10-Q/A 1 mpmi331201210qamendment411.htm 10-Q/A

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

(Mark One)

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

For the quarterly period ended March 31, 2012

OR

o	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.)
260 Hudson River Road Waterford, NY 12188		(518) 237-3330
(Address of principal executive offices including zip code)		(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  o

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

Large accelerated filer	o		Accelerated filer	o
Non-accelerated filer	x		Smaller Reporting Company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

The number of shares of common stock of the Company, par value $0.01 per share, outstanding as of the close of business on May 7, 2012 was 100 shares, all of which were held by Momentive Performance Materials Holdings Inc.

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Explanatory Note

We are filing this Amendment No. 1 on Form 10-Q/A (this “Form 10-Q/A”) to amend our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (the “Original Filing”), as originally filed with the Securities and Exchange Commission (the “SEC”) on May 7, 2012 (the “Original Filing Date”) to reflect a restatement of the following previously filed financial statements and data (and related disclosures):

•	Our condensed consolidated statements of cash flows for the three months ended March 31, 2012 and April 3, 2011, as discussed in Note 1 to the financial statements included in Item 1 of this 10-Q/A.

•	Our management's discussion and analysis of financial condition and results of operations for the three months ended March 31, 2012 and April 3, 2011 as discussed in Item 2 of this Form 10-Q/A.

The restatement corrects the following classification errors within the condensed consolidated statements of cash flows:

•	We included in cash used for capital expenditures amounts that resided in “Trade payables” which should be excluded as a non-cash item. These amounts have now been properly excluded from operating and investing activities.

•	We misclassified certain currency translation adjustments and other non-cash transactions within the “Effects of exchange rate changes on cash” line item. These amounts have now been properly reflected in operating activities.

•	We misclassified certain outstanding checks as “Trade payables.” The amounts have now been properly classified as a reduction to “Cash and cash equivalents.”

In connection with the restatement of our financial statements described herein, we have reported a material weakness in our internal controls and procedures with regard to the preparation and review of the statement of cash flows. Due to this material weakness, our principal executive officer and principal financial officer also concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report. For more information, see Item 4 included in this Form 10-Q/A.

In addition to the restatement of the condensed consolidated statement of cash flows, we have revised the condensed consolidated balance sheet to correct for the misclassification of outstanding checks as “Trade payables.”

We have also revised the Guarantor and Non-Guarantor Condensed Consolidating Financial Statements in Note 12 to correct the cash flow and balance sheet errors as noted above and certain misclassifications as described in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.

Although this Form 10-Q/A supersedes the Original Filing in its entirety, this Form 10-Q/A amends and restates only Items 1, 2 and 4 of Part I, solely as a result of, and to reflect, the restatement and revisions described above, and no other information in the Original Filing is amended hereby. This Form 10-Q/A speaks as of the Original Filing Date and does not reflect any events that may have occurred subsequent to the Original Filing Date. In addition, pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, as a result of this Form 10-Q/A, the certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, filed and furnished, respectively, as exhibits to the Original Filing have been re-executed and re-filed as of the date of this Form 10-Q/A and are included as exhibits hereto.

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TABLE OF CONTENTS
		Page
Part I	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011	4
	Condensed Consolidated Statements of Operations for the Fiscal Three-Month Periods ended March 31, 2012 and April 3, 2011	5
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Fiscal Three-Month Periods ended March 31, 2012 and April 3, 2011	6
	Condensed Consolidated Statements of Cash Flows for the Fiscal Three-Month Periods ended March 31, 2012 and April 3, 2011 (as restated)	7
	Condensed Consolidated Statements of Equity (Deficit) for the Fiscal Three-Month Period ended March 31, 2012	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 4.	Controls and Procedures	35
Part II	Other Information
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	50
Item 6.	Exhibits	52
Signatures		53

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MOMENTIVE PERFORMANCE MATERIALS INC.

Condensed Consolidated Balance Sheets (Unaudited)

(Dollar amounts in millions)

	March 31, 2012				December 31, 2011
Assets
Current assets:
Cash and cash equivalents	$	118			$	199
Accounts receivable (net of allowance for doubtful accounts, of $3 at March 31, 2012 and December 31, 2011, respectively)	327				315
Due from affiliates	8				8
Inventories (note 6)	413				394
Prepaid expenses	11				14
Deferred income taxes (note 8)	9				10
Other current assets	49				49
Total current assets	935				989
Property and equipment (net of accumulated depreciation and amortization of $858 and $825 at March 31, 2012 and December 31, 2011, respectively)	1,067				1,084
Other long-term assets	88				89
Deferred income taxes (note 8)	25				25
Intangible assets (net of accumulated amortization of $229 and $219 at March 31, 2012 and December 31, 2011, respectively)	532				542
Goodwill	423				432
Total assets	$	3,070			$	3,161
Liabilities and Deficit
Current liabilities:
Trade payables	$	312			$	308
Short-term borrowings (note 7)	5				3
Accrued expenses and other liabilities	161				166
Accrued interest	48				62
Due to affiliates	11				15
Accrued income taxes	6				2
Deferred income taxes (note 8)	20				19
Current installments of long-term debt (note 7)	36				36
Total current liabilities	599				611
Long-term debt (note 7)	2,914				2,895
Other liabilities	51				51
Pension liabilities (note 10)	291				288
Deferred income taxes (note 8)	47				52
Total liabilities	3,902				3,897
Commitments and contingencies (note 9)
Deficit:
Common stock	—				—
Additional paid-in capital	605				605
Accumulated deficit	(1,634		)		(1,569		)
Accumulated other comprehensive income	197				228
Total Momentive Performance Materials Inc.'s deficit	(832		)		(736		)
Noncontrolling interests	—				—
Total deficit	(832		)		(736		)
Total liabilities and deficit	$	3,070			$	3,161

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 millions)

 

	Fiscal three-month period ended
	March 31, 2012				April 3, 2011
Net sales	$	593			$	660
Costs and expenses:
Cost of sales, excluding depreciation	425				417
Selling, general and administrative expenses	100				95
Depreciation and amortization expenses	46				50
Research and development expenses	18				20
Restructuring and other costs (note 3)	9				5
Operating (loss) income	(5		)		73
Other income (expense):
Interest expense, net	(62		)		(64		)
Other income, net	3				—
(Loss) income before income taxes and losses from unconsolidated entities	(64		)		9
Income taxes (note 8)	—				12
Loss before losses from unconsolidated entities	(64		)		(3		)
Losses from unconsolidated entities	(1		)		—
Net loss	(65		)		(3		)
Net income attributable to the noncontrolling interest	—				—
Net loss attributable to Momentive Performance Materials Inc.	$	(65	)		$	(3	)

See accompanying notes to condensed consolidated financial statements.

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MOMENTIVE PERFORMANCE MATERIALS INC.

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(Dollar amounts in millions)

	Fiscal three-month period ended
	March 31, 2012				April 3, 2011
Net loss	$	(65	)		$	(3	)
Other comprehensive loss, net of tax:
Foreign currency translation	(30		)		(15		)
Other comprehensive income adjustments, net	(1		)		(1		)
Other comprehensive loss	(96		)		(19		)
Comprehensive income attributable to the noncontrolling interest	—				—
Foreign currency translation attributable to the noncontrolling interest	—				—
Comprehensive loss attributable to Momentive Performance Materials Inc.	$	(96	)		$	(19	)

See accompanying notes to condensed consolidated financial statements.

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MOMENTIVE PERFORMANCE MATERIALS INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollar amounts in millions)
	Fiscal three-month period ended
	March 31, 2012 (as restated)				April 3, 2012 (as restated)
Cash flows from operating activities:
Net loss	$	(65	)		$	(3	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	46				50
Amortization of debt discount and issuance costs	4				4
Deferred income taxes	(3		)		9
Losses from unconsolidated entities	1				—
Unrealized foreign currency gains	(3		)		(9		)
Other non-cash adjustments	1				(3		)
Changes in operating assets and liabilities:
Accounts receivable	(12		)		(29		)
Inventories	(20		)		(46		)
Due to/from affiliates	(7		)		(4		)
Accrued income taxes	3				(1		)
Prepaid expenses and other assets	6				(10		)
Trade payables	15				12
Accrued expenses and other liabilities	(19		)		32
Pension liabilities	5				3
Net cash (used in) provided by operating activities	(48		)		5
Cash flows from investing activities:
Capital expenditures	(29		)		(27		)
Purchases of intangible assets	(1		)		(1		)
Net cash used in investing activities	(30		)		(28		)
Cash flows from financing activities:
Debt issuance costs	—				(5		)
Increase (decrease) in short-term borrowings	2				(2		)
Proceeds from long-term debt	25				37
Payments of long-term debt	(29		)		(55		)
Net cash used in financing activities	(2		)		(25		)
Decrease in cash and cash equivalents	(80		)		(48		)
Effect of exchange rate changes on cash	(1		)		4
Cash and cash equivalents, beginning of period	199				250
Cash and cash equivalents, end of period	$	118			$	206
Supplemental information
Capital expenditures included in trade payables	$	17			$	14

See accompanying notes to condensed consolidated financial statements.

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MOMENTIVE PERFORMANCE MATERIALS INC.

Condensed Consolidated Statements of Equity (Deficit) (Unaudited)

(Dollar amounts in millions)

		Common Shares		Common Stock				Additional paid-in capital				Accumulated deficit				Accumulated other comprehensive income (loss)				Equity attributable to noncontrolling interest				Total equity (deficit)
Balance December 31, 2011		100		$	—			$	605			$	(1,569	)		$	228			$	—			$	(736	)
Stock option activity and other		—		—				—				—				—				—				—
Comprehensive (loss):
Net loss		—		—				—				(65		)		—				—				(65		)
Foreign currency translation adjustment—net		—		—				—				—				(30		)		—				(30		)
Other comprehensive income adjustments—net		—		—				—				—				(1		)		—				(1		)
Balance at March 31, 2012		100		$	—			$	605			$	(1,634	)		$	197			$	—			$	(832	)

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MOMENTIVE PERFORMANCE MATERIALS INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollar amounts in millions)

(1)	Business and Basis of Presentation

Momentive Performance Materials Inc. (the "Company" or "MPM") was incorporated in Delaware on September 6, 2006 as a wholly-owned subsidiary of Momentive Performance Materials Holdings Inc. (MPM Holdings and together with its subsidiaries, the MPM Group) for the purpose of acquiring the assets and stock of various subsidiaries of General Electric Company (GE) that comprised GE's Advanced Materials (GEAM or the Predecessor) business. The acquisition was completed on December 3, 2006 (the GE Advanced Materials Acquisition). GEAM was comprised of two businesses, GE Silicones and GE Quartz, and was an operating unit within the Industrial segment of GE. On October 1, 2010, the newly formed holding companies of MPM Holdings and Momentive Specialty Chemicals Holdings LLC (formerly known as Hexion LLC), the parent company of Momentive Specialty Chemicals Inc. (formerly known as Hexion Specialty Chemicals, Inc.), merged, with the surviving entity renamed Momentive Performance Materials Holdings LLC. The Company refers to this transaction as the "Momentive Combination". As a result of the merger, Momentive Performance Materials Holdings LLC (Momentive Holdings) became the ultimate parent company of Momentive Performance Materials Inc. and Momentive Specialty Chemicals Inc. Momentive Holdings is controlled by investment funds managed by affiliates of Apollo Management Holdings, LP. (together with Apollo Global Management, LLC and subsidiaries, "Apollo").

The Company is comprised of two businesses, Silicones and Quartz. Silicones is a global business engaged in the manufacture, sale and distribution of silanes, specialty silicones and urethane additives. 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 Waterford, 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; 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; 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; Bergen op Zoom, Netherlands; Lostock, U.K.; Termoli, Italy; Antwerp, Belgium and Chennai, India. 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 the Willoughby, Ohio, Waterford, New York and Sistersville, West Virginia facilities will expire in 2013. The Company does not have significant collective bargaining agreements that will expire before the end of 2012.

The Company restated the condensed consolidated statements of cash flows for the three months ended March 31, 2012 and April 3, 2011. The tables below show the impact of correcting the financial statements for the specified periods for the following classification errors:

•	The Company included in cash used for capital expenditures amounts that resided in “Trade payables” which should be excluded as a non-cash item. These amounts have now been properly excluded from operating and investing activities.

•	The Company corrected for the misclassification of certain currency translation adjustments and other non-cash transactions within the “Effects of exchange rate changes on cash” line item. These amounts have now been properly reflected in operating activities.

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MOMENTIVE PERFORMANCE MATERIALS INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in millions)

•	The Company corrected the balance sheets for the specified periods for the misclassification of certain outstanding checks as “Trade payables.” The amounts have now been properly classified as a reduction to “Cash and cash equivalents.”

Condensed Consolidated Balance Sheets:		As Previously Reported					Adjustments					As Restated
As of December 31, 2011
Cash and cash equivalents		$	203				$	(4	)			$	199
Trade payables		312					(4		)			308
As of March 31, 2012
Cash and cash equivalents		$	122				$	(4	)			$	118
Trade payables		316					(4		)			312

Condensed Consolidated Statements of Cash Flows:		As Previously Reported					Adjustments					As Restated
Fiscal Three-Month Period Ended March 31, 2012
Net cash used in operating activities		$	(55	)			$	7				$	(48	)
Net cash used in investing activities		(21		)			(9		)			(30		)
Effect of exchange rate changes on cash		(3		)			2					(1		)
Cash and cash equivalents at beginning of period		203					(4		)			199
Cash and cash equivalents at end of period		122					(4		)			118
Fiscal Three-Month Period Ended April 3, 2011
Net cash provided by operating activities		$	11				$	(6	)			$	5
Net cash used in investing activities		(19		)			(9		)			(28		)
Effect of exchange rate changes on cash		(11		)			15					4
Cash and cash equivalents at beginning of period		254					(4		)			250
Cash and cash equivalents at end of period		210					(4		)			206

Footnotes contained herein have been restated, where applicable, for the restatement discussed above.

(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 March 31, 2012 and December 31, 2011, and for the fiscal three-month periods ended March 31, 2012 and April 3, 2011. Noncontrolling interests represent the noncontrolling shareholder’s proportionate share of the equity in a consolidated joint venture affiliate. During the fiscal three-month period ended July 3, 2011, the Company disposed of its interest in this affiliate. All significant intercompany balances and transactions, including profit and loss as a result of those transactions, have been eliminated in the consolidation.

The Company also has investments in nonconsolidated entities, primarily consisting of a subsidiary's investments in a siloxane joint venture in China.

(b)	Income Taxes

For the fiscal three-month periods ended March 31, 2012 and April 3, 2011, the Company’s 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). Discrete items are recorded in the period in which they are incurred.

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MOMENTIVE PERFORMANCE MATERIALS INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in millions)

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)	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.

(d)	Recently Issued Accounting Standards

Newly Adopted Accounting Standards

On January 1, 2012, the Company adopted the provisions of Accounting Standards Update No. 2011-05: Comprehensive Income ("ASU 2011-05"), which was issued by the FASB in June 2011 and amended by Accounting Standards    Update No. 2011-12: Comprehensive Income ("ASU 2011-12") issued in December 2011. ASU 2011-05 amended presentation guidance by eliminating the option for an entity to present the components of comprehensive income as part of the statements of changes in stockholders' equity and required presentation of comprehensive income in a single continuous financial statement or two separate consecutive financial statements. ASU 2011-12 deferred the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income in ASU 2011-05. The amendments in ASU 2011-05 did not change the items that must be reported in other comprehensive income or when an item of comprehensive income must be reclassified to net income. The Company has presented comprehensive income in a separate and consecutive statement entitled, "Condensed Consolidated Statements of Comprehensive Income (Loss)".

