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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 27, 2009
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 333-146093
Momentive Performance Materials Inc.
(Exact name of registrant as specified in its charter)
Delaware | 20-5748297 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
22 Corporate Wood Blvd., 2nd Fl Albany, NY 12211 |
(518) 533-4600 | |
(Address of principal executive offices including zip code) | (Registrants 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. Yes þ No ¨
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). Yes ¨ No ¨
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):
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer þ | Smaller Reporting Company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The number of shares of common stock of the Company, par value $0.01 per share, outstanding as of the close of business on November 7, 2009 was 100 shares, all of which were held by Momentive Performance Materials Holdings Inc.
Table of Contents
Page | ||||
Part I |
Financial Information |
|||
Item 1. |
Financial Statements |
|||
Condensed Consolidated Balance Sheets as of September 27, 2009 and December 31, 2008 |
3 | |||
4 | ||||
5 | ||||
6 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
25 | ||
Item 3. |
36 | |||
Item 4. |
36 | |||
Part II |
Other Information |
|||
Item 1. |
37 | |||
Item 1A. |
37 | |||
Item 2. |
38 | |||
Item 3. |
38 | |||
Item 4. |
38 | |||
Item 5. |
38 | |||
Item 6. |
39 | |||
40 |
Table of Contents
MOMENTIVE PERFORMANCE MATERIALS INC.
Condensed Consolidated Balance Sheets (Unaudited)
(Dollar amounts in thousands)
September 27, 2009 |
December 31, 2008 |
||||||
Assets | |||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ | 404,195 | 340,542 | ||||
Receivables, net (note 4) |
420,643 | 408,851 | |||||
Due from affiliates |
3,104 | 1,776 | |||||
Inventories (note 5) |
354,667 | 377,162 | |||||
Prepaid expenses |
8,825 | 10,295 | |||||
Income tax receivable |
2,732 | 16,955 | |||||
Deferred income taxes (note 7) |
10,464 | 8,401 | |||||
Other current assets |
3,582 | 5,932 | |||||
Total current assets |
1,208,212 | 1,169,914 | |||||
Property and equipment (net of accumulated depreciation and amortization of $559,519 and $447,024 at September 27, 2009 and December 31, 2008, respectively) |
1,165,262 | 1,225,256 | |||||
Other long-term assets |
68,265 | 73,567 | |||||
Deferred income taxes (note 7) |
37,765 | 34,272 | |||||
Investments in nonconsolidated affiliates |
590 | 592 | |||||
Intangible assets (net of accumulated amortization of $124,691 and $89,078 at September 27, 2009 and December 31, 2008, respectively) |
658,838 | 671,523 | |||||
Goodwill |
418,002 | 409,239 | |||||
Total assets |
$ | 3,556,934 | 3,584,363 | ||||
Liabilities and Shareholders Deficit | |||||||
Current liabilities: |
|||||||
Trade payables |
$ | 289,423 | 320,994 | ||||
Short-term borrowings (note 6) |
2,101 | 6,726 | |||||
Accrued expenses and other liabilities |
178,823 | 178,952 | |||||
Accrued interest |
64,537 | 18,615 | |||||
Due to affiliates |
1,424 | 3,404 | |||||
Accrued income taxes (note 7) |
5,157 | 2,688 | |||||
Deferred income taxes (note 7) |
17,640 | 19,522 | |||||
Current installments of long-term debt |
91,102 | 68,378 | |||||
Total current liabilities |
650,207 | 619,279 | |||||
Long-term debt (note 6) |
3,127,407 | 3,164,732 | |||||
Other liabilities |
65,882 | 72,283 | |||||
Pension liabilities (note 9) |
211,068 | 202,064 | |||||
Deferred income taxes (note 7) |
66,629 | 67,147 | |||||
Total liabilities |
4,121,193 | 4,125,505 | |||||
Shareholders deficit: |
|||||||
Common stock |
| | |||||
Additional paid-in capital |
601,553 | 601,017 | |||||
Accumulated deficit |
(1,341,835 | ) | (1,321,963 | ) | |||
Accumulated other comprehensive income (note 8) |
172,247 | 175,960 | |||||
Total Momentive Performance Materials Inc. shareholders deficit |
(568,035 | ) | (544,986 | ) | |||
Noncontrolling interest |
3,776 | 3,844 | |||||
Total shareholders deficit |
(564,259 | ) | (541,142 | ) | |||
Total liabilities and shareholders deficit |
$ | 3,556,934 | 3,584,363 | ||||
See accompanying notes to condensed consolidated financial statements.
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MOMENTIVE PERFORMANCE MATERIALS INC.
Condensed Consolidated Statements of Operations (Unaudited)
(Dollar amounts in thousands)
Fiscal three-month period ended | Fiscal nine-month period ended | ||||||||||||
September 27, 2009 |
September 28, 2008 |
September 27, 2009 |
September 28, 2008 |
||||||||||
Net sales |
$ | 568,421 | 699,884 | 1,476,488 | 2,093,960 | ||||||||
Costs and expenses: |
|||||||||||||
Cost of sales, excluding depreciation |
381,876 | 472,189 | 1,028,013 | 1,420,928 | |||||||||
Selling, general and administrative expenses |
77,899 | 118,963 | 250,198 | 318,214 | |||||||||
Depreciation and amortization expenses |
46,409 | 63,031 | 142,635 | 178,404 | |||||||||
Research and development expenses |
14,737 | 18,406 | 45,761 | 57,171 | |||||||||
Restructuring and other costs (note 2(c)) |
3,377 | 9,623 | 24,890 | 22,626 | |||||||||
Operating income (loss) |
44,123 | 17,672 | (15,009 | ) | 96,617 | ||||||||
Other income (expense): |
|||||||||||||
Interest income |
700 | 1,213 | 2,371 | 3,941 | |||||||||
Interest expense |
(67,050 | ) | (69,824 | ) | (193,644 | ) | (210,059 | ) | |||||
Other income (expense), net |
970 | 11,749 | 12,228 | (1,713 | ) | ||||||||
Gain on exchange of debt |
| | 178,732 | | |||||||||
Loss before income taxes |
(21,257 | ) | (39,190 | ) | (15,322 | ) | (111,214 | ) | |||||
Income taxes (benefit) (note 7) |
3,884 | (4,402 | ) | 4,307 | 18,917 | ||||||||
Net loss |
(25,141 | ) | (34,788 | ) | (19,629 | ) | (130,131 | ) | |||||
Net (income) loss attributable to the noncontrolling interest |
(713 | ) | (70 | ) | (243 | ) | 290 | ||||||
Net loss attributable to Momentive Performance Materials Inc. |
$ | (25,854 | ) | (34,858 | ) | (19,872 | ) | (129,841 | ) | ||||
See accompanying notes to condensed consolidated financial statements.
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MOMENTIVE PERFORMANCE MATERIALS INC.
Consolidated Statements of Cash Flows (Unaudited)
(Dollar amounts in thousands)
Fiscal nine-month period ended | |||||||
September 27, 2009 |
September 28, 2008 |
||||||
Cash flows from operating activities: |
|||||||
Net loss attributable to Momentive Performance Materials Inc. |
$ | (19,872 | ) | (129,841 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
|||||||
Depreciation and amortization |
142,635 | 178,404 | |||||
Asset impairment charge |
| 2,437 | |||||
Amortization of debt issuance costs |
7,753 | 7,808 | |||||
Deferred income taxes |
(6,546 | ) | 15,622 | ||||
Stock-based compensation expense |
606 | 999 | |||||
Change in the noncontrolling interests |
243 | (16 | ) | ||||
Change in unrealized gain on derivative instruments |
(6,848 | ) | (2,895 | ) | |||
PIK interest election |
17,200 | | |||||
Gain on exchange of debt |
(178,732 | ) | | ||||
Changes in operating assets and liabilities: |
|||||||
Receivables |
(419 | ) | (28,889 | ) | |||
Inventories |
31,629 | 5,473 | |||||
Due to/from affiliates |
(7,018 | ) | (16,765 | ) | |||
Prepaid expenses and other assets |
2,620 | 581 | |||||
Trade payables |
(35,752 | ) | 18,596 | ||||
Accrued expenses and other liabilities |
44,942 | 33,045 | |||||
Accrued income taxes |
15,855 | (859 | ) | ||||
Pension liabilities |
6,899 | (3,759 | ) | ||||
Net cash provided by operating activities |
15,195 | 79,941 | |||||
Cash flows from investing activities: |
|||||||
Capital expenditures |
(33,499 | ) | (109,282 | ) | |||
Purchases of intangible assets |
(2,236 | ) | (3,411 | ) | |||
Net cash used in investing activities |
(35,735 | ) | (112,693 | ) | |||
Cash flows from financing activities: |
|||||||
Debt issuance costs |
(6,671 | ) | | ||||
Net (decrease) increase in short-term borrowings |
(4,546 | ) | 2,230 | ||||
Proceeds from long-term debt |
104,690 | 38,648 | |||||
Payments of long-term debt |
(2,622 | ) | (14,400 | ) | |||
Funds remitted to joint venture |
(4,900 | ) | (4,900 | ) | |||
Net cash provided by financing activities |
85,951 | 21,578 | |||||
Increase (decrease) in cash and cash equivalents |
65,411 | (11,174 | ) | ||||
Effect of exchange rate changes on cash |
(1,758 | ) | (1,361 | ) | |||
Cash and cash equivalents, beginning of period |
340,542 | 249,056 | |||||
Cash and cash equivalents, end of period |
$ | 404,195 | 236,521 | ||||
See accompanying notes to condensed consolidated financial statements.
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MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands)
(1) Business and Basis of Presentation
Momentive Performance Materials Inc. (the Company or Successor) was incorporated in Delaware on September 6, 2006 as a wholly-owned subsidiary of Momentive Performance Materials Holdings Inc. (Holdings and together with its subsidiaries the Momentive Group) for the purpose of acquiring the assets and stock of various subsidiaries of General Electric Company (GE) that comprised GEs Advanced Materials (GEAM or the Predecessor ) business. Prior to November 21, 2006, the Company was known as Nautilus Holdings Intermediate Corp. The acquisition was completed on December 3, 2006 (the Acquisition). Holdings is owned approximately 88% by Apollo Management VI, L.P. (Apollo), 10% by GE Capital Equity Investments, Inc. and 2% by certain current and former employees and other service providers of the Company. GEAM was comprised of two businesses, GE Silicones and GE Quartz, and was an operating unit within the Industrial segment of GE.
The Company is comprised of two business segments, Silicones and Quartz. The Silicones segment (Silicones) is a global organization engaged in the manufacture, sale and distribution of silanes, specialty silicones and urethane additives. The Quartz segment (Quartz), also a global business, is engaged in the manufacture, sale and distribution of high-purity fused quartz and ceramic materials. The Company is headquartered in Albany, New York.
Momentive Performance Materials Inc. is comprised of the following legal entities and their wholly-owned subsidiaries: Momentive Performance Materials USA Inc.; Momentive Performance Materials Worldwide Inc.; Momentive Performance Materials China SPV Inc.; Juniper Bond Holdings I LLC; Juniper Bond Holdings II LLC; Juniper Bond Holdings III LLC; and Juniper Bond Holdings IV LLC.
In the Americas, Silicones has manufacturing facilities in Waterford, New York; Sistersville, West Virginia; New Smyrna Beach, Florida; Pickering, Ontario, Canada; Itatiba, Brazil; and custom elastomers compounding operations in Chino, California and Garrett, Indiana. In the Americas, Quartz manufactures in Strongsville, Ohio; Willoughby, Ohio; Richmond Heights, Ohio and Newark, Ohio. A majority of the manufacturing personnel in Waterford, New York; Pickering, Ontario; Sistersville, West Virginia and Willoughby, Ohio are covered by collective bargaining agreements.
Silicones has manufacturing facilities outside the Americas in Leverkusen, Germany; Nantong, China; Ohta, Japan; Rayong, Thailand; Shanghai, China; Shenzhen, China; Songjiang, China; Bergen op Zoom, Netherlands; Lostock, U.K.; Termoli, Italy and Antwerp, Belgium. Quartz non-U.S. manufacturing facilities are located in Kozuki, Japan; Wuxi, China and Geesthacht, Germany. In Europe, employees at the Leverkusen, Bergen op Zoom, Termoli, and Geesthacht facilities are covered by collective bargaining agreements.
The collective bargaining agreements that cover Willoughby, OH, Waterford, NY and Sistersville, WV facilities will expire in June 2010, June 2010 and July 2010, respectively. The Company does not have other significant collective bargaining agreements that will expire during 2009.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In accordance with Rule 10-01, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting only of normal, recurring adjustments, considered necessary for a fair presentation, have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2008. Results for the interim periods are not necessarily indicative of results for the full year. The balance sheet data as of December 31, 2008 was derived from audited financial statements as of December 31, 2008 but does not include all of the information and notes required by U.S. GAAP for complete financial statements.
We evaluated subsequent events through November 10, 2009, the date of financial statement issuance.
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MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
(2) Summary of Significant Accounting Policies
The following is an update of the significant accounting policies followed by the Company.
(a) Consolidation
The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries as of September 27, 2009 and December 31, 2008, and for the fiscal three and nine-month periods ended September 27, 2009 and September 28, 2008. Noncontrolling interests represent the noncontrolling shareholders proportionate share of the equity in the consolidated joint venture affiliates. All significant intercompany balances and transactions, including profit and loss as a result of those transactions, have been eliminated in the consolidation.
(b) Income Taxes
For the fiscal three and nine-month periods ended September 27, 2009 and September 28, 2008, the Companys provision for income taxes was calculated by applying an estimate of the annual effective tax rate for the full fiscal year to ordinary income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items such as the gain on exchange of debt). Discrete items are recorded in the period in which they are incurred.
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. A valuation allowance is established, as needed, to reduce deferred tax assets to the amount expected to be realized.
(c) Restructuring and other costs
Included in restructuring and other costs are costs related to restructuring (primarily severance payments associated with workforce reductions), consulting services associated with transformation savings, and initial stand-alone activities.
For the fiscal three-month periods ended September 27, 2009 and September 28, 2008, the Company recognized restructuring of $1,821 and $4,338, respectively, and other costs of $1,556 and $5,285, respectively. For the fiscal nine-month periods ended September 27, 2009 and September 28, 2008, the Company recognized restructuring of $24,589 and $8,113, respectively, and other costs of $301 and $14,513, respectively. Other costs of $301 for the fiscal nine-month period ended September 27, 2009 included a one-time benefit reduction and wage tax credits of $5,419 recorded during fiscal three-month period ended March 29, 2009. The following table sets forth the changes in the restructuring reserve:
Silicones | Quartz | Total | ||||||||
Balance as of January 1, 2008 |
$ | 5,691 | 1,427 | 7,118 | ||||||
Additions |
16,760 | 1,736 | 18,496 | |||||||
Cash payments |
(5,612 | ) | (2,641 | ) | (8,253 | ) | ||||
Foreign currency translation adjustments |
(570 | ) | | (570 | ) | |||||
Balance as of December 31, 2008 |
16,269 | 522 | 16,791 | |||||||
Additions |
17,799 | 6,790 | 24,589 | |||||||
Cash payments |
(17,541 | ) | (1,650 | ) | (19,191 | ) | ||||
Foreign currency translation adjustments |
391 | 210 | 601 | |||||||
Balance as of September 27, 2009 |
$ | 16,918 | 5,872 | 22,790 | ||||||
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MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
A breakdown of restructuring costs by program is set forth below.
