MPMI 6.30.2012 10Q (1) Restated

10-Q/A 1 mpmi630201210q2restated.htm 10-Q/A MPMI 6.30.2012 10Q (1) Restated

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 June 30, 2012



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 August 8, 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 June 30, 2012 (the “Original Filing”), as originally filed with the Securities and Exchange Commission (the “SEC”) on August 8, 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 six months ended June 30, 2012 and July 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 six months ended June 30, 2012 and July 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 June 30, 2012 and December 31, 2011	4
	Condensed Consolidated Statements of Operations for the Fiscal Three and Six-Month Periods ended June 30, 2012 and July 3, 2011	5
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Fiscal Three and Six-Month Periods ended June 30, 2012 and July 3, 2011	6
	Condensed Consolidated Statements of Cash Flows for the Fiscal Six-Month Periods ended June 30, 2012 and July 3, 2011 (as restated)	7
	Condensed Consolidated Statements of Equity (Deficit) for the Fiscal Six-Month Period ended June 30, 2012	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	43

Part II	Other Information

Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Defaults Upon Senior Securities	58
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	58
Item 6.	Exhibits	59

Signatures		60

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MOMENTIVE PERFORMANCE MATERIALS INC.

Condensed Consolidated Balance Sheets (Unaudited)

(Dollar amounts in millions)



	June 30, 2012			December 31, 2011
Assets
Current assets:
Cash and cash equivalents	$	112		$	199
Accounts receivable (net of allowance for doubtful accounts of $3)	342			315
Due from affiliates	4			8
Inventories (note 6)	398			394
Prepaid expenses	14			14
Deferred income taxes (note 8)	9			10
Other current assets	43			49
Total current assets	922			989
Property and equipment, net	1,047			1,084
Other long-term assets	89			89
Deferred income taxes (note 8)	25			25
Intangible assets, net	512			542
Goodwill	423			432
Total assets	$	3,018		$	3,161
Liabilities and Deficit
Current liabilities:
Trade payables	$	307		$	308
Short-term borrowings (note 7)	4			3
Accrued expenses and other liabilities	170			166
Accrued interest	62			62
Due to affiliates	8			15
Accrued income taxes	7			2
Deferred income taxes (note 8)	20			19
Current installments of long-term debt (note 7)	30			36
Total current liabilities	608			611
Long-term debt (note 7)	2,925			2,895
Other liabilities	46			51
Pension liabilities (note 10)	293			288
Deferred income taxes (note 8)	47			52
Total liabilities	3,919			3,897
Commitments and contingencies (note 9)
Deficit:
Common stock	—			—
Additional paid-in capital	605			605
Accumulated deficit	(1,722		)	(1,569		)
Accumulated other comprehensive income	216			228
Total Momentive Performance Materials Inc.'s deficit	(901		)	(736		)
Noncontrolling interests	—			—
Total deficit	(901		)	(736		)
Total liabilities and deficit	$	3,018		$	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						Fiscal six-month period ended
	June 30, 2012			July 3, 2011			June 30, 2012			July 3, 2011
Net sales	$	627		$	728		$	1,220		$	1,388
Costs and expenses:
Cost of sales, excluding depreciation	458			486			883			903
Selling, general and administrative expenses	113			95			213			190
Depreciation and amortization expenses	48			48			94			98
Research and development expenses	17			20			35			40
Restructuring and other costs (note 3)	15			9			24			14
Operating (loss) income	(24		)	70			(29		)	143
Other income (expense):
Interest expense, net	(64		)	(65		)	(126		)	(129		)
Other income, net	8			—			11			—
Loss on extinguishment and exchange of debt	(6		)	—			(6		)	—
(Loss) income before income taxes and earnings from unconsolidated entities	(86		)	5			(150		)	14
Income taxes (note 8)	4			15			4			27
Loss before earnings from unconsolidated entities	(90		)	(10		)	(154		)	(13		)
Earnings from unconsolidated entities, net of taxes	2			—			1			—
Net loss	(88		)	(10		)	(153		)	(13		)
Net income attributable to the noncontrolling interest	—			(1		)	—			(1		)
Net loss attributable to Momentive Performance Materials Inc.	$	(88	)	$	(11	)	$	(153	)	$	(14	)

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						Fiscal six-month period ended
	June 30, 2012			July 3, 2011			June 30, 2012			July 3, 2011
Net loss	$	(88	)	$	(10	)	$	(153	)	$	(13	)
Other comprehensive income (loss), net of tax:
Foreign currency translation	17			13			(13		)	(2		)
Other comprehensive income adjustments, net	2			(1		)	1			(1		)
Other comprehensive loss	(69		)	2			(165		)	(16		)
Comprehensive income attributable to the noncontrolling interest	—			(1		)	—			(1		)
Comprehensive (loss) income attributable to Momentive Performance Materials Inc.	$	(69	)	$	1		$	(165	)	$	(17	)

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 six-month period ended
	June 30, 2012			July 3, 2011
	(as restated)			(as restated)
Cash flows from operating activities:
Net loss	$	(153	)	$	(14	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	94			98
Loss on the extinguishment of debt	6			—
Amortization of debt discount and issuance costs	9			7
Deferred income taxes	(4		)	18
Earnings from unconsolidated entities	(1		)	—
Stock-based compensation expense	—			1
Pension curtailment gain	(1		)	—
Unrealized foreign currency losses (gains)	11			(13		)
Other non-cash adjustments	(4		)	—
Changes in operating assets and liabilities:
Accounts receivable	(33		)	(44		)
Inventories	(10		)	(35		)
Due to/from affiliates	(4		)	2
Accrued income taxes	2			2
Prepaid expenses and other assets	10			(9		)
Trade payables	12			34
Accrued expenses and other liabilities	2			24
Pension liabilities	11			9
Net cash (used in) provided by operating activities	(53		)	80
Cash flows from investing activities:
Capital expenditures	(53		)	(54		)
Purchases of intangible assets	(1		)	(1		)
Net cash used in investing activities	(54		)	(55		)
Cash flows from financing activities:
Debt issuance costs	(8		)	(5		)
Increase (decrease) in short-term borrowings	1			(2		)
Proceeds from long-term debt	469			52
Payments of long-term debt	(440		)	(58		)
Net cash used in financing activities	22			(13		)
Decrease in cash and cash equivalents	(85		)	12
Effect of exchange rate changes on cash	(2		)	11
Cash and cash equivalents, beginning of period	199			250
Cash and cash equivalents, end of period	$	112		$	273
Supplemental information:
Capital expenditures included in trade payables	$	18		$	12

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)			Total equity (deficit)
Balance December 31, 2011	100	$	—	$	605	$	(1,569	)	$	228		$	(736	)
Net loss	—	—		—		(153		)	—			(153		)
Foreign currency translation adjustment—net	—	—		—		—			(13		)	(13		)
Other comprehensive income adjustments—net	—	—		—		—			1			1

Balance at June 30, 2012	100	$	—	$	605	$	(1,722	)	$	216		$	(901	)

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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 AlbanyWaterford 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; 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 six months ended June 30, 2012 and July 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.


•	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.”

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MOMENTIVE PERFORMANCE MATERIALS INC.

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

(Dollar amounts in millions)



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 June 30, 2012
Cash and cash equivalents	$	115	$	(3	)	$	112
Trade payables	310		(3		)	307



Condensed Consolidated Statements of Cash Flows:	As Previously Reported			Adjustments			As Restated
Fiscal Six-Month Period Ended June 30, 2012
Net cash used in operating activities	$	(68	)	$	15		$	(53	)
Net cash used in investing activities	(46		)	(8		)	(54		)
Effect of exchange rate changes on cash	4			(6		)	(2		)
Cash and cash equivalents at beginning of period	203			(4		)	199
Cash and cash equivalents at end of period	115			(3		)	112

Fiscal Six-Month Period Ended July 3, 2011
Net cash provided by operating activities	$	86		$	(6	)	$	80
Net cash used in investing activities	(46		)	(9		)	(55		)
Effect of exchange rate changes on cash	(2		)	13			11
Cash and cash equivalents at beginning of period	254			(4		)	250
Cash and cash equivalents at end of period	279			(6		)	273

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 June 30, 2012 and December 31, 2011, and for the fiscal three and six-month periods ended June 30, 2012 and July 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

The Company's provision for income taxes during interim reporting periods has historically been 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) for the reporting period. The Company has utilized a discrete effective tax rate method, as allowed by ASC 740-270 “Income Taxes, Interim Reporting,” to calculate taxes for the fiscal three and six-month periods ended June 30, 2012. The Company determined that as small changes in estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the fiscal three and six-month periods ended June 30, 2012.

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

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MOMENTIVE PERFORMANCE MATERIALS INC.

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

(Dollar amounts in millions)

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.