Newly Issued Accounting Standards

Except as discussed in (d) above, there were no newly issued accounting standards in the first quarter of 2012 applicable to the Company's unaudited Condensed Consolidated Financial Statements.

(e)	Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, trade payables, short-term borrowings and accrued expenses and other liabilities. 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 5.

(f) Reclassifications

Certain prior period balances have been reclassified to conform to the current year presentation. Certain prior period non-trade accounts receivable balances were reclassed to other current assets in the current period. In addition, certain pension liabilities were reclassed to accrued expenses and other liabilities in the current period.

(3)     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 activities.

For the fiscal three-month periods ended March 31, 2012 and April 3, 2011, the Company recognized restructuring of $4 and $2, respectively, and other costs of $5 and $3, respectively.

The following table sets forth the changes in the restructuring reserve, which is recorded in accrued expenses and other liabilities on the condensed consolidated balance sheets:

 

	Silicones				Quartz				Total
Balance as of January 1, 2011	$	3			$	—			$	3
Additions	9				—				9
Cash payments	(4		)		—				(4		)
Balance as of December 31, 2011	8				—				8
Additions	4				—				4
Cash payments	(1		)		—				(1		)
Balance as of March 31, 2012	$	11			$	—			$	11

The restructuring costs above are primarily related to the Momentive Combination and are expected to be paid in 2012 and 2013.

(4) Related Party Transactions

On October 1, 2010 in connection with the closing of the Momentive Combination, the Company entered into a shared services agreement with MSC. Under this agreement, as amended on March 17, 2011 (the "Shared Services Agreement"), the Company provides to MSC, and MSC provides to the Company, certain services, including, but not limited to, executive and senior management, administrative support, human resources, information technology support, accounting, finance, technology development, legal and procurement services. The Shared Services Agreement establishes certain criteria upon which the costs of such services are allocated between MSC and the Company. Pursuant to this agreement, during the three months ended March 31, 2012 and April 3, 2011, the Company incurred approximately $39 and $41, respectively, of costs for shared services and MSC incurred approximately $41 and 44, respectively, of costs for shared services (excluding, in each case, costs allocated 100% to one party), including estimated shared service true-up billings. During the three months ended March 31, 2012 and April 3, 2011, MSC billed the Company approximately $5 and $1, respectively, to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to 49% for the Company and 51% for MSC as well as costs allocated 100% to one party. The true-up amount is included in Selling, general and administrative expense in the Consolidated Statements of Operations. The Company had accounts receivable of $0 and $3 as of March 31, 2012 and December 31, 2011, respectively, and accounts payable to MSC of $7 and $15 at March 31, 2012 and December 31, 2011, respectively.

On March 17, 2011, the Company entered into an amendment to the Shared Services Agreement with MSC to reflect the terms of the Master Confidentiality and Joint Development Agreement by and between MSC and the Company entered into on the same date.

In connection with the GE Advanced Materials Acquisition, MPM Holdings entered into a management consulting and advisory services agreement with Apollo and its affiliates for the provision of management and advisory services for an initial term of up to twelve years. The Company also agreed to indemnify Apollo and its affiliates and their directors, officers, and representatives for potential losses relating to the services contemplated under these agreements. Terms of the agreement provide for annual fees of $3.5 plus out of pocket expenses, payable in one lump sum annually, and provide for a lump-sum settlement equal to the net present value of the remaining annual management fees payable under the remaining term of the agreement in connection with a sale or initial public offering by the Company. These fees are included within Selling, general and administrative expenses in the Company's Consolidated Statements of Operations.

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The Company sells products to various affiliated businesses (affiliates). For the three months ended March 31, 2012, sales to affiliates amounted to $5. Receivables from affiliates were $4 at March 31, 2012.

The Company purchases products and services from various affiliates. Purchases under these agreements amounted to $4 for the three months ended March 31, 2012. Payables to affiliates as of March 31, 2012, resulting from procurement activity and services was $1.

The Company is presently a party to an off-take agreement that provides for Asia Silicones Monomer Limited (“ASM”), which is owned 50% by GE Monomer (Holdings) Pte Ltd. and its affiliates to supply siloxane and certain related products to the Company through 2014 (or until certain ASM financing obligations are satisfied). At the closing of the GE Advanced Materials Acquisition, the Company entered into a long-term supply agreement with GE and GE Monomer (Holdings)Pte. Ltd. regarding the supply of siloxane and certain related products. Pursuant to the long-term siloxane supply agreement for the period through December 2026, GE and GE Monomer (Holdings) Pte. Ltd. will ensure the Company a minimum annual supply of siloxane and certain related products at least equal to the amount purchased by GE Toshiba Silicones (Thailand) Limited during the twelve month period ending November 30, 2006, subject to customary force majeure provisions and certain other limited exceptions. Under the current arrangement, the Company is committed to purchase approximately $113 for 2012 and $113 each year thereafter of off-take product, assuming total ASM production is equal to current volumes, without taking into account inflation and changes in foreign exchange rates. The Company purchased approximately $21of supply from ASM for the three months ended March 31, 2012. Pursuant to an Assignment and Assumption Agreement, GE Monomer (Holdings) Pte. Ltd. also assigned its interest as licensor under a certain Technology License Agreement with ASM to the Company. Under this Technology License Agreement, the Company received royalties from ASM of less than $1 for the three months ended March 31, 2012.

An affiliate of GE is one of the lenders under the Company's revolving credit facility representing approximately $160 of the lenders' $300 revolving credit facility commitment.

(5)	Fair Value Measurements

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

Level 1		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 Company’s level 2 liabilities include 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.

 

At March 31, 2012 and December 31, 2011, the Company had less than $1 of natural gas derivative contracts included in level 2. The fair value of the natural gas derivative contracts generally reflects the estimated amounts that the Company would receive or pay, on a pre-tax basis, to terminate the contracts at the reporting date based on broker quotes for the same or similar instruments. Counterparties to these contracts are highly rated financial institutions, none of which experienced any significant downgrades in the fiscal three-month period ended March 31, 2012 that would reduce the fair value receivable amount owed, if any, to the Company.

At March 31, 2012, the Company estimates that the $1,337 of outstanding springing lien notes had a fair value of approximately $1,158; the $379 of outstanding fixed rate senior subordinated notes had a fair value of approximately $313; the $1,003 of outstanding variable rate term loans had a fair value of approximately $963; the $181 of outstanding fixed rate second-lien senior secured notes with a $200 aggregate principal amount had a fair value of approximately $213; and the fair value of the $4 outstanding medium term loan, the $30 outstanding fixed asset loan and the $16 of outstanding working capital loans 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.

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MOMENTIVE PERFORMANCE MATERIALS INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in millions)

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.

(6)	Inventories

Inventories consisted of the following at March 31, 2012 and December 31, 2011:

 

	March 31, 2012				December 31, 2011
Raw materials and work in process	$	124			$	135
Finished goods	289				259
Total inventories	$	413			$	394

(7)	Indebtedness

(a)	Short-Term Borrowings

At March 31, 2012, the Company's short-term borrowings consisted of bank borrowings of $5 with a weighted average interest rate of 10.20%. At December 31, 2011, the Company's short-term borrowings consisted of bank borrowings of $3 with a weighted average interest rate of 9.90%.

(b)	Long-Term Debt

As of March 31, 2012, the Company had no outstanding borrowings under the revolving credit facility. The outstanding letters of credit under the revolving credit facility at March 31, 2012 were $44, leaving an unused borrowing capacity of $256. Outstanding letters of credit issued under the synthetic letter of credit facility at March 31, 2012 were $30, leaving an unused capacity of $3.

At March 31, 2012, the Company was in compliance with the covenants of all long-term debt agreements.

(8)	Income Taxes

The effective tax rate was 0% and 133% for the fiscal three-month periods ended March 31, 2012 and April 3, 2011, respectively. The change in the effective tax rate was primarily due to the maintenance of a full valuation allowance against a substantial amount of the Company's net deferred tax assets and a valuation allowance release in certain non-U.S. jurisdictions in 2011, in addition to a change in the amount of income (loss) before income taxes and changes in the tax rates applied in the various jurisdictions in which the Company operates.  The valuation allowance, which relates principally to the U.S. deferred tax assets, was established and maintained based on the Company's assessment that the net deferred tax assets will likely not be realized.

For the fiscal three month periods ended March 31, 2012 and April 3, 2011, income taxes include unfavorable discrete tax adjustments of $0 and $8, respectively, pertaining to foreign currency exchange gains in certain jurisdictions that generated tax expense and hedged currency exchange losses in other jurisdictions for which no net tax benefit is recognized due to a full valuation allowance in those jurisdictions, partially offset by the resolution of certain tax matters in the U.S. and non-U.S. jurisdictions.

The Company is recognizing the earnings of non-U.S. operations currently in its U.S. consolidated income tax return as of December 31, 2011 and is expecting, with the exception of certain operations in China, that all earnings not required to service debt of the Company’s operations in non-U.S. jurisdictions will be repatriated to the U.S. The Company has accrued the incremental tax expense expected to be incurred upon the repatriation of these earnings. In addition, the Company has certain intercompany arrangements that if settled may trigger taxable gains or losses based on currency exchange rates in place at the time of settlement. Since the currency translation impact is considered indefinite, the Company has not provided deferred taxes on gains of $336, which could result in a tax obligation of $119, based on currency exchange rates as of March 31, 2012. Should the intercompany arrangement be settled or the Company change its assertion, the actual tax impact will depend on the currency exchange rate at the time of settlement or change in assertion.

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(9) Commitments and Contingencies

(a) Litigation

The Company is subject to various claims and legal actions arising in the ordinary course of business, none of which management believes is likely to have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.

(b) Environmental Matters

The Company is involved in certain remediation actions to clean up hazardous wastes as required by federal and state laws. Liabilities for remediation costs at each site are based on the Company's best estimate of discounted future costs. As of March 31, 2012 and December 31, 2011, the Company had recognized obligations of $8 and $8, respectively, for remediation costs at the Company's manufacturing facilities and offsite landfills. These amounts are included in Other liabilities in the accompanying Condensed Consolidated Balance Sheets.

(10)	Pension Plans and Other Postretirement Benefits

The following are the components of the Company’s net pension and postretirement benefit expense for the fiscal three-month periods ended March 31, 2012 and April 3, 2011:

 

	Pension								Postretirement
	Fiscal three-month period ended
	March 31, 2012				April 3, 2011				March 31, 2012				April 3, 2011
Service cost	$	7			$	6			$	1			$	1
Interest cost	3				2				1				1
Expected return on plan assets	(2		)		(1		)		—				—
Other	1				—				—				—
Total	$	9			$	7			$	2			$	2

In 2012, the Company expects to contribute approximately $16 and $3 to the Company’s Domestic and Foreign plans, respectively. The Company contributed $4 to its Domestic plans during the fiscal three-month period ended March 31, 2012.

(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 Company’s operating segments are organized based on the nature of the products they produce. 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 (d)				Total
Fiscal three-month period ended March 31, 2012:
Net sales (a)	$	536			$	57			$	—			$	593
Operating income (loss) (b)	7				2				(14		)		(5		)
Depreciation and amortization	40				6				—				46
Capital expenditures (c)	15				5				—				20

 

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MOMENTIVE PERFORMANCE MATERIALS INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

(Dollar amounts in millions)

	Silicones				Quartz				Corporate and other items (d)				Total
Fiscal three-month period ended April 3, 2011:
Net sales (a)	$	572			$	88			$	—			$	660
Operating income (loss) (b)	51				22				—				73
Depreciation and amortization	43				7				—				50
Capital expenditures (c)	15				3				—				18

__________________

(a)	There were no intersegment sales during the fiscal three-month periods ended March 31, 2012 or April 3, 2011, respectively.

(b)	A reconciliation of the segment operating income (loss) to income (loss) before income taxes would include interest expense, net and other income (expense), net as presented in the Condensed Consolidated Statements of Operations.

(c)	Capital expenditures are presented on an accrual basis.

(d)	Corporate and other items include pension and postretirement expenses and headquarter costs, net of corporate assessments.

 

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 ended
	March 31, 2012				April 3, 2011
Net sales:
United States	$	185			$	215
Canada	10				12
Pacific	178				192
Europe	192				213
Mexico and Brazil	28				28
	$	593			$	660

 

	March 31, 2012				December 31, 2011
Total long-lived assets:
United States	$	571			$	579
Canada	19				18
Pacific	784				826
Europe	641				628
Mexico and Brazil	7				7
	$	2,022			$	2,058

(12)     Guarantor and Non-Guarantor Condensed Consolidating Financial Statements

As of March 31, 2012, the Company had outstanding $200 in aggregate principal amount of second-lien senior notes, $1,161 in aggregate principal amount of springing lien Dollar notes, €133 in aggregate principal amount of springing lien Euro notes and $382 in aggregate principal amount of senior subordinated notes. The notes are fully, jointly, severally and unconditionally guaranteed by the Company’s domestic subsidiaries (the guarantor subsidiaries). The following condensed consolidated financial information presents the Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, the Condensed Consolidated Statements of Operations for the fiscal three-month periods ended March 31, 2012 and April 3, 2011 and Condensed Consolidated Statements of Cash Flows for the fiscal three-month periods ended

15

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March 31, 2012 and April 3, 2011 of (i) Momentive Performance Materials Inc. (Parent); (ii) the guarantor subsidiaries; (iii) the non-guarantor subsidiaries; and (iv) the Company on a consolidated basis.

These financial statements are prepared on the same basis as the consolidated financial statements of the Company except that investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. The guarantor subsidiaries are 100% owned by Parent and all guarantees are full and unconditional, subject to certain customary release provisions set forth in the applicable Indenture. Additionally, 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 Company’s general creditors.

For the presentation of this footnote prior to the second quarter of 2011, the Company had displayed the intercompany profit elimination (ICP) and its related deferred tax impact in the Elimination column. As a result, the ICP elimination and its related tax deferred impact did not get pushed up to the Parent column for presentation purposed; thereby causing equity (deficit) in the Parent column to not agree with equity (deficit) in the Consolidated column. Also, as a result, the net income (loss) attributable to Momentive Performance Materials Inc. in the Parent column did not agree with the corresponding amount in the Consolidated column.

The Company has revised the presentation of this footnote for all historical periods presented to display the ICP elimination and its deferred tax impact in the column for which it directly relates, as opposed to the Eliminations column. As a result of this revision, equity (deficit) in the Parent column agrees with equity (deficit) in the Consolidated column for all periods presented. In addition, net income (loss) attributable to Momentive Performance Materials Inc. in the Parent column agrees with the corresponding amount in the Consolidated column for all periods presented.    

The Company also revised its condensed consolidating balance sheet as of March 31, 2012 and December 31, 2011 to correctly reflect the Investment in affiliates line item. The revisions were made to appropriately classify the balance sheet credit arising from recognition of losses in excess of investment as a liability balance. These amounts were previously classified as a credit to the asset in the Guarantor Subsidiaries column. In the Guarantor column, as of March 31, 2012 and December 31, 2011, the correction resulted in an increase of $123 and $85, respectively, to “Investment in affiliates”, with a corresponding increase to “Accumulated losses from unconsolidated subsidiaries in excess of investment”.    