Globalization
As a result of the acquisition of the Company and managements efforts to create a more globalized structure, in December 2006, the Company initiated a comprehensive restructuring program which was designed to enhance its global supply chain, sourcing and customer service capabilities. Costs for this program were incurred through the third quarter of 2008, with the related payments expected to occur throughout 2009. The Company incurred approximately $14,077 of costs under this program, of which $10,845 related to the Silicones segment and $3,232 related to the Quartz segment.
Business Optimization
Due to the global economic slowdown, in the fourth quarter of 2008 and into 2009, the Company experienced significant year-over-year decreases in sales. As a result of the Companys continued focus on streamlining its cost structure to enhance the Companys profitability and in response to the economic crisis, the Company initiated a restructuring program to increase the efficiency of its operations and control labor costs. Costs for the program are expected to be incurred through the end of 2009, with the related payments expected to occur throughout 2009 and into 2010. The Company expects to incur approximately $39,500 of costs ($32,710 for Silicones and $6,790 for Quartz) under this program, of which approximately $24,589 ($17,799 for Silicones and $6,790 for Quartz) has been incurred in 2009, and $37,410 ($30,620 for Silicones and $6,790 for Quartz) has been incurred to date.
(d) Use of Estimates
The preparation of the unaudited condensed consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangibles, valuation allowances for receivables, inventories, deferred income tax assets and assets and obligations related to employee benefits. Actual results could differ from those estimates.
(e) Recently Issued Accounting Standards
In June 2009, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement modifies the Generally Accepted Accounting Principles (GAAP) hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB Accounting Standards Codification (ASC), also known collectively as the Codification, is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC. Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. This statement applies beginning in the third quarter of 2009. All accounting references have been updated, and therefore SFAS references have been replaced with ASC references, where applicable.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167 (SFAS 167), Amendments to FASB Interpretation No. 46(R) (FIN 46(R)) (revised December 2003), Consolidation of Variable Interest Entities. This SFAS amends FIN 46(R) to require an enterprise to perform an analysis to determine whether the enterprises variable interest or interests give it a controlling financial interest in a variable interest entity, and requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This SFAS shall be effective as of the beginning of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company is currently in the process of evaluating this guidance. This Statement has yet to be incorporated into the Codification.
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MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assetsan amendment of FASB Statement No. 140 (SFAS 166). SFAS 166 intends to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferors continuing involvement, if any, in transferred financial assets. This Statement must be applied as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This Statement must be applied to transfers occurring on or after the effective date. The Company is currently in the process of evaluating this guidance. This Statement has yet to be incorporated into the Codification.
Effective for interim or annual financial periods ending after June 15, 2009, the Subsequent Events Topic, ASC 855, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. The Company adopted the provisions of this statement and it did not have a material impact to its financial statements.
Effective for interim reporting periods ending after June 15, 2009, the Financial Instruments Topic, ASC 825-10-65, requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This statement does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this statement requires comparative disclosures only for periods ending after initial adoption. The Company adopted the provisions of this statement and it did not have a material impact to its financial statements.
Effective for interim and annual reporting periods ending after June 15, 2009, and applied prospectively, the Fair Value Measurements and Disclosures Topic, ASC 820-10-65, provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This statement also includes guidance on identifying circumstances that indicate a transaction is not orderly. The Company adopted the provisions of this statement and it did not have a material impact to its financial statements.
Effective for fiscal years ending after December 15, 2009, the Compensation-Retirement Benefits Topic, ASC 715-20-50, provides guidance on an employers disclosures about plan assets of a defined benefit pension or other postretirement plan. This statement also includes a technical amendment that requires a nonpublic entity to disclose net periodic benefit cost for each annual period for which a statement of income is presented. Upon initial application, the provisions of this statement are not required for earlier periods that are presented for comparative purposes. Earlier application of the provisions of this statement is permitted. The Company is currently in the process of evaluating this guidance.
Effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, the Derivatives and Hedging Topic, ASC 815, requires enhanced disclosures about derivative and hedging activities. On January 1, 2009, the Company adopted the expanded disclosure requirements as disclosed in Note 10.
The Fair Value Measurements and Disclosures Topic, ASC 820-10-50, defers the provisions of ASC 820 for non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a non-recurring basis to fiscal years beginning after November 15, 2008. The Company adopted the provisions of this statement on January 1, 2009 and it did not have a material impact on the Companys financial statements.
Effective for periods beginning on or after December 15, 2008, the Business Combinations Topic, ASC 805 requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at full fair value. This statement applies to all business combinations, including combinations among mutual entities and combination by contract alone. The Company adopted the provisions of this statement on January 1, 2009 and it did not have a material impact on the Companys financial statements.
Effective for periods beginning on or after December 15, 2008, the Consolidation Topic, ASC 810-10-45, requires non-controlling interests (previously referred to as minority interests) to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. The Company adopted this statement on January 1, 2009.
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MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
(f) Fair Value of Financial Instruments
The Companys financial instruments consist principally of cash and cash equivalents, accounts receivable and accounts payable and accrued expenses. Carrying amounts approximate fair value due to the short-term maturity of these instruments. The fair value of long-term debt is disclosed in Note 3.
(3) 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 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. | |
Level 2 | Quoted prices for similar assets or liabilities in active markets; or observable prices which are based on observable market data, based on, directly or indirectly market-corroborated inputs. The Companys level 2 liabilities included interest rate swaps and natural gas derivative contracts that are traded in an active exchange market. | |
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. |
The following table presents liabilities at September 27, 2009 that the Company measures at fair value on a recurring basis, by level within the fair value hierarchy: Certain financial instruments are carried at cost on the consolidated balance sheets, which approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. The fair value of the natural gas derivative contracts and interest rate swap generally reflects the estimated amounts that the Company would receive or pay, on a pre-tax basis, to terminate the contracts and swap at the reporting date based on broker quotes for the same or similar instruments. Counterparties to these contracts are highly rated financial institutions, none of which experienced any significant downgrades in the fiscal three-month period ended September 27, 2009 that would reduce the receivable amount owed, if any, to the Company.
Level 1 | Level 2 | Level 3 | Total | ||||||
Liabilities |
|||||||||
Interest rate swap |
$ | | 2,394 | | 2,394 | ||||
Natural gas derivative contracts |
| 917 | | 917 | |||||
Total liabilities at fair value |
$ | | 3,311 | | 3,311 | ||||
At September 27, 2009, the Company estimates that the $1,649,864 of outstanding fixed rate senior notes had a fair value of approximately $1,209,858; the $1,088,713 of outstanding variable rate term loans had a fair value of approximately $878,618; the $164,778 of outstanding fixed rate second-lien senior secured notes with a $200,000 aggregate principal amount had a fair value of approximately $208,000; and the fair value of the $4,690 outstanding medium term loan, the $60,464 outstanding construction project financing loan and $250,000 borrowing under the revolving credit facility were approximately the same as their outstanding balances. The Company determined the estimated fair value amounts by using available market information for the senior notes and commonly accepted valuation methodologies for the term loans. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the fair value estimates presented herein are not necessarily indicative of the amount that the Company or the debt-holders could realize in a current market exchange. The use of different assumptions, changes in market conditions and/or estimation methodologies may have a material effect on the estimated fair value.
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MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
(4) Receivables, net
Receivables consisted of the following at September 27, 2009 and December 31, 2008:
September 27, 2009 |
December 31, 2008 |
||||||
Trade |
$ | 365,496 | 353,728 | ||||
Other: |
|||||||
VAT |
25,951 | 29,366 | |||||
Advances |
11,280 | 9,364 | |||||
Other |
22,322 | 20,706 | |||||
425,049 | 413,164 | ||||||
Allowance for doubtful accounts |
(4,406 | ) | (4,313 | ) | |||
Total receivables, net |
$ | 420,643 | 408,851 | ||||
(5) Inventories
Inventories consisted of the following at September 27, 2009 and December 31, 2008:
September 27, 2009 |
December 31, 2008 | ||||
Raw materials and work-in-process |
$ | 122,894 | 133,618 | ||
Finished goods |
231,773 | 243,544 | |||
Total inventories |
$ | 354,667 | 377,162 | ||
(6) Indebtedness
(a) Short-Term Borrowings
At September 27, 2009, the Companys short-term borrowings consisted of bank borrowings of $2,101 with a weighted average interest rate of 3.78%. At December 31, 2008, the Companys short-term borrowings consisted of bank borrowings of $6,726 with a weighted average interest rate of 6.53%.
(b) Long-Term Debt
On September 22, 2009, the Company entered into a Limited Waiver and Amendment (the Waiver and Amendment) with respect to the credit agreement dated as of December 4, 2006 governing its senior secured credit facility. Pursuant to the Waiver and Amendment, the requisite revolving credit facility lenders agreed to waive compliance by the Company with the senior secured leverage ratio maintenance covenant set forth in the credit agreement for the fiscal quarters ending September 27, 2009 and December 31, 2009, subject to certain conditions, and the applicable margin on revolving credit facility borrowings under the credit agreement was increased by 125 basis points, effective on September 22, 2009. In addition, the Company agreed to pay a one-time fee in an amount equal to 0.25% of the revolving facility commitment of each revolving facility lender that was a party to the Waiver and Amendment and to reimburse certain fees and expenses incurred in connection with the Waiver and Amendment.
On June 15, 2009, the Company completed the private exchange offers announced on May 12, 2009 to exchange $200,000 aggregate principal amount of 12 1/2% Second-Lien Senior Secured Notes (the Second Lien Notes) due 2014 for certain of its outstanding unsecured notes. The Second Lien Notes were recorded at their fair value of $163,000 on the date of the exchange. Interest on the Second Lien Notes is payable semiannually on June 15 and December 15 of each year, commencing on December 15, 2009. The purpose of the exchange offers was to reduce the outstanding principal amount of the Companys debt. The Company recognized a gain on the exchange offers of $178,732.
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MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
Approximately $48,400 in aggregate principal amount (or 6%) of 9 3/4% Senior Notes due 2014, 29,800 in aggregate principal amount (or 11%) of 9% Senior Notes due 2014, $140,900 in aggregate principal amount (or 42%) of 10 1/8 / 10 7/8% Senior Toggle Notes due 2014 and $118,100 in aggregate principal amount (or 24%) of 11 1/2% Senior Subordinated Notes due 2016 were accepted in the exchange offers for $200,000 aggregate principal amount of 12 1/2% Second-Lien Senior Secured Notes due 2014.
The new Second Lien Notes are guaranteed on a senior secured basis by each of the Companys U.S. subsidiaries that is a borrower or a guarantor under the Companys existing senior secured credit facility. The new Second Lien Notes are secured by a second-priority security interest in certain assets of the Company and such U.S. subsidiaries, which interest is junior in priority to the liens on substantially the same collateral securing the Companys existing senior secured credit facility.
The Company had $250,000 outstanding under the revolving credit facility. The borrowings accrued interest at a weighted average rate of 4.40% per annum as of September 27, 2009. The outstanding letters of credit under the revolving credit facility at September 27, 2009 were $35,849, leaving unused capacity of $14,151. Outstanding letters of credit issued under the synthetic letter of credit facility at September 27, 2009 were $31,984, leaving unused capacity of $2,316. On October 23, 2009, the Company made a principal repayment of $75,000 on the revolving credit facility.
At September 27, 2009, the Company was in compliance with the covenants of the credit agreement and note indentures.
The Companys wholly-owned subsidiary, MPM Nantong, also has borrowings of approximately $60,464 outstanding (based on exchange rates as of September 27, 2009) from the China Construction Bank, which were used to finance the construction of its finishing plant in Nantong, China. Such loans are secured by substantially all of MPM Nantongs assets. On April 30, 2009, MPM Nantong was in breach of a financial covenant under its loan agreement with the China Construction Bank. On June 3, 2009, MPM Nantong and the China Construction Bank entered into a Supplemental Agreement, which amended the loan agreement. Pursuant to the Supplemental Agreement, the parties (1) changed the first measurement date for the financial covenants under the loan agreement from December 31, 2008 to December 31, 2010 and (2) deferred principal repayments originally due on June 30, 2009 and December 31, 2009, aggregating to approximately $6,200 (based on exchange rates at the time), until June 30, 2014, the final maturity date of the debt under the loan agreement. The Company reclassified all principal payments due under the loan from China Construction Bank as long-term debt. The borrowings accrues interest at a weighted average rate of 5.44% per annum. MPM Nantong was in compliance with the terms of the Supplemental Agreement as of September 27, 2009.
On March 17, 2009, Apollo Management VI, L.P. (Apollo) and the Company entered into a letter agreement enabling the Company to purchase some or all of certain debt securities of the Company acquired by Apollo or its affiliates for a period of 180 days after the date of purchase unless such securities are sold or transferred to an unaffiliated third party. As of the date of this filing, the Company has not exercised this right.
(7) Income Taxes
The effective tax rate was -18.27% and 11.23% for the fiscal three-month periods ended September 27, 2009 and September 28, 2008, respectively. The effective tax rate was -28.11% and 17.01% for the fiscal nine-month periods ended September 27, 2009 and September 28, 2008, respectively. The change in the effective tax rate in 2009 was primarily due to a change in the amount of income (loss) before income taxes, changes in the tax rates applied in the various jurisdictions in which the Company operates, current period foreign exchange gains and the maintenance of a full valuation allowance against a substantial amount of the Companys net deferred tax assets. The valuation allowance, which relates principally to U.S. deferred tax assets, was established and maintained based on the Companys assessment that the net deferred tax assets will likely not be realized.
