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MOMENTIVE PERFORMANCE MATERIALS INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[April 11, 2014]

MOMENTIVE PERFORMANCE MATERIALS INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis of our results of operations and financial condition for the years ended December 31, 2013, 2012 and 2011 with the audited consolidated financial statements and related notes included elsewhere herein. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs, and which involve numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Item 1A, "Risk Factors." Actual results may differ materially from those contained in any forward-looking statements.



See "Forward-Looking and Cautionary Statements." Overview and Outlook We believe we are 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 business 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.

We serve more than 4,500 customers between our Silicones and Quartz businesses in over 100 countries. Our customers include leading companies in their respective industries, such as Procter & Gamble, Avery, Continental Tire, Saint Gobain, Unilever, BASF, The Home Depot and Lowe's.


Going Concern Based on our current liquidity position as of December 31, 2013, and projections of operating results and cash flows in 2014, there is substantial doubt about our ability to continue as a going concern for the next twelve months. Our current projections of operating results, cash flows and liquidity are not expected to be sufficient to fund our most significant cash obligations necessary to continue as a going concern.

To address the risk of being able to continue as a going concern, we have undertaken steps to restructure our balance sheet and capital structure. We have retained financial advisors and are in discussions with certain of our financial creditors regarding alternatives to the Company's capital structure. As part of the process, a filing under Chapter 11 in the near future may provide the most expeditious manner in which to effect a plan of reorganization that may be proposed by the Company. Management currently expects that a Chapter 11 filing would only involve our U.S. subsidiaries. We would expect to continue our ongoing, ordinary course operations during and following any Chapter 11 proceeding.

Given the likelihood of a Chapter 11 filing, we and our U.S. subsidiaries have obtained commitments from certain lenders to provide debtor-in-possession financing ("DIP Facilities"). The proposed DIP Facilities would be comprised of a $270 asset-based revolving loan and a $300 term loan. Such commitments are contingent upon, among other things, us and our subsidiaries commencing a filing under Chapter 11.

As a result of these facts and circumstances, we have made certain adjustments to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report of Form 10-K, including the reclassification of certain outstanding debt to current liabilities and the write-off of unamortized deferred financing costs related to such debt. Refer to Notes 2 and 7 to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for more information.

Momentive Combination and Shared Services Agreement In October 2010, our parent, Momentive Performance Materials Holdings Inc., and Momentive Specialty Chemicals Holdings LLC, the parent company of Momentive Specialty Chemicals Inc. ("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 (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 and requires that the Steering Committee formed under the agreement meet no less than annually to evaluate and determine an equitable allocation percentage. The allocation percentage for 2013 is set at 43% for us and 57% for MSC.

The Momentive Combination, including the Shared Services Agreement, has resulted in significant synergies for us, including shared services and logistics optimization, best-of-source contractual terms, procurement savings, regional site rationalization and administrative and overhead savings. We project achieving a total of approximately $65 of cost savings in connection with the Shared Services Agreement, and through December 31, 2013, we have realized all of these savings on a run-rate basis. We expect the savings from these synergies to continue.

29-------------------------------------------------------------------------------- Table of Contents Reportable Segments Our businesses are based on the products that we offer and the markets that we serve. At December 31, 2013, our businesses are managed as one reportable segment; however, given the differing technology and marketing strategies, we report the results for the Silicones and Quartz businesses separately.

The Company's organizational structure continues to evolve. We are also continuing to refine our business and operating structure to better align our services to our customers and improve our cost position, while continuing to invest in global growth opportunities.

2013 Overview • Net sales increased $41 in 2013 compared to 2012, primarily due to improved demand for our silicones products in the North American market, partially offset by continued softness in the markets for semiconductor and solar related products.

• Segment EBITDA increased $24 in 2013 compared to 2012, primarily as a result of the successful implementation of growth, cost control and productivity initiatives.

• During 2013, we realized approximately $9 in cost savings as a result of the Shared Services Agreement with MSC bringing our total realized savings under the agreement to $64. During 2013, we also realized approximately $16 in cost savings as a result of other initiatives bringing our total realized savings under these initiatives to $31. As of December 31, 2013, we have approximately $1 of in-process cost savings in connection with the Shared Services Agreement and approximately $5 of in-process cost savings in connection with other initiatives that we expect to achieve over the next 12 to 15 months.