The Company also revised its condensed consolidating balance sheet as of March 31, 2012 and December 31, 2011 to correctly present intercompany borrowings. The revisions were made to present all intercompany borrowings on a gross basis. In the Parent column, as of March 31, 2012 and December 31, 2011, the revisions resulted in an increase of $9 and $20, respectively, to the "Intercompany borrowings" asset with a corresponding increase to the "Intercompany borrowings" liability. In the Guarantor Subsidiaries column, as of March 31, 2012 and December 31, 2011, the revisions resulted in an increase of $62 and a decrease of $12, respectively, to the "Intercompany borrowings" asset with a corresponding increase and decrease to the "Intercompany borrowings" liability. In the Non-Guarantor Subsidiaries column, as of March 31, 2012 and December 31, 2011, the revisions resulted in an increase of $224 and $196, respectively, to the "Intercompany borrowings" asset with a corresponding increase to the "Intercompany borrowings" liability. These corrections, which the Company determined are not material, had no impact on any financial statements or footnotes, except for the columns of the condensed consolidating balance sheet.

16

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Condensed Consolidating Balance Sheet as of March 31, 2012:

 

	Parent				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents	$	6			$	—			$	112			$	—			$	118
Accounts receivable	—				84				243				—				327
Due from affiliates	—				69				46				(107		)		8
Inventories					191				222				—				413
Prepaid expenses	—				9				2				—				11
Deferred income taxes	—				1				8				—				9
Other current assets	—				6				43				—				49
Total current assets	6				360				676				(107		)		935
Property and equipment, net	—				489				578				—				1,067
Other long-term assets	54				8				26				—				88
Deferred income taxes	—				—				25				—				25
Investment in affiliates	1,379				—				—				(1,379		)		—
Intercompany borrowing	9				1,165				287				(1,461		)		—
Intangible assets, net	—				82				450				—				532
Goodwill	—				—				423				—				423
Total assets	$	1,448			$	2,104			$	2,465			$	(2,947	)		$	3,070
Liabilities and Equity (Deficit)
Current liabilities:
Trade payables	$	—			$	97			$	215			$	—			$	312
Short-term borrowings	—				—				5				—				5
Accrued expenses and other liabilities	—				66				95				—				161
Accrued interest	48				—				—				—				48
Due to affiliates	5				49				64				(107		)		11
Accrued income taxes	—				—				6				—				6
Deferred income taxes	—				—				20				—				20
Current installments of long-term debt	—				—				36				—				36
Total current liabilities	53				212				441				(107		)		599
Long-term debt	1,898				—				1,016				—				2,914
Other liabilities	—				9				42				—				51
Pension liabilities	—				186				105				—				291
Intercompany Borrowings	329				195				937				(1,461		)		—
Deferred income taxes	—				—				47				—				47
Accumulated losses of unconsolidated subsidiaries in excess of investment	—				123				—				(123		)		—
Total liabilities	2,280				725				2,588				(1,691		)		3,902
Equity (deficit):
Additional paid-in capital	605				1,906				560				(2,466		)		605
Accumulated deficit	(1,634		)		(724		)		(927		)		1,651				(1,634		)
Accumulated other comprehensive income	197				197				244				(441		)		197
Total Momentive Performance Materials Inc.’s equity (deficit)	(832		)		1,379				(123		)		(1,256		)		(832		)
Noncontrolling interests	—				—				—				—				—
Total equity (deficit)	(832		)		1,379				(123		)		(1,256		)		(832		)
Total liabilities and equity (deficit)	$	1,448			$	2,104			$	2,465			$	(2,947	)		$	3,070

 

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Condensed Consolidating Balance Sheet as of December 31, 2011:

	Parent				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents	$	40			$	—			$	159			$	—			$	199
Accounts receivable	—				82				233				—				315
Due from affiliates	3				60				30				(85		)		8
Inventories	—				193				201				—				394
Prepaid expenses	—				11				3				—				14
Deferred income taxes	—				1				9				—				10
Other current assets	—				11				38				—				49
Total current assets	43				358				673				(85		)		989
Property and equipment, net	—				495				589				—				1,084
Other long-term assets	55				9				25				—				89
Deferred income taxes	—				—				25				—				25
Investment in affiliates	1,415				—				—				(1,415		)		—
Intercompany borrowing	20				1,091				259				(1,370		)		—
Intangible assets, net	—				84				458				—				542
Goodwill	—				—				432				—				432
Total assets	$	1,533			$	2,037			$	2,461			$	(2,870	)		$	3,161
Liabilities and Equity (Deficit)
Current liabilities:
Trade payables	$	—			$	89			$	219			$	—			$	308
Short-term borrowings	—				—				3				—				3
Accrued expenses and other liabilities	1				66				99				—				166
Accrued interest	61				—				1				—				62
Due to affiliates	14				26				60				(85		)		15
Accrued income taxes	—				—				2				—				2
Deferred income taxes	—				—				19				—				19
Current installments of long-term debt	—				—				36				—				36
Total current liabilities	76				181				439				(85		)		611
Long-term debt	1,891				—				1,004				—				2,895
Other liabilities	—				9				42				—				51
Pension liabilities	—				183				105				—				288
Intercompany Borrowings	302				164				904				(1,370		)		—
Deferred income taxes	—				—				52				—				52
Accumulated losses of unconsolidated subsidiaries in excess of investment	—				85				—				(85		)		—
Total liabilities	2,269				622				2,546				(1,540		)		3,897
Equity (deficit):
Common stock	—				—				—				—				—
Additional paid-in capital	605				1,911				567				(2,478		)		605
Accumulated deficit	(1,569		)		(724		)		(925		)		1,649				(1,569		)
Accumulated other comprehensive income	228				228				273				(501		)		228
Total Momentive Performance Materials Inc.’s equity (deficit)	(736		)		1,415				(85		)		(1,330		)		(736		)
Noncontrolling interests	—				—				—				—				—
Total equity (deficit)	(736		)		1,415				(85		)		(1,330		)		(736		)

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Total liabilities and equity (deficit)	$	1,533			$	2,037			$	2,461			$	(2,870	)		$	3,161

Condensed Consolidating Statements of Operations for the fiscal three-month periods ended March 31, 2012 and April 3, 2011:

	Fiscal three-month period ended March 31, 2012:
	Parent				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
Net sales	$	—			$	252			$	452			$	(111	)		$	593
Costs and expenses:
Cost of sales, excluding depreciation	—				192				344				(111		)		425
Selling, general and administrative expenses	13				51				45				—				109
Depreciation and amortization expenses	—				18				28				—				46
Research and development expenses	—				12				6				—				18
Operating income (loss)	(13		)		(21		)		29				—				(5		)
Other income (expense):
Interest income	—				26				1				(27		)		—
Interest expense	(52		)		(3		)		(34		)		27				(62		)
Other income (expense), net	—				(2		)		3				2				3
Income (loss) before income taxes and losses from unconsolidated entities	(65		)		—				(1		)		2				(64		)
Income taxes (benefit)	—				—				—				—				—
Income (loss) before losses from unconsolidated entities	(65		)		—				(1		)		2				(64		)
Losses from unconsolidated entities	—				—				(1		)		—				(1		)
Net income (loss)	(65		)		—				(2		)		2				(65		)
Net income (loss) attributable to noncontrolling interests	—				—				—				—				—
Net income (loss) attributable to Momentive Performance Materials Inc.	$	(65	)		$	—			$	(2	)		$	2			$	(65	)
Comprehensive (loss) income	$	(31	)		$	(31	)		$	(29	)		$	60			$	(31	)
	Fiscal three-month period ended April 3, 2011:
	Parent				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
Net sales	$	—			$	305			$	510			$	(155	)		$	660
Costs and expenses:
Cost of sales, excluding depreciation	—				204				368				(155		)		417
Selling, general and administrative expenses	16				46				38				—				100
Depreciation and amortization expenses	—				19				31				—				50
Research and development expenses	—				14				6				—				20
Operating income (loss)	(16		)		22				67				—				73
Other income (expense):
Interest income	—				26				2				(28		)		—
Interest expense	(54		)		(3		)		(35		)		28				(64		)
Other income (expense), net	67				19				(2		)		(84		)		—

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Income (loss) before income taxes	(3		)		64				32				(84		)		9
Income taxes (benefit)	—				—				12				—				12
Net income (loss)	(3		)		64				20				(84		)		(3		)
Net income (loss) attributable to noncontrolling interests	—				—				—				—				—
Net income (loss) attributable to Momentive Performance Materials Inc.	$	(3	)		$	64			$	20			$	(84	)		$	(3	)
Comprehensive (loss) income	$	(16	)		$	(15	)		$	(15	)		$	30			$	(16	)

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Condensed Consolidating Statement of Cash Flows for the fiscal three-month period ended March 31, 2012:

	Fiscal three-month period ended March 31, 2012:
	Parent				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
Net cash provided by (used in) operating activities	$	(81	)		$	12			$	21			$	—			$	(48	)
Cash flows from investing activities:
Capital expenditures	—				(13		)		(16		)		—				(29		)
Purchases of intangible assets	—				(1		)		—				—				(1		)
Net cash used in investing activities	—				(14		)		(16		)		—				(30		)
Cash flows from financing activities:
Increase in short-term borrowings	—				—				2				—				2
Proceeds from long-term debt	25				—				—				—				25
Payments of long-term debt	(25		)		—				(4		)		—				(29		)
Net borrowings with affiliates	47				2				(49		)		—				—
Net cash provided by (used in) financing activities	47				2				(51		)		—				(2		)
Increase (decrease) in cash and cash equivalents	(34		)		—				(46		)		—				(80		)
Effect of exchange rate changes on cash	—				—				(1		)		—				(1		)
Cash and cash equivalents, beginning of period	40				—				159				—				199
Cash and cash equivalents, end of period	$	6			$	—			$	112			$	—			$	118

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Condensed Consolidating Statement of Cash Flows for the fiscal three-month period ended April 3, 2011:

	Fiscal three-month period ended April 3, 2011:
	Parent				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
Net cash provided by (used in) operating activities	$	(22	)		$	46			$	(17	)		$	(2	)		$	5
Cash flows from investing activities:
Capital expenditures	—				(15		)		(12		)		—				(27		)
Purchases of intangible assets	—				(1		)		—				—				(1		)
Net cash used in investing activities	—				(16		)		(12		)		—				(28		)
Cash flows from financing activities:
Debt issuance costs	(5		)		—				—				—				(5		)
Dividends paid within MPM Inc., net	—				—				(2		)		2				—
Decrease in short-term borrowings	—				—				(2		)		—				(2		)
Proceeds from long-term debt	—				—				37				—				37
Payments of long-term debt	—				—				(55		)		—				(55		)
Net borrowings between affiliates	40				(30		)		(10		)		—				—
Net cash provided by (used in) financing activities	35				(30		)		(32		)		2				(25		)
Increase (decrease) in cash and cash equivalents	13				—				(61		)		—				(48		)
Effect of exchange rate changes on cash	—				—				4				—				4
Cash and cash equivalents, beginning of period	28				—				222				—				250
Cash and cash equivalents, end of period	$	41			$	—			$	165			$	—			$	206

(13)	Subsequent Events

In April 2012, the Company’s wholly-owned subsidiary Momentive Performance Materials GmbH, the German Borrower under the senior secured credit facilities, incurred incremental term loans due May 2015 under the senior secured credit facilities in an aggregate principal amount of $175 in the form of new tranche B-3 term loans denominated in U.S. dollars. Net consideration from the transaction (which consisted of a combination of cash and rollover debt after discounts and fees), together with cash on hand, was used to extinguish approximately $178 of existing term loans maturing December 2013, effectively extending the Company's debt maturity profile. The interest rate per annum applicable to the tranche B-3 term loan is equal to an adjusted LIBOR rate for, at the option of the German Borrower, a one-, two-, three- or six-month interest period, or a nine- or twelve-month period, if available from all relevant lenders, in each case plus an applicable margin of 3.5%. As part of the senior secured credit facilities, the tranche B-3 term loans are subject to the covenants under the Credit Agreement (none of which have been modified in connection with the incurrence of the new tranche B-3 term loans), including the Senior Secured Leverage Ratio maintenance covenant.

The Company has evaluated subsequent events from the balance sheet date through May 7, 2012, the date at which the financial statements were available to be issued, and determined there are no other items to disclose.

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Item 2.	Management’s 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, 2011.

Restatement of Condensed Consolidated Financial Statements

We have restated the condensed consolidated statements of cash flows for the three months ended March 31, 2012 and April 3, 2011, including the applicable notes as reflected in this Form 10-Q/A. For additional information about the restatement, please see the Explanatory Note regarding restatement immediately preceding Part I, Item 1 and Note 1 of the Notes to Condensed Consolidated Financial Statements.

The following discussion and analysis of our financial condition and results of operations incorporates the restated amounts.

Forward-Looking and Cautionary Statements

Certain statements in this report, including without limitation, certain statements made under the caption “Overview and Outlook,” are forward-looking statements within the meaning of and made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, our management may from time to time make oral forward-looking statements. All statements, other than statements of historical facts, are forward-looking statements. Forward-looking statements may be identified by the words “believe,” “expect,” “anticipate,” “project,” “plan,” “estimate,” “may,” “will,” “could,” “should,” “seek” or “intend” and similar expressions. Forward-looking statements reflect our current expectations and assumptions regarding our business, the economy and other future events and conditions and are based on currently available financial, economic and competitive data and our current business plans. Actual results could vary materially depending on risks and uncertainties that may affect our operations, markets, services, prices and other factors as discussed in the Risk Factors section of this report and our other filings with the Securities and Exchange Commission (the “SEC”). While we believe our assumptions are reasonable, we caution you against relying on any forward-looking statements as it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: a weakening of global economic and financial conditions, interruptions in the supply of or increased cost of raw materials, changes in governmental regulations and related compliance and litigation costs, difficulties with the realization of cost savings in connection with our strategic initiatives, including transactions with our affiliate, Momentive Specialty Chemicals Inc., pricing actions by our competitors that could affect our operating margins, the impact of our substantial indebtedness, our failure to comply with financial covenants under our credit facilities or other debt, and the other factors listed in the Risk Factors section of this report and in our other SEC filings. For a more detailed discussion of these and other risk factors, see the Risk Factors section in our most recent Annual Report on Form 10-K, our other filings made with the SEC and this report. All forward-looking statements are expressly qualified in their entirety by this cautionary notice. The forward-looking statements made by us speak only as of the date on which they are made. Factors or events that could cause our actual results to differ may emerge from time to time. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Overview and Outlook

Business Overview

Momentive Performance Materials Inc., together with its subsidiaries (collectively referred to herein as “we,” “us,” “our,” “MPM” or the “Company”) believes that it is one of the world's largest producers of silicones and silicone derivatives and a global leader in the development and manufacture of products derived from quartz and specialty ceramics. Silicones are a multi-functional family of materials used in a wide variety of products and serve as a critical ingredient in many construction, transportation, healthcare, personal care, electronic, consumer and agricultural uses. Silicones are generally used as an additive to a wide variety of end products in order to provide or enhance certain of their attributes, such as resistance (heat, ultraviolet light and chemical), lubrication, adhesion or viscosity. Some of the most well-known end-use product applications include bath and shower caulk, pressure-sensitive adhesive labels, foam products, cosmetics and tires. Due to the versatility and high-performance characteristics of silicones, they are increasingly being used as a substitute for other materials. Our Quartz division manufactures quartz, specialty ceramics and crystal products for use in a number of high-technology industries, which typically require products made to precise specifications. The cost of our products typically represents a small percentage of the overall cost of our customers' products.

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We serve more than 5,000 customers between our Silicones and Quartz businesses in over 100 countries. Our customers include leading companies in their respective industries, such as Procter & Gamble, 3M, Goodyear, Unilever, Saint Gobain, Motorola, L'Oreal, BASF, The Home Depot and Lowe's. Note, our customer classifications for the Silicones division were modified in 2011 and, as a result, the division's total number of customers has been adjusted accordingly. Under the modified classifications, the division's total customers on a year over year basis are not materially different.