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MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
(8) Comprehensive Income (Loss)
The balances for each classification of comprehensive income (loss) are as follows:
Fiscal three-month period ended | Fiscal nine-month period ended | ||||||||||||
September 27, 2009 |
September 28, 2008 |
September 27, 2009 |
September 28, 2008 |
||||||||||
Net loss |
$ | (25,141 | ) | (34,788 | ) | (19,629 | ) | (130,131 | ) | ||||
Foreign currency translation |
11,321 | 3,618 | (4,637 | ) | 65,054 | ||||||||
Other comprehensive income adjustments, net |
1,227 | (1,417 | ) | 613 | 1,884 | ||||||||
Comprehensive income (loss) |
(12,593 | ) | (32,587 | ) | (23,653 | ) | (63,193 | ) | |||||
Net (income) loss attributable to the noncontrolling interest |
(713 | ) | (70 | ) | (243 | ) | 290 | ||||||
Foreign currency translation attributable to the noncontrolling interest |
(7 | ) | 76 | 311 | (791 | ) | |||||||
Comprehensive income (loss) attributable to Momentive Performance Materials Inc. |
$ | (13,313 | ) | (32,581 | ) | (23,585 | ) | (63,694 | ) | ||||
The following table details changes in shareholders deficit, including changes in equity (deficit) attributable to the Momentive Performance Materials Inc. shareholder and changes in equity attributable to the noncontrolling interests:
Total | Equity (deficit) attributable to Momentive Performance Materials Inc. shareholder |
Equity attributable to noncontrolling Interest |
|||||||||||||||
Common stock |
Additional paid-in capital |
Accumulated deficit |
Accumulated other comprehensive Income |
||||||||||||||
Balance at January 1, 2009 |
$ | (541,142 | ) | | 601,017 | (1,321,963 | ) | 175,960 | 3,844 | ||||||||
Stock option activity and other |
536 | | 536 | | | | |||||||||||
Comprehensive income (loss): |
|||||||||||||||||
Net income (loss) |
(19,629 | ) | | | (19,872 | ) | | 243 | |||||||||
Foreign currency translation adjustment - net |
(4,637 | ) | | | | (4,326 | ) | (311 | ) | ||||||||
Other comprehensive income adjustments - net |
613 | | | | 613 | | |||||||||||
Balance at September 27, 2009 |
$ | (564,259 | ) | | 601,553 | (1,341,835 | ) | 172,247 | 3,776 | ||||||||
Total | Equity (deficit) attributable to Momentive Performance Materials Inc. shareholder |
Equity attributable to noncontrolling Interest |
|||||||||||||||
Common stock |
Additional paid-in capital |
Accumulated deficit |
Accumulated other comprehensive Income |
||||||||||||||
Balance at January 1, 2008 |
$ | 322,644 | | 600,274 | (324,906 | ) | 43,252 | 4,024 | |||||||||
Stock option activity |
999 | | 999 | | | | |||||||||||
Deemed dividend to General Electric Company |
1,769 | | 1,769 | | | ||||||||||||
Comprehensive income (loss): |
|||||||||||||||||
Net income (loss) |
(130,131 | ) | | | (129,841 | ) | | (290 | ) | ||||||||
Foreign currency translation adjustment - net |
65,056 | | | | 64,265 | 791 | |||||||||||
Other comprehensive income adjustments - net |
1,882 | | | | 1,882 | | |||||||||||
Balance at September 28, 2008 |
$ | 262,219 | | 603,042 | (454,747 | ) | 109,399 | 4,525 | |||||||||
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MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
(9) Pension Plans and Other Postretirement Benefits
The following are the components of the Companys net pension and postretirement benefit expense for the fiscal three and nine-month periods ended September 27, 2009 and September 28, 2008:
Pension | Postretirement | ||||||||||||
Fiscal three-month period ended | |||||||||||||
September 27, 2009 |
September 28, 2008 |
September 27, 2009 |
September 28, 2008 |
||||||||||
Service cost |
$ | 4,735 | 4,790 | 351 | (179 | ) | |||||||
Interest cost |
1,669 | 1,651 | 1,142 | 983 | |||||||||
Amortization of prior service cost (benefit) |
(210 | ) | (216 | ) | 328 | 487 | |||||||
Expected return on plan assets |
(819 | ) | (411 | ) | | | |||||||
Amortization of actuarial gain |
(244 | ) | (428 | ) | (31 | ) | 83 | ||||||
Other |
1 | (13 | ) | | (98 | ) | |||||||
$ | 5,132 | 5,373 | 1,790 | 1,276 | |||||||||
Pension | Postretirement | ||||||||||||
Fiscal nine-month period ended | |||||||||||||
September 27, 2009 |
September 28, 2008 |
September 27, 2009 |
September 28, 2008 |
||||||||||
Service cost |
$ | 15,368 | 14,663 | 1,051 | 1,133 | ||||||||
Interest cost |
5,381 | 4,811 | 3,424 | 3,311 | |||||||||
Amortization of prior service cost (benefit) |
(636 | ) | (646 | ) | 984 | 885 | |||||||
Expected return on plan assets |
(2,474 | ) | (2,093 | ) | | | |||||||
Amortization of actuarial gain |
(622 | ) | (1,004 | ) | (93 | ) | 83 | ||||||
Other |
(119 | ) | (13 | ) | | (98 | ) | ||||||
$ | 16,898 | 15,718 | 5,366 | 5,314 | |||||||||
In 2009, the Company expects to contribute approximately $12,661 and $3,253 to the Companys Domestic and Foreign plans, respectively. The Company contributed $5,240 and $9,561 to its Domestic plans during the fiscal three and nine-month periods ended September 27, 2009, respectively.
(10) Financial Instruments
The Companys business and activities expose it to a variety of market risks, including risks related to changes in commodity prices, foreign-currency exchange rates and interest rates. These financial exposures are monitored and managed by the Company as an integral part of its risk management program. This program recognizes the unpredictability of financial and commodity markets and seeks to reduce the potentially adverse effects that market volatility could have on operating results. As part of its risk management strategy, the Company uses derivative instruments to protect cash flows from fluctuations caused by volatility in currency exchange rates, commodity prices and interest rates.
On March 2, 2009, the Company settled all of its outstanding foreign currency forward contracts and recognized a gain of $4,035.
Cash Flow Hedges
The Companys commodity price risk management strategy is to use derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from volatility in commodity prices. Price fluctuations in commodities, mainly in natural gas, can cause the actual prices paid to natural gas vendors to differ from anticipated cash outlays. The Company uses commodity swap contracts to manage these risks. The Companys energy risk management strategy is to use derivative instruments to minimize significant unanticipated manufacturing cost fluctuations that may arise from volatility in natural gas prices.
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MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
The Companys interest rate risk management strategy is to use derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from volatility in interest rates of the Companys borrowings and to manage the interest rate sensitivity of its debt.
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
The maximum term over which the Company may hedge exposures to the variability of cash flow (for all forecasted transactions, excluding interest payments on variable-rate debt) is 18 months for commodity hedges. No cash flow hedges were discontinued during the fiscal nine-month period ended September 27, 2009.
Derivatives Not Designated as Hedging Instruments
The Company uses commodity forward contracts to hedge a portion of its anticipated cash payments to natural gas vendors in the U.S., which can fluctuate based on changes in natural gas prices. These forward contracts do not meet the provisions required to qualify for hedge accounting treatment. Accordingly, the gain or loss on these derivatives is recognized in current earnings.
Financial instruments are neither held nor issued by the Company for trading purposes. The Companys natural gas hedge contracts and interest rate swap contract do not contain any credit related contingent features and accordingly, the Company is not required to post any collateral.
The notional amounts of the Companys derivative instruments outstanding as of September 27, 2009, were as follows:
Notional Amount | |||
Derivatives Designated as Hedges: |
|||
Interest Rate Swap contract |
$ | 185,000 | |
Natural Gas Hedge Contracts |
5,388 | ||
Total Derivatives Designated as Hedges |
$ | 190,388 | |
Derivatives Not Designated as Hedges: |
|||
Natural Gas Purchase Contracts |
$ | 381 | |
Total Derivatives Not Designated as Hedges |
$ | 381 | |
The fair values of the Companys derivative instruments outstanding as of September 27, 2009, were as follows:
Balance Sheet Location |
Fair Value | ||||
Liability Derivatives: |
|||||
Derivatives Designated as Hedges: |
|||||
Interest Rate Swap contract |
Accrued expense and other liabilities | $ | 2,394 | ||
Natural Gas Hedge Contracts |
Accrued expense and other liabilities | 640 | |||
Total Derivatives Designated as Hedges |
$ | 3,034 | |||
Derivatives Not Designated as Hedges: |
|||||
Natural Gas Purchase Contracts |
Accrued expense and other liabilities | $ | 277 | ||
Total Derivatives Not Designated as Hedges |
$ | 277 | |||
Total Liability Derivatives |
$ | 3,311 | |||
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MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
The gains and losses on the Companys derivative instruments during the fiscal three and nine-month periods ended September 27, 2009 were as follows:
Fiscal three-month period ended September 27, 2009:
Amount of Gain or (Loss) Recognized in AOCI (Effective Portion) (1) |
Income Statement |
Amount of Gain or (Loss) Recognized in Income |
||||||||
Liability Derivatives: |
||||||||||
Derivatives Designated as Hedges: |
||||||||||
Interest Rate Swap contract |
$ | 679 | Interest Expense | $ | (1,038 | ) | ||||
Natural Gas Hedge Contracts |
418 | Cost of sales, excluding depreciation | (625 | ) | ||||||
Total Derivatives Designated as Hedges |
$ | 1,097 | $ | (1,663 | ) | |||||
Derivatives Not Designated as Hedges: |
||||||||||
Natural Gas Purchase Contracts |
| Other income (expense) | 660 | |||||||
Foreign Currency Contracts |
| Other income (expense) | | |||||||
Total Derivatives Not Designated as Hedges |
| 660 | ||||||||
Total Derivatives |
$ | 1,097 | $ | (1,003 | ) | |||||
Fiscal nine-month period ended September 27, 2009: |
| |||||||||
Amount of Gain or (Loss) Recognized in AOCI (Effective Portion) (1) |
Income Statement Classification (2) |
Amount of Gain or (Loss) Recognized in Income |
||||||||
Liability Derivatives: |
||||||||||
Derivatives Designated as Hedges: |
||||||||||
Interest Rate Swap contract |
$ | 1,184 | Interest Expense | $ | (2,940 | ) | ||||
Natural Gas Hedge Contracts |
(640 | ) | Cost of sales, excluding depreciation | (1,295 | ) | |||||
Total Derivatives Designated as Hedges |
$ | 544 | $ | (4,235 | ) | |||||
Derivatives Not Designated as Hedges: |
||||||||||
Natural Gas Purchase Contracts |
| Other income (expense) | 826 | |||||||
Foreign Currency Contracts |
| Other income (expense) | 4,035 | |||||||
Total Derivatives Not Designated as Hedges |
| 4,861 | ||||||||
Total Derivatives |
$ | 544 | $ | 626 | ||||||
(1) | Accumulated other comprehensive income (loss) (AOCI) |
(2) | For derivatives designated as cash flow hedges, this represents the effective portion of the gain (loss) reclassified from AOCI into income during the period. |
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MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
(11) Operating Segments
The Company operates in two independent business segments: Silicones and Quartz. The Silicones segment is engaged in the manufacture, sale and distribution of silanes, specialty silicones and urethane additives. The Quartz segment is engaged in the manufacture, sale and distribution of high-purity fused quartz and ceramic materials. The Companys operating segments are organized based on the nature of the products they serve. The segments are managed separately because each business requires different technology and marketing strategies.
An update of the accounting policies of the Silicones and Quartz segments are as described in the summary of significant accounting policies in Note 2.
Silicones | Quartz | Corporate and other items (c) |
Total | ||||||||||
Fiscal three-month period ended September 27, 2009: |
|||||||||||||
Net sales (a) |
$ | 523,451 | 44,970 | | 568,421 | ||||||||
Operating income (loss) (b) |
53,068 | (2,594 | ) | (6,351 | ) | 44,123 | |||||||
Depreciation and amortization |
39,135 | 7,274 | | 46,409 | |||||||||
Interest expense and other financial charges |
67,044 | 6 | | 67,050 | |||||||||
Interest income |
644 | 56 | | 700 | |||||||||
Provision for income taxes |
4,144 | (260 | ) | | 3,884 | ||||||||
Capital expenditures |
10,284 | 2,360 | | 12,644 | |||||||||
Silicones | Quartz | Corporate and other items (c) |
Total | ||||||||||
Fiscal three-month period ended September 28, 2008: |
|||||||||||||
Net sales (a) |
$ | 634,354 | 65,530 | | 699,884 | ||||||||
Operating income (loss) (b) |
25,720 | 6,123 | (14,171 | ) | 17,672 | ||||||||
Depreciation and amortization |
54,055 | 8,976 | | 63,031 | |||||||||
Interest expense and other financial charges |
69,572 | 252 | | 69,824 | |||||||||
Interest income |
1,065 | 148 | | 1,213 | |||||||||
Provision for income taxes |
(2,934 | ) | (1,468 | ) | | (4,402 | ) | ||||||
Capital expenditures |
23,244 | 3,517 | | 26,761 |
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MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
Silicones | Quartz | Corporate and other items (c) |
Total | |||||||||
Fiscal nine-month period ended September 27, 2009: |
||||||||||||
Net sales (a) |
$ | 1,362,330 | 114,158 | 1,476,488 | ||||||||
Operating income (loss) (b) (d) |
8,732 | (20,603 | ) | (3,138 | ) | (15,009 | ) | |||||
Depreciation and amortization |
120,483 | 22,152 | 142,635 | |||||||||
Interest expense and other financial charges |
193,442 | 202 | 193,644 | |||||||||
Interest income |
2,192 | 179 | 2,371 | |||||||||
Provision for income taxes |
3,728 | 579 | 4,307 | |||||||||
Capital expenditures |
28,757 | 4,742 | 33,499 | |||||||||
Silicones | Quartz | Corporate and other items (c) |
Total | |||||||||
Fiscal nine-month period ended September 28, 2008: |
||||||||||||
Net sales (a) |
$ | 1,893,340 | 200,620 | | 2,093,960 | |||||||
Operating income (loss) (b) |
123,683 | 15,395 | (42,461 | ) | 96,617 | |||||||
Depreciation and amortization |
151,962 | 26,442 | | 178,404 | ||||||||
Interest expense and other financial charges |
209,802 | 257 | | 210,059 | ||||||||
Interest income |
3,273 | 668 | | 3,941 | ||||||||
Provision for income taxes |
18,539 | 378 | | 18,917 | ||||||||
Capital expenditures |
96,253 | 13,029 | | 109,282 |
(a) | There were no intersegment sales during the fiscal three and nine-month periods ended September 27, 2009 or September 28, 2008, respectively. |
(b) | A reconciliation of the segment operating income (loss) to income (loss) before income taxes would include interest income, interest expense, other income (expense), net and gain on exchange of debt as presented in the Condensed Consolidated Statements of Operations. |
(c) | Corporate and other items include pension expenses and headquarter costs, net of corporate assessments. Effective as of the fourth quarter of 2008, the Company allocated corporate assessment to all locations. |
(d) | Operating income (loss) for the fiscal nine-month period ended September 27, 2009 for the Silicones and Quartz segments has been adjusted to correct an error in presentation for the fiscal three-month periods ended March 29, 2009 and June 28, 2009. Operating income (loss) for the Silicones and Quartz segments was $(55,601) and $(11,842), respectively, for the fiscal three-month period ended March 29, 2009 and $11,265 and $(6,167), respectively, for the fiscal three-month period ended June 28, 2009. In our prior presentation, Silicones operating loss was understated by $13,281 for the fiscal three-month period ended March 29, 2009 and Quartz operating loss was overstated by the same amount. In our prior presentation, Silicones operating income was overstated by $10,335 for the fiscal three-month period ended June 28, 2009 and Quartz operating loss was overstated by the same amount. |
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MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
The following tables show data by geographic area. Net sales are based on the location of the operation recording the final sale to the customer. Total long-lived assets consist of property and equipment, net of accumulated depreciation and amortization, intangible assets, net of accumulated amortization, and goodwill.