• In April 2013, we entered into two new senior secured revolving credit facilities: a $270 asset-based revolving loan facility with a syndicate of lenders, which is subject to a borrowing base (the "ABL Facility"), and a $75 revolving credit facility with an affiliate of GE, which supplements the ABL Facility and is available subject to a certain utilization test based on borrowing availability under the ABL Facility (the "Cash Flow Facility"). The ABL Facility and Cash Flow Facility replaced our prior senior secured credit facility.

• In May 2013, one of our subsidiaries entered into a new purchase and sale agreement with Asia Silicones Monomer Limited ("ASM") in connection with the sale by an affiliate of GE of its equity interests in ASM. The new agreement provides us with a long-term supply of siloxane through 2026 and the option to extend such agreement through 2036. The agreement replaced and superseded (i) an off-take agreement with ASM, pursuant to which we sourced a portion of our siloxane, and (ii) a long-term supply agreement, pursuant to which GE and its affiliate ensured that we were provided with a minimum annual supply of siloxane from ASM or an alternative source in certain circumstances through December 2026. In connection with the foregoing transactions, our direct parent received a one-time payment of approximately $102 from GE, which was subsequently contributed to us.

• Also in May 2013, we entered into an amendment to the Trademark License Agreement, dated as of December 3, 2006, by and between GE Monogram Licensing International and us, to, among other things, revise the royalty payable to GE Monogram Licensing International and provide for an option to extend such agreement for an additional five-year period through 2023. In connection with the amendment, our direct parent recorded a gain and related intangible asset of $7, which was subsequently contributed to us.

2014 Outlook Our business is impacted by general economic and industrial conditions, including general industrial production, automotive builds, housing starts, construction activity, consumer spending and semiconductor capital equipment investment. Our business has both geographic and end market diversity which often reduces the impact of any one of these factors on our overall performance.

Due to continued worldwide economic volatility and uncertainty, the outlook for 2014 for our business is difficult to predict. Although we expect certain global markets to begin to stabilize, a continued lack of consumer confidence and over-capacity in our industry could continue to negatively impact the results of both of our businesses. However, we remain focused on gaining productivity efficiencies to reduce material costs and improve margins, and expect moderate increases in volumes in 2014 as compared to 2013 due to expected growth within the construction and transportation markets.

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 investments 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.

30-------------------------------------------------------------------------------- Table of Contents In response to the uncertain economic outlook, we continue to execute restructuring and cost reduction programs, with $5 of in-process cost savings.

We continue to evaluate additional actions, as well as productivity measures, that could lead to further savings. Such actions could result in more significant restructuring, exit and disposal costs and asset impairments in the future.

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

Matters Impacting Comparability of Results Our Consolidated Financial Statements include the accounts of the Company, its majority-owned subsidiaries in which minority shareholders hold no substantive participating rights and variable interest entities in which we have a controlling financial interest. Intercompany accounts and transactions are eliminated in consolidation.

Raw Materials Raw materials comprised approximately 70% of our cost of sales in 2013. The largest raw material used in our Silicones business is silicon metal. The cost of silicon metal comprised approximately 22% of our total raw material costs in our Silicones' manufacturing processes in 2013. The market price of silicon metal rose through 2010 and peaked in early 2011. Market prices declined steadily through 2011 and leveled out at the end of 2012. The extended economic slowdown and deteriorating conditions in the solar sector are adversely impacting this market, leading to favorable market prices during 2013, which slightly improved material margins. The largest raw material used in our Quartz business is a specific type of sand, which is currently available from a limited number of suppliers. Because Unimin controls a significant amount of the quartz sand market, it exercises significant control over quartz sand prices, which have been steadily increasing. Our long term purchase agreement with Unimin expired on December 31, 2012. We are currently negotiating the terms of a new long term supply agreement with Unimin and expect to enter into an agreement in 2014.

Other Comprehensive Income Our other comprehensive income is significantly impacted by foreign currency translation and defined benefit pension and postretirement benefit adjustments.

The impact of foreign currency translation is driven by the translation of assets and liabilities of our foreign subsidiaries which are denominated in functional currencies other than the U.S. dollar. The primary assets and liabilities driving the adjustments are cash and cash equivalents; accounts receivable; inventory; property, plant and equipment; goodwill and other intangible assets; accounts payable and pension and other postretirement benefit obligations. The primary currencies in which these assets and liabilities are denominated are the euro and Japanese Yen. The impact of defined benefit pension and postretirement benefit adjustments is primarily driven by unrecognized actuarial gains and losses related to our defined benefit and other postretirement benefit plans, as well as the subsequent amortization of gains and losses from accumulated other comprehensive income in periods following the initial recording such items. These actuarial gains and losses are determined using various assumptions, the most significant of which are (i) the weighted average rate used for discounting the liability, (ii) the weighted average expected long-term rate of return on pension plan assets, (iii) the method used to determine market-related value of pension plan assets, (iv) the weighted average rate of future salary increases and (v) the anticipated mortality rate tables.