Momentive Combination and Shared Services Agreement

In October 2010, our parent, Momentive Performance Materials Holdings Inc., and Momentive Specialty Chemicals Holdings LLC (formerly known as Hexion LLC), the parent company of Momentive Specialty Chemicals Inc. (formerly known as Hexion Specialty Chemicals Inc. and referred to herein as "MSC"), became subsidiaries of a newly formed holding company, Momentive Performance Materials Holdings LLC. We refer to this transaction as the "Momentive Combination." In connection with the closing of the Momentive Combination, we entered into a shared services agreement with MSC, as amended on March 17, 2011 (referred to herein as the "Shared Services Agreement"), pursuant to which we provide to MSC, and MSC provides to us, certain services, including, but not limited to, executive and senior management, administrative support, human resources, information technology support, accounting, finance, technology development, legal and procurement services. The Shared Services Agreement establishes certain criteria upon which the costs of such services are allocated between us and MSC.

We anticipate that the Momentive Combination will provide opportunities to streamline our business and reduce our cost structure, and are currently targeting $58 million of cost savings related to the Momentive Combination. Through March 31, 2012, we realized $47 million of these savings on a run-rate basis, and anticipate fully realizing the remaining anticipated savings over the next 9 to 15 months.

Business Strategy

We believe that we have opportunities for growth through the following strategies:

•	Develop and Market New Products. We will continue to expand our product offerings through research and development initiatives and research partnership formations with third parties. Through these innovation initiatives we will continue to create new generations of products and services which will drive revenue and earnings growth.

•

Expand Our Global Reach in Faster Growing Regions. We intend to continue to grow internationally by expanding our product sales to our customers around the world. Specifically, we are focused on growing our business in markets in the high growth regions of Asia-Pacific, Eastern Europe, Latin America, India and the Middle East, where the usage of our products is increasing. Furthermore, by consolidating sales and distribution infrastructures via the Momentive Combination, we expect to accelerate the penetration of our high-end, value-added products into new markets, thus further leveraging our research and applications efforts.

•

Increase Shift to High-Margin Specialty Products. We continue to proactively manage our product portfolio with a focus on specialty, high-margin applications and the reduction of our exposure to lower-margin products. As a result of this capital allocation strategy and strong end market growth underlying these specialty segments, high-margin specialty products will continue to be a larger part of our broader portfolio. Consequently, we have witnessed a strong organic improvement in our profitability profile as a trend over the last several years which we believe will continue.

•

Continue Portfolio Optimization and Pursue Targeted Add-On Acquisitions and Joint Ventures. As a large manufacturer of performance materials with leadership in the production of silicone, silicone derivatives, quartz and specialty ceramics, we have a significant advantage in pursuing add-on acquisitions and joint ventures in areas that allow us to build upon our core strengths, expand our product, technology and geographic portfolio, and better serve our customers. We believe we may have the opportunity to consummate acquisitions at relatively attractive valuations due to the scalability of our existing global operations and deal-related synergies. In addition, we have and will continue to monitor the strategic landscape for opportunistic divestments consistent with our broader specialty strategy.

•

Capitalize on the Momentive Combination to Grow Revenues and Realize Operational Efficiencies. We believe the Momentive Combination will present opportunities to increase our revenues by leveraging each of our and MSC's respective global manufacturing footprint and technology platform. For instance, we anticipate greater penetration of our products into Latin America, where MSC has historically maintained a larger manufacturing and selling presence. Further, we anticipate the Momentive Combination will provide opportunities to streamline our business and reduce our cost structure and are currently targeting $58 million in annual cost savings related to

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the Momentive Combination. We anticipate these savings to come from logistics optimization, reduction in corporate expenses and reductions in the costs for raw materials and other inputs.

•

Generate Free Cash Flow and Deleverage. We expect to generate strong free cash flow over the long term due to our size, cost structure, and reasonable ongoing capital expenditure requirements. Furthermore, we have demonstrated expertise in efficiently managing our working capital. Our strategy of generating significant free cash flow and deleveraging is complimented by our long-dated capital structure with no significant short-term maturities and strong liquidity position. This financial flexibility allows us to prudently balance deleveraging with our focus on growth and innovation.

First Quarter 2012 Overview

•	Net sales decreased $67 million in the three months ended March 31, 2012, as compared to the same period in 2011 primarily due to a decrease in price and mix shift of $49 million and volume of $17 million.

•	Operating loss in the three months ended March 31, 2012 was $5 million, down $78 million from the same period in 2011 primarily driven by increases in inflation in raw material and processing costs, mix shift and decreases in price and volume.

•	During the three months ended March 31, 2012, we realized approximately $7 million in cost savings as a result of the Shared Services Agreement with MSC. As of March 31, 2012, we have approximately $27 million of in-process cost savings and synergies that we expect to achieve over the next 9 to 15 months in connection with the Shared Services Agreement.

2012 Financing Developments

In April 2012, we incurred incremental term loans due May 2015 under our senior secured credit facilities in an aggregate principal amount of $175 million. Net consideration from the transaction (which consisted of a combination of cash and rollover debt after discounts and fees), together with cash on hand, was used to extinguish existing term loans, maturing December 2013, under our senior secured credit facilities with an aggregate U.S. dollar equivalent principal amount of approximately $178 million, effectively extending our debt maturity profile. The new term loans bear interest at an adjusted LIBOR rate plus an applicable margin of 3.50%.

Short-term Outlook

Our business is impacted by general economic and industrial conditions, including general industrial production, automotive builds, housing starts, construction activity, consumer spending and semiconductor capital equipment investment. Our business has both geographic and end market diversity which often reduces the impact of any one of these factors on our overall performance.

 

Due to recent worldwide economic developments, the short-term outlook for 2012 for our business is difficult to predict. We expect the continued volatility in the global financial markets, the ongoing debt crisis in Europe, slower than expected growth in China and other Asia Pacific countries and general lack of consumer confidence will continue to impact our results. In the third and fourth quarters of 2011, we experienced sequential sales decreases across our silicones and quartz businesses primarily as a result of recent macroeconomic factors and, with respect to our quartz business, a slowdown in the overall semiconductor market. In the first quarter of 2012, we experienced a sequential sales increase in our silicones business as a result of slightly improving economic conditions, although volumes continued to sequentially decrease slightly. Due to continued weak demand in the semiconductor market, sales for our Quartz segment during the first quarter of 2012 were down, both on a year over year and sequential basis.  We anticipate weak demand in the semiconductor sector to continue to affect our Quartz segment throughout 2012.  As the global economy recovers throughout the year, we expect our results to gradually improve on a sequential basis in 2012.

 

We are focused on managing liquidity and optimizing resources in our manufacturing footprint and across our cost structure. We are continuing to invest in growth opportunities in our higher growth product lines and geographical regions and will leverage the combination of our proprietary technologies, strategic investment in key assets, and leading presence in high-growth end markets to benefit as the global economy recovers and for long-term success.

An additional economic recession or further postponement of the modest economic recovery could have an adverse impact on our business and results of operations. If global economic growth remains slow for an extended period of time or

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another economic recession occurs, the fair value of our reporting units and long-lived assets could be more adversely affected than we estimated in earlier periods. This may result in goodwill or other additional asset impairments beyond amounts that have already been recognized.

In response to the uncertain economic outlook, we are reviewing our plans to aggressively accelerate savings from the Shared Services Agreement with MSC in order to capture these cost savings as quickly as possible, while also reviewing our cost structure and manufacturing footprint across all businesses. We have begun to execute restructuring and cost reduction programs that will continue to be finalized throughout 2012. These actions could lead to more significant restructuring, exit and disposal costs and asset impairments to be incurred by the Company in 2012.

We remain optimistic about our position in the global markets when they do recover to more stable conditions due to our leading technologies and innovation capabilities, strong positions in high-growth end markets and regions and partnerships with a growth-oriented, blue-chip customer base.

We expect long-term raw material cost fluctuations to continue because of price movements of key feedstocks. To help mitigate the fluctuations in raw material pricing, we have purchase and sale contracts and commercial arrangements with many of our vendors and customers that contain periodic price adjustment mechanisms. Due to differences in the timing of pricing mechanism trigger points between our sales and purchase contracts, there is often a lead-lag impact during which margins are negatively impacted in the short term when raw material prices increase and are positively impacted in the short term when raw material prices fall. We continue to implement selective pricing actions to compensate for the increase in raw materials expected during 2012, which should benefit our operating cash flows in 2012.

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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 March 31, 2012 and April 3, 2011:

Fiscal three-month period ended March 31, 2012 compared to fiscal three-month period ended April 3, 2011 (Unaudited)

 

(in millions)	Fiscal three-month period ended
	March 31, 2012							April 3, 2011
Net sales	$	593			100	%		$	660			100	%
Costs and expenses:
Cost of sales, excluding depreciation	425				72	%		417				63	%
Selling, general and administrative expenses	146				25	%		145				22	%
Research and development expenses	18				3	%		20				3	%
Restructuring and other costs	9				2	%		5				1	%
Operating (loss) income	(5		)		(1	)%		73				11	%
Other income (expense)
Interest expense, net	(62		)		(11	)%		(64		)		(10	)%
Other income, net	3				—			—				—	%
(Loss) income before income taxes and losses from unconsolidated entities	(64		)		(11	)%		9				1	%
Income taxes	—				—	%		12				2	%
Loss before losses from unconsolidated entities	(64		)		(11	)%		(3		)		(1	)%
Losses from unconsolidated entities	(1		)		—			—				—	%
Net loss	(65		)		(11	)%		(3		)		(1	)%
Net income attributable to the noncontrolling interest	—				—			—				—	%
Net loss attributable to Momentive Performance Materials Inc.	$	(65	)		(11	)%		$	(3	)		(1	)%
Net Sales by Segment
Silicones	$	536			90	%		$	572			87	%
Quartz	57				10	%		88				13	%
Total	$	593			100	%		$	660			100	%

 

Net Sales. Net sales in the fiscal three-month period ended March 31, 2012 were $593 million, compared to $660 million for the fiscal three-month period ended April 3, 2011 (the "first quarter in 2011"), a decrease of $67 million or 10%. The decrease was primarily due to a decrease in price and mix shift of $49 million and volume of $17 million.

Net sales for our Silicones segment in the fiscal three-month period ended March 31, 2012 were $536 million, compared to $572 million for the first quarter in 2011, a decrease of $36 million or 6%. The decrease was primarily due to a decrease in price and mix shift of $49 million, partially offset by an increase in volume of $14 million. Sales in our Silicones segment were negatively impacted by lower sales in the automotive, electronics and industrial sectors. Compared to the fourth quarter of 2011, net sales for our Silicones segment increased by $6 million primarily due to a slight increase in pricing.

Net sales for our Quartz segment in the fiscal three-month period ended March 31, 2012 were $57 million, compared to $88 million for the first quarter in 2011, a decrease of $31 million or 35%. The decrease was due to lower volumes reflecting a downturn in demand for semiconductor related products. Compared to the fourth quarter of 2011, net sales for our Quartz segment decreased by $9 million due to a decrease in volume.

Cost of Sales, Excluding Depreciation. Cost of sales, excluding depreciation, in the fiscal three-month period ended March 31, 2012 was $425 million, compared to $417 million for the first quarter in 2011, an increase of $8 million or 2%. The increase was primarily due to inflation in raw material and processing costs of $29 million and lower factor leverage, partially offset by the impact of lower sales.

Cost of sales, excluding depreciation, for our Silicones segment was $390 million, compared to $371 million for the first quarter in 2011, an increase of $19 million or 5%. The increase was primarily due to inflation in raw material and

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processing costs of $29 million and lower factory leverage, partially offset by the impact of lower sales.

Cost of sales, excluding depreciation, for our Quartz segment was $35 million for the fiscal three-month period ended March 31, 2012, compared to $46 million in the first quarter in 2011, a decrease of $11 million or 24%. The decrease was primarily due to lower volume of $16 million, partially offset by lower factory leverage.

Selling, General and Administrative Expenses. Selling, general and administrative expenses in the fiscal three-month period ended March 31, 2012 were $146 million, compared to $145 million for the first quarter in 2011. The slight increase was due to exchange rate fluctuations of $7 million and inflation of $2 million, partially offset by savings realized in connection with the Shared Services Agreement with MSC of $4 million and lower depreciation of $4 million.

Research and Development Expenses. Research and development expenses in the fiscal three-month period ended March 31, 2012 were $18 million, compared to $20 million for the first quarter in 2011, a decrease of $2 million or 10%. The decrease was primarily related to the timing of new projects.

Restructuring and Other Costs. Restructuring and other costs in the fiscal three-month period ended March 31, 2012 were $9 million, compared to $5 million for the first quarter in 2011. For the fiscal three-month period ended March 31, 2012, these costs were comprised of restructuring costs (primarily severance payments associated with previously announced workforce reductions) of $4 million and other costs (primarily one-time payments for services and integration costs) of $5 million. For the fiscal three-month period ended April 3, 2011, these costs were comprised of restructuring costs (primarily severance payments associated with previously announced workforce reductions) of $2 million and other costs (primarily one-time payments for services and integration costs) of $3 million. See Note 3 to the condensed consolidated financial statements for additional information.

Interest Expense, Net. Interest expense, net in the fiscal three-month period ended March 31, 2012 was $62 million, compared to $64 million for the first quarter in 2011, a decrease of $2 million or 3%.

Other Income, Net. Other income, net in the fiscal three-month period ended March 31, 2012 was $3 million, compared to $0 million for the first quarter in 2011. Other income, net during the fiscal three-month period ended March 31, 2012, was primarily comprised of a royalty payment received from our siloxane joint venture.

Income Taxes. The effective tax rate was 0% and 133% for the fiscal three-month periods ended March 31, 2012 and April 3, 2011, respectively. The change in the effective tax rate was primarily due to the maintenance of a full valuation allowance against a substantial amount of our net deferred tax assets, in addition to a change in the amount of income (loss) before income taxes and changes in the tax rates applied in the various jurisdictions in which we operate.  The valuation allowance, which relates principally to the U.S. deferred tax assets, was established and maintained based on our assessment that the net deferred tax assets will likely not be realized.

Income taxes for the fiscal three-month periods ended March 31, 2012 and April 3, 2011 included unfavorable discrete tax adjustments of $0 and $8 million, respectively, primarily pertaining to foreign currency exchange gains in certain jurisdictions in 2011 that generated tax expense and hedged currency exchange losses in other jurisdictions for which no net tax benefit is recognized due to a full valuation allowance in those jurisdictions, partially offset by the resolution of certain tax matters in the U.S. and non-U.S. jurisdictions.

We are recognizing the earnings of non-U.S. operations currently in our U.S. consolidated income tax return as of December 31, 2011 and are expecting, with the exception of certain operations in China, that all earnings not required to service debt of the Company’s operations in non-U.S. jurisdictions will be repatriated to the U.S. We have accrued the incremental tax expense expected to be incurred upon the repatriation of these earnings. In addition, we have certain intercompany arrangements that if settled may trigger taxable gains or losses based on currency exchange rates in place at the time of settlement. Since the currency translation impact is considered indefinite, the Company has not provided deferred taxes on gains of $336 million, which could result in a tax obligation of $119 million, based on currency exchange rates as of March 31, 2012. Should the intercompany arrangement be settled or we change our assertion, the actual tax impact will depend on the currency exchange rate at the time of settlement or change in assertion.

Net Loss Attributable to Momentive Performance Materials Inc. Net loss attributable to Momentive Performance Materials Inc. for the fiscal three-month period ended March 31, 2012 was $65 million, compared to $3 million for the first quarter in 2011. The change was a result of the effects described above.

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Liquidity and Capital Resources

 

We are a highly leveraged company. Our primary sources of liquidity are cash on hand, cash flow from operations and funds available under our senior secured credit facilities. Our primary continuing liquidity needs are to finance our working capital, capital expenditures and debt service.

