UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

MPM HOLDINGS INC.

(Exact name of registrant as specified in its charter)

Commission File Number 333-201338



Delaware		47-1756080
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

MOMENTIVE PERFORMANCE MATERIALS INC.

(Exact name of registrant as specified in its charter)

Commission File Number 333-146093



Delaware		20-5748297
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

MPM Holdings Inc. Yes x No o

Momentive Performance Materials Inc. Yes x No o

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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

MPM Holdings Inc. Yes x No o

Momentive Performance Materials Inc. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

MPM Holdings Inc.



Large accelerated filer	o	Accelerated filer	o

Non-accelerated filer	x	Smaller Reporting Company	o

		Emerging Growth Company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Momentive Performance Materials Inc.



Large accelerated filer	o	Accelerated filer	o

Non-accelerated filer	x	Smaller Reporting Company	o

		Emerging Growth Company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

MPM Holdings Inc. Yes o No x

Momentive Performance Materials Inc. Yes o No x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

MPM Holdings Inc. Yes x No o

Momentive Performance Materials Inc. Yes x No o

The number of shares of common stock of MPM Holdings Inc., par value $0.01 per share, outstanding as of the close of business on October 27, 2017, was 48,121,634 shares.

The number of shares of common stock of Momentive Performance Materials Inc., par value $0.01 per share, outstanding as of the close of business on October 27, 2017, was 48 shares, all of which were held by MPM Intermediate Holdings Inc.

This Form 10-Q is a combined quarterly report being filed separately by two registrants: MPM Holdings Inc. and Momentive Performance Materials Inc.

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MPM HOLDINGS INC. AND MOMENTIVE PERFORMANCE MATERIALS INC.

INDEX



		Page
Part I —	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016	4
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016	5
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2017 and 2016	7
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016	8
	Condensed Consolidated Statement of Equity for the nine months ended September 30, 2017	9
	Notes to Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48
Item 4.	Controls and Procedures	48

Part II —	OTHER INFORMATION

Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.	Defaults Upon Senior Securities	59
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	61

Signatures		62

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Part I — FINANCIAL INFORMATION


Item 1.	Financial Statements (Unaudited)

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)



	MPM HOLDINGS INC.						MOMENTIVE PERFORMANCE MATERIALS INC.
(In millions, except share data)	September 30, 2017			December 31, 2016			September 30, 2017			December 31, 2016
Assets
Current assets:
Cash and cash equivalents (including restricted cash of $1 and $4 at September 30, 2017 and December 31, 2016, respectively)	$	144		$	228		$	144		$	228
Accounts receivable (net of allowance for doubtful accounts of $4 at both September 30, 2017 and December 31, 2016)	332			280			332			280
Inventories:
Raw materials	152			119			152			119
Finished and in-process goods	276			271			276			271
Other current assets	64			50			64			50
Total current assets	968			948			968			948
Investment in unconsolidated entities	19			20			19			20
Deferred income taxes	13			9			13			9
Other long-term assets	11			20			11			20
Property, plant and equipment:
Land	78			74			78			74
Buildings	327			307			327			307
Machinery and equipment	1,100			959			1,100			959
	1,505			1,340			1,505			1,340
Less accumulated depreciation	(354		)	(265		)	(354		)	(265		)
	1,151			1,075			1,151			1,075
Goodwill	216			211			216			211
Other intangible assets, net	308			323			308			323
Total assets	$	2,686		$	2,606		$	2,686		$	2,606
Liabilities and Equity
Current liabilities:
Accounts payable	$	274		$	238		$	274		$	238
Debt payable within one year	36			36			36			36
Interest payable	25			11			25			11
Income taxes payable	6			8			6			8
Accrued payroll and incentive compensation	60			61			60			61
Other current liabilities	109			123			107			122
Total current liabilities	510			477			508			476
Long-term liabilities:
Long-term debt	1,185			1,167			1,185			1,167
Pension and postretirement benefit liabilities	337			341			337			341
Deferred income taxes	67			66			67			66
Other long-term liabilities	70			73			70			72
Total liabilities	2,169			2,124			2,167			2,122
Commitments and contingencies (See Note 7)
Equity
Common stock - $0.01 par value; 70,000,000 shares authorized; 48,121,634 and 48,058,114 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	—			—
Common stock - $0.01 par value; 100 shares authorized; 48 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively							—			—
Additional paid-in capital	867			864			865			863
Accumulated other comprehensive loss	(25		)	(76		)	(25		)	(76		)
Accumulated deficit	(325		)	(306		)	(321		)	(303		)
Total equity	517			482			519			484
Total liabilities and equity	$	2,686		$	2,606		$	2,686		$	2,606

See Notes to Condensed Consolidated Financial Statements

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MPM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions, except share and per share data)	2017			2016			2017			2016
Net sales	$	594		$	567		$	1,732		$	1,689
Cost of sales	473			457			1,378			1,371
Gross profit	121			110			354			318
Costs and expenses:
Selling, general and administrative expense	83			79			252			238
Research and development expense	17			17			48			50
Restructuring and discrete costs (See Note 3)	6			2			6			11
Other operating (income) expense, net	(2		)	2			2			10
Operating income	17			10			46			9
Interest expense, net (See Note 6)	21			19			60			57
Gain on extinguishment of debt (See Note 6)	—			—			—			(9		)
Non-operating (income) expense, net	(3		)	—			(7		)	2
Reorganization items, net	—			—			—			1
Loss before income taxes and earnings (losses) from unconsolidated entities	(1		)	(9		)	(7		)	(42		)
Income tax expense (See Note 12)	6			8			11			4
Loss before earnings (losses) from unconsolidated entities	(7		)	(17		)	(18		)	(46		)
Earnings (losses) from unconsolidated entities, net of taxes	(1		)	—			(1		)	1
Net loss	$	(8	)	$	(17	)	$	(19	)	$	(45	)

Net loss per share:
Net loss per common share—basic	$	(0.17	)	$	(0.35	)	$	(0.39	)	$	(0.94	)
Net loss per common share—diluted	$	(0.17	)	$	(0.35	)	$	(0.39	)	$	(0.94	)
Shares used in per-share calculation
Weighted average common shares outstanding—basic	48,121,634			48,058,114			48,109,535			48,047,340
Weighted average common shares outstanding—diluted	48,121,634			48,058,114			48,109,535			48,047,340

See Notes to Condensed Consolidated Financial Statements

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MOMENTIVE PERFORMANCE MATERIALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2017			2016			2017			2016
Net sales	$	594		$	567		$	1,732		$	1,689
Cost of sales	473			457			1,378			1,371
Gross profit	121			110			354			318
Costs and expenses:
Selling, general and administrative expense	83			78			251			236
Research and development expense	17			17			48			50
Restructuring and discrete costs (See Note 3)	6			2			6			11
Other operating (income) expense, net	(2		)	2			2			10
Operating income	17			11			47			11
Interest expense, net (See Note 6)	21			19			60			57
Gain on extinguishment of debt (See Note 6)	—			—			—			(9		)
Non-operating (income) expense, net	(3		)	—			(7		)	2
Reorganization items, net	—			—			—			1
Loss before income taxes and earnings (losses) from unconsolidated entities	(1		)	(8		)	(6		)	(40		)
Income tax expense (See Note 12)	6			8			11			4
Loss before earnings (losses) from unconsolidated entities	(7		)	(16		)	(17		)	(44		)
Earnings (losses) from unconsolidated entities, net of taxes	(1		)	—			(1		)	1
Net loss	$	(8	)	$	(16	)	$	(18	)	$	(43	)

