with its emergence from bankruptcy, the Company adopted fresh start accounting as of October 24, 2014.

/s/ PricewaterhouseCoopers LLP

Stamford, Connecticut

March 10, 2017, except for the effects of the change in the composition of reportable segments disclosed in Note 16, as to which the date is October 31, 2017

 

F-66


Table of Contents

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

(In millions, except share data)

   September 30,
2017
    December 31,
2016
 

Assets

    

Current assets:

    

Cash and cash equivalents (including restricted cash of $1 and $4 at September 30, 2017 and December 31, 2016, respectively)

   $ 144     $ 228  

Accounts receivable (net of allowance for doubtful accounts of $4 at both September 30, 2017 and December 31, 2016)

     332       280  

Inventories:

    

Raw materials

     152       119  

Finished and in-process goods

     276       271  

Other current assets

     64       50  
  

 

 

   

 

 

 

Total current assets

     968       948  

Investment in unconsolidated entities

     19       20  

Deferred income taxes

     13       9  

Other long-term assets

     11       20  

Property, plant and equipment:

    

Land

     78       74  

Buildings

     327       307  

Machinery and equipment

     1,100       959  
  

 

 

   

 

 

 
     1,505       1,340  

Less accumulated depreciation

     (354     (265
  

 

 

   

 

 

 
     1,151       1,075  

Goodwill

     216       211  

Other intangible assets, net

     308       323  
  

 

 

   

 

 

 

Total assets

   $ 2,686     $ 2,606  
  

 

 

   

 

 

 

Liabilities and Equity

    

Current liabilities:

    

Accounts payable

   $ 274     $ 238  

Debt payable within one year

     36       36  

Interest payable

     25       11  

Income taxes payable

     6       8  

Accrued payroll and incentive compensation

     60       61  

Other current liabilities

     109       123  
  

 

 

   

 

 

 

Total current liabilities

     510       477  

Long-term liabilities:

    

Long-term debt

     1,185       1,167  

Pension and postretirement benefit liabilities

     337       341  

Deferred income taxes

     67       66  

Other long-term liabilities

     70       73  
  

 

 

   

 

 

 

Total liabilities

     2,169       2,124  
  

 

 

   

 

 

 

Commitments and contingencies (See Note 7)

    

Equity

    

Common stock—$0.01 par value; 70,000,000 shares authorized; 48,121,634 and 48,058,114 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

     —         —    

Common stock—$0.01 par value; 100 shares authorized; 48 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

    

Additional paid-in capital

     867       864  

Accumulated other comprehensive loss

     (25     (76

Accumulated deficit

     (325     (306
  

 

 

   

 

 

 

Total equity

     517       482  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 2,686     $ 2,606  
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

F-67


Table of Contents

MPM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(In millions, except share and per share data)

   2017     2016     2017     2016  

Net sales

   $ 594     $ 567     $ 1,732     $ 1,689  

Cost of sales

     473       457       1,378       1,371  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     121       110       354       318  

Costs and expenses:

        

Selling, general and administrative expense

     83       79       252       238  

Research and development expense

     17       17       48       50  

Restructuring and discrete costs (See Note 3)

     6       2       6       11  

Other operating (income) expense, net

     (2     2       2       10  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     17       10       46       9  

Interest expense, net (See Note 6)

     21       19       60       57  

Gain on extinguishment of debt (See Note 6)

     —         —         —         (9

Non-operating (income) expense, net

     (3     —         (7     2  

Reorganization items, net

     —         —         —         1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes and earnings (losses) from unconsolidated entities

     (1     (9     (7     (42

Income tax expense (See Note 12)

     6       8       11       4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before earnings (losses) from unconsolidated entities

     (7     (17     (18     (46

Earnings (losses) from unconsolidated entities, net of taxes

     (1     —         (1     1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (8   $ (17   $ (19   $ (45
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share:

        

Net loss per common share—basic

   $ (0.17   $ (0.35   $ (0.39   $ (0.94
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share—diluted

   $ (0.17   $ (0.35   $ (0.39   $ (0.94
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in per-share calculation

        

Weighted average common shares outstanding—basic

     48,121,634       48,058,114       48,109,535       48,047,340  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding—diluted

     48,121,634       48,058,114       48,109,535       48,047,340  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

F-68


Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

     Three Months
Ended
September 30,
    Nine Months
Ended
September 30,
 

(In millions)

   2017     2016     2017     2016  

Net loss

   $ (8   $ (17   $ (19   $ (45

Other comprehensive income, net of tax:

        

Foreign currency translation

     11       8       42       67  

Net prior service credit

     (1     (1     9       19  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     10       7       51       86  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ 2     $ (10   $ 32     $ 41  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

F-69


Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

     Nine Months Ended
September 30,
 

(In millions)

   2017     2016  

Cash flows (used in) provided by operating activities

    

Net loss

   $ (19   $ (45

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     117       132  

Unrealized actuarial losses from pensions and other post retirement liabilities

     1       5  

Deferred income tax benefit

     (10     (14

Unrealized foreign currency gains

     (4     (2

Amortization of debt discount

     18       17  

Gain on the extinguishment of debt

     —         (9

Stock based compensation

     3       3  

Other non-cash adjustments

     9       8  

Net change in assets and liabilities:

    

Accounts receivable

     (40     (13

Inventories

     (20     (31

Accounts payable

     27       (9

Income taxes payable

     —         5  

Other assets, current and non-current

     (3     (8

Other liabilities, current and non-current

     (33     38  
  

 

 

   

 

 

 

Net cash provided by operating activities

     46       77  
  

 

 

   

 

 

 

Cash flows used in investing activities

    

Capital expenditures

     (123     (85

Purchases of intangible assets

     (2     (1

Dividend from MPM

     1       1  

Proceeds from sale of assets

     —         1  

Purchase of a business

     (9     —    

Change in restricted cash

     3       —    
  

 

 

   

 

 

 

Net cash used in investing activities

     (130     (84
  

 

 

   

 

 

 

Cash flows used in financing activities

    

Net short-term debt borrowings

     (1     2  

Repayments of long-term debt

     —         (16

Dividends paid

     —         —    
  

 

 

   

 

 

 

Net cash used in financing activities

     (1     (14
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (85     (21

Effect of exchange rate changes on cash and cash equivalents

     4       5  

Cash and cash equivalents (unrestricted), beginning of period

     224       217  
  

 

 

   

 

 

 

Cash and cash equivalents (unrestricted), end of period

   $ 143     $ 201  
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Cash paid for:

    

Interest

   $ 30     $ 29  

Income taxes, net of refunds

     20       13  

Non-cash investing activity:

    

Capital expenditures included in accounts payable

   $ 25     $ 21  

See Notes to Condensed Consolidated Financial Statements

 

F-70


Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF EQUITY (Unaudited)

 

     Common Stock      Additional
Paid-in
Capital
     Accumulated
Other
Comprehensive
Loss
    Accumulated
Deficit
    Total
Equity
 

(In millions, except share data)

   Shares      Amount            

Balance as of December 31, 2016

     48,058,114      $ —        $ 864      $ (76   $ (306   $ 482  

Net loss

     —          —          —          —         (19     (19

Other comprehensive income

     —          —          —          51       —         51  

Stock-based compensation expense

     —          —          3        —         —         3  

Issuance of common stock

     63,520        —          —          —         —         —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2017

     48,121,634      $ —        $ 867      $ (25   $ (325   $ 517  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

F-71


Table of Contents

MPM HOLDINGS INC. AND MOMENTIVE PERFORMANCE MATERIALS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In millions, except share and per share data)

1. Business and Basis of Presentation

MPM Holdings Inc. (“Momentive”) is a holding company that conducts substantially all of its business through its subsidiaries. Momentive’s wholly owned subsidiary, MPM Intermediate Holdings Inc. (“Intermediate Holdings”), is a holding company for its wholly owned subsidiary, Momentive Performance Materials Inc. (“MPM”) and its subsidiaries. Momentive became the indirect parent company of MPM in accordance with MPM’s plan of reorganization (the “Plan”) pursuant to MPM’s emergence from Chapter 11 bankruptcy on October 24, 2014 (the “Effective Date” or the “Emergence Date”). Prior to its reorganization, MPM, through a series of intermediate holding companies, was controlled by investment funds managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and subsidiaries, “Apollo”). Unless otherwise noted, references to “we,” “us,” “our” or the “Company” refer collectively to Momentive and MPM and their subsidiaries, and, unless otherwise noted, the information provided pertains to both Momentive and MPM. Differences between the financial results of Momentive and MPM represent certain management expenses of and cash received by Momentive and therefore are not consolidated within the results of MPM.