Assets and liabilities of non-U.S. operations have been translated into United States dollars at the applicable rates of exchange in effect at the end of each period and any resulting translation gains and losses are included as a separate component of shareholder’s equity in the Condensed Consolidated Balance Sheets. Revenues, expenses and cash flows have been translated at the applicable weighted average rates of exchanges in effect during the applicable period. Certain non-U.S. operations use the United States dollar as their functional currency since a majority of their activities are transacted in United States dollars. Aggregate realized and unrealized gains (losses) on foreign currency transactions for the fiscal six-month periods ended June 30, 2012 and 2011 were ($9) and $14, respectively. These amounts are included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. An additional $2 of realized losses on foreign currency transactions was recorded in conjunction with the loss on the extinguishment and exchange of debt and is recorded in other income (expense).


(d)	Use of Estimates

The preparation of the unaudited condensed consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangibles, valuation allowances for receivables, inventories, deferred income tax assets and assets and obligations related to employee benefits. Actual results could differ from those estimates.


(e)	Recently Issued Accounting Standards

Newly Adopted Accounting Standards

On January 1, 2012, the Company adopted the provisions of Accounting Standards Update No. 2011-04: Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 amended existing fair value measurement guidance and is intended to align U.S. GAAP and International Financial Reporting Standards. The guidance requires several new disclosures, including additional quantitative information about significant unobservable inputs used in Level 3 fair value measurements and a qualitative description of the valuation process for both recurring and nonrecurring Level 2 and Level 3 fair value measurements. ASU 2011-04 also requires the disclosure of all fair value measurements by fair value hierarchy level, amongst other requirements. The adoption of ASU 2011-04 did not have a material impact on the Company's unaudited Condensed Consolidated Financial Statements.

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)".

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MOMENTIVE PERFORMANCE MATERIALS INC.

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

(Dollar amounts in millions)

Newly Issued Accounting Standards

There were no newly issued accounting standards in the second quarter of 2012 applicable to the Company's unaudited Condensed Consolidated Financial Statements.


(f)	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.

(g) 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) and services and other expenses associated with transformation savings activities.

In the second quarter of 2012, in response to the uncertain economic outlook, the Company initiated significant restructuring programs with the intent to optimize its cost structure. Prior to the second quarter of 2012, the Company had recognized significant restructuring costs primarily related to the Momentive Combination. At June 30, 2012, the Company had $33 of in-process cost reduction programs savings expected to be achieved over the remaining life of the projects. The Company estimates that these restructuring cost activities will occur over the next 12 to 18 months. As of June 30, 2012, the costs expected to be incurred on restructuring activities are estimated at $18, consisting mainly of workforce reduction.

The following table summarizes restructuring information by type of cost:



	Workforce reductions			Site closure costs		Other projects		Total
Restructuring costs expected to be incurred	$	18		$	—	$	—	$	18
Cumulative restructuring costs incurred though June 30, 2012	$	28		$	—	$	—	$	28

Accrued liability at December 31, 2011	$	8		$	—	$	—	$	8
Restructuring charges	16			—		—		16
Payments	(5		)	—		—		(5		)
Balance as of June 30, 2012	$	19		$	—	$	—	$	19

Workforce reduction costs primarily relate to non-voluntary employee termination benefits and are accounted for under the guidance for nonretirement postemployment benefits or as exit and disposal costs, as applicable. During the three and six months ended June 30, 2012, charges of $12 and $16, respectively, were recorded in "Restructuring and other costs" in the unaudited Condensed Consolidated Statements of Operations. At June 30, 2012 and December 31, 2011, the Company had accrued $21 and $8, respectively, for restructuring liabilities in "Accrued expenses and other liabilities" in the unaudited Condensed Consolidated Balance Sheets. All of the restructuring activity related to the Silicones reporting segment.

For the fiscal three-month periods ended June 30, 2012 and July 3, 2011, the Company recognized other costs of $3 and $8, respectively. For the fiscal six-month periods ended June 30, 2012 and July 3, 2011, the Company recognized other costs of $8 and $11, respectively. These costs are primarily comprised of one-time payments for services and integration expenses.

(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

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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 fiscal six-month periods ended June 30, 2012 and July 3, 2011, the Company incurred approximately $75 and $86, respectively, of net costs for shared services and MSC incurred approximately $79 and $90, respectively, of net costs for shared services. Included in the net costs incurred for shared services under the Shared Services Agreement during the fiscal six-months periods ended June 30, 2012 and July 3, 2011, were net billings from MSC to MPM of $9 and $3 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 to reflect costs allocated 100% to one party. During the six-month periods ended June 30, 2012 and July 3, 2011, the Company realized approximately $13 and $9, respectively, in cost savings as a result of the Shared Services Agreement. The Company had accounts receivable of $1 and $3 as of June 30, 2012 and December 31, 2011, respectively, and accounts payable to MSC of $7 and $15 at June 30, 2012 and December 31, 2011, respectively.

Momentive Holdings purchases insurance policies which also cover the Company and MSC. Amounts are billed to the Company based on the Company's relative share of the insurance premiums. The Company had accounts payable to Momentive Holdings of approximately $1 and $1 under these arrangements at June 30, 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.

The Company sells products to various affiliated businesses (affiliates). For the fiscal three-month period ended June 30, 2012, sales to affiliates amounted to $5. Receivables from affiliates were $2 at June 30, 2012.

The Company purchases products and services from various affiliates. Purchases under these agreements amounted to $7 for the fiscal three-month period ended June 30, 2012. Payables to affiliates as of June 30, 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 $24 and $45 of supply from ASM for the fiscal three and six-month periods ended June 30, 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 and $1 for the fiscal three and six month periods ended June 30, 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

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MOMENTIVE PERFORMANCE MATERIALS INC.

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

(Dollar amounts in millions)

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



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

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

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

At June 30, 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 June 30, 2012 that would reduce the fair value receivable amount owed, if any, to the Company.

The following table summarizes the carrying amount of the Company's non-derivative financial instruments at June 30, 2012:



	Carrying Amount		Fair Value
	Carrying Amount		Level 1		Level 2		Level 3

Springing Lien Notes	$	1,329	$	—	$	998	$	—
Senior Subordinated Notes	379		—		284		—
Second Lien Senior Secured Notes	183		—		209		—
Variable Rate Term Loans	730		—		684		—
Senior Secured Notes	250		—		251		—

Total	$	2,871	$	—	$	2,426	$	—

In addition, the fair values of the $3 outstanding medium term loan, the $30 outstanding fixed asset loan, the $16 of outstanding working capital loans and the $35 of borrowings under the revolving credit facility were approximately the same as their outstanding balances. Fair values of debt classified as Level 2 are determined based on other similar financial instruments, or based upon interest rates that are currently available to the Company for the issuance of debt with similar terms and maturities. The carrying amounts of cash and cash equivalents, short term investments, accounts receivable, trade payables and accrued expenses and other liabilities are considered reasonable estimates of their fair values due to the short-term maturity of these financial instruments.


(6)	Inventories

Inventories consisted of the following at June 30, 2012 and December 31, 2011:



	June 30, 2012		December 31, 2011
Raw materials and work in process	$	127	$	135
Finished goods	271		259
Total inventories	$	398	$	394


(7)	Debt Obligations

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MOMENTIVE PERFORMANCE MATERIALS INC.

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

(Dollar amounts in millions)


(a)	Short-Term Borrowings

At June 30, 2012, the Company's short-term borrowings consisted of bank borrowings of $4 with a weighted average interest rate of 10.50%. 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 June 30, 2012, the Company had $35 of outstanding borrowings under the revolving credit facility. The outstanding letters of credit under the revolving credit facility at June 30, 2012 were $41, leaving an unused borrowing capacity of $224. Outstanding letters of credit issued under the synthetic letter of credit facility at June 30, 2012 were $32, leaving an unused capacity of $1.

In May 2012, the Company issued $250 in aggregate principal amount of 10% senior secured notes due October 2020 (the "Senior Secured Notes") at an issue price of 100%. The Company used the net proceeds to repay $240 in aggregate principal amount of existing term loans maturing May 2015 under its senior secured credit facilities, effectively extending its debt maturity profile. The Company recognized a loss of $6 on this extinguishment of debt. The Senior Secured Notes are guaranteed on a senior secured basis by the Company's existing domestic subsidiaries that are guarantors under the senior secured credit facilities and will be guaranteed on the same basis by any future domestic subsidiaries that guarantee any debt of the Company or of any guarantor of the Senior Secured Notes. The Senior Secured Notes are secured by a security interest in certain assets of the Company and such U.S. subsidiaries, which interest is junior in priority to the liens on substantially the same collateral securing the existing senior secured credit facilities and senior in priority to the liens on substantially the same collateral securing the 12 ¹/2% Second-Lien Senior Secured Notes due 2014.

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 were modified in connection with the incurrence of the new term loans), including the Senior Secured Leverage Ratio maintenance covenant.