Fiscal three-month period | Fiscal nine-month period ended | ||||||||
September 27, 2009 |
September 28, 2008 |
September 27, 2009 |
September 28, 2008 | ||||||
Net sales: |
|||||||||
United States |
$ | 175,190 | 215,992 | 473,850 | 648,621 | ||||
Canada |
9,545 | 12,837 | 26,819 | 35,480 | |||||
Pacific |
175,204 | 200,786 | 440,030 | 595,127 | |||||
Europe |
186,550 | 245,723 | 477,155 | 750,138 | |||||
Mexico and Brazil |
21,932 | 24,546 | 58,634 | 64,594 | |||||
$ | 568,421 | 699,884 | 1,476,488 | 2,093,960 | |||||
September 27, 2009 |
December 31, 2008 | ||||
Long-lived assets |
|||||
United States |
$ | 633,135 | 677,705 | ||
Canada |
24,250 | 21,720 | |||
Pacific |
818,781 | 851,066 | |||
Europe |
759,195 | 749,333 | |||
Mexico and Brazil |
6,741 | 6,194 | |||
$ | 2,242,102 | 2,306,018 | |||
(12) Guarantor/Non-Guarantor Subsidiary Financial Information
The Company has outstanding $200.0 million in aggregate principal amount of second-lien senior notes, $716.6 million in aggregate principal amount of senior notes, 245.2 million in aggregate principal amount of Euro senior notes, $192.6 million in aggregate principal amount of senior toggle notes and $381.9 million in aggregate principal amount of senior subordinated notes (following the completion of the debt exchange on June 15, 2009). The notes are fully, jointly, severally and unconditionally guaranteed by the Companys domestic subsidiaries (the guarantor subsidiaries). The following condensed consolidated financial information presents the Condensed Consolidated Balance Sheets as of September 27, 2009 and December 31, 2008, the Condensed Consolidated Statements of Operations for the fiscal three and nine-month periods ended September 27, 2009 and September 28, 2008 and Condensed Consolidated Statements of Cash Flows for the fiscal nine-month periods ended September 27, 2009 and September 28, 2008 of (i) Momentive Performance Materials Inc. (Parent); (ii) the guarantor subsidiaries; (iii) the non-guarantor subsidiaries; and (iv) the Company on a consolidated basis.
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. Additionally, substantially all of the assets of the guarantor subsidiaries and certain non-guarantor subsidiaries are pledged under the senior secured credit facility, and consequently will not be available to satisfy the claims of the Companys general creditors.
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Table of Contents
MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
Condensed Consolidated Balance Sheet as of September 27, 2009:
Parent | Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||
Assets | ||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 196,246 | 22,373 | 185,576 | | 404,195 | ||||||||||
Receivables, net |
| 111,846 | 308,797 | | 420,643 | |||||||||||
Due from affiliates |
16 | 106,261 | 28,203 | (131,376 | ) | 3,104 | ||||||||||
Inventories |
| 161,059 | 207,110 | (13,502 | ) | 354,667 | ||||||||||
Prepaid expenses |
| 4,839 | 3,986 | | 8,825 | |||||||||||
Income tax receivable |
| 2,732 | | | 2,732 | |||||||||||
Deferred income taxes |
| | 9,045 | 1,419 | 10,464 | |||||||||||
Other current assets |
| 2,540 | 1,042 | | 3,582 | |||||||||||
Total current assets |
196,262 | 411,650 | 743,759 | (143,459 | ) | 1,208,212 | ||||||||||
Property and equipment, net |
| 533,873 | 631,389 | | 1,165,262 | |||||||||||
Other long-term assets |
35,904 | | 32,361 | | 68,265 | |||||||||||
Deferred income taxes |
| 786 | 36,979 | | 37,765 | |||||||||||
Investments in nonconsolidated affiliates |
| | 590 | | 590 | |||||||||||
Investment in affiliates |
1,342,753 | (238,117 | ) | | (1,104,636 | ) | | |||||||||
Intercompany borrowings |
| 1,156,204 | 74,883 | (1,231,087 | ) | | ||||||||||
Intangible assets, net |
| 99,262 | 559,576 | | 658,838 | |||||||||||
Goodwill |
| | 418,002 | | 418,002 | |||||||||||
Total assets |
$ | 1,574,919 | 1,963,658 | 2,497,539 | (2,479,182 | ) | 3,556,934 | |||||||||
Liabilities and Shareholders Equity (Deficit) | ||||||||||||||||
Current liabilities: |
||||||||||||||||
Trade payables |
$ | | 72,023 | 217,400 | | 289,423 | ||||||||||
Short-term borrowings |
| | 2,101 | | 2,101 | |||||||||||
Accrued expenses and other liabilities |
2,393 | 65,107 | 111,323 | | 178,823 | |||||||||||
Accrued interest |
61,582 | 224 | 2,731 | | 64,537 | |||||||||||
Due to affiliates |
| 27,592 | 105,208 | (131,376 | ) | 1,424 | ||||||||||
Accrued income taxes |
| | 5,157 | | 5,157 | |||||||||||
Deferred income taxes |
| 786 | 16,854 | | 17,640 | |||||||||||
Current installments of long-term debt |
| 75,000 | 16,102 | | 91,102 | |||||||||||
Total current liabilities |
63,975 | 240,732 | 476,876 | (131,376 | ) | 650,207 | ||||||||||
Long-term debt |
1,814,642 | 175,000 | 1,137,765 | | 3,127,407 | |||||||||||
Other liabilities |
| 6,954 | 58,928 | | 65,882 | |||||||||||
Pension liabilities |
| 120,003 | 91,065 | | 211,068 | |||||||||||
Intercompany borrowings |
255,621 | 74,849 | 900,617 | (1,231,087 | ) | | ||||||||||
Deferred income taxes |
| | 66,629 | | 66,629 | |||||||||||
Total liabilities |
2,134,238 | 617,538 | 2,731,880 | (1,362,463 | ) | 4,121,193 | ||||||||||
Shareholders equity (deficit): |
||||||||||||||||
Additional paid-in capital |
601,553 | 2,153,171 | 537,385 | (2,690,556 | ) | 601,553 | ||||||||||
Accumulated deficit |
(1,333,119 | ) | (981,692 | ) | (944,659 | ) | 1,917,635 | (1,341,835 | ) | |||||||
Accumulated other comprehensive income |
172,247 | 174,641 | 169,157 | (343,798 | ) | 172,247 | ||||||||||
Total Momentive Performance |
||||||||||||||||
Materials Inc. shareholders equity (deficit) |
(559,319 | ) | 1,346,120 | (238,117 | ) | (1,116,719 | ) | (568,035 | ) | |||||||
Noncontrolling Interest |
| | 3,776 | | 3,776 | |||||||||||
Total shareholders equity (deficit) |
(559,319 | ) | 1,346,120 | (234,341 | ) | (1,116,719 | ) | (564,259 | ) | |||||||
Total liabilities and shareholders equity (deficit) |
$ | 1,574,919 | 1,963,658 | 2,497,539 | (2,479,182 | ) | 3,556,934 | |||||||||
20
Table of Contents
MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
Condensed Consolidated Balance Sheet as of December 31, 2008:
Parent | Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||
Assets | ||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 1,894 | 200,667 | 137,981 | | 340,542 | ||||||||||
Receivables, net |
| 96,572 | 312,279 | | 408,851 | |||||||||||
Due from affiliates |
| 82,526 | 19,254 | (100,004 | ) | 1,776 | ||||||||||
Inventories |
| 178,113 | 206,192 | (7,143 | ) | 377,162 | ||||||||||
Prepaid expenses |
| 4,194 | 6,101 | | 10,295 | |||||||||||
Income tax receivable |
| 16,955 | | | 16,955 | |||||||||||
Deferred income taxes |
| | 6,328 | 2,073 | 8,401 | |||||||||||
Other current assets |
| 2,322 | 3,610 | | 5,932 | |||||||||||
Total current assets |
1,894 | 581,349 | 691,745 | (105,074 | ) | 1,169,914 | ||||||||||
Property and equipment, net |
| 573,243 | 652,013 | | 1,225,256 | |||||||||||
Other long-term assets |
40,673 | | 32,894 | | 73,567 | |||||||||||
Deferred income taxes |
| 786 | 33,486 | | 34,272 | |||||||||||
Investments in nonconsolidated affiliates |
| | 592 | | 592 | |||||||||||
Investment in affiliates |
1,402,887 | (166,689 | ) | | (1,236,198 | ) | | |||||||||
Intercompany borrowing |
7,245 | 844,030 | 83,774 | (935,049 | ) | | ||||||||||
Intangible assets, net |
| 104,342 | 567,181 | | 671,523 | |||||||||||
Goodwill |
| | 409,239 | | 409,239 | |||||||||||
Total assets |
$ | 1,452,699 | 1,937,061 | 2,470,924 | (2,276,321 | ) | 3,584,363 | |||||||||
Liabilities and Shareholders Equity (Deficit) | ||||||||||||||||
Current liabilities: |
||||||||||||||||
Trade payables |
$ | | 91,798 | 229,196 | | 320,994 | ||||||||||
Short-term borrowings |
| | 6,726 | | 6,726 | |||||||||||
Accrued expenses and other liabilities |
3,579 | 64,204 | 111,169 | | 178,952 | |||||||||||
Accrued interest |
18,204 | 192 | 219 | | 18,615 | |||||||||||
Due to affiliates |
8,976 | 21,489 | 72,943 | (100,004 | ) | 3,404 | ||||||||||
Accrued income taxes |
| | 2,688 | | 2,688 | |||||||||||
Deferred income taxes |
| 786 | 18,736 | | 19,522 | |||||||||||
Current installments of long-term debt |
| | 68,378 | | 68,378 | |||||||||||
Total current liabilities |
30,759 | 178,469 | 510,055 | (100,004 | ) | 619,279 | ||||||||||
Long-term debt |
1,961,279 | 150,000 | 1,053,453 | | 3,164,732 | |||||||||||
Other liabilities |
| 5,837 | 66,446 | | 72,283 | |||||||||||
Pension liabilities |
| 112,728 | 89,336 | | 202,064 | |||||||||||
Intercompany Borrowings |
3,943 | 83,774 | 847,332 | (935,049 | ) | | ||||||||||
Deferred income taxes |
| | 67,147 | | 67,147 | |||||||||||
Total liabilities |
1,995,981 | 530,808 | 2,633,769 | (1,035,053 | ) | 4,125,505 | ||||||||||
Shareholders equity (deficit): |
||||||||||||||||
Additional paid-in capital |
601,017 | 2,193,688 | 535,622 | (2,729,310 | ) | 601,017 | ||||||||||
Accumulated deficit |
(1,320,259 | ) | (966,975 | ) | (875,705 | ) | 1,840,976 | (1,321,963 | ) | |||||||
Accumulated other comprehensive income |
175,960 | 179,540 | 173,394 | (352,934 | ) | 175,960 | ||||||||||
Total Momentive Performance Materials Inc. shareholders equity (deficit) |
(543,282 | ) | 1,406,253 | (166,689 | ) | (1,241,268 | ) | (544,986 | ) | |||||||
Noncontrolling Interest |
| | 3,844 | | 3,844 | |||||||||||
Total shareholders equity (deficit) |
(543,282 | ) | 1,406,253 | (162,845 | ) | (1,241,268 | ) | (541,142 | ) | |||||||
Total liabilities and shareholders equity (deficit) |
$ | 1,452,699 | 1,937,061 | 2,470,924 | (2,276,321 | ) | 3,584,363 | |||||||||
21
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MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
Condensed Consolidated Statements of Operations for the fiscal three-month periods ended September 27, 2009 and September 28, 2008:
Fiscal three-month period ended September 27, 2009 | ||||||||||||||||
Parent | Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||
Net sales |
$ | | 237,952 | 437,754 | (107,285 | ) | 568,421 | |||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales, excluding depreciation |
| 163,010 | 323,730 | (104,864 | ) | 381,876 | ||||||||||
Selling, general and administrative expenses |
18,159 | 34,865 | 28,252 | | 81,276 | |||||||||||
Depreciation and amortization |
| 19,519 | 26,890 | | 46,409 | |||||||||||
Research and development expenses |
| 9,729 | 5,008 | | 14,737 | |||||||||||
Operating income (loss) |
(18,159 | ) | 10,829 | 53,874 | (2,421 | ) | 44,123 | |||||||||
Other income (expense): |
||||||||||||||||
Interest income |
413 | 24,525 | 1,748 | (25,986 | ) | 700 | ||||||||||
Interest expense |
(55,202 | ) | (3,532 | ) | (34,302 | ) | 25,986 | (67,050 | ) | |||||||
Other income (expense), net |
49,886 | 18,140 | 344 | (67,400 | ) | 970 | ||||||||||
Income (loss) before income taxes |
(23,062 | ) | 49,962 | 21,664 | (69,821 | ) | (21,257 | ) | ||||||||
Income taxes (benefit) |
| 76 | 3,441 | 367 | 3,884 | |||||||||||
Net income (loss) |
(23,062 | ) | 49,886 | 18,223 | (70,188 | ) | (25,141 | ) | ||||||||
Net income attributable to the noncontrolling interest |
| | (713 | ) | | (713 | ) | |||||||||
Net income (loss) attributable to Momentive Performance Materials Inc. |
$ | (23,062 | ) | 49,886 | 17,510 | (70,188 | ) | (25,854 | ) | |||||||
Fiscal three-month period ended September 28, 2008 | ||||||||||||||||
Parent | Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||
Net sales |
$ | | 287,427 | 527,764 | (115,307 | ) | 699,884 | |||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales, excluding depreciation |
| 198,630 | 388,340 | (114,781 | ) | 472,189 | ||||||||||
Selling, general and administrative expenses |
(29,262 | ) | 58,772 | 99,076 | | 128,586 | ||||||||||
Depreciation and amortization |
| 29,075 | 33,956 | | 63,031 | |||||||||||
Research and development expenses |
| 11,037 | 7,369 | | 18,406 | |||||||||||
Operating income (loss) |
29,262 | (10,087 | ) | (977 | ) | (526 | ) | 17,672 | ||||||||
Other income (expense): |
||||||||||||||||
Interest income |
23,907 | 200 | 988 | (23,882 | ) | 1,213 | ||||||||||
Interest expense |
(52,340 | ) | (293 | ) | (41,073 | ) | 23,882 | (69,824 | ) | |||||||
Other income (expense), net |
(35,384 | ) | (19,105 | ) | 11,819 | 54,419 | 11,749 | |||||||||
Income (loss) before income taxes |
(34,555 | ) | (29,285 | ) | (29,243 | ) | 53,893 | (39,190 | ) | |||||||
Income taxes (benefit) |
| 6,099 | (10,278 | ) | (223 | ) | (4,402 | ) | ||||||||
Net income (loss) |
(34,555 | ) | (35,384 | ) | (18,965 | ) | 54,116 | (34,788 | ) | |||||||
Net income attributable to the noncontrolling interest |
| | (70 | ) | | (70 | ) | |||||||||
Net income (loss) attributable to Momentive Performance Materials Inc. |
$ | (34,555 | ) | (35,384 | ) | (19,035 | ) | 54,116 | (34,858 | ) | ||||||
22
Table of Contents
MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
Condensed Consolidated Statements of Operations for the fiscal nine-month periods ended September 27, 2009 and September 28, 2008:
Fiscal nine-month period ended September 27, 2009 | ||||||||||||||||
Parent | Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||
Net sales |
$ | | 636,799 | 1,110,063 | (270,374 | ) | 1,476,488 | |||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales, excluding depreciation |
| 442,588 | 849,443 | (264,018 | ) | 1,028,013 | ||||||||||
Selling, general and administrative expenses |
20,376 | 109,479 | 145,233 | | 275,088 | |||||||||||
Depreciation and amortization |
| 64,211 | 78,424 | | 142,635 | |||||||||||
Research and development expenses |
| 29,762 | 15,999 | | 45,761 | |||||||||||
Operating loss |
(20,376 | ) | (9,241 | ) | 20,964 | (6,356 | ) | (15,009 | ) | |||||||
Other income (expense): |
||||||||||||||||
Interest income |
413 | 73,048 | 5,775 | (76,865 | ) | 2,371 | ||||||||||
Interest expense |
(156,912 | ) | (9,412 | ) | (104,185 | ) | 76,865 | (193,644 | ) | |||||||
Other income (expense), net |
(14,717 | ) | (68,252 | ) | 11,528 | 83,669 | 12,228 | |||||||||
Gain on exchange of debt |
178,732 | | | | 178,732 | |||||||||||
Income (loss) before income taxes |
(12,860 | ) | (13,857 | ) | (65,918 | ) | 77,313 | (15,322 | ) | |||||||
Income taxes (benefit) |
| 860 | 2,793 | 654 | 4,307 | |||||||||||
Net income (loss) |
(12,860 | ) | (14,717 | ) | (68,711 | ) | 76,659 | (19,629 | ) | |||||||
Net income attributable to the noncontrolling interest |
| | (243 | ) | | (243 | ) | |||||||||
Net income (loss) attributable to Momentive Performance Materials Inc. |
$ | (12,860 | ) | (14,717 | ) | (68,954 | ) | 76,659 | (19,872 | ) | ||||||
Fiscal nine-month period ended September 28, 2008 | ||||||||||||||||
Parent | Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||
Net sales |
