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EX-32.2 - EXHIBIT 32.2 - Momentive Performance Materials Inc.exhibit322-q22017.htm
EX-32.1 - EXHIBIT 32.1 - Momentive Performance Materials Inc.exhibit321-q22017.htm
EX-31.2B - EXHIBIT 31.2B - Momentive Performance Materials Inc.exhibit312bq22017.htm
EX-31.2A - EXHIBIT 31.2A - Momentive Performance Materials Inc.exhibit312aq22017.htm
EX-31.1B - EXHIBIT 31.1B - Momentive Performance Materials Inc.exhibit311bq22017.htm
EX-31.1A - EXHIBIT 31.1A - Momentive Performance Materials Inc.exhibit311aq22017.htm
EX-10.2 - EXHIBIT 10.2 - Momentive Performance Materials Inc.exhibit1022017compplan.htm
EX-10.1 - EXHIBIT 10.1 - Momentive Performance Materials Inc.exhibit1012016compplan.htm



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 June 30, 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



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 August 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 August 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.



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


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)
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents (including restricted cash of $4)
$
132

 
$
228

 
$
132

 
$
228

Accounts receivable (net of allowance for doubtful accounts of $4)
332

 
280

 
332

 
280

Inventories:
 
 
 
 
 
 
 
Raw materials
137

 
119

 
137

 
119

Finished and in-process goods
292

 
271

 
292

 
271

Other current assets
67

 
50

 
67

 
50

Total current assets
960

 
948

 
960

 
948

Investment in unconsolidated entities
20

 
20

 
20

 
20

Deferred income taxes
13

 
9

 
13

 
9

Other long-term assets
10

 
20

 
10

 
20

Property, plant and equipment:
 
 
 
 
 
 
 
Land
77

 
74

 
77

 
74

Buildings
322

 
307

 
322

 
307

Machinery and equipment
1,048

 
959

 
1,048

 
959

 
1,447

 
1,340

 
1,447

 
1,340

Less accumulated depreciation
(323
)
 
(265
)
 
(323
)
 
(265
)
 
1,124

 
1,075

 
1,124

 
1,075

Goodwill
215

 
211

 
215

 
211

Other intangible assets, net
314

 
323

 
314

 
323

Total assets
$
2,656

 
$
2,606

 
$
2,656

 
$
2,606

Liabilities and Equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
276

 
$
238

 
$
276

 
$
238

Debt payable within one year
36

 
36

 
36

 
36

Interest payable
12

 
11

 
12

 
11

Income taxes payable
7

 
8

 
7

 
8

Accrued payroll and incentive compensation
47

 
61

 
47

 
61

Other current liabilities
108

 
123

 
105

 
122

Total current liabilities
486

 
477

 
483

 
476

Long-term liabilities:
 
 
 
 
 
 
 
Long-term debt
1,179

 
1,167

 
1,179

 
1,167

Pension and postretirement benefit liabilities
342

 
341

 
342

 
341

Deferred income taxes
68

 
66

 
68

 
66

Other long-term liabilities
67

 
73

 
67

 
72

Total liabilities
2,142

 
2,124

 
2,139

 
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 June 30, 2017 and December 31, 2016, respectively

 

 

 

Common stock - $0.01 par value; 100 shares authorized; 48 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

 

Additional paid-in capital
866

 
864

 
865

 
863

Accumulated other comprehensive loss
(35
)
 
(76
)
 
(35
)
 
(76
)
Accumulated deficit
(317
)
 
(306
)
 
(313
)
 
(303
)
Total equity
514

 
482

 
517

 
484

Total liabilities and equity
$
2,656

 
$
2,606

 
$
2,656

 
$
2,606


See Notes to Condensed Consolidated Financial Statements

4


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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions, except share and per share data)
 
2017
 
2016
 
2017
 
2016
Net sales
 
$
594

 
$
586

 
$
1,138

 
$
1,122

Cost of sales
 
459

 
468

 
905

 
914

Gross profit
 
135

 
118

 
233

 
208

Costs and expenses:
 

 
 
 
 
 
 
Selling, general and administrative expense
 
85

 
78

 
169

 
159

Research and development expense
 
16

 
17

 
31

 
33

Restructuring and other costs (See Note 3)
 
(5
)
 
4

 

 
9

Other operating expense, net
 
1

 
2

 
4

 
8

Operating income (loss)
 
38

 
17

 
29


(1
)
Interest expense, net (See Note 6)
 
20

 
19

 
39

 
38

Gain on extinguishment of debt (See Note 6)
 

 

 

 
(9
)
Other non-operating (income) expense, net
 
(5
)
 
5

 
(4
)
 
2

Reorganization items, net
 

 

 

 
1

Income (loss) before income taxes and earnings from unconsolidated entities
 
23

 
(7
)
 
(6
)

(33
)
Income tax expense (benefit) (See Note 12)
 
4

 
4

 
5

 
(4
)
Income (loss) before earnings from unconsolidated entities
 
19

 
(11
)
 
(11
)

(29
)
Earnings from unconsolidated entities, net of taxes
 

 
1

 

 
1

Net income (loss)
 
$
19

 
$
(10
)
 
$
(11
)
 
$
(28
)
 
 
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 
 
 
 
Net income (loss) per common share—basic
 
$
0.39

 
$
(0.21
)
 
$
(0.23
)
 
$
(0.58
)
Net income (loss) per common share—diluted
 
$
0.39

 
$
(0.21
)
 
$
(0.23
)
 
$
(0.58
)
Shares used in per-share calculation
 
 
 
 
 
 
 
 
Weighted average common shares outstanding—basic
 
48,117,894

 
48,055,194

 
48,103,386

 
48,041,894

Weighted average common shares outstanding—diluted
 
48,166,189

 
48,055,194

 
48,103,386

 
48,041,894


See Notes to Condensed Consolidated Financial Statements

5


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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 (In millions)
 
2017
 
2016
 
2017
 
2016
Net sales
 
$
594

 
$
586

 
$
1,138

 
$
1,122

Cost of sales
 
459

 
468

 
905

 
914

Gross profit
 
135

 
118

 
233

 
208

Selling, general and administrative expense
 
85

 
78

 
168

 
158

Research and development expense
 
16

 
17

 
31

 
33

Restructuring and other costs (See Note 3)
 
(5
)
 
4

 

 
9

Other operating expense, net
 
1

 
2

 
4

 
8

Operating income
 
38

 
17

 
30

 

Interest expense, net (See Note 6)
 
20

 
19

 
39

 
38

Gain on extinguishment of debt (See Note 6)

 

 

 

 
(9
)
Other non-operating (income) expense, net
 
(5
)
 
5

 
(4
)
 
2

Reorganization items, net
 

 

 

 
1

Income (loss) before income taxes and earnings from unconsolidated entities
 
23

 
(7
)
 
(5
)
 
(32
)
Income tax expense (benefit) (See Note 12)
 
4

 
4

 
5

 
(4
)
Income (loss) before earnings from unconsolidated entities
 
19

 
(11
)
 
(10
)
 
(28
)
Earnings from unconsolidated entities, net of taxes
 

 
1

 

 
1

Net income (loss)
 
$
19

 
$
(10
)
 
$
(10
)
 
$
(27
)

See Notes to Condensed Consolidated Financial Statements


6


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 
MPM HOLDINGS INC.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions)
2017
 
2016
 
2017
 
2016
Net income (loss)
$
19

 
$
(10
)
 
$
(11
)
 
$
(28
)
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation
9

 
21

 
31

 
59

Net prior service credit
(1
)
 

 
10

 
20

Other comprehensive income
8

 
21

 
41

 
79

Comprehensive income
$
27

 
$
11

 
$
30

 
$
51


 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions)
2017
 
2016
 
2017
 
2016
Net income (loss)
$
19

 
$
(10
)
 
$
(10
)
 
$
(27
)
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation
9

 
21

 
31

 
59

Net prior service credit
(1
)
 

 
10

 
20

Other comprehensive income
8

 
21

 
41

 
79

Comprehensive income
$
27

 
$
11

 
$
31

 
$
52


See Notes to Condensed Consolidated Financial Statements

7


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
MPM HOLDINGS INC.
 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Six Months Ended June 30,
 
Six Months Ended June 30,
(In millions)
2017
 
2016
 
2017
 
2016
Cash flows (used in) provided by operating activities
 
 
 
 
 
 
 
Net loss
$
(11
)
 
$
(28
)
 
$
(10
)
 
$
(27
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
75

 
84

 
75

 
84

Unrealized actuarial losses from pensions and other post retirement liabilities
1

 
5

 
1

 
5

Deferred income tax benefit
(9
)
 
(14
)
 
(9
)
 
(14
)
Unrealized foreign currency gains
(4
)
 

 
(4
)
 

Amortization of debt discount
12

 
12

 
12

 
12

Gain on the extinguishment of debt

 
(9
)
 

 
(9
)
Other non-cash adjustments
7

 
7

 
7

 
7

Net change in assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
(43
)
 
(14
)
 
(43
)
 
(14
)
Inventories
(27
)
 
(25
)
 
(27
)
 
(25
)
Accounts payable
36

 
(2
)
 
36

 
(2
)
Income taxes payable
(1
)
 
3

 
(1
)
 
3

Other assets, current and non-current
(4
)
 
(7
)
 
(4
)
 
(7
)
Other liabilities, current and non-current
(44
)
 
