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

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

Registration No. 333-220384

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 3

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

MPM HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

 

 

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

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

260 Hudson River Road

Waterford, NY 12188

(518) 237-3330

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

 

 

John D. Moran, Esq.

MPM Holdings Inc.

260 Hudson River Road

Waterford, NY 12188

(518) 237-3330

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

 

 

Copies to:

 

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

Michael Kaplan, Esq.

Marcel R. Fausten, Esq.

Davis Polk & Wardell LLP

450 Lexington Avenue

New York, NY 10017

(212) 450-4000

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

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

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

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

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

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

 

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

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each Class of
Securities to be Registered
 

Amount to be
Registered(1)(2)

 

Proposed

Maximum

Offering Price

per Share

 

Proposed

Maximum
Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee(3)

Common Stock, par value $0.01 per share

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

 

 

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

 

 

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

 

 

 


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

 

Subject to Completion

Preliminary Prospectus dated November 6, 2017

PRELIMINARY PROSPECTUS

14,583,333 Shares

 

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MPM Holdings Inc.

Common Stock

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

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

 

 

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

 

 

 

     Per Share      Total  

Public offering price

   $                   $               

Underwriting discount(1)

   $      $  

Proceeds to us, before expenses

   $      $  

 

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

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

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

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

 

 

 

J.P. Morgan   Goldman Sachs & Co. LLC

 

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

Prospectus dated                , 2017.

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     21  

Cautionary Statements Concerning Forward Looking Statements

     43  

Use of Proceeds

     45  

Market Prices and Dividend Policy

     46  

Capitalization

     47  

Dilution

     48  

Selected Historical Financial Information

     50  

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

     52  

Business

     79  

Management

     96  

Compensation Discussion and Analysis

     103  

Principal and Selling Stockholders

     117  

Certain Relationships and Related Party Transactions

     121  

Description of Indebtedness

     126  

Description of Capital Stock

     131  

Shares Eligible for Future Sales

     135  

Material U.S. Federal Income Tax Considerations

     137  

Underwriting

     142  

Legal Matters

     148  

Experts

     148  

Where You Can Find Additional Information

     148  

Index To Consolidated Financial Statements

     F-1  

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

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

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

 

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PRESENTATION OF FINANCIAL INFORMATION

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

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

MARKET AND INDUSTRY DATA DESCRIPTIONS AND FORECASTS

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

TRADEMARKS

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

 

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PROSPECTUS SUMMARY

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

Our Company

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

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

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

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

 



 

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2016 Revenue by
End-market

  

2016 Revenue by
Geography

  

2016 Segment EBITDA by
Segment(1)

 

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

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

Our Operating Segments

In the third quarter of 2017, we changed the organization of our reporting segments from two to four segments. Our new segment structure consists of a new Performance Additives segment realigned from the former Silicones segment, a new Formulated and Basic Silicones segment realigned from the former Silicones segment, a Quartz Technologies segment, which has been renamed from the existing Quartz segment, and a Corporate segment. We have organized the discussion below based upon our new segment structure. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Realignment” for additional information.

Performance Additives

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

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

 

   

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

 



 

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

 

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

 

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

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

Formulated and Basic Silicones

Our Formulated and Basic Silicones segment produces sealants, electronic materials, coatings, elastomers and basic silicone fluids focused on automotive, consumer goods, construction, electronics and healthcare end-markets. Our products enable key design features, such as extended product life, wear resistance, biocompatibility and weight reduction. Our sealants, electronic materials and coatings product lines are generally applied to our customers’ products, in the form of a high-tech coating or adhesive, while our elastomers product lines are fashioned into parts by extruding or molding them in items such as gaskets or tubing. Formulated silicones product offerings are typically used to seal, protect or adhere, and often perform multiple functions at once.

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

Our portfolio consists of five product families:

 

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

 

   

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

 



 

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

 

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

 

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

 

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

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

Quartz Technologies

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

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

 



 

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

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

Operations Overview

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

Global Operating Footprint

 

 

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

 



 

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

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

Industry Overview and Market Outlook

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

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

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

 

 

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Source: Freedonia

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

 



 

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

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

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

 

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

 



 

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Our Strengths

Our Company has the following competitive strengths:

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

 

Global Silicones Sales (All Products)1      Global Quartz Sales (All Products)2
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(1) Source: Freedonia
(2) Management estimate

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

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

 



 

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

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

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

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

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

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

 



 

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

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

Growth and Strategy

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

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

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

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

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

 



 

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

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

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

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

Recent Developments

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

 



 

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Risks Associated with our Business

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

 

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

 

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

 

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

 

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

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

 



 

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Organizational Structure

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

 

LOGO

 

(1) Guarantor under our senior secured asset-based revolving credit facility (the “ABL Facility”).
(2) MPM and the guarantors also provide guarantees under (or are borrowers under) the ABL Facility.
(3) Total estimated availability of $270 million, subject to borrowing base availability, of which approximately $215 million was available as of September 30, 2017, after giving effect to no outstanding borrowings and $55 million of outstanding letters of credit. The ABL Facility covenants include a fixed charge coverage ratio of 1.0 to 1.0 that will only apply if our availability is less than the greater of (a) 12.5% of the lesser of the borrowing base and the total ABL Facility commitments at such time and (b) $27 million. On October 30, 2017, we received commitments to extend the maturity of the ABL Facility from October 2019 to five years from the closing of this offering, subject to certain conditions and exceptions. See “Description of Indebtedness—ABL Facility.”
(4) Certain of our non-U.S. subsidiaries provide guarantees under the ABL Facility but do not guarantee the 3.88% First-Priority Senior Secured Notes due 2021 (the “First Lien Notes”) or the 4.69% Second-Priority Senior Secured Notes due 2022 (the “Second Lien Notes”).

 



 

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Additional Information

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

 



 

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The Offering

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

 

Issuer

MPM Holdings Inc.

 

Common stock offered by us

10,416,667 shares of common stock.

 

Common stock offered by the selling stockholders

4,166,666 shares of common stock.

 

Underwriters’ option to purchase additional shares

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

 

Common stock to be outstanding immediately after this offering

58,538,301 shares of common stock.

 

Use of proceeds

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

 

Dividend policy

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

 

Directed share program

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

 



 

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

 

Listing

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

 

Risk factors

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

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

 

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

 

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

 

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

 

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

 



 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table presents the Company’s summary historical financial information as of and for the periods presented. Prior to our emergence from bankruptcy on October 24, 2014 (the “Emergence Date”), Momentive had not conducted any business operations. Accordingly, unless otherwise noted or suggested by context, all financial information and data and accompanying financial statements and corresponding notes, as of and prior to the Emergence Date, as contained in this prospectus, reflect the actual historical consolidated results of operations and financial condition of MPM for the periods presented and do not give effect to the Plan of Reorganization or any of the transactions contemplated thereby or the adoption of “fresh-start” accounting.

Upon emergence from bankruptcy on the Emergence Date, we adopted fresh start accounting, which resulted in the creation of a new entity for financial reporting purposes. As a result of the application of fresh start accounting, as well as the effects of the implementation of the Plan of Reorganization, the consolidated financial statements on or after October 24, 2014 are not comparable with the consolidated financial statements prior to that date. Refer to Note 2 to our audited consolidated financial statements included elsewhere herein for more information.

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

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

 



 

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    Successor     Predecessor  
    Last Twelve
Months
Ended

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

Statements of Operations

               

Net sales

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

Costs and expenses:

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

    424       354       318       388       395       63    

Cost of sales, excluding depreciation and amortization

                  1,439  

Selling, general and administrative expense

    361       252       238       347       285       80       434  

Depreciation and amortization expense

                  147  

Research and development expense

    62       48       50       64       65       13       63  

Restructuring and discrete costs

    37       6       11       42       32       5       20  

Other operating loss (income), net

    11       2       10       19       2       (1     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (47     46       9       (84     11       (34     (92

Interest expense, net

    79       60       57       76       79       15       162  

Non-operating (income) expense, net

    (16     (7     2       (7     3       8       —    

Gain on extinguishment and exchange of debt

    —         —         (9     (9     (7     —         —    

Reorganization items, net

    1       —         1       2       8       3       (1,972
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

Income tax expense

    25       11       4       18       13       —         36  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

(Losses) earnings from unconsolidated entities, net of taxes

    (1     (1     1       1       2       —         3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share—basic and diluted

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

Balance Sheet Data (at end of period):

               

Cash and cash equivalents

    $ 144       $ 228     $ 221        

Working capital(1)

      486         432       450        

Total assets

      2,686         2,606       2,663        

Total long-term debt

      1,185         1,167       1,169        

Total liabilities

      2,169         2,124       2,037        

Total equity

      517         482       626        

Cash Flow provided by (used in):

               

Operating activities

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

Investing activities

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

Financing activities

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

Other Financial Data:

               

Capital expenditures(2)

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

Segment EBITDA(3)

    275       210       173       238       194       46       192  

 

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

We have provided Segment EBITDA in this prospectus because it is the primary performance measure used by our senior management, the chief operating decision-maker and the Board of Directors to evaluate operating results and allocate capital resources among businesses. Segment EBITDA is also a profitability measure used to set management and executive incentive compensation goals. Segment EBITDA is the aggregate of the Segment EBITDA for our

 



 

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

 



 

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

 

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

2014
          Period from
January 1,
2014
through
October 24,

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

Net (loss) income

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

Interest expense, net

    79       60       57       76       79       15           162  

Income tax expense

    25       11       4       18       13       —             36  

Depreciation and amortization

    170       117       132       185       153       22           147  

Gain on extinguishment and exchange of debt

    —         —       $ (9     (9     (7     —             —    

Items not included in Segment EBITDA:

                 

Non-cash charges and other income and expense

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

Unrealized gains (losses) on pension and postretirement benefits

    29       1       5       33       (16     15           —    

Restructuring and discrete costs

    93       36       13       70       32       5           20  

Reorganization items, net

    1       —         1       2       8       3           (1,972
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Segment EBITDA

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Segment EBITDA margin(a)

    12     12     10     11     8     10         10

Segment EBITDA(b):

                 

Performance Additives

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

Formulated and Basic Silicones

    90       71       51       70       25       10           56  

Quartz Technologies

    37       30       13       20       27       6           17  

Corporate

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

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

 



 

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RISK FACTORS

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

Risks Related to Our Business

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

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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value of our reporting units could be more adversely affected than we estimated in our analysis of reporting unit fair values at the Emergence Date of October 24, 2014. This could result in goodwill or other asset impairments, which could negatively impact our business, results of operations and financial condition.