Based in Waterford, New York, the Company, is comprised of, effective as of the third quarter of 2017 as described in footnote 10, four operating and reportable segments: Performance Additives, Formulated and Basic Silicones, Quartz Technologies, and Corporate. Performance Additives is a global business engaged in the manufacture, sale and distribution of specialty silanes, silicone fluids and urethane additives. Formulated and Basic Silicones is a global business engaged in the manufacture, sale and distribution of sealants, electronics materials, coatings, elastomers and basic silicone fluids. Quartz Technologies, also a global business, is engaged in the manufacture, sale and distribution of high-purity fused quartz and ceramic materials. Corporate includes corporate, general and administrative expenses that are not allocated to the other segments, such as certain shared service and other administrative functions.

On April 13, 2014 (the “Petition Date”), Momentive Performance Materials Holdings Inc. (MPM’s direct parent prior to October 24, 2014) (“Old MPM Holdings”), MPM and certain of its U.S. subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization (the “Bankruptcy Filing”) under Chapter 11 (“Chapter 11”) of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Court”). The Chapter 11 proceedings were jointly administered under the caption In re MPM Silicones, LLC, et al., Case No. 14-22503. The Debtors continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court through the Effective Date.

The unaudited Condensed Consolidated Financial Statements include the accounts of the Company, its majority-owned subsidiaries in which minority shareholders hold no substantive participating rights. Intercompany accounts and transactions are eliminated upon consolidation. In the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair statement have been included. Results for the interim periods are not necessarily indicative of results for the entire year.

Year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the accompanying notes included in Momentive, MPM and their subsidiaries’ most recent Annual Report on Form 10-K for the year ended December 31, 2016.

 

F-72


Table of Contents

During the three months ended June 30, 2017, the Company recorded an out-of-period correction totaling approximately $1 related to the reversal of capitalized interest on a capital project in progress between November 2014 and March 2017. Also during the three months ended March 31, 2017, the Company recorded an another out-of-period adjustment of $1 related to the correction of 2016 sales commissions to employees. After evaluating the quantitative and qualitative aspects of the above adjustments, the Company concluded the effect of these adjustments was not material to the current periods presented as well as any previously issued consolidated financial statements or expected annual results for 2017.

2. Summary of Significant Accounting Policies

Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and also requires the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, it requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Management’s estimates and assumptions are evaluated on an ongoing basis and are based on historical experience, current conditions and available information. Actual results could differ from these estimates.

Subsequent Events—As a public reporting company, the Company evaluates subsequent events and transactions through the date these unaudited Condensed Consolidated Financial Statements are issued.

Reclassifications—Certain prior period balances have been reclassified to conform with current presentations.

Net Income (Loss) Per Share—Momentive calculates earnings per share as the ratio of net income (loss) to weighted average basic and diluted common shares outstanding.

Stock-Based Compensation—The Company measures and recognizes the compensation expense for all share-based awards made to employees and directors based on estimated fair values, in accordance with ASC 718, Compensation—Stock Compensation. The fair value of stock options granted is calculated using a Monte Carlo option-pricing model on the date of the grant, and the fair value of Restricted Stock Units are valued using the fair market value of the Company’s common stock on the date of grant. Compensation expense is recognized over the employee’s requisite service period (generally the vesting period of the equity grant). See Note 8 for additional details regarding stock-based compensation.

Business Acquisitions—In January 2017 the Company acquired the operating assets of Sea Lion Technology, Inc. to further support the Silanes business of its Performance Additives segment. The Company previously had a tolling relationship with Sea Lion Technology, Inc. on their site. The Company believes the acquisition will enable it to further strategically leverage these assets in support of the NXT* silane business. The Company paid $9 in cash to acquire Sea Lion Technology, Inc., and acquired substantially all of its property, plant and equipment. This acquisition was not significant in relation to the Company’s consolidated financial results and, therefore, pro forma financial information has not been presented.

 

F-73


Table of Contents

The acquisition was accounted for using the purchase method of accounting and the allocation of the purchase price inclusive of identification and measurement of the fair value of tangible and intangible assets. The Company engaged specialists to assist in the valuation of tangible and intangible assets. The table below summarizes the initial purchase price allocation to the fair value of assets acquired at the acquisition date. Goodwill is calculated as the excess of the purchase price over the total assets recognized and represents the estimated future economic benefits arising from expected synergies and growth opportunities for the Company. All of the goodwill and intangible assets are deductible for tax purposes.

 

Property, plant & equipment

   $ 7  

Goodwill

     1  

Intangible assets

     1  
  

 

 

 

Purchase price of the business acquisition

   $ 9  
  

 

 

 

*NXT is a trademark of Momentive Performance Materials Inc.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Board Update No. 2014-09: Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 supersedes the existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. According to the new guidance, an entity will apply a principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Additionally, in March 2016, the FASB issued Accounting Standards Board Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued Accounting Standards Board Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and the licensing implementation guidance. In May 2016, the FASB issued Accounting Standards Board Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides clarifying guidance in certain narrow areas and adds some practical expedients. In December 2016, the FASB issued Accounting Standards Board Update No. 2016-20, Technical Corrections and Improvements to Topic 606: Revenue from Contracts with Customers, which facilitates 13 technical corrections and improvements to Topic 606 and other Topics amended by ASU 2014-09 to increase stakeholders’ awareness of the proposals and to expedite improvements to ASU 2014-09. In September 2017, the FASB issued Accounting Standards Board Update No. 2017-13: Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which clarifies transition provisions for certain public business entities. The effective dates for the ASUs issued in 2016 and 2017 are the same as the effective date for ASU 2014-09. The revised effective date for ASU 2014-09 is for annual and interim periods beginning on or after December 15, 2017, and early adoption from the calendar year 2017 is permitted. Entities have the option of using either a full retrospective approach or a modified retrospective approach to adopt the guidance in ASU 2014-09. The Company expects to utilize the modified retrospective approach. The Company has started its evaluation process to assess the impact of the new guidance on its ongoing financial reporting. The evaluation process includes tasks such as performing an initial scoping analysis to identify key revenue streams, reviewing current revenue-based contracts and evaluating revenue recognition requirements in order to prepare a high-level road map and implementation work plan. As the Company completes its overall assessment, the Company is also identifying and preparing to implement changes, if any, to its accounting policies and practices, business processes, systems and controls to support the new revenue recognition and disclosure requirements.

In July 2015, the FASB issued Accounting Standards Board Update No. 2015-11: Inventory (Topic 330)—Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 has changed the measurement

 

F-74


Table of Contents

requirement of inventory within the scope of this guidance from lower of cost or market to the lower of cost and net realizable value. The guidance is also defining net realizable value as: the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period and amendments to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of the requirements of ASU 2015-11 during 2017 did not significantly impact the Company’s financial statements.

In February 2016, the FASB issued Accounting Standards Board Update No. 2016-02: Leases (ASC 842) (“ASU 2016-02”). Pursuant to the guidance in ASU 2016-02, lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. It will be critical to identify leases embedded in a contract to avoid misstating the lessee’s balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. In September 2017, the FASB issued Accounting Standards Board Update No. 2017-13: Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which clarifies transition provisions for certain public business entities. The effective dates for the ASU issued in 2017 are the same as the effective date for ASU 2016-02. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the effect of the standard on its ongoing financial reporting.