42

 
(43
)
 
41

Net cash (used in) provided by operating activities
(12
)
 
54

 
(10
)
 
54

Cash flows used in investing activities
 
 
 
 
 
 
 
Capital expenditures
(77
)
 
(53
)
 
(77
)
 
(53
)
Purchases of intangible assets
(2
)
 
(1
)
 
(2
)
 
(1
)
Dividend from MPM
1

 

 

 

Purchase of a business
(9
)
 

 
(9
)
 

Net cash used in investing activities
(87
)
 
(54
)
 
(88
)
 
(54
)
Cash flows used in financing activities
 
 
 
 
 
 
 
Net short-term debt borrowings

 
1

 

 
1

Repayments of long-term debt

 
(16
)
 

 
(16
)
Dividends paid

 

 
(1
)
 

Net cash used in financing activities


(15
)
 
(1
)
 
(15
)
Decrease in cash and cash equivalents
(99
)
 
(15
)
 
(99
)
 
(15
)
Effect of exchange rate changes on cash and cash equivalents
3


4

 
3

 
4

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

 
217

 
224

 
217

Cash and cash equivalents (unrestricted), end of period
$
128

 
$
206

 
$
128

 
$
206

Supplemental disclosures of cash flow information
 
 
 
 
 
 
 
Cash paid for:
 
 
 
 
 
 
 
Interest
$
28

 
$
28

 
$
28

 
$
28

Income taxes, net of refunds
14

 
7

 
14

 
7

Non-cash investing activity:
 
 
 
 
 
 
 
Capital expenditures included in accounts payable
$
21

 
$
18

 
$
21

 
$
18


See Notes to Condensed Consolidated Financial Statements

8


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
 

 

 

 

 
(11
)
 
(11
)
Other comprehensive income
 

 

 

 
41

 

 
41

Stock-based compensation expense
 

 

 
2

 

 

 
2

Issuance of common stock
 
63,520

 

 

 

 

 

Balance as of June 30, 2017
 
48,121,634

 
$

 
$
866

 
$
(35
)
 
$
(317
)
 
$
514


MOMENTIVE PERFORMANCE MATERIALS INC.
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except share data)
 
 
 
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
 

 

 

 

 
(10
)
 
(10
)
Other comprehensive income
 

 

 

 
41

 

 
41

Stock-based compensation expense
 

 

 
2

 

 

 
2

Capital contribution from parent
 

 

 

 


 

 

Balance as of June 30, 2017
 

 
$

 
$
865

 
$
(35
)
 
$
(313
)
 
$
517


See Notes to Condensed Consolidated Financial Statements

9


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 organo-functional 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.
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.

10


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 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 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. 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. 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 formed an implementation team and is currently evaluating the impact of the standard on its ongoing financial reporting. The Company has not yet selected a transition method for the standard. The Company will provide additional updates in future filings, as appropriate.

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.

11


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 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 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. 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 should 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.

12


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 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 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.

The total charges incurred to date on the above restructuring programs were $14.

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

Restructuring charges
 

Adjustments
 

Payments
 
(1
)
Accrued liability at June 30, 2017
 
$
4


For the three months ended June 30, 2017 and June 30, 2016, the Company recognized other costs of $(5) and $3, respectively. For the six months ended June 30, 2017 and June 30, 2016, the company recognized other costs of $(1) and $6, 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 $10 related to fire damage at our Leverkusen, Germany facility. These are included in “Restructuring and other 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 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).

13


Pursuant to the Shared Services Agreement, during the six months ended June 30, 2017 and 2016, the Company incurred approximately $23 and $29, respectively, of net costs for shared services and Hexion incurred approximately $31 and $39, respectively, of net costs for shared services. Included in the net costs incurred during the six months ended June 30, 2017 and 2016, were net billings from Hexion to the Company of $15 and $16, 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 June 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 six months ended June 30, 2017, the Company sold $6 and $11, 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 six months ended June 30, 2016, the Company sold $6 and $13, 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 June 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 June 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 June 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 June 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 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 six months ended June 30, 2017.

Non-derivative Financial Instruments
The following table summarizes the carrying amount and fair value of the Company’s non-derivative financial instruments:

14


 
 
Carrying Amount
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2017
 
 
 
 
 
 
 
 
 
 
Debt
 
$
1,215

 
$

 
$
1,319

 
$

 
$
1,319

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 June 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 June 30, 2017 were $56, leaving an unused borrowing capacity of $214.
As of June 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 June 30, 2017, the weighted average interest rate of the Company’s long term debt was 4.42%.
Debt outstanding at June 30, 2017 and December 31, 2016 was as follows:
 
June 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 $95 and $105 of unamortized debt discount, respectively)
1,005

 

 
995

 

4.69% Second-Priority Senior Secured Notes due 2022 (includes $28 and $30 of unamortized debt discount, respectively)
174

 

 
172

 

Other Borrowings:
 
 
 
 
 
 
 
China bank loans

 
36

 

 
36

Total debt
$
1,179

 
$
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 $2 and $3 at June 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.

15



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 June 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.

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.

16


The estimated fair values of Stock Options granted and the assumptions used for the Monte Carlo option-pricing model were as follows:
 
 
June 30, 2017
 
June 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 June 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 months and six months ended June 30, 2017 and the three months and six months ended June 30, 2016 with respect to stock options. At both June 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 June 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 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

17


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 six months ended June 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 June 30, 2017 and June 30, 2016 and $2 for both the six months ended June 30, 2017 and June 30, 2016. As of June 30, 2017, unrecognized compensation related to RSU awards was $7 and expense will be recognized over the remaining 1.79 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.


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 six months ended June 30, 2017 and 2016:
 
Pension Benefits
 
Non-Pension Postretirement Benefits
 
Three Months Ended June 30,
 
Three Months Ended June 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
$
1

 
$
3

 
 
$
1

 
$
3

 
$

 
$

 
 
$
1

 
$

Interest cost on projected benefit obligation
3

 
1

 
 
2

 
1

 
1

 

 
 

 

Expected return on assets
(3
)
 

 
 
(2
)
 

 

 

 
 

 

Amortization of prior service credit

 

 
 

 

 
(1
)
 

 
 
(1
)
 

Net periodic benefit cost
$
1

 
$
4

 
 
$
1

 
$
4

 
$

 
$

 
 
$

 
$


 
Pension Benefits
 
Non-Pension Postretirement Benefits
 
Six Months Ended June 30,
 
Six Months Ended June 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
$
3

 
$
6

 
 
$
3

 
$
5

 
$

 
$

 
 
$
1

 
$

Interest cost on projected benefit obligation
5

 
2

 
 
4

 
2

 
1

 

 
 
1

 

Expected return on assets
(5
)
 

 
 
(4
)
 

 

 

 
 

 

Amortization of prior service credit

 

 
 

 

 
(2
)
 

 
 
(1
)
 

Actuarial loss (1)

 


 
 

 

 
1

 

 
 
5

 

Net periodic benefit cost
$
3

 
$
8

 
 
$
3

 
$
7

 
$

 
$

 
 
$
6

 
$


(1)
The actuarial loss on non-pension post-retirement benefits of $1 and $5 during the six months ended June 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.



18


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 June 30, 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.
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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Silicones
$
542

 
$
539

 
$
1,037

 
$
1,039

Quartz
52

 
47

 
101

 
83

Total
$
594

 
$
586

 
$
1,138

 
$
1,122

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

Segment EBITDA:
 
MPM HOLDINGS INC.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Silicones
$
75

 
$
70

 
$
146

 
$
120

Quartz
10

 
6

 
17

 
7

Corporate
(11
)
 
(10
)
 
(20
)
 
(20
)
Total
$
74

 
$
66

 
$
143

 
$
107


 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Silicones
$
75

 
$
70

 
$
146

 
$
120

Quartz
10

 
6

 
17

 
7

Corporate
(11
)
 
(10
)
 
(19
)
 
(19
)
Total
$
74

 
$
66

 
$
144

 
$
108



19


Reconciliation of Net Income (Loss) to Segment EBITDA:
 
MPM HOLDINGS INC.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
 
2016
 
2017
 
 
2016
Net income (loss)
$
19

 
 
$
(10
)
 
$
(11
)
 
 
$
(28
)
Interest expense, net
20

 
 
19

 
39

 
 
38

Income tax expense (benefit)
4

 
 
4

 
5

 
 
(4
)
Depreciation and amortization
37

 
 
42

 
75

 
 
84

Gain on extinguishment and exchange of debt

 
 

 

 
 
(9
)

 
 
 
 
 
 
 
 
 
Items not included in Segment EBITDA:
 
 
 
 
 
 
 
 
 
Non-cash charges and other income and expense
$
(2
)
 
 
$
7

 
$
4

 
 
$
11

Unrealized losses on pension and postretirement benefits

 
 

 
1

 
 
5

Restructuring and other costs
(4
)
 
 
4

 
30

 
 
9

Reorganization items, net

 
 

 

 
 
1

Segment EBITDA
$
74

 
 
$
66

 
$
143

 
 
$
107



 
 

 

 
 

Segment EBITDA:

 
 


 

 
 

Silicones
$
75

 
 
$
70

 
$
146

 
 
$
120

Quartz
10

 
 
6

 
17

 
 
7

Corporate
(11
)
 
 
(10
)
 
(20
)
 
 
(20
)
Total
$
74

 
 