31-------------------------------------------------------------------------------- Table of Contents Results of Operations CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, (In millions) 2013 2012 2011 Net sales $ 2,398 $ 2,357 $ 2,637 Costs and expenses: Cost of sales, excluding depreciation and amortization 1,732 1,705 1,798 Selling, general and administrative expense 373 392 389 Depreciation and amortization expense 171 187 197 Research and development expense 70 69 78 Restructuring and other costs 21 43 33 Operating income (loss) 31 (39 ) 142 Operating income (loss) as a percentage of net sales 1 % (2 )% 5 % Interest expense, net 394 277 256 Other non-operating income, net - (11 ) - Loss (gain) on extinguishment and exchange of debt - 57 (7 ) Total non-operating expense 394 323 249 Loss before income taxes and earnings (losses) from unconsolidated entities (363 ) (362 ) (107 ) Income tax expense 104 8 27 Loss before earnings (losses) from unconsolidated entities (467 ) (370 ) (134 ) Earnings (losses) from unconsolidated entities 3 5 (6 ) Net loss (464 ) (365 ) (140 ) Net income attributable to noncontrolling interest - - (1 ) Net loss attributable to Momentive Performance Materials Inc. $ (464 ) $ (365 ) $ (141 ) Other comprehensive income (loss) $ 22 $ (48 ) $ 11 Net Sales In 2013, net sales increased by $41, or 2%, compared to 2012. Volume increases positively impacted net sales by $95, and were partially offset by unfavorable foreign exchange rate fluctuations of $36 and a decrease in price and mix shift of $18. The volume increases were primarily driven by improved demand for our silicones products in construction, automotive and personal care applications as a result of successful growth initiatives and economic improvement primarily in the North American market.

In 2012, net sales decreased by $280, or 11%, compared to 2011. The decrease was primarily due to a decrease in price and mix shift of $154, a decrease in volume of $69 and unfavorable exchange rate fluctuations of $57. Sales were negatively impacted by lower demand in the automotive, construction, electronics and industrial sectors, as well as by a downturn in demand for semiconductor related products.

Operating Income (Loss) In 2013, operating income increased $70, from a loss of $39 to income of $31, compared to 2012. The increase was partially due to the $41 increase in net sales discussed above. Cost of sales, excluding depreciation and amortization increased by $27, which was primarily due to the increase in volumes discussed above, and was partially offset by deflation in raw materials and processing costs of $40, as well as a positive impact from exchange rate fluctuations of $29. Selling, general and administrative and depreciation and amortization expense decreased by $35 due to lower depreciation and amortization expense of $16 and lower compensation and benefit expense as a result of reduced headcount from our restructuring programs, which was partially offset by unfavorable exchange rate fluctuations of $10. Research and development expense remained relatively flat compared to 2012. Restructuring and other costs decreased by $22 primarily due to the wind-down of 2012 restructuring activities, which consisted of severance charges associated with workforce reductions and other one-time expenses for services and integration.

In 2012, operating income decreased $181, from income of $142 to a loss of $39, compared to 2011. The decrease was partially due to the $280 decrease in net sales discussed above. Cost of sales, excluding depreciation and amortization decreased by $93, which was primarily due to favorable exchange rate fluctuations of $51, cost savings as a result of the Shared Services Agreement with MSC and other initiatives of $31 and the impact of lower sales, partially offset by inflation in raw material and processing costs of $41 and lower factory leverage. Selling, general and administrative and depreciation and amortization expense decreased by $7 compared to 2011. The decrease was primarily due to cost savings as a result of the Shared Services Agreement with MSC of $15 and lower depreciation and amortization expense, partially offset by inflation of $8. Research and development expense decreased by $9, which was primarily due to the timing of new projects. Restructuring and other costs increased by $10 compared to 2011. In 2012, restructuring and other costs were comprised of restructuring related costs of $23 and other costs of $20, which were primarily related to payments for services and integration costs. In 2011, restructuring and other costs were 32-------------------------------------------------------------------------------- Table of Contents comprised of restructuring related costs of $8 and other costs of $25, mainly consisting of costs related to the Momentive Combination and Shared Services Agreement and various debt restructuring activities.