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

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

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

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

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

 

    new or existing laws or regulations;

 

    suppliers’ allocations to other purchasers;

 

    interruptions in production by suppliers; and

 

    natural disasters.

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

For example, our silicones business is highly dependent upon access to silicon metal, a key raw material, and siloxane, an intermediate product that is derived from silicon metal. While silicon is itself abundant, silicon metal is produced through a manufacturing process and, in certain geographic areas, is currently available through a limited number of suppliers. In North America, there is only one significant qualified silicon metal supplier, which in December 2015 completed a business combination with a significant European based silicon metal supplier. In 2009 and 2010, two of our competitors acquired silicon metal manufacturing assets in North America and Europe, respectively, becoming vertically integrated in silicon metal for a portion of their supply requirements and reducing the manufacturing base of certain independent silicon metal producers. In addition, silicon metal producers face a number of regulations that affect the supply or price of silicon metal in some or all of the jurisdictions in which we operate. For example, significant anti-dumping duties of up to 139.5% imposed by the U.S. Department of Commerce (the “DOC”) and the International Trade Commission (the “ITC”) against producers of silicon metal in China and Russia effectively block the sale by all or most producers in these jurisdictions to U.S. purchasers, which restricts the supply of silicon metal and results in increased prices.

 

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On October 4, 2017, the DOC issued affirmative preliminary determinations in the anti-dumping duty investigation on silicon metal, finding that imports of silicon metal from Australia, Brazil and Norway were sold at a price less than fair value. The DOC will now instruct U.S. Customs and Border Protection to collect cash deposits from importers of silicon metal from Australia (20.79%), Brazil (56.78% to 134.92%) and Norway (3.74%). The DOC is expected to announce its final anti-dumping determination on February 16, 2018. In August 2017, the DOC published the preliminary countervailing duties rates for silicon metal from Australia (16.23%), Brazil (3.69% to 52.07%) and Kazakhstan (120%). The ITC is also investigating whether there is material injury or threat of material injury to the domestic industry by reason of the dumped or subsidized imports from Australia, Brazil, Kazakhstan and Norway and is expected to make a determination as to whether there is material injury or threat to the domestic market by April 3, 2018. We currently purchase silicon metal under multi-year, one-year or short-term contracts and in the spot market. We typically purchase silicon metal under formal contracts for our United States’ operations from suppliers in the United States and for our Asia Pacific operations in the spot market from suppliers in Asia Pacific. Some of our formal contracts have pricing mechanisms tied to global silicon metal indices. Imposition of antidumping or countervailing duties in connection with the foregoing investigations could lead to higher duties on such imports.

Our silicones business also relies heavily on siloxane as an intermediate product. Our manufacturing capacity at our internal sites and at our joint venture in China is sufficient to meet the substantial majority of our current siloxane requirements. We also source a portion of our requirements from Asia Silicones Monomer Limited (“ASM”) under an existing long-term purchase and sale agreement. In addition, from time to time we enter into supply agreements with other third parties to take advantage of favorable pricing and minimize our cost. There are also a limited number of third-party siloxane providers, and the supply of siloxane may be limited from time to time. In addition, regulation of siloxane producers can also affect the supply of siloxane. For example, in May 2009, China’s Ministry of Commerce concluded an anti-dumping investigation of siloxane manufacturers in Thailand and South Korea, which resulted in an imposition of a 5.4% duty against our supplier, ASM, in Thailand, a 21.8% duty against other Thailand companies and a 25.1% duty against Korean companies. In May 2014, China’s Ministry of Commerce announced that the duty imposed on imports of siloxane originating in South Korea and Thailand terminated since no application had been filled for an extension.

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

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

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

 

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that engage in hazardous and potentially dangerous activities. Our operations or adjacent operations could result in personal injury or loss of life, severe damage to or destruction of property or equipment, environmental damage or a loss of the use of all or a portion of one of our key manufacturing facilities. Such events at our facilities or adjacent third-party facilities could have a material adverse effect on our business or operations.

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

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

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

Compliance with environmental, health and safety laws and regulations, and maintenance of permits, can be costly and complex, and we have incurred and will continue to incur costs, including capital expenditures and costs associated with the issuance and maintenance of letters of credit, to comply with these requirements. In 2016, we incurred capital expenditures of approximately $24 million to comply with environmental laws and regulations and to make other environmental improvements, and we expect to incur capital expenditures of approximately $20 million in 2017. If we are unable to comply with environmental, health and safety laws and regulations, or maintain our permits, we could incur substantial costs, including fines and civil or criminal sanctions, third party property or natural resource damage or personal injury claims or costs associated with upgrades to our facilities or changes in our manufacturing processes in order to achieve and maintain compliance, and may also be required to halt permitted activities or operations until any necessary permits can be obtained or complied with. In addition, future developments or increasingly stringent regulations could require us to make additional unforeseen environmental expenditures, which could have a material adverse effect on our business.

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

We are currently conducting investigations and/or cleanup of known or potential contamination at several of our facilities. In connection with our creation on December 3, 2006, through the acquisition of certain assets,

 

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

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

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

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

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

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

 

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provided letters of credit in the following amounts: approximately $43 million for closure and post-closure care and accidental occurrences at the Waterford and the Sistersville facilities. A renewal of our Waterford facility’s hazardous waste permit was issued by the NYSDEC in March 2016, which required us to provide approximately $26 million in financial assurances for our Waterford facility. The renewal permit also requires a re-evaluation of the financial assurance amount within the next three years. One or more of our facilities may also in the future be subject to additional financial assurance requirements imposed by governmental authorities, including the USEPA. In this regard, in January 2017, the USEPA identified chemical manufacturing as an industry for which it plans to develop, as necessary, proposed regulations identifying appropriate financial assurance requirements pursuant to §108(b) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”). Any increase in financial assurances required for our facilities in connection with environmental, health and safety laws or regulations or the maintenance of permits would likely increase our costs and could also materially impact our financial condition. For example, to the extent we issue letters of credit under our ABL Facility to satisfy any financial assurance requirements, we would incur fees for the issuance and maintenance of these letters of credit and the amount of borrowings that would otherwise be available to us under such facility would be reduced.

Future chemical regulatory actions may decrease our profitability.

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

We cannot at this time estimate the impact of these regulations on our financial condition, results of operations, cash flows and profitability, but it could be material. The European Union is reviewing octamethylcyclotetrasiloxane (“D4”) and decamethylcyclopentasiloxane (“D5”), each of which are chemical substances we manufacture and are utilized as key ingredients in many of our products and by the silicon industry generally, and may, pursuant to REACH, regulate the use of these two chemical substances in the European Union. The USEPA has also stated that they are reviewing the potential environmental risks posed by D4 to determine whether regulatory measures are warranted. We and other silicones industry members have entered into a consent order with the USEPA to conduct certain studies to obtain relevant data, the results of which were submitted to the USEPA in September 2017. Finally, in March 2016, the European Union Directorate-General for Environment (“DG Environment”) proposed to the European Commission that D4 be nominated as a persistent organic pollutant pursuant to the Stockholm Convention on Persistent Organic Pollutants (the “Stockholm Convention”). This proposal was not acted upon by the European Commission, but continues to be evaluated by the DG Environment. The Stockholm Convention is an international treaty aimed at eliminating or minimizing the release of organic chemicals that are toxic, resistant to degradation in the environment, and transported and deposited far from the point of release. Regulation of our products containing such substances by the European Union, Canada, the United States or parties to the Stockholm Convention would likely reduce our sales within the respective jurisdiction and possibly in other geographic areas as well. These reductions in sales could be material depending upon the extent of any such additional regulations.

We participate with other companies in trade associations and regularly contribute to the research and study of the safety and environmental impact of our products and raw materials. These programs are part of a program

 

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

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

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

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

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

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

We produce and use hazardous chemicals that require appropriate procedures and care to be used in handling them or in using them to manufacture other products. As a result of the hazardous nature of some of the products we produce and use, we may face claims relating to incidents that involve our customers’ improper handling, storage and use of our products. Additionally, we may face lawsuits alleging personal injury or property damage by neighbors living near our production facilities. These lawsuits could result in substantial damage awards against us, which in turn could encourage additional lawsuits and could cause us to incur significant legal fees to defend such lawsuits, either of which could have a material adverse effect on our

 

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business, financial condition and/or profitability. In addition, the activities of environmental action groups could result in litigation or damage to our reputation.