$
66

 
$
143

 
 
$
107


 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
 
2016
 
2017
 
 
2016
Net income (loss)
$
19

 
 
$
(10
)
 
$
(10
)
 
 
$
(27
)
Interest expense, net
20

 
 
19

 
39

 
 
38

Income tax expense (benefit)
4

 
 
4

 
5

 
 
(4
)
Depreciation and amortization
37

 
 
42

 
75

 
 
84

Gain on extinguishment and exchange of debt

 
 

 

 
 
(9
)
 
 
 
 
 
 
 
 
 
 
Items not included in Segment EBITDA:
 
 
 
 
 
 
 
 
 
Non-cash charges and other income and expense
$
(2
)
 
 
$
7

 
$
4

 
 
$
11

Unrealized losses on pension and postretirement benefits

 
 

 
1

 
 
5

Restructuring and other costs
(4
)
 
 
4

 
30

 
 
9

Reorganization items, net

 
 

 

 
 
1

Segment EBITDA
$
74

 
 
$
66

 
$
144

 
 
$
108

 
 
 
 
 
 
 
 
 
 
Segment EBITDA:
 
 
 
 
 
 
 
 
 
Silicones
75

 
 
70

 
146

 
 
120

Quartz
10

 
 
6

 
17

 
 
7

Corporate
(11
)
 
 
(10
)
 
(19
)
 
 
(19
)
Total
$
74

 
 
$
66

 
$
144

 
 
$
108


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

20


For the three and six months ended June 30, 2017 and June 30, 2016, non-cash charges primarily included asset impairment charges, stock based compensation expense and net foreign exchange transaction gains and losses related to certain intercompany arrangements.
For the six months ended June 30, 2017 and June 30, 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 six months ended June 30, 2017 and June 30, 2016, restructuring and other costs included expenses from restructuring and integration. In addition, for the three months ended June 30, 2017, these costs also included a gain related to an insurance reimbursement of $10 related to fire damage at our Leverkusen, Germany facility and for the six months ended June 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 six months ended June 30, 2017 and 2016:
 
Three Months Ended June 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
$
28

 
$
(71
)
 
$
(43
)
 
 
$
20

 
$
(54
)
 
$
(34
)
Other comprehensive income before reclassifications, net of tax (1)

 
9

 
9

 
 

 
21

 
21

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

 
(1
)
 
 

 

 

Net other comprehensive (loss) income
(1
)
 
9

 
8

 
 

 
21

 
21

Ending balance
$
27

 
$
(62
)
 
$
(35
)
 
 
$
20

 
$
(33
)
 
$
(13
)


 
Six Months Ended June 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

 
31

 
43

 
 
20

 
59

 
79

Amounts reclassified from Accumulated other comprehensive income (loss), net of tax
(2
)
 

 
(2
)
 
 

 

 

Net other comprehensive income
10

 
31

 
41

 
 
20

 
59

 
79

Ending balance
$
27

 
$
(62
)
 
$
(35
)
 
 
$
20

 
$
(33
)
 
$
(13
)

(1)
Other comprehensive income related to defined benefit pension and postretirement plans for the six months ended June 30, 2017 and six months ended June 30, 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

21


expenses of $6 and $12, for the six months ended June 30, 2017 and six months ended June 30, 2016, respectively, (see Note 9).

12. Income Taxes
The effective tax rate was 17% for both Momentive and MPM, for the three months ended June 30, 2017 and (57)% for Momentive and MPM, for the three months ended June 30, 2016. The effective tax rate was (83)% and (100)% for Momentive and MPM for the Six Months Ended June 30, 2017. The effective tax rate was 12% and 13% for Momentive and MPM for the six months ended June 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 six months ended June 30, 2017, income taxes included a favorable discrete tax adjustment of $5 and $10, 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 six months ended June 30, 2016, income taxes included a favorable discrete tax adjustment of $0 and $13, respectively, 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 June 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 $11, which could result in a tax obligation of $3, based on currency exchange rates as of June 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.



13. Net Income (Loss) per Share
The following table presents the calculation of basic and diluted net loss per share attributable to Momentive for the three and six months ended June 30, 2017 and 2016:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions, except share data)
2017
 
 
2016
 
2017
 
 
2016
Net income (loss)
$
19

 
 
$
(10
)
 
$
(11
)
 
 
$
(28
)
Weighted average common shares—basic
48,117,894

 
 
48,055,194

 
48,103,386

 
 
48,041,894

Effect of dilutive potential common shares
48,295

 
 

 

 
 

Weighted average shares outstandingdiluted
48,166,189

 
 
48,055,194

 
48,103,386

 
 
48,041,894

Net income (loss) per common share—basic
$
0.39

 
 
$
(0.21
)
 
$
(0.23
)
 
 
$
(0.58
)
Net income (loss) per common share—diluted
$
0.39

 
 
$
(0.21
)
 
$
(0.23
)
 
 
$
(0.58
)
Antidilutive employee share-based awards, excluded

 
 
583,527

 
32,906

 
 
713,224

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.


22




14. Guarantor/Non-Guarantor Subsidiary Financial Information
As of June 30, 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 June 30, 2017 and December 31, 2016, the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016 and the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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.

23



MOMENTIVE PERFORMANCE MATERIALS INC.
JUNE 30, 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)
$
18

 
$
2

 
$
112

 
$

 
$
132

Accounts receivable

 
99

 
233

 

 
332

Due from affiliates

 
74

 
38

 
(112
)
 

Inventories:


 


 


 


 


Raw materials

 
67

 
70

 

 
137

Finished and in-process goods

 
127

 
165

 

 
292

Other current assets


 
9

 
58

 

 
67

Total current assets
18

 
378

 
676

 
(112
)
 
960

Investment in unconsolidated entities
1,612

 
303

 
20

 
(1,915
)
 
20

Deferred income taxes

 

 
13

 

 
13

Other long-term assets

 

 
10

 

 
10

Intercompany loans receivable
302

 
949

 
88

 
(1,339
)
 

Property, plant and equipment, net

 
540

 
584

 

 
1,124

Goodwill

 
105

 
110

 

 
215

Other intangible assets, net

 
129

 
185

 

 
314

Total assets
$
1,932

 
$
2,404

 
$
1,686

 
$
(3,366
)
 
$
2,656

Liabilities and Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
97

 
$
179

 
$

 
$
276

Due to affiliates

 
38

 
74

 
(112
)
 

Debt payable within one year

 

 
36

 

 
36

Interest payable
11

 

 
1

 

 
12

Income taxes payable

 

 
7

 

 
7

Accrued payroll and incentive compensation

 
25

 
22

 

 
47

Other current liabilities

 
31

 
74

 

 
105

Total current liabilities
11

 
191

 
393

 
(112
)
 
483

Long-term liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
1,179

 

 

 

 
1,179

Intercompany loans payable
225

 
435

 
679

 
(1,339
)
 

Pension and retirement benefit liabilities

 
152

 
190

 

 
342

Deferred income taxes

 

 
68

 

 
68

Other long-term liabilities

 
14

 
53

 

 
67

Total liabilities
1,415

 
792

 
1,383

 
(1,451
)
 
2,139

Total equity (deficit)
517

 
1,612

 
303

 
(1,915
)
 
517

Total liabilities and equity
$
1,932

 
$
2,404

 
$
1,686

 
$
(3,366
)
 
$
2,656


24



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

 
118

 
153

 

 
271

Other current assets

 
16

 
34

 

 
50

Total current assets
39

 
369

 
667

 
(127
)
 
948

Investment in unconsolidated entities
1,556

 
257

 
20

 
(1,813
)
 
20

Deferred income taxes

 

 
9

 

 
9

Other long-term assets

 
1

 
19

 

 
20

Intercompany loans receivable
264

 
927

 
51

 
(1,242
)
 

Property, plant and equipment, net

 
526

 
549

 

 
1,075

Goodwill

 
105

 
106

 

 
211

Other intangible assets, net

 
136

 
187

 

 
323

Total assets
$
1,859

 
$
2,321

 
$
1,608

 
$
(3,182
)
 
$
2,606

Liabilities and Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
64

 
$
174

 
$

 
$
238

Due to affiliates

 
41

 
86

 
(127
)
 

Debt payable within one year

 

 
36

 

 
36

Interest payable
11

 

 

 

 
11

Income taxes payable

 

 
8

 

 
8

Accrued payroll and incentive compensation

 
35

 
26

 

 
61

Other current liabilities

 
41

 
81

 

 
122

Total current liabilities
11

 
181

 
411

 
(127
)
 
476

Long-term liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
1,167

 

 

 

 
1,167

Intercompany loans payable
197

 
401

 
644

 
(1,242
)
 

Pension and retirement benefit liabilities

 
168

 
173

 

 
341

Deferred income taxes

 

 
66

 

 
66

Other long-term liabilities

 
15

 
57

 

 
72

Total liabilities
1,375

 
765

 
1,351

 
(1,369
)
 
2,122

Total equity (deficit)
484

 
1,556

 
257

 
(1,813
)
 
484

Total liabilities and equity (deficit)
$
1,859

 
$
2,321

 
$
1,608

 
$
(3,182
)
 
$
2,606



25



MOMENTIVE PERFORMANCE MATERIALS INC.
THREE MONTHS ENDED JUNE 30, 2017
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)

 
Parent
 
Combined Guarantor
Subsidiaries
 
Combined Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
300

 
$
461

 
$
(167
)
 