See Notes to Condensed Consolidated Financial Statements

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)



	MPM HOLDINGS INC.
	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2017			2016			2017			2016
Net loss	$	(8	)	$	(17	)	$	(19	)	$	(45	)
Other comprehensive income, net of tax:
Foreign currency translation	11			8			42			67
Net prior service credit	(1		)	(1		)	9			19
Other comprehensive income	10			7			51			86
Comprehensive (loss) income	$	2		$	(10	)	$	32		$	41



	MOMENTIVE PERFORMANCE MATERIALS INC.
	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2017			2016			2017			2016
Net loss	$	(8	)	$	(16	)	$	(18	)	$	(43	)
Other comprehensive income, net of tax:
Foreign currency translation	11			8			42			67
Net prior service credit	(1		)	(1		)	9			19
Other comprehensive income	10			7			51			86
Comprehensive (loss) income	$	2		$	(9	)	$	33		$	43

See Notes to Condensed Consolidated Financial Statements

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



	MPM HOLDINGS INC.						MOMENTIVE PERFORMANCE MATERIALS INC.
	Nine Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2017			2016			2017			2016
Cash flows (used in) provided by operating activities
Net loss	$	(19	)	$	(45	)	$	(18	)	$	(43	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	117			132			117			132
Unrealized actuarial losses from pensions and other post retirement liabilities	1			5			1			5
Deferred income tax benefit	(10		)	(14		)	(10		)	(14		)
Unrealized foreign currency gains	(4		)	(2		)	(4		)	(2		)
Amortization of debt discount	18			17			18			17
Gain on the extinguishment of debt	—			(9		)	—			(9		)
Stock based compensation	3			3			2			3
Other non-cash adjustments	9			8			9			8
Net change in assets and liabilities:
Accounts receivable	(40		)	(13		)	(40		)	(13		)
Inventories	(20		)	(31		)	(20		)	(31		)
Accounts payable	27			(9		)	27			(9		)
Income taxes payable	—			5			—			5
Other assets, current and non-current	(3		)	(8		)	(3		)	(8		)
Other liabilities, current and non-current	(33		)	38			(31		)	38
Net cash provided by operating activities	46			77			48			79
Cash flows used in investing activities
Capital expenditures	(123		)	(85		)	(123		)	(85		)
Purchases of intangible assets	(2		)	(1		)	(2		)	(1		)
Dividend from MPM	1			1			—			—
Proceeds from sale of assets	—			1			—			1
Purchase of a business	(9		)	—			(9		)	—
Change in restricted cash	3			—			3			—
Net cash used in investing activities	(130		)	(84		)	(131		)	(85		)
Cash flows used in financing activities
Net short-term debt borrowings	(1		)	2			(1		)	2
Repayments of long-term debt	—			(16		)	—			(16		)
Dividends paid	—			—			(1		)	(1		)
Net cash used in financing activities	(1		)	(14		)	(2		)	(15		)
Decrease in cash and cash equivalents	(85		)	(21		)	(85		)	(21		)
Effect of exchange rate changes on cash and cash equivalents	4			5			4			5
Cash and cash equivalents (unrestricted), beginning of period	224			217			224			217
Cash and cash equivalents (unrestricted), end of period	$	143		$	201		$	143		$	201
Supplemental disclosures of cash flow information
Cash paid for:
Interest	$	30		$	29		$	30		$	29
Income taxes, net of refunds	20			13			20			13
Non-cash investing activity:
Capital expenditures included in accounts payable	$	25		$	21		$	25		$	21

See Notes to Condensed Consolidated Financial Statements

Table of Contents

CONDENSED CONSOLIDATED STATEMENT OF EQUITY (Unaudited)



MPM HOLDINGS INC.
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Equity
(In millions, except share data)	Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Equity
Balance as of December 31, 2016	48,058,114	$	—	$	864	$	(76	)	$	(306	)	$	482
Net loss	—	—		—		—			(19		)	(19		)
Other comprehensive income	—	—		—		51			—			51
Stock-based compensation expense	—	—		3		—			—			3
Issuance of common stock	63,520	—		—		—			—			—
Balance as of September 30, 2017	48,121,634	$	—	$	867	$	(25	)	$	(325	)	$	517



MOMENTIVE PERFORMANCE MATERIALS INC.
(In millions, except share data)	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Equity
Balance as of December 31, 2016	$	—	$	863	$	(76	)	$	(303	)	$	484
Net loss	—		—		—			(18		)	(18		)
Other comprehensive income	—		—		51			—			51
Capital contribution from parent	—		2		—			—			2
Balance as of September 30, 2017	$	—	$	865	$	(25	)	$	(321	)	$	519

See Notes to Condensed Consolidated Financial Statements

Table of Contents

MPM HOLDINGS INC. AND MOMENTIVE PERFORMANCE MATERIALS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In millions, except share and per share data)

1. Business and Basis of Presentation

MPM Holdings Inc. (“Momentive”) is a holding company that conducts substantially all of its business through its subsidiaries. Momentive’s wholly owned subsidiary, MPM Intermediate Holdings Inc. (“Intermediate Holdings”), is a holding company for its wholly owned subsidiary, Momentive Performance Materials Inc. (“MPM”) and its subsidiaries. Momentive became the indirect parent company of MPM in accordance with MPM’s plan of reorganization (the “Plan”) pursuant to MPM’s emergence from Chapter 11 bankruptcy on October 24, 2014 (the “Effective Date” or the “Emergence Date”). Prior to its reorganization, MPM, through a series of intermediate holding companies, was controlled by investment funds managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and subsidiaries, “Apollo”). Unless otherwise noted, references to “we,” “us,” “our” or the “Company” refer collectively to Momentive and MPM and their subsidiaries, and, unless otherwise noted, the information provided pertains to both Momentive and MPM. Differences between the financial results of Momentive and MPM represent certain management expenses of and cash received by Momentive and therefore are not consolidated within the results of MPM.

Based in Waterford, New York, the Company, is comprised of, effective as of the third quarter of 2017 as described in Note 10, four operating and reportable segments: Performance Additives, Formulated and Basic Silicones, Quartz Technologies, and Corporate. Performance Additives is a global business engaged in the manufacture, sale and distribution of specialty silanes, silicone fluids and urethane additives. Formulated and Basic Silicones is a global business engaged in the manufacture, sale and distribution of sealants, electronics materials, coatings, elastomers and basic silicone fluids. Quartz Technologies, also a global business, is engaged in the manufacture, sale and distribution of high-purity fused quartz and ceramic materials. Corporate includes corporate, general and administrative expenses that are not allocated to the other segments, such as certain shared service and other administrative functions.

On April 13, 2014 (the “Petition Date”), Momentive Performance Materials Holdings Inc. (MPM’s direct parent prior to October 24, 2014) (“Old MPM Holdings”), MPM and certain of its U.S. subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization (the “Bankruptcy Filing”) under Chapter 11 (“Chapter 11”) of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Court”). The Chapter 11 proceedings were jointly administered under the caption In re MPM Silicones, LLC, et al., Case No. 14-22503. The Debtors continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court through the Effective Date.