In August 2016, the FASB issued Accounting Standards Board Update No. 2016-15: Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides new guidance designed to reduce existing diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU addresses eight specific cash flow issues, of which the following are expected to be applicable to the Company: 1) debt prepayment and extinguishment costs, 2) proceeds from settlement of insurance claims, 3) distributions received from equity method investments, and 4) separately identifiable cash flows and application of the predominance principle. In addition, in November 2016, the FASB issued Accounting Standards Board Update No. 2016-18: Statement of Cash Flows (Topic 230), Restricted Cash (“ASU 2016-18”). ASU 2016-18 clarifies certain existing principles in ASC 230, including providing additional guidance related to transfers between cash and restricted cash and how entities present, in their statement of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts. These ASUs will be effective for the Company’s fiscal year beginning January 1, 2018 and subsequent interim periods with retrospective application to each period presented being required and early adoption is permitted. The adoption of ASU 2016-15 and ASU 2016-18 will modify the Company’s current disclosures and reclassifications within the consolidated statement of cash flows but they are not expected to have a material effect on the Company’s consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Board Update No. 2017-01: Business Combinations (Topic 805)—Clarifying the Definition of a Business (“ASU 2017-01”). The ASU clarifies the definition of business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective for the Company’s fiscal year beginning January 1, 2018 and subsequent interim periods with prospective application with impacts on the Company’s consolidated financial statements that may vary depending on each specific acquisition. Early adoption is conditionally permitted.

In January 2017, the FASB issued Accounting Standards Board Update No. 2017-04: Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying value, which eliminates the current requirement to calculate a goodwill impairment charge by comparing the implied fair value of goodwill with its carrying amount. The

 

F-75


Table of Contents

amendments in this ASU are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this ASU need to be applied on a prospective basis. The Company is currently evaluating whether to early adopt this ASU.

In February 2017 the FASB issued Accounting Standards Board Update No. 2017-05: Other Income—Gains and Loss from Derecognition of Nonfinancial Assets (subtopic 610-20). The amendments in this ASU provide clarification that nonfinancial assets within the scope of ASC 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty and that an entity should allocate consideration to each distinct asset by applying the guidance in ASC 606 on allocating the transaction price to performance obligations. The amendments in this ASU also require entities to de-recognize a distinct non-financial asset or distinct in substance non-financial asset in a partial sale transaction when it (1) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with ASC 810 and (2) transfers control of the asset in accordance with ASC 606. The amendments to this ASU are effective in fiscal years beginning after December 15, 2017, including interim periods within those annual periods. The Company does not expect the adoption of the amendments in this ASU to have a significant impact on the Company’s consolidated financial statements.

In March 2017 the FASB issued Accounting Standards Update No. 2017-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU requires entities to: 1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and 2) present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. In addition, the ASU requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines. The ASU’s amendments are effective for interim and annual periods beginning after December 15, 2017. The Company is currently assessing this ASU’s impact on its financial statements.

In May 2017 the FASB issued Accounting Standards Update No. 2017-09: Compensation—Stock Compensation (Topic 718). The amendments in the ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The ASU’s amendments are effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. An entity need to apply the amendments in this ASU on a prospective basis to an award modified on or after the adoption date. The impact on the Company’s consolidated financial statements would vary depending on the nature of any potential future changes to share-based payment awards.

All other new accounting pronouncements issued but not yet effective or adopted have been deemed to be not relevant to the Company and, accordingly, are not expected to have an impact once adopted.

3. Restructuring Expenses and Discrete Costs

Included in restructuring and discrete costs are costs related to restructuring (primarily severance payments associated with work force reductions) and services and other expenses associated with cost optimization programs and transformation savings activities.

In November 2015 and as expanded in March and May 2016, the Company announced a global restructuring program to reduce costs through global selling, general and administrative expenses reductions and productivity actions at the Company’s operating facilities. The Company expected the program cost, primarily severance related, to be approximately $15. Substantially all of these charges will result in cash expenditures. These costs primarily relate to the Formulated and Basic Silicones and Performance Additives operating segments and are included in Other current liabilities on the Consolidated Balance Sheet and Restructuring and discrete costs on the Consolidated Statement of Operations.

 

F-76


Table of Contents

In January 2016, the Company announced plans to exit siloxane production at its Leverkusen, Germany site to help optimize its manufacturing footprint in order to improve its long-term profitability once fully implemented. The planned reduction is expected to be fully implemented in 2017 and is incremental to the Company’s global restructuring program. This restructuring will result in an overall reduction of employment at the site. The Company recorded severance related costs of approximately $3, some of which was paid in late 2016 and the remaining to be paid in 2017. In addition, as a result of the siloxane production transformation programs, the Company recognized $17 of accelerated depreciation associated with asset retirement obligations during the year ended December 31, 2016 and $6 during the three months and nine months ended September 30, 2017.

The total charges incurred to date on the above restructuring programs were $16.

The following table sets forth the changes in the restructuring reserve related to severance. Included in this table are also other minor restructuring programs that were undertaken by the Company in different locations, none of which were individually material. These costs are primarily related to workforce reductions:

 

     Total  

Accrued liability at December 31, 2016

     4  

Restructuring charges

     1  

Payments

     —    
  

 

 

 

Accrued liability at March 31, 2017

     5  

Restructuring charges

     —    

Payments

     (1
  

 

 

 

Accrued liability at June 30, 2017

     4  

Restructuring Charges

     2  

Payments

     (2
  

 

 

 

Accrued Liability at September 30, 2017

   $ 4  
  

 

 

 

For both the three months ended September 30, 2017 and 2016, the Company recognized other costs of $4. For the nine months ended September 30, 2017 and 2016, the company recognized other costs of $3 and $10, respectively. The costs in 2017 and 2016 were primarily comprised of one-time expenses for services and integration, whereas the costs in 2017 were offset by a gain related to an insurance reimbursement of $15 related to fire damage at our Leverkusen, Germany facility. These are included in “Restructuring and discrete costs” in the Condensed Consolidated Statements of Operations. Refer to Note 10 for further details regarding these costs.

4. Related Party Transactions

Transactions with Hexion

Shared Services Agreement

In October 2010, the Company entered into a shared services agreement with Hexion Inc. (“Hexion”) (which, from October 1, 2010 through October 24, 2014, was a subsidiary under a common parent and thereafter, an entity controlled by a significant shareholder of the Company) (the “Shared Services Agreement”). Under this agreement, the Company provides to Hexion, and Hexion provides to the Company, certain services, including, but not limited to, human resources, information technology, accounting, finance, legal, and procurement services. The Shared Services Agreement establishes certain criteria upon which the cost of such services are allocated between the Company and Hexion. The Shared Services Agreement was renewed for one year starting in October 2017, is subject to termination by either the Company or Hexion, without cause, on not less than 30 days’ written notice, and expires in October 2018 (subject to one-year renewals every year thereafter; absent contrary notice from either party).

 

F-77


Table of Contents

Pursuant to the Shared Services Agreement, during the nine months ended September 30, 2017 and 2016, the Company incurred approximately $31 and $38, respectively, of net costs for shared services and Hexion incurred approximately $41 and $50, respectively, of net costs for shared services. Included in the net costs incurred during the nine months ended September 30, 2017 and 2016, were net billings from Hexion to the Company of $21 and $23, respectively, to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to the applicable allocation percentage. The allocation percentages are reviewed by the Steering Committee pursuant to the terms of the Shared Services Agreement. The Company had accounts payable to Hexion of $2 and $5 at September 30, 2017 and December 31, 2016, respectively, and no accounts receivable from Hexion under this agreement.

Other Transactions with Hexion

In April 2014, the Company sold 100% of its interest in its Canadian subsidiary to a subsidiary of Hexion for a purchase price of $12. As a part of the transaction the Company also entered into a non-exclusive distribution agreement with a subsidiary of Hexion, whereby the subsidiary of Hexion will act as a distributor of certain of the Company’s products in Canada. The agreement has a term of 10 years, and is cancelable by either party with 180 days’ notice. The Company compensates the subsidiary of Hexion for acting as distributor at a rate of 2% of the net selling price of the related products sold. During the three and nine months ended September 30, 2017, the Company sold $6 and $17, respectively, of products to Hexion under this distribution agreement, and paid less than $1 to Hexion as compensation for acting as distributor of the products for all periods. During the three and nine months ended September 30, 2016, the Company sold $7 and $20, respectively, of products to Hexion under this distribution agreement, and paid less than $1 to Hexion as compensation for acting as distributor of the products for all periods. As of both September 30, 2017 and December 31, 2016, the Company had $2 of accounts receivable from Hexion related to the distribution agreement.

The Company also sells other products to, and purchases products from Hexion. These transactions were not material as of September 30, 2017.