At June 30, 2012, the Company was in compliance with the covenants of all long-term debt agreements.

A summary of long-term debt as of June 30, 2012 and December 31, 2011 is as follows:

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MOMENTIVE PERFORMANCE MATERIALS INC.

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

(Dollar amounts in millions)



	June 30, 2012		December 31, 2011
JPMorgan Chase Bank, N.A. $300,000 revolving credit facility. Matures December 3, 2012. Interest varies at LIBOR plus 3.75%. The interest rate as of June 30, 2012 was 4.0%.	$	35	$	—
JPMorgan Chase Bank, N.A. term loan tranche B-1-A. Matures December 4, 2013. Interest is payable monthly and 1% per annum principal payments are payable quarterly. Interest varies at LIBOR plus 2.25%. The interest rate as of December 31, 2011 was 2.563%.	—		66
JPMorgan Chase Bank, N.A. term loan tranche B-1-B. Matures May 5, 2015. Interest is payable monthly and 1% per annum principal payments are payable quarterly. Interest varies at LIBOR plus 3.50%. The interest rate as of June 30, 2012 and December 31, 2011 was 3.75% and 3.813%, respectively.	192		433
JPMorgan Chase Bank, N.A. term loan tranche B-2-A denominated in Euros. Matures December 4, 2013. Interest is payable monthly and 1% per annum principal payments are payable quarterly. Interest varies at Euro LIBOR plus 2.25%. The interest rate as of December 31, 2011 was 3.447%.	—		110
JPMorgan Chase Bank, N.A. term loan tranche B-2-B denominated in Euros. Matures May 5, 2015. Interest is payable monthly and 1% per annum principal payments are payable quarterly. Interest varies at Euro LIBOR plus 3.50%. The interest rate as of June 30, 2012 and December 31, 2011 was 3.88% and 4.697%, respectively.	372		382
JPMorgan Chase Bank, N.A. term loan tranche B-3 . Matures May 5, 2015. Interest is payable monthly and 1% per annum principal payments are payable quarterly. Interest varies at LIBOR plus 3.50%. The interest rate as of June 30, 2012 and December 31, 2011 was 3.75% and 3.813%, respectively..	166		—
9.0% Springing Lien Dollar Notes. Matures on January 15, 2021. Interest is payable semi-annually at 9.0%.	1,161		1,161
Springing Lien Euro Notes. Matures January 15, 2021. Interest is payable semi-annually at 9.5%.	168		171
10.0% Senior Secured Notes. Matures on October 15, 2020. Interest is payable semi-annually at 10.0%	250		—
Senior Subordinated Notes. Matures December 1, 2016. Interest is payable semi-annually at a coupon rate of 11.5%, with a yield-to-maturity of 11.68% as the notes were issued at a discount of $7.	379		379
Second-Lien Senior Secured Notes. Matures June 15, 2014. Interest is payable semi-annually in cash at 12.5%.	183		179
Agricultural Bank of China Fixed Asset Loan denominated in RMB. Matures June 30, 2015. Interest on borrowings is based on 101% of the People's Bank of China reference rate. The weighted average interest rate at June 30, 2012 and December 31 ,2011 was 6.51%. Interest is payable quarterly.	30		30
Agricultural Bank of China Revolving Working Capital Loan denominated in RMB. Matures June 30, 2012. Interest on borrowings is based on 105% of the People's Bank of China reference rate. The weighted average interest rate at June 30, 2012 and December 31, 2011 was 6.88%. Interest is payable quarterly.	16		16
India Bank Medium Term Loan denominated in INR. Matures June 20, 2015. Interest on borrowings is set annually and is based on 99.5% of India Bank’s Benchmark Prime Lending Rate plus a Tenor Fee of 0.5%. The interest rate at June 30, 2012 and December 31, 2011 was 14.75% and 15.00%, respectively. Interest is payable monthly.	3		4
Total long-term debt	2,955		2,931
Less current installments	30		36
Long-term debt, excluding current installments	$	2,925	$	2,895


(8)	Income Taxes

The effective tax rate was (5)% and 300% for the fiscal three-month periods ended June 30, 2012 and July 3, 2011, respectively. The effective tax rate was (3)% and 193% for the fiscal six-month periods ended June 30, 2012 and July 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 and six-month periods ended June 30, 2012, income taxes include discrete tax adjustments of $0 and $0, respectively. For the fiscal three and six-month periods ended July 3, 2011, income taxes include unfavorable discrete tax adjustments of $6 and $14, 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.

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MOMENTIVE PERFORMANCE MATERIALS INC.

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

(Dollar amounts in millions)

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 $374, which could result in a tax obligation of $132, based on currency exchange rates as of June 30, 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.

(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 June 30, 2012 and December 31, 2011, the Company had recognized obligations of $6 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 and six-month periods ended June 30, 2012 and July 3, 2011:



	Pension						Postretirement
	Fiscal three-month period ended
	June 30, 2012			July 3, 2011			June 30, 2012		July 3, 2011
Service cost	$	7		$	7		$	—	$	—
Interest cost	3			3			1		1
Amortization of prior service cost (benefit)	—			—			1		1
Expected return on plan assets	(2		)	(2		)	—		—
Other	(1		)	—			—		—
Total	$	7		$	8		$	2	$	2



	Pension						Postretirement
	Fiscal six-month period ended
	June 30, 2012			July 3, 2011			June 30, 2012		July 3, 2011
Service cost	$	14		$	13		$	1	$	1
Interest cost	6			5			2		2
Amortization of prior service cost (benefit)	—			—			1		1
Expected return on plan assets	(4		)	(3		)	—		—
Other	—			—			—		—
Total	$	16		$	15		$	4	$	4

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MOMENTIVE PERFORMANCE MATERIALS INC.

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

(Dollar amounts in millions)

In 2012, the Company expects to contribute approximately $16 and $3 to the Company’s Domestic and Foreign plans, respectively. The Company contributed $4 and $8 to its Domestic plans during both the fiscal three and six-month periods ended June 30, 2012.

The Company's U.S. defined benefit plan provides benefits to substantially all U.S. employees based on the greater of a formula recognizing career earnings or a formula recognizing length of service and final average earnings. Certain benefit

provisions are subject to collective bargaining agreements with U.S. labor unions. In June 2012, the Company announced that benefits under the U.S. defined benefit plan will be frozen effective as of August 31, 2012 for all U.S. employees except those subject to such collective bargaining agreements. As a result of this action, the Company remeasured its pension plan obligations for the U.S. defined benefit plan based on actuarially determined estimates, using a June 30, 2012 measurement date. This remeasurement resulted in the Company recognizing a curtailment gain of $1 on domestic pension benefits during the fiscal three-month period ended June 30, 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 June 30, 2012:
Net sales (a)	$	568		$	59	$	—		$	627
Operating income (loss) (b)	(19		)	6		(11		)	(24		)
Depreciation and amortization	41			7		—			48
Capital expenditures (c)	19			5		—			24



	Silicones		Quartz		Corporate and other items (d)			Total
Fiscal three-month period ended July 3, 2011:
Net sales (a)	$	640	$	88	$	—		$	728
Operating income (loss) (b)	56		22		(8		)	70
Depreciation and amortization	41		7		—			48
Capital expenditures (c)	22		5		—			27



	Silicones			Quartz		Corporate and other items (d)			Total
Fiscal six-month period ended June 30, 2012:
Net sales (a)	$	1,104		$	116	$	—		$	1,220
Operating income (loss) (b)	(12		)	8		(25		)	(29		)
Depreciation and amortization	81			13		—			94
Capital expenditures (c)	35			10		—			45

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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 six-month period ended July 3, 2011:
Net sales (a)	$	1,212	$	176	$	—		$	1,388
Operating income (loss) (b)	107		44		(8		)	143
Depreciation and amortization	84		14		—			98
Capital expenditures (c)	37		8		—			45

________________


(a)	There were no intersegment sales during the fiscal three and six-month periods ended June 30, 2012 or July 3, 2011.


(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				Fiscal six-month period ended
	June 30, 2012		July 3, 2011		June 30, 2012		July 3, 2011
Net sales:
United States	$	197	$	221	$	382	$	436
Canada	11		11		21		23
Pacific	197		226		375		418
Europe	195		240		387		453
Mexico and Brazil	27		30		55		58
	$	627	$	728	$	1,220	$	1,388



	June 30, 2012		December 31, 2011
Total long-lived assets:
United States	$	561	$	579
Canada	19		18
Pacific	794		826
Europe	602		628
Mexico and Brazil	6		7
	$	1,982	$	2,058

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

As of June 30, 2012, the Company had outstanding $250 in aggregate principal amount of senior secured notes, $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 June 30, 2012 and December 31, 2011, the Condensed Consolidated Statements of Operations for the fiscal three and six-month periods ended June 30, 2012 and July 3, 2011 and Condensed Consolidated Statements of Cash Flows for the fiscal six-month periods ended June 30, 2012 and July 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.

