Document
Table of Contents






UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
 
 
MPM HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Commission File Number 333-201338
 
 
Delaware
 
47-1756080
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
MOMENTIVE PERFORMANCE MATERIALS INC.
(Exact name of registrant as specified in its charter)
Commission File Number 333-146093 
 
Delaware
 
20-5748297
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 

260 Hudson River Road
Waterford, NY 12188
 
(518) 233-3330
(Address of principal executive offices including zip code)
 
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
MPM Holdings Inc.                Yes  x    No  o
Momentive Performance Materials Inc.    Yes  x    No  o


Table of Contents




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
MPM Holdings Inc.                Yes  x    No  o
Momentive Performance Materials Inc.    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
MPM Holdings Inc.
Large accelerated filer
o
  
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
x
  
Smaller Reporting Company
o
 
 
 
 
 
 
 
 
Emerging Growth Company
o
    
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 13(a) of the Exchange Act. o
Momentive Performance Materials Inc.
Large accelerated filer
o
  
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
x
  
Smaller Reporting Company
o
 
 
 
 
 
 
 
 
Emerging Growth Company
o
    
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 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
MPM Holdings Inc.                Yes  o    No  x
Momentive Performance Materials Inc.    Yes  o    No  x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    
MPM Holdings Inc.                Yes  x    No  o
Momentive Performance Materials Inc.    Yes  x    No  o
The number of shares of common stock of MPM Holdings Inc., par value $0.01 per share, outstanding as of the close of business on May 4, 2017, was 48,121,634 shares.
The number of shares of common stock of Momentive Performance Materials Inc., par value $0.01 per share, outstanding as of the close of business on May 4, 2017, was 48 shares, all of which were held by MPM Intermediate Holdings Inc.
This Form 10-Q is a combined quarterly report being filed separately by two registrants: MPM Holdings Inc. and Momentive Performance Materials Inc.


Table of Contents




MPM HOLDINGS INC. AND MOMENTIVE PERFORMANCE MATERIALS INC.

INDEX

 
 
Page
Part I —
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Part II —
OTHER INFORMATION
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


3

Table of Contents




Part I — FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 
MPM HOLDINGS INC.
 
MOMENTIVE PERFORMANCE MATERIALS INC.
(In millions, except share data)
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents (including restricted cash of $4)
$
167

 
$
228

 
$
167

 
$
228

Accounts receivable (net of allowance for doubtful accounts of $4)
316

 
280

 
316

 
280

Inventories:
 
 
 
 
 
 
 
Raw materials
127

 
119

 
127

 
119

Finished and in-process goods
268

 
271

 
268

 
271

Other current assets
46

 
50

 
46

 
50

Total current assets
924

 
948

 
924

 
948

Investment in unconsolidated entities
20

 
20

 
20

 
20

Deferred income taxes
9

 
9

 
9

 
9

Other long-term assets
22

 
20

 
22

 
20

Property, plant and equipment:
 
 
 
 
 
 
 
Land
77

 
74

 
77

 
74

Buildings
313

 
307

 
313

 
307

Machinery and equipment
1,003

 
959

 
1,003

 
959

 
1,393

 
1,340

 
1,393

 
1,340

Less accumulated depreciation
(295
)
 
(265
)
 
(295
)
 
(265
)
 
1,098

 
1,075

 
1,098

 
1,075

Goodwill
214

 
211

 
214

 
211

Other intangible assets, net
320

 
323

 
320

 
323

Total assets
$
2,607

 
$
2,606

 
$
2,607

 
$
2,606

Liabilities and Equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
233

 
$
238

 
$
233

 
$
238

Debt payable within one year
36

 
36

 
36

 
36

Interest payable
25

 
11

 
25

 
11

Income taxes payable
4

 
8

 
4

 
8

Accrued payroll and incentive compensation
74

 
61

 
73

 
61

Other current liabilities
109

 
123

 
107

 
122

Total current liabilities
481

 
477

 
478

 
476

Long-term liabilities:
 
 
 
 
 
 
 