Purchases and Sales of Products and Services with Affiliates other than Hexion.

The Company also sells products to, and purchases products from its affiliates other than Hexion. These transactions were not material as of September 30, 2017.

5. Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy exists, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are:

 

    Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

    Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.

 

    Level 3: Unobservable inputs, that are supported by little or no market activity and are developed based on the best information available in the circumstances. For example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

Recurring Fair Value Measurements

At both September 30, 2017 and December 31, 2016, the Company had less than $1 of natural gas derivative contracts, which are measured using Level 2 inputs, and are included in “Other current assets” in the

 

F-78


Table of Contents

unaudited Condensed Consolidated Balance Sheets. The fair value of the natural gas derivative contracts generally reflects the estimated amounts that the Company would receive or pay, on a pre-tax basis, to terminate the contracts at the reporting date based on broker quotes for the same or similar instruments. Counter-parties to these contracts are highly rated financial institutions, none of which experienced any significant downgrades that would reduce the fair value receivable amount owed, if any, to the Company. There were no transfers between Level 1, Level 2 or Level 3 measurements during the three or nine months ended September 30, 2017.

Non-derivative Financial Instruments

The following table summarizes the carrying amount and fair value of the Company’s non-derivative financial instruments:

 

     Carrying
Amount
     Fair Value  
        Level 1      Level 2      Level 3      Total  

September 30, 2017

              

Debt

   $ 1,221      $ —        $ 1,341      $ —        $ 1,341  

December 31, 2016

              

Debt

   $ 1,203      $ —        $ 1,243      $ —        $ 1,243  

Fair values of debt classified as Level 2 are determined based on other similar financial instruments, or based upon interest rates that are currently available to the Company for the issuance of debt with similar terms and maturities. Fair values of debt are based upon the aggregate principal amount of each instrument, and do not include any unamortized debt discounts or premiums. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities are considered reasonable estimates of their fair values due to the short-term maturity of these financial instruments.

6. Debt Obligations

As of September 30, 2017 and December 31, 2016, the Company had no outstanding borrowings under its senior secured asset-based revolving loan facility (the “ABL Facility”). Outstanding letters of credit under the ABL Facility at September 30, 2017 were $55, leaving an unused borrowing capacity of $215. On October 30, 2017, we received commitments to extend the maturity of the ABL Facility from October 2019 to five years from the closing of this offering, subject to certain conditions and exceptions.

As of September 30, 2017, the Company was in compliance with all the covenants included in the agreements governing its outstanding indebtedness.

During the first quarter of 2016, the Company repurchased in the open market $29 aggregate principal amount of the Company’s 4.69% Second-Priority Senior Secured Notes due 2022 (the “Second Lien Notes”) for $16. The Company recorded a gain of $9 net of associated discount on these notes, as a result of paying down this debt at less than its aggregate principal amount. All repurchased notes were canceled reducing the aggregate principal amount of Second Lien Notes outstanding from $231 to $202.

At September 30, 2017, the weighted average interest rate of the Company’s long term debt was 4.40%.

 

F-79


Table of Contents

Debt outstanding at September 30, 2017 and December 31, 2016 was as follows:

 

     September 30, 2017      December 31, 2016  
     Long-Term      Due Within
One Year
     Long-Term      Due Within
One Year
 

Senior Secured Credit Facilities:

           

ABL Facility

   $ —        $ —        $ —        $ —    

Secured Notes:

           

3.88% First-Priority Senior Secured Notes due 2021 (includes $90 and $105 of unamortized debt discount, respectively)

     1,010        —          995        —    

4.69% Second-Priority Senior Secured Notes due 2022 (includes $27 and $30 of unamortized debt discount, respectively)

     175        —          172        —    

Other Borrowings:

           

China bank loans

     —          36        —          36  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt

   $ 1,185      $ 36      $ 1,167      $ 36  
  

 

 

    

 

 

    

 

 

    

 

 

 

Momentive is not an obligor under the debt obligations above. MPM is a borrower under the ABL Facility and the issuer of the secured notes, which are fully and unconditionally guaranteed by certain subsidiaries of MPM (see Note 14).

7. Commitments and Contingencies

Non-Environmental Legal Matters

The Company is involved in various legal proceedings in the ordinary course of business and had reserves of $4 and $3 at September 30, 2017 and December 31, 2016, respectively, for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable, all of which are included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets.

Environmental Matters

The Company is involved in certain remediation actions to clean up hazardous wastes as required by federal and state laws. Liabilities for remediation costs at each site are based on the Company’s best estimate of discounted future costs. As of September 30, 2017 and December 31, 2016, the Company had recognized total obligations of approximately $12 and $13, respectively, for remediation costs at the Company’s manufacturing facilities and off-site landfills. These amounts are included in “Other long-term liabilities” in the unaudited Condensed Consolidated Balance Sheets.

Included in these liabilities is $8 related to groundwater treatment at the Company’s Waterford, NY site. In 1988, a consent decree was signed with the State of New York which requires recovery of groundwater at the site to contain migration of specified contaminants in the groundwater. A groundwater pump and treat system and groundwater monitoring program are currently operational to implement the requirements of this consent decree.

Due to the long-term nature of the project and the uncertainty inherent in estimating future costs of implementing this program, this liability was recorded at its net present value, which assumes a 3% discount rate and an estimated time period of 50 years and is included in our total obligations as discussed above. The undiscounted obligations, which are expected to be paid over the estimated period, are approximately $17. Over the next five years the Company expects to make ratable payments totaling approximately $2.

 

F-80


Table of Contents

8. Equity Plans and Stock Based Compensation

Management Equity Plan

On March 12, 2015, the Board of Directors of Momentive approved the MPM Holdings Inc. Management Equity Plan (the “MPMH Equity Plan”). Under the MPMH Equity Plan, Momentive can award no more than 3,818,182 shares which may consist of options, restricted stock units, restricted stock and other stock-based awards, qualifying as equity classified awards in accordance with ASC 718 “Compensation—Stock Compensation”. The restricted stock units are non-voting units of measurement which are deemed to be equivalent to one common share of Momentive. The options are options to purchase common shares of Momentive. The awards contain restrictions on transferability and other typical terms and conditions. The purpose of the MPMH Equity Plan is to assist the Company in attracting, retaining, incentivizing and motivating employees and to promote the success of the Company’s business by providing such participating individuals with a proprietary interest in the performance of the Company.

The Compensation Committee of the Board of Directors of Momentive has approved grants under the MPMH Equity Plan of restricted stock units and options to certain of the Company’s key managers, including the Company’s named executive officers (“NEOs”) and certain directors of the Company.

The following is a summary of key terms of the stock-based awards granted under the MPMH Equity Plan:

 

Award

  

Vesting Terms

   Option/Unit
Terms
Stock Options—Tranche A    Performance-based and market-based upon achievement of targeted common stock prices either through a Sale or an IPO with certain conditions as such terms are defined by the MPMH Equity Plan    10 years
Stock Options—Tranche B    Performance-based and market-based upon achievement of targeted common stock prices either through a Sale or an IPO with certain conditions as such terms are defined by the MPMH Equity Plan    10 years

Employees and NEOs Restricted Stock Units grant

   Cliff vest four years after grant date; Immediate vesting upon a Sale and ratable vesting in the event of an IPO as defined in the MPMH Equity Plan    NA

Directors Restricted Stock Units grant

   Cliff vest annually after grant date; Immediate vesting upon a Sale as defined in the MPMH Equity Plan    NA

Stock Options

In May 2016, the Company’s Board of Directors approved a re-pricing of the granted stock options reducing the strike price to $10.25 from $20.33 based on the fair market value of Momentive’s shares on May 19, 2016 and changing the market conditions vesting thresholds of Tranche A and Tranche B to be $20 per share and $25 per share, down from $30.50 per share and $40.66 per share, respectively. Momentive treated the repricing as a modification of the original awards and calculated additional compensation costs for the difference between the fair value of the modified award and the fair value of the original award on the modification date. The repricing triggered changes in fair value of Tranche A from $7.93 per option to $9.83 per option and in Tranche B from $7.62 per option to $8.93 per option resulting in an incremental increase of $3 in unrecognized compensation expense related to these non-vested stock options, to $15 at May 19, 2016.