The Company revised its condensed consolidating balance sheets as of June 30, 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 June 30, 2012 and December 31, 2011, the correction resulted in an increase of $169 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 sheets as of June 30, 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 June 30, 2012 and December 31, 2011, the revisions resulted in an increase of $107 and $20, respectively, to the "Intercompany borrowings" asset with a corresponding increase to the "Intercompany borrowings" liability. In the Guarantor Subsidiaries column, as of June 30, 2012 and December 31, 2011, the revisions resulted in an increase of $20 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 June 30, 2012 and December 31, 2011, the revisions resulted in an increase of $83 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.

Condensed Consolidating Balance Sheet as of June 30, 2012:



	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	7		$	—		$	105		$	—		$	112
Accounts receivable	—			86			256			—			342
Due from affiliates	—			78			22			(96		)	4
Inventories				184			214			—			398
Prepaid expenses	—			9			5			—			14
Deferred income taxes	—			1			8			—			9
Other current assets	—			8			35			—			43
Total current assets	7			366			645			(96		)	922
Property and equipment, net	—			481			566			—			1,047
Other long-term assets	57			9			23			—			89
Deferred income taxes	—			—			25			—			25
Investment in affiliates	1,386			—			—			(1,386		)	—
Intercompany borrowing	107			1,123			123			(1,353		)	—
Intangible assets, net	—			80			432			—			512
Goodwill	—			—			423			—			423
Total assets	$	1,557		$	2,059		$	2,237		$	(2,835	)	$	3,018
Liabilities and Equity (Deficit)
Current liabilities:
Trade payables	$	—		$	81		$	226		$	—		$	307
Short-term borrowings	—			—			4			—			4
Accrued expenses and other liabilities	1			72			97			—			170
Accrued interest	62			—			—			—			62
Due to affiliates	5			21			78			(96		)	8
Accrued income taxes	—			—			7			—			7
Deferred income taxes	—			—			20			—			20
Current installments of long-term debt	—			—			30			—			30
Total current liabilities	68			174			462			(96		)	608
Long-term debt	2,141			35			749			—			2,925
Other liabilities	—			7			39			—			46
Pension liabilities	—			188			105			—			293
Intercompany Borrowings	249			100			1,004			(1,353		)	—
Deferred income taxes	—			—			47			—			47
Accumulated losses from unconsolidated subsidiaries in excess of investment	—			169			—			(169		)	—
Total liabilities	2,458			504			2,406			(1,449		)	3,919
Equity (deficit):
Common stock	—			—			—			—			—
Additional paid-in capital	605			1,939			532			(2,471		)	605
Accumulated deficit	(1,722		)	(769		)	(964		)	1,733			(1,722		)
Accumulated other comprehensive income	216			216			263			(479		)	216
Total Momentive Performance Materials Inc.’s equity (deficit)	(901		)	1,386			(169		)	(1,217		)	(901		)
Noncontrolling interests	—			—			—			—			—
Total equity (deficit)	(901		)	1,386			(169		)	(1,217		)	(901		)
Total liabilities and equity (deficit)	$	1,557		$	1,890		$	2,237		$	(2,666	)	$	3,018

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 from unconsolidated subsidiaries in excess of investment	—			85			—			(85		)	—
Total liabilities	2,269			537			2,546			(1,455		)	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		)



Total liabilities and equity (deficit)	$	1,533	$	1,952	$	2,461	$	(2,785	)	$	3,161

Condensed Consolidating Statements of Operations for the fiscal three-month period ended June 30, 2012:



	Fiscal three-month period ended June 30, 2012:
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	270		$	488		$	(131	)	$	627
Costs and expenses:
Cost of sales, excluding depreciation	—			201			388			(131		)	458
Selling, general and administrative expenses	(7		)	72			63			—			128
Depreciation and amortization expenses	—			21			27			—			48
Research and development expenses	—			12			5			—			17
Operating income (loss)	7			(36		)	5			—			(24		)
Other income (expense):
Interest income	—			25			1			(25		)	1
Interest expense	(54		)	(2		)	(34		)	25			(65		)
Other income (expense), net	—			—			8			—			8
Gain (loss) on extinguishment and exchange of debt	4			5			(15		)	—			(6		)
Income (loss) before income taxes and earnings from unconsolidated entities	(43		)	(8		)	(35		)	—			(86		)
Income taxes (benefit)	—			(1		)	5			—			4
Income (loss) before earnings from unconsolidated entities	(43		)	(7		)	(40		)	—			(90		)
Earnings from unconsolidated entities	(45		)	(38		)	2			83			2
Net income (loss)	(88		)	(45		)	(38		)	83			(88		)
Net income (loss) attributable to noncontrolling interests	—			—			—			—			—
Net income (loss) attributable to Momentive Performance Materials Inc.	$	(88	)	$	(45	)	$	(38	)	$	83		$	(88	)
Comprehensive (loss) income	$	(69	)	$	(26	)	$	(21	)	$	47		$	(69	)

Condensed Consolidating Statements of Operations for the fiscal three-month period ended July 3, 2011:



	Fiscal three-month period ended July 3, 2011:
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	300		$	571		$	(143	)	$	728
Costs and expenses:
Cost of sales, excluding depreciation	—			207			422			(143		)	486
Selling, general and administrative expenses	9			47			48			—			104
Depreciation and amortization expenses	—			19			29			—			48
Research and development expenses	—			13			7			—			20
Operating income (loss)	(9		)	14			65			—			70
Other income (expense):
Interest income	—			26			2			(28		)	—
Interest expense	(53		)	(3		)	(37		)	28			(65		)
Other income (expense), net	—			—			—			—			—
Income (loss) before income taxes and earnings from unconsolidated entities	(62		)	37			30			—			5
Income taxes (benefit)	—			—			15			—			15
Income (loss) before earnings from unconsolidated entities	(62		)	37			15			—			(10		)
Earnings from unconsolidated entities	51			14			—			(65		)	—
Net income (loss)	(11		)	51			15			(65		)	(10		)
Net income (loss) attributable to noncontrolling interests	—			—			(1		)	—			(1		)
Net income (loss) attributable to Momentive Performance Materials Inc.	$	(11	)	$	51		$	14		$	(65	)	$	(11	)
Comprehensive (loss) income	$	1		$	63		26			$	(89	)	$	1

Condensed Consolidating Statements of Operations for the fiscal six-month period ended June 30, 2012:



	Fiscal six-month period ended June 30, 2012:
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	522		$	940		$	(242	)	$	1,220
Costs and expenses:
Cost of sales, excluding depreciation	—			393			732			(242		)	883
Selling, general and administrative expenses	6			123			108			—			237
Depreciation and amortization expenses	—			39			55			—			94
Research and development expenses	—			24			11			—			35
Operating income (loss)	(6		)	(57		)	34			—			(29		)
Other income (expense):
Interest income	—			51			2			(52		)	1
Interest expense	(106		)	(5		)	(68		)	52			(127		)
Other income (expense), net	—			—			11			—			11
Gain (loss) on extinguishment and exchange of debt	4			5			(15		)	—			(6		)
Income (loss) before income taxes and earnings from unconsolidated entities	(108		)	(6		)	(36		)	—			(150		)
Income taxes (benefit)	—			(1		)	5			—			4
Income (loss) before earnings from unconsolidated entities	(108		)	(5		)	(41		)	—			(154		)
Earnings from unconsolidated entities	(45		)	(40		)	1			85			1
Net income (loss)	(153		)	(45		)	(40		)	85			(153		)
Net income (loss) attributable to noncontrolling interests	—			—			—			—			—
Net income (loss) attributable to Momentive Performance Materials Inc.	$	(153	)	$	(45	)	$	(40	)	$	85		$	(153	)
Comprehensive (loss) income	$	(165	)	$	(57	)	$	(53	)	$	110		$	(165	)

Condensed Consolidating Statements of Operations for the fiscal six-month period ended July 3, 2011:



	Fiscal six-month period ended July 3, 2011:
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	—		$	605		$	1,081		$	(298	)	$	1,388
Costs and expenses:
Cost of sales, excluding depreciation	—			411			790			(298		)	903
Selling, general and administrative expenses	25			93			86			—			204
Depreciation and amortization expenses	—			38			60			—			98
Research and development expenses	—			27			13			—			40
Operating income (loss)	(25		)	36			132			—			143
Other income (expense):
Interest income	—			52			4			(56		)	—
Interest expense	(107		)	(6		)	(72		)	56			(129		)
Other income (expense), net	3			(1		)	(2		)	—			—
Income (loss) before income taxes and earnings from unconsolidated entities	(129		)	81			62			—			14
Income taxes (benefit)	—			—			27			—			27
Income (loss) before earnings from unconsolidated entities	(129		)	81			35			—			(13		)
Earnings from unconsolidated entities	115			34			—			(149		)	—
Net income (loss)	(14		)	115			35			(149		)	(13		)
Net income (loss) attributable to noncontrolling interests	—			—			(1		)	—			(1		)
Net income (loss) attributable to Momentive Performance Materials Inc.	$	(14	)	$	115		$	34		$	(149	)	$	(14	)
Comprehensive (loss) income	$	(17	)	$	112		$	31		$	(143	)	$	(17	)