Long-term debt
1,173

 
1,167

 
1,173

 
1,167

Pension and postretirement benefit liabilities
332

 
341

 
332

 
341

Deferred income taxes
70

 
66

 
70

 
66

Other long-term liabilities
65

 
73

 
65

 
72

Total liabilities
2,121

 
2,124

 
2,118

 
2,122

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 March 31, 2017 and December 31, 2016, respectively

 

 
 
 
 
Common stock - $0.01 par value; 100 shares authorized; 48 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
 
 
 
 

 

Additional paid-in capital
865

 
864

 
864

 
863

Accumulated other comprehensive loss
(43
)
 
(76
)
 
(43
)
 
(76
)
Accumulated deficit
(336
)
 
(306
)
 
(332
)
 
(303
)
Total equity
486

 
482

 
489

 
484

Total liabilities and equity
$
2,607

 
$
2,606

 
$
2,607

 
$
2,606


See Notes to Condensed Consolidated Financial Statements

4

Table of Contents




MPM HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 
 
Three Months Ended March 31,
(In millions, except share and per share data)
 
2017
 
2016
Net sales
 
$
544

 
$
536

Cost of sales
 
446

 
446

Gross profit
 
98

 
90

Costs and expenses:
 

 
 
Selling, general and administrative expense
 
84

 
81

Research and development expense
 
15

 
16

Restructuring and other costs (See Note 3)
 
5

 
5

Other operating expense, net
 
3

 
6

Operating loss
 
(9
)
 
(18
)
Interest expense, net (See Note 6)
 
19

 
19

Gain on extinguishment of debt (See Note 6)
 

 
(9
)
Other non-operating expense (income), net
 
1

 
(3
)
Reorganization items, net
 

 
1

Loss before income taxes and earnings from unconsolidated entities
 
(29
)
 
(26
)
Income tax expense (benefit) (See Note 12)
 
1

 
(8
)
Loss before earnings from unconsolidated entities
 
(30
)
 
(18
)
Earnings from unconsolidated entities, net of taxes
 

 

Net loss
 
$
(30
)
 
$
(18
)
 
 
 
 
 
Net loss per share:
 
 
 
 
Net loss per common share—basic
 
$
(0.62
)
 
$
(0.37
)
Net loss per common share—diluted
 
$
(0.62
)
 
$
(0.37
)
Shares used in per-share calculation
 
 
 
 
Weighted average common shares outstanding—basic
 
48,084,933

 
48,028,594

Weighted average common shares outstanding—diluted
 
48,084,933

 
48,028,594


See Notes to Condensed Consolidated Financial Statements

5

Table of Contents




MOMENTIVE PERFORMANCE MATERIALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 
 
Three Months Ended March 31,
 
 (In millions)
 
2017
 
2016
 
Net sales
 
$
544

 
$
536

 
Cost of sales
 
446

 
446

 
Gross profit
 
98

 
90

 
Selling, general and administrative expense
 
83

 
80

 
Research and development expense
 
15

 
16

 
Restructuring and other costs (See Note 3)
 
5

 
5

 
Other operating expense, net
 
3

 
6

 
Operating loss
 
(8
)
 
(17
)
 
Interest expense, net (See Note 6)
 
19

 
19

 
Gain on extinguishment of debt (See Note 6)

 

 
(9
)
 
Other non-operating expense (income), net
 
1

 
(3
)
 
Reorganization items, net
 

 
1

 
Loss before income taxes and earnings from unconsolidated entities
 
(28
)
 
(25
)
 
Income tax expense (benefit) (See Note 12)
 
1

 
(8
)
 
Loss before earnings from unconsolidated entities
 
(29
)
 
(17
)
 
Earnings from unconsolidated entities, net of taxes
 

 

 
Net loss
 
$
(29
)
 
$
(17
)
 

See Notes to Condensed Consolidated Financial Statements


6

Table of Contents




CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

 
MPM HOLDINGS INC.
 