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

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

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

In connection with the bankruptcy cases, three appeals were filed relating to the confirmation of the Plan of Reorganization. Specifically, on September 15, 2014, U.S. Bank National Association (“U.S. Bank”) as trustee for our previously issued 11.5% Senior Subordinated Notes due 2016 (the “Subordinated Notes”) filed its appeal (the “U.S. Bank Appeal”) before the U.S. District Court for the Southern District of New York (the “District Court”) seeking a reversal of the Bankruptcy Court’s determination that the Plan of Reorganization properly denied recovery to holders of the Subordinated Notes on the basis that those debt securities are contractually subordinated to the 9.00% Second-Priority Springing Lien Notes due 2021 and 9.50% Second-Priority Springing Lien Notes due 2021 (collectively, the “Old Second Lien Notes”) (such determination, the “Subordinated Notes Determination”). In addition, on September 16, 2014, BOKF, NA, as trustee (“First Lien Trustee”) for the 8.875% First-Priority Senior Secured Notes due 2020 (the “Old First Lien Notes”), and Wilmington Trust, National Association, as trustee for the 10% Senior Secured Notes due 2020 (the “Old Secured Notes”) (“1.5 Lien Trustee” and together with U.S. Bank and First Lien Trustee, the “Appellants”) filed their joint appeal (together with the U.S. Bank Appeal, the “District Court Appeals”) before the District Court seeking reversal of the bankruptcy court’s determinations that (i) Old MPM Holdings and certain of its domestic subsidiaries (the “Debtors”) were not required to compensate holders of the Old First Lien Notes and Old Secured Notes for any prepayment premiums (the “Prepayment Premiums Determination”) and (ii) the interest rates on the First Lien Notes and the Second Lien Notes provided to holders of the Old First Lien Notes and Old Secured Notes under the Plan of Reorganization was proper and in accordance with the Bankruptcy Code (the “Interest Rate Determination”). On November 11, 2014, the Debtors filed a motion to dismiss the District Court Appeals (the “District Court Motion to Dismiss”) with the District Court asserting, inter alia, that granting the relief requested by the Appellants would be inequitable under the legal doctrine of equitable mootness. On May 5, 2015, the District Court dismissed the District Court Appeals (the “District Court Decision”) and affirmed the Bankruptcy Court rulings. Because the District Court Appeals were decided on their merits, the District Court also terminated the District Court Motion to Dismiss as moot. All the Appellants appealed the District Court Decision to the United States Court of Appeals for the Second Circuit (the “Second Circuit”, and the appeals, the “Second Circuit Appeals”). On September 3, 2015, the Debtors filed motions to dismiss the Second Circuit Appeals (the “Second Circuit Motions to Dismiss”) with the Second Circuit asserting, inter alia, that granting the relief requested by the Appellants would be inequitable under the legal doctrine of equitable mootness. On October 20, 2017, the Second Circuit issued its decision on the Second Circuit Appeals (the “Second Circuit Decision”). The

 

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

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

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

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

 

    exchange controls and currency restrictions;

 

    currency fluctuations and devaluations;

 

    tariffs and trade barriers;

 

    export duties and quotas;

 

    changes in local economic conditions;

 

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

 

    exposure to possible expropriation or other government actions;

 

    hostility from local populations;

 

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

 

    restrictions on our ability to repatriate dividends from our subsidiaries;

 

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

 

    natural disasters or other catastrophic events.

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

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

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

 

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

Our business is subject to foreign currency risk.

In 2016, approximately 67% of our net sales originated outside the United States. In our consolidated financial statements, we translate our local currency financial results into U.S. dollars based on average exchange rates prevailing during a reporting period or the exchange rate at the end of that period. During times of a strengthening U.S. dollar, at a constant level of business, our reported international revenues and earnings would be reduced because the local currency would translate into fewer U.S. dollars.

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

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

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

Oil and natural gas prices have fluctuated greatly over the past several years and we anticipate that they will continue to do so. Natural gas and electricity are essential to our manufacturing processes, which are energy-intensive. Our energy costs represented approximately 5% of our total cost of sales for the year ended December 31, 2016, 6% for the year ended December 31, 2015, and 7% for the year ended 2014, respectively.

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

If our energy prices decrease, we expect benefits in the short-run with decreased operating expenses and increased operating income, but may face increased pricing pressure from competitors that are similarly impacted by energy prices and could see reduced demand for certain of our products that are sold to participants in the energy sector. As a result, profitability may decrease over an extended period of time of lower energy prices. Moreover, any future increases in energy prices after a period of lower energy prices may have an adverse impact on our profitability for the reasons described above.

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

The markets that we operate in are highly competitive, and this competition could harm our results of operations, cash flows and financial condition. Our competitors include major international producers as well as

 

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smaller regional competitors. We may be forced to lower our selling price based on our competitors’ pricing decisions, which would reduce our profitability. This has been further magnified by the impact of the recent global economic downturn, as companies have focused more on price to retain business and market share. In addition, we face competition from a number of products that are potential substitutes for our products. Growth in substitute products could adversely affect our market share, net sales and profit margins.

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

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

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

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

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

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

For the nine months ended September 30, 2017 and the years ended December 31, 2016 and 2015, we generated net losses of $19 million, $163 million and $83 million, respectively. If we continue to suffer net losses, our liquidity may suffer and we may not be able to fund all of our obligations. As of September 30, 2017, on an adjusted basis after giving effect to this offering and the use of proceeds therefrom (assuming a price per share at the midpoint of the range on the cover of this prospectus), we would have had approximately $1,109 million aggregate principal amount of consolidated outstanding indebtedness. Our projected annualized cash interest expense on an adjusted basis after giving effect to this offering and the use of proceeds therefrom (assuming a price per share at the midpoint of the range on the cover of this prospectus), would be approximately $43 million based on our consolidated indebtedness and letters of credit outstanding and interest rates at September 30, 2017 without giving effect to any subsequent borrowings under our ABL Facility, substantially all of which represents cash interest expense on fixed-rate obligations. Our ability to generate sufficient cash flows from operations to make scheduled debt service payments depends on a range of economic, competitive and business factors, many of which are outside of our control. In addition, if we continue to experience net losses, the trading price of our common stock may decline significantly.

 

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

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

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

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

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

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

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

Our production processes and products are specialized; however, we may become subject to claims that we infringe, misappropriate or otherwise violate the intellectual property rights of our competitors or others in the

 

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

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

As of September 30, 2017, approximately 44% of our employees were unionized or represented by works councils that were covered by collective bargaining agreements. In addition, some of our employees reside in countries in which employment laws provide greater bargaining or other employee rights than the laws of the United States. These rights may require us to expend more time and money altering or amending employees’ terms of employment or making staff reductions. For example, most of our employees in Europe are represented by works councils, which generally must approve changes in conditions of employment, including restructuring initiatives and changes in salaries and benefits. A significant dispute could divert our management’s attention and otherwise hinder our ability to conduct our business or to achieve planned cost savings.

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

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

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

We sponsor various pension and similar benefit plans worldwide. As of December 31, 2016, our U.S. and non-U.S. defined benefit pension plans were under-funded in the aggregate by $119 million and $172 million, respectively. We are legally required to make contributions to our pension plans in the future, and those contributions could be material. See Note 15 to our audited consolidated financial statements included elsewhere in this prospectus for additional information regarding our unfunded and under-funded pension plans.

Our future funding obligations for our employee benefit plans depend upon the levels of benefits provided for by the plans, the future performance of assets set aside for these plans, the rates of interest used to determine funding levels, the impact of potential business dispositions, actuarial data and experience and any changes in

 

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government laws and regulations. In addition, certain of our funded employee benefit plans hold a significant amount of equity securities. If the market values of these securities decline, our pension expense and funding requirements would increase and, as a result, could have a material adverse effect on our business.

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

Prior to December 2006, substantially all of our products and services were marketed using the GE brand name and monogram, and we believe the association with GE provided our products and services with preferred status among our customers and employees due to GE’s globally recognized brands and perceived high quality. We and GE Monogram Licensing International (“GE Monogram”) are parties to a trademark license agreement, which was entered into in December 2006 and amended in May 2013, that grants us a limited right to, among other things, use the GE mark and monogram solely in connection with our sealant, adhesive and certain other products, subject to certain conditions. These rights extend through December 3, 2018, with options that allow us to renew the license through 2023, subject to certain terms and conditions, including the payment of royalties. We also have the right to use numerous specific product trademarks that contain the letters “GE” for the life of

 

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the respective products. While we continue to use the GE mark and monogram on these products and continue to use these product specifications, we are not able to use the GE mark and monogram on other products, use GE as part of our name or advertise ourselves as a GE company. While we have not yet experienced any significant loss of business as a result of our limited use of the GE mark and monogram, our business could be disadvantaged in the future by the loss of association with the GE name on our sealant, adhesive and certain other products.

Risks Related to Our Indebtedness

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

We have substantial consolidated indebtedness. As of September 30, 2017, on an adjusted basis after giving effect to this offering and the use of proceeds therefrom (assuming a price per share at the midpoint of the range on the cover of this prospectus), we would have had approximately $1,109 million aggregate principal amount of consolidated outstanding indebtedness. Our projected annualized cash interest expense, on an adjusted basis after giving effect to this offering and the use of proceeds therefrom (assuming a price per share at the midpoint of the range on the cover of this prospectus), would be approximately $43 million based on our consolidated indebtedness and letters of credit outstanding and interest rates at September 30, 2017 without giving effect to any subsequent borrowings under our ABL Facility, substantially all of which represents cash interest expense on fixed-rate obligations.