Condensed Consolidating Statement of Cash Flows for the fiscal six-month periods ended June 30, 2012:



	Fiscal six-month period ended June 30, 2012:
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries				Eliminations				Consolidated
Net cash provided by (used in) operating activities	$	(65	)	$	(3	)	$	63			$	(48	)		$	(53	)
Cash flows from investing activities:
Capital expenditures	—			(25		)	(28		)		—				(53		)
Purchases of intangible assets	—			(1		)	—				—				(1		)
Proceeds from return of capital	—			24			—				(24		)		—
Net cash used in investing activities	—			(2		)	(28		)	—	(24		)	—	(54		)
Cash flows from financing activities:
Debt issuance costs	(5		)	—			(3		)		—				(8		)
Increase in short-term borrowings	—			—			1				—				1
Proceeds from long-term debt	275			60			134				—				469
Dividends paid within MPM Inc.	—			(48		)	—				48				—
Payments of long-term debt	(25		)	(25		)	(390		)		—				(440		)
Return of capital	—			—			(24		)		24				—
Net borrowings with affiliates	(213		)	18			195				—				—
Net cash provided by (used in) financing activities	32			5			(87		)		72				22
Increase (decrease) in cash and cash equivalents	(33		)	—			(52		)		—				(85		)
Effect of exchange rate changes on cash	—			—			(2		)		—				(2		)
Cash and cash equivalents, beginning of period	40			—			159				—				199
Cash and cash equivalents, end of period	$	7		$	—		$	105			$	—			$	112

Condensed Consolidating Statement of Cash Flows for the fiscal six-month periods ended July 3, 2011:



	Fiscal six-month period ended July 3, 2011:
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	(14	)	$	89		$	57		$	(52	)	$	80
Cash flows from investing activities:
Capital expenditures	—			(26		)	(28		)	—			(54		)
Purchases of intangible assets	—			(1		)	—			—			(1		)
Net cash used in investing activities	—			(27		)	(28		)	—			(55		)
Cash flows from financing activities:
Debt issuance costs	(5		)	—			—			—			(5		)
Dividends paid within MPM Inc.	—			(49		)	(3		)	52			—
Decrease in short-term borrowings	—			—			(2		)	—			(2		)
Proceeds from long-term debt	—			—			52			—			52
Payments of long-term debt	—			—			(58		)	—			(58		)
Net borrowings between affiliates	59			(13		)	(46		)	—			—
Net cash provided by (used in) financing activities	54			(62		)	(57		)	52			(13		)
Increase (decrease) in cash and cash equivalents	40			—			(28		)	—			12
Effect of exchange rate changes on cash	—			—			11			—			11
Cash and cash equivalents, beginning of period	28			—			222			—			250
Cash and cash equivalents, end of period	$	68		$	—		$	205		$	—		$	273


(13)	Subsequent Events

On July 17, 2012, the Board of Directors of the Company approved plans to realign the Company's businesses globally. These actions are part of the Company's initiatives to better service its customers and improve its cost position, while continuing to invest in global growth opportunities. As a result of the realignment, the Company expects to reduce its workforce by approximately 6%.

In connection with the workforce reductions, the Company expects to incur one-time pretax charges related to severance and other benefits of approximately $30, $14 to $18 of which is anticipated to be recognized in 2012 with the remainder to be recognized in 2013. Substantially all of these charges will result in cash expenditures.

The Company has evaluated subsequent events from the balance sheet date through August 8, 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 six months ended June 30, 2012 and July 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 segment 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 June 30, 2012, we realized $48 million of these savings on a run-rate basis, and anticipate fully realizing the remaining anticipated savings over the next 6 to 12 months.

First Half 2012 Overview


•	Net sales decreased $168 million in the first half of 2012, as compared to the same period in 2011, primarily due to a decrease in price and mix shift of $125 million, unfavorable exchange rate fluctuations of $23 million and a decrease in volume of $20 million.


•	Operating loss in the first half of 2012 was $29 million, down $172 million when compared to operating income of $143 million from the same period in 2011 primarily driven by inflation in raw material and processing costs, mix shift, unfavorable exchange rate fluctuations and decreases in price and volume.

•

During the first half of 2012, we realized approximately $13 million and $3 million in cost savings as a result of the Shared Services Agreement with MSC and other initiatives, respectively. As of June 30, 2012, we have approximately $21 million and $33 million of in-process cost savings that we expect to achieve over the next 12 to 18 months in connection with the Shared Services Agreement and other initiatives, respectively.

•

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 $178 million aggregate U.S. dollar equivalent principal amount of existing term loans maturing December 2013, effectively extending these maturities by approximately two years . The new term loans bear interest at an adjusted LIBOR rate plus an applicable margin of 3.50%.


•	In May 2012, we issued $250 million aggregate principal amount of 10% senior secured notes due 2020 at an issue price of 100% (the "Senior Secured Notes"). We used the net proceeds to repay $240 million aggregate principal amount of our existing term loans maturing May 2015 under our senior secured credit facilities, effectively extending these maturities by approximately five years.

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.

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the second quarter, as compared to the first quarter of 2012, but business continues to be weak as a result of the cyclical downturn in the semiconductor capital equipment industry. We expect the continued volatility in the global financial markets, the ongoing debt crisis in Europe, economic softness in China and other Asia Pacific countries and general lack of consumer confidence, as well as continued over-capacity in our industry, will continue to adversely impact our results in the second half of the year.

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 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 with $33 million of in-process cost savings. We continue to evaluate additional actions that could lead to more significant restructuring, exit and disposal costs and asset impairments.

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.

We remain optimistic about our position in the global markets when they recover to more stable conditions.

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 and six-month periods ended June 30, 2012 and July 3, 2011:

Fiscal three-month period ended June 30, 2012 compared to fiscal three-month period ended July 3, 2011 (Unaudited)

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(in millions)	Fiscal three-month period ended
	June 30, 2012					July 3, 2011
Net sales	$	627		100	%	$	728		100	%
Costs and expenses:
Cost of sales, excluding depreciation	458			73	%	486			67	%
Selling, general and administrative expenses & depreciation	161			26	%	143			20	%
Research and development expenses	17			3	%	20			3	%
Restructuring and other costs	15			2	%	9			1	%
Operating (loss) income	(24		)	(4	)%	70			10	%
Other income (expense)
Interest expense, net	(64		)	(10	)%	(65		)	(9	)%
Other income, net	8			—		—			—	%
Loss on extinguishment and exchange of debt	(6		)	—		—			—	%
(Loss) income before income taxes and earnings from unconsolidated entities	(86		)	(14	)%	5			1	%
Income taxes	4			1	%	15			2	%
Loss before earnings from unconsolidated entities	(90		)	(14	)%	(10		)	(1	)%
Earnings from unconsolidated entities, net of tax	2			—		—			—	%
Net loss	(88		)	(14	)%	(10		)	(1	)%
Net income attributable to the noncontrolling interest	—			—		(1		)	—	%
Net loss attributable to Momentive Performance Materials Inc.	$	(88	)	(14	)%	$	(11	)	(2	)%
Net Sales by Segment
Silicones	$	568		91	%	$	640		88	%
Quartz	59			9	%	88			12	%
Total	$	627		100	%	$	728		100	%

Net Sales. Net sales in the fiscal three-month period ended June 30, 2012 were $627 million, compared to $728 million for the fiscal three-month period ended July 3, 2011 (the "second quarter in 2011"), a decrease of $101 million or 14%. The decrease was primarily due to a decrease in price and mix shift of $76 million, exchange rate fluctuations of $22 million and a decrease in volume of $3 million.

Net sales for our Silicones segment in the fiscal three-month period ended June 30, 2012 were $568 million, compared to $640 million for the second quarter in 2011, a decrease of $72 million or 11%. The decrease was primarily due to a decrease in price and mix shift of $77 million and exchange rate fluctuations of $21 million, partially offset by an increase in volume of $26 million. Our Silicones segment was negatively impacted by lower sales in the automotive, electronics and industrial sectors. Compared to the first quarter of 2012, net sales for our Silicones segment increased by $32 million primarily due to an increase in volume.