The unaudited Condensed Consolidated Financial Statements include the accounts of the Company, its majority-owned subsidiaries in which minority shareholders hold no substantive participating rights. Intercompany accounts and transactions are eliminated upon consolidation. In the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair statement have been included. Results for the interim periods are not necessarily indicative of results for the entire year.

Year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the accompanying notes included in Momentive, MPM and their subsidiaries’ most recent Annual Report on Form 10-K for the year ended December 31, 2016.

During the three months ended June 30, 2017, the Company recorded an out-of-period correction totaling approximately $1 related to the reversal of capitalized interest on a capital project in progress between November 2014 and March 2017. Also during the three months ended March 31, 2017, the Company recorded an another out-of-period adjustment of $1 related to the correction of 2016 sales commissions to employees. After evaluating the quantitative and qualitative aspects of the above adjustments, the Company concluded the effect of these adjustments was not material to the current periods presented as well as any previously issued consolidated financial statements or expected annual results for 2017.

2. Summary of Significant Accounting Policies

Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and also requires the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, it requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Management’s estimates and assumptions are evaluated on an ongoing basis and are based on historical experience, current conditions and available information. Actual results could differ from these estimates.

Subsequent Events—As a public reporting company, the Company evaluates subsequent events and transactions through the date these unaudited Condensed Consolidated Financial Statements are issued.

Reclassifications—Certain prior period balances have been reclassified to conform with current presentations.

Net Income (Loss) Per Share—Momentive calculates earnings per share as the ratio of net income (loss) to weighted average basic and diluted common shares outstanding.

Stock-Based Compensation—The Company measures and recognizes the compensation expense for all share-based awards made to employees and directors based on estimated fair values, in accordance with ASC 718, Compensation – Stock Compensation. The fair value of stock options granted is calculated using a Monte Carlo option-pricing model on the date of the grant, and the fair value of Restricted Stock Units are valued using the fair market value of the Company’s common stock on the date of grant. Compensation expense is recognized over the employee’s requisite service period (generally the vesting period of the equity grant). See Note 8 for additional details regarding stock-based compensation.

Business Acquisitions—In January 2017 the Company acquired the operating assets of Sea Lion Technology, Inc. to further support the Silanes business of its Performance Additives segment. The Company previously had a tolling relationship with Sea Lion Technology, Inc. on their site. The Company believes the acquisition will enable it to further strategically leverage these assets in support of the NXT* silane business. The Company paid $9 in cash to acquire Sea Lion Technology, Inc., and acquired substantially all of its property, plant and equipment. This acquisition was not significant in relation to the Company’s consolidated financial results and, therefore, pro forma financial information has not been presented.

The acquisition was accounted for using the purchase method of accounting and the allocation of the purchase price inclusive of identification and measurement of the fair value of tangible and intangible assets. The Company engaged specialists to assist in the valuation of tangible and intangible assets. The table below summarizes the initial purchase price allocation to the fair value of assets acquired at the acquisition date. Goodwill is calculated as the excess of the purchase price over the total assets recognized and represents the estimated future economic benefits arising from expected synergies and growth opportunities for the Company. All of the goodwill and intangible assets are deductible for tax purposes.



Property, plant & equipment	$	7
Goodwill	1
Intangible assets	1
Purchase price of the business acquisition	$	9

*NXT is a trademark of Momentive Performance Materials Inc.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Board Update No. 2014-09: Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 supersedes the existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. According to the new guidance, an entity will apply a principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Additionally, in March 2016, the FASB issued Accounting Standards Board Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued Accounting Standards Board Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and the licensing implementation guidance. In May 2016, the FASB issued Accounting Standards Board Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides clarifying guidance in certain narrow areas and adds some practical expedients. In December 2016, the FASB issued Accounting Standards Board Update No. 2016-20, Technical Corrections and Improvements to Topic 606: Revenue from Contracts with Customers, which facilitates 13 technical corrections and improvements to Topic 606 and other Topics amended by ASU 2014-09 to increase stakeholders’ awareness of the proposals and to expedite improvements to ASU 2014-09. In September 2017, the FASB issued Accounting Standards Board Update No. 2017-13: Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which clarifies transition provisions for certain public business entities. The effective dates for the ASUs issued in 2016 and 2017 are the same as the effective date for ASU 2014-09. The revised effective date for ASU 2014-09 is for annual and interim periods beginning on or after December 15, 2017, and early adoption from the calendar year 2017 is permitted. Entities have the option of using either a full retrospective approach or a modified retrospective approach to adopt the guidance in ASU 2014-09. The Company expects to utilize the modified retrospective approach. The Company has started its evaluation process to assess the impact of the new guidance on its ongoing financial reporting. The evaluation process includes tasks such as performing an initial scoping analysis to identify key revenue streams, reviewing current revenue-based contracts and evaluating revenue recognition requirements in order to prepare a high-level road map and implementation work plan. As the Company completes its overall assessment, the Company is also identifying and preparing

to implement changes, if any, to its accounting policies and practices, business processes, systems and controls to support the new revenue recognition and disclosure requirements.

In July 2015, the FASB issued Accounting Standards Board Update No. 2015-11: Inventory (Topic 330) - Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 has changed the measurement requirement of inventory within the scope of this guidance from lower of cost or market to the lower of cost and net realizable value. The guidance is also defining net realizable value as: the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period and amendments to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of the requirements of ASU 2015-11 during 2017 did not significantly impact the Company’s financial statements.

In February 2016, the FASB issued Accounting Standards Board Update No. 2016-02: Leases (ASC 842) (“ASU 2016-02”). Pursuant to the guidance in ASU 2016-02, lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. It will be critical to identify leases embedded in a contract to avoid misstating the lessee’s balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. In September 2017, the FASB issued Accounting Standards Board Update No. 2017-13: Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which clarifies transition provisions for certain public business entities. The effective dates for the ASU issued in 2017 are the same as the effective date for ASU 2016-02. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the effect of the standard on its ongoing financial reporting.

In August 2016, the FASB issued Accounting Standards Board Update No. 2016-15: Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides new guidance designed to reduce existing diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU addresses eight specific cash flow issues, of which the following are expected to be applicable to the Company: 1) debt prepayment and extinguishment costs, 2) proceeds from settlement of insurance claims, 3) distributions received from equity method investments, and 4) separately identifiable cash flows and application of the predominance principle. In addition, in November 2016, the FASB issued Accounting Standards Board Update No. 2016-18: Statement of Cash Flows (Topic 230), Restricted Cash ("ASU 2016-18"). ASU 2016-18 clarifies certain existing principles in ASC 230, including providing additional guidance related to transfers between cash and restricted cash and how entities present, in their statement of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts. These ASUs will be effective for the Company’s fiscal year beginning January 1, 2018 and subsequent interim periods, with retrospective application to each period presented being required and early adoption is permitted. The adoption of ASU 2016-15 and ASU 2016-18 will modify the Company's current disclosures and reclassifications within the consolidated statement of cash flows but they are not expected to have a material effect on the Company’s consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Board Update No. 2017-01: Business Combinations (Topic 805) - Clarifying the Definition of a Business (“ASU 2017-01”). The ASU clarifies the definition of business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective for the Company’s fiscal year beginning January 1, 2018 and subsequent interim periods with prospective application with impacts on the Company’s consolidated financial statements that may vary depending on each specific acquisition. Early adoption is conditionally permitted.