We had $2,950 million of indebtedness at March 31, 2012. Accordingly, we have significant debt service obligations. In addition, at March 31, 2012, we had $374 million in liquidity, including $118 million of unrestricted cash and cash equivalents (of which $112 million is maintained in foreign jurisdictions), and $256 million of borrowings available under our revolving credit facility. A summary of the components of our net working capital (defined as accounts receivable and inventories less trade payables) at March 31, 2012 is as follows:

(dollars in millions)	March 31, 2012				% of LTM Net Sales			December 31, 2011				% of LTM Net Sales
Accounts receivable	$	327			12.7	%		$	315			11.9	%
Inventories	413				16.1	%		394				14.9	%
Trade payables	(312		)		(12.1	)%		(308		)		(11.7	)%
Net working capital	$	428			16.7	%		$	401			15.1	%

The increase in net working capital of $27 million from December 31, 2011 was due to an inventory build to meet anticipated levels of demand and an increase in receivables due to the impact of seasonality on our sales. To minimize the impact of net working capital on cash flows, we continue to review inventory safety stock levels where possible. We also continue to focus on receivable collections by offering incentives to customers to encourage early payment, or accelerating receipts through the sale of receivables.

We have entered into accounts receivable sale agreements to sell a portion of our trade accounts receivable. For the fiscal three month ended March 31, 2012 and April 3, 2011, we effectively accelerated the timing of cash receipts by $10 million and $0 million, respectively. We may continue to accelerate cash receipts through accounts receivable sale agreements, as appropriate.

Following are highlights from our unaudited Condensed Consolidated Statements of Cash Flows:

	Fiscal three-month period ended
	March 31, 2012				April 3, 2011
	(dollars in millions)
Cash (used in) provided by operating activities	$	(48	)		$	5
Cash used in investing activities	(30		)		(28		)
Cash used in financing activities	(2		)		(25		)
Decrease in cash and cash equivalents, before effect of exchange rate changes on cash	$	(80	)		$	(48	)

Operating activities. Cash used by operating activities was $48 million in the fiscal three-month period ended March 31, 2012, compared to cash provided of $5 million in the fiscal three-month period ended April 3, 2011. Net loss of $65 million included $46 million of non-cash and non-operating expense items, of which $46 million was for depreciation and amortization, $4 million was in amortization of deferred debt discount and issuance costs, $1 million was from losses from unconsolidated entities and other non-cash adjustments of $1 million. These amounts were slightly offset by $3 million for deferred taxes and $3 of unrealized foreign currency gains. Net working capital used $17 million of cash driven by an increase in our accounts receivable of $12 million and inventories of $20 million, partially offset by an increase in trade payables of $15 million. Other assets and liabilities used cash of $12 million reflecting a decrease in accrued expenses and other liabilities of $19 million, an increase in due to/due from affiliates of $7 million, partially offset by a decrease in prepaid expenses and other assets of $6 million, an increase in pension liabilities of $5 million and an increase in accrued income taxes of $3 million.

For the fiscal three-month period ended April 3, 2011, net loss of $3 million included $51 million of non-cash and non-operating expense items, of which $50 million was for depreciation and amortization, $9 million was for deferred taxes and $4 million was in amortization of deferred debt discount and issuance costs. These amounts were partially offset by $9 million of unrealized foreign currency gains and $3 million of other non-cash adjustments. Net working capital used $63

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million in cash driven by increases in our accounts receivable and inventories of $29 million and $46 million, respectively, partially offset by an increase in trade payables of $12 million. Other assets and liabilities provided $20 million in cash primarily reflecting increases in accrued expenses and other liabilities of $32 million, which were partially offset by an increase in prepaid expenses and other assets of $10 million.

Investing activities. Cash used in investing activities was $30 million in the fiscal three-month period ended March 31, 2012, compared to $28 million in the fiscal three-month period ended April 3, 2011. Cash used in investing activities in the fiscal three-month period ended March 31, 2012 primarily consisted of ongoing expenditures of $20 million for environmental, health and safety compliance and maintenance projects. Cash used in investing activities in the fiscal three-month period ended April 3, 2011 primarily consisted of ongoing expenditures of $27 million for environmental, health and safety compliance and maintenance projects.

Financing activities. Cash used in financing activities was $2 million in the fiscal three-month period ended March 31, 2012, compared to $25 million in the fiscal three-month period ended April 3, 2011. Cash used in financing activities in the fiscal three-month period ended March 31, 2012 consisted of principal payments of $29 million, offset by proceeds from long-term debt of $25 million and an increase in short-term borrowings of $2 million. Cash used by financing activities in the fiscal three-month period ended April 3, 2011 consisted of payments of long-term debt of $55 million and additional borrowings of $37 million by a subsidiary in China, as well as $5 million of debt issuance costs associated with the amendment of our credit agreement in February 2011.

For 2012, we expect the following significant cash outflows: interest payments on our fixed rate Second-Priority Springing Lien Notes, Second Lien Notes and Senior Subordinated Notes (due semi-annually) of approximately $190 million in total (with first quarter and third quarter payments of approximately $61 million, and second quarter and fourth quarter payments of approximately $34 million); principal (due quarterly) and interest payments (due monthly) on our variable rate term loans under our senior secured credit facilities of approximately $11 million and $40 million (depending on interest rate and foreign exchange fluctuations), respectively; principal (due semi-annually) and interest (due quarterly) related to our Agricultural Bank of China fixed asset loan of approximately $8 million and $3 million (depending on interest rate and foreign exchange rate fluctuations), respectively; global pension fund contributions of approximately $19 million and income tax payments estimated at $17 million. Capital spending in 2012 is expected to be between $120 million and $130 million. We expect to fund these significant outflows with available cash and cash generated from operations.

Our senior secured credit facilities at March 31, 2012 consisted of two variable-rate term loans in an aggregate U.S. dollar equivalent principal amount of approximately $1,003 million, a $300 million revolving credit facility that includes borrowing capacity available for letters of credit of up to $100 million and a $33 million synthetic letter of credit facility. The borrowers under the revolving credit facility are our wholly-owned subsidiaries, Momentive Performance Materials USA Inc. and Momentive Performance Materials GmbH ("MPM GmbH"). The term loans, one of which is denominated in Euros, and our synthetic letter of credit facility are extended to MPM GmbH.

There were no borrowings outstanding under the revolving credit facility as of March 31, 2012. From time to time, we borrow on our revolving credit facility, as the needs of the our business dictate. The outstanding letters of credit under the revolving credit facility at March 31, 2012 were $44 million, leaving unused borrowing capacity of $256 million. Outstanding letters of credit issued under the synthetic letter of credit facility at March 31, 2012 were $30 million, leaving an unused capacity of $3 million.

Term loans denominated in U.S. dollars and Euros with an aggregate U.S. dollar equivalent principal amount of approximately $824 million (at March 31, 2012) mature on May 5, 2015 and bear interest at an adjusted LIBOR rate or an adjusted Euro LIBOR rate, as applicable, plus an applicable margin of 3.50%, in each case.

In April 2012, MPM GmbH incurred incremental term loans due May 2015 under our senior secured credit facilities in an aggregate principal amount of $175 million in the form of a new tranche of term loans denominated in U.S. dollars. Net consideration from the transaction (which consisted of a combination of cash and rollover debt after discounts and fees), together with cash on hand, was used to extinguish existing term loans, maturing December 2013, under our senior secured credit facilities with an aggregate U.S. dollar equivalent principal amount of approximately $178 million, effectively extending our debt maturity profile. The new term loans bear interest at an adjusted LIBOR rate plus an applicable margin of 3.50%.

Principal repayments on our term loans are due and payable in quarterly installments of approximately $3 million (depending on exchange rates), representing 0.25% of the original principal amounts, on the last day of each calendar quarter. We must also prepay the term loans, subject to certain exceptions, with (1) 50% (which percentage may be reduced to 25% or 0% 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; (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 we do not reinvest or commit to reinvest those proceeds in assets to be used in our business or to make

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certain other permitted investments within 15 months (and, if committed to be reinvested, actually reinvested within 36 months). We did not have excess cash flow under the terms of the credit agreement in calendar year 2011. Although we had excess cash flow under the terms of our credit agreement in 2010, we were not required to prepay any of the term loans under subsection (1) above because the ratio of our net first-lien secured indebtedness to Adjusted EBITDA was below 1.5:1.

The current revolving credit facility is available until December 3, 2012. In late 2010, however, we obtained commitments from certain existing revolving facility lenders and certain other financial institutions to provide a new and/or extended revolving credit facility for the full $300 million under our existing revolving credit facility. The commitments are subject to customary conditions and will take effect on or no more than five business days prior to December 3, 2012, in the case of a new lender, and the earlier of such date or the effective date of an amendment to our senior secured credit facility that extends the revolver maturity date, in the case of an existing lender. The commitments for the new revolving facility will mature on December 3, 2014 (the "extended revolver maturity date"). In the event more than $500 million of our term loans mature prior to 91 days after the extended revolver maturity date, the revolver loans outstanding under the new revolving facility must be repaid in full at least 91 days prior to such maturity date of such term loans and the revolver loans may not be drawn thereunder until such term loans are repaid and/or their maturity date extended to a date not earlier than 91 days after the extended revolver maturity date. The synthetic letter of credit facility amortizes at a rate of $350 thousand per annum, 1% of the original commitment, and is due and payable in full on December 4, 2013.

As of March 31, 2012, we had outstanding $1,161 million in aggregate principal amount of 9% Second-Priority Springing Lien Notes due 2021 (the "Dollar Fixed-Rate Notes"), €133 million in aggregate principal amount of 9 ¹/2% Second-Priority Springing Lien Notes due 2021 (the "Euro Fixed-Rate Notes" and together with the Dollar Fixed-Rate Notes, the "Second-Priority Springing Lien Notes"), $200 million in aggregate principal amount of 12 ¹/2% Second-Lien Senior Secured Notes due 2014 (the “Second Lien Notes”), and $382 million in aggregate principal amount of 11¹/2% Senior Subordinated Notes due 2016 (the “Senior Subordinated Notes”). The Second-Priority Springing Lien Notes, Second Lien Notes and the Senior Subordinated Notes are 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-Priority Springing Lien Notes are guaranteed on a senior unsecured (or, following the occurrence of certain events, a second-priority secured) basis by our existing domestic subsidiaries that are our guarantors under our senior secured credit facilities and each of our future domestic subsidiaries that guarantee any debt of the Company or of any guarantor of the Second-Priority Springing Lien Notes. The portion of the Second-Priority Springing Lien Notes which represent Dollar Fixed-Rate Notes and Euro Fixed-Rate Notes bear interest at a rate per annum of 9% and 9 ¹/2%, respectively, payable semiannually on January 15 and July 15 of each year, commencing on January 15, 2011.

The Second Lien Notes are guaranteed on a senior secured basis by each of our existing and future U.S. subsidiaries that is a guarantor under our existing senior secured credit facilities. 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 facilities. 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 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 facilities. Each Senior Subordinated Note bears interest at 11¹/2% per annum, payable semiannually on June 1 and December 1 of each year.

Our senior secured credit facilities contain various restrictive covenants that prohibit us and/or restrict our ability to prepay indebtedness, including our Second-Priority Springing Lien Notes, Second Lien Notes and Senior Subordinated Notes (collectively, the “notes”). If there are any borrowings under the revolving credit facility (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. In addition, our senior secured credit facilities and the indentures governing our notes, among other things, restrict our ability to incur indebtedness or liens, make investments or declare or pay any dividends. However, all of these restrictions are subject to exceptions.

As of March 31, 2012, Momentive Performance Materials Nantong Co. Ltd. ("MPM Nantong") had outstanding borrowings of $30 million under a fixed asset loan agreement with Agricultural Bank of China ("ABOC"). The loan is denominated in Chinese renminbi and collateralized by certain assets of MPM Nantong. Remaining principal repayments under the fixed asset loan agreement are due and payable in annual installments of $8 million (subject to exchange rates) on December 31 of 2012 through 2014, with the remaining balance due on December 31, 2015. Interest on the loan is due quarterly. The interest rate on the loan as of March 31, 2012 was 6.51%. MPM Nantong also entered into two working capital loan agreements with ABOC providing for revolving secured loans up to $16 million (subject to exchange rates), all of which

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were outstanding as of March 31, 2012. These revolving loans, which are also denominated in Chinese renminbi, must be paid down and renewed annually. The interest rate on these loans as of March 31, 2012 was 6.89%.

We have recorded deferred taxes on the earnings of certain foreign subsidiaries that are not considered to be permanently reinvested as those foreign earnings are needed for operations in the United States. In certain cases, such as the need to service debt in a foreign jurisdiction, we have not provided deferred taxes on the undistributed earnings because these earnings are considered permanently reinvested outside of the United States. Upon distribution of those earnings, we would be subject to U.S. income taxes and/or withholding taxes payable to the various foreign countries.

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. Our ability to generate cash in the future is subject to general economic, financial, competitive, legislative, regulatory and other factors that may be beyond our control.

Based on our current assessment of our operating plan and the general economic outlook, we believe that cash flow from operations and available cash, including available borrowings under our senior secured credit facilities, will be adequate to meet our liquidity needs for the next twelve months.

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 facilities 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 facilities and the notes issued, on commercially reasonable terms or at all.

    

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 the Company through open market purchases, privately negotiated transactions, tender offers, redemption or otherwise, upon such terms and at such prices as we or our affiliates may determine (or as may be provided for in the indentures governing 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, 2011 can be found in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission. There have been no material changes in our contractual obligations to our previous disclosures made on this matter.

Covenants under our Senior Secured Credit Facilities and the Notes

The credit agreement governing our senior secured credit facilities 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.

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 facilities) 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 facilities) to trailing twelve-month Adjusted EBITDA (as adjusted per the credit agreement governing the senior secured credit facilities) may not exceed 4.25 to 1 as of the last day of any fiscal quarter. In addition, our ability to incur indebtedness or make investments is restricted under the indentures governing our notes unless we have an Adjusted EBITDA to fixed charges ratio (measured on a

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last twelve months, or LTM, basis) of at least 2.00 to 1.00. “Fixed charges” are defined under the indentures as net interest expense, excluding the amortization or write-off of deferred financing costs. As of March 31, 2012, we were not able to satisfy this test. The restrictions on our ability to incur indebtedness or make investments under the indentures, however, are subject to exceptions, including exceptions that permit indebtedness under our senior secured credit facilities (including the use of unused borrowing capacity under the revolving credit facility, which was $256 million at March 31, 2012). Based on the forecast for the next 12 months, we have sufficient cash and available borrowing capacity to fund operations and pay liabilities as they come due in the normal course of business. On March 31, 2012, we were in compliance with the senior secured leverage ratio maintenance covenant, the other covenants under the credit agreement governing the senior secured credit facilities and the covenants under the indentures governing the notes.

Financial Measures that Supplement U.S. 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 non-recurring items and other 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 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 U.S. 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 senior secured credit facilities 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. Adjusted EBITDA excludes the EBITDA of our subsidiaries that are designated as Unrestricted Subsidiaries under our debt documents. We define Combined Adjusted EBITDA as Adjusted EBITDA modified to include the EBITDA of our subsidiaries that are designated as Unrestricted Subsidiaries under our debt documents. Combined Adjusted EBITDA is an important performance measure used by our senior management and the board of directors to evaluate operating results and allocate capital resources.

EBITDA, Adjusted EBITDA and Combined Adjusted EBITDA are not measurements of financial performance under U.S. GAAP, and our EBITDA, Adjusted EBITDA and Combined Adjusted EBITDA may not be comparable to similarly titled measures of other companies. You should not consider our EBITDA, Adjusted EBITDA or Combined Adjusted EBITDA, which are non-U.S. 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.