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

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

Availability under the ABL Facility is subject to a borrowing base based on a specified percentage of eligible accounts receivable and inventory and, in certain foreign jurisdictions, machinery and equipment. As of September 30, 2017, the borrowing base (including various reserves) was determined to be approximately $301 million, and we had approximately $55 million of drawn letters of credit and no revolver borrowings under the ABL Facility. The borrowing base (including various reserves) is updated on a monthly basis, so the actual borrowing base could be lower in the future. To the extent the borrowing base is lower than we expect, that could significantly impair our liquidity.

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

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

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

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

 

    incur or guarantee additional debt;

 

    pay dividends and make other distributions to our stockholders;

 

    create or incur certain liens;

 

    make certain loans, acquisitions, capital expenditures or investments;

 

    engage in sales of assets and subsidiary stock;

 

    enter into sale/leaseback transactions;

 

    enter into transactions with affiliates; and

 

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

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

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

The credit agreement governing the ABL Facility requires us to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 at any time when the availability is less than the greater of (a) 12.5% of the lesser of the

 

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

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

 

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

 

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

 

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

 

    could prevent us from making payments on our notes;

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

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

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

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

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

Our subsidiaries own a significant portion of our consolidated assets and conduct a significant portion of our consolidated operations. Repayment of our indebtedness depends, to a significant extent, on the generation of cash flows and the ability of our subsidiaries to make cash available to us by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to

 

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make payments on our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from subsidiaries. While there are limitations on the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make intercompany payments, these limitations are subject to certain qualifications and exceptions. In the event that we are unable to receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

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

S&P Global Ratings (“S&P”) and Moody’s Investors Service (“Moody’s”) maintain credit ratings on us and certain of our debt. Our ratings were downgraded by Moody’s in January 2016. The ratings assigned by both ratings agencies to our debt issued in connection with our emergence from the Chapter 11 proceedings are currently below investment grade. Any decision by these ratings agencies to further downgrade such ratings or put them on negative watch in the future could restrict our access to, and negatively impact the terms of, current or future financings and trade credit extended by our suppliers of raw materials or other vendors.

Risks Related to Our Common Stock

There is a limited public market for our common stock and an active trading market may not develop or be sustained following this offering.

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

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

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

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

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

 

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

 

    industry cycles and trends;

 

    changes in government and environmental regulation;

 

    adverse resolution of new or pending litigation against us;

 

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    changes in laws or regulations governing our business and operations;

 

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

 

    future sales of our common stock by our stockholders.

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

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

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

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

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

Additional sales of a substantial number of our shares of common stock, or the perception that such sales may occur, could have a material adverse effect on the price of our common stock and could materially impair our ability to raise capital through the sale of additional shares. As of October 31, 2017, we had 48,121,634 shares of common stock issued and outstanding. Substantially all of these shares have been registered by the Company’s registration statement (File No. 333-201338) (the “Shelf Registration Statement”) or otherwise are freely tradable. The sale of all or a portion of the shares by the such stockholders under the Shelf Registration Statement or by our other stockholders, or the perception that these sales may occur, could cause the price of our common stock to decrease significantly.

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

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

 

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

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

Following this offering (assuming no exercise of the underwriters’ option to purchase additional shares), investment funds managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and its consolidated subsidiaries, “Apollo”) will beneficially own approximately 28.9% of our common stock. In connection with our emergence from the Chapter 11 proceedings, Apollo designated four of our eleven directors. As a result of that representation, Apollo has the ability to exert significant influence over us. The interests of Apollo could conflict with or differ from the interests of our other stockholders. For example, the concentration of ownership held by Apollo could delay, defer, cause or prevent a change of control of us or impede a merger, takeover or other business combination that you as a stockholder may otherwise view favorably. Apollo is in the business of making or advising on investments in companies and holds, and may from time to time in the future acquire, interests in or provide advice to businesses that may directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. Apollo may also pursue acquisitions that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. Our Amended and Restated Certificate of Incorporation (“Certificate of Incorporation”), which will be effective upon the consummation of this offering, provides that we expressly renounce any interest or expectancy in any business opportunity, transaction or other matter in which Apollo or any of its affiliates, or Oaktree Capital Management, L.P. (“Oaktree”) or any of its affiliates, participates or desires or seeks to participate in, even if the opportunity is one that we would reasonably be deemed to have pursued if given the opportunity to do so.

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

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

These provisions include, among others, those that:

 

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

 

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

 

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

 

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

 

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

 

    prohibit actions by written consent of the stockholders;

 

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

 

    require advance notice for stockholder proposals and director nominations.

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

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

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

 

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CAUTIONARY STATEMENTS CONCERNING FORWARD LOOKING STATEMENTS

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

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

 

    global economic conditions;

 

    raw material costs and supply availability;

 

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

 

    litigation costs;

 

    manufacturing regulations and related compliance and litigation costs;

 

    risks associated with international operations;

 

    foreign currency fluctuations;

 

    rising energy costs;

 

    increased competition;

 

    the success of our strategic initiatives;

 

    our holding company structure;

 

    intellectual property protection, enforcement and litigation;

 

    relations and costs associated with our workforce;

 

    our pension liabilities;

 

    disruptions to our information technology infrastructure;

 

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

 

    the impact of our substantial indebtedness;

 

    our incurring additional debt;

 

    acquisitions, divestitures and joint ventures that we may pursue;

 

    restrictive covenants related to our indebtedness; and

 

    other factors presented under the heading “Risk Factors.”

 

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

 

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USE OF PROCEEDS

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

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

 

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MARKET PRICES AND DIVIDEND POLICY

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

 

     High      Low  

Year ended December 31, 2016

     

First Quarter (from March 4, 2016)

   $ 9.00      $ 6.00  

Second Quarter

   $ 9.50      $ 7.00  

Third Quarter

   $ 13.00      $ 9.50  

Fourth Quarter

   $ 10.60      $ 7.65  

Year ended December 31, 2017

     

First Quarter

   $ 10.12      $ 8.00  

Second Quarter

   $ 14.90      $ 9.25  

Third Quarter

   $ 16.35      $ 13.75  

Fourth Quarter (through November 3, 2017)

   $ 17.50      $ 15.05  

Holders. As of October 31, 2017, there were 25 stockholders of record of our common stock, one of which was Cede & Co., a nominee for The Depository Trust Company. All of our common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are considered to be held of record by Cede & Co., who is considered to be one stockholder of record. A greater number of holders of our common stock are “street name” or beneficial holders, whose shares of common stock are held of record by banks, brokers and other financial institutions. Because such shares of common stock are held on behalf of stockholders, and not by the stockholders directly, and because a stockholder can have multiple positions with different brokerage firms, banks and other financial institutions, we are unable to determine the total number of beneficial stockholders we have.

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

 

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CAPITALIZATION

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

 

    on an actual basis; and

 

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

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

 

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

Cash and cash equivalents(1)

   $ 144     $ 144  
  

 

 

   

 

 

 

Debt outstanding:

    

ABL Facility(2)

     —         —    

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

     1,010       1,010  

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

     175       8  

China bank loans

     36       —    
  

 

 

   

 

 

 

Total debt

     1,221       1,018  
  

 

 

   

 

 

 

Common stock

     —         —    

Additional paid-in capital

     867       1,117  

Accumulated other comprehensive loss

     (25     (25

Accumulated deficit

     (325     (387
  

 

 

   

 

 

 

Total equity(3)

     517       705  
  

 

 

   

 

 

 

Total capitalization

   $ 1,738     $ 1,723  
  

 

 

   

 

 

 

 

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

 

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DILUTION

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

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

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

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

 

Initial public offering price per share

   $ 24.00  

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

   $ (0.15

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

     3.25  

Net tangible book value per share after this offering

     3.10  
  

 

 

 

Dilution in net tangible book value per share

   $ (20.90
  

 

 

 

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

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

 

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

 

     Shares Purchased     Total Consideration     Average
Price per

Share
 
     Number      Percent     Amount      Percent    

Existing equity holders(1)

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

New investors in this offering

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

 

 

    

 

 

   

 

 

    

 

 

   

Total

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

 

 

    

 

 

   

 

 

    

 

 

   

 

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

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

 

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SELECTED HISTORICAL FINANCIAL INFORMATION

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

Upon emergence from bankruptcy on the Emergence Date, we adopted fresh start accounting, which resulted in the creation of a new entity for financial reporting purposes. As a result of the application of fresh start accounting, as well as the effects of the implementation of the Plan of Reorganization, the consolidated financial statements on or after October 24, 2014 are not comparable with the consolidated financial statements prior to that date. Refer to Note 2 to our audited consolidated financial statements included elsewhere herein for more information.

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

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

 

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    Successor     Predecessor  
    Nine Months
Ended September 30,
    Year Ended
December 31,
   

Period from
October 25,
2014 through
December 31,
2014

   

Period from
January 1,
2014 through
October 24,
2014

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

Statement of Operations Data:

               

Net sales

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

Cost of sales

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

Gross profit

    354       318       388       395       63        

Cost of sales, excluding depreciation and amortization

              1,439       1,732       1,705  

Selling, general and administrative expense

    252       238       347       285       80       434       373       392  

Depreciation and amortization expense

              147       171       187  

Research and development expense

    48       50       64       65       13       63       70       69  

Restructuring and discrete costs

    6       11       42       32       5       20       21       43  

Other operating expense (income), net

    2       10       19       2       (1     —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

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

Interest expense, net

    60       57       76       79       15       162       394       277  

Non-operating (income) expense, net

    (7     2       (7     3       8       —         —         (11

(Gain) loss on extinguishment and exchange of debt

    —         (9     (9     (7     —         —         —         57  

Reorganization items, net

    —         1       2       8       3       (1,972     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

Income tax expense

    11       4       18       13       —         36       104       8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

(Losses) earnings from unconsolidated entities, net of taxes

    (1     1       1       2       —         3       3       5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) earnings per share, basic and diluted

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

Dividends declared per common share

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

Cash Flow provided by (used in):

               

Operating activities

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

Investing activities

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

Financing activities

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

Balance Sheet Data (at end of period):

               

Cash and cash equivalents

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

Working capital(1)

    486         432       450       611         (2,884     290  

Total assets

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

Total long-term debt

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

Total liabilities

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

Total equity (deficit)

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

 

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

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our results of operations and financial condition for the nine months ended September 30, 2017 and 2016, years ended December 31, 2016 and 2015, successor period from October 25, 2014 through December 31, 2014 and the predecessor period from January 1, 2014 through October 24, 2014 with corresponding financial statements and related notes included elsewhere herein. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs, and which involve numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements. See “Cautionary Statements Concerning Forward-Looking Statements.”