 

F-81


Table of Contents

The estimated fair values of Stock Options granted and the assumptions used for the Monte Carlo option-pricing model were as follows:

 

     September 30, 2017     September 30, 2016  
     Tranche A     Tranche B     Tranche A     Tranche B  

Estimated fair values

   $ 9.83     $ 8.93     $ 9.83     $ 8.93  

Assumptions:

        

Strike Price

   $ 10.25     $ 10.25     $ 10.25     $ 10.25  

Risk-free interest rate

     0.80     0.80     0.80     0.80

Expected term

     1.62 years       1.62 years       1.62 years       1.62 years  

Expected volatility

     60.00     60.00     60.00     60.00

Tranche Market Threshold

   $ 20.00     $ 25.00     $ 20.00     $ 25.00  

Information on Stock Options activity is as follows:

 

     Tranche A      Tranche B  
     Units      Weighted-
Average
Exercise Price
per Share
     Units      Weighted-
Average
Exercise Price
per Share
 

Balance at January 1, 2017

     782,040      $ 10.33        782,040      $ 10.33  

Granted

     —             —       

Exercised

     —             —       

Forfeited

     —             —       

Expired

     —             —       
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of September 30, 2017

     782,040      $ 10.33        782,040      $ 10.33  
  

 

 

    

 

 

    

 

 

    

 

 

 

As there have been no performance and market based achievements since the date of the original grant, there has been no compensation expense recorded during the three and nine months ended September 30, 2017 and the three and nine months ended September 30, 2016 with respect to stock options. At both September 30, 2017 and December 31, 2016, unrecognized compensation expense related to non-vested stock options was $15. Stock-based compensation cost related to stock options will be recognized once the satisfaction of the performance and market conditions becomes probable.

Restricted Stock Units

Information on Restricted Stock Units activity is as follows:

 

     Units      Weighted-
Average
Grant Date
Fair Value
per Share
     Aggregate
Fair Value
 

Balance at January 1, 2017

     733,840      $ 19.23     

Granted

     42,056        18.28     

Vested

     (63,520      10.35        1  

Forfeited

     —          

Expired

     —          
  

 

 

    

 

 

    

Balance as of September 30, 2017

     712,376      $ 19.92     
  

 

 

    

 

 

    

The fair market values related to the RSUs at the different grant dates were derived from material financial weighted analysis of the Company’s value as implied at emergence from Chapter 11 Bankruptcy or by the sales of stock completed with related parties and adjusted to reflect current and future market conditions and the

 

F-82


Table of Contents

Company’s expected financial performances at the grant date. The material financial weighted analysis consisted of (i) a discounted cash flow analysis, (ii) a selected publicly traded company analysis and (iii) a selected transactions analysis. The employees’ and named executive officers’ RSUs are 100% vested upon the fourth anniversary of the date of grant (“Scheduled Vesting Date”) provided that the grantee remains continuously employed in active service by the Company or one of its affiliates from the date of grant through the Scheduled Vesting Date. The directors’ RSUs are 100% vested upon the first anniversary of the date of grant.

Additionally, vesting of the RSU grants could be accelerated: (i) upon a Sale of the Company occurring prior to the Scheduled Vesting Date, the RSUs, to the extent unvested, shall become fully vested, subject to the grantee’s continued employment through the effective date of such Sale; or (ii) upon an IPO occurring prior to the Scheduled Vesting Date, a graded percentage of the employees’ RSUs, shall become vested subject to the grantee’s continued employment through the effective date of the IPO.

There were no performance-based achievements during the three and nine months ended September 30, 2017. The fair value of the Company’s RSUs, net of forfeitures, is expensed on a straight-line basis over the required service period.

Stock-based compensation expense related to the RSU awards was approximately $1 for both the three months ended September 30, 2017 and 2016 and $3 for both the nine months ended September 30, 2017 and 2016. As of September 30, 2017, unrecognized compensation related to RSU awards was $6 and expense will be recognized over the remaining 1.57 years vesting period. Stock-based compensation cost related to RSU awards may be accelerated once the satisfaction of one of the performance conditions outlined becomes probable.

Although the MPMH Equity Plan, under which the above awards were granted, was issued by Momentive, substantially all of the underlying compensation cost represents compensation costs paid by Momentive on MPM’s behalf, as a result of the MPM’s employees’ services to MPM. Upon vesting of awards, Momentive will issue new stock to deliver shares under the MPMH Equity Plan.

9. Pension and Postretirement Benefit Plans

The following are the components of the Company’s net pension and postretirement (benefit) expense for the three and nine months ended September 30, 2017 and 2016:

 

     Pension Benefits     Non-Pension Postretirement Benefits  
     Three Months Ended September 30,     Three Months Ended September 30,  
     2017      2016     2017      2016  
     U.S.
Plans
    Non-U.S.
Plans
     U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
     U.S.
Plans
    Non-U.S.
Plans
 

Service cost

   $ 2     $ 3      $ 2     $ 3     $ —       $ —        $ —       $ —    

Interest cost on projected benefit obligation

     2       —          3       1       —         —          1       —    

Expected return on assets

     (2     —          (2     (1     —         —          —         —    

Amortization of prior service credit

     —         —          —         —         (1     —          (1     —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic benefit cost

   $ 2     $ 3      $ 3     $ 3     $ (1   $ —        $ —       $ —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

F-83


Table of Contents
     Pension Benefits     Non-Pension Postretirement Benefits  
     Nine Months Ended September 30,     Nine Months Ended September 30,  
     2017      2016     2017      2016  
     U.S.
Plans
    Non-U.S.
Plans
     U.S.
Plans
    Non-U.S.
Plans
    U.S.
Plans
    Non-U.S.
Plans
     U.S.
Plans
    Non-U.S.
Plans
 

Service cost

   $ 5     $ 9      $ 5     $ 8     $ —       $ —        $ 1     $ —    

Interest cost on projected benefit obligation

     7       2        7       3       1       —          2       —    

Expected return on assets

     (7     —          (6     (1     —         —          —         —    

Amortization of prior service credit

     —         —          —         —         (3     —          (2     —    

Actuarial loss(1)

     —            —         —         1       —          5       —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic benefit cost

   $ 5     $ 11      $ 6     $ 10     $ (1   $ —        $ 6     $ —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) The actuarial loss on U.S. non-pension post-retirement benefit plans of $1 and $5 during the nine months ended September 30, 2017 and 2016, respectively relates to the decrease in discount rate as a result of the re-measurement of the accumulated postretirement benefit obligation on company sponsored post-retiree medical, dental, vision and life insurance benefit plans. These were triggered by plan provision changes for active retirees and employees. The Company recorded this expense in Selling, general and administrative expense in the unaudited Consolidated Statements of Operations.

10. Segment Information and Customers

In the third quarter of 2017, the Company reorganized its segment structure and bifurcated its Silicones segment into Performance Additives and Formulated and Basic Silicones to better reflect the Company’s specialty chemical portfolio and related performance. This reorganization included a change in the Company’s operating segments from two to four segments. The Company reorganized to the new four segment model, by implementing the following:

 

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

 

    having the CEO regularly review the results of operations, manage the allocation of resources and assess the performance of each of these segments

The four segment 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.

The Company’s segments are based on the products that the Company offers and the markets that it serves. The Performance Additives business is engaged in the manufacture, sale and distribution of specialty silanes, silicone fluids and urethane additives. The Formulated and Basic Silicones business is engaged in the manufacture, sale and distribution of sealants, electronics materials, coatings, elastomers and basic silicone fluids. The Quartz Technologies business is engaged in the manufacture, sale and distribution of high-purity fused quartz and ceramic materials. In addition, Corporate consists of corporate, general and administrative expenses that are not allocated to the other segments, such as certain shared service and other administrative functions.

Following are net sales and Segment EBITDA (earnings before interest, income taxes, depreciation and amortization) by segment. Segment EBITDA is defined as EBITDA adjusted for certain non-cash items and certain other income and expenses. Segment EBITDA is the primary performance measure used by the

 

F-84


Table of Contents

Company’s 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 the profitability measure used to set management and executive incentive compensation goals.