The following table reconciles net loss attributable to Momentive Performance Materials Inc. to EBITDA, Adjusted EBITDA (as calculated under our credit agreement and as substantially calculated under our indentures) and Combined Adjusted EBITDA for the periods presented:

 

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		Fiscal three-month period ended								Last twelve months ended
		March 31, 2012				April 3,  2011†				March 31, 2012
		(dollars in millions)
Net loss attributable to Momentive Performance Materials Inc.		$	(65	)		$	(3	)		(203	)
Gain on extinguishment of debt		—				—				(7	)
Interest expense, net		62				64				254
Income taxes		—				12				15
Depreciation and amortization		46				50				193
EBITDA		43				123				252
Noncontrolling interest	(a)	—				—				1
Restructuring and other costs	(b)	9				5				39
Pro forma cost savings	(c)	4				—				6
Non cash and purchase accounting effects	(d)	(3		)		(9		)		9
Exclusion of Unrestricted Subsidiary results	(e)	(5		)		(7		)		(20	)
Management fee and other	(f)	2				1				7
Pro forma savings from Shared Services Agreement	(g)	10				11				27
Adjusted EBITDA		$	60			$	124			321
Inclusion of Unrestricted Subsidiary results		5				7				20
Combined Adjusted EBITDA		$	65			$	131			341
Combined Adjusted EBITDA excluding pro forma savings from the Shared Services Agreement		$	55			$	120			314
Key calculations under the Credit Agreement
Total Senior Secured Net Debt		$	905
Senior Secured Leverage Ratio for the twelve-month period ended March 31, 2012		2.82

† The earthquake and tsunami on March 11, 2011 and related events reduced first quarter 2011 results.  The calculation of EBITDA, Adjusted EBITDA and Combined Adjusted EBITDA for the fiscal three-month period ended April 3, 2011 were negatively impacted by $9 million related to these events.

____________________

(a)	Reflects the elimination of noncontrolling interests resulting from the sale of the Shenzhen joint venture in 2011.

(b)	Relates primarily to restructuring and other costs.

(c)	Represents estimated cost savings, on a pro forma basis, from initiatives implemented or being implemented by management, including headcount reductions and indirect cost savings. For the fiscal three-month period ended March 31, 2012, estimated cost savings include facility rationalizations and headcount reductions.

(d)

Non-cash items include the effects of (i) stock-based compensation expense, (ii) 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, (iii) unrealized natural gas derivative gains or losses, and (iv) impairment charges. For the fiscal three-month period ended March 31, 2012, non-cash items include unrealized foreign currency exchange loss of $3 million. For the fiscal three-month period ended April 3, 2011, non-cash items include unrealized foreign currency exchange loss of $9 million.

(e)	Reflects the exclusion of the EBITDA of our subsidiaries that are designated as Unrestricted Subsidiaries under our debt documents.

(f)	Management Fees and Other include management and other fees to Apollo and affiliates and business optimization expenses.

(g)	Represents estimated cost savings, on a pro-forma basis, from the Shared Services Agreement with MSC.

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Critical Accounting Policies and Significant Estimates

Our principal accounting policies are described under the “Notes to Condensed Consolidated Financial Statements—Summary of Significant Accounting Policies.” The preparation of financial statements in accordance with U.S. 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 critical accounting policies and our most significant estimates and assumptions in our Annual Report on Form 10-K for the year ended December 31, 2011 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

Newly Adopted Accounting Standards

On January 1, 2012, we adopted the provisions of Accounting Standards Update No. 2011-05: Comprehensive Income ("ASU 201-05"), which was issued by the FASB in June 2011 and amended by Accounting Standards Update No. 2011-12: Comprehensive Income ("ASU 2011-12") issued in December 2011. ASU 2011-05 amended presentation guidance by eliminating the option for an entity to present the components of comprehensive income as part of the statements of changes in stockholders' equity and required presentation of comprehensive income in a single continuous financial statement or two separate consecutive financial statements. ASU 2011-12 deferred the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income in ASU 2011-05. The amendments in ASU 2011-05 did not change the items that must be reported in other comprehensive income or when an item of comprehensive income must be reclassified to net income. We have presented comprehensive income in a separate and consecutive statement entitled, "Condensed Consolidated Statements of Comprehensive Income (Loss)".

Newly Issued Accounting Standards

There were no newly issued accounting standards in the first quarter of 2012 applicable to the our unaudited Condensed Consolidated Financial Statements.

Item 3.	Quantitative and Qualitative Disclosures About Market Risks.

Information regarding our market risk as of December 31, 2011 was provided in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes to such disclosure.

Item 4.	Controls and Procedures.

Disclosure Controls and Procedures

At the time that our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 was filed on May 7, 2012, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2012. Subsequent to that evaluation, as a result of the restatement described in Note 1 to the financial statements included in this report, a re-evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on that re-evaluation, our principal executive officer and principal financial officer concluded that, as a result of the material weakness in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of March 31, 2012 to ensure that information required to be disclosed by us in reports that we file or furnish under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Material Weakness in Internal Control over Financial Reporting

A material weakness in internal control over financial reporting is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis. Based on our re-evaluation, management determined that it had not maintained effective controls over the preparation and review of our statement of cash flows. Our controls over the preparation and review of the statement of cash flows were not adequately designed, which led to misclassifications between operating, investing, and financing activities and the effect of exchange rate changes on cash, resulting in the restatement of the condensed consolidated statements of cash flows for the fiscal three-month periods ended

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March 31, 2012 and April 3, 2011; the fiscal six-month periods ended June 30, 2012 and July 3, 2011 and the fiscal nine-month periods ended September 30 of 2012 and 2011, respectively. Additionally, this control deficiency could result in misstatements of the aforementioned accounts and disclosures that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected. Accordingly, we have determined that this control deficiency constitutes a material weakness.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Plan of Remediation of Material Weakness

In response to the identification of the material weakness, in the first quarter of 2013 management has taken actions to remediate its controls over the preparation and review of the statement of cash flows, specifically over the calculation of the effect of exchange rate over cash, reconciling items from net loss to cash used from operating, investing and financing activities, validating the amount of cash capital expenditures, and validating the gross amounts of proceeds and payments of debt. We have changed certain of our manual methods for preparation and calculation of the statement of cash flows by implementing an automated tool which directly extracts information from our accounting records, and calculates the effect of exchange rate over cash. We have also implemented procedures to provide improved tracking of non-cash operating adjustments, cash amounts of capital expenditures, and gross payments and proceeds on debt. We have also instituted additional management review to confirm the proper classification of cash flow items going forward.

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Part II. Other Information.

Item 1.	Legal Proceedings.

In February 2012, the Italian regional environmental agency assessed an administrative penalty of €527,000 against the directors of our Italian subsidiary in connection with allegations that our Termoli, Italy facility violated certain hazardous waste record keeping and reporting requirements during the period from November 2010 to July 2011. The agency allows administrative penalties to be settled by payment of one-third of the assessed penalty within 60 days of receipt of notice. In accordance with agency policies, we settled the matter by paying €175,667, one-third of the assessed penalty, in April 2012. The agency has also alleged our Termoli, Italy facility has violated certain hazardous waste storage and disposal requirements. These allegations may be the subject of further enforcement actions, including criminal enforcement.

There have been no other material developments to our previous disclosures on legal proceedings that are included in

our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 1A.	Risk Factors.

Our amended and restated risk factors are set forth below. These factors may or may not occur, and we cannot express a view on the likelihood that any of these may occur. Other factors may exist that we do not consider significant based on information that is currently available or that we are not currently able to anticipate. Any of the following risks could materially adversely affect our business, financial condition or results of operations and prospects.

Risks Related to Our Business

<>If global economic conditions weaken again, it will continue to negatively impact our business, results of operations and financial condition.

Global economic and financial market conditions, including severe market disruptions like in late 2008 and 2009 and the potential for a significant and prolonged global economic downturn, have impacted or could impact our business operations in a number of ways including, but not limited to, the following:

•	reduced demand in key customer segments, such as automotive, building, construction and electronics, compared to prior years;

•

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

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

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

•

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

 

Global economic conditions may weaken again. Any further weakening of economic conditions would likely exacerbate the negative effects described above, could significantly affect our liquidity which may cause us to defer needed capital expenditures, reduce research and development or other spending, defer costs to achieve productivity and synergy programs or sell assets or incur additional borrowings which may not be available or may only be available on terms significantly less advantageous than our current credit terms and could result in a wide-ranging and prolonged impact on general business conditions, thereby negatively impacting our business, results of operations and financial condition. In addition, if the global economic environment weakens again or remains slow for an extended period of time, the fair value of our reporting units could be more adversely affected than we estimated in our analysis of reporting unit fair values at October 1, 2011. This could result in additional goodwill or other asset impairments, which could negatively impact our business, results of operations and financial condition.

Due to recent worldwide economic developments, the short-term outlook for 2012 for our business is difficult to predict. We expect the continued volatility in the global financial markets, the ongoing debt crisis in Europe, slower than expected growth in China and other Asia Pacific countries and general lack of consumer confidence will continue to impact our

results. In the third and fourth quarters of 2011, we experienced sequential sales decreases across our silicones and quartz businesses primarily as a result of recent macroeconomic factors and, with respect to our quartz business, a slowdown in the overall semiconductor market. In the first quarter of 2012, we experienced a sequential sales increase in our silicones business as a result of slightly improving economic conditions, although volumes continued to sequentially decrease slightly. Due to continued weak demand in the semiconductor market, sales for our Quartz segment during the first quarter of 2012 were down, both on a year over year and sequential basis.  We anticipate weak demand in the semiconductor sector to continue to affect our Quartz segment throughout 2012.  As the global economy recovers throughout the year, we expect our results to gradually improve on a sequential basis in 2012. However, we cannot assure you that such a recovery will occur.

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

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

Although some of our materials contracts include competitive price clauses that allow us to buy outside the contract if market pricing falls below contract pricing, and certain contracts have minimum-maximum monthly volume commitments that allow us to take advantage of spot pricing, we may be unable to purchase raw materials at market prices. In addition, some of our customer contracts have fixed prices for a certain term, and as a result, we may not be able to pass on raw material price increases to our customers immediately, if at all. Due to differences in timing of the pricing trigger points between our sales and purchase contracts, there is often a “lead-lag” impact that can negatively impact our margins in the short term in periods of rising raw material prices and positively impact them in the short term in periods of falling raw material prices. Future raw material prices may be impacted by new laws or regulations, suppliers' allocations to other purchasers, changes in our supplier manufacturing processes as some of our products are byproducts of these processes, interruptions in production by suppliers, natural disasters, volatility in the price of crude oil and related petrochemical products and changes in exchange rates.

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

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

•	new or existing laws or regulations;

•	suppliers' allocations to other purchasers;

•	interruptions in production by suppliers; and

•	natural disasters.

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

For example, our silicones business is highly dependent upon access to silicon metal, a key raw material, and siloxane, an intermediate product that is derived from silicon metal. While silicon is itself abundant, silicon metal is produced through a manufacturing process and, in certain geographic areas, is currently available through a limited number of suppliers. In North America, there are only two significant silicon metal suppliers. In 2009 and 2010, two of our competitors acquired silicon metal manufacturing assets in North America and Europe, respectively, becoming vertically integrated in silicon metal for a portion of their supply requirements and reducing the manufacturing base of certain independent silicon metal producers. In addition, silicon metal producers face a number of regulations that affect the supply or price of silicon metal in some or all of the jurisdictions in which we operate. For example, significant anti-dumping duties of up to 139.5% imposed by the U.S. Department of Commerce and the International Trade Commission against producers of silicon metal in China and Russia effectively block the sale by all or most producers in these jurisdictions to U.S. purchasers, which restricts the supply of silicon metal and results in increased prices. We currently purchase silicon metal under multi-year, one-year or short-term contracts and in the spot market. We typically purchase silicon metal under contracts in the U.S. and Europe and in the spot market in Asia Pacific.

Our silicones business also relies heavily on siloxane as an intermediate product. Our manufacturing capacity at our internal sites and our joint venture in China is sufficient to meet the substantial majority of our current siloxane requirements. We also source a portion of our requirements from Asia Silicones Monomer Limited (“ASM”) under an existing off-take agreement. In addition, from time to time we enter into supply agreements with other third parties to take advantage of favorable pricing and minimize our cost. There are also a limited number of third-party siloxane providers, and the supply of siloxane may be limited from time to time. In addition, regulation of siloxane producers can also affect the supply of siloxane.

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For example, in January 2006, the Ministry of Commerce of the People's Republic of China issued a final determination of an anti-dumping investigation that imposed anti-dumping duties on all siloxane manufacturers, including us, ranging from 13% to 22%. These duties were terminated in January 2011. In late May 2009, China's Ministry of Commerce also concluded an anti-dumping investigation of siloxane manufacturers in Thailand and South Korea, which resulted in an imposition of a 5.4% duty against our supplier, ASM, in Thailand, a 21.8% duty against other Thailand companies and a 25.1% duty against Korean companies.

Our quartz production relies heavily on a specific type of sand, which is currently available in the necessary quality and quantity from only one supplier, Unimin. While we continue to negotiate a new long-term supply agreement with Unimin, we recently amended our supply agreement with Unimin, extending the term of the agreement through June 30, 2012.

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

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

Our production facilities are subject to hazards associated with the manufacturing, handling, storage and transportation of chemical materials and products, including human exposure to hazardous substances, pipeline and equipment leaks and ruptures, explosions, fires, inclement weather and natural disasters, mechanical failures, unscheduled downtime, transportation interruptions, remedial complications, chemical spills, discharges or releases of toxic or hazardous substances or gases, storage tank leaks and other environmental risks. Additionally, a number of our operations are adjacent to operations of independent entities that engage in hazardous and potentially dangerous activities. Our operations or adjacent operations could result in personal injury or loss of life, severe damage to or destruction of property or equipment, environmental damage, or a loss of the use of all or a portion of one of our key manufacturing facilities. Such events at our facilities or adjacent third-party facilities, could have a material adverse effect on us.

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

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

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

Compliance with environmental, health and safety laws and regulations, and maintenance of permits, can be costly and complex, and we have incurred and will continue to incur costs, including capital expenditures and costs associated with the issuance and maintenance of letters of credit, to comply with these requirements. In 2011, we incurred capital expenditures of $23 million to comply with environmental laws and regulations and to make other environmental improvements. If we are unable to comply with environmental, health and safety laws and regulations, or maintain our permits, we could incur

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substantial costs, including fines and civil or criminal sanctions, third party property damage or personal injury claims or costs associated with upgrades to our facilities or changes in our manufacturing processes in order to achieve and maintain compliance, and may also be required to halt permitted activities or operations until any necessary permits can be obtained or complied with. In addition, future developments or increasingly stringent regulations could require us to make additional unforeseen environmental expenditures.

Actual and alleged environmental violations have been identified at our facility in Waterford, New York. We are cooperating with the New York State Department of Environmental Conservation and the U.S. Environmental Protection Agency, or USEPA, and the U.S. Department of Justice in their respective investigations of that facility's compliance with certain applicable environmental requirements, including certain requirements governing the operation of the facility's hazardous waste incinerators. Although we currently believe that the costs and potential penalties associated with these investigations will not have a material adverse impact on our business, these investigations may result in administrative, civil or criminal enforcement by the State of New York and/or the United States and resolution of such enforcement actions will likely require payment of a monetary penalty and/or the imposition of other civil or criminal sanctions.