 
Three Months Ended March 31,
 
(In millions)
2017
 
2016
 
Net loss
$
(30
)
 
$
(18
)
 
Other comprehensive income, net of tax:
 
 
 
 
Foreign currency translation
22

 
38

 
Net prior service credit
11

 
20

 
Other comprehensive income (loss)
33

 
58

 
Comprehensive income
$
3

 
$
40

 

 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
 
Three Months Ended March 31,
 
(In millions)
2017
 
2016
 
Net loss
$
(29
)
 
$
(17
)
 
Other comprehensive income, net of tax:
 
 
 
 
Foreign currency translation
22

 
38

 
Net prior service credit
11

 
20

 
Other comprehensive income (loss)
33

 
58

 
Comprehensive income
$
4

 
$
41

 

See Notes to Condensed Consolidated Financial Statements

7

Table of Contents




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
MPM HOLDINGS INC.
 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Three Months Ended March 31,
 
Three Months Ended March 31,
(In millions)
2017
 
2016
 
2017
 
2016
Cash flows (used in) provided by operating activities
 
 
 
 
 
 
 
Net loss
$
(30
)
 
$
(18
)
 
$
(29
)
 
$
(17
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
38

 
42

 
38

 
42

Unrealized actuarial losses from pensions and other post retirement liabilities
1

 
5

 
1

 
5

Deferred income tax benefit
(5
)
 
(12
)
 
(5
)
 
(12
)
Unrealized foreign currency gains

 
(2
)
 

 
(2
)
Amortization of debt discount
6

 
6

 
6

 
6

Gain on the extinguishment of debt

 
(9
)
 

 
(9
)
Other non-cash adjustments
4

 
5

 
4

 
5

Net change in assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
(32
)
 
(11
)
 
(32
)
 
(11
)
Inventories

 
(14
)
 

 
(14
)
Accounts payable
(1
)
 
(8
)
 
(1
)
 
(8
)
Income taxes payable
(3
)
 

 
(3
)
 

Other assets, current and non-current
2

 
3

 
2

 
2

Other liabilities, current and non-current
3

 
23

 
2

 
23

Net cash (used in) provided by operating activities
(17
)
 
10

 
(17
)
 
10

Cash flows used in investing activities
 
 
 
 
 
 
 
Capital expenditures
(36
)
 
(25
)
 
(36
)
 
(25
)
Capitalized interest
(1
)
 

 
(1
)
 

Purchase of a business
(9
)
 

 
(9
)
 

Net cash used in investing activities
(46
)
 
(25
)
 
(46
)
 
(25
)
Cash flows used in financing activities
 
 
 
 
 
 
 
Net short-term debt borrowings

 
(2
)
 

 
(2
)
Repayments of long-term debt

 
(16
)
 

 
(16
)
Net cash used in financing activities


(18
)
 

 
(18
)
Decrease in cash and cash equivalents
(63
)
 
(33
)
 
(63
)
 
(33
)
Effect of exchange rate changes on cash and cash equivalents
2


3

 
2

 
3

Cash and cash equivalents (unrestricted), beginning of period
224

 
217

 
224

 
217

Cash and cash equivalents (unrestricted), end of period
$
163

 
$
187

 
$
163

 
$
187

Supplemental disclosures of cash flow information
 
 
 
 
 
 
 
Cash paid for:
 
 
 
 
 
 
 
Interest
$
1

 
$
1

 
$
1

 
$
1

Income taxes, net of refunds
9

 
3

 
9

 
3

Non-cash investing activity:
 
 
 
 
 
 
 
Capital expenditures included in accounts payable
$
18

 
$
16

 
$
18

 
$
16


See Notes to Condensed Consolidated Financial Statements

8

Table of Contents




CONDENSED CONSOLIDATED STATEMENT OF EQUITY (Unaudited)

MPM HOLDINGS INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 

 

 

 

 
(30
)
 
(30
)
Other comprehensive income
 

 

 

 
33

 

 
33

Stock-based compensation expense
 

 

 
1

 

 

 
1

Issuance of common stock
 
63,520

 

 

 

 

 

Balance as of March 31, 2017
 
48,121,634

 
$

 
$
865

 
$
(43
)
 
$
(336
)
 
$
486


MOMENTIVE PERFORMANCE MATERIALS INC.
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
Equity
Balance as of December 31, 2016
 
 
 
$

 
$
863

 
$
(76
)
 
$
(303
)
 
$
484

Net loss
 
 
 

 

 

 
(29
)
 
(29
)
Other comprehensive income
 
 
 

 

 
33

 

 
33

Stock-based compensation expense
 
 
 

 
1

 

 

 
1

Capital contribution from parent
 
 
 

 

 


 

 

Balance as of March 31, 2017
 
 
 
$

 
$
864

 
$
(43
)
 
$
(332
)
 
$
489


See Notes to Condensed Consolidated Financial Statements

9

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 two operating and reportable segments: Silicones and Quartz. Silicones is a global business engaged in the manufacture, sale and distribution of silicones, silicone derivatives and organofunctional silanes. Quartz, also a global business, is engaged in the manufacture, sale and distribution of high-purity fused quartz and ceramic materials.
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.