$ | | 845,030 | 1,573,154 | (324,224 | ) | 2,093,960 | |||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales, excluding depreciation |
| 590,096 | 1,154,192 | (323,360 | ) | 1,420,928 | ||||||||||
Selling, general and administrative expenses |
2,643 | 165,869 | 172,328 | | 340,840 | |||||||||||
Depreciation and amortization |
| 81,252 | 97,152 | | 178,404 | |||||||||||
Research and development expenses |
| 34,760 | 22,411 | | 57,171 | |||||||||||
Operating income (loss) |
(2,643 | ) | (26,947 | ) | 127,071 | (864 | ) | 96,617 | ||||||||
Other income (expense): |
||||||||||||||||
Interest income |
71,834 | 711 | 3,508 | (72,112 | ) | 3,941 | ||||||||||
Interest expense |
(158,431 | ) | 85 | (123,825 | ) | 72,112 | (210,059 | ) | ||||||||
Other income (expense), net |
(39,734 | ) | 4,329 | (1,605 | ) | 35,297 | (1,713 | ) | ||||||||
Income (loss) before income taxes |
(128,974 | ) | (21,822 | ) | 5,149 | 34,433 | (111,214 | ) | ||||||||
Income taxes (benefit) |
| 17,948 | 966 | 3 | 18,917 | |||||||||||
Net income (loss) |
(128,974 | ) | (39,770 | ) | 4,183 | 34,430 | (130,131 | ) | ||||||||
Net loss attributable to the noncontrolling interest |
| | 290 | | 290 | |||||||||||
Net income (loss) attributable to Momentive Performance Materials Inc. |
$ | (128,974 | ) | (39,770 | ) | 4,473 | 34,430 | (129,841 | ) | |||||||
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Table of Contents
MOMENTIVE PERFORMANCE MATERIALS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)(Continued)
(Dollar amounts in thousands)
Condensed Consolidated Statement of Cash Flows for the fiscal nine-month period ended September 27, 2009:
Fiscal nine-month period ended September 27, 2009 | |||||||||||||||
Parent | Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
Net cash (used in) provided by operating activities |
$ | (120,186 | ) | 105,479 | 29,902 | | 15,195 | ||||||||
Cash flows from investing activities: |
|||||||||||||||
Capital expenditures |
| (17,616 | ) | (15,883 | ) | | (33,499 | ) | |||||||
Purchases of intangible assets |
| (1,642 | ) | (594 | ) | | (2,236 | ) | |||||||
Net cash used in investing activities |
| (19,258 | ) | (16,477 | ) | | (35,735 | ) | |||||||
Cash flows from financing activities: |
|||||||||||||||
Capital contribution to affiliates |
| (4,925 | ) | 4,925 | | | |||||||||
Dividends paid within Momentive Performance Materials Inc. |
48,300 | 3,092 | (51,392 | ) | | | |||||||||
Debt issuance costs |
(6,671 | ) | | | | (6,671 | ) | ||||||||
Net change in short-term borrowings |
| | (4,546 | ) | | (4,546 | ) | ||||||||
Proceeds from long-term debt |
| 100,000 | 4,690 | | 104,690 | ||||||||||
Payments of long-term debt |
| | (2,622 | ) | | (2,622 | ) | ||||||||
Funds remitted to joint venture |
| | (4,900 | ) | | (4,900 | ) | ||||||||
Net borrowings with affiliates |
251,678 | (362,682 | ) | 111,004 | | | |||||||||
Net cash provided by (used in) financing activities |
293,307 | (264,515 | ) | 57,159 | | 85,951 | |||||||||
Increase (decrease) in cash and cash equivalents |
173,121 | (178,294 | ) | 70,584 | | 65,411 | |||||||||
Effect of exchange rate changes on cash |
21,231 | | (22,989 | ) | | (1,758 | ) | ||||||||
Cash and cash equivalents, beginning of period |
1,894 | 200,667 | 137,981 | | 340,542 | ||||||||||
Cash and cash equivalents, end of period |
$ | 196,246 | 22,373 | 185,576 | | 404,195 | |||||||||
Condensed Consolidated Statement of Cash Flows for the fiscal nine-month period ended September 28, 2008:
Fiscal nine-month period ended September 28, 2008 | |||||||||||||||
Parent | Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
Net cash (used in) provided by operating activities |
$ | (51,168 | ) | 62,634 | 68,475 | 79,941 | |||||||||
Cash flows from investing activities: |
|||||||||||||||
Capital expenditures |
| (43,535 | ) | (65,747 | ) | | (109,282 | ) | |||||||
Purchase of intangible assets |
| (2,799 | ) | (612 | ) | | (3,411 | ) | |||||||
Net cash used in investing activities |
| (46,334 | ) | (66,359 | ) | | (112,693 | ) | |||||||
Cash flows from financing activities: |
|||||||||||||||
Capital contribution |
| 4,261 | (4,261 | ) | | | |||||||||
Dividends paid within Momentive Performance Materials Inc. |
59,900 | (53,991 | ) | (5,909 | ) | | | ||||||||
Net change in short-term borrowings |
| | 2,230 | | 2,230 | ||||||||||
Proceeds of long-term debt |
| | 38,648 | | 38,648 | ||||||||||
Payments of long-term debt |
| | (14,400 | ) | | (14,400 | ) | ||||||||
Funds remitted to joint venture |
| | (4,900 | ) | | (4,900 | ) | ||||||||
Net borrowings with affiliates |
(20,954 | ) | 23,578 | (2,624 | ) | | |||||||||
Net cash provided by (used in) financing activities |
38,946 | (26,152 | ) | 8,784 | | 21,578 | |||||||||
Increase (decrease) in cash and cash equivalents |
(12,222 | ) | (9,852 | ) | 10,900 | | (11,174 | ) | |||||||
Effect of exchange rate changes on cash |
4,420 | | (5,781 | ) | | (1,361 | ) | ||||||||
Cash and cash equivalents, beginning of period |
8,051 | 47,514 | 193,491 | | 249,056 | ||||||||||
Cash and cash equivalents, end of period |
$ | 249 | 37,662 | 198,610 | | 236,521 | |||||||||
24
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion of our results of operations and financial condition should be read in conjunction with the financial statements and notes thereto included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2008.
Forward-Looking and Cautionary Statements
Certain statements included in this report may constitute forward-looking statements within the meaning of and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, our management may from time to time make oral forward-looking statements. All statements other than statements of historical facts are statements that could be forward-looking statements. Forward-looking statements may be identified by the words believe, expect, anticipate, project, plan, estimate, will or intend and similar words or expressions. These forward-looking statements reflect our current views with respect to future events and are based on currently available financial, economic and competitive data and our current business plans. Actual results could vary materially depending on risks and uncertainties that may affect our operations, markets, services, prices and other factors. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: our substantial leverage; limitations in operating our business contained in the documents governing our indebtedness, including the restrictive covenants therein; the recent global financial crisis and economic slowdown; changes in prices and availability of raw materials and key intermediates; rising energy costs, increases in interest rates; fluctuations in currency exchange rates; changes in government regulation or the costs of compliance with such regulation; our reliance on patents, unpatented proprietary know-how and trade secrets; risks of exposure of workers, customers or users of end-products to hazardous materials; and disputes with the unions or works councils to which our employees belong and other factors listed under Risk Factors in this Quarterly Report on Form 10-Q. For a more detailed discussion of these and other risk factors, see our Quarterly Reports on Form 10-Q for the fiscal three-month periods ended March 29, 2009 and June 28, 2009 filed with the Securities and Exchange Commission. All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report. 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.
Critical Accounting Policies
Our principal accounting policies are described under the Notes to Condensed Consolidated Financial StatementsSummary of Significant Accounting Policies. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. We have discussed our most significant estimates and assumptions in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission. There have been no material changes to our critical accounting policies or in such estimates and assumptions.
Recently Issued Accounting Standards
In June 2009, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement modifies the Generally Accepted Accounting Principles (GAAP) hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB Accounting Standards Codification (ASC), also known collectively as the Codification, is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC. Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. This statement applies beginning in the third quarter of 2009. All accounting references have been updated, and therefore SFAS and other references have been replaced with ASC references, where applicable.
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In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167 (SFAS 167), Amendments to FASB Interpretation No. 46(R) (FIN 46(R)) (revised December 2003), Consolidation of Variable Interest Entities. This SFAS amends FIN 46(R) to require an enterprise to perform an analysis to determine whether the enterprises variable interest or interests give it a controlling financial interest in a variable interest entity, and requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This SFAS shall be effective as of the beginning of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. We are currently in the process of evaluating this guidance. This Statement has yet to be incorporated into the Codification.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assetsan amendment of FASB Statement No. 140 (SFAS 166). SFAS 166 intends to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferors continuing involvement, if any, in transferred financial assets. This Statement must be applied as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This Statement must be applied to transfers occurring on or after the effective date. We are currently in the process of evaluating this guidance. This Statement has yet to be incorporated into the Codification.
Effective for interim or annual financial periods ending after June 15, 2009, the Subsequent Events Topic, ASC 855, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. We adopted the provisions of this statement and it did not have a material impact to our financial statements.
Effective for interim reporting periods ending after June 15, 2009, the Financial Instruments Topic, ASC 825-10-65, requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This statement does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this statement requires comparative disclosures only for periods ending after initial adoption. We adopted the provisions of this statement and it did not have a material impact to our financial statements.
Effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively, the Fair Value Measurements and Disclosures Topic, ASC 820-10-65, provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This statement also includes guidance on identifying circumstances that indicate a transaction is not orderly. We adopted the provisions of this statement and it did not have a material impact to our financial statements.
Effective for fiscal years ending after December 15, 2009, the Compensation-Retirement Benefits Topic, ASC 715-20-50, provides guidance on an employers disclosures about plan assets of a defined benefit pension or other postretirement plan. This statement also includes a technical amendment that requires a nonpublic entity to disclose net periodic benefit cost for each annual period for which a statement of income is presented. Upon initial application, the provisions of this statement are not required for earlier periods that are presented for comparative purposes. Earlier application of the provisions of this statement is permitted. We are currently in the process of evaluating this guidance.
Effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, the Derivatives and Hedging Topic, ASC 815, requires enhanced disclosures about derivative and hedging activities. On January 1, 2009, we adopted the expanded disclosure requirements as disclosed in Note 10 to the condensed consolidated financial statements.
The Fair Value Measurements and Disclosures Topic, ASC 820-10-50, defers the provisions of ASC 820 for non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a non-recurring basis to fiscal years beginning after November 15, 2008. We adopted the provisions of this statement on January 1, 2009 and it did not have a material impact to our financial statements.
Effective for periods beginning on or after December 15, 2008, the Business Combinations Topic, ASC 805 requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at full fair value. This statement applies to all business combinations, including combinations among mutual entities and combination by contract alone. We adopted the provisions of this statement on January 1, 2009 and it did not have a material impact to our financial statements.
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Effective for periods beginning on or after December 15, 2008, the Consolidation Topic, ASC 810-10-45, requires non-controlling interests (previously referred to as minority interests) to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. We adopted this statement on January 1, 2009.
Business Outlook
We continue to believe in the strength of the long-term fundamentals of our business. However, due to the effects of the global recession, the short- and mid-term outlook for our business and the industry, although improving, remains uncertain. During the third quarter of 2009, we experienced significant year-over-year decreases in sales of approximately 17% and 31% in our Silicones and Quartz businesses, respectively, but sales on a quarterly basis have improved from a low base since the first quarter of 2009. Sluggish economic conditions have resulted in more cautious customer spending behavior and significantly lower demand for our products compared to the first three quarters of 2008 across a majority of our end markets, with particular weakness in the automotive, construction, textiles and furniture sectors. Our ability to forecast the depth and length of relatively weak economic conditions, its impact on our business and demand for our products, as well as raw material pricing, is very limited due to the many factors involved which are outside of our control. However, we expect to generate higher sales in the fourth quarter compared to the third quarter, due to normal seasonal increases in demand and continued modest improvements in economic activity, albeit at a lower growth rate than achieved in the third quarter. We also expect our year-over-year comparisons in the fourth quarter to turn positive, as last years fourth quarter results were significantly impacted by the global recession.