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

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

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

In addition, we are required to provide financial assurances in the normal course of our business in connection with certain hazardous waste management activities. Pursuant to financial assurance requirements set forth in state hazardous waste permit regulations applicable to our manufacturing facilities in Waterford, NY and Sistersville, WV, we have provided letters of credit in the following amounts: $25.3 million for closure and post-closure care for the Waterford and the Sistersville facilities; and $10 million (annual aggregate) for accidental occurrences at the Waterford and Sistersville facilities. We are currently in discussions with the New York State Department of Environmental Conservation (the “NYSDEC”) regarding the renewal of our Waterford facility's hazardous waste permit. In connection with the renewal, the NYSDEC may increase the financial assurances we are required to provide for this facility, which may result in a material increase in the amount of letters of credit we must deliver. One or more of our facilities may also in the future be subject to additional financial assurance requirements imposed by governmental authorities, including the USEPA. In this regard, the USEPA has identified chemical manufacturing as an industry for which it plans to develop, as necessary, proposed regulations identifying appropriate financial assurance requirements pursuant to §108(b) of CERCLA. Any increase in financial assurances required for our facilities in connection with environmental, health and safety laws or regulations or the maintenance of permits would likely increase our costs and could also materially impact our financial position. For example, to the extent we issue letters of credit under our revolving credit facility to satisfy any financial assurance requirements, we would incur fees for the issuance and maintenance of these

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letters of credit and the amount of borrowings that would otherwise be available to us under our revolving credit facility would be reduced.

Future chemical regulatory actions may decrease our profitability.

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

Similarly, the Canadian government is implementing an initiative to review certain chemical products for potential environmental and human health and safety impacts. The list of products being reviewed includes several chemicals sold by us. We are part of an industry organization that is working with the Canadian government to develop relevant data and information. Upon review of such data and information, the Canadian government may enact regulations that would limit our ability to sell the affected chemicals in Canada. As part of this initiative, based upon modeled potential impacts on the aquatic environment, the Canadian government has listed as environmentally toxic octamethylcyclotetrasiloxane, or D4, a chemical substance that we manufacture. The Canadian government is developing, and will likely finalize, regulations to limit the discharge of D4 into the aquatic environment. These regulations may include limitations on the import into Canada, or the use in Canada, of certain products containing more than a specified amount of D4. The European Union is also reviewing D4, as well as decamethylcyclopentasiloxane, or D5, another chemical substance we manufacture, and may, pursuant to REACH, regulate the manufacture, import and/or use of these two chemical substances in the European Union. The USEPA has also stated that they are reviewing the potential environmental risks posed by these two substances to determine whether regulatory measures are warranted, and we and other silicones industry members are discussing with the USEPA the possibility of the silicones industry conducting certain studies to obtain relevant data. Finally, the Norwegian Climate and Pollution Agency has published a study that identifies D4 and D5 as potential candidates for listing as persistent organic pollutants pursuant to the Stockholm Convention on Persistent Organic Pollutants (the "Stockholm Convention"), an international treaty aimed at eliminating or minimizing the release of organic chemicals that are toxic, resistant to degradation in the environment, and transported and deposited far from the point of release. Regulation of our products containing such substances by the European Union, Canada, the United States and/or parties to the Stockholm Convention would likely reduce our sales within the jurisdiction and possibly in other geographic areas as well. These reductions in sales could be material depending upon the extent of any such additional regulations.

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

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

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

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workplace or based upon the use of our products could result in significant liability for us, which could have a material adverse effect on our business, financial condition and/or profitability.

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

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

Products we have made or used could be the focus of legal claims based upon allegations of harm to human health. While we cannot predict the outcome of suits and claims, we believe that we maintain adequate reserves, in accordance with our policy, to address litigation and are adequately insured to cover foreseeable future claims. However, an unfavorable outcome in these litigation matters could have a material adverse effect on our business, financial condition and/or profitability and cause our reputation to decline.

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

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

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

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

•	exchange controls and currency restrictions;

•	currency fluctuations and devaluations;

•	tariffs and trade barriers;

•	export duties and quotas;

•	changes in local economic conditions;

•	changes in laws and regulations;

•	exposure to possible expropriation or other government actions;

•	hostility from local populations;

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

•	restrictions on our ability to repatriate dividends from our subsidiaries;

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

•	natural disasters or other catastrophic events.

 

Our international operations expose us to different local political and business risks and challenges. For example, we face potential difficulties in staffing and managing local operations, and we have to design local solutions to manage credit risks of

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local customers and distributors. In addition, some of our operations are located in regions that may be politically unstable, having particular exposure to riots, civil commotion or civil unrests, acts of war (declared or undeclared) or armed hostilities or other national or international calamity. In some of these regions, our status as a U.S. company also exposes us to increased risk of sabotage, terrorist attacks, interference by civil or military authorities or to greater impact from the national and global military, diplomatic and financial response to any future attacks or other threats.

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

In addition, intellectual property rights may be more difficult to enforce in non-U.S. or non-Western Europe countries.

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

Our business is subject to foreign currency risk.

In 2011, approximately 68% of our net sales originated outside the United States. In our consolidated financial statements, we translate our local currency financial results into U.S. dollars based on average exchange rates prevailing during a reporting period or the exchange rate at the end of that period. During times of a strengthening U.S. dollar, at a constant level of business, our reported international revenues and earnings would be reduced because the local currency would translate into fewer U.S. dollars.

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

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

 

The recent European debt crisis and related European financial restructuring efforts have contributed to instability in global credit markets and may cause the value of the Euro to further deteriorate. If global economic and market conditions, or economic conditions in Europe, the United States or other key markets remain uncertain or deteriorate further, the value of the Euro and the global credit markets may weaken. While we do not transact a significant amount of business in Greece, Italy or Spain, the general financial instability in those countries could have a contagion effect on the region and contribute to the general instability and uncertainty in the European Union. If this were to occur, it could adversely affect our European customers and suppliers and in turn have a materially adverse effect on our international business and results of operations.

Increased energy costs could increase our operating expenses, reduce net income and negatively affect our financial condition.

Natural gas and electricity are essential to our manufacturing processes, which are energy-intensive. Oil and natural gas prices have fluctuated greatly over the past several years and we anticipate that they will continue to do so. Our energy costs represented approximately 7% of our total cost of sales for the fiscal year ended December 31, 2011 and 8% of our total cost of sales in both of the fiscal years ended December 31, 2010, and 2009.

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

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

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The markets that we operate in are highly competitive, and this competition could harm our results of operations, cash flows and financial condition. Our competitors include major international producers as well as smaller regional competitors. We may be forced to lower our selling price based on our competitors' pricing decisions, which would reduce our profitability. This has been further magnified by the impact of the recent global economic downturn, as companies have focused more on price to retain business and market share. In addition, we face competition from a number of products that are potential substitutes for our products. Growth in substitute products could adversely affect our market share, net sales and profit margins.

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

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

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

We have not yet realized all of the cost savings and synergies we expect to achieve from our current strategic initiatives, including the Momentive Combination and those related to shared services and logistics optimization, best-of-source contractual terms, procurement savings, regional site rationalization, administrative and overhead savings, and new product development, and may not be able to realize such cost savings or synergies. A variety of risks could cause us not to realize the expected cost savings and synergies, including but not limited to, the following: the shared services agreement between us and MSC, dated October 1, 2010, as amended on March 17, 2011 (the "Shared Services Agreement"), may be viewed negatively by vendors, customers or financing sources, negatively impacting potential benefits; any difficulty or inability to integrate shared services with our business; higher than expected severance costs related to staff reductions; higher than expected retention costs for employees that will be retained; higher than expected stand-alone overhead expenses; delays in the anticipated timing of activities related to our cost-saving plan; increased complexity and cost in collaborating between us and MSC and establishing and maintaining shared services; and other unexpected costs associated with operating our business.

Our ability to realize the benefits of the Momentive Combination also may be limited by applicable limitations under the terms of our debt instruments. These debt instruments generally require that transactions between us and MSC with a value in excess of a de minimis threshold be entered into on an arm's-length basis. These constraints could result in significantly fewer cost savings and synergies than would occur if these limitations did not exist. Our ability to realize intended savings also may be limited by existing contracts to which we are a party, the need for consents with respect to agreements with third parties, and other logistical difficulties associated with integration.

The Shared Services Agreement expires in October 2015 (subject to one-year renewals every year thereafter, absent contrary notice from either party). Moreover, the Shared Services Agreement is also subject to termination by either MSC or MPM, without cause, on not less than thirty days prior written notice subject to a one year transition assistance period. If the Shared Services Agreement is terminated, it could have a negative effect on our business, results of operations and financial condition, as we would need to replace the services that were being provided by MSC, and would lose the benefits we were generating under the agreement at the time.

If we are unable to achieve the cost savings or synergies that we expect to achieve from our strategic initiatives, including the Shared Services Agreement, it would adversely affect our profitability and financial condition. In addition, while we have been successful in reducing costs and generating savings, factors may arise that may not allow us to sustain our current cost structure. As market and economic conditions change, we may also make changes to our operating cost structure. To the extent we are permitted to include the pro forma impact of such cost savings initiatives in the calculation of financial covenant ratios under our senior credit agreements, our failure to realize such savings could impact our compliance with such covenants.

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

We rely on the patent, trademark, copyright and trade-secret laws of the United States and the countries where we do business to protect our intellectual property rights. We may be unable to prevent third parties from using our intellectual property without our authorization. The unauthorized use of our intellectual property could reduce any competitive advantage we have developed, reduce our market share or otherwise harm our business. In the event of unauthorized use of our

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intellectual property, litigation to protect or enforce our rights could be costly, and we may not prevail.

Many of our technologies are not covered by any patent or patent application, and our issued and pending U.S. and non-U.S. patents may not provide us with any competitive advantage and could be challenged by third parties. Our inability to secure issuance of our pending patent applications may limit our ability to protect the intellectual property rights these pending patent applications were intended to cover. Our competitors may attempt to design around our patents to avoid liability for infringement and, if successful, our competitors could adversely affect our market share. Furthermore, the expiration of our patents may lead to increased competition.

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

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

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

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

Our production processes and products are specialized; however, we could face intellectual property infringement claims from our competitors or others alleging that our processes or products infringe on their proprietary technology. If we were subject to an infringement suit, we may be required to change our processes or products, or stop using certain technologies or producing the infringing product entirely. Even if we ultimately prevail in an infringement suit, the existence of the suit could cause our customers to seek other products that are not subject to infringement suits. Any infringement suit could result in significant legal costs and damages and impede our ability to produce key products, which could have a material adverse effect on our business, financial condition and results of operations.

We depend on certain of our key executives and our ability to attract and retain qualified employees.

Our ability to operate our business and implement our strategies depends, in part, on the skills, experience and efforts of Craig O. Morrison, our chief executive officer and interim President of the Silicones and Quartz Division, and William H. Carter, our chief financial officer, and other key members of our leadership team. We do not maintain any key-man insurance on any of these individuals. In addition, our success will depend on, among other factors, our ability to attract and retain other managerial, scientific and technical qualified personnel, particularly research scientists, technical sales professionals and engineers who have specialized skills required by our business and focused on the industries in which we compete. Competition for qualified employees in the materials industry is intense and the loss of the services of any of our key employees or the failure to attract or retain other qualified personnel could have a material adverse effect on our business or business prospects. Further, if any of these executives or employees joins a competitor, we could lose customers and suppliers and incur additional expenses to recruit and train personnel, who require time to become productive and to learn our business.

Our and MSC's majority shareholder's interest may conflict with or differ from our interests.

Apollo controls our ultimate parent company, Momentive Performance Materials Holdings LLC, or Momentive Holdings, which indirectly owns 100% of our common equity. In addition, representatives of Apollo comprise a majority of our directors. As a result, Apollo can control our ability to enter into significant corporate transactions such as mergers, tender offers and the sale of all or substantially all of our assets. The interests of Apollo and its affiliates could conflict with or differ

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from our interests. For example, the concentration of ownership held by Apollo could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination which may otherwise be favorable for us.

Our ultimate parent company, Momentive Holdings, is also the ultimate parent company of our affiliate, MSC. Therefore, in addition to controlling our activities through its control of Momentive Holdings, Apollo can also control the activities of MSC through this same ownership and control structure. There can be no assurance that Apollo (and our senior management team, many of whom hold the same position with, or also provide services to, MSC ) will not decide to focus its attention and resources on matters relating to MSC or Momentive Holdings that otherwise could be directed to our business and operations. If Apollo determines to focus attention and resources on MSC or any new business lines of MSC instead of us, it could adversely affect our ability to expand our existing business or develop new business.

Additionally, Apollo is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete, directly or indirectly with us. Apollo may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. Additionally, even if Apollo invests in competing businesses through Momentive Holdings, such investments may be made through MSC or a newly-formed subsidiary of Momentive Holdings. Any such investment may increase the potential for the conflicts of interest discussed in this risk factor.

So long as Apollo continues to indirectly own a significant amount of the equity of Momentive Holdings, even if such amount is less than 50%, they will continue to be able to substantially influence or effectively control our ability to enter into any corporate transactions.

<Because our equity securities are not and will not be registered under the securities laws of the United States or in any other jurisdiction and are not listed on any U.S. securities exchange, we are not subject to certain of the corporate governance requirements of U.S. securities authorities or to any corporate governance requirements of any U.S. securities exchanges.

The diversion of our key personnel's attention to other businesses could adversely affect our business and results of operations.

Certain members of our senior management team, including Mr. Morrison, our chief executive officer and interim President of the Silicones and Quartz Division, and Mr. Carter, our chief financial officer, and other individuals who provide substantial services to our business, act in the same or similar capacities for, and are employed by, our affiliate, MSC. Certain of our employees, who provide substantial services to our business, also act in the same or similar capacities and provide services with respect to MSC. The services of such individuals are provided by us to MSC, or by MSC to us, pursuant to the Shared Services Agreement. Any or all of these individuals may be required to focus their time and energies on matters relating to MSC that otherwise could be directed to our business and operations. If the attention of our senior management team, and/or such other individuals providing substantial services to our business, is significantly diverted from their responsibilities to us, it could affect our ability to service our existing business and develop new business, which could have a material adverse effect on our business and results of operations. We cannot assure you that the implementation of the Shared Services Agreement will not be disruptive to our business.

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

As of December 31, 2011, approximately 42% of our employees were unionized or represented by works councils that were covered by collective bargaining agreements. In addition, some of our employees reside in countries in which employment laws provide greater bargaining or other employee rights than the laws of the United States. These rights may require us to expend more time and money altering or amending employees' terms of employment or making staff reductions. For example, most of our employees in Europe are represented by works councils, which generally must approve changes in conditions of employment, including restructuring initiatives and changes in salaries and benefits. A significant dispute could divert our management's attention and otherwise hinder our ability to conduct our business or to achieve planned cost savings.

We may be unable to timely extend or renegotiate our collective bargaining agreements as they expire. For example, a majority of our manufacturing personnel at our Waterford, New York; Sistersville, West Virginia and Willoughby, Ohio sites are covered by collective bargaining agreements that expire in the summer of 2013. We also may be subject to strikes or work stoppages by, or disputes with, our labor unions. In January 2011, the union at our Waterford, New York facility representing approximately 780 employees went on strike for two days in response to grievances. In addition, in January and November 2009, this union filed a variety of unfair labor practice charges against us with the National Labor Relations Board, or NLRB, arising from our implementation of a new wage rate schedule, a new job classification structure and a new overtime procedure at our Waterford, New York facility. In January 2010, the NLRB filed a complaint against us relating to a portion of these

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charges, and in July 2010 we reached a settlement with respect to these claims and the complaint was withdrawn. If we fail to extend or renegotiate our collective bargaining agreements, if additional disputes with our works councils or unions arise or if our unionized or represented workers engage in a further strike or other work stoppage, we could incur higher labor costs or experience a significant disruption of operations, which could have a material adverse effect on our business, financial position and results of operations.