Overview and Outlook

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

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

Chapter 11 Bankruptcy and Emergence

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

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

Shared Services Agreement

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

 

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

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

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

Reportable Segments

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

Third Quarter 2017 Overview

 

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

 

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

 

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

 

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2016 Overview

 

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

 

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

 

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

 

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

 

    Future growth initiatives include the expansion of our capability to manufacture NXT silane, which is an innovative product used in the production of tires, and can offer tire manufacturers the ability to reduce rolling resistance without loss of wet traction, as well as deliver benefits in the tire manufacturing process. This expansion will double our current NXT silane manufacturing capacity and is expected to be completed in 2017.

Short-term Outlook

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

We are continuing to leverage our R&D capabilities and invest in high-growth product lines and geographical regions, positioning the Company for long-term success. We are also focused on gaining productivity efficiencies to reduce raw material costs and improve margins through investments in improved operational reliability. We continue to evaluate additional actions, as well as productivity measures, that could support further cost savings. Such actions could include additional restructuring and incremental exit and disposal costs.

We have implemented approximately $48 million in annual structural cost reduction initiatives through our previously announced global restructuring program, which have begun delivering significant savings. Cumulatively through September 30, 2017, we have achieved approximately $42 million of savings under this program.

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

 

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Matters Impacting Comparability of Results

Fresh Start Accounting

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

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

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

Other Comprehensive Income

Our other comprehensive income is significantly impacted by foreign currency translation. The impact of foreign currency translation is driven by the translation of assets and liabilities of our foreign subsidiaries which are denominated in functional currencies other than the U.S. dollar. The primary assets and liabilities driving the adjustments are cash and cash equivalents; accounts receivable; inventory; property, plant and equipment; goodwill and other intangible assets; accounts payable and pension and other postretirement benefit obligations. The primary currencies in which these assets and liabilities are denominated are the euro and Japanese yen. Prior to October 24, 2014, other comprehensive income included the impact of defined benefit pension and postretirement benefit adjustments. Upon the application of fresh start accounting, beginning on and after October 24, 2014, actuarial gains and losses resulting from pension and postretirement liability re-measurements are recognized immediately in the unaudited Condensed Consolidated Statements of Operations, compared to our prior policy of deferring such gains and losses in accumulated other comprehensive income and amortizing them over future periods. The impact of defined benefit pension and postretirement benefit adjustments prior to October 24, 2014 were primarily driven by unrecognized actuarial gains and losses related to our defined benefit and other postretirement benefit plans, as well as the subsequent amortization of gains and losses from accumulated other comprehensive income in periods following the initial recording of such items. These actuarial gains and losses were determined using various assumptions, the most significant of which were (i) the weighted average rate used for discounting the liability, (ii) the weighted average expected long-term rate of return on pension plan assets, (iii) the weighted average rate of future salary increases and (iv) the anticipated mortality rate tables.

Raw Materials

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

 

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

Results of Operations

Consolidated Statements of Operations

 

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

2014
          Period from
January 1,
2014 through
October 24,

2014
 
         2017             2016         2016     2015            

Net sales

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

Cost of sales

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Gross profit

     354       318       388       395       63        

Cost of sales, excluding depreciation and amortization

                   1,439  

Selling, general and administrative expense

     252       238       347       285       80           434  

Depreciation and amortization expense

                   147  

Research and development expense

     48       50       64       65       13           63  

Restructuring and discrete costs

     6       11       42       32       5           20  

Other operating expense (income), net

     2       10       19       2       (1         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Operating income (loss)

     46       9       (84     11       (34         (92

Operating income (loss) as a percentage of net sales

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

Interest expense, net

     60       57       76       79       15           162  

Non-operating (income) expense, net

     (7     2       (7     3       8           —    

Gain on extinguishment of debt

     —         (9     (9     (7     —             —    

Reorganization items, net

     —         1       2       8       3           (1,972
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total non-operating expense (income)

     53       51       62       83       26           (1,810
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

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

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

Income tax expense

     11       4       18       13       —             36  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

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

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

(Losses) earnings from unconsolidated entities, net of taxes

     (1     1       1       2       —             3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net (loss) income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Other comprehensive income (loss)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

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

Net Sales

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

Operating Income

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

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

 

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

Cost of sales

   $ 84      $ 96  

Selling, general and administrative expense

     33        36  
  

 

 

    

 

 

 

Total depreciation and amortization expense

   $ 117      $ 132  
  

 

 

    

 

 

 

Non-Operating Expense

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

Income Tax Expense

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

 

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

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

Other Comprehensive Income (Loss)

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

In the first nine months of 2016, foreign currency translation positively impacted other comprehensive loss by $67 million, primarily due to the weakening of the U.S. dollar against other currencies. Also, for the first nine months of 2016, pension and postretirement benefit adjustments positively impacted other comprehensive income by $19 million, primarily due to the recognition of a net prior service credit related to the effect of plan redesign triggered by certain changes to company sponsored post-retiree medical, dental, vision and life insurance benefit plans.

2016 Compared to 2015

Net Sales

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

Operating (Loss) Income

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

Selling, general and administrative expense increased by $62 million, compared to 2015 primarily due to $49 million in re-measurement of our pension and other postretirement liabilities. The incremental increase was

 

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driven by increased merit and incentive compensation, partially offset by various cost reduction actions. Research and development expense for 2016 decreased by $1 million compared to 2015 primarily related to the timing of new projects.

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

 

     Year Ended
December 31,
 
(dollars in millions)    2016      2015  

Cost of sales

   $ 137      $ 105  

Selling, general and administrative expense

     48        48  
  

 

 

    

 

 

 

Total depreciation and amortization expense

   $ 185      $ 153  
  

 

 

    

 

 

 

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

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

Non-Operating Expense (Gain)

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

Income Tax Expense

In 2016, income tax expense increased by $5 million compared to 2015. The effective income tax rate was (13%) for 2016 compared to (18%) for 2015. The change in the effective tax rate was primarily attributable to the amount and distribution of income and loss among the various jurisdictions in which we operate. The effective tax rate was also impacted by the movement in the valuation allowance. The valuation allowance, which relates principally to U.S. and certain non-U.S. deferred tax assets, was established and maintained based on our assessment that a portion of the deferred tax assets will likely not be realized. Due to fluctuations in pre-tax income or loss between jurisdictions with and without a valuation allowance established, our historical effective tax rates are likely not indicative of our future effective tax rates.

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

We are recognizing the earnings of non-U.S. operations currently in our U.S. consolidated income tax return as of December 31, 2016 and are expecting that, with the exception of Germany and Japan, all earnings will be repatriated to the United States. We have accrued the incremental tax expense expected to be incurred upon the repatriation of these earnings. In addition, we have certain intercompany arrangements that, if settled, may trigger taxable gains or losses based on foreign currency exchange rates in place at the time of settlement. As a result, we are asserting permanent reinvestment with respect to certain intercompany arrangements considered indefinite.

 

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Other Comprehensive (Loss) Income

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

For the year ended December 31, 2015, foreign currency translation negatively impacted other comprehensive loss by $63 million, primarily due to the impact of the strengthening of the U.S. dollar against the euro. In 2015, pension and postretirement benefit negative impact on other comprehensive loss was $1 million due to the recognition of prior service costs in 2014 following provision changes to our U.S. pension plan.

2015 Compared to 2014

Net Sales

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

Operating (Loss) Income

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

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

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

 

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

Non-Operating Expense (Gain)

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

Income Tax Expense

In 2015, income tax expense decreased by $23 million compared to 2014. The effective income tax rate was (18%) for 2015 compared to 2% for 2014. The change in the effective tax rate was primarily attributable to the amount and distribution of income and loss among the various jurisdictions in which we operate. The effective tax rate was also impacted by the tax impact of the reorganization and fresh start accounting net of the movement in valuation allowance. The valuation allowance, which relates principally to U.S. and certain non-U.S. deferred tax assets, was established and maintained based on our assessment that a portion of the deferred tax assets will likely not be realized.

Other Comprehensive (Loss) Income

For the year ended December 31, 2015, foreign currency translation negatively impacted other comprehensive loss by $63 million, primarily due to the impact of the strengthening of the U.S. dollar against the euro. In 2015, pension and postretirement benefit negative impact on other comprehensive loss was $1 million compared to $69 million in 2014 due to the recognition of prior service costs in 2014 following provision changes to our U.S. pension plan.