Net Sales(1):

 

     Three Months
Ended
September 30,
     Nine Months
Ended
September 30,
 
     2017      2016      2017      2016  

Performance Additives

   $ 223      $ 215      $ 670      $ 638  

Formulated and Basic Silicones

     320        309        910        925  

Quartz Technologies

     51        43        152        126  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 594      $ 567      $ 1,732      $ 1,689  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Segment EBITDA:

 

     Three Months
Ended
September 30,
     Nine Months
Ended
September 30,
 
     2017      2016      2017      2016  

Performance Additives

   $ 45      $ 49      $ 140      $ 138  

Formulated and Basic Silicones

     20        20        71        51  

Quartz Technologies

     13        6        30        13  

Corporate

     (11      (9      (31      (29
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 67      $ 66      $ 210      $ 173  
  

 

 

    

 

 

    

 

 

    

 

 

 

Reconciliation of Net Loss to Segment EBITDA:

 

     Three Months
Ended
September 30,
    Nine Months
Ended
September 30,
 
     2017     2016     2017     2016  

Net loss

   $ (8   $ (17   $ (19   $ (45

Interest expense, net

     21       19       60       57  

Income tax expense

     6       8       11       4  

Depreciation and amortization

     42       48       117       132  

Gain on extinguishment and exchange of debt

     —         —         —         (9

Items not included in Segment EBITDA:

        

Non-cash charges and other income and expense

   $ —       $ 4     $ 4     $ 15  

Unrealized losses on pension and postretirement benefits

     —         —         1       5  

Restructuring and discrete costs

     6       4       36       13  

Reorganization items, net

     —         —         —         1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment EBITDA

   $ 67     $ 66     $ 210     $ 173  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

F-85


Table of Contents

Items Not Included in Segment EBITDA

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

For the three and nine months ended September 30, 2017 and 2016, non-cash charges primarily included asset impairment charges, loss due to the scrapping of certain assets, stock based compensation expense, and net foreign exchange transaction gains and losses related to certain intercompany arrangements.

For the nine months ended September 30, 2017 and 2016, unrealized gains (losses) on pension and postretirement benefits represented non-cash actuarial losses recognized upon the remeasurement of our pension and postretirement benefit obligations.

For the three and nine months ended September 30, 2017 and 2016, restructuring and discrete costs included expenses from restructuring and integration. In addition, for the three and nine months ended September 30, 2017, these costs also included a gain related to an insurance reimbursement of $5 and $15, respectively, related to fire damage at our Leverkusen, Germany facility and for the nine months ended September 30, 2017, these costs also included costs arising from the work stoppage inclusive of unfavorable manufacturing variances at our Waterford, NY facility.

11. Changes in Other Comprehensive (Loss) Income

Following is a summary of changes in “Accumulated other comprehensive (loss) income” for the three and nine months ended September 30, 2017 and 2016:

 

     Three Months Ended September 30,  
     2017     2016  
     Defined
Benefit
Pension and
Postretirement
Plans
    Foreign
Currency
Translation
Adjustments
    Total     Defined
Benefit
Pension and
Postretirement
Plans
    Foreign
Currency
Translation
Adjustments
    Total  

Beginning balance

   $ 27     $ (62   $ (35   $ 20     $ (33   $ (13

Other comprehensive income before reclassifications, net of tax(1)

     —         11       11       —         8       8  

Amounts reclassified from Accumulated other comprehensive income (loss), net of tax

     (1     —         (1     (1     —         (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive (loss) income

     (1     11       10       (1     8       7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 26     $ (51   $ (25   $ 19     $ (25   $ (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30,  
     2017     2016  
     Defined
Benefit
Pension and
Postretirement
Plans
    Foreign
Currency
Translation
Adjustments
    Total     Defined
Benefit
Pension and
Postretirement
Plans
    Foreign
Currency
Translation
Adjustments
    Total  

Beginning balance

   $ 17     $ (93   $ (76   $ —       $ (92   $ (92

Other comprehensive income before reclassifications, net of tax(1)

     12       42       54       20       67       87  

Amounts reclassified from Accumulated other comprehensive income (loss), net of tax

     (3     —         (3     (1     —         (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income

     9       42       51       19       67       86  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 26     $ (51   $ (25   $ 19     $ (25   $ (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-86


Table of Contents
(1) Other comprehensive income related to defined benefit pension and postretirement plans for the nine months ended September 30, 2017 and 2016, represent the recognition of prior service benefits of $18 and $32, respectively, with the corresponding decrease in the projected benefit obligation following certain plan provision changes, reduced by tax expenses of $6 and $12, for the nine months ended September 30, 2017 and 2016, respectively, (see Note 9).

12. Income Taxes

The effective tax rate was (600)% for the three months ended September 30, 2017 and (89)% for the three months ended September 30, 2016. The effective tax rate was (157)% for the nine months ended September 30, 2017. The effective tax rate was (10)% for the nine months ended September 30, 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 the Company operates. The effective tax rates were also impacted by operating losses generated in jurisdictions where no tax benefit was recognized due to the maintenance of a full valuation allowance, tax impact of recognition of net prior service benefit following certain plan provision changes (see Note 11), legislative changes in Italy and Japan, and the resolution of certain tax matters in non-U.S. jurisdictions.

For the three and nine months ended September 30, 2017, income taxes included unfavorable discrete tax adjustments of $2 and favorable discrete tax adjustments of $8, respectively, pertaining to benefits curtailment, legislative changes in Italy and Japan, and the resolution of certain tax matters in non-U.S. jurisdictions. For the three and nine months ended September 30, 2016, income taxes included unfavorable discrete tax adjustments of $2 and favorable discrete tax adjustments of $11, respectively, pertaining to benefits curtailment, a change in tax law in Japan and the resolution of certain tax matters in non-U.S. jurisdictions.

The Company is recognizing the earnings of non-U.S. operations currently in its U.S. consolidated income tax return as of September 30, 2017 and is expecting that all earnings, with the exception of Germany and Japan, will be repatriated to the United States. The Company has accrued the incremental tax expense expected to be incurred upon the repatriation of these earnings. In addition, the Company has certain intercompany arrangements that if settled may trigger taxable gains or losses based on currency exchange rates in place at the time of settlement. Since the currency translation impact is considered indefinite, the Company has not provided deferred taxes on gains of $10, which could result in a tax obligation of $3, based on currency exchange rates as of September 30, 2017. Should the intercompany arrangement be settled or the Company change its assertion, the actual tax impact will depend on the currency exchange rate at the time of settlement or change in assertion.

 

F-87


Table of Contents

13. Net Loss per Share

The following table presents the calculation of basic and diluted net loss per share attributable to Momentive for the three and nine months ended September 30, 2017 and 2016:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  

(in millions, except share data)

   2017     2016     2017     2016  

Net loss

   $ (8   $ (17   $ (19   $ (45
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares—basic

     48,121,634       48,058,114       48,109,535       48,047,340  

Effect of dilutive potential common shares

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding—diluted

     48,121,634       48,058,114       48,109,535       48,047,340  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share—basic

   $ (0.17   $ (0.35   $ (0.39   $ (0.94
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share—diluted

   $ (0.17   $ (0.35   $ (0.39   $ (0.94
  

 

 

   

 

 

   

 

 

   

 

 

 

Antidilutive employee share-based awards, excluded

     310,836       28,288       129,409       21,436  
  

 

 

   

 

 

   

 

 

   

 

 

 

Employee equity share options, unvested shares and similar equity instruments granted by the Company are treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options, unvested restricted stock, and restricted stock units. The dilutive effect of such equity awards is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are collectively assumed to be used to repurchase shares.

Due to the losses recognized three and nine months ended September 30, 2017 and 2016, there is no effect for potentially dilutive shares.

 

F-88


Table of Contents

 

 

14,583,333 Shares

 

LOGO

MPM Holdings Inc.