Non-Operating Expense In 2013, total non-operating expense increased by $71 compared to 2012, primarily due to an increase in interest expense of $117, which was driven by higher average outstanding debt balances and interest rates as a result of the refinancing transactions in April, May and October 2012, as well as the write off of $81 in unamortized deferred debt issuance costs and $2 in unamortized debt discount due to the reclassification of outstanding debt to current in the fourth quarter of 2013 as a result of the substantial doubt about our ability to continue as a going concern for the next twelve months, which would represent a covenant violation and would make the debt callable. These increases were partially offset by a $57 loss on extinguishment of debt related to the debt refinancing transactions in 2012, which did not recur in 2013. Other non-operating income, net, decreased by $11 as a result of a one-time gain recognized in 2012 from the sale of a building lease option to a third party as well as a one-time royalty payment received from our siloxane joint venture in China, neither of which recurred in 2013.

In 2012, total non-operating expense increased by $74 compared to 2011, primarily due to a $57 loss on extinguishment of debt recognized in 2012 related to the debt refinancing transactions in April, May and October 2012. In 2011, a $7 gain on extinguishment of debt was recognized in connection with the repurchase of €17 of 9.5% Second-Priority Springing Lien Notes. In 2012, interest expense increased $21 due to higher average outstanding debt balances and interest rates as a result of the debt refinancing transactions in April, May and October 2012. Other non-operating income, net increased by $11 as a result of a one-time gain recognized in 2012 from the sale of a building lease option to a third party as well as a one-time royalty payment received from our siloxane joint venture in China Income Tax Expense In 2013, income tax expense increased by $96 compared to 2012. The effective income tax rate was (29)% for 2013 compared to (2)% for 2012. The change in the effective tax rate in 2013 was primarily due to our inability to continue our permanent reinvestment assertion related to certain intercompany arrangements, the maintenance of a full valuation allowance against a substantial amount of our net deferred tax assets and the establishment of valuation allowances in certain non-U.S. jurisdictions, in addition to a change in the amount of loss before income taxes, geographic mix of earnings, changes in the tax rates applied in various jurisdictions in which we operate and foreign exchange gains and losses. The valuation allowance, which relates principally to U.S. and certain non-U.S. deferred tax assets, was established and maintained based on our assessment that a portion of the deferred tax assets will likely not be realized. In 2013, a new valuation allowance of $20 was established in certain non-U.S. jurisdictions based on the Company's assessment that the net deferred tax assets will likely not be realized.

In 2012, income tax expense decreased by $19 compared to 2011. The effective income tax rate was (2)% for 2012 compared to (25)% for 2011. In 2012, we established a new valuation allowance of $9 in certain non-U.S. jurisdictions based on the Company's assessment that the net deferred tax assets will likely not be realized. The change in the effective tax rate in 2012 was primarily due to the maintenance of a full valuation allowance against a substantial amount of our net deferred tax assets and the establishment of valuation allowances in certain non-U.S. jurisdictions, in addition to a change in the amount of loss before income taxes, geographic mix of earnings, changes in the tax rates applied in various jurisdictions in which we operate and foreign exchange gains and losses. The valuation allowance, which relates principally to U.S. and certain non-U.S. deferred tax assets, was established and maintained based on our assessment that a portion of the deferred tax assets will likely not be realized.

We are recognizing the earnings of non-U.S. operations currently in our U.S.

consolidated income tax return as of December 31, 2013 and are expecting that all earnings will be repatriated to the United States. 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 foreign currency exchange rates in place at the time of settlement. As a result of the conditions related to our ability to continue as a going concern described above, in the fourth quarter of 2013, we are no longer able to assert permanent reinvestment with respect to certain intercompany arrangements previously considered indefinite, and are now recording deferred taxes on the foreign currency translation impact.

This change in assertion resulted in a tax expense of $86 in the period the change occurred.

Other Comprehensive Income (Loss) For the year ended December 31, 2013, foreign currency translation negatively impacted other comprehensive income by $6, primarily due to the strengthening of the U.S. dollar against the Japanese yen, partially offset by the weakening of the U.S. dollar against the euro. Additionally, for the year ended December 31, 2013, a tax benefit of $54 was recognized in other comprehensive income related to a change in assertion with respect to certain intercompany arrangements, which were previously considered indefinite. For the year ended December 31, 2013, pension and postretirement benefit adjustments positively impacted other comprehensive income by $28, primarily due to unrecognized actuarial gains driven by an increase in the discount rate at December 31, 2013, favorable asset experience and the amortization of unrecognized actuarial losses recorded in prior periods.