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.
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. As described in Note 8, 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 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 Silicones 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

10


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.
    
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 that have been acquired is not yet complete. The Company has engaged specialists to assist in the valuation of tangible and intangible assets acquired for which certain inputs have not yet been finalized. 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. 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 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 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”). 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. 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 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

11


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.
  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 tests performed on testing dates after January 1, 2017. The amendments in this ASU should 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.We do not expect the adoption of the amendments in this ASU to have a significant impact on our consolidated financial statements.
In February 2017, the FASB issued Accounting Standards Board Update No. 2017-06: Employee Benefit Plan Master Trust Reporting (ASU 2017-06”). The ASU requires that: 1) presentation within the plan’s financial statements of its interest in a master trust as a single line item, 2) disclosure of the master trust’s other assets and liabilities and the balances related to the plan, 3) elimination of required disclosures for Section 401(h) accounts that are already provided by the associated defined benefit plan and 4) for a plan’s divided interest in a master trust, disclosure of the master trust’s investments by general type as well as by the dollar amount of the plan’s interest in each type. The amendments in the ASU are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. An entity should apply the amendments in ASU 2017-06 retrospectively to each period for which financial statements are presented. The Company is currently assessing this ASU’s impact on its 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.
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 Other Costs

Included in restructuring and other 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

12

Table of Contents




expenditures. 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 $3, some of which was paid in late 2016 and the remaining to be paid in 2017.

The total charges incurred to date on the above restructuring programs were $13.

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

Adjustments
 

Payments
 

Accrued liability at March 31, 2017
 
$
5


For the three months ended March 31, 2017 and March 31, 2016, the Company recognized other costs of $4 and $3, respectively. The costs in 2017 and 2016 are primarily comprised of one-time expenses for services and integration, and are included in “Restructuring and other costs” in the Condensed Consolidated Statements of Operations.


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 2016, 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).
Pursuant to the Shared Services Agreement, during the three months ended March 31, 2017 and 2016, the Company incurred approximately $14 and $16, respectively, of net costs for shared services and Hexion incurred approximately $22 and $27, respectively, of net costs for shared services. Included in the net costs incurred during the three months ended March 31, 2017 and 2016, were net billings from Hexion to the Company of $9, 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 $3 and $5 at March 31, 2017 and December 31, 2016, respectively, and no accounts receivable from Hexion.
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 months ended March 31, 2017 and March 31, 2016 , the Company sold $5 and $7, 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. As of both March 31, 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 March 31, 2017.

13


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 March 31, 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 March 31, 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 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 months ended March 31, 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
March 31, 2017
 
 
 
 
 
 
 
 
 
 
Debt
 
$
1,209

 
$

 
$
1,302

 
$

 
$
1,302

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 March 31, 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 March 31, 2017 were $55, leaving an unused borrowing capacity of $215.
As of March 31, 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.

14


At March 31, 2017, the weighted average interest rate of the Company’s long term debt was 4.45%.
Debt outstanding at March 31, 2017 and December 31, 2016 is as follows:
 
March 31, 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 $100 and $105 of unamortized debt discount, respectively)
1,000

 

 
995

 

4.69% Second-Priority Senior Secured Notes due 2022 (includes $29 and $30 of unamortized debt discount, respectively)
173

 

 
172

 

Other Borrowings:
 
 
 
 
 
 
 
China bank loans

 
36

 

 
36

Total debt
$
1,173

 
$
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 March 31, 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 both March 31, 2017 and December 31, 2016, the Company had recognized obligations of approximately $13 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.
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 an estimated time period of 50 years. 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.

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

15


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.
The estimated fair values of Stock Options granted and the assumptions used for the Monte Carlo option-pricing model were as follows
:
 
 
March 31, 2017
 
March 31, 2016
 
 
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.