In January 2017, the FASB issued Accounting Standards Board Update No. 2017-04: Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying value, which eliminates the current requirement to calculate a goodwill impairment charge by comparing the implied fair value of goodwill with its carrying amount. The amendments in this ASU are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this ASU need to be applied on a prospective basis. The Company is currently evaluating whether to early adopt this ASU.

In February 2017 the FASB issued Accounting Standards Board Update No. 2017-05: Other Income - Gains and Loss from Derecognition of Nonfinancial Assets (subtopic 610-20). The amendments in this ASU provide clarification that nonfinancial assets within the scope of ASC 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty and that an entity should allocate consideration to each distinct asset by applying the guidance in ASC 606 on allocating the transaction price to performance obligations. The amendments in this ASU also require entities to de-recognize a distinct non-financial asset or distinct in substance non-financial asset in a partial sale transaction when it (1) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with ASC 810 and (2) transfers control of the asset in accordance with ASC 606. The amendments to this ASU are effective in fiscal years beginning after December 15, 2017, including interim periods within those annual periods. The Company does not expect the adoption of the amendments in this ASU to have a significant impact on the Company’s consolidated financial statements.

In March 2017 the FASB issued Accounting Standards Update No. 2017-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU requires entities to: 1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and 2) present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. In addition, the ASU requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines. The ASU’s amendments are effective for interim and annual periods beginning after December 15, 2017. The Company is currently assessing this ASU’s impact on its financial statements.

In May 2017 the FASB issued Accounting Standards Update No. 2017-09: Compensation - Stock Compensation (Topic 718). The amendments in the ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The ASU’s amendments are effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. An entity need to apply the amendments in this ASU on a prospective basis to an award modified on or after the adoption date. The impact on the Company’s consolidated financial statements would vary depending on the nature of any potential future changes to share-based payment awards.

All other new accounting pronouncements issued but not yet effective or adopted have been deemed to be not relevant to the Company and, accordingly, are not expected to have an impact once adopted.

3. Restructuring Expenses and Discrete Costs

Included in restructuring and discrete costs are costs related to restructuring (primarily severance payments associated with work force reductions) and services and other expenses associated with cost optimization programs and transformation savings activities.

In November 2015 and as expanded in March and May 2016, the Company announced a global restructuring program to reduce costs through global selling, general and administrative expenses reductions and productivity actions at the Company’s operating facilities. The Company expected the program cost, primarily severance related, to be approximately $15. Substantially all of these charges will result in cash expenditures. These costs primarily relate to the Formulated and Basic Silicones and Performance Additives operating segments and are included in Other current liabilities on the Consolidated Balance Sheet and Restructuring and discrete costs on the Consolidated Statement of Operations.

In January 2016, the Company announced plans to exit siloxane production at its Leverkusen, Germany site to help optimize its manufacturing footprint in order to improve its long-term profitability once fully implemented. The planned reduction is expected to be fully implemented in 2017 and is incremental to the Company’s global restructuring program. This restructuring will result in an overall reduction of employment at the site. The Company recorded severance related costs of approximately $3, some of which was paid in late 2016 and the remaining to be paid in 2017. In addition, as a result of the siloxane production transformation programs, the Company recognized $17 of accelerated depreciation associated with asset retirement obligations during the year ended December 31, 2016 and $6 during the three months and nine months ended September 30, 2017.

The total charges incurred to date on the above restructuring programs were $16.

The following table sets forth the changes in the restructuring reserve related to severance. Included in this table are also other minor restructuring programs that were undertaken by the Company in different locations, none of which were individually material. These costs are primarily related to workforce reductions:



	Total
Accrued liability at December 31, 2016	4
Restructuring charges	1
Payments	—
Accrued liability at March 31, 2017	5
Restructuring charges	—
Payments	(1		)
Accrued liability at June 30, 2017	4
Restructuring Charges	2
Payments	(2		)
Accrued Liability at September 30, 2017	$	4

For both the three months ended September 30, 2017 and 2016, the Company recognized other costs of $4. For the nine months ended September 30, 2017 and 2016, the company recognized other costs of $3 and $10, respectively. The costs in 2017 and 2016 were primarily comprised of one-time expenses for services and integration, whereas the costs in 2017 were offset by a gain related to an insurance reimbursement

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of $15 related to fire damage at our Leverkusen, Germany facility. These are included in “Restructuring and discrete costs” in the Condensed Consolidated Statements of Operations. Refer to Note 10 for further details regarding these costs.

4. Related Party Transactions

Transactions with Hexion

Shared Services Agreement

In October 2010, the Company entered into a shared services agreement with Hexion Inc. (“Hexion”) (which, from October 1, 2010 through October 24, 2014, was a subsidiary under a common parent and thereafter, an entity controlled by a significant shareholder of the Company) (the “Shared Services Agreement”). Under this agreement, the Company provides to Hexion, and Hexion provides to the Company, certain services, including, but not limited to, human resources, information technology, accounting, finance, legal, and procurement services. The Shared Services Agreement establishes certain criteria upon which the cost of such services are allocated between the Company and Hexion. The Shared Services Agreement was renewed for one year starting in October 2017, is subject to termination by either the Company or Hexion, without cause, on not less than 30 days’ written notice, and expires in October 2018 (subject to one-year renewals every year thereafter; absent contrary notice from either party).

Pursuant to the Shared Services Agreement, during the nine months ended September 30, 2017 and 2016, the Company incurred approximately $31 and $38, respectively, of net costs for shared services and Hexion incurred approximately $41 and $50, respectively, of net costs for shared services. Included in the net costs incurred during the nine months ended September 30, 2017 and 2016, were net billings from Hexion to the Company of $21 and $23, respectively, to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to the applicable allocation percentage. The allocation percentages are reviewed by the Steering Committee pursuant to the terms of the Shared Services Agreement. The Company had accounts payable to Hexion of $2 and $5 at September 30, 2017 and December 31, 2016, respectively, and no accounts receivable from Hexion under this agreement.

Other Transactions with Hexion

In April 2014, the Company sold 100% of its interest in its Canadian subsidiary to a subsidiary of Hexion for a purchase price of $12. As a part of the transaction the Company also entered into a non-exclusive distribution agreement with a subsidiary of Hexion, whereby the subsidiary of Hexion will act as a distributor of certain of the Company’s products in Canada. The agreement has a term of 10 years, and is cancelable by either party with 180 days’ notice. The Company compensates the subsidiary of Hexion for acting as distributor at a rate of 2% of the net selling price of the related products sold. During the three and nine months ended September 30, 2017, the Company sold $6 and $17, respectively, of products to Hexion under this distribution agreement, and paid less than $1 to Hexion as compensation for acting as distributor of the products for all periods. During the three and nine months ended September 30, 2016, the Company sold $7 and $20, respectively, of products to Hexion under this distribution agreement, and paid less than $1 to Hexion as compensation for acting as distributor of the products for all periods. As of both September 30, 2017 and December 31, 2016, the Company had $2 of accounts receivable from Hexion related to the distribution agreement.

The Company also sells other products to, and purchases products from Hexion. These transactions were not material as of September 30, 2017.

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

The Company also sells products to, and purchases products from its affiliates other than Hexion. These transactions were not material as of September 30, 2017.

5. Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy exists, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are:


•	Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.


•	Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.