For the year ended December 31, 2012, foreign currency translation negatively impacted other comprehensive loss by $29, primarily due to the strengthening of the U.S. dollar against the Japanese yen, partially offset by the weakening of the U.S. dollar against the euro. For the year ended December 31, 2012, pension and postretirement benefit adjustments negatively impacted other comprehensive loss by $19, primarily due to unrecognized actuarial losses driven by a decrease in the discount rate at December 31, 2012 and unfavorable asset experience.

These decreases were partially offset by the positive impact of a curtailment gain recognized on domestic pension benefit plans.

33-------------------------------------------------------------------------------- Table of Contents For the year ended December 31, 2011, foreign currency translation positively impacted other comprehensive loss by $26, primarily due to the weakening of the U.S. dollar against the Japanese yen, partially offset by the strengthening of the U.S. dollar against the euro. For the year ended December 31, 2011, pension and postretirement benefit adjustments negatively impacted other comprehensive loss by $15, primarily due to unrecognized actuarial losses driven by a decrease in the discount rate at December 31, 2011 and unfavorable asset experience.

Results of Operations by Business Following are net sales and Segment EBITDA by business. Segment EBITDA is defined as EBITDA (earnings before interest, income taxes, depreciation and amortization) adjusted for certain non-cash and certain other income and expenses. Segment EBITDA is the primary performance measure used by our senior management, the chief operating decision-maker and the Board of Directors to evaluate operating results and allocate capital resources among businesses.

Segment EBITDA is also the profitability measure used to set management and executive incentive compensation goals.

Year Ended December 31, 2013 2012 2011 Net Sales(1): Silicones $ 2,197 $ 2,136 $ 2,310 Quartz 201 221 327 Total $ 2,398 $ 2,357 $ 2,637 Segment EBITDA: Silicones $ 248 $ 206 $ 291 Quartz 37 44 101 Other (47 ) (36 ) (13 ) (1)Inter-business sales are not significant and, as such, are eliminated within the selling business.

2013 vs. 2012 Business Results Following is an analysis of the percentage change in sales by business from 2012 to 2013 : Currency Volume Price/Mix Translation Total Silicones 5 % (1 )% (1 )% 3 % Quartz (8 )% - % (1 )% (9 )% Silicones Net sales in 2013 increased $61, or 3%, compared to 2012. The increase was primarily due to an increase in volume of $112, partially offset by unfavorable exchange rate fluctuations of $33 and a decrease in price and mix shift of $18.

The volume increases were driven by the execution of growth initiatives primarily in the North American and Pacific markets, which contributed to increased demand for our products, primarily in construction, automotive and oil and gas applications.

Segment EBITDA in 2013 increased by $42 to $248 compared to 2012. The increase was primarily due to the increase in sales discussed above, as well as the impact of cost control and productivity initiatives.

Quartz Net sales in 2013 decreased $20, or 9%, compared to 2012. The decrease was primarily due to lower volumes of $17 reflecting a downturn in demand for semiconductor and solar related products, as well as unfavorable exchange rate fluctuations of $3.

Segment EBITDA in 2013 decreased by $7 to $37 compared to 2012. The decrease was primarily due to the decrease in sales discussed above as well as challenges in the solar and lighting markets.

Other Other is primarily general and administrative expenses that are not allocated to the businesses, such as shared service and administrative functions. Other charges increased by $11 to $47 compared to 2012, primarily due to increased expenses that were not assessed to the businesses.

34-------------------------------------------------------------------------------- Table of Contents 2012 vs 2011 Business Results Following is an analysis of the percentage change in sales by business from 2011 to 2012: Currency Volume Price/Mix Translation Total Silicones 1 % (7 )% (2 )% (8 )% Quartz (31 )% - % (1 )% (32 )% Silicones Net sales in 2012 decreased $174, or 8%, compared to 2011. The decrease was primarily due to a decrease in price and mix shift of $155 and unfavorable exchange rate fluctuations of $54, partially offset by an increase in volume of $35. Sales in our Silicones business were negatively impacted by lower sales in the automotive, construction, electronics and industrial markets.