Results of Operations
The following table sets forth certain historical consolidated financial information, in both dollars and percentages of net sales, for the fiscal three-month periods ended September 27, 2009 and September 28, 2008:
Fiscal three-month period ended September 27, 2009 compared to fiscal three-month period ended September 28, 2008 (Unaudited)
For fiscal three-month period ended | ||||||||||||||
September 27, 2009 | September 28, 2008 | |||||||||||||
(dollars in millions) | ||||||||||||||
Net sales - Silicones |
$ | 523.4 | 92.1 | % | $ | 634.4 | 90.6 | % | ||||||
Net sales - Quartz |
45.0 | 7.9 | % | 65.5 | 9.4 | % | ||||||||
Net sales |
568.4 | 100.0 | % | 699.9 | 100.0 | % | ||||||||
Costs and expenses: |
||||||||||||||
Cost of sales, excluding depreciation |
381.9 | 67.2 | % | 472.2 | 67.5 | % | ||||||||
Selling, general and administrative expenses |
124.3 | 21.9 | % | 182.0 | 26.0 | % | ||||||||
Research and development expenses |
14.7 | 2.6 | % | 18.4 | 2.6 | % | ||||||||
Restructuring and other costs |
3.4 | 0.6 | % | 9.6 | 1.4 | % | ||||||||
Operating income (loss) |
44.1 | 7.8 | % | 17.7 | 2.5 | % | ||||||||
Other income (expenses): |
||||||||||||||
Interest expense, net |
(66.4 | ) | (11.7 | )% | (68.6 | ) | (9.8 | )% | ||||||
Other income (expense), net |
1.0 | 0.2 | % | 11.7 | 1.7 | % | ||||||||
Loss before income taxes |
(21.3 | ) | (3.7 | )% | (39.2 | ) | (5.6 | )% | ||||||
Income taxes (benefit) |
3.9 | 0.7 | % | (4.4 | ) | (0.6 | )% | |||||||
Net loss |
(25.2 | ) | (4.4 | )% | (34.8 | ) | (5.0 | )% | ||||||
Net (income) loss attributable to the noncontrolling interest |
(0.7 | ) | (0.1 | )% | (0.1 | ) | | |||||||
Net loss attributable to Momentive Performance Materials Inc. |
$ | (25.9 | ) | (4.6 | )% | $ | (34.9 | ) | (5.0 | )% | ||||
Net Sales. Net sales in the fiscal three-month period ended September 27, 2009 were $568.4 million, compared to $699.9 million for the same period in 2008, a decrease of 18.8%. The decrease was primarily due to a decrease in sales volume of 16.9%, a decrease in selling prices, and unfavorable exchange rate fluctuations of 1.7%. Foreign exchange impacts were primarily related to the strengthening in the U.S. dollar against the Euro.
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Net sales for our Silicones segment in the fiscal three-month period ended September 27, 2009 were $523.4 million, compared to $634.4 million for the same period in 2008, a decrease of 17.5%. The decrease was primarily due to the impact of the global recession on sales volume, which declined by 15.4%, a decrease in selling prices, and unfavorable exchange rate fluctuations of 1.8%. Sales volume for our Silicones segment was negatively impacted on a year-over-year basis by weak consumer demand in the automotive, construction, textiles, and furniture sectors. Compared to the second quarter of 2009, however, net sales for Silicones segment grew 15.2% due to modest consumer spending improvement on a sequential basis and inventory re-stocking by end users of our products. All product segments and regions also saw improvements in volume versus the second quarter of 2009. The Pacific region was especially strong with China and Southeast Asia recovering much faster than Japan.
We continue to focus on providing more high-value specialty products to our customers versus lower-margin commoditized or core products. Demand for specialty products has been impacted less by the recession compared to core products. We anticipate core products, however, to recover at a faster pace than specialty products in the upcoming quarters as consumer demand improves.
Net sales for our Quartz segment in the fiscal three-month period ended September 27, 2009 were $45.0 million, compared to $65.5 million for the same period in 2008, a decrease of 31.3%. The decrease was primarily a result of weak overall demand on a year-over-year basis for semiconductor related products. Compared to the second quarter of 2009, however, net sales for our Quartz segment grew 26.4% due to improved semiconductor demand on a sequential basis as production levels recovered slightly at chipmakers. We expect further sequential improvement in semiconductor related product sales in the fourth quarter of 2009.
Cost of Sales, excluding depreciation. Cost of sales, excluding depreciation, in the fiscal three-month period ended September 27, 2009 was $381.9 million, compared to $472.2 million for the same period in 2008, a decrease of 19.1%. The decrease was primarily due to lower sales volume and deflation in raw material and energy related costs, partially offset by significantly lower factory leverage.
Cost of sales, excluding depreciation, for our Silicones segment was $352.7 million, compared to $434.6 million for the same period in 2008, a decrease of 18.8%. The decline was primarily due to lower sales volume and lower raw material and energy related costs, partially offset by unfavorable factory leverage.
Cost of sales, excluding depreciation, for our Quartz segment was $29.2 million, compared to $37.6 million for the same period in 2008, a decrease of 22.3%. The decline was primarily due to lower sales volume and savings from restructuring and cost actions partially offset by unfavorable factory leverage.
Selling, General and Administrative Expenses. Selling, general and administrative expenses in the fiscal three-month period ended September 27, 2009 were $124.3 million, compared to $182.0 million for the same period in 2008, a decrease of 31.7%. The decrease was due to managements efforts to reduce operating expenses through productivity and cost reduction initiatives, including temporary pay and benefit reductions for our salaried workforce, lower depreciation and amortization expense due to short lives of certain assets that were stepped up under purchase accounting and favorable foreign currency exchange rates.
Research and Development Expenses. Research and development expenses in the fiscal three-month period ended September 27, 2009 were $14.7 million, compared to $18.4 million for the same period in 2008, a decrease of 20.1%. The decrease was primarily due to efficiencies and other cost reduction initiatives.
Restructuring and Other Costs. Restructuring and other costs in the fiscal three-month period ended September 27, 2009 were $3.4 million, compared to $9.6 million for the same period in 2008. For the fiscal three-month period ended September 27, 2009, these costs were comprised of restructuring costs (primarily severance payments associated with previously announced workforce reductions) of $1.8 million and other costs (primarily one-time payments for services) of $1.6 million. For the fiscal three-month period ended September 28, 2008, these costs were comprised of restructuring costs of $4.3 million and other costs of $5.3 million. See Note 2(c) to the condensed consolidated financial statements for additional disclosure.
Interest Expense, net. Interest expense, net in the fiscal three-month period ended September 27, 2009 was $66.4 million, compared to $68.6 million for the same period in 2008, a decrease of 3.2%. The decrease was primarily due to overall lower interest rates on our variable-rate term loans.
Other Income (Expense), net. Other Income, net in the fiscal three-month period ended September 27, 2009 was $1.0 million, compared to $11.7 million for the same period in 2008. For the fiscal three-month period ended September 27, 2009, other income (expense), net included an unrealized gain on natural gas hedging of $0.7. For the fiscal three-month period ended September 28, 2008, other income (expense), net included an unrealized gain of $11.4 million related to foreign currency forward contracts.
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Income taxes. The effective tax rate was -18.27% and 11.23% for the fiscal three-month periods ended September 27, 2009 and September 28, 2008, respectively. The change in the effective tax rate in 2009 was primarily due to a change in the amount of income (loss) before income taxes, changes in the tax rates applied in the various jurisdictions in which we operate, current period foreign exchange gains and the maintenance of a full valuation allowance against a substantial amount of our net deferred tax assets. The valuation allowance, which relates principally to U.S. deferred tax assets, was established and maintained based on our assessment that the net deferred tax assets will likely not be realized.
Net loss attributable to Momentive Performance Materials Inc. Net loss in the fiscal three-month period ended September 27, 2009 was $25.9 million, compared to a net loss of $34.9 million for the same period in 2008. The change in net loss was a result of the effects described above.
Fiscal nine-month period ended September 27, 2009 compared to fiscal nine-month period ended September 28, 2008 (Unaudited)
For fiscal nine-month period ended | ||||||||||||||
September 27, 2009 | September 28, 2008 | |||||||||||||
(dollars in millions) | ||||||||||||||
Net sales - Silicones |
$ | 1,362.2 | 92.3 | % | $ | 1,893.4 | 90.4 | % | ||||||
Net sales - Quartz |
114.2 | 7.7 | % | 200.6 | 9.6 | % | ||||||||
Net sales |
1,476.4 | 100.0 | % | 2,094.0 | 100.0 | % | ||||||||
Costs and expenses: |
||||||||||||||
Cost of sales, excluding depreciation |
1,028.0 | 69.6 | % | 1,421.0 | 67.9 | % | ||||||||
Selling, general and administrative expenses |
392.8 | 26.6 | % | 496.5 | 23.7 | % | ||||||||
Research and development expenses |
45.7 | 3.1 | % | 57.2 | 2.7 | % | ||||||||
Restructuring and other costs |
24.9 | 1.7 | % | 22.6 | 1.1 | % | ||||||||
Operating income (loss) |
(15.0 | ) | (1.0 | )% | 96.7 | 4.6 | % | |||||||
Other income (expenses): |
||||||||||||||
Interest expense, net |
(191.3 | ) | (13.0 | )% | (206.2 | ) | (9.8 | )% | ||||||
Other income (expense), net |
190.9 | 12.9 | % | (1.7 | ) | (0.1 | )% | |||||||
Loss before income taxes |
(15.4 | ) | (1.0 | )% | (111.2 | ) | (5.3 | )% | ||||||
Income taxes (benefit) |
4.3 | 0.3 | % | 19.0 | 0.9 | % | ||||||||
Net loss |
(19.7 | ) | (1.3 | )% | (130.2 | ) | (6.2 | )% | ||||||
Net (income) loss attributable to the noncontrolling interest |
(0.2 | ) | (0.0 | )% | 0.3 | 0.0 | % | |||||||
Net loss attributable to Momentive Performance Materials Inc. |
$ | (19.9 | ) | (1.3 | )% | $ | (129.9 | ) | (6.2 | )% | ||||
Net Sales. Net sales in the fiscal nine-month period ended September 27, 2009 were $1,476.4 million, compared to $2,094.0 million for the same period in 2008, a decrease of 29.5%. The decrease was primarily due to a decrease in sales volume of 29.3% and unfavorable exchange rate fluctuations of 2.7%, partially offset by an increase in selling prices. Foreign exchange impacts were primarily related to the strengthening in the U.S. dollar against the Euro.
Net sales for our Silicones segment in the fiscal nine-month period ended September 27, 2009 were $1,362.2 million, compared to $1,893.4 million for the same period in 2008, a decrease of 28.1%. The decrease was primarily due to the impact of the global recession on sales volume, which declined by 27.9% and unfavorable exchange rate fluctuations of 2.8%, partially offset by an increase in selling prices. Since the beginning of the year, however, net sales for our Silicones segment have continued to improve each quarter on a sequential basis due to modest consumer spending improvement and inventory re-stocking by end users of our products. During this time, all product lines and regions have also seen improvements in volume from the prior quarter.
Our continued focus on growing high-value specialty products versus lower-margin commoditized or core products saw specialty products sales improve for the fiscal nine-month period ended September 27, 2009, compared to the same period in 2008. Specialty products, which by their nature provide added value to our customers, have been less affected by the recession than core products.
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Net sales for our Quartz segment in the fiscal nine-month period ended September 27, 2009 were $114.2 million, compared to $200.6 million for the same period in 2008, a decrease of 43.1%. The decrease primarily was a result of weak overall demand on a year-over year basis for semiconductor related products. Although some strengthening has been experienced in semiconductor demand on a sequential basis during 2009 due to increases in end user production, shipment levels remain significantly below last year.
Cost of Sales, excluding depreciation. Cost of sales, excluding depreciation, in the fiscal nine-month period ended September 27, 2009 was $1,028.0 million, compared to $1,421.0 million for the same period in 2008, a decrease of 27.7%. The decrease was primarily due to lower sales volume and deflation in raw material, energy and transportation costs, partially offset by significantly lower factory leverage. In addition, cost of sales was favorably impacted by changes in foreign currency exchange rates.
Cost of sales, excluding depreciation, for our Silicones segment was $952.4 million, compared to $1,300.9 million for the same period in 2008, a decrease of 26.8%. The decline was primarily due to lower sales volume and lower raw material and energy related costs, partially offset by unfavorable factory leverage.
Cost of sales, excluding depreciation, for our Quartz segment was $75.6 million, compared to $120.1 million for the same period in 2008, a decrease of 37.1%. The decline was primarily due to lower sales volume and savings from restructuring and cost actions partially offset by unfavorable factory leverage.
Selling, General and Administrative Expenses. Selling, general and administrative expenses in the fiscal nine-month period ended September 27, 2009 were $392.8 million, compared to $496.5 million for the same period in 2008, a decrease of 20.9%. The decrease was primarily due to managements efforts to reduce operating expenses through productivity and cost reduction initiatives, including temporary pay and benefit reductions for our salaried workforce, lower depreciation and amortization expense, and favorable foreign currency exchange rates.
Research and Development Expenses. Research and development expenses in the fiscal nine-month period ended September 27, 2009 were $45.7 million, compared to $57.2 million for the same period in 2008, a decrease of 20.1%. The decrease was primarily due to timing of program expenditures related to new projects, efficiencies and other cost reduction initiatives.
Restructuring and Other Costs. Restructuring and other costs in the fiscal nine-month period ended September 27, 2009 were $24.9 million, compared to $22.6 million for the same period in 2008. For the fiscal nine-month period ended September 27, 2009, these costs were comprised of restructuring costs (primarily severance payments associated with previously announced workforce reductions) of $24.6 million and other costs of $0.3 million. Other costs of $0.3 million for the fiscal nine-month period ended September 27, 2009 included a one-time benefit reduction and wage tax credits of $5.4 million. For the fiscal nine-month period ended September 28, 2008, these costs were comprised of restructuring costs of $5.7 million and other costs of $16.9 million. See Note 2(c) to the condensed consolidate financial statements for additional disclosure.
Interest Expense, net. Interest expense, net in the fiscal nine-month period ended September 27, 2009 was $191.3 million, compared to $206.2 million for the same period in 2008, a decrease of 7.2%. The decrease was primarily due to overall lower interest rates on our variable-rate term loans and favorable foreign currency exchange rate fluctuations.