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

Results of Operations by Segment

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

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

 

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

 

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

2014
          Period from
January 1,
2014 through
October 24,

2014
 

(dollars in millions)

   2017     2016     2016     2015            

Net Sales(1):

                

Performance Additives

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

Formulated and Basic Silicones

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

Quartz Technologies

     152       126       172       177       34           145  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Segment EBITDA:

                

Performance Additives

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

Formulated and Basic Silicones

     71       51       70       25       10           56  

Quartz Technologies

     30       13       20       27       6           17  

Corporate

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

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

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

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

 

     Volume      Price/Mix     Currency
Translation
     Total  

Performance Additives

     5%        —       —  %        5

Formulated and Basic Silicones

     (9)%                    7     —  %        (2 )% 

Quartz Technologies

     21%        —       —  %        21

Performance Additives

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

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

Formulated and Basic Silicones

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

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

 

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Quartz Technologies

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

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

Corporate

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

2016 Compared to 2015 Segment Results

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

 

     Volume      Price/Mix      Currency
Translation
     Total  

Performance Additives

     6%        (4)%        —  %        2%  

Formulated and Basic Silicones

     (5)%                —  %        —  %        (5)%  

Quartz Technologies

     (4)%        —  %        1%        (3)%  

Performance Additives

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

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

Formulated and Basic Silicones

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

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

Quartz Technologies

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

 

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

Corporate

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

2015 Compared to 2014 Segment Results

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

 

     Volume      Price/Mix      Currency
Translation
     Total  

Performance Additives

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

Formulated and Basic Silicones

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

Quartz Technologies

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

Performance Additives

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

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

Formulated and Basic Silicones

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

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

Quartz Technologies

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

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

 

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Corporate

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

Reconciliation of Net (Loss) Income to Segment EBITDA:

 

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

Net (loss) income

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

Interest expense, net

     60       57       76       79       15           162  

Income tax expense

     11       4       18       13       —             36  

Depreciation and amortization

     117       132       185       153       22           147  

Gain on extinguishment and exchange of debt

     —         (9     (9     (7     —             —    

Items not included in Segment EBITDA:

                

Non-cash charges and other income and expense

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

Unrealized gains (losses) on pension and postretirement benefits

     1       5       33       (16     15           —    

Restructuring and discrete costs

     36       13       70       32       5           20  

Reorganization items, net

     —         1       2       8       3           (1,972
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total adjustments

     41       34       131       39       69           (1,838
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Segment EBITDA

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Items Not Included in Segment EBITDA

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

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

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

 

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

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

Segment Realignment

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

In the third quarter of 2017, we reorganized our segment structure and bifurcated our Silicones segment into Performance Additives and Formulated and Basic Silicones to better reflect our specialty chemical portfolio and related performance. This reorganization included a change in the Company’s operating segments from two to four segments. The Company reorganized to the new four segments model, by implementing the following:

 

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

 

    the CEO would regularly review the results of operations, manage the allocation of resources and assesses the performance of each of these segments.

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

 

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

 

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

 

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

 

    a Corporate segment.

Liquidity and Capital Resources

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

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

 

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

 

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    $215 million of availability under the ABL Facility ($270 million borrowing base, less $55 million of outstanding letters of credit and subject to a fixed charge coverage ratio of 1.0 to 1.0 that will only apply if our availability is less than the greater of (a) 12.5% of the lesser of the borrowing base and the total ABL Facility commitments at such time and (b) $27 million).

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

 

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

Accounts receivable

   $ 332        15   $ 280        13

Inventories

     428        19     390        17

Accounts payable

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

 

 

    

 

 

   

 

 

    

 

 

 

Net working capital

   $ 486        22   $ 432        19
  

 

 

    

 

 

   

 

 

    

 

 

 

The increase in net working capital of $54 million from December 31, 2016, was due to an increase in accounts receivable because of timing of sales in the period and increased inventory to meet forecast volume and normal seasonality, offset by an increase in accounts payable due to strategic efforts to improve payment terms. Exchange rate fluctuations of $19 million due to the weakening of the U.S. dollar against the euro and Japanese yen also contributed to this increase in net working capital.

We remain focused on driving positive free cash flow in 2017 through our global cost control initiatives and aggressively managing net working capital. To minimize the impact of net working capital on cash flows, we continue to review inventory safety stock levels where possible. We also continue to focus on receivable collections by accelerating receipts through the sale of receivables at a discount.

We have the ability to borrow from the ABL Facility to support our short-term liquidity requirements, particularly when net working capital requirements increase in response to seasonality of our volumes in the summer months. As of September 30, 2017, we had no outstanding borrowings under the ABL Facility.

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

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

2017 Outlook

Following, and as a result of, our emergence from the Chapter 11 proceedings, we believe we are favorably positioned to fund our ongoing liquidity requirements. We believe that due to our businesses operating cash flows as well as our $358 million of liquidity (and $358 million of liquidity after giving effect to this offering, assuming a price per share at the midpoint of the range on the cover of this prospectus) in the form of cash and our ABL Facility, our long-term debt maturities in 2021 and 2022, and our annual debt service costs of approximately $55 million (and $43 million after giving effect to this offering, assuming a price per share at the midpoint of the range on the cover of this prospectus), our business has adequate capital resources to meet material commitments coming due during the next 12-month period. The additional liquidity provided by the rights offerings in connection with the Chapter 11 process (the “Rights Offerings”) and the impact of the Plan of Reorganization on our capital structure, resulting in reduced annual debt service obligations of approximately $240 million, increased our future operational and financial flexibility and left us well-positioned to make strategic capital investments, leverage our leadership positions with both our customers and suppliers, optimize

 

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our portfolio and drive new growth programs. Our business is impacted by general economic and industrial conditions, including general industrial production, automotive builds, housing starts, construction activity, consumer spending and semiconductor capital equipment investment, and these factors could have negative effects to our liquidity. Our business has both geographic and end-market diversity, which often reduces the impact of any one of these factors on our overall performance.

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

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

Debt Repurchases and Other Transactions

From time to time, depending upon market, pricing and other conditions, as well as on our cash balances and liquidity, we or our affiliates may seek to acquire (and have acquired) our outstanding equity and/or debt securities or other indebtedness of the Company through open market purchases, privately negotiated transactions, tender offers, redemption or otherwise, upon such terms and at such prices as we or our affiliates may determine (or as may be provided for in the indentures governing our notes if applicable), for cash or other consideration. For example, in the fourth quarter of 2015 and first quarter of 2016, we repurchased $48 million in aggregate principal amount of our Second Lien Notes for approximately $26 million, resulting in a net gain of $16 million. All repurchased notes were canceled at the time of repurchase, reducing the aggregate principal amount of these notes outstanding from $250 million at the end of third quarter of 2015 to $202 million as of December 31, 2016. In addition, we have considered and will continue to evaluate potential transactions to reduce net debt, such as debt for debt exchanges and other transactions. There can be no assurance as to which, if any, of these alternatives or combinations thereof we or our affiliates may choose to pursue in the future as the pursuit of any alternative will depend upon numerous factors such as market conditions, our financial performance and the limitations applicable to such transactions under our financing documents.

Sources and Uses of Cash

Following are highlights from our Consolidated Statements of Cash Flows:

 

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

2014
          Period from
January 1,
2014 through
October 24,

2014
 
(dollars in millions)      2017          2016          2016          2015               

(Uses) sources of cash:

                    

Operating activities

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

Investing activities

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

Financing activities

     (1      (14      (16      (10      (1         390  

Effect of exchange rates on cash flows

     4        5        (2      (8      (4         (6
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Net (decrease) increase in cash and cash equivalents

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Operating Activities

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

 

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and amortization, $18 million was for the amortization of debt discount, stock based compensation expense of $3 million and $1 million for unrealized actuarial loss from other post retirement liabilities. These were offset by a $10 million change in deferred tax provisions and $4 million related to unrealized foreign exchange gains. Net working capital used $33 million of cash, primarily due to increases in accounts receivable and inventories of $40 million and $20 million, respectively, offset by a decrease in accounts payable of $27 million, primarily due to reasons stated in the preceding paragraphs. Changes in other assets and liabilities that primarily included interest expense, taxes and pension plan contributions were driven by the timing of when items were expensed versus paid and impact of foreign currency fluctuations.

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

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

In 2015, operations generated $128 million of cash. Net loss of $83 million included $147 million of net non-cash items, of which mainly $153 million was for depreciation and amortization and $22 million was for amortization of debt discount costs, offset primarily by $10 million of unrealized foreign currency gains, $16 million of unrealized gains related to the re-measurement and curtailment related to our pension liabilities and $7 million related to gain on the extinguishment of debt. Net working capital generated $30 million of cash driven by customer mix and timing of collections as well as a decrease in accounts payable due to longer payment terms with vendors following our emergence from Chapter 11. Changes in other assets and liabilities, due to/from affiliates and income taxes payable are driven by the timing of when items were expensed versus paid, which primarily included interest expense, pension plan contributions and taxes.

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

 

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Investing Activities

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

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

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

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

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

Financing Activities

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

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

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

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

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

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

 

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

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

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

Covenants Under the ABL Facility and the Notes

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

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

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

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

 

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

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

 

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

Net loss

   $ (136

Interest expense, net

     79  

Income tax expense

     25  

Depreciation and amortization

     170  
  

 

 

 

EBITDA

     138  

Adjustments to EBITDA:

  

Restructuring and discrete costs(a)

     93  

Reorganization items, net(b)

     1  

Unrealized gains losses on pension and postretirement benefits(c)

     29  

Pro forma cost savings(d)

     6  

Acquisitions(e)

     2  

Non-cash charges(f)

     15  
  

 

 

 

Adjusted EBITDA(g)

   $ 284  
  

 

 

 

Adjusted EBITDA less Capital Expenditures and Cash Taxes

   $ 95  
  

 

 

 

Pro forma fixed charges(h)

   $ 56  
  

 

 

 

Ratio of Adjusted EBITDA to Fixed Charges(i)

     5.07  
  

 

 

 

Pro forma Fixed Charge Coverage Ratio(j)

     1.70  
  

 

 

 

 

 

  (a) Primarily includes expenses related to our global restructuring program, siloxane production transformation, work stoppage and certain other non-operating income and expenses.
  (b) Represents professional fees related to our reorganization.
  (c) Represents non-cash actuarial losses resulting from pension and postretirement liability curtailment and re-measurements.
  (d) Represents estimated cost savings, on a pro forma basis, from initiatives implemented or being implemented by management.