Net sales for our Quartz segment in the fiscal three-month period ended June 30, 2012 were $59 million, compared to $88 million for the second quarter in 2011, a decrease of $29 million or 33%. The decrease was due to lower volumes reflecting a downturn in demand for semiconductor related products. Compared to the first quarter of 2012, net sales for our Quartz segment increased by $2 million due to a slight increase in volume.

Cost of Sales, Excluding Depreciation. Cost of sales, excluding depreciation, in the fiscal three-month period ended June 30, 2012 was $458 million, compared to $486 million for the second quarter in 2011, a decrease of $28 million or 6%. The decrease was primarily due to exchange rate fluctuations of $21 million and the impact of lower sales, partially offset by inflation in raw material and processing costs of $17 million and lower factory leverage.

Cost of sales, excluding depreciation, for our Silicones segment was $421 million, compared to $440 million for the second quarter in 2011, a decrease of $19 million or 4%. The decrease was primarily due to exchange rate fluctuations of $20 million and the impact of lower sales, partially offset by inflation in raw material and processing costs of $15 million and lower factory leverage.

Cost of sales, excluding depreciation, for our Quartz segment was $37 million for the fiscal three-month period ended June 30, 2012, compared to $46 million in the second quarter in 2011, a decrease of $9 million or 20%. The decrease was

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primarily due to lower volume of $15 million, partially offset by inflation in raw material and processing costs of $2 million and lower factory leverage.

Selling, General and Administrative Expenses. Selling, general and administrative expenses in the fiscal three-month period ended June 30, 2012 were $161 million, compared to $143 million for the second quarter in 2011. The increase was due to exchange rate fluctuations of $13 million (primarily relating to the translation of debt denominated in a currency other than the functional currency) and inflation of $2 million, partially offset by savings realized in connection with the Shared Services Agreement with MSC of $3 million.

Research and Development Expenses. Research and development expenses in the fiscal three-month period ended June 30, 2012 were $17 million, compared to $20 million for the second quarter in 2011, a decrease of $3 million or 15%. 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 June 30, 2012 were $15 million, compared to $9 million for the second quarter in 2011. For the fiscal three-month period ended June 30, 2012, these costs were comprised of restructuring costs (primarily severance payments associated with workforce reductions) of $12 million and other costs (primarily one-time payments for services and integration costs) of $3 million. For the fiscal three-month period ended July 3, 2011, these costs were comprised of restructuring costs (primarily severance payments associated with workforce reductions) of $1 million and other costs (primarily one-time payments for services and integration costs) of $8 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 June 30, 2012 was $64 million, compared to $65 million for the second quarter in 2011, a decrease of $1 million or 2%.

Other Income, Net. Other income, net in the fiscal three-month period ended June 30, 2012 was $8 million, compared to $0 million for the second quarter in 2011. Other income, net during the fiscal three-month period ended June 30, 2012, was primarily the result of gain from the sale of a building lease option to a third party.

Loss on Extinguishment and Exchange of Debt. In connection with our debt refinancing transactions in April and May 2012, we recognized a loss on the extinguishment and exchange of debt of $6 million.

Income Taxes. The effective tax rate was (5)% and 300% for the fiscal three-month periods ended June 30, 2012 and July 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 June 30, 2012 and July 3, 2011 included unfavorable discrete tax adjustments of $0 and $6 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 $374 million, which could result in a tax obligation of $132 million, based on currency exchange rates as of June 30, 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 June 30, 2012 was $88 million, compared to $11 million for the second quarter in 2011. The change was a result of the effects described above.

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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 six-month periods ended June 30, 2012 and July 3, 2011:

Fiscal six-month periods ended June 30, 2012 compared to fiscal six-month periods ended July 3, 2011 (Unaudited)



(in millions)	Fiscal six-month periods ended
	June 30, 2012					July 3, 2011
Net sales	$	1,220		100	%	$	1,388		100	%
Costs and expenses:
Cost of sales, excluding depreciation	883			72	%	903			65	%
Selling, general and administrative expenses & depreciation	307			25	%	288			21	%
Research and development expenses	35			3	%	40			3	%
Restructuring and other costs	24			2	%	14			1	%
Operating (loss) income	(29		)	(2	)%	143			10	%
Other income (expense)
Interest expense, net	(126		)	(10	)%	(129		)	(9	)%
Other income, net	11			—		—			—	%
Loss on extinguishment and exchange of debt	(6		)	—		—			—	%
(Loss) income before income taxes and earnings from unconsolidated entities	(150		)	(12	)%	14			1	%
Income taxes	4			—	%	27			2	%
Loss before earnings from unconsolidated entities	(154		)	(13	)%	(13		)	(1	)%
Earnings from unconsolidated entities, net of tax	1			—		—			—	%
Net loss	(153		)	(13	)%	(13		)	(1	)%
Net income attributable to the noncontrolling interest	—			—		(1		)	—	%
Net loss attributable to Momentive Performance Materials Inc.	$	(153	)	(13	)%	$	(14	)	(1	)%
Net Sales by Segment
Silicones	$	1,104		90	%	$	1,212		87	%
Quartz	116			10	%	176			13	%
Total	$	1,220		100	%	$	1,388		100	%

Net Sales. Net sales in the fiscal six-month period ended June 30, 2012 were $1,220 million, compared to $1,388 million for the fiscal six-month period ended July 3, 2011 (the "first half of 2011"), a decrease of $168 million or 12%. The decrease was primarily due to a decrease in price and mix shift of $125 million, exchange rate fluctuations of $23 million and a decrease in volume of $20 million.

Net sales for our Silicones segment in the fiscal six-month period ended June 30, 2012 were $1,104 million, compared to $1,212 million for the first half of 2011, a decrease of $108 million or 9%. The decrease was primarily due to a decrease in price and mix shift of $126 million and exchange rate fluctuations $22 million, partially offset by an increase in volume of $40 million. Sales in our Silicones segment were negatively impacted by lower sales in the automotive, electronics and industrial sectors.

Net sales for our Quartz segment in the fiscal six-month period ended June 30, 2012 were $116 million, compared to $176 million for the first half in 2011, a decrease of $60 million or 34%. The decrease was due to lower volumes reflecting a downturn in demand for semiconductor related products.

Cost of Sales, Excluding Depreciation. Cost of sales, excluding depreciation, in the fiscal six-month period ended June 30, 2012 was $883 million, compared to $903 million for the first half of 2011, a decrease of $20 million or 2%. The decrease was primarily due to exchange rate fluctuations of $22 million and the impact of lower sales, partially offset by inflation in raw material and processing costs of $47 million and lower factory leverage.

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Cost of sales, excluding depreciation, for our Silicones segment was $811 million, compared to $811 million for the first half of 2011. Impacting cost of sales, excluding depreciation were exchange rate fluctuations of $21 million and the impact of lower sales, partially offset by inflation in raw material and processing costs of $44 million and lower factory leverage.

Cost of sales, excluding depreciation, for our Quartz segment was $72 million for the fiscal six-month period ended June 30, 2012, compared to $92 million in the first half in 2011, a decrease of $20 million or 21%. The decrease was primarily due to lower volume of $31 million, partially offset by inflation in raw material and processing costs of $3 million and lower factory leverage.

Selling, General and Administrative Expenses. Selling, general and administrative expenses in the fiscal six-month period ended June 30, 2012 were $307 million, compared to $288 million for the first half of 2011. The increase was due to exchange rate fluctuations of $20 million (primarily relating to the translation of debt denominated in a currency other than the functional currency) and inflation of $3 million, partially offset by savings realized in connection with the Shared Services Agreement with MSC of $7 million and lower depreciation of $3 million.

Research and Development Expenses. Research and development expenses in the fiscal six-month period ended June 30, 2012 were $35 million, compared to $40 million for the first half of 2011, a decrease of $5 million or 13%. The decrease was primarily related to the timing of new projects.

Restructuring and Other Costs. Restructuring and other costs in the fiscal six-month period ended June 30, 2012 were $24 million, compared to $14 million for the first half of 2011. For the fiscal six-month period ended June 30, 2012, these costs were comprised of restructuring costs (primarily severance payments associated with workforce reductions) of $16 million and other costs (primarily one-time payments for services and integration costs) of $8 million. For the fiscal six-month period ended July 3, 2011, these costs were comprised of restructuring costs (primarily severance payments associated with workforce reductions) of $3 million and other costs (primarily one-time payments for services and integration costs) of $11 million. See Note 3 to the condensed consolidated financial statements for additional information.

Interest Expense, Net. Interest expense, net in the fiscal six-month period ended June 30, 2012 was $126 million, compared to $129 million for the first half of 2011, a decrease of $3 million or 3%.

Other Income, Net. Other income, net in the fiscal six-month period ended June 30, 2012 was $11 million, compared to $0 million for the first half of 2011. Other income, net during the fiscal six-month period ended June 30, 2012 was primarily the result of a gain from the sale of a building lease option to a third party and a royalty payment received from our siloxane joint venture.