•	Level 3: Unobservable inputs, that are supported by little or no market activity and are developed based on the best information available in the circumstances. For example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

Recurring Fair Value Measurements

At both September 30, 2017 and December 31, 2016, the Company had less than $1 of natural gas derivative contracts, which are measured using Level 2 inputs, and are included in “Other current assets” in the unaudited Condensed Consolidated Balance Sheets. The fair value of the natural gas derivative contracts generally reflects the estimated amounts that the Company would receive or pay, on a pre-tax basis, to terminate the contracts at the reporting date based on broker quotes for the same or similar instruments. Counter-parties to these contracts are highly rated financial institutions, none of which experienced any significant downgrades that would reduce the fair value receivable amount owed, if any, to the Company. There were no transfers between Level 1, Level 2 or Level 3 measurements during the three or nine months ended September 30, 2017.

Non-derivative Financial Instruments

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



	Carrying Amount		Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
September 30, 2017
Debt	$	1,221	$	—	$	1,341	$	—	$	1,341
December 31, 2016
Debt	$	1,203	$	—	$	1,243	$	—	$	1,243

Fair values of debt classified as Level 2 are determined based on other similar financial instruments, or based upon interest rates that are currently available to the Company for the issuance of debt with similar terms and maturities. Fair values of debt are based upon the aggregate principal amount of each instrument, and do not include any unamortized debt discounts or premiums. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities are considered reasonable estimates of their fair values due to the short-term maturity of these financial instruments.

6. Debt Obligations

As of September 30, 2017 and December 31, 2016, the Company had no outstanding borrowings under its senior secured asset-based revolving loan facility (the “ABL Facility”). Outstanding letters of credit under the ABL Facility at September 30, 2017 were $55, leaving an unused borrowing capacity of $215. On October 30, 2017, the Company received commitments to extend the maturity of the ABL Facility from October 2019 to five years from the closing of an equity offering by the Company, subject to certain conditions and exceptions.

As of September 30, 2017, the Company was in compliance with all the covenants included in the agreements governing its outstanding indebtedness.

During the first quarter of 2016, the Company repurchased in the open market $29 aggregate principal amount of the Company’s 4.69% Second-Priority Senior Secured Notes due 2022 (the “Second Lien Notes”) for $16. The Company recorded a gain of $9 net of associated discount on these notes, as a result of paying down this debt at less than its aggregate principal amount. All repurchased notes were canceled reducing the aggregate principal amount of Second Lien Notes outstanding from $231 to $202.

At September 30, 2017, the weighted average interest rate of the Company’s long term debt was 4.40%.

Debt outstanding at September 30, 2017 and December 31, 2016 was as follows:



	September 30, 2017				December 31, 2016
	Long-Term		Due Within One Year		Long-Term		Due Within One Year
Senior Secured Credit Facilities:
ABL Facility	$	—	$	—	$	—	$	—
Secured Notes:
3.88% First-Priority Senior Secured Notes due 2021 (includes $90 and $105 of unamortized debt discount, respectively)	1,010		—		995		—
4.69% Second-Priority Senior Secured Notes due 2022 (includes $27 and $30 of unamortized debt discount, respectively)	175		—		172		—
Other Borrowings:
China bank loans	—		36		—		36
Total debt	$	1,185	$	36	$	1,167	$	36

Momentive is not an obligor under the debt obligations above. MPM is a borrower under the ABL Facility and the issuer of the secured notes, which are fully and unconditionally guaranteed by certain subsidiaries of MPM (see Note 14).

7. Commitments and Contingencies

Non-Environmental Legal Matters

The Company is involved in various legal proceedings in the ordinary course of business and had reserves of $4 and $3 at September 30, 2017 and December 31, 2016, respectively, for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable, all of which are included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets.

Environmental Matters

The Company is involved in certain remediation actions to clean up hazardous wastes as required by federal and state laws. Liabilities for remediation costs at each site are based on the Company’s best estimate of discounted future costs. As of September 30, 2017 and December 31, 2016, the Company had recognized total obligations of approximately $12 and $13, respectively, for remediation costs at the Company’s manufacturing facilities and off-site landfills. These amounts are included in “Other long-term liabilities” in the unaudited Condensed Consolidated Balance Sheets.

Included in these liabilities is $8 related to groundwater treatment at the Company’s Waterford, NY site. In 1988, a consent decree was signed with the State of New York which requires recovery of groundwater at the site to contain migration of specified contaminants in the groundwater. A groundwater pump and treat system and groundwater monitoring program are currently operational to implement the requirements of this consent decree.

Due to the long-term nature of the project and the uncertainty inherent in estimating future costs of implementing this program, this liability was recorded at its net present value, which assumes a 3% discount rate and an estimated time period of 50 years and is included in our total obligations as discussed above. The undiscounted obligations, which are expected to be paid over the estimated period, are approximately $17. Over the next five years the Company expects to make ratable payments totaling approximately $2.

8. Equity Plans and Stock Based Compensation

Management Equity Plan

On March 12, 2015, the Board of Directors of Momentive approved the MPM Holdings Inc. Management Equity Plan (the “MPMH Equity Plan”). Under the MPMH Equity Plan, Momentive can award no more than 3,818,182 shares which may consist of options, restricted stock units, restricted stock and other stock-based awards, qualifying as equity classified awards in accordance with ASC 718 “Compensation - Stock Compensation”. The restricted stock units are non-voting units of measurement which are deemed to be equivalent to one common share of Momentive. The options are options to purchase common shares of Momentive. The awards contain restrictions on transferability and other typical terms and conditions. The purpose of the MPMH Equity Plan is to assist the Company in attracting, retaining, incentivizing and motivating employees and to promote the success of the Company’s business by providing such participating individuals with a proprietary interest in the performance of the Company.

The Compensation Committee of the Board of Directors of Momentive has approved grants under the MPMH Equity Plan of restricted stock units and options to certain of the Company’s key managers, including the Company’s named executive officers (“NEOs”) and certain directors of the Company.

The following is a summary of key terms of the stock-based awards granted under the MPMH Equity Plan:



Award	Vesting Terms	Option/Unit Terms
Stock Options—Tranche A	Performance-based and market-based upon achievement of targeted common stock prices either through a Sale or an IPO with certain conditions as such terms are defined by the MPMH Equity Plan	10 years
Stock Options—Tranche B	Performance-based and market-based upon achievement of targeted common stock prices either through a Sale or an IPO with certain conditions as such terms are defined by the MPMH Equity Plan	10 years
Employees and NEOs Restricted Stock Units grant	Cliff vest four years after grant date; Immediate vesting upon a Sale and ratable vesting in the event of an IPO as defined in the MPMH Equity Plan	NA
Directors Restricted Stock Units grant	Cliff vest annually after grant date; Immediate vesting upon a Sale as defined in the MPMH Equity Plan	NA

Stock Options

In May 2016, the Company’s Board of Directors approved a re-pricing of the granted stock options reducing the strike price to $10.25 from $20.33 based on the fair market value of Momentive’s shares on May 19, 2016 and changing the market conditions vesting thresholds of Tranche A and Tranche B to be $20 per share and $25 per share, down from $30.50 per share and $40.66 per share, respectively. Momentive treated the repricing as a modification of the original awards and calculated additional compensation costs for the difference between the fair value of the modified award and the fair value of the original award on the modification date. The repricing triggered changes in fair value of Tranche A from $7.93 per option to $9.83 per option and in Tranche B from $7.62 per option to $8.93 per option resulting in an incremental increase of $3 in unrecognized compensation expense related to these non-vested stock options, to $15 at May 19, 2016.