16


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 at March 31, 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 months ended March 31, 2017 and the three months ended March 31, 2016 with respect to stock options. At both March 31, 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 at March 31, 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 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 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 months ended March 31, 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 the three months ended March 31, 2017. As of March 31, 2017, unrecognized compensation related to RSU awards was $8 and expense will be recognized over the remaining 2.02 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 for 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.

17



9. Pension and Postretirement Benefit Plans
The following are the components of the Company’s net pension and postretirement (benefit) expense for the three months ended March 31, 2017 and 2016:
 
Pension Benefits
 
Non-Pension Postretirement Benefits
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
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

 
$
2

 
$

 
$

 
 
$

 
$

Interest cost on projected benefit obligation
2

 
1

 
 
2

 
1

 

 

 
 
1

 

Expected return on assets
(2
)
 

 
 
(2
)
 

 

 

 
 

 

Amortization of prior service credit

 

 
 

 

 
(1
)
 

 
 

 

Actuarial loss (1)

 

 
 

 

 
1

 

 
 
5

 

Net periodic benefit cost (gain)
$
2

 
$
4

 
 
$
2

 
$
3

 
$

 
$

 
 
$
6

 
$


(1)
The actuarial loss on non-pension post-retirement benefits of $1 and $5 during the three months ended March 31, 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
The Company’s segments are based on the products that the Company offers and the markets that it serves. At March 31, 2017, the Company’s had two reportable segments: Silicones and Quartz. The Silicones business is engaged in the manufacture, sale and distribution of silicones, silicone derivatives and silanes. The Quartz business is engaged in the manufacture, sale and distribution of high-purity fused quartz and ceramic materials. The Company’s segments are organized based on the nature of the products they produce. In addition, Corporate is primarily corporate, general and administrative expenses that are not allocated to the operating segments, such as certain shared service and administrative functions.
The Company’s organizational structure continues to evolve. It is also continuing to refine its business and operating structure to better align its services to its customers and improve its cost position, while continuing to invest in global growth opportunities.
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.
Net Sales(1):
 
Three Months Ended March 31,
 
2017
 
2016
Silicones
$
495

 
$
500

Quartz
49

 
36

Total
$
544

 
$
536

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

18


Segment EBITDA:
 
MPM HOLDINGS INC.
 
Three Months Ended March 31,
 
2017
 
2016
Silicones
$
71

 
$
50

Quartz
7

 
1

Corporate
(9
)
 
(10
)
Total
$
69

 
$
41


 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Three Months Ended March 31,
 
2017
 
2016
Silicones
$
71

 
$
50

Quartz
7

 
1

Corporate
(8
)
 
(9
)
Total
$
70

 
$
42



Reconciliation of Net Loss to Segment EBITDA:
 
MPM HOLDINGS INC.
 
Three Months Ended March 31,
 
2017
 
 
2016
Net loss
$
(30
)
 
 
$
(18
)
Interest expense, net
19

 
 
19

Income tax expense (benefit)
1

 
 
(8
)
Depreciation and amortization
38

 
 
42

Gain on extinguishment and exchange of debt

 
 
(9
)

 
 
 
 
Items not included in Segment EBITDA:
 
 
 
 
Non-cash charges and other income and expense
$
6

 
 
$
4

Unrealized losses on pension and postretirement benefits
1

 
 
5

Restructuring and other costs
34

 
 
5

Reorganization items, net

 
 
1

Segment EBITDA
$
69

 
 
$
41


 
 
 

Segment EBITDA:
 
 
 


Silicones
$
71

 
 
$
50

Quartz
7

 
 
1

Corporate
(9
)
 
 
(10
)
Total
$
69

 
 
$
41



19


 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Three Months Ended March 31,
 
2017
 
 
2016
Net loss
$
(29
)
 
 
$
(17
)
Interest expense, net
19

 
 
19

Income tax expense (benefit)
1

 
 
(8
)
Depreciation and amortization
38

 
 
42

Gain on extinguishment and exchange of debt

 
 
(9
)
 
 
 
 
 
Items not included in Segment EBITDA:
 
 
 