Loss on Extinguishment and Exchange of Debt. In connection with our debt refinancing transactions in April and May 2012, we recognized a loss on the extinguishment and exchange of debt of $6 million.

Income Taxes. The effective tax rate was (3)% and 193% for the fiscal six-month periods ended June 30, 2012 and July 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 six-month periods ended June 30, 2012 and July 3, 2011 included unfavorable discrete tax adjustments of $0 and $14 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.

Net Loss Attributable to Momentive Performance Materials Inc. Net loss attributable to Momentive Performance Materials Inc. for the fiscal six-month period ended June 30, 2012 was $153 million, compared to $14 million for the first half of 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 $2,955 million of indebtedness at June 30, 2012. Accordingly, we have significant debt service obligations. In addition, at June 30, 2012, we had $336 million in liquidity, including $112 million of unrestricted cash and cash equivalents (of which $105 million is maintained in foreign jurisdictions), and $224 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 June 30, 2012 is as follows:



(dollars in millions)	June 30, 2012			% of LTM Net Sales		December 31, 2011			% of LTM Net Sales

Accounts receivable	$	342		13.9	%	$	315		11.9	%
Inventories	398			16.1	%	394			14.9	%
Trade payables	(307		)	(12.4	)%	(308		)	(11.7	)%
Net working capital	$	433		17.6	%	$	401		15.1	%

The increase in net working capital of $32 million from December 31, 2011 was due primarily to an increase in receivables reflecting the increase in volume in the first half of 2012. 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 six months ended June 30, 2012 and July 3, 2011, we effectively accelerated the timing of cash receipts by $24 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 six-month period ended
	June 30, 2012			July 3, 2011
	(dollars in millions)
Cash (used in) provided by operating activities	$	(53	)	$	80
Cash used in investing activities	(54		)	(55		)
Cash provided by (used in) financing activities	22			(13		)
(Decrease) increase in cash and cash equivalents, before effect of exchange rate changes on cash	$	(85	)	$	12

Operating activities. Cash used by operating activities was $53 million in the fiscal six-month period ended June 30, 2012, compared to cash provided by operations of $80 million in the fiscal six-month period ended July 3, 2011. Net loss of $153 million included $110 million of non-cash and non-operating expense items, of which $94 million was for depreciation and amortization, $9 million was in amortization of deferred debt discount and issuance costs, $6 million was for a loss on the extinguishment of debt and $11 million was for unrealized foreign currency losses. These amounts were slightly offset by $4 million for deferred taxes, $4 million of other non-cash adjustments, $1 million of a pension curltailment gain and earnings from unconsolidated entities of $1 million. Net working capital used $31 million of cash driven by an increase in our accounts receivable of $33 million and inventories of $10 million, partially offset by an increase in trade payables of $12 million. Other assets and liabilities provided cash of $21 million reflecting an increase in pension liabilities of $11 million, an increase in accrued expenses and other liabilities of $2 million, a decrease in prepaid expenses and other assets of $10 million, and an increase in accrued income taxes of $2 million, partially offset by a decrease in due to/due from affiliates of $4 million.

For the fiscal six-month period ended July 3, 2011, net loss of $14 million included $111 million of non-cash and non-operating expense items, of which $98 million was for depreciation and amortization, $18 million was for deferred taxes and $7 million was in amortization of deferred debt discount and issuance costs, $1 million was for stock based compensation expense, offset by $13 million of unrealized foreign currency gains. Net working capital used $45 million in cash driven by an increase

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in our accounts receivable of $44 million and inventories of $35 million, partially offset by an increase in accounts payable of $34 million. Other assets and liabilities provided $28 million in cash primarily reflecting the increase in accrued interest.

Investing activities. Cash used in investing activities was $54 million in the fiscal six-month period ended June 30, 2012, compared to $55 million in the fiscal six-month period ended July 3, 2011. Cash used in investing activities in the fiscal six-month period ended June 30, 2012 primarily consisted of ongoing expenditures of $53 million for environmental, health and safety compliance and maintenance projects. Cash used in investing activities in the fiscal six-month period ended July 3, 2011 primarily consisted of ongoing expenditures of $54 million for environmental, health and safety compliance and maintenance projects.

Financing activities. Cash provided from financing activities was $22 million in the fiscal six-month period ended June 30, 2012, compared to cash used of $13 million in the fiscal six-month period ended July 3, 2011. Cash used in financing activities in the fiscal six-month period ended June 30, 2012 consisted primarily of proceeds from long-term debt of $469 million and an increase in short-term borrowings of $1 million, offset by principal payments of $440 million, and debt issuance costs of $8 million. Cash used by financing activities in the fiscal six-month period ended July 3, 2011 consisted of payments of long-term debt of $58 million, debt issuance costs of $5 million and a decrease in short-term borrowings of $2 million, offset by proceeds from long-term debt of $52 million.

For 2012, we expect the following significant cash outflows: interest payments on our fixed rate Senior Secured Notes, Second Lien Notes, Second-Priority Springing Lien Notes and Senior Subordinated Notes (due semi-annually) of approximately $200 million in total (with a third quarter payment of approximately $60 million, and a fourth quarter payment of approximately $44 million); principal (due quarterly) and interest payments (due monthly) on our variable rate term loans under our senior secured credit facilities of approximately $7 million and $34 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 $100 million and $110 million, however, we continue to evaluate our level of capital spending. We expect to fund these significant outflows with available cash and cash generated from operations.

Our senior secured credit facilities at June 30, 2012 consisted of three tranches of variable-rate term loans in an aggregate U.S. dollar equivalent principal amount of approximately $739 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, a portion of which are denominated in Euros, and our synthetic letter of credit facility are extended to MPM GmbH.

There were $35 million of borrowings outstanding under the revolving credit facility as of June 30, 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 June 30, 2012 were $41 million, leaving unused borrowing capacity of $224 million. Outstanding letters of credit issued under the synthetic letter of credit facility at June 30, 2012 were $32 million, leaving an unused capacity of $1 million.

Our term loans under the senior secured credit facilities 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 $178 million aggregate U.S. dollar equivalent principal amount of existing term loans maturing December 2013 under our senior secured credit facilities, effectively extending our debt maturity profile. The new term loans bear interest at an adjusted LIBOR rate plus an applicable margin of 3.50%.

In May 2012, we issued $250 million aggregate principal amount of 10% senior secured notes due 2020 at an issue price of 100%. We used the net proceeds to repay $240 million aggregate principal amount of existing term loans maturing May 2015 under our senior secured credit facilities, effectively extending our debt maturity profile.

Principal repayments on our term loans are due and payable in quarterly installments of approximately $1 million (depending on exchange rates) 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

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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 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 June 30, 2012, we had outstanding $250 million in aggregate principal amount of 10% Senior Secured Notes due 2020 (the “Senior Secured Notes”), $200 million in aggregate principal amount of 12 ¹/2% Second-Lien Senior Secured Notes due 2014 (the “Second Lien Notes”), $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 9¹/2% 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") and $382 million in aggregate principal amount of 11¹/2% Senior Subordinated Notes due 2016 (the “Senior Subordinated Notes”). The Senior Secured Notes, Second Lien Notes, Second-Priority Springing 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 Senior Secured Notes are guaranteed on a senior secured basis by our existing domestic subsidiaries that are our guarantors under our senior secured credit facilities and will be guaranteed on the same basis by any future domestic subsidiaries that guarantee any debt of the Company or of any guarantor of the Senior Secured Notes. The Senior Secured Notes are secured by a 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 and senior in priority to the liens on substantially the same collateral securing our Second Lien Notes. The Senior Secured Notes mature on October 15, 2020 and bear interest at a rate per annum of 10%, payable semiannually on April 15 and October 15 of each year, commencing on October 15, 2012.

The Second Lien Notes are guaranteed on a senior secured basis by our existing U.S. subsidiaries that are guarantors under our existing senior secured credit facilities and will be guaranteed on the same basis by any such future U.S. subsidiaries. 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 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 will be guaranteed on the same basis by any 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 9¹/2%, respectively, payable semiannually on January 15 and July 15 of each year, commencing on January 15, 2011.

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 Senior Secured Notes, Second Lien Notes, Second-Priority Springing Lien Notes and Senior Subordinated Notes (collectively, the “notes”). If there are any borrowings under the revolving credit facility (or

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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 June 30, 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 June 30, 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 were outstanding as of June 30, 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 June 30, 2012 was 6.88%.

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

The following table presents our contractual cash obligations as of December 31, 2011 related to our long-term debt, as adjusted for our debt refinancing transactions in April and May 2012.

We do not believe our other cash obligations have changed materially since December 31, 2011.