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

We sponsor various pension and similar benefit plans worldwide.

Our non-U.S. defined benefit pension plans were under-funded in the aggregate by $99 million as of December 31, 2011. Our U.S. defined benefit pension plans were under-funded in the aggregate by $83 million as of December 31, 2011.

We are legally required to make contributions to our pension plans in the future, and those contributions could be material. The need to make these cash contributions will reduce the amount of cash that would be available to meet other obligations or the needs of our business, which could have a material adverse effect on our financial condition and liquidity. In 2012, we expect to contribute approximately $16 million and $3 million to our U.S. and non-U.S. defined benefit pension plans, respectively, which we believe is sufficient to meet the minimum funding requirements as set forth in employee benefit and tax laws.

Our future funding obligations for our employee benefit plans depend upon the levels of benefits provided for by the plans, the future performance of assets set aside for these plans, the rates of interest used to determine funding levels, the impact of potential business dispositions, actuarial data and experience, and any changes in government laws and regulations. In addition, our employee benefit plans hold a significant amount of equity securities. If the market values of these securities decline, our pension expense and funding requirements would increase and, as a result, could have a material adverse effect on our business.

Any decrease in interest rates and asset returns, if and to the extent not offset by contributions, could increase our obligations under these plans. If the performance of assets in the funded plans does not meet our expectations, our cash contributions for these plans could be higher than we expect, which could have a material adverse effect on our financial condition and liquidity.

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

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

For example, our manufacturing facility in Ohta, Japan and the manufacturing facilities of certain of our suppliers have been impacted by the effects of the earthquake and tsunami in Japan on March 11, 2011 and related events. Our Ohta facility is one of three facilities globally where we internally produce siloxane, a key intermediate required in our manufacturing process of silicones. We also produce a variety of finished silicone products at this plant, including highly specialized silicone products. We are currently able to shift only certain amounts of production to our other facilities throughout the world over the short term. Our Ohta plant, which is approximately 230 kilometers away from the nuclear power plant at Fukushima, Japan that incurred significant damage as a result of the earthquake, is our closest facility to the area affected by the earthquake and tsunami. We also have manufacturing and research facilities in Kozuki and Kobe, Japan that produce quartz products, and administration offices in Tokyo, Nagoya and Fukuoka, Japan, none of which were significantly impacted by the earthquake. In addition, our manufacturing facilities, primarily those located in the Asia Pacific region, purchase certain raw materials from suppliers throughout Japan. Our sales, operating income and Combined Adjusted EBITDA in the first half of 2011 were reduced by approximately $31 million, $16 million and $16 million, respectively, as a result of the earthquake and related events, primarily due to power, transportation and other supply-related issues, along with reduced demand from Japanese customers impacted by the earthquake. Normal plant operations at our Ohta facility were restored in early May 2011 but uncertainty in Japan continues primarily with respect to the country's energy infrastructure. To the extent conditions worsen, including, but not limited to, the resumption of rolling blackouts, further restrictions on power usage, disruptions in the supply chain, increased radiation exposure from damaged nuclear power plants or the expansion of evacuation zones around nuclear power plants, it could materially and adversely affect our operations, operating results and financial condition.

In addition, many of our current and potential customers are concentrated in specific geographic areas. A disaster in one

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of these regions could have a material adverse impact on our operations, operating results and financial condition. Our business interruption insurance may not be sufficient to cover all of our losses from a disaster, in which case our unreimbursed losses could be substantial.

Acquisitions and joint ventures that we pursue may present unforeseen integration obstacles and costs, increase our leverage and negatively impact our performance. Divestitures that we pursue also may present unforeseen obstacles and costs and alter the synergies we expect to achieve from the Momentive Combination.

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

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

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

•	potential disruptions of our ongoing business and distraction of management;

•	unexpected loss of key employees or customers of the acquired company;

•	conforming the acquired company's standards, processes, procedures and controls with our operations;

•	coordinating new product and process development;

•	hiring additional management and other critical personnel; and

•	increasing the scope, geographic diversity and complexity of our operations.

 

In addition, we may encounter unforeseen obstacles or costs in the integration of acquired businesses. For example, if we were to acquire an international business, the preparation of the U.S. GAAP financial statements could require significant management resources. Also, the presence of one or more material liabilities of an acquired company that are unknown to us at the time of acquisition may have a material adverse effect on our business. Our acquisition and joint venture strategy may not be successfully received by customers, and we may not realize any anticipated benefits from acquisitions or joint ventures.

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

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

 

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

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access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations, and damage our reputation, which could adversely affect our business, financial condition and results of operations.

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

Historically, we have marketed our products and services using the GE brand name and monogram, and we believe the association with GE has provided us with preferred status among our customers and employees due to GE's globally recognized brands and perceived high quality products and services. We and GE are parties to a trademark license agreement that granted us a limited right to, among other things, use the GE mark and monogram on our sealant, adhesive and certain other products. These rights will extend for an initial term of seven years that commenced on December 3, 2006, with a one-time option that allows us to renew the license for an additional five-year period, subject to certain terms and conditions, including the payment of royalties. We also retained the right to use numerous product specifications that contain the letters “GE” for the life of the respective products. While we continue to use the GE mark and monogram on these products and continue to use these product specifications, we will not be able to use the GE mark and monogram on other products, use GE as part of our name or advertise ourselves as a GE company. While we have not yet experienced any significant loss of business as a result of our limited use of the GE mark and monogram, our business could be disadvantaged in the future by the loss of association with the GE name.

 

Risks Related to Our Indebtedness

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

We have substantial consolidated indebtedness. As of March 31, 2012, we had $2,955 million of consolidated outstanding indebtedness, including payments due within the next twelve months and short-term borrowings. In 2012, our annualized cash interest expense is projected to be approximately $230 million based on our consolidated indebtedness and interest rates at March 31, 2012, of which $190 million represents cash interest expense on fixed-rate obligations.

Our ability to generate sufficient cash flows from operations to make scheduled debt service payments depends on a range of economic, competitive and business factors, many of which are outside of our control. Our business may generate insufficient cash flows from operations to meet our debt service and other obligations, and currently anticipated cost savings, working capital reductions and operating improvements may not be realized on schedule, or at all. If we are unable to meet our expenses and debt service obligations, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets or issue additional equity securities. We may be unable to refinance any of our indebtedness, sell assets or issue equity securities on commercially reasonable terms, or at all, which could cause us to default on our obligations and result in the acceleration of our debt obligations. Our inability to generate sufficient cash flows to satisfy our outstanding debt obligations, or to refinance our obligations on commercially reasonable terms, would have a material adverse effect on our business, financial condition and results of operations.

Our substantial indebtedness exposes us to significant interest expense increases if interest rates increase.

$1,057 million, or approximately 36%, of our borrowings as of March 31, 2012, were at variable interest rates and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease. Assuming our consolidated variable interest rate indebtedness outstanding as of March 31, 2012 remains the same, an increase of 1% in the interest rates payable on our variable rate indebtedness would increase our 2012 annual estimated debt-service requirements by approximately $11 million. Accordingly, an increase in interest rates from current levels could cause our annual debt-service obligations to increase significantly.

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

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

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

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

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

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

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

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opportunities;

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

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

•	it may limit our ability to borrow additional funds or dispose of assets; and

•	it may limit our ability to fully achieve possible cost savings from the Momentive Combination.

 

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

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

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

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

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

•	incur or guarantee additional debt;

•	pay dividends and make other distributions to our stockholders;

•	create or incur certain liens;

•	make certain loans, acquisitions, capital expenditures or investments;

•	engage in sales of assets and subsidiary stock;

•	enter into sale/leaseback transactions;

•	enter into transactions with affiliates; and

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

 

In addition, 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 facilities, requires us to maintain a specified leverage ratio. At March 31, 2012, we were in compliance with our leverage ratio maintenance covenant set forth in our senior secured credit facilities. If business conditions weaken, we may not comply with our leverage ratio covenant for future periods. If we are at risk of failing to comply with our 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 these covenants, but any such measures may be unsuccessful or may be insufficient to maintain compliance with our leverage ratio covenants.

A failure to comply with the covenants contained in our senior secured credit facilities, the indentures governing notes issued or guaranteed by our subsidiaries or their 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 a leverage ratio covenant would result in an event of default under our revolving credit facility. Pursuant to the terms of the Credit Agreement, our direct parent company has the right, but not the obligation, to cure such default through the purchase of additional equity in up to three of any four consecutive quarters. If a breach of a leverage ratio covenant is not cured or waived, or if any other event of default under a senior secured credit facility occurs, the lenders under such credit agreement:

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

•	could elect to declare all borrowings outstanding under such 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 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 our notes;

 

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

If the indebtedness under our senior secured credit facilities or our existing notes were to be accelerated after an event of default, our respective assets may be insufficient to repay such indebtedness in full and our lenders could foreclose on the assets pledged under the applicable facility. Under these circumstances, a refinancing or additional financing may not be obtainable on acceptable terms, or at all, and we may be forced to explore a restructuring.

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

We may be unable to generate sufficient cash flows from operations to pay dividends or distributions to our direct parent company in amounts sufficient for it to pay its debt.

Our direct parent company has incurred substantial indebtedness, and likely will need to rely upon distributions from us to pay such indebtedness. As of March 31, 2012, the aggregate principal amount outstanding of MPM Holdings' PIK notes due 2017 was $708 million. These notes accrue interest in-kind until maturity.

We and our subsidiaries may not generate sufficient cash flows from operations to pay dividends or distributions in amounts sufficient to allow our direct parent company to pay principal and cash interest on its debt upon maturity. If our direct parent company is unable to meet its debt service obligations, it could attempt to restructure or refinance their indebtedness or seek additional equity capital. It may be unable to accomplish these actions on satisfactory terms, if at all. A default under our direct parent company's debt instruments could lead to a change of control under our debt instruments and lead to an acceleration of all outstanding loans under our senior secured credit facilities and other indebtedness.

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

Our subsidiaries own a significant portion of our consolidated assets and conduct a significant portion of our consolidated operations. Repayment of our indebtedness depends, to a significant extent, on the generation of cash flows and the ability of our subsidiaries to make cash available to us by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments on our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from subsidiaries. While there are limitations on the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make intercompany payments, these limitations are subject to certain qualifications and exceptions. In the event that we are unable to receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

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

Standard & Poor's Ratings Services and Moody's Investors Service maintain credit ratings on us and certain of our debt. Each of these ratings is currently below investment grade. Any decision by these ratings agencies to downgrade such ratings or put them on negative watch in the future could restrict our access to, and negatively impact the terms of, current or future financings and trade credit extended by our suppliers of raw materials or other vendors.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.	Defaults Upon Senior Securities.

None.

Item 4.	Mine Safety Disclosures

Not applicable.

Item 5.	Other Information

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On May 3, 2012, the Compensation Committee of the Board of Directors of Momentive Performance Materials Inc., the Compensation Committee of the Board of Managers of Momentive Performance Materials Holdings LLC, our indirect parent company (referred to herein as Momentive Holdings) and the Compensation Committee of the Board of Directors of Momentive Specialty Chemical Inc., our affiliate (referred to herein as MSC), approved the 2012 annual incentive compensation plan for the Company and MSC (the “2012 IC Plan”). Each of our named executive officers and other specified members of management are eligible to participate in the 2012 IC Plan. Any incentive compensation earned by our named executive officers, each of whom provides services to both MSC and us under the Amended and Restated Shared Services Agreement dated March 17, 2011 between us and MSC (the “Shared Services Agreement”), would be paid by the executive's employer, MSC, and allocated along with other expenses under the Shared Services Agreement. The target awards for these executives expressed as a percentage of their base salary are as follows: Mr. Morrison - 100%, Mr. Carter - 80%, Ms. Sonnett - 60%, and Messrs. Fisher and McGuire - 50%.

Under the 2012 IC Plan, our named executive officers have the opportunity to earn cash bonus compensation based upon the achievement of certain division and/or Momentive Holdings performance targets established with respect to the plan. The performance targets are established based on the following performance criteria: EBITDA (earnings before interest, taxes, depreciation and amortization) adjusted to exclude certain non-cash, certain non-recurring expenses and discontinued operations (“Segment EBITDA”), an environment, health & safety (“EH&S”) statistic that measures the rate of occupational illness and injury, cash flow, and the achievement of cost savings related to the Shared Services Agreement, which we refer to as “Synergies”. Targets for Segment EBITDA, the EH&S statistic, cash flow, and Synergies for our executive officers with non-divisional roles are based upon the results of Momentive Holdings and its subsidiaries, including our results and the results of MSC. Targets for our executive officers with divisional roles are based primarily on the division's results.

The performance criteria for participants are weighted by component. Our named executive officers have 50% of their incentive compensation tied to achieving Momentive Holdings and/or division Segment EBITDA targets, 10% tied to the achievement of global or division EH&S goals, 30% tied to the achievement of Momentive Holdings or division cash flow targets, and 10% tied to the achievement of Synergies. Minimum, target and maximum threshold targets were established for each performance criteria. The minimum threshold for Segment EBITDA is set at 80% of the target and the maximum threshold is set at 120% of the target.

The payouts for achieving the minimum thresholds are a percentage of the allocated target award for the component (30% for Segment EBITDA and 50% for the other performance measures). The payouts for achieving the maximum thresholds are 175% or 200% of the allocated target award, depending on the executive's position.

Each performance measure under the 2012 IC Plan acts independently such that a payout of one element is possible even if the minimum target threshold for another is not achieved. Any payments under the 2012 IC Plan are subject to the prior approval of audited annual financial results.

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Item 6.	Exhibits.

 

INDEX TO EXHIBITS
Exhibit Number		Description
10.33‡		Extension and Amendment to Quartz Sand Products Purchase Agreement, effective as of December 31, 2011, by and between Unimin Corporation and Momentive Performance Materials Quartz, Inc. (filed as Exhibit 10.35 to our Form S-1/A Registration Statement, filed on April 13, 2012)
10.34		Severance Pay Agreement and Release of All Claims, effective as of February 23, 2012, among Mike Modak, Momentive Performance Materials Inc. and Momentive Performance Materials Holdings Inc. (filed as Exhibit 10.35 to our Form S-1/A Registration Statement, filed on April 13, 2012)
10.35		Severance Pay Agreement and Release of All Claims, effective as of February 27, 2012, among Steve Delarge, Momentive Performance Materials Inc., Momentive Performance Materials Holdings Inc. and Momentive Performance Materials Holdings LLC (filed as Exhibit 10.35 to our Form S-1/A Registration Statement, filed on April 13, 2012)
10.36		Incremental Assumption Agreement, dated as of April 2, 2012, among Momentive Performance Materials Holdings Inc., Momentive Performance Materials Inc., Momentive Performance Materials USA Inc., Momentive Performance Materials GmbH, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent under the Amended and Restated Credit Agreement, dated as of February 10, 2011 (filed as Exhibit 10.1 to our Form 8-K, filed on April 2, 2012)
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
101.INS**		XBRL Instance Document
101.SCH		XBRL Schema Document
101.CAL		XBRL Calculation Linkbase Document
101.LAB		XBRL Label Linkbase Document
101.PRE		XBRL Presentation Linkbase Document
101.DEF		XBRL Definition Linkbase Document

____________________

‡     Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.

*    Filed herewith

**     Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised pursuant to Rule 406T of Regulation S-T that the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise not subject to liability under these sections. The financial information contained in the XBRL-related documents is “unaudited” or “unreviewed.”

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

April 12, 2013

 

	MOMENTIVE PERFORMANCE MATERIALS INC.
	BY:	/s/ WILLIAM H. CARTER
		William H. Carter
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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