 
Non-cash charges and other income and expense
$
6

 
 
$
4

Unrealized losses on pension and postretirement benefits
1

 
 
5

Restructuring and other costs
34

 
 
5

Reorganization items, net

 
 
1

Segment EBITDA
$
70

 
 
$
42

 
 
 
 
 
Segment EBITDA:
 
 
 
 
Silicones
71

 
 
50

Quartz
7

 
 
1

Corporate
(8
)
 
 
(9
)
Total
$
70

 
 
$
42


Items Not Included in Segment EBITDA
Not included in Segment EBITDA are certain non-cash items and other income and expenses. For the three months ended March 31, 2017 and March 31, 2016, non-cash charges primarily included asset impairment charges and net foreign exchange transaction gains and losses related to certain intercompany arrangements. For the three months ended March 31, 2017 and March 31, 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 months ended March 31, 2017 and March 31, 2016, restructuring and other costs primarily included expenses from restructuring and integration. For the three months ended March 31, 2017, restructuring and other costs also included costs arising from the union strike inclusive of unfavorable manufacturing variances at our Waterford, NY facility.


20


11. Changes in Other Comprehensive (Loss) Income
Following is a summary of changes in “Accumulated other comprehensive (loss) income” for the three months ended March 31, 2017 and 2016:
 
Three Months Ended March 31,
 
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

 
22

 
34

 
 
20

 
38

 
58

Amounts reclassified from Accumulated other comprehensive income (loss), net of tax
(1
)
 

 
(1
)
 
 

 

 

Net other comprehensive income
11

 
22

 
33

 
 
20

 
38

 
58

Ending balance
$
28

 
$
(71
)
 
$
(43
)
 
 
$
20

 
$
(54
)
 
$
(34
)
(1)
Other comprehensive income related to defined benefit pension and postretirement plans for the three months ended March 31, 2017 and three months ended March 31, 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 three months ended March 31, 2017 and three months ended March 31, 2016, respectively, (see Note 9).

12. Income Taxes
The effective tax rate was (3)% and (4)% for Momentive and MPM, respectively, for the three months ended March 31, 2017 and 31% and 32% for Momentive and MPM, respectively, for the three months ended March 31, 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), a tax rate change in Japan, and the resolution of certain tax matters in non-U.S. jurisdictions.
For the three months ended March 31, 2017, income taxes included a favorable discrete tax adjustment of $5, pertaining to benefits curtailment, and the resolution of certain tax matters in non-U.S. jurisdictions. For the three months ended March 31, 2016, income taxes included a favorable discrete tax adjustment of $13 pertaining to benefits curtailment and a change in tax law in Japan.
The Company is recognizing the earnings of non-U.S. operations currently in its U.S. consolidated income tax return as of March 31, 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 $15, which could result in a tax obligation of $4, based on currency exchange rates as of March 31, 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.



21


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 months ended March 31, 2017 and 2016:

 
Three Months Ended March 31,
(in millions, except share data)
2017
 
 
2016
Net loss
$
(30
)
 
 
$
(18
)
Weighted average common shares—basic
48,084,933

 
 
48,028,594

Effect of dilutive potential common shares

 
 

Weighted average shares outstandingdiluted
48,084,933

 
 
48,028,594

Net loss per common share—basic
$
(0.62
)
 
 
$
(0.37
)
Net loss per common share—diluted
$
(0.62
)
 
 
$
(0.37
)
Antidilutive employee share-based awards, excluded
159,196

 
 
86,090

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 three months ended March 31, 2016, there is no effect for potentially 86,090 dilutive shares and there were 159,196 antidilutive shares as of March 31, 2017.