Other Income (Expense), net. Other Income, net in the fiscal nine-month period ended September 27, 2009 was $190.9 million, compared to other expense, net of $1.7 million for the same period in 2008. For the fiscal nine-month period ended September 27, 2009, other income, net included a gain on exchange of debt of $178.7 million. In addition, other income (expense), net also included a realized gain of $4.0 million and an unrealized gain of $6.0 million due to the settlement of our foreign currency forward contracts in March 2009. For the fiscal nine-month period ended September 28, 2008, other expense, net included a loss of $6.1 million offset by an unrealized gain of $2.9 million related to the foreign currency forward contracts.
Income taxes. The effective tax rate was -28.11% and 17.01% for the fiscal nine-month periods ended September 27, 2009 and September 28, 2008, respectively. The change in the effective tax rate in 2009 was primarily due to a change in the amount of income (loss) before income taxes, changes in the tax rates applied in the various jurisdictions in which we operate, current period foreign exchange gains and the maintenance of a full valuation allowance against a substantial amount of our net deferred tax assets. The valuation allowance, which relates principally to U.S. deferred tax assets, was established and maintained based on our assessment that the net deferred tax assets will likely not be realized.
Net loss attributable to Momentive Performance Materials Inc. Net loss in the fiscal nine-month period ended September 27, 2009 was $19.9 million, compared to a net loss of $129.9 million for the same period in 2008. The change in net loss was a result of the effects described above.
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Liquidity and Capital Resources
Fiscal nine-month period ended |
|||||||
September 27, 2009 |
September 28, 2008 |
||||||
(dollars in millions) | |||||||
Cash provided by operating activities |
$ | 15.2 | 79.9 | ||||
Cash used in investing activities |
(35.7 | ) | (112.7 | ) | |||
Cash provided by financing activities |
85.9 | 21.6 | |||||
Increase (decrease) in cash and cash equivalents, before effect of exchange rate changes on cash |
$ | 65.4 | (11.2 | ) | |||
Operating activities. Cash provided by operating activities was $15.2 million in the fiscal nine-month period ended September 27, 2009, compared to $79.9 million in the fiscal nine-month period ended September 28, 2008. Cash provided in operating activities in the fiscal nine-month period ended September 27, 2009 was primarily due to a decrease in inventory as a result of management efforts to reduce working capital requirements and an increase in accrued expenses, partially offset by a decline in operating income and decreases in accounts payable (primarily due to lower material purchases and capital projects during the first half of 2009). For 2009, we expect the following significant cash outflows related to operating activities: cash interest payments on our Second Lien Notes, Senior Notes, and Senior Subordinated Note due in the second quarter ($83 million) and fourth quarter ($86 million) of approximately $169 million in total, annual cash principal (due quarterly) and interest payments (due monthly) related to our variable rate term loans of approximately $9 million and $31 million (depending on interest rate and foreign exchange fluctuations), respectively, annual global pension fund contributions of approximately $16 million, and annual cash income tax payments estimated at $12 million. Cash provided by operating activities in the fiscal nine-month period ended September 28, 2008 was primarily due to increases in accrued expenses and increases in accounts payable as a result of extension in vendor payment terms and timing of payments, offset by a payment made to a related party and increases in accounts receivable as a result of price increases and higher non-U.S. sales.
Investing activities. Cash used in investing activities was $35.7 million in the fiscal nine-month period ended September 27, 2009, compared to $112.7 million in the fiscal nine-month period ended September 28, 2008. Cash used in investing activities in the fiscal nine-month period ended September 27, 2009 was primarily due to ongoing expenditures for environmental health and safety compliance and maintenance projects. During the fiscal nine-month period ended September 27, 2009, management made a concerted effort to preserve cash as a result of economic conditions impacting our industry and reduced capital spending. Capital spending in 2009 is expected to be between $55 million and $60 million, excluding restructuring activities. Cash used in investing activities in the fiscal nine-month period ended September 28, 2008 was primarily due to capital expenditures related to the construction of a silicone finishing facility in Nantong, China which commenced limited operation in June 2008 and ongoing environmental, health and safety compliance and maintenance projects.
Financing activities. Cash provided by financing activities was $85.9 million in the fiscal nine-month period ended September 27, 2009, compared to $21.6 million in the fiscal nine-month period ended September 28, 2008. Cash provided by financing activities in the fiscal nine-month period ended September 27, 2009 was primarily due to an additional $100.0 million draw down under our revolving credit facility and $4.7 million borrowing by our subsidiary in India, partially offset by $6.7 million of debt issuance costs associated with the exchange of our debt, principal payments of $7.1 million and a $4.9 million capital contribution to our Xinan joint venture in Jiande, China. Cash provided by financing activities in the fiscal nine-month period ended September 28, 2008 was primarily due to additional long-term borrowings of $38.6 million associated with the Nantong construction project, offset by $14.4 million of principal payments on our term loans under our senior credit facility and a $4.9 million capital contribution to our Xinan joint venture in Jiande, China.
Liquidity
Our primary sources of liquidity are cash on hand, cash flow from operations and funds available under a senior secured credit facility. Our primary continuing liquidity needs are to finance our working capital, capital expenditures and debt service obligations.
We had $3,218.5 million of indebtedness (excluding short-term borrowings), at September 27, 2009. Accordingly, we have significant debt service obligations.
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Our senior secured credit facility at September 27, 2009 consists of two variable-rate term loans in an aggregate principal amount of approximately $1,088.7 million, a $300.0 million revolving credit facility that includes borrowing capacity available for letters of credit of up to $100.0 million, and a $34.3 million synthetic letter of credit facility. One of our term loans is denominated in euros. There were $250.0 million of borrowings outstanding under the revolving credit facility as of September 27, 2009. The outstanding letters of credit under the revolving credit facility at September 27, 2009 were $35.8 million, leaving unused borrowing capacity of $14.2 million. Outstanding letters of credit issued under the synthetic letter of credit facility at September 27, 2009 were $32.0 million, leaving unused capacity of $2.3 million. On October 23, 2009, we made a principal repayment of $75.0 million on our revolving credit facility.
Principal repayments on our term loans are due and payable in quarterly installments of approximately $2.8 million (depending on exchange rates), 0.25% of the original principal amounts, on the last day of each calendar quarter. The remaining balance of the term loans will be due and payable in full on December 4, 2013. The revolving credit facility is available until December 3, 2012. The synthetic letter of credit facility amortizes at a rate of $350,000 per annum, 1% of the original commitment, and is due and payable in full on December 4, 2013. We must also prepay the term loans, subject to certain exceptions, with (1) 50% (which percentage may be reduced depending on the achievement of certain ratios of our net first-lien secured indebtedness to Adjusted EBITDA) of excess cash flow (as defined in the credit agreement) less the amount of certain voluntary prepayments as described in the credit agreement (beginning with the second half of the fiscal year ending December 31, 2007); (2) 100% of the net cash proceeds of any incurrence of debt other than excluded debt issuances (as defined in the credit agreement) and (3) 100% of the net cash proceeds of all non-ordinary course asset sales and casualty and condemnation events, to the extent the Company does not reinvest or commit to reinvest those proceeds in assets to be used in its business or to make certain other permitted investments within 15 months (and, if committed to be reinvested, actually reinvested within 36 months). As a result of our obligation to prepay the terms loans dependent on our excess cash flow described above, we prepaid approximately $14.4 million of our term loans on March 28, 2008. This prepayment essentially eliminated our obligation to make required quarterly principal repayments through the first quarter of 2009 and reduced our required quarterly principal payment due on June 30, 2009. On March 10, 2008, we entered into an interest rate swap agreement, whereby we receive one-month LIBOR and pay a fixed rate of 2.48% on a notional value of $185.0 million. The interest rate swap matures on March 31, 2010. We designated the interest rate swap as a cash flow hedge of variable interest rate risk associated with the first $185.0 million of our U.S. dollar denominated term loan (tranche B-1).
As of September 27, 2009, we have outstanding $200.0 million in aggregate principal amount of 12 1/2% Second-Lien Senior Secured Notes due 2014 (the Second Lien Notes), $716.6 million in aggregate principal amount of 9 3/4% Senior Notes due 2014 (the Dollar Fixed-Rate Notes), 245.2 million in aggregate principal amount of 9% Senior Notes due 2014 (the Euro Fixed-Rate Notes and together with the Dollar Fixed-Rate Notes, the Senior Notes), $192.6 million in aggregate principal amount of 10 1/8% / 10 7/8% Senior Toggle Notes due 2014 (the Senior Toggle Notes), and $381.9 million in aggregate principal amount of 11 1/2% Senior Subordinated Notes due 2016 (the Senior Subordinated Notes). The Second Lien Notes, Dollar Fixed-Rate Senior Notes, the Euro Fixed-Rate Senior Notes, the Senior Toggle Notes and the Senior Subordinated Notes are five separate series of notes issued under separate indentures, including for purposes of, among other things, payments of principal and interest, events of default and consents to amendments to the applicable indenture and the applicable notes.
The Second Lien Notes are guaranteed on a senior secured basis by each of our U.S. subsidiaries that is a borrower or guarantor under our existing senior secured credit facility described below. The Second Lien Notes are secured by a second-priority security interest in certain assets of the Company and such U.S. subsidiaries, which interest is junior in priority to the liens on substantially the same collateral securing our existing senior secured credit facility. The Second Lien Notes mature on June 15, 2014 and bear interest at a rate per annum of 12.5%, payable semiannually on June 15 and December 15 of each year, commencing on December 15, 2009.
The Senior Notes are unsecured senior obligations of the Company, which mature on December 1, 2014. The Senior Notes are guaranteed on an unsecured senior basis by each of our U.S. subsidiaries that is a borrower or guarantor under our senior secured credit facility. The portion of the Senior Notes which represent Dollar Fixed-Rate Notes and Euro Fixed-Rate Notes bear interest at a rate per annum of 9 3/4% and 9%, respectively, payable semiannually on June 1 and December 1 of each year.
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The Senior Toggle Notes are unsecured senior obligations of the Company, which mature on December 1, 2014. The Senior Toggle Notes are guaranteed on an unsecured senior basis by each of our U.S. subsidiaries that is a borrower or guarantor under our senior secured credit facility. Interest on the Senior Toggle Notes is payable semiannually on June 1 and December 1 of each year. For any interest payment period after the initial interest payment period and through December 1, 2010, we may, at our option, elect to pay interest on the Senior Toggle Notes (1) entirely in cash (Cash Interest) or (2) entirely by increasing the principal amount of the outstanding Senior Toggle Notes or by issuing additional Senior Toggle Notes (PIK Interest). We must elect the form of interest payment with respect to each interest period by delivering a notice to the trustee prior to the beginning of each interest period. After December 1, 2010, we are required to make all interest payments on the Senior Toggle Notes entirely in cash. Cash Interest on the Senior Toggle Notes accrues at a rate of 10 1/8% per annum. PIK Interest on the Senior Toggle Notes accrues at a rate of 10 7/8% per annum. Prior to June 1, 2009, we made the permitted election under the indenture governing the Senior Toggle Notes to pay interest that is due on December 1, 2009 as PIK Interest. Previously, we also made this pay-in-kind election for the interest payments due on June 1, 2009 and December 1, 2008, thereby increasing the outstanding balance of the Senior Toggle Notes by $17.2 million and $16.3 million on such dates, respectively. For future interest periods beginning prior to December 1, 2010, pursuant to the terms of the Senior Toggle Notes, interest on the Senior Toggle Notes will remain due and payable as elected during the immediately preceding interest rate period unless we make a new election prior to the beginning of the applicable interest period. Under the indenture for the Senior Toggle Notes, we are required to redeem for cash a portion of the Senior Toggle Notes equal to the Mandatory Principal Redemption Amount (as defined below) on June 1, 2012. The redemption price for the portion of the Senior Toggle Notes required to be redeemed will be 100% of the principal amount of the Senior Toggle Notes plus any accrued interest thereon on the date of redemption. The Mandatory Principal Redemption Amount means the portion of the Senior Toggle Notes required to be redeemed to prevent such notes from being treated as an applicable high yield discount obligation within the meaning of Section 163(i)(l) of the Internal Revenue Code. The payment of interest in the form of PIK Interest may result in us being required to redeem a portion of the Senior Toggle Notes pursuant to those provisions.
The Senior Subordinated Notes are unsecured senior subordinated obligations of the Company, which mature on December 1, 2016. The Senior Subordinated Notes are guaranteed on an unsecured senior subordinated basis by each of our U.S. subsidiaries that is a borrower or guarantor under our senior secured credit facility. Each Senior Subordinated Note bears interest at 11 1/2% per annum, payable semiannually on June 1 and December 1 of each year.
Our senior secured credit facility contains various restrictive covenants that prohibit us and/or restrict our ability to prepay indebtedness, including our Second Lien Notes, Senior Notes and Senior Subordinated Notes (collectively, the notes). If there are any borrowings under the revolving credit agreement (or outstanding letters of credit that have not been cash collateralized), our credit facility requires us to maintain a specified net first-lien indebtedness to Adjusted EBITDA ratio. This covenant, however, has been conditionally waived by the requisite revolving credit facility lenders for the fiscal three-month period ended September 27, 2009 and the fiscal three-month period ending December 31, 2009. See Covenants under our Senior Secured Credit Facility and the Notes below. In addition, our senior secured credit facility and 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 significant exceptions.
Our wholly-owned subsidiary, Momentive Performance Materials (Nantong) Co., Ltd. (MPM Nantong), also has borrowings of approximately $60.5 million outstanding (based on exchange rates as of September 27, 2009) from the China Construction Bank, which were used to finance the construction of its finishing plant in Nantong, China. Such loans are secured by substantially all of MPM Nantongs assets. On April 30, 2009, MPM Nantong was in breach of a financial covenant under its loan agreement with the China Construction Bank. On June 3, 2009, MPM Nantong and the China Construction Bank entered into a Supplemental Agreement, which amended the loan agreement. Pursuant to the Supplemental Agreement, the parties (1) changed the first measurement date for the financial covenants under the loan agreement from December 31, 2008 to December 31, 2010 and (2) deferred principal repayments originally due on June 30, 2009 and December 31, 2009, aggregating to approximately $6.2 million (based on exchange rates at the time), until June 30, 2014, the final maturity date of the debt under the loan agreement. As a result, MPM Nantong is now in compliance with the terms of the loan agreement as amended by the Supplemental Agreement. Accordingly, all principal payments due under the loan from China Construction Bank are classified as long-term debt.
Our ability to make scheduled payments of principal, to pay interest on, or to refinance our indebtedness, including the notes, or to fund planned capital expenditures, will depend on our ability to generate cash in the future. This ability is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
Based on our current assessment of the economic outlook for the next twelve months, we believe that cash flow from operations and available cash, together with available borrowings under our senior secured credit facility, will be adequate to meet our liquidity needs for the next twelve months.