COMMON STOCK

 

 

PRELIMINARY PROSPECTUS

 

 

J.P. Morgan

Goldman Sachs & Co. LLC

Credit Suisse

Deutsche Bank Securities

UBS Investment Bank

Wells Fargo Securities

BMO Capital Markets

                , 2017

 

 

 


Table of Contents

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

Set forth below is a table of the registration fee for the Securities and Exchange Commission and estimates of all other expenses to be paid by the registrant in connection with the issuance and distribution of the securities described in the registration statement:

 

SEC registration fee

     $52,200  

NYSE listing fee

     285,000  

Financial Industry Regulatory Authority filing fee

     46,610  

Printing fees and expenses

     314,000  

Legal fees and expenses

     750,000  

Accounting fees and expenses

     375,000  

Blue Sky fees and expenses

     50,000  

Transfer agent fees and expenses

     8,000  

Miscellaneous

     19,190  
  

 

 

 

Total

   $ 1,900,000  
  

 

 

 

 

  * To be updated by amendment.

Item 14. Indemnification of Directors and Officers.

MPM Holdings Inc. (“Momentive”) is a Delaware Corporation. Section 145(a) of the General Corporation Law of the State of Delaware (the “DGCL”), provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no cause to believe his conduct was unlawful.

Section 145(b) of the DGCL provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, including attorneys’ fees actually and reasonably incurred by him or her in connection with the defense or settlement of such action or suit if he or she acted under similar standards set forth above, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that a court of appropriate jurisdiction in which such action or suit was brought shall determine that despite the adjudication of liability, such person is fairly and reasonably entitled to be indemnified for such expenses which such court shall deem proper.

Article VIII of Momentive’s Certificate of Incorporation will provide for the indemnification of directors and officers to the fullest extent authorized by the DGCL, except that, subject to certain exceptions, Momentive shall be required to provide indemnification in connection with an action, suit or proceeding initiated by such person only if the action, suit or proceeding was authorized by the Board of Directors of Momentive (the

 

II-1


Table of Contents

“Board of Directors”). This indemnification right will include the right of a covered person to be paid his or her expenses (including attorneys’ fees) incurred in defending any such action, suit or proceeding in advance of its final disposition.

Section 102(b)(7) of the DGCL provides that a Delaware corporation may set forth in its certificate of incorporation a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of a fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director’s duty of loyalty to the registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. Article VII of Momentive’s Certificate of Incorporation will include such a provision.

Section 145(g) of the DGCL provides that a Delaware corporation has the power to purchase and maintain insurance on behalf of any director, officer, employee or other agent of the corporation or, if serving in such capacity at the request of the corporation, of another enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation has the power to indemnify such person against such liability under the DGCL. Article VIII of Momentive’s Certificate of Incorporation will permit the corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of Momentive or is or was serving at the request of Momentive as a director, officer, employee or agent of another entity against any liability asserted against such person and incurred by such person in any capacity, or arising out of such person’s status as such, whether or not Momentive would have the power to indemnify such person against such liability under the DGCL.

In addition, our directors have entered, or will enter, into separate contractual indemnity arrangements with Momentive. These arrangements will provide for indemnification and the advancement of expenses to our directors in circumstances and subject to limitations substantially similar to those described above.

The underwriting agreement for this offering will provide that each underwriter severally agrees to indemnify and hold harmless Momentive, each of our directors, each of our officers who signs the registration statement and each person who controls Momentive within the meaning of the Securities Act but only with respect to written information relating to such underwriter furnished to Momentive by or on behalf of such underwriter specifically for inclusion in the documents referred to in the foregoing indemnity.

Insurance

Momentive currently maintains an insurance policy which, within the limits and subject to the terms and conditions thereof, covers certain expenses and liabilities that may be incurred by directors and officers in connection with proceedings that may be brought against them as a result of an act or omission committed or suffered while acting as a director or officer of this Registrant.

Item 15. Recent Sales of Unregistered Securities

In connection with the emergence of Momentive Performance Materials Inc. (“MPM”) and certain of its domestic subsidiaries from Chapter 11, on October 24, 2014, we issued 47,989,000 shares of our common stock in exchange of shares of common stock of MPM pursuant to the Plan of Reorganization in transactions exempt from registration under Section 4(a)(2) of the Securities Act and Section 1145(a)(1) of the Bankruptcy Code.

On April 30, 2015, we issued 39,594 shares of our common stock to certain of our directors for aggregate proceeds of approximately $1 million pursuant to Rule 506 of Regulation D under the Securities Act.

 

II-2


Table of Contents

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits

 

               Incorporated by Reference
Exhibit
Number
  

Exhibit Description

   Filed
Herewith
   Form    File Number    Exhibit    Filing
Date
  1.1    Form of Underwriting Agreement       S-1/A    333-220384    1.1    10/31/17
  2.1    Joint Chapter 11 Plan of Reorganization for Momentive Performance Materials Inc. and its Affiliated Debtors, dated September  24, 2014.       8-K    333-146093    2.1    10/28/14
  3.1    Form of Amended and Restated Certificate of Incorporation of MPM Holdings Inc. to be in effect at the closing of the initial public offering.       S-1/A    333-220384    3.1    10/31/17
  3.2    Form of Amended and Restated By-laws of MPM Holdings Inc. to be in effect at the closing of the initial public offering.       S-1/A    333-220384    3.2    10/31/17
  4.1    Indenture, dated as of October  24, 2014, among Momentive Performance Materials Inc., the Note Guarantors party thereto, The Bank of New  York Mellon Trust Company, N.A., as trustee and collateral agent, relating to the $1,100,000,000 First-Priority Senior Secured Notes due 2021.       8-K    333-146093    4.1    10/28/14
  4.2    Indenture, dated as of October  24, 2014, among Momentive Performance Materials Inc., the Note Guarantors party thereto, The Bank of New  York Mellon Trust Company, N.A., as trustee and collateral agent, relating to the $250,000,000 Second-Priority Senior Secured Notes due 2022.       8-K    333-146093    4.2    10/28/14
  4.3    First Lien Collateral Agreement, dated and effective as of October  24, 2014, among Momentive Performance Materials Inc., each Subsidiary Guarantor party thereto and The Bank of New York Mellon Trust Company, N.A., as Collateral Agent.       8-K    333-146093    4.3    10/28/14
  4.4    Second Lien Collateral Agreement, dated and effective as of October  24, 2014, among Momentive Performance Materials Inc., each Subsidiary Guarantor party thereto and The Bank of New York Mellon Trust Company, N.A., as Collateral Agent.       8-K    333-146093    4.4    10/28/14

 

II-3


Table of Contents
               Incorporated by Reference
Exhibit
Number
  

Exhibit Description

   Filed
Herewith
   Form    File Number    Exhibit    Filing
Date
  4.5    ABL Intercreditor Agreement, dated as of October  24, 2014, among JPMorgan Chase Bank, N.A., as ABL Facility Collateral Agent, The Bank of New  York Mellon Trust Company, N.A., as Applicable First-Lien Agent and First-Lien Collateral Agent, Momentive Performance Materials Inc., Momentive Performance Materials USA Inc. and the Subsidiaries of Momentive Performance Materials Inc. named therein.       8-K    333-146093    4.5    10/28/14
  4.6    Intercreditor Agreement, dated as of October  24, 2014, among JPMorgan Chase Bank, N.A., as ABL Credit Agreement Agent and as Intercreditor Agent, The Bank of New York Mellon Trust Company, N.A., as First-Lien Notes Agent, The Bank of New  York Mellon Trust Company, N.A., as Trustee and as Collateral Agent, Momentive Performance Materials Inc. and the Subsidiaries of Momentive Performance Materials Inc. named therein.       8-K    333-146093    4.6    10/28/14
  5.1    Opinion of Paul, Weiss, Rifkind, Wharton & Garrison LLP    X            
10.1^    Intellectual Property Cross License Agreement, dated as of December  3, 2006, by and between General Electric Company and Momentive Performance Materials Holdings Inc.       S-4    333-146093    10.5    10/11/07
10.2^    Trademark License Agreement (GE Name and Marks), dated as of December  3, 2006, by and between GE Monogram Licensing International and Momentive Performance Materials Holdings Inc.       S-4    333-146093    10.6    10/11/07
10.3    Land Lease Agreement, as amended, dated as of July  1, 1998, by and among Bayer AG and Momentive Performance Materials GmbH (formerly known as Bayer Silicones GmbH & Co. KG)       S-4    333-146093    10.10    9/14/07
10.4    Master Confidentiality and Joint Development Agreement entered into on March  17, 2011 by and between Momentive Performance Materials Inc. and Momentive Specialty Chemicals Inc.       8-K    333-146093    10.2    3/17/11