The estimated fair values of Stock Options granted and the assumptions used for the Monte Carlo option-pricing model were as follows:



	September 30, 2017						September 30, 2016
	Tranche A			Tranche B			Tranche A			Tranche B
Estimated fair values	$	9.83		$	8.93		$	9.83		$	8.93
Assumptions:
Strike Price	$	10.25		$	10.25		$	10.25		$	10.25
Risk-free interest rate	0.80		%	0.80		%	0.80		%	0.80		%
Expected term	1.62 years			1.62 years			1.62 years			1.62 years
Expected volatility	60.00		%	60.00		%	60.00		%	60.00		%
Tranche Market Threshold	$	20.00		$	25.00		$	20.00		$	25.00

Information on Stock Options activity is as follows:



	Tranche A			Tranche B
	Units	Weighted-Average Exercise Price per Share		Units	Weighted-Average Exercise Price per Share
Balance at January 1, 2017	782,040	$	10.33	782,040	$	10.33
Granted	—			—
Exercised	—			—
Forfeited	—			—
Expired	—			—
Balance as of September 30, 2017	782,040	$	10.33	782,040	$	10.33

As there have been no performance and market based achievements since the date of the original grant, there has been no compensation expense recorded during the three and nine months ended September 30, 2017 and the three and nine months ended September 30, 2016 with respect to stock options. At both September 30, 2017 and December 31, 2016, unrecognized compensation expense related to non-vested stock options was $15. Stock-based compensation cost related to stock options will be recognized once the satisfaction of the performance and market conditions becomes probable.

Restricted Stock Units

Information on Restricted Stock Units activity is as follows:



	Units		Weighted-Average Grant Date Fair Value per Share		Aggregate Fair Value
Balance at January 1, 2017	733,840		$	19.23
Granted	42,056		18.28
Vested	(63,520	)	10.35		1
Forfeited	—
Expired	—
Balance as of September 30, 2017	712,376		$	19.92

The fair market values related to the RSUs at the different grant dates were derived from material financial weighted analysis of the Company’s value as implied at emergence from Chapter 11 Bankruptcy or by the sales of stock completed with related parties and adjusted to reflect current and future market conditions and the Company’s expected financial performances at the grant date. The material financial weighted analysis consisted of (i) a discounted cash flow analysis, (ii) a selected publicly traded company analysis and (iii) a selected transactions analysis. The employees’ and named executive officers’ RSUs are 100% vested upon the fourth anniversary of the date of grant (“Scheduled Vesting Date”) provided that the grantee remains continuously employed in active service by the Company or one of its affiliates from the date of grant through the Scheduled Vesting Date. The directors’ RSUs are 100% vested upon the first anniversary of the date of grant.

Additionally, vesting of the RSU grants could be accelerated: (i) upon a Sale of the Company occurring prior to the Scheduled Vesting Date, the RSUs, to the extent unvested, shall become fully vested, subject to the grantee’s continued employment through the effective date of such Sale; or (ii) upon an IPO occurring prior to the Scheduled Vesting Date, a graded percentage of the employees’ RSUs, shall become vested subject to the grantee’s continued employment through the effective date of the IPO.

There were no performance-based achievements during the three and nine months ended September 30, 2017. The fair value of the Company’s RSUs, net of forfeitures, is expensed on a straight-line basis over the required service period.

Stock-based compensation expense related to the RSU awards was approximately $1 for both the three months ended September 30, 2017 and 2016 and $3 for both the nine months ended September 30, 2017 and 2016 for Momentive, whereas for MPM, it was $0 and $1 for the three months ended September 30, 2017 and 2016, respectively, and $2 and $3 for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, unrecognized compensation related to RSU awards was $6 and expense will be recognized over the remaining 1.57 years vesting period. Stock-based compensation cost related to RSU awards may be accelerated once the satisfaction of one of the performance conditions outlined becomes probable.

Although the MPMH Equity Plan, under which the above awards were granted, was issued by Momentive, substantially all of the underlying compensation cost represents compensation costs paid by Momentive on MPM’s behalf, as a result of the MPM’s employees’ services to MPM. Upon vesting of awards, Momentive will issue new stock to deliver shares under the MPMH Equity Plan.

9. Pension and Postretirement Benefit Plans

The following are the components of the Company’s net pension and postretirement (benefit) expense for the three and nine months ended September 30, 2017 and 2016:



	Pension Benefits											Non-Pension Postretirement Benefits
	Three Months Ended September 30,											Three Months Ended September 30,
	2017					2016						2017					2016
	U.S. Plans			Non-U.S. Plans		U.S. Plans			Non-U.S. Plans			U.S. Plans			Non-U.S. Plans		U.S. Plans			Non-U.S. Plans
Service cost	$	2		$	3	$	2		$	3		$	—		$	—	$	—		$	—
Interest cost on projected benefit obligation	2			—		3			1			—			—		1			—
Expected return on assets	(2		)	—		(2		)	(1		)	—			—		—			—
Amortization of prior service credit	—			—		—			—			(1		)	—		(1		)	—
Net periodic benefit cost	$	2		$	3	$	3		$	3		$	(1	)	$	—	$	—		$	—



	Pension Benefits											Non-Pension Postretirement Benefits
	Nine Months Ended September 30,											Nine Months Ended September 30,
	2017					2016						2017					2016
	U.S. Plans			Non-U.S. Plans		U.S. Plans			Non-U.S. Plans			U.S. Plans			Non-U.S. Plans		U.S. Plans			Non-U.S. Plans
Service cost	$	5		$	9	$	5		$	8		$	—		$	—	$	1		$	—
Interest cost on projected benefit obligation	7			2		7			3			1			—		2			—
Expected return on assets	(7		)	—		(6		)	(1		)	—			—		—			—
Amortization of prior service credit	—			—		—			—			(3		)	—		(2		)	—
Actuarial loss⁽¹⁾	—					—			—			1			—		5			—
Net periodic benefit cost	$	5		$	11	$	6		$	10		$	(1	)	$	—	$	6		$	—

(1)

The actuarial loss on U.S. non-pension post-retirement benefit plans of $1 and $5 during the nine months ended September 30, 2017 and 2016, respectively relates to the decrease in discount rate as a result of the re-measurement of the accumulated postretirement benefit obligation on company sponsored post-retiree medical, dental, vision and life insurance benefit plans. These were triggered by plan provision changes for active retirees and employees. The Company recorded this expense in Selling, general and administrative expense in the unaudited Consolidated Statements of Operations.

10. Segment Information and Customers

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


•	preparing financial information separately and regularly for each of the four segments; and


•	having the CEO regularly review the results of operations, manage the allocation of resources and assess the performance of each of these segments

The four segment model is composed of the following:


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


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


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


•	a Corporate segment.

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

Following are net sales and Segment EBITDA (earnings before interest, income taxes, depreciation and amortization) by segment. Segment EBITDA is defined as EBITDA adjusted for certain non-cash items and certain other income and expenses. Segment EBITDA is the primary performance measure used by the Company’s senior management, the chief operating decision-maker and the board of directors to evaluate operating results and allocate capital resources among segments. Segment EBITDA is also the profitability measure used to set management and executive incentive compensation goals.