$
594

Cost of sales

 
245

 
381

 
(167
)
 
459

Gross profit

 
55

 
80

 

 
135

Selling, general and administrative expense

 
46

 
39

 

 
85

Research and development expense

 
10

 
6

 

 
16

Restructuring and other costs

 
2

 
(7
)
 

 
(5
)
Other operating expense, net

 
1

 

 

 
1

Operating (loss) income

 
(4
)
 
42

 

 
38

Interest expense (income), net
18

 
(6
)
 
8

 

 
20

Other non-operating (income) expense, net
(1
)
 
(3
)
 
(1
)
 

 
(5
)
(Loss) income before income taxes and earnings (losses) from unconsolidated entities
(17
)
 
5

 
35

 

 
23

Income tax expense

 

 
4

 

 
4

(Loss) income before earnings (losses) from unconsolidated entities
(17
)
 
5

 
31

 

 
19

Earnings (losses) from unconsolidated entities, net of taxes
36

 
31

 

 
(67
)
 

Net income (loss)
$
19

 
$
36

 
$
31

 
$
(67
)
 
$
19

Comprehensive income (loss)
$
27

 
$
43

 
$
23

 
$
(66
)
 
$
27


26



MOMENTIVE PERFORMANCE MATERIALS INC.
THREE MONTHS ENDED JUNE 30, 2016
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)

 
Parent
 
Combined Guarantor
Subsidiaries
 
Combined Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
280

 
$
467

 
$
(161
)
 
$
586

Cost of sales

 
232

 
397

 
(161
)
 
468

Gross profit

 
48

 
70

 

 
118

Selling, general and administrative expense
1

 
43

 
34

 

 
78

Research and development expense

 
9

 
8

 

 
17

Restructuring and other costs

 
5

 
(1
)
 

 
4

Other operating expense (income), net

 
3

 
(1
)
 

 
2

Operating (loss) income
(1
)
 
(12
)
 
30

 

 
17

Interest expense (income), net
19

 
(13
)
 
13

 

 
19

Other non-operating (income) expense, net

 
(1
)
 
6

 

 
5

(Loss) income before income taxes and earnings (losses) from unconsolidated entities
(20
)
 
2

 
11

 

 
(7
)
Income tax expense

 

 
4

 

 
4

(Loss) income before earnings (losses) from unconsolidated entities
(20
)
 
2

 
7

 

 
(11
)
Earnings (losses) from unconsolidated entities, net of taxes
10

 
8

 
1

 
(18
)
 
1

Net (loss) income
$
(10
)
 
$
10

 
$
8

 
$
(18
)
 
$
(10
)
Comprehensive income (loss)
$
11

 
$
30

 
$
37

 
$
(67
)
 
$
11



27


MOMENTIVE PERFORMANCE MATERIALS INC.
SIX MONTHS ENDED JUNE 30, 2017
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)

 
Parent
 
Combined Guarantor
Subsidiaries
 
Combined Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
561

 
$
905

 
$
(328
)
 
$
1,138

Cost of sales

 
489

 
744

 
(328
)
 
905

Gross profit

 
72

 
161

 

 
233

Selling, general and administrative expense

 
91

 
77

 

 
168

Research and development expense

 
20

 
11

 

 
31

Restructuring and other costs

 
5

 
(5
)
 

 

Other operating income, net

 
3

 
1

 

 
4

Operating (loss) income

 
(47
)
 
77

 

 
30

Interest expense (income), net
36

 
(13
)
 
16

 


 
39

Other non-operating income, net
(1
)
 
(4
)
 
1

 


 
(4
)
Reorganization items, net

 

 

 


 

(Loss) income before income taxes and losses from unconsolidated entities
(35
)
 
(30
)
 
60

 

 
(5
)
Income tax (benefit) expense

 
(6
)
 
11

 


 
5

(Loss) income before earnings (losses) from unconsolidated entities
(35
)
 
(24
)
 
49

 

 
(10
)
Earnings (losses) from unconsolidated entities, net of taxes
25

 
49

 

 
(74
)
 

Net (loss) income
$
(10
)
 
$
25

 
$
49

 
$
(74
)
 
$
(10
)
Comprehensive income (loss)
$
31

 
$
66

 
$
60

 
$
(126
)
 
$
31


28


MOMENTIVE PERFORMANCE MATERIALS INC.
SIX MONTHS ENDED JUNE 30, 2016
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)

 
Parent
 
Combined Guarantor
Subsidiaries
 
Combined Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
536

 
$
880

 
$
(294
)
 
$
1,122

Cost of sales

 
451

 
757

 
(294
)
 
914

Gross profit

 
85

 
123

 

 
208

Selling, general and administrative expense
1

 
98

 
59

 

 
158

Research and development expense

 
20

 
13

 

 
33

Restructuring and other costs

 
4

 
5

 

 
9

Other operating income, net

 
3

 
5

 

 
8

Operating (loss) income
(1
)
 
(40
)
 
41

 

 

Interest expense (income), net
37

 
(25
)
 
26

 

 
38

Other non-operating (income) expense, net
(9
)
 
(1
)
 
3

 

 
(7
)
Reorganization items, net

 
1

 

 

 
1

(Loss) income before income taxes and losses from unconsolidated entities
(29
)
 
(15
)
 
12

 

 
(32
)
Income tax (benefit) expense

 
(11
)
 
7

 

 
(4
)
(Loss) income before earnings (losses) from unconsolidated entities
(29
)
 
(4
)
 
5

 

 
(28
)
Earnings (losses) from unconsolidated entities, net of taxes
2

 
6

 
1

 
(8
)
 
1

Net (loss) income
$
(27
)
 
$
2

 
$
6

 
$
(8
)
 
$
(27
)
Comprehensive income (loss)
$
52

 
$
80

 
$
60

 
$
(140
)
 
$
52




29



MOMENTIVE PERFORMANCE MATERIALS INC.
SIX MONTHS ENDED JUNE 30, 2017
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

 
Parent
 
Combined Guarantor
Subsidiaries
 
Combined Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash flows (used in) provided by operating activities
$
(4
)
 
$
(20
)
 
$
27

 
$
(13
)
 
$
(10
)
Cash flows (used in) provided by investing activities:
 
 
 
 
 
 
\
 
 
Capital expenditures

 
(29
)
 
(48
)
 

 
(77
)
Purchase of business

 
(9
)
 

 

 
(9
)
Purchases of intangible assets

 
(1
)
 
(1
)
 

 
(2
)
Return of capital from subsidiary from sales of accounts receivable

 
23

(a)

 
(23
)
 

 

 
(16
)
 
(49
)
 
(23
)
 
(88
)
Cash flows (used in) provided by financing activities:
 
 
 
 
 
 
 
 
 
Net intercompany loan (repayments) borrowings
(16
)
 
37

 
(21
)
 

 

Common stock dividends paid
(1
)
 

 
(13
)
 
13

 
(1
)
Return of capital to parent from sales of accounts receivable

 

 
(23
)
(a)
23

 

 
(17
)
 
37

 
(57
)
 
36

 
(1
)
(Decrease) increase in cash and cash equivalents
(21
)
 
1

 
(79
)
 

 
(99
)
Effect of exchange rate changes on cash and cash equivalents

 

 
3

 

 
3

Cash and cash equivalents (unrestricted), beginning of period
39

 
1

 
184

 

 
224

Cash and cash equivalents (unrestricted), end of period
$
18

 
$
2

 
$
108

 
$

 
$
128


(a)
During the six months ended June 30, 2017, Momentive Performance Materials USA LLC contributed receivables of $23 to a non-guarantor subsidiary as capital contributions, resulting in a non-cash transaction. During the six months ended June 30, 2017, the non-guarantor subsidiary sold the contributed receivables to certain banks under various supplier financing agreements. The cash proceeds were returned to Momentive Performance Materials USA LLC by the non-guarantor subsidiary as a return of capital. The sale of receivables has been included within cash flows from operating activities on the Combined Non-Guarantor Subsidiaries. The return of the cash proceeds from the sale of receivables has been included as a financing outflow and an investing inflow on the Combined Non-Guarantor Subsidiaries and the Combined Guarantor Subsidiaries, respectively.