 

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  (e) Reflects pro forma unrealized EBITDA related to Momentive’s acquisition of the operating assets of Sea Lion Technology, Inc. as if the business was acquired at the beginning of the LTM period.
  (f) Non-cash charges primarily include the effects of foreign exchange gains and losses and impacts of asset impairments and disposals, and stock-based compensation expense.
  (g) Effective Quarter ended September 30, 2017, Nantong, China subsidiary is no longer designated as Unrestricted Subsidiary under the ABL Facility and the indentures that govern our notes, resulting in an increase of $24 million in Adjusted EBITDA.
  (h) Reflects pro forma interest expense based on outstanding indebtedness and interest rates at September 30, 2017 adjusted for applicable restricted payments.
  (i) MPM’s ability to incur additional indebtedness, among other actions, is restricted under the indentures governing our notes, unless MPM has an Adjusted EBITDA to Fixed Charges ratio of at least 2.0 to 1.0. As of September 30, 2017, we were able to satisfy this test and incur additional indebtedness under these indentures.
  (j) Represents Pro forma Fixed Charge Coverage Ratio (the “FCCR”) as defined in the credit agreement for the ABL Facility. If the availability under the ABL Facility is less than the greater of (a) 12.5% of the lesser of the borrowing base and the total ABL Facility commitments at such time and, (b) $27 million, then the FCCR must be greater than 1.0 to 1.0.

Contractual Obligations

The following table presents our contractual cash obligations at December 31, 2016. Our contractual cash obligations consist of legal commitments at December 31, 2016 that require us to make fixed or determinable cash payments, regardless of the contractual requirements of the specific vendor to provide us with future goods or services. This table does not include information about most of our recurring purchases of materials used in our production; our raw material purchase contracts do not meet this definition since they generally do not require fixed or minimum quantities. Contracts with cancellation clauses are not included, unless a cancellation would result in a major disruption to our business. These contractual obligations are grouped in the same manner as they are classified in the Consolidated Statements of Cash Flows in order to provide a better understanding of the nature of the obligations.

 

(dollars in millions)   Payments Due By Year  

Contractual Obligations

  2017     2018     2019     2020     2021     2022 and
beyond
    Total  

Operating activities:

             

Purchase obligations(1)

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

Interest on fixed rate debt obligations

    53       52       52       52       44       3       256  

Operating lease obligations

    15       11       9       7       6       15       63  

Funding of pension and other postretirement obligations(2)

    33       29       30       31       33       —         156  

Financing activities:

             

Long-term debt, including current maturities(3)

    36       —         —         —         1,100       202       1,338  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Purchase obligations are comprised of the fixed or minimum amounts of goods and/or services under long-term contracts and assumes that certain contracts are terminated in accordance with their terms after giving the requisite notice which is generally two to three years for most of these contracts; however, under certain circumstances, some of these minimum commitment term periods could be further reduced which would significantly decrease these contractual obligations.
(2)

Pension and other postretirement contributions have been included in the above table for the next five years. These amounts include estimated benefit payments to be made for unfunded foreign defined benefit pension plans as well as estimated contributions to our funded defined benefit plans. The assumptions used by our actuaries in calculating these projections includes a weighted average annual return on pension assets of

 

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  approximately 6% for the years 2017—2021 and the continuation of current law and plan provisions. These estimated payments may vary based on the actual return on our plan assets or changes in current law or plan provisions. See Note 15 to our audited consolidated financial statements included elsewhere in this prospectus for more information on our pension and postretirement obligations.
(3) Long-term debt amounts above represent gross repayments, and are exclusive of any unamortized debt discounts.

The table above excludes payments for income taxes and environmental obligations since, at this time, we cannot determine either the timing or the amounts of all payments beyond 2017. At December 31, 2016, we recorded unrecognized tax benefits and related interest and penalties of $45 million. We estimate that we will pay approximately $25 million in 2017 for local, state and international income taxes. See Note 13 to our audited consolidated financial statements included elsewhere in this prospectus for more information on these obligations.

Critical Accounting Estimates

In preparing our financial statements in conformity with accounting principles generally accepted in the United States, we have to make estimates and assumptions about future events that affect the amounts of reported assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Some of these accounting policies require the application of significant judgment by management to select the appropriate assumptions to determine these estimates. By their nature, these judgments are subject to an inherent degree of uncertainty; therefore, actual results may differ significantly from estimated results. We base these judgments on our historical experience, advice from experienced consultants, forecasts and other available information, as appropriate. Our significant accounting policies are more fully described in Note 5 to our audited consolidated financial statements included elsewhere in this prospectus.

Income Taxes

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

At December 31, 2016 and 2015, we had valuation allowances of $484 million and $419 million, respectively, against our deferred income tax assets. At December 31, 2016, we had a $297 million valuation allowance against a portion of our net U.S. federal and state deferred tax assets, as well as a valuation allowance of $187 million against a portion of our net foreign deferred income tax assets, primarily in Germany and Japan. At December 31, 2015, we had a $243 million valuation allowance against all of our net U.S. federal and state deferred tax assets, as well as a valuation allowance of $176 million against a portion of our net foreign deferred income tax assets, primarily in Germany and Japan. The valuation allowances require an assessment of both negative and positive evidence, such as operating results during the most recent three-year period. This evidence is given more weight than our expectations of future profitability, which are inherently uncertain.

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

 

    Taxable income in prior carryback years;

 

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    Future reversal of existing taxable temporary differences;

 

    Tax planning strategies; and

 

    Future taxable income exclusive of reversing temporary differences and carryforwards.

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

The calculation of our income tax liabilities involves dealing with uncertainties in the application of complex domestic and foreign income tax regulations. Unrecognized tax benefits are generated when there are differences between tax positions taken in a tax return and amounts recognized in our audited consolidated financial statements. Tax benefits are recognized in our audited consolidated financial statements when it is more likely than not that a tax position will be sustained upon examination. Tax benefits are measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective income tax rate in a given period could be materially impacted. An unfavorable income tax settlement would require the use of cash and result in an increase in our effective income tax rate in the year it is resolved. A favorable income tax settlement would be recognized as a reduction in the effective income tax rate in the year of resolution. At December 31, 2016 and 2015, we recorded unrecognized tax benefits and related interest and penalties of $45 million and $40 million, respectively.

Pensions

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

 

    The weighted average rate used for discounting the liability;

 

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

 

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

 

    The weighted average rate of future salary increases; and

 

    The anticipated mortality rate tables.

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

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

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

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

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

 

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

 

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

Assumption:

        

Increase in discount rate of 0.5%

   $ (37    $ (35    $ (1

Decrease in discount rate of 0.5%

     43        40        1  

Increase in estimated return on assets of 1.0%

           (2

Decrease in estimated return on assets of 1.0%

           2  

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

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

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

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

At the time of the Segment Realignment, we performed an assessment to determine whether the existence of any events or circumstances leads to a determination that it is more likely than not that the fair value of a

 

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reporting unit is less than the carrying amount of the reporting unit’s net assets. It is possible that the conclusions regarding the impairment or recoverability of goodwill could change in future periods if, for example, the reporting unit does not perform as projected, the results of strategic plans and certain cost saving initiatives are not fully achieved, or the overall economic or business conditions are worse than current assumptions (including inputs to the discount rate or market based EBITDA multiples). If our assumptions and related estimates change in the future, or if we change our reporting structure or other events and circumstances change, we may be required to record impairment charges in future periods. Any impairment charges that we may take in the future could be material to our results of operations and financial condition.

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

Recently Issued Accounting Standards

The nature and impact of recent accounting pronouncements is discussed in Note 5 to our audited consolidated financial statements included elsewhere in this prospectus, which is incorporated herein by reference.

Quantitative and Qualitative Disclosures about Market Risk

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

Foreign Exchange Risk

Our international operations accounted for approximately 67% of our net sales in 2016, 66% in 2015 and 68% in 2014. As a result, we have significant exposure to foreign exchange risk related to transactions that can potentially be denominated in many foreign currencies, which are offset by the Company’s global manufacturing presence throughout the world. These transactions include foreign currency denominated imports and exports of raw materials and finished goods (both intercompany and third party) and loan repayments. The functional currency of our operating subsidiaries is generally the related local currency.

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

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

Interest Rate Risk

As of September 30, 2017, none of our borrowings were at variable interest rates. If we make borrowings at variable interest rates in the future, we will be subject to the variations in interest rates in respect of our variable

 

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rate debt. While we may enter into agreements intending to limit our exposure to higher interest rates, any such agreements may not offer complete protection from this risk. See additional discussion about interest rate risk in “Risk Factors.”

The following is a summary of our outstanding debt as of December 31, 2016 and 2015 (see Note 10 to our audited consolidated financial statements for additional information on our debt). The fair value of our publicly held debt is based on the price at which the bonds are traded or quoted at December 31, 2016 and 2015. All other debt fair values are based on other similar financial instruments, or based upon interest rates that are currently available to us for the issuance of debt with similar terms and maturities.