Net Sales⁽¹⁾:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Performance Additives	$	223	$	215	$	670	$	638
Formulated and Basic Silicones	320		309		910		925
Quartz Technologies	51		43		152		126
Total	$	594	$	567	$	1,732	$	1,689


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

Segment EBITDA:



	MPM HOLDINGS INC.
	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Performance Additives	$	45		$	49		$	140		$	138
Formulated and Basic Silicones	20			20			71			51
Quartz Technologies	13			6			30			13
Corporate	(11		)	(9		)	(31		)	(29		)
Total	$	67		$	66		$	210		$	173



	MOMENTIVE PERFORMANCE MATERIALS INC.
	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Performance Additives	$	45		$	49		$	140		$	138
Formulated and Basic Silicones	20			20			71			51
Quartz Technologies	13			6			30			13
Corporate	(11		)	(8		)	(30		)	(27		)
Total	$	67		$	67		$	211		$	175

Reconciliation of Net Loss to Segment EBITDA:



	MPM HOLDINGS INC.
	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net loss	$	(8	)	$	(17	)	$	(19	)	$	(45	)
Interest expense, net	21			19			60			57
Income tax expense	6			8			11			4
Depreciation and amortization	42			48			117			132
Gain on extinguishment and exchange of debt	—			—			—			(9		)

Items not included in Segment EBITDA:
Non-cash charges and other income and expense	$	—		$	4		$	4		$	15
Unrealized losses on pension and postretirement benefits	—			—			1			5
Restructuring and discrete costs	6			4			36			13
Reorganization items, net	—			—			—			1
Segment EBITDA	$	67		$	66		$	210		$	173



	MOMENTIVE PERFORMANCE MATERIALS INC.
	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net loss	$	(8	)	$	(16	)	$	(18	)	$	(43	)
Interest expense, net	21			19			60			57
Income tax expense	6			8			11			4
Depreciation and amortization	42			48			117			132
Gain on extinguishment and exchange of debt	—			—			—			(9		)

Items not included in Segment EBITDA:
Non-cash charges and other income and expense	$	—		$	4		$	4		$	15
Unrealized losses on pension and postretirement benefits	—			—			1			5
Restructuring and discrete costs	6			4			36			13
Reorganization items, net	—			—			—			1
Segment EBITDA	$	67		$	67		$	211		$	175

Items Not Included in Segment EBITDA

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

For the three and nine months ended September 30, 2017 and 2016, non-cash charges primarily included asset impairment charges, loss due to the scrapping of certain assets, stock based compensation expense, and net foreign exchange transaction gains and losses related to certain intercompany arrangements.

For the nine months ended September 30, 2017 and 2016, unrealized gains (losses) on pension and postretirement benefits represented non-cash actuarial losses recognized upon the remeasurement of our pension and postretirement benefit obligations.

For the three and nine months ended September 30, 2017 and 2016, restructuring and discrete costs included expenses from restructuring and integration. In addition, for the three and nine months ended September 30, 2017, these costs also included a gain related to an insurance reimbursement of $5 and $15, respectively, related to fire damage at our Leverkusen, Germany facility and for the nine months ended September 30, 2017, these costs also included costs arising from the work stoppage inclusive of unfavorable manufacturing variances at our Waterford, NY facility.

11. Changes in Other Comprehensive (Loss) Income

Following is a summary of changes in “Accumulated other comprehensive (loss) income” for the three and nine months ended September 30, 2017 and 2016:



	Three Months Ended September 30,
	2017									2016
	Defined Benefit Pension and Postretirement Plans			Foreign Currency Translation Adjustments			Total			Defined Benefit Pension and Postretirement Plans			Foreign Currency Translation Adjustments			Total
Beginning balance	$	27		$	(62	)	$	(35	)	$	20		$	(33	)	$	(13	)
Other comprehensive income before reclassifications, net of tax ⁽¹⁾	—			11			11			—			8			8
Amounts reclassified from Accumulated other comprehensive income (loss), net of tax	(1		)	—			(1		)	(1		)	—			(1		)
Net other comprehensive (loss) income	(1		)	11			10			(1		)	8			7
Ending balance	$	26		$	(51	)	$	(25	)	$	19		$	(25	)	$	(6	)



	Nine Months Ended September 30,
	2017									2016
	Defined Benefit Pension and Postretirement Plans			Foreign Currency Translation Adjustments			Total			Defined Benefit Pension and Postretirement Plans			Foreign Currency Translation Adjustments			Total
Beginning balance	$	17		$	(93	)	$	(76	)	$	—		$	(92	)	$	(92	)
Other comprehensive income before reclassifications, net of tax ⁽¹⁾	12			42			54			20			67			87
Amounts reclassified from Accumulated other comprehensive income (loss), net of tax	(3		)	—			(3		)	(1		)	—			(1		)
Net other comprehensive income	9			42			51			19			67			86
Ending balance	$	26		$	(51	)	$	(25	)	$	19		$	(25	)	$	(6	)

(1)

Other comprehensive income related to defined benefit pension and postretirement plans for the nine months ended September 30, 2017 and 2016, represent the recognition of prior service benefits of $18 and $32, respectively, with the corresponding decrease in the projected benefit obligation following certain plan provision changes, reduced by tax expenses of $6 and $12, for the nine months ended September 30, 2017 and 2016, respectively, (see Note 9).

12. Income Taxes

The effective tax rate was (600)% for both Momentive and MPM, for the three months ended September 30, 2017 and (89)% and (100)% for Momentive and MPM, respectively, for the three months ended September 30, 2016. The effective tax rate was (157)% and (183)% for Momentive and MPM for the Nine Months Ended September 30, 2017. The effective tax rate was (10)% for Momentive and MPM for the nine months ended September 30, 2016. The change in the effective tax rate was primarily attributable to the amount and distribution of income and loss among the various jurisdictions in which the Company operates. The effective tax rates were also impacted by operating losses generated in jurisdictions where no tax benefit was recognized due to the maintenance of a full valuation allowance, tax impact of recognition of net prior service benefit following certain plan provision changes (see Note 11), legislative changes in Italy and Japan, and the resolution of certain tax matters in non-U.S. jurisdictions.

For the three and nine months ended September 30, 2017, income taxes included unfavorable discrete tax adjustments of $2 and favorable discrete tax adjustments of $8, respectively, pertaining to benefits curtailment, legislative changes in Italy and Japan, and the resolution of certain tax matters in non-U.S. jurisdictions. For the three and nine months ended September 30, 2016, income taxes included unfavorable discrete tax adjustments of $2 and favorable discrete tax adjustments of $11, respectively, pertaining to benefits curtailment, a change in tax law in Japan and the resolution of certain tax matters in non-U.S. jurisdictions.

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

13. Net Loss per Share

The following table presents the calculation of basic and diluted net loss per share attributable to Momentive for the three and nine months ended September 30, 2017 and 2016:



	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions, except share data)	2017			2016			2017			2016
Net loss	$	(8	)	$	(17	)	$	(19	)	$	(45	)
Weighted average common shares—basic	48,121,634			48,058,114			48,109,535			48,047,340
Effect of dilutive potential common shares	—			—			—			—
Weighted average shares outstanding—diluted	48,121,634			48,058,114			48,109,535			48,047,340
Net loss per common share—basic	$	(0.17	)	$	(0.35	)	$	(0.39	)	$	(0.94	)
Net loss per common share—diluted	$	(0.17	)	$	(0.35	)	$	(0.39	)	$	(0.94	)
Antidilutive employee share-based awards, excluded	310,836			28,288			129,409			21,436

Employee equity share options, unvested shares and similar equity instruments granted by the Company are treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options, unvested restricted stock, and restricted stock units. The dilutive effect of such equity awards is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are collectively assumed to be used to repurchase shares.