30



MOMENTIVE PERFORMANCE MATERIALS INC.
SIX MONTHS ENDED JUNE 30, 2016
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

 
Parent
 
Combined Guarantor
Subsidiaries
 
Combined Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash flows provided by (used in) operating activities
$
74

 
$
(22
)
 
$
39

 
$
(37
)
 
$
54

Cash flows (used in) provided by investing activities:
 
 
 
 
 
 
 
 
 
Capital Expenditures

 
(22
)
 
(31
)
 

 
(53
)
Purchases of intangible assets

 
(1
)
 

 

 
(1
)
Return of capital from subsidiary from sales of accounts receivable

 
31

(a)

 
(31
)
 

 

 
8

 
(31
)
 
(31
)
 
(54
)
Cash flows (used in) provided by financing activities:
 
 
 
 
 
 
 
 
 
Net short-term debt (repayments) borrowings
(3
)
 

 
4

 

 
1

Repayments of long-term debt
(16
)
 

 

 

 
(16
)
Net intercompany loan (repayments) borrowings
(42
)
 
42

 

 

 

Common stock dividends paid

 
(29
)
 
(8
)
 
37

 

Return of capital to parent from sales of accounts receivable

 

 
(31
)
(a)
31

 

 
(61
)
 
13

 
(35
)
 
68

 
(15
)
Decrease in cash and cash equivalents
13

 
(1
)
 
(27
)
 

 
(15
)
Effect of exchange rate changes on cash and cash equivalents

 

 
4

 

 
4

Cash and cash equivalents (unrestricted), beginning of period
57

 
2

 
158

 

 
217

Cash and cash equivalents (unrestricted), end of period
$
70

 
$
1

 
$
135

 
$

 
$
206


(a)
During the six months ended June 30, 2016, Momentive Performance Materials USA LLC contributed receivables of $31 to a non-guarantor subsidiary as capital contributions, resulting in a non-cash transaction. During the six months ended June 30, 2016, the non-guarantor subsidiary sold the contributed receivables to certain banks under various supplier financing agreements. The cash proceeds were returned to Momentive Performance Materials USA LLC by the non-guarantor subsidiary as a return of capital. The sale of receivables has been included within cash flows from operating activities on the Combined Non-Guarantor Subsidiaries. The return of the cash proceeds from the sale of receivables has been included as a financing outflow and an investing inflow on the Combined Non-Guarantor Subsidiaries and the Combined Guarantor Subsidiaries, respectively.


31


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)    


The following commentary should be read in conjunction with the condensed consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Momentive’s and MPM’s most recent Annual Report on Form 10-K and amendments thereto.
Within the following discussion, unless otherwise stated, “the second quarter of 2017” refers to the three months ended June 30, 2017, and “the second quarter of 2016” refers to the three months ended June 30, 2016.
Forward-Looking and Cautionary Statements
Certain statements in this report, including without limitation, certain statements made under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements within the meaning of and made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements related to our transformation and restructuring activities, growth and productivity initiatives, anticipated cost savings, growth, and market recovery, and competitiveness. In addition, our management may from time to time make oral forward-looking statements. All statements, other than statements of historical facts, are forward-looking statements. Forward-looking statements may be identified by the words “believe,” “expect,” “anticipate,” “project,” “plan,” “estimate,” “may,” “will,” “could,” “should,” “seek” or “intend” and similar expressions. Forward-looking statements reflect our current expectations and assumptions regarding our business, the economy and other future events and conditions and are based on currently available financial, economic and competitive data and our current business plans. Actual results could vary materially depending on risks and uncertainties that may affect our operations, markets, services, prices and other factors as discussed in the Risk Factors section of our most recent Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”). While we believe our assumptions are reasonable, we caution you against relying on any forward-looking statements as 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. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: a weakening of global economic and financial conditions, interruptions in the supply of or increased cost of raw materials, changes in governmental regulations or interpretations thereof and related compliance and litigation costs, adverse rulings in litigation, significant work stoppages, difficulties with the realization of cost savings in connection with our global restructuring, transformation, and strategic initiatives, including transactions with our affiliate, Hexion Inc., pricing actions by our competitors that could affect our operating margins, and our ability to obtain additional financing. For a more detailed discussion of these and other risk factors, see the “Risk Factors” section of Momentive’s and MPM’s most recent Annual Report on Form 10-K and in our other SEC filings. All forward-looking statements are expressly qualified in their entirety by this cautionary notice. The forward-looking statements made by us speak only as of the date on which they are made. Factors or events that could cause our actual results to differ may emerge from time to time. 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.
Overview and Outlook
Business Overview
We are one of the world’s largest producers of silicones, silicone derivatives and silanes 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, transportation, healthcare, personal care, electronic, consumer and agricultural uses. Silicones and silanes are generally used as an additive to a wide variety of end products in order to provide or enhance certain of their attributes, such as resistance (heat, 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, polyurethane foam products, cosmetics and tires. Due to the versatility and high-performance characteristics of silicones and silanes, they are increasingly being used as a substitute for other materials. Our Quartz business manufactures quartz, specialty ceramics and crystal products 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 Silicones and Quartz businesses in over 100 countries. Our customers include leading companies in their respective industries.
Unless otherwise noted, references to “we,” “us,” “our” or the “Company” refer collectively herein 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.
Six Months Ended June 30, 2017 Overview
Net Sales—Net sales increased approximately $16 in the first half of 2017 as compared to the first half 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 half of 2017, net loss decreased by $17 for both Momentive and MPM, compared to the first half of 2016, primarily due to the increase in gross profit and the gain recognition from an insurance claim, offset by a gain

32


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)    (Continued)

on extinguishment of debt not recurring during the first half of 2017, an increase in selling, general and administrative expense, and an increase in income tax expense.
Segment EBITDA—Segment EBITDA increased by $36 in the first half of 2017 for both Momentive and MPM, as compared to the first half 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 the silicones segment. In addition, the quartz business segment EBITDA improved by $10 due to improved sales, cost controls and substantially improved manufacturing efficiencies.
Short-term Outlook
As we look into the remaining quarters 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 these remaining quarters to be supported by improving global macroeconomic conditions and further bolstered by our recent acquisition of Sea Lion Technology. 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. Our third quarter results will be impacted by the intentional delays in our turnarounds to help rebalance our supply chain after the work stoppage at our Waterford, NY facility.
We are continuing to leverage our research and development capabilities and invest in high-growth product lines and geographical regions, positioning the Company for long-term success. We are also focused on gaining 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 in annual structural cost reduction initiatives through our previously announced global restructuring program, which have begun delivering significant savings. Cumulatively through June 30, 2017, Momentive has achieved approximately $38 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. We expect net working capital to be a source of cash for the remainder of 2017.
Matters Impacting Comparability of Results
Other Comprehensive Income
Our other comprehensive income is significantly impacted by foreign currency translation and re-measurement of actuarial gains and losses. 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. Actuarial gains and losses resulting from pension and postretirement liability re-measurements are recognized immediately in the unaudited Condensed Consolidated Statements of Operations. 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.
    

33


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)    (Continued)

Results of Operations
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
MPM HOLDINGS INC.
 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
2017
 
 
2016
 
2017
 
 
2016
 
$
 
% of Net Sales
 
 
$
 
% of Net Sales
 
$
 
% of Net Sales
 
 
$
 
% of Net Sales
Net sales
$
594

 
100
 %
 
 
$
586

 
100
 %
 
$
594

 
100
 %
 
 
$
586

 
100
 %
Cost of sales
459

 
77
 %
 
 
468

 
80
 %
 
459

 
77
 %
 
 
468

 
80
 %
Gross profit
135

 
23
 %
 
 
118

 
20
 %
 
135

 
23
 %
 
 
118

 
20
 %
Selling, general and administrative expense
85

 
15
 %
 
 
78

 
13
 %
 
85

 
15
 %
 
 
78

 
13
 %
Research and development expense
16

 
3
 %
 
 
17

 
3
 %
 
16

 
3
 %
 
 
17

 
3
 %
Restructuring and other costs
(5
)
 
(1
)%
 
 
4

 
1
 %
 
(5
)
 
(1
)%
 
 
4

 
1
 %
Other operating expense, net
1

 
 %
 
 
2

 
 %
 
1

 
 %
 
 
2

 
 %
Operating income
38

 
6
 %
 
 
17

 
3
 %
 
38

 
6
 %
 
 
17

 
3
 %
Interest expense, net
20

 
3
 %
 
 
19

 
3
 %
 
20

 
3
 %
 
 
19

 
3
 %
Gain on extinguishment of debt

 
 %
 
 

 
 %
 

 
 %
 
 

 
 %
Other non-operating (income) expense, net
(5
)
 
(1
)%
 
 
5

 
1
 %
 
(5
)
 
(1
)%
 
 
5

 
1
 %
Reorganization items, net

 
 %
 
 

 
 %
 

 
 %
 
 

 
 %
Total non-operating expense
15

 
2
 %
 
 
24

 
4
 %
 
15

 
2
 %
 
 
24

 
4
 %
Income (loss) before income taxes and earnings from unconsolidated entities
23

 
4
 %
 
 
(7
)
 
(1
)%
 
23

 
4
 %
 
 
(7
)
 
(1
)%
Income tax expense
4

 
1
 %
 
 
4

 
1
 %
 
4

 
1
 %
 
 
4

 
1
 %
Income (loss) before earnings from unconsolidated entities
19

 
3
 %
 
 
(11
)
 
(2
)%
 
19

 
3
 %
 
 
(11
)
 
(2
)%
Earnings from unconsolidated entities, net of taxes

 
 %
 
 
1

 
 %
 

 
 %
 
 
1

 
 %
Net Income (loss)
$
19

 
3
 %
 
 
$
(10
)
 
(2
)%
 
$
19

 
3
 %
 
 
$
(10
)
 
(2
)%
Other comprehensive income
$
8

 
 
 
 
$
21

 
 
 
$
8

 
 
 
 
$
21

 
 
Three Months Ended June 30, 2017 vs. Three Months Ended June 30, 2016
Net Sales
Net sales in the second quarter of 2017 increased $8, or 1%, compared to the second quarter of 2016. This increase was primarily due to a favorable price/mix shift of approximately $25, which was offset by a volume decrease of approximately $12, both driven by our intentional mix shift towards higher-margin products versus less profitable commodity products and unfavorable foreign exchange rate fluctuations of $5.

