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
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 333-146093
 
 
Momentive Performance Materials Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
20-5748297
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
260 Hudson River Road
Waterford, NY 12188
 
(518) 237-3330
(Address of principal executive offices including zip code)
 
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
  
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
x
  
Smaller Reporting Company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The number of shares of common stock of the Company, par value $0.01 per share, outstanding as of the close of business on August 8, 2012 was 100 shares, all of which were held by Momentive Performance Materials Holdings Inc.




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.





TABLE OF CONTENTS
 
 
Page
Part I
Financial Information
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Part II
Other Information
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 


3






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.

4


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.

5


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.

6



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.

7


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
)
 


8




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.”

9

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

10

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.
(c) Foreign Currency
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)".

11

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

12


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

13

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
 
 
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

14

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:

15

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.

16

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


17

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

_

18

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

19


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.





20


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

 

21


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
)

22


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
)
 
$