	Payments due by period
	Total	Less than 1 year	1 - 3 years	4 - 5 years	More than 5 years
	(dollars in millions)
Long-term debt	2,957	33	229	1,112	1,583
Interest on long term debt	1,776	248	491	391	646

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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 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 June 30, 2012, we were not able to satisfy this test. The restrictions on our ability to incur indebtedness or make investments under the indentures that apply as a result, however, are subject to exceptions, including exceptions that permit indebtedness under our senior secured credit facilities (including the use of unused borrowing capacity under the revolving credit facility, which was $224 million at June 30, 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 June 30, 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 (which we refer to as "pro forma cost savings") 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

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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. Both Adjusted EBITDA and Combined Adjusted EBITDA include pro forma cost savings. Combined Adjusted EBITDA, excluding all pro forma cost savings, and Combined Adjusted EBITDA are important performance measures 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:



		Fiscal three-month period ended						Fiscal six-month period ended				Last twelve months ended
		June 30, 2012			July 3, 2011†			June 30, 2012		July 3, 2011†		June 30, 2012
		(dollars in millions)
Net loss attributable to Momentive Performance Materials Inc.		$	(88	)	$	(11	)	(153	)	(14	)	(280		)
Loss (gain) on extinguishment and exchange of debt		6			—			6		—		(1		)
Interest expense, net		64			65			126		129		253
Income taxes		4			15			4		27		4
Depreciation and amortization		48			48			94		98		193
EBITDA		34			117			77		240		169
Noncontrolling interest	(a)	—			1			—		1		—
Restructuring and other costs	(b)	15			9			24		14		45
Non cash and purchase accounting effects	(c)	14			(3		)	11		(12	)	26
Management fee and other	(d)	1			1			3		2		7
Combined Adjusted EBITDA, excluding all pro forma savings		$	64		$	125		115		245		247
Pro forma savings from Shared Services Agreement	(e)											21
Pro forma savings from other initiatives	(f)											33
Combined Adjusted EBITDA												$	301
Exclusion of Unrestricted Subsidiary results	(g)											(19		)
Adjusted EBITDA												$	282

Key calculations under the Credit Agreement
Total Senior Secured Net Debt		$	681
Senior Secured Leverage Ratio for the twelve-month period ended June 30, 2012		2.41

† The earthquake and tsunami on March 11, 2011 and related events reduced 2011 results. The calculation of EBITDA, Adjusted EBITDA and Combined Adjusted EBITDA for the fiscal three-month and six-month periods ended July 3, 2011 were negatively impacted by $7 million and $16 million, respectively, related to these events.

____________________


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

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(b)	Relates primarily to restructuring and other costs.

(c)

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 June 30, 2012, non-cash items include unrealized foreign currency exchange loss of $14 million. For the fiscal three-month period ended July 3, 2011, non-cash items include: (i) unrealized foreign currency exchange gain of $4 million and (ii) stock-based compensation expense of $1 million.


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


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


(f)	Represents estimated cost savings, on a pro forma basis, from initiatives not related to the Shared Services Agreement implemented or being implemented by management, including headcount reductions and indirect cost savings. For the fiscal three-month period ended June 30, 2012, estimated cost savings include facility rationalizations and headcount reductions.


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

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. 2011-04: Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 amended existing fair value measurement guidance and is intended to align U.S. GAAP and International Financial Reporting Standards. The guidance requires several new disclosures, including additional quantitative information about significant unobservable inputs used in Level 3 fair value measurements and a qualitative description of the valuation process for both recurring and nonrecurring Level 2 and Level 3 fair value measurements. ASU 2011-04 also requires the disclosure of all fair value measurements by fair value hierarchy level, amongst other requirements. The adoption of ASU 2011-04 did not have a material impact on our unaudited Condensed Consolidated Financial Statements.

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 half of 2012 applicable to our unaudited Condensed Consolidated Financial Statements.


Item 3.	Quantitative and Qualitative Disclosures About Market Risks.

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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 June 30, 2012 was filed on August 8, 2012, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 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 June 30, 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 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 June 30, 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.

There have been no material developments to our previous disclosures on this matter.


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 negatively impact our business, results of operations and financial condition.

Global economic and financial market conditions, including severe market disruptions such as those that occurred 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 worldwide economic developments, the outlook for the second half of 2012 for our business is difficult to predict. In the second quarter of 2012, we experienced a sequential sales increase of 6% in our silicones business, with results rebounding modestly from the recent low in the fourth quarter of 2011. Sales at our Quartz segment also increased slightly in the second quarter, as compared to the first quarter of 2012, but business continues to be weak as a result of the cyclical downturn in the semiconductor capital equipment industry. We expect the continued volatility in the global financial markets, the ongoing debt crisis in Europe, economic softness in China and other Asia Pacific countries and general lack of consumer confidence, as well as continued over-capacity in our industry, will continue to adversely impact our results in the second half of the year.

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

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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. 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 Corporation ("Unimin"). While we continue to negotiate a new long-term supply

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agreement with Unimin, we recently amended our supply agreement with Unimin, extending the term of the agreement through September 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 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, which could have a material adverse effect on our business.

Actual and alleged environmental violations have been identified at our facility in Waterford, New York. 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

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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 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 sent, 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, in the normal course of our business, we are required to provide financial assurances for contingent future costs associated with certain hazardous waste management and remedial activities. Pursuant to financial assurance requirements set forth in state hazardous waste permit regulations applicable to our manufacturing facilities in Waterford, 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 or other assurance 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 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

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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 has issued regulations to minimize the discharge of D4 from industrial facilities into the aquatic environment. We cannot at this time estimate the effect of these regulations on us or our financial condition, cash flows and profitability, but it could be material. 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 November 2011 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, parties to the Stockholm Convention and/or other jurisdictions 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.

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

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 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.

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

Products we have made or used could be the focus of legal claims based upon allegations of harm to human health. 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 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

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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.

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.

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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 entered into on October 1, 2010 and amended on March 17, 2011 and referred to herein as 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 intellectual property, litigation to protect or enforce our rights could be costly, and we may not prevail.

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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 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 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.

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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 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 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

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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 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.

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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 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.

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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 June 30, 2012, we had $2,959 million of consolidated outstanding indebtedness, including payments due within the next twelve months and short-term borrowings. Our annualized cash interest expense is projected to be approximately $248 million based on our consolidated indebtedness and interest rates at June 30, 2012, of which $214 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.

$818 million, or approximately 28%, of our borrowings as of June 30, 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 June 30, 2012 remains the same, an increase of 1% in the interest rates payable on our variable rate indebtedness would increase our annual estimated debt-service requirements by approximately $8 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 in the economy;


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


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


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


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


•	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.

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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 June 30, 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;

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

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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 June 30, 2012, the aggregate principal amount outstanding of MPM Holdings' PIK notes due 2017 was $727 million. These notes accrue interest in-kind until maturity in June 2017.

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 or other ratings agencies to downgrade such ratings or put us 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

None.

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Item 6.	Exhibits.

INDEX TO EXHIBITS

Exhibit Number		Description


4.1		Indenture, dated as of May 25, 2012, by and among Momentive Performance Materials Inc., the Note Guarantors named therein, and The Bank of New York Mellon Trust Company, N.A. as trustee and collateral agent (filed as Exhibit 4.1 to our Form 8-K, filed on June 1, 2012)

4.2		Registration Rights Agreement, dated as of May 25, 2012, by and among Momentive Performance Materials Inc., the guarantors party thereto and J.P. Morgan Securities LLC, as representative of the several initial purchasers (filed as Exhibit 4.2 to our Form 8-K, filed on June 1, 2012)

10.1		Intercreditor Agreement, dated as of May 25, 2012, among JPMorgan Chase Bank, N.A., as Intercreditor Agent, The Bank Of New York Mellon Trust Company, N.A., as trustee and as collateral agent, Momentive Performance Materials Inc., Momentive Performance Materials USA Inc., and each Subsidiary of Momentive Performance Materials Inc. listed on Schedule I thereto (filed as Exhibit 10.1 to our Form 8-K, filed on June 1, 2012)

10.2		Joinder and Supplement to Intercreditor Agreement, dated as of May 25, 2012, by and among The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent, JPMorgan Chase Bank, N.A., as first priority representative under the Intercreditor Agreement, The Bank of New York Mellon Trust Company, N.A., as second priority representative under the Intercreditor Agreement, Momentive Performance Materials Inc., and each Subsidiary of Momentive Performance Materials Inc. listed on Schedule I thereto (filed as Exhibit 10.2 to our Form 8-K, filed on June 1, 2012)

10.3		Third Extension and Amendment to the Quartz Sand Products Purchase Agreement, effective as of June 30, 2012, by and between Unimin Corporation and Momentive Performance Materials Quartz, Inc. (filed as Exhibit 10.1 to our Form 8-K, filed on July 17, 2012)

10.4*		Momentive Performance Materials Holdings LLC 2012 Incentive Compensation Plan

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

____________________

* 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)