Due to the losses recognized three and nine months ended September 30, 2017 and 2016, there is no effect for potentially dilutive shares.

14. Guarantor/Non-Guarantor Subsidiary Financial Information

As of September 30, 2017, the Company had outstanding $1,100 in aggregate principal amount of 3.88% First-Priority Senior Secured Notes due 2021 (the “First Lien Notes”) and $202 in aggregate principal amount of 4.69% Second-Priority Senior Secured Notes due 2022 (the “Second Lien Notes”). The notes are fully and unconditionally, jointly and severally guaranteed on a senior secured basis by each of MPM’s existing 100% owned U.S. subsidiaries that is a guarantor under MPM’s ABL Facility and MPM’s future U.S. subsidiaries (other than receivables subsidiaries and U.S. subsidiaries of foreign subsidiaries) that guarantee any debt of MPM or any of the guarantor subsidiaries of MPM under the related indenture (the “Note Guarantors”). The following condensed consolidated financial information presents the Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 of (i) Momentive Performance Materials Inc. (“Parent”); (ii) the guarantor subsidiaries; (iii) the non-guarantor subsidiaries; and (iv) MPM on a consolidated basis.

These financial statements are prepared on the same basis as the consolidated financial statements of MPM except that investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. The guarantor subsidiaries are 100% owned by Parent and all guarantees are full and unconditional, subject to certain customary release provisions set forth in the applicable Indenture. Additionally, the ABL Facility is secured by, among other things, most of the assets of the Parent, the guarantor subsidiaries and certain non-guarantor subsidiaries, subject to certain exceptions and permitted liens. There are no significant restrictions on the ability of Parent to obtain funds from its domestic subsidiaries by dividend or loan. The indentures governing the First Lien Notes and the Second Lien Notes contain covenants that, among other things, limit MPM’s ability and the ability of certain of MPM’s subsidiaries to (i) incur or guarantee additional indebtedness or issue preferred stock; (ii) grant liens on assets; (iii) pay dividends or make distributions to MPM’s stockholders; (iv) repurchase or redeem capital stock or subordinated indebtedness; (v) make investments or acquisitions; (vi) enter into sale/leaseback transactions; (vii) incur restrictions on the ability of MPM’s subsidiaries to pay dividends or to make other payments to us; (viii) enter into transactions with MPM’s affiliates; (ix) merge or consolidate with other companies or transfer all or substantially all of MPM’s assets; and (x) transfer or sell assets.

MOMENTIVE PERFORMANCE MATERIALS INC.

SEPTEMBER 30, 2017

CONDENSED CONSOLIDATING BALANCE SHEETS (Unaudited)



	Parent		Combined Guarantor Subsidiaries		Combined Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents (including restricted cash of $0, $0, $1 and $1, respectively)	$	23	$	1	$	120	$	—		$	144
Accounts receivable	—		97		235		—			332
Due from affiliates	4		71		32		(107		)	—
Inventories:
Raw materials	—		77		75		—			152
Finished and in-process goods	—		113		163		—			276
Other current assets			16		48		—			64
Total current assets	27		375		673		(107		)	968
Investment in unconsolidated entities	1,609		310		19		(1,919		)	19
Deferred income taxes	—		—		13		—			13
Other long-term assets	—		1		10		—			11
Intercompany loans receivable	322		941		116		(1,379		)	—
Property, plant and equipment, net	—		545		606		—			1,151
Goodwill	—		105		111		—			216
Other intangible assets, net	—		126		182		—			308
Total assets	$	1,958	$	2,403	$	1,730	$	(3,405	)	$	2,686
Liabilities and Equity
Current liabilities:
Accounts payable	$	—	$	92	$	182	$	—		$	274
Due to affiliates	—		32		75		(107		)	—
Debt payable within one year	—		—		36		—			36
Interest payable	24		1		—		—			25
Income taxes payable	—		—		6		—			6
Accrued payroll and incentive compensation	—		31		29		—			60
Other current liabilities	—		37		70		—			107
Total current liabilities	24		193		398		(107		)	508
Long-term liabilities:
Long-term debt	1,185		—		—		—			1,185
Intercompany loans payable	230		447		702		(1,379		)	—
Pension and retirement benefit liabilities	—		139		198		—			337
Deferred income taxes	—		—		67		—			67
Other long-term liabilities	—		15		55		—			70
Total liabilities	1,439		794		1,420		(1,486		)	2,167
Total equity (deficit)	519		1,609		310		(1,919		)	519
Total liabilities and equity	$	1,958	$	2,403	$	1,730	$	(3,405	)	$	2,686

MOMENTIVE PERFORMANCE MATERIALS INC.

DECEMBER 31, 2016

CONDENSED CONSOLIDATING BALANCE SHEETS



	Parent		Combined Guarantor Subsidiaries		Combined Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents (including restricted cash of $0, $0, $4 and $4, respectively)	$	39	$	1	$	188	$	—		$	228
Accounts receivable	—		77		203		—			280
Due from affiliates	—		86		41		(127		)	—
Inventories:
Raw materials	—		71		48		—			119
Finished and in-process goods	—		118		153		—			271
Other current assets	—		16		34		—			50
Total current assets	39		369		667		(127		)	948
Investment in unconsolidated entities	1,556		257		20		(1,813		)	20
Deferred income taxes	—		—		9		—			9
Other long-term assets	—		1		19		—			20
Intercompany loans receivable	264		927		51		(1,242		)	—
Property, plant and equipment, net	—		526		549		—			1,075
Goodwill	—		105		106		—			211
Other intangible assets, net	—		136		187		—			323
Total assets	$	1,859	$	2,321	$	1,608	$	(3,182	)	$	2,606
Liabilities and Equity
Current liabilities:
Accounts payable	$	—	$	64	$	174	$	—		$	238
Due to affiliates	—		41		86		(127		)	—
Debt payable within one year	—		—		36		—			36
Interest payable	11		—		—		—			11
Income taxes payable	—		—		8		—			8
Accrued payroll and incentive compensation	—		35		26		—			61
Other current liabilities	—		41		81		—			122
Total current liabilities	11		181		411		(127		)	476
Long-term liabilities:
Long-term debt	1,167		—		—		—			1,167
Intercompany loans payable	197		401		644		(1,242		)	—
Pension and retirement benefit liabilities	—		168		173		—			341
Deferred income taxes	—		—		66		—			66
Other long-term liabilities	—		15		57		—			72
Total liabilities	1,375		765		1,351		(1,369		)	2,122
Total equity (deficit)	484		1,556		257		(1,813		)	484
Total liabilities and equity (deficit)	$	1,859	$	2,321	$	1,608	$	(3,182	)	$	2,606

MOMENTIVE PERFORMANCE MATERIALS INC.

THREE MONTHS ENDED SEPTEMBER 30, 2017

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)



	Parent		Combined Guarantor Subsidiaries		Combined Non- Guarantor Subsidiaries		Eliminations			Consolidated
Net sales	$	—	$	291	$	459	$	(156	)	$	594
Cost of sales	—		244

Momentive Performance Materials Inc. 10-Q