14. Guarantor/Non-Guarantor Subsidiary Financial Information
As of March 31, 2017, the Company had outstanding $1,100 in aggregate principal amount of 3.88% First-Priority Senior Secured Notes due 2021 (the “First Lien Notes”) and $202 in aggregate principal amount of 4.69% Second-Priority Senior Secured Notes due 2022 (the “Second Lien Notes”). The notes are fully and unconditionally, jointly and severally guaranteed on a senior secured basis by each of MPM’s existing 100% owned U.S. subsidiaries that is a guarantor under MPM’s ABL Facility and MPM’s future U.S. 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”). The following condensed consolidated financial information presents the Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016, the Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 of (i) Momentive Performance Materials Inc. (“Parent”); (ii) the guarantor subsidiaries; (iii) the non-guarantor subsidiaries; and (iv) MPM on a consolidated basis.
These financial statements are prepared on the same basis as the consolidated financial statements of MPM except that investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. The guarantor subsidiaries are 100% owned by Parent and all guarantees are full and unconditional, subject to certain customary release provisions set forth in the applicable Indenture. Additionally, the ABL Facility is secured by, among other things, most of the assets of the Parent, the guarantor subsidiaries and certain non-guarantor subsidiaries, subject to certain exceptions and permitted liens. There are no significant restrictions on the ability of Parent to obtain funds from its domestic subsidiaries by dividend or loan. The indentures governing the First Lien Notes and the Second Lien Notes contain 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) enter into sale/leaseback transactions; (vii) incur restrictions on the ability of MPM’s subsidiaries to pay dividends or to make other payments to us; (viii) enter into transactions with MPM’s affiliates; (ix) merge or consolidate with other companies or transfer all or substantially all of MPM’s assets; and (x) transfer or sell assets.

22



MOMENTIVE PERFORMANCE MATERIALS INC.
MARCH 31, 2017
CONDENSED CONSOLIDATING BALANCE SHEETS (Unaudited)
 
 
Parent
 
Combined Guarantor
Subsidiaries
 
Combined Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (including restricted cash of $0, $0 and $4, respectively)
$
32

 
$

 
$
135

 
$

 
$
167

Accounts receivable

 
86

 
230

 

 
316

Due from affiliates

 
66

 
37

 
(103
)
 

Inventories:


 


 


 


 


Raw materials

 
66

 
61

 

 
127

Finished and in-process goods

 
122

 
146

 

 
268

Other current assets


 
15

 
31

 

 
46

Total current assets
32

 
355

 
640

 
(103
)
 
924

Investment in unconsolidated entities
1,586

 
293

 
20

 
(1,879
)
 
20

Deferred income taxes

 

 
9

 

 
9

Other long-term assets

 

 
22

 

 
22

Intercompany loans receivable
267

 
926

 
69

 
(1,262
)
 

Property, plant and equipment, net

 
533

 
565

 

 
1,098

Goodwill

 
105

 
109

 

 
214

Other intangible assets, net

 
133

 
187

 

 
320

Total assets
$
1,885

 
$
2,345

 
$
1,621

 
$
(3,244
)
 
$
2,607

Liabilities and Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
69

 
$
164

 
$

 
$
233

Due to affiliates

 
37

 
66

 
(103
)
 

Debt payable within one year

 

 
36

 

 
36

Interest payable
25

 

 

 

 
25

Income taxes payable

 

 
4

 

 
4

Accrued payroll and incentive compensation

 
42

 
31

 

 
73

Other current liabilities

 
32

 
75

 

 
107

Total current liabilities
25

 
180

 
376

 
(103
)
 
478

Long-term liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
1,173

 

 

 

 
1,173

Intercompany loans payable
198

 
413

 
651

 
(1,262
)
 

Pension and retirement benefit liabilities

 
153

 
179

 

 
332

Deferred income taxes

 

 
70

 

 
70

Other long-term liabilities

 
13

 
52

 

 
65

Total liabilities
1,396

 
759

 
1,328

 
(1,365
)
 
2,118

Total equity (deficit)
489

 
1,586

 
293

 
(1,879
)
 
489

Total liabilities and equity
$
1,885

 
$
2,345

 
$
1,621

 
$
(3,244
)
 
$
2,607


23



MOMENTIVE PERFORMANCE MATERIALS INC.
DECEMBER 31, 2016
CONDENSED CONSOLIDATING BALANCE SHEETS

 
Parent
 
Combined Guarantor
Subsidiaries
 
Combined Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (including restricted cash of $0, $0 and $4, respectively)
$
39

 
$
1

 
$
188

 
$

 
$
228

Accounts receivable

 
77

 
203

 

 
280

Due from affiliates

 
86

 
41

 
(127
)
 

Inventories:


 


 


 


 


Raw materials

 
71

 
48

 

 
119

Finished and in-process goods