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We cannot assure investors, however, that our business will generate sufficient cash flow from operations or that borrowings will be available to us under our senior secured credit facility in an amount sufficient to enable us to pay our indebtedness, including the notes issued, or to fund our other liquidity needs. In addition, upon the occurrence of certain events, such as a change of control, we could be required to repay or refinance our indebtedness. We cannot assure investors that we will be able to refinance any of our indebtedness, including our senior secured credit facility and the notes issued, on commercially reasonable terms or at all.
Potential 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, including Apollo, may seek to acquire (and have acquired) notes or other indebtedness of Momentive 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 the notes), for cash or other consideration. 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.
Contractual Obligations
Information related to our contractual obligations at December 31, 2008 can be found in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission. Except for the private exchange offer disclosed in Note 6 to the condensed consolidated financial statements, there have been no material changes in our contractual obligations to our previous disclosures made on this matter.
Effect of Inflation
Inflation in general did not negatively impact our operating results during the fiscal three-month period ended September 27, 2009 compared to the same period in 2008. We cannot assure investors, however, that we will not be affected by inflation in the future. While we have been able to partially or completely offset inflation by increasing selling prices and implementing cost reduction actions in the past, we cannot assure investors that we will be able to do so in the future.
Covenants under our Senior Secured Credit Facility and the Notes
The credit agreement governing our senior secured credit facility and the indentures governing the notes contain various covenants that limit 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. |
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In addition, at any time that loans or letters of credit are outstanding (and not cash collateralized) thereunder, our revolving credit facility (which is part of our senior secured credit facility) requires us to maintain a specified net first-lien indebtedness to Adjusted EBITDA ratio, referred to as the Senior Secured Leverage Ratio. Specifically, the ratio of our Total Senior Secured Net Debt (as defined in the credit agreement governing the senior secured credit facility) to trailing twelve-month Adjusted EBITDA (as adjusted per the credit agreement governing the senior secured credit facility) may not exceed 4.25 to 1 as of the last day of any fiscal quarter. On September 22, 2009, we entered into a Limited Waiver and Amendment (the Waiver and Amendment) with respect to the credit agreement governing our senior secured credit facility. Pursuant to the Waiver and Amendment, in return for certain consideration, the requisite revolving credit facility lenders conditionally waived our compliance with the senior secured leverage ratio maintenance covenant set forth in the credit agreement for the fiscal three-month period ended September 27, 2009 and the fiscal three-month period ending December 31, 2009. For additional information regarding the Waiver and Amendment, see Note 6 (Indebtedness) to our condensed consolidated financial statements. On September 27, 2009, we were in compliance with the senior secured leverage ratio maintenance covenant (irrespective of the Waiver and Amendment), the other covenants under the credit agreement governing the senior secured credit facility and the covenants under the indentures governing the notes.
Financial Measures that Supplement GAAP
EBITDA consists of earnings before interest, taxes and depreciation and amortization. EBITDA is a measure commonly used in our industry and we present EBITDA to enhance your understanding of our operating performance. We use EBITDA as one criterion for evaluating our performance relative to that of our peers. We believe that EBITDA is an operating performance measure, and not a liquidity measure, that provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies. Adjusted EBITDA is defined as EBITDA further adjusted for unusual items and other pro forma adjustments permitted in calculating covenant compliance in the credit agreement governing our credit facilities and indentures governing the notes to test the permissibility of certain types of transactions. Adjusted EBITDA as presented in the table below corresponds to the definition of EBITDA calculated on a Pro Forma Basis used in the credit agreement and substantially conforms to the definition of EBITDA calculated on a pro forma basis used in the indentures. Adjusted EBITDA is intended to show our unleveraged, pre-tax operating results and therefore reflects our financial performance based on operational factors, excluding non-operational, non-cash or non-recurring losses or gains. Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted EBITDA does not reflect: (a) our capital expenditures, future requirements for capital expenditures or contractual commitments; (b) changes in, or cash requirements for, our working capital needs; (c) the significant interest expenses, or the cash requirements necessary to service interest or principal payments, on our debt; (d) tax payments that represent a reduction in cash available to us; (e) any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future; (f) management fees that may be paid to Apollo; or (g) the impact of earnings or charges resulting from matters that we and the lenders under our secured senior credit facility may not consider indicative of our ongoing operations. In particular, our definition of Adjusted EBITDA allows us to add back certain non-cash, non-operating or non-recurring charges that are deducted in calculating net income, even though these are expenses that may recur, vary greatly and are difficult to predict and can represent the effect of long-term strategies as opposed to short-term results. In addition, certain of these expenses can represent the reduction of cash that could be used for other corporate purposes. Further, as included in the calculation of Adjusted EBITDA below, the measure allows us to add estimated cost savings and operating synergies related to operational changes ranging from restructuring to acquisitions to dispositions as if such event occurred on the first day of the four consecutive fiscal quarter period ended on or before the occurrence of such event and/or exclude one-time transition expenditures that we anticipate we will need to incur to realize cost savings before such savings have occurred.
EBITDA and Adjusted EBITDA are not measurements of financial performance under U.S. GAAP, and our EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. You should not consider our EBITDA or Adjusted EBITDA, which are non-GAAP financial measures, as an alternative to operating or net income, determined in accordance with U.S. GAAP, as an indicator of our operating performance, or as an alternative to cash flows from operating activities, determined in accordance with U.S. GAAP, as an indicator of our cash flows or as a measure of liquidity.
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The following table reconciles net loss attributable to Momentive Performance Materials Inc. to EBITDA and Adjusted EBITDA (as calculated under our credit agreement and indentures) for the periods presented:
Fiscal three-month period ended | Fiscal nine-month period ended | ||||||||||||
September 27, 2009 |
September 28, 2008 |
September 27, 2009 |
September 28, 2008 |
||||||||||
(dollars in millions) | |||||||||||||
Net loss attributable to Momentive Performance Materials Inc. |
$ | (25.9 | ) | (34.9 | ) | (19.9 | ) | (129.9 | ) | ||||
Gain on exchange of debt |
| | (178.7 | ) | | ||||||||
Interest expense, net |
66.4 | 68.6 | 191.3 | 206.2 | |||||||||
Income taxes |
3.9 | (4.4 | ) | 4.3 | 19.0 | ||||||||
Depreciation and amortization |
46.4 | 63.0 | 142.6 | 178.4 | |||||||||
EBITDA |
90.8 | 92.3 | 139.6 | 273.7 | |||||||||
Net income (loss) attributable to the noncontrolling interest(a) |
0.7 | 0.1 | 0.2 | (0.3 | ) | ||||||||
Restructuring and non-recurring(b) |
3.4 | 11.5 | 24.9 | 21.8 | |||||||||
Cost Savings and Inventory Optimization(c) |
4.9 | 9.5 | 24.0 | 40.5 | |||||||||
Non cash and purchase accounting effects(d) |
(5.2 | ) | 1.6 | (10.0 | ) | (2.9 | ) | ||||||
Management fee and other(e) |
(1.1 | ) | 1.0 | (0.9 | ) | 5.3 | |||||||
Adjusted EBITDA |
$ | 93.5 | 116.0 | 177.8 | 338.1 | ||||||||
Total Senior Secured Net Debt |
$ | 944.4 | |||||||||||
Senior Secured Leverage Ratio for the twelve-month period ended September 27, 2009 |
4.09 | ||||||||||||
Adjusted EBITDA for the twelve-month period ended September 27, 2009 |
231.0 |
(a) | Reflects the elimination of minority interests resulting from the Shenzhen joint venture. |
(b) | Relates primarily to restructuring and non-recurring costs. |
(c) | Represents estimated cost savings, on a pro forma basis, from initiatives implemented or being implemented by management, including headcount reductions, indirect cost savings, and inventory optimization programs. For the fiscal three-month periods ended September 27, 2009 and September 28, 2008, estimated cost savings includes facility rationalizations and headcount reductions. |
(d) | Non-cash items include the effects of (i) stock-based compensation expense, (ii) purchase accounting, (iii) non-cash mark-to-market revaluation of foreign currency forward contracts and unrealized gains or losses on revaluations of the U.S. dollar denominated debt of our foreign subsidiaries and the Euro denominated debt of our U.S. subsidiary, (iv) unrealized natural gas derivative gains or losses, and (v) reserve changes and impairment charges. For the fiscal three-month period ended September 27, 2009, non-cash items include: (i) stock-based compensation expense of $0.2, (ii) unrealized foreign currency exchange gain of $4.7, and (iii) unrealized gain on natural gas hedges of $0.7. For the fiscal three-month period ended September 28, 2008, non-cash items include: stock-based compensation expense of $0.3; (ii) unrealized gain of $11.3 on foreign currency forward contracts and unrealized foreign currency exchange loss of $12.6. |
(e) | Management Fees and Other include (i) management and other fees to Apollo and affiliates, (ii) transition service agreements with General Electric, and (iii) the exclusion of our unrestricted subsidiary. |
Item 3. | Quantitative and Qualitative Disclosures About Market Risks. |
Information regarding our market risk as of December 31, 2008 was provided in our Annual Report on Form 10-K for the year ended December 31, 2008. There have been no material changes to such disclosure.
Item 4. | Controls and Procedures. |
We maintain disclosure controls and procedures (as defined in Rules 13(a)-15(e) or 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), that are designed to ensure that information required to be disclosed in our reports filed or furnished under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable SEC rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.
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We carried out the evaluation required by paragraph (b) of the Exchange Act Rules 13(a)-15 or 15(d)-15, under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is (1) accumulated and communicated to management, including our CEO and CFO, to allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and forms.
There have been no changes in our internal control over financial reporting that occurred during the fiscal three-month period ended September 27, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information.
Item 1. | Legal Proceedings. |
There have been no material changes to our previous disclosures on this matter.
Item 1A. | Risk Factors. |
Other than the risk factor below which has been restated, there have been no material changes to our previous disclosures on this matter.
An event of default under our senior secured credit facility may adversely affect our business, results of operations and financial condition.
At any time that loans or letters of credit are outstanding (and not cash collateralized) thereunder, the agreement governing our revolving credit facility (which is part of our senior secured credit facility) requires us to maintain a specified net first-lien indebtedness to Adjusted EBITDA ratio, referred to as the Senior Secured Leverage Ratio. Specifically, the ratio of our Total Senior Secured Net Debt (as defined in the credit agreement governing the senior secured credit facility) to trailing twelve-month Adjusted EBITDA (as adjusted per the credit agreement governing the senior secured credit facility) may not exceed 4.25 to 1 as of the last day of any fiscal quarter. At September 27, 2009, we had a senior secured leverage ratio of 4.09 to 1. On September 22, 2009, we entered into a Limited Waiver and Amendment (the Waiver and Amendment) with respect to the credit agreement governing our senior secured credit facility. Pursuant to the Waiver and Amendment, in return for certain consideration, the requisite revolving credit facility lenders conditionally waived our compliance with the senior secured leverage ratio maintenance covenant set forth in the credit agreement for the fiscal three-month period ended September 27, 2009 and the fiscal three-month period ending December 31, 2009. However, we are required to comply with the senior secured leverage ratio maintenance covenant set forth in the credit agreement beginning with the fiscal quarter ending March 28, 2010 and depending upon whether business conditions deteriorate, we may not comply with our senior secured leverage ratio covenant for such future quarters. If business conditions deteriorate in fiscal 2010 and therefore we are at risk of failing to comply with our senior secured leverage ratio covenant, we would pursue additional cost saving actions, restructuring initiatives or other business or capital structure optimization measures available to us to remain in compliance with this covenant, but there can be no assurance that any such measures will be successful or will be sufficient to maintain compliance with our senior secured leverage ratio covenant.
A failure to comply with the covenants contained in our senior secured credit facility, the indentures governing the notes or our other existing indebtedness could result in an event of default under the existing agreements that, if not cured or waived, would have a material adverse effect on our business, financial condition and results of operations.
In particular, a breach of our senior secured leverage ratio covenant would result in an event of default under our revolving credit facility. Pursuant to the credit agreement, our parent company, Momentive Performance Materials Holdings Inc. (Holdings), has the right but not the obligation to cure such default through the purchase of additional equity in the Company in up to three of any four consecutive quarters. If a breach of the senior secured leverage ratio covenant is not cured or waived, or if any other event of default under our senior secured credit facility occurred, the lenders under the credit agreement:
| would not be required to lend any additional amounts to us; |
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| could elect to declare all borrowings outstanding under the revolving credit 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 elect to declare all borrowings outstanding under the term loan facility, together with accrued and unpaid interest and fees, due and payable and could demand cash collateral for all letters of credit issued under the synthetic letter of credit facility (provided, that if triggered by a breach of the senior secured leverage ratio covenant, certain other conditions are met); |
| could require us to apply all of our available cash to repay these borrowings; and/or |
| could prevent us from making payments on the notes; |
all of which could result in an event of default under the notes.
If the indebtedness under our senior secured credit facility or the notes were to be accelerated after an event of a default, our assets may not be sufficient to repay such indebtedness in full and our lenders could foreclose on our pledged assets. Under these circumstances, we cannot give assurance that a refinancing would be possible or that any additional financing could be obtained on acceptable terms or at all and we may be forced to explore a restructuring.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Submission of Matters to a Vote of Security Holders. |
None.
Item 5. | Other Information. |
Not applicable.
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Item 6. | Exhibits. |
INDEX TO EXHIBITS
Exhibit |
Description | |
10.21 | Limited Waiver and Amendment to Credit Agreement, dated as of September 22, 2009 by Momentive Performance Materials Inc., Momentive Performance Materials Holdings Inc., Momentive Performance Materials USA Inc., Momentive Performance Materials GmbH, each Subsidiary Loan Party thereto, the Lenders thereto and JPMorgan Chase Bank, N.A., as administrative agent (filed as exhibit 10.1 to our Form 8-K, filed on September 24, 2009) | |
31.1* | Rule 13a-14(a)/15d-14(a) certification of Principal Executive Officer | |
31.2* | Rule 13a-14(a)/15d-14(a) certification of Principal Financial Officer | |
32* | Section 1350 certification of Principal Executive Officer and Principal Financial Officer |
* | Filed herewith |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
November 10, 2009
MOMENTIVE PERFORMANCE MATERIALS INC. | ||
BY: | /s/ JONATHAN D. RICH | |
Jonathan D. Rich Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated below.
Signature |
Title |
Date | ||
/s/ JONATHAN D. RICH Jonathan D. Rich |
Chief Executive Officer, President and Director (Principal Executive Officer) |
November 10, 2009 | ||
/s/ ANTHONY S. COLATRELLA Anthony S. Colatrella |
Chief Financial Officer (Principal Financial Officer) |
November 10, 2009 | ||
/s/ WILLIAM L. TORRENCE William L. Torrence |
Controller (Principal Accounting Officer) |
November 10, 2009 |
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