34


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)    (Continued)

Operating income
In the second quarter of 2017, operating income increased by $21 for both Momentive and MPM, compared to the second quarter of 2016. Cost of sales decreased by $9 for both Momentive and MPM, compared to the second quarter of 2016 primarily due to savings related to favorable exchange rate fluctuations. Selling, general and administrative expense increased by $7 for both Momentive and MPM, compared to the second quarter of 2016 primarily due to the impact of a merit increase implemented in 2016, timing of services, and unfavorable exchange rate fluctuations of $2. Research and development expense for the second quarter of 2017 decreased by $1 for both Momentive and MPM compared to the second quarter of 2016 primarily related to the timing of new projects. Restructuring and other costs decreased by $9 for both Momentive and MPM, mainly due to the gain related to an insurance reimbursement of $10 during the quarter ended June 30, 2017, related to fire damage at our Leverkusen, Germany facility. Other operating expense decreased by $1 for both Momentive and MPM, during the second quarter of 2017 compared to the second quarter of 2016, mainly due to the non-recurrence of impairment of certain assets in 2017.
Non-Operating Expense
In the second quarter of 2017, total non-operating expense decreased by $9 compared to the second quarter of 2016 for both Momentive and MPM, mainly due to favorable foreign exchange fluctuations on certain intercompany arrangements during the second quarter of 2017.
Income Tax Expense
The effective tax rate was 17% for both Momentive and MPM, for the three months ended June 30, 2017 and (57)% 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, and tax impact of recognition of net prior service benefit following certain plan provision changes (see Note 11), legislative changes in Italy and the resolution of certain tax matters in non-U.S. jurisdictions.
For the three months ended June 30, 2017, income taxes included favorable discrete tax adjustments of $5 pertaining to legislative changes in Italy 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 June 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 for deferred taxes on gains of $11, which could result in a tax obligation of $3, based on currency exchange rates as of June 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 second quarter of 2017, foreign currency translation positively impacted other comprehensive income by $9 for both Momentive and MPM, primarily due to the impact of the weakening of the U.S. dollar against other currencies. Also, for the first quarter of 2017, amortization of net prior service benefit following certain plan provision changes also impacted other comprehensive income by $1.
In the second quarter of 2016, foreign currency translation positively impacted other comprehensive income by $21 for both Momentive and MPM, primarily due to the impact of the weakening of the U.S dollar against the Japanese yen and the Euro.

35


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)    (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
MPM HOLDINGS INC.
 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
 
2016
 
2017
 
 
2016
 
$
 
% of Net Sales
 
 
$
 
% of Net Sales
 
$
 
% of Net Sales
 
 
$
 
% of Net Sales
Net sales
$
1,138

 
100
 %
 
 
$
1,122

 
100
 %
 
$
1,138

 
100
 %
 
 
$
1,122

 
100
 %
Cost of sales
905

 
80
 %
 
 
914

 
81
 %
 
905

 
80
 %
 
 
914

 
81
 %
Gross profit
233

 
20
 %
 
 
208

 
19
 %
 
233

 
20
 %
 
 
208

 
19
 %
Selling, general and administrative expense
169

 
14
 %
 
 
159

 
14
 %
 
168

 
14
 %
 
 
158

 
14
 %
Research and development expense
31

 
3
 %
 
 
33

 
3
 %
 
31

 
3
 %
 
 
33

 
3
 %
Restructuring and other costs

 
 %
 
 
9

 
1
 %
 

 
 %
 
 
9

 
1
 %
Other operating expense
4

 
 %
 
 
8

 
1
 %
 
4

 
 %
 
 
8

 
1
 %
Operating income (loss)
29

 
3
 %
 
 
(1
)
 
 %
 
30

 
3
 %
 
 

 
 %
Interest expense, net
39

 
4
 %
 
 
38

 
3
 %
 
39

 
4
 %
 
 
38

 
3
 %
Gain on extinguishment of debt

 
 %
 
 
(9
)
 
(1
)%
 

 
 %
 
 
(9
)
 
(1
)%
Other non-operating (income) expense, net
(4
)
 
 %
 
 
2

 
 %
 
(4
)
 
 %
 
 
2

 
 %
Reorganization items, net

 
 %
 
 
1

 
 %
 

 
 %
 
 
1

 
 %
Total non-operating expense
35

 
4
 %
 
 
32

 
2
 %
 
35

 
4
 %
 
 
32

 
2
 %
Loss before income taxes and earnings from unconsolidated entities
(6
)
 
(1
)%
 
 
(33
)
 
(2
)%
 
(5
)
 
(1
)%
 
 
(32
)
 
(2
)%
Income tax expense
 (benefit)
5

 
 %
 
 
(4
)
 
 %
 
5

 
 %
 
 
(4
)
 
 %
Loss before earnings from unconsolidated entities
(11
)
 
(1
)%
 
 
(29
)
 
(2
)%
 
(10
)
 
(1
)%
 
 
(28
)
 
(2
)%
Earnings from unconsolidated entities, net of taxes

 
 %
 
 
1

 
 %
 

 
 %
 
 
1

 
 %
Net loss
$
(11
)
 
(1
)%
 
 
$
(28
)
 
(2
)%
 
$
(10
)
 
(1
)%
 
 
$
(27
)
 
(2
)%
Other comprehensive income
$
41

 
 
 
 
$
79

 
 
 
$
41

 
 
 
 
$
79

 
 

Six Months Ended June 30, 2017 vs. Six Months Ended June 30, 2016
Net Sales
Net sales in the first half of 2017 increased $16 or 1%, compared to the first half of 2016. This increase was primarily due to a favorable price/mix shift of $42, which was offset by a volume decrease of approximately $19, driven by our intentional mix shift towards higher-margin products versus less profitable commodity products and unfavorable exchange rate fluctuations of approximately $7.

36


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)    (Continued)

Operating Income
During the first half of 2017, operating income increased by $30 for both Momentive and MPM, compared to the first half of 2016. Cost of sales decreased by $9 compared to the first half of 2016 for both Momentive and MPM, primarily due to raw material cost deflation of $20 and $15 of savings related to favorable exchange rate fluctuations offset by $26 of higher net processing costs driven by the work stoppage in the first quarter of 2017. Selling, general and administrative expense increased by $10 for both Momentive and MPM, compared to the first half of 2016, primarily due to the impact of a merit increase implemented in 2016, timing of services, and unfavorable exchange rate fluctuations of $3 offset by lower actuarial re-measurement loss of $4 related to our pension and post retirement liabilities. Research and development expense for the first half of 2017 decreased by $2 compared to the first half of 2016 for both Momentive and MPM, primarily related to the timing of new projects. Restructuring and other costs decreased by $9 for both Momentive and MPM, mainly due to the gain related to an insurance reimbursement of $10, during the quarter ended June 30, 2017, related to fire damage at our Leverkusen, Germany facility. Other operating expense decreased by $4 for both Momentive and MPM, mainly due to the non-recurrence of impairment of certain assets in 2017.
Non-Operating Expense
In the first half of 2017, total non-operating expense increased by $3 compared to the first half of 2016 for both Momentive and MPM. The increase was primarily due to the gain on extinguishment of Second Lien Notes not recurring in 2017.
Income Tax Expense
The effective tax rate was (83)% and (100)% for Momentive and MPM, respectively, for the six months ended June 30, 2017 and 12% and 13% 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), and legislative changes in Italy and Japan.
For the six months ended June 30, 2017, income taxes included favorable discrete tax adjustments of $10 pertaining to benefits curtailment, legislative changes in Italy and Japan, and the resolution of certain tax matters in non-U.S. jurisdictions. For the six months ended June 30, 2016, income taxes included favorable discrete tax adjustments of $13 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 June 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 $11, which could result in a tax obligation of $3, based on currency exchange rates as of June 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 half of 2017, foreign currency translation positively impacted other comprehensive income by $31 for both Momentive and MPM, primarily due to the impact of the weakening of the U.S. dollar against the Japanese yen and the euro. Also, for the first half of 2017, pension and postretirement benefit adjustments positively impacted other comprehensive income by $10, primarily due to the recognition of net prior service benefit related to the effect of certain plan provision changes.
In the first half of 2016, foreign currency translation negatively impacted other comprehensive loss by $59 for both Momentive and MPM, primarily due to the impact of the weakening of the U.S. dollar against the Japanese yen and the euro. Also, for the first half of 2016, pension and postretirement benefit adjustments positively impacted other comprehensive income by $20, 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.

Results of Operations by Segment
Our segments are based on the products that we offer and the markets that we serve. At June 30, 2017, we had two reportable segments: Silicones and Quartz.
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 the profitability measure used to set management and executive incentive compensation goals. Segment EBITDA should not be considered a substitute for net income (loss) or other results reported in accordance with U.S. GAAP. Segment EBITDA may not be comparable to similarly titled measures reported by other companies.

37


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)    (Continued)


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
 
2016
 
2017
 
 
2016
Net Sales(1):
 
 
 
 
 
 
 
 
 
Silicones
$
542

 
 
$
539

 
$
1,037

 
 
$
1,039

Quartz
52

 
 
47

 
101

 
 
83

Total
$
594

 
 
$
586

 
$
1,138

 
 
$
1,122

(1)
Inter-segment sales are not significant and, as such, are eliminated within the selling segment.
 