 

II-4


Table of Contents
               Incorporated by Reference
Exhibit
Number
  

Exhibit Description

   Filed
Herewith
   Form    File Number    Exhibit    Filing
Date
10.5†    Momentive Performance Materials Inc. Supplemental Executive Retirement Plan, effective January 1, 2012       8-K    333-146093    99.2    1/6/12
10.6^    Amendment No. 1 to Trademark License Agreement dated December  3, 2006 by and among GE Monogram Licensing International, Momentive Performance Materials Inc. and General Electric Company, effective as of May 17, 2013       10-Q    333-146093    10.1    8/13/13
10.7†    Offer Letter Agreement, dated March 14, 2014, between Momentive Performance Materials Holdings LLC and Jack Boss       10-K    333-146093    10.47    4/11/14
10.8    Employee Services Agreement, dated as of March  25, 2014, among Momentive Performance Materials Holdings LLC, Momentive Performance Materials Holdings Employee Corporation, Momentive Performance Materials Inc. and Momentive Specialty Chemicals Inc.       10-K    333-146093    10.48    4/11/14
10.9    Amended and Restated Senior Secured Debtor-in-Possession and Exit Asset-Based Revolving Credit Agreement, dated as of April 15, 2014, among Momentive Performance Materials Holdings Inc., Momentive Performance Materials Inc., Momentive Performance Materials USA Inc., as U.S. borrower, Momentive Performance Materials GmbH and Momentive Performance Materials Quartz GmbH, as German borrowers, Momentive Performance Materials Nova Scotia ULC, as Canadian borrower, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other parties named therein.       8-K    333-146093    10.3    4/17/14

 

II-5


Table of Contents
               Incorporated by Reference
Exhibit
Number
  

Exhibit Description

   Filed
Herewith
   Form    File Number    Exhibit    Filing
Date
10.10    First Amendment to Amended and Restated Senior Secured Debtor-in-Possession and Exit Asset-Based Revolving Credit Agreement, dated as of May 12, 2014, among the Company, MPM Holdings, Momentive Performance Materials USA Inc., Momentive Performance Materials GmbH, Momentive Performance Materials Quartz GmbH, Momentive Performance Materials Nova Scotia ULC, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent for the lenders under the Amended and Restated Senior Secured Debtor-in-Possession and Exit Asset-Based Revolving Credit Agreement, dated as of April 15, 2014.       10-Q    333-146093    10.13    8/13/14
10.11    Waiver, dated as of October 24, 2014 with respect to the Amended and Restated Senior Secured Debtor-in-Possession and Exit Asset-Based Revolving Credit Agreement dated as of April  15, 2014, among Momentive Performance Materials Holdings Inc., Momentive Performance Materials Inc., Momentive Performance Materials USA Inc., as U.S. borrower, Momentive Performance Materials GmbH and Momentive Performance Materials Quartz GmbH, as German borrowers, Momentive Performance Materials Nova Scotia ULC, as Canadian borrower, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other parties named therein.       8-K    333-146093    10.1    10/28/14
10.12    Second Amended and Restated Shared Services Agreement, dated as of October  24, 2014, by and among Momentive Specialty Chemicals Inc., Momentive Performance Materials Inc. and the subsidiaries of Momentive Performance Materials Inc. party thereto.       S-1/A    333-201338    10.47    2/13/15
10.13    Registration Rights Agreement, dated as of October  24, 2014, by and among MPM Holdings Inc. and the stockholders of MPM Holdings Inc. party thereto.       S-1    333-201338    10.48    12/31/14

 

II-6


Table of Contents
                 Incorporated by Reference  
Exhibit
Number
  

Exhibit Description

   Filed
Herewith
     Form      File Number      Exhibit      Filing
Date
 
10.14†    MPM Holdings Inc. 2015 Incentive Compensation Plan         10-K        333-146093        10.33        3/30/15  
10.15†    MPM Holdings Inc. Management Equity Plan         10-K        333-146093        10.36        3/30/15  
10.16†    MPM Holdings Inc. Form of Nonqualified Stock Option Grant Certificate         10-K        333-146093        10.37        3/30/15  
10.17†    MPM Holdings Inc. Form of Restricted Stock Unit Grant Certificate         10-K        333-146093        10.38        3/30/15  
10.18†    MPM Holdings Inc. Form of Director Restricted Stock Unit Grant Certificate         10-K        333-146093        10.39        3/30/15  
10.19†    Offer Letter, dated April 20, 2015, between Momentive Performance Materials Inc. and Erick Asmussen         10-Q        333-146093        10.1        8/14/15  
10.20†    Offer Letter, dated August 17, 2015, between Momentive Performance Materials Inc. and John D. Moran         10-Q        333-146093        10.1        11/13/15  
10.21†    Form of Option Adjustment Letter         10-Q        333-146093        10.1        8/9/16  
10.22†    MPM Holdings Inc. 2016 Incentive Compensation Plan         10-Q        333-146093        10.1        8/8/17  
10.23†    MPM Holdings Inc. 2017 Incentive Compensation Plan         10-Q        333-146093        10.2        8/8/17  
10.24†    MPM Holdings Inc. Annual Cash Incentive Plan         S-1/A        333-220384        10.24        10/31/17  
10.25    Form of Indemnification Agreement         S-1/A        333-220384        10.25        10/31/17  
21.1    List of Subsidiaries of MPM Holdings Inc.         S-1/A        333-220384        21.1        10/31/17  
23.1    Consent of PricewaterhouseCoopers LLP, an independent registered public accounting firm      X              
23.2    Consent of Paul, Weiss, Rifkind, Wharton & Garrison LLP (included in Exhibit 5.1)      X              
24.1    Powers of Attorney of the Directors and Officers of the Registrant (included in signature pages)         S-1        333-220384        24.1        9/8/17  
101.INS††    XBRL Instance Document      X              
101.SCH    XBRL Schema Document      X              
101.CAL    XBRL Calculation Linkbase Document      X              
101.LAB    XBRL Label Linkbase Document      X              
101.PRE    XBRL Presentation Linkbase Document      X              
101.DEF    XBRL Definition Linkbase Document      X              

 

 

II-7


Table of Contents
^ Certain portions of this document have been omitted pursuant to an order granting confidential treatment by the SEC.
Indicates a management contract or compensatory plan or arrangement.
†† Attached as Exhibit 101 to this registration statement are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised pursuant to Rule 406T of Regulation S-T that the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise not subject to liability under these sections. The financial information contained in the XBRL-related documents is “unaudited” or “unreviewed.”

(b) Financial Statement Schedules

All schedules are omitted because they are not applicable or the required information is included in the financial statements or notes thereto.

Item 17. Undertakings.

The undersigned registrant hereby undertakes:

(a) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions referenced in Item 14 of this registration statement, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

(c) The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, if the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no

 

II-8


Table of Contents

statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

(4) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

II-9


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, MPM Holdings Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Waterford, State of New York, on the 6th day of November, 2017.

 

MPM HOLDINGS INC.
By:  

*

 

John G. Boss

Chief Executive Officer and President

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature

  

Capacity

 

Date

*

John G. Boss

  

Chief Executive Officer and President;

Director
(Principal Executive Officer)

  November 6, 2017

/s/ ERICK R. ASMUSSEN

Erick R. Asmussen

   Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
  November 6, 2017

*

Suraj Kunchala

   Controller
(Principal Accounting Officer)
  November 6, 2017

*

Mahesh Balakrishnan

   Director   November 6, 2017

*

Bradley Bell

   Director   November 6, 2017

*

John D. Dionne

  

Director

  November 6, 2017

*

Robert Kalsow-Ramos

   Director   November 6, 2017

*

Scott Kleinman

   Director   November 6, 2017

*

Julian Markby

   Director   November 6, 2017

*

Jeffrey Nodland

   Director   November 6, 2017

 

II-10


Table of Contents

Signature

  

Capacity

 

Date

*

Theodore H. Butz

   Director   November 6, 2017

*

Samuel Feinstein

  

Director

  November 6, 2017

*

Marvin Schlanger

  

Director

  November 6, 2017

 

*By:   /s/ ERICK R. ASMUSSEN
 

Erick R. Asmussen

Attorney-in-Fact

 

II-11