 

(dollars in millions, except percentages)    2016      2015  

Year

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

2016

           $ 36        4.1   $ 36  

2017

   $ 36        4.1   $ 36        —          —       —    

2018

     —          —       —          —          —       —    

2019

     —          —       —          —          —       —    

2020

     —          —       —          —          —       —    

2021

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

2022 and beyond

     202        5.5     173        231        5.6     114  
  

 

 

      

 

 

    

 

 

      

 

 

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

 

 

      

 

 

    

 

 

      

 

 

 

Commodity Risk

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

 

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BUSINESS

Our Company

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

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

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

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

 

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2016 Revenue by

End-market

 

2016 Revenue by

Geography

 

2016 Segment EBITDA by

Segment(1)

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

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

Our Operating Segments

In the third quarter of 2017, we changed the organization of our reporting segments from two to four segments. Our new segment structure consists of a new Performance Additives segment realigned from the former Silicones segment, a new Formulated and Basic Silicones segment realigned from the former Silicones segment, a Quartz Technologies segment, which has been renamed from the existing Quartz segment, and a Corporate segment. We have organized the discussion below based upon our new segment structure. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Realignment” for additional information.

Performance Additives

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

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

 

   

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

 

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

 

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

 

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

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

Formulated and Basic Silicones

Our Formulated and Basic Silicones segment produces sealants, electronic materials, coatings, elastomers and basic silicone fluids focused on automotive, consumer goods, construction, electronics and healthcare end-markets. Our products enable key design features, such as extended product life, wear resistance, biocompatibility and weight reduction. Our sealants, electronic materials and coatings product lines are generally applied to our customers’ products, in the form of a high-tech coating or adhesive, while our elastomers product lines are fashioned into parts by extruding or molding them in items such as gaskets or tubing. Formulated silicones product offerings are typically used to seal, protect or adhere, and often perform multiple functions at once.

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

Our portfolio consists of five product families:

 

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

 

   

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

 

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

 

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

 

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

 

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

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

Quartz Technologies

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

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

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

 

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

Operations Overview

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

Global Operating Footprint

 

 

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

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

 

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Industry Overview and Market Outlook

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

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

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

 

 

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Source: Freedonia

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

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

 

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

 

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

Our Strengths

Our Company has the following competitive strengths:

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

 

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

 

Global Silicones Sales (All Products)1

 

Global Quartz Sales (All Products)2

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(1) Source: Freedonia
(2) Management estimate

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

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

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

 

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

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

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

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

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

 

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Growth and Strategy

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

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

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

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

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

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

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

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

 

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

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

Industry and Competitors

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

Raw Material Purchases

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

Performance Additives and Formulated and Basic Silicones

 

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

 

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

 

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

Quartz Technologies

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

 

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

Marketing, Customers and Seasonality

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

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

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

Research and Development

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

Intellectual Property

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

Solely for convenience, the trademarks, service marks and tradenames referred to in this prospectus are without the “®” and “TM” symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and tradenames.

Trademark License Agreement

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

 

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

Industry Regulatory Matters

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

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

Environmental Regulations

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

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

 

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

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

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

Employees

As of December 31, 2016, we had approximately 4,900 employees, flat compared to 2015. Approximately 44% (as of September 30, 2017) of our employees are members of a labor union or have collective bargaining agreements. The new contract involving the Local 81359 and Local 81380 unions in our Waterford, New York site and Local 84707 union in our Willoughby, Ohio site was ratified by union membership in February 2017 and is effective until June 2019.

Chapter 11 Bankruptcy Filing and Emergence

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

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

Properties

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

 

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

 

Location

   Real Property
Interest
     Business in Which Property is Used  

Americas:

     

Waterford, NY(2)

     Owned       
Performance Additives, Formulated
and Basic Silicones
 
 

Tarrytown, NY(1)

     Leased        Performance Additives  

Sistersville, WV(2)

     Owned        Performance Additives  

Chino, CA

     Leased        Formulated and Basic Silicones  

Garrett, IN

     Leased        Formulated and Basic Silicones  

New Smyrna Beach, FL

     Owned        Formulated and Basic Silicones  

Charlotte, NC(1)

     Leased        Performance Additives  

Itatiba, Brazil

     Owned        Performance Additives  

Texas City, TX

     Owned        Performance Additives  

Strongsville, OH(2)

     Owned        Quartz Technologies  

Willoughby, OH

     Owned        Quartz Technologies  

Richmond Heights, OH(2)

     Owned        Quartz Technologies  

Newark, OH

     Owned        Quartz Technologies  

Europe:

     

Leverkusen, Germany(2)

     Leased       
Performance Additives, Formulated
and Basic Silicones
 
 

Bergen op Zoom, Netherlands

     Leased        Formulated and Basic Silicones  

Lostock, United Kingdom

     Leased        Formulated and Basic Silicones  

Termoli, Italy

     Owned        Performance Additives  

Antwerp, Belgium

     Leased        Performance Additives  

Geesthacht, Germany

     Owned        Quartz Technologies  

Asia Pacific:

     

Nantong, China

     Leased       
Performance Additives, Formulated
and Basic Silicones
 
 

Ohta, Japan(2)

     Owned       
Performance Additives, Formulated
and Basic Silicones
 
 

Rayong, Thailand

     Leased        Formulated and Basic Silicones  

Bangalore, India(1)

     Leased       
Performance Additives, Formulated
and Basic Silicones
 
 

Chennai, India

     Owned        Performance Additives  

Shanghai, China(1)

     Leased       

Performance Additives, Formulated
and Basic Silicones, Quartz
Technologies
 
 
 

Seoul, Korea(3)

     Leased       
Performance Additives, Formulated
and Basic Silicones
 
 

Kobe, Japan(2)

     Leased        Quartz Technologies  

Kozuki, Japan

     Owned        Quartz Technologies  

Wuxi, China

     Leased        Quartz Technologies  

 

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

 

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Legal Proceedings

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

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

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

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

Environmental Matters

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

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

 

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and regulations, including obtaining and maintaining permits, we have incurred and will continue to incur costs, including capital expenditures for projects related to environmental, health and safety improvements. In addition, pursuant to applicable hazardous waste regulations, we are required to provide financial assurances for contingent future costs associated with certain hazardous waste management and remedial activities. Pursuant to financial assurance requirements set forth in state hazardous waste permit regulations applicable to our manufacturing facilities in Waterford, New York and Sistersville, West Virginia, we have provided letters of credit in the following amounts: approximately $43 million for closure and post-closure care and accidental occurrences at the Waterford and the Sistersville facilities. A renewal of our Waterford facility’s hazardous waste permit was issued by the NYSDEC in March 2016, which required us to provide approximately $26 million in financial assurances for our Waterford facility. The renewal permit also requires a re-evaluation of the financial assurance amount within the next three years. One or more of our facilities may also in the future be subject to additional financial assurance requirements imposed by governmental authorities, including the USEPA.    In this regard, in January 2017, the USEPA identified chemical manufacturing, among others, as an industry for which it plans to develop, as necessary, proposed regulations identifying appropriate financial assurance requirements pursuant to §108(b) of CERCLA.

We are currently conducting investigations and/or cleanup of known or potential contamination at several of our facilities. In connection with our creation on December 3, 2006, through the acquisition of certain assets, liabilities and subsidiaries of GE that comprised GE Advanced Materials, an operating unit within the Industrial Segment of GE, by Momentive Performance Materials Holdings Inc. (the parent company of MPM prior to its emergence from Chapter 11 bankruptcy) and its subsidiaries (the “GE Advanced Materials Acquisition”), GE has agreed to indemnify us for liabilities associated with contamination at former properties and with third-party waste disposal sites. GE has also agreed that if we suffer any losses that are the subject of an indemnification obligation under a third party contract with respect to which GE is an indemnitee, GE will pursue such indemnification on our behalf and provide us with any benefits received.

While we do not anticipate material costs in excess of current reserves and/or available indemnification relating to known or potential environmental contamination, the discovery of additional contamination or the imposition of more stringent cleanup requirements, could require us to make significant expenditures in excess of such reserves and/or indemnification.

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

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

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

 

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MANAGEMENT

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

 

Name

   Age   

Title

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

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

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

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

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

 

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

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

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

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

 

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

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

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

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

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

 

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

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

Board of Directors

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

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

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

 

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

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

Director Independence

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

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

Committees of the Board of Directors

Audit Committee

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

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

 

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

 

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

 

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

 

    to oversee our risk management procedures and risk exposure;

 

    to oversee the performance of our internal audit function; and

 

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

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

 

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Compensation Committee

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

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

 

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

 

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

 

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

 

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

 

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

 

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

Nominating and Governance Committee

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Environment, Health and Safety Committee

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

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

 

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

 

    to oversee compliance with environmental, health and safety indemnifications;

 

    to monitor our environmental, health and safety performance statistics;

 

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

 

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

 

    to oversee environmental, health and safety audit program.

Other Committees

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

Code of Ethics

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

 

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COMPENSATION DISCUSSION AND ANALYSIS

Overview

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

Oversight of the Executive Compensation Program

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

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

Use of Compensation Data

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

Executive Summary

Executive Compensation Objectives and Strategy

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

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

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

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

 

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

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

2016 Executive Compensation Highlights

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Evaluating Company and Individual Performance

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

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

 

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

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

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

Components of Our Executive Compensation Program

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

 

Type

  

Components

Annual Cash Compensa