MPM HOLDINGS INC.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
 
2016
 
2017
 
 
2016
Segment EBITDA:
 
 
 
 
 
 
 
 
 
Silicones
$
75

 
 
$
70

 
$
146

 
 
$
120

Quartz
10

 
 
6

 
17

 
 
7

Corporate
(11
)
 
 
(10
)
 
(20
)
 
 
(20
)
Total
$
74

 
 
$
66

 
$
143

 
 
$
107


 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
 
2016
 
2017
 
 
2016
Segment EBITDA:
 
 
 
 
 
 
 
 
 
Silicones
$
75

 
 
$
70

 
$
146

 
 
$
120

Quartz
10

 
 
6

 
17

 
 
7

Corporate
(11
)
 
 
(10
)
 
(19
)
 
 
(19
)
Total
$
74

 
 
$
66

 
$
144

 
 
$
108


38


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)    (Continued)

Segment Results
Three Months Ended June 30, 2017 vs. Three Months Ended June 30, 2016
Following is an analysis of the percentage change in sales by business from the three months ended June 30, 2016 to the three months ended June 30, 2017:
 
Volume
 
Price/Mix
 
Currency
Translation
 
Total
Silicones
(3
)%
 
5
%
 
(1
)%
 
1
%
Quartz
11
 %
 
%
 
 %
 
11
%
Silicones
Net sales in the second quarter of 2017 increased $3, or 1%, compared to the second quarter of 2016. This increase was primarily due to favorable price/mix shift of approximately $25 driven by intentional mix shift towards higher-margin products versus less profitable commodity products, which was offset by volume decrease of $17 related to our actions to migrate our sales portfolio into high growth specialty markets and $5 due to the strengthening of the U.S. dollar.
Segment EBITDA in the second quarter of 2017 increased by $5 to $75 compared to the second quarter of 2016. This increase was primarily due to improved demand in automotive, consumer products and electronic markets, production efficiencies and raw material deflation.


Quartz
Net sales in the second quarter of 2017 increased $5, or 11%, compared to the second quarter of 2016. The increase was primarily due to volume increase of $5 mainly due to improved market conditions in the electronics market.

Segment EBITDA in the second quarter of 2017 increased by $4 to $10 compared to the second quarter of 2016. This increase was primarily due to the sales volume increase, cost controls, and improved manufacturing efficiencies.

Corporate
Corporate charges increased by $1 in the second quarter of 2017 for both Momentive and MPM, as compared to the second quarter of 2016.
Six Months Ended June 30, 2017 vs. Six Months Ended June 30, 2016
Following is an analysis of the percentage change in sales by business from the six months ended June 30, 2016 to the six months ended June 30, 2017:
 
Volume
 
Price/Mix
 
Currency
Translation
 
Total
Silicones
(3
)%
 
4
%
 
(1
)%
 
%
Quartz
22
 %
 
%
 
 %
 
22
%
Silicones
Net sales in the first half of 2017 decreased $2, compared to the first half of 2016. This decrease was primarily due to volume decrease of $37 related to our actions to migrate our sales portfolio into high growth specialty markets and $7 due to the strengthening of the U.S. dollar, offset by approximately $42 driven by intentional mix/price shift towards higher-margin products versus less profitable commodity products.
Segment EBITDA in the first half of 2017 increased by $26 to $146 compared to the first half of 2016. This increase was primarily due to improved demand in automotive, consumer products, and electronic markets, and improved production efficiencies and raw material deflation.

Quartz
Net sales in the first half of 2017 increased $18, or 22%, compared to the first half of 2016. The increase was primarily due to volume increase of $18 mainly due to improved market conditions in the electronics market.
Segment EBITDA in the first half of 2017 decreased by $10 to $17 compared to the first half of 2016. This increase was primarily due to the sales volume increase, cost controls, and improved manufacturing efficiencies.

39


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)    (Continued)


Reconciliation of Net Income (Loss) to Segment EBITDA:
 
MPM HOLDINGS INC.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
 
2016
 
2017
 
 
2016
Net income (loss)
$
19

 
 
$
(10
)
 
$
(11
)
 
 
$
(28
)
Interest expense, net
20

 
 
19

 
39

 
 
38

Income tax expense (benefit)
4

 
 
4

 
5

 
 
(4
)
Depreciation and amortization
37

 
 
42

 
75

 
 
84

Gain on extinguishment and exchange of debt

 
 

 

 
 
(9
)
 
 
 
 
 
 
 
 
 
 
Items not included in Segment EBITDA:
 
 
 
 
 
 
 
 
 
Non-cash charges and other income and expense
$
(2
)
 
 
$
7

 
$
4

 
 
$
11

Unrealized losses on pension and postretirement benefits

 
 

 
1

 
 
5

Restructuring and other costs
(4
)
 
 
4

 
30

 
 
9

Reorganization items, net

 
 

 

 
 
1

Segment EBITDA
$
74

 
 
$
66

 
$
143

 
 
$
107

 
 
 
 
 
 
 
 
 
 
Segment EBITDA:
 
 
 
 
 
 
 
 
 
Silicones
$
75

 
 
$
70

 
$
146

 
 
$
120

Quartz
10

 
 
6

 
17

 
 
7

Corporate
(11
)
 
 
(10
)
 
(20
)
 
 
(20
)
Total
$
74

 
 
$
66

 
$
143

 
 
$
107


 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
 
2016
 
2017
 
 
2016
Net income (loss)
$
19

 
 
$
(10
)
 
$
(10
)
 
 
$
(27
)
Interest expense, net
20

 
 
19

 
39

 
 
38

Income tax expense (benefit)
4

 
 
4

 
5

 
 
(4
)
Depreciation and amortization
37

 
 
42

 
75

 
 
84

Gain on extinguishment and exchange of debt

 
 

 

 
 
(9
)
 
 
 
 
 
 
 
 
 
 
Items not included in Segment EBITDA:
 
 
 
 
 
 
 
 
 
Non-cash charges and other income and expense
$
(2
)
 
 
$
7

 
$
4

 
 
$
11

Unrealized losses on pension and postretirement benefits

 
 

 
1

 
 
5

Restructuring and other costs
(4
)
 
 
4

 
30

 
 
9

Reorganization items, net

 
 

 

 
 
1

Segment EBITDA
$
74

 
 
$
66

 
$
144

 
 
$
108

 
 
 
 
 
 
 
 
 
 
Segment EBITDA:
 
 
 
 
 
 
 
 
 
Silicones
$
75

 
 
$
70

 
146

 
 
120

Quartz
10

 
 
6

 
17

 
 
7

Corporate
(11
)
 
 
(10
)
 
(19
)
 
 
(19
)
Total
$
74

 
 
$
66

 
$
144

 
 
$
108


40


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)    (Continued)

Items Not Included in Segment EBITDA
For the three and six months ended June 30, 2017 and June 30, 2016, non-cash charges primarily included asset impairment charges, stock based compensation expense and net foreign exchange transaction gains and losses related to certain intercompany arrangements.
For the six months ended June 30, 2017 and June 30, 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 six months ended June 30, 2017 and June 30, 2016, restructuring and other costs included expenses from restructuring and integration. In addition, for the three months ended June 30, 2017, these costs also included a gain related to an insurance reimbursement of $10 related to fire damage at our Leverkusen, Germany facility and for the six months ended June 30, 2017, these costs also included costs arising from the work stoppage inclusive of unfavorable manufacturing variances at our Waterford, NY facility.




Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash flow 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 June 30, 2017, we had $1,215 of outstanding indebtedness. In addition, at June 30, 2017, we had $342 in liquidity, consisting of the following:
$128 of unrestricted cash and cash equivalents (of which $108 is maintained in foreign jurisdictions); and
$214 of availability under the ABL Facility ($270 borrowing base, less $56 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).
A summary of the components of our net working capital (defined as accounts receivable and inventories less accounts payable) at June 30, 2017 and December 31, 2016 is as follows:
 
June 30, 2017
 
% of LTM Net Sales
 
December 31, 2016
 
% of LTM Net Sales
Accounts receivable
$
332

 
15
 %
 
$
280

 
13
 %
Inventories
429

 
19
 %
 
390

 
17
 %
Accounts payable
(276
)
 
(12
)%
 
(238
)
 
(11
)%
Net working capital
$
485

 
22
 %
 
$
432

 
19
 %
The increase in net working capital of $53 from December 31, 2016, was due to an increase in accounts receivable because of timing of sales in the period and increased inventory due to the work stoppage at our Waterford, NY facility and normal seasonality, offset by an increase in accounts payable due to strategic efforts to improve payment terms.
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 June 30, 2017, we had no outstanding borrowings under the ABL Facility.
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.

41


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)    (Continued)

Sources and Uses of Cash
Following are highlights from our unaudited Condensed Consolidated Statements of Cash Flows:
 
MPM HOLDINGS INC.
 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
 
2016
 
2017
 
 
2016
(Uses) sources of cash:
 
 
 
 
 
 
 
 
 
Operating activities
$
(12
)
 
 
$
54

 
$
(10
)
 
 
$
54

Investing activities
(87
)
 
 
(54
)
 
(88
)
 
 
(54
)
Financing activities

 
 
(15
)
 
(1
)
 
 
(15
)
Effect of exchange rates on cash flows
3

 
 
4

 
3

 
 
4

Net decrease in cash and cash equivalents
$
(96
)
 
 
$
(11
)
 
$
(96
)
 
 
$
(11
)

Operating Activities
During the first half of 2017, the Company’s operations used $12 and $10 of cash for Momentive and MPM, respectively. Net loss of $11 and $10 for both Momentive and MPM, included $82 of net non-cash expense items, of which $75 was for depreciation and amortization, $12 was for the amortization of debt discount, $4 for loss on sale of certain assets, $2 for stock based compensation expense and $1 for unrealized actuarial loss from other post retirement liabilities. These were offset by a $9 change in deferred tax provisions and $4 related to unrealized foreign exchange gains. Net working capital used $34 of cash for both Momentive and MPM, primarily, due to increases in accounts receivable and inventories of $43 and $27, respectively, offset by a decrease in accounts payable of $36, 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 half of 2016, the Company’s operations provided $54 of cash, Net loss of $28 and $27 for Momentive and MPM, respectively, included $85 of net non-cash items of which $84 was for depreciation and amortization, $12 was for amortization of debt discount, and $5 of unrealized actuarial loss from other post retirement liabilities. These were partially offset by a $14 change in deferred tax provisions and $9 related to a gain from extinguishment of our Second Lien Notes. Net working capital used $41 of cash for both Momentive and MPM, respectively, primarily due to increases in inventory of $25 and accounts receivable of $14, and a decrease in accounts payable of $2. Changes in other assets and liabilities, driven by timing of when items were expensed versus paid, which primarily included interest expense, pension plan contributions and taxes.
Investing Activities
During the first half of 2017, investing activities used $77 of cash on ongoing capital expenditures related to growth, environmental, health and safety compliance and capital improvement projects and $9 related to our acquisition of a business. We are on track in maintaining the fiscal year 2017 capital expenditure budget of approximately $161.
During the first half of 2016 investing activities used $54 of cash on ongoing capital expenditures related to growth, environmental, health and safety compliance, capital improvement and maintenance projects.
Financing Activities
During the first half of 2017, Momentive did not have any financing activity and MPM’s financing activity comprised of dividend to Momentive.
During the first half of 2016, Momentive and MPM’s financing activities used $15 of cash, which primarily related to the extinguishment of $29 aggregate principal amount of our Second Lien Notes.
At June 30, 2017, there were $56 in outstanding letters of credit and no outstanding borrowings under our ABL Facility, leaving unused borrowing capacity of $214.
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 and 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

42


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)    (Continued)

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 MPM’s 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 MPM’s 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. 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, MPM is 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 MPM’s notes contain an incurrence test that restricts MPM’s ability to incur indebtedness or make investments, among other actions, if MPM does 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 June 30, 2017, MPM was in compliance with all covenants under the credit agreement governing the ABL Facility and under the indentures governing the notes.
Adjusted EBITDA is defined as EBITDA adjusted for certain non-cash and certain non-recurring items and other adjustments calculated on a pro-forma basis, including the expected future cost savings from business optimization or other programs and the expected future impact of acquisitions, in each case as determined under the governing debt instrument. 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 U.S. GAAP. Adjusted EBITDA is not a measure of financial condition, liquidity or profitability, and should not be considered as an alternative to net income (loss) determined in accordance with U.S. GAAP or operating cash flows determined in accordance with U.S. GAAP. Additionally, 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.

43


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in millions)    (Continued)

The following table reconciles 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 ABL Facility for the period presented:
 
June 30, 2017
 
LTM Period
Net loss
$
(144
)
Interest expense, net
77

Income tax expense
27

Depreciation and amortization
176

EBITDA
136

Adjustments to EBITDA
 
Restructuring and other costs(a)
92

Reorganization items, net(b)
1

Unrealized gains losses on pension and postretirement benefits (c)
29

Pro forma cost savings (d)
10

Acquisitions (e)
2

Non-cash charges (f)
18

Exclusion of Unrestricted Subsidiary results(g)
(31
)
Adjusted EBITDA
$
257

Adjusted EBITDA less Capital Expenditures and Cash Taxes
$
91

Pro forma fixed charges(h)
$
55

Ratio of Adjusted EBITDA to Fixed Charges(i)
4.67

Pro forma Fixed Charge Coverage Ratio(j)
1.65


(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.
(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)
Reflects the exclusion of the EBITDA of our subsidiaries that are designated as Unrestricted Subsidiaries under the ABL Facility and the indentures that govern our notes.
(h)
Reflects pro forma interest expense based on outstanding indebtedness and interest rates at June 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 2.0 to 1.0. As of June 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 borrowing base and, (b) $27 million, then the FCCR must be greater than 1.0 to 1.

Recently Issued Accounting Standards
The nature and impact of recent accounting pronouncements is discussed in Note 2 to our condensed consolidated financial statements in this Form 10-Q, which is incorporated herein by reference.


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Item 3.
Quantitative and Qualitative Disclosures about Market Risks
Information regarding our market risk as of December 31, 2016 was provided in Momentive’s and MPM’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes to such disclosure during the six months ended June 30, 2017.

Item 4.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures    
As of the end of the period covered by this Quarterly Report on Form 10-Q, Momentive, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, our President and Chief Executive Officer, and Chief Financial Officer concluded that Momentive’s disclosure controls and procedures were effective as of June 30, 2017.
As of the end of the period covered by this Quarterly Report on Form 10-Q, MPM, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, our President and Chief Executive Officer, and Chief Financial Officer concluded that MPM’s disclosure controls and procedures were effective as of June 30, 2017.
Changes in Internal Control Over Financial Reporting
There have been no changes in Momentive’s internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
There have been no changes in MPM’s internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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Part II — OTHER INFORMATION
Item 1.
Legal Proceedings
Except as noted below, there have been no material developments in any of the ongoing legal proceedings during the first half of 2017 for both Momentive and MPM that are included in Momentive’s and MPM’s Annual Report on Form 10-K for the year ended December 31, 2016 and the amendments thereto.
Appeals Relating to the Confirmation of the Plan in the Bankruptcy Cases
In connection with the Bankruptcy Cases, three appeals were filed relating to the confirmation of the Plan. Specifically, on September 15, 2014, U.S. Bank National Association (“U.S. Bank”) as trustee for 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 Court’s determination that the Debtors’ Plan properly denied recovery to holders of the Subordinated Notes on the basis that those debt securities are contractually subordinated to the Old Second Lien Notes. In addition, on September 16, 2014, BOKF, NA, as trustee for the Old First Lien Notes (“First Lien Indenture Trustee”) and Wilmington Trust, National Association, as trustee for the Old Secured Notes (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) the Debtors were not required to compensate holders of the Old First Lien Notes and Old Secured Notes for any prepayment premiums and (ii) the interest rates on First Lien Notes and Second Lien Notes provided to holders of the Old First Lien Notes and Old Secured Notes under the Plan was proper and in accordance with United States Bankruptcy Code. On November 11, 2014, the Debtors also 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 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. The merits briefing of the Second Circuit Appeals has been completed, and oral argument on the Second Circuit Appeals was held on November 9, 2016. The Second Circuit has not yet issued a decision with respect to the Second Circuit Appeals. We cannot predict with certainty the ultimate outcome of the Second Circuit Appeals.

Item 1A.    Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in Momentive and MPM’s Annual Report on Form 10-K for the year ended December 31, 2016, which could materially affect our business, financial condition or results of operations. There have been no material changes to our risk factors from those disclosed in Momentive’s and MPM’s 2016 Annual Report on Form 10-K.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3.    Defaults Upon Senior Securities
None.

Item 4.    Mine Safety Disclosures
This item is not applicable to the registrant.

Item 5.    Other Information

None

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Item 6.    Exhibits
 
 
 
10.1*†
 
2016 Incentive Compensation Plan


 
 
 
10.2*†
 
2017 Incentive Compensation Plan


 
 
 
31.1*
 
Rule 13a-14(a)/15d-14(a) Certifications for MPM Holdings Inc.:
 
 
 
 
  
(a) Certificate of the Chief Executive Officer
 
 
 
 
  
(b) Certificate of the Chief Financial Officer
 
 
 
31.2*
 
Rule 13a-14(a)/15d-14(a) Certifications for Momentive Performance Materials Inc.:
 
 
 
 
  
(a) Certificate of the Chief Executive Officer
 
 
 
 
  
(b) Certificate of the Chief Financial Officer
 
 
 
32.1*
  
Section 1350 Certifications for MPM Holdings Inc.
 
 
 
32.2*
  
Section 1350 Certifications for Momentive Performance Materials Inc.
 
 
 
101.INS**
 
XBRL Instance Document
 
 
 
101.SCH**
 
XBRL Schema Document
 
 
 
101.CAL**
 
XBRL Calculation Linkbase Document
 
 
 
101.DEF**
 
XBRL Definition Linkbase Document
 
 
 
101.LAB**
 
XBRL Label Linkbase Document
 
 
 
101.PRE**
 
XBRL Presentation Linkbase Document

*
Filed herewith.
**
Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). The financial information in the XBRL-related documents is “unaudited” or “unreviewed.”
Indicates a management contract or compensatory plan or arrangement.







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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
MPM HOLDINGS INC.
 
 
 
Date:
August 8, 2017
/s/ Erick R. Asmussen

 
 
Erick R. Asmussen
 
 
Chief Financial Officer
(Principal Financial Officer)
 
 
 
MOMENTIVE PERFORMANCE MATERIALS INC.
 
 
 
Date:
August 8, 2017
/s/ Erick R. Asmussen

 
 
Erick R. Asmussen
 
 
Chief Financial Officer
(Principal Financial Officer)


48