Segment EBITDA in 2012 decreased by $85 to $206 compared to 2011. The decrease was primarily due to the factors discussed above, partially offset by a royalty payment received from our siloxane joint venture in China and the earnings from our unconsolidated affiliates.

Quartz Net sales in 2012 decreased $106, or 32%, compared to 2011. The decrease was primarily due to lower volumes reflecting a downturn in demand for semiconductor related products.

Segment EBITDA in 2012 decreased by $57 to $44 compared to 2011. The decrease was primarily due to the factors discussed above.

Other Other is primarily general and administrative expenses that are not allocated to the businesses, such as shared service and administrative functions. Other charges increased by $23 to $36 compared to 2011, primarily due to increased expenses that were not assessed to the businesses.

Reconciliation of Segment EBITDA to Net Loss: Year Ended December 31, 2013 2012 2011 Segment EBITDA: Silicones $ 248 $ 206 $ 291 Quartz 37 44 101 Other (47 ) (36 ) (13 ) Reconciliation: Items not included in Segment EBITDA: Non-cash charges (12 ) (7 ) (14 ) Restructuring and other costs (21 ) (43 ) (33 ) Total adjustments (33 ) (50 ) (47 ) Interest expense, net (394 ) (277 ) (256 ) Income tax expense (104 ) (8 ) (27 ) Depreciation and amortization (171 ) (187 ) (197 ) (Loss) gain on extinguishment and exchange of debt - (57 ) 7 Net loss attributable to Momentive Performance Materials Inc. (464 ) (365 ) (141 ) Net income attributable to noncontrolling interest - - 1 Net loss $ (464 ) $ (365 ) $ (140 ) Items Not Included in Segment EBITDA Not included in Segment EBITDA are certain non-cash and other income and expenses. Non-cash charges primarily represent stock-based compensation expense, unrealized derivative and foreign exchange gains and losses and asset disposal gains and losses. Restructuring and other costs primarily include expenses from the Company's restructuring and cost optimization programs and management fees paid to its owner.

35-------------------------------------------------------------------------------- Table of Contents 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 credit facilities.

Our primary continuing liquidity needs are to finance our working capital, debt service and capital expenditures.

At December 31, 2013, we had $3,257 of indebtedness. In addition, at December 31, 2013, we had $196 in liquidity consisting of the following: •$89 of unrestricted cash and cash equivalents (of which $87 is maintained in foreign jurisdictions); and • $107 of borrowings available under our senior secured revolving credit facilities (without triggering the financial maintenance covenant under the ABL Facility).

Our prior senior secured revolving credit facilities were terminated in March 2013 in connection with the closing of our new ABL Facility described below.

Our net working capital (defined as accounts receivable and inventory less accounts payable) at December 31, 2013 and 2012 was $444 and $413, respectively.

A summary of the components of our net working capital as of December 31, 2013 and 2012 is as follows: % of LTM Net % of LTM Net December 31, 2013 Sales December 31, 2012 Sales Accounts receivable $ 326 14 % $ 293 12 % Inventories 368 15 % 374 16 % Accounts payable (250 ) (10 )% (254 ) (10 )% Net working capital $ 444 19 % $ 413 18 % The increase in net working capital of $31 from December 31, 2012 was due primarily to the increase in accounts receivable driven by lower receivable discounting near the end of 2013, as well as decreases in accounts payable driven by lower purchases near the end of 2013. These impacts were partially offset by decreases in inventories, which also was driven by lower purchasing activities near the end of 2013. In an effort to manage working capital, inventory reduction from buildups during mid-2013 were used to satisfy orders towards the end of the year. To minimize the impact of net working capital on cash flows, we continue to review inventory safety stock levels where possible.

We periodically borrow from our senior secured revolving credit facilities to support our short-term liquidity requirements, particularly when net working capital requirements increase in response to seasonality of our volumes in the summer months. During the year ended December 31, 2013, we had gross borrowings under the ABL Facility of $395. As of December 31, 2013, we had $135 of outstanding borrowings under the ABL Facility.

2014 Outlook Based on our current liquidity position as of December 31, 2013, and projections of operating cash flows in 2014, we believe there is substantial doubt about our ability to continue as a going concern for the next twelve months. Our current projections of operating cash flows and liquidity are not expected to be sufficient to fund our most significant cash obligations necessary to continue as a going concern.

To address the risk of being able to continue as a going concern, we have undertaken steps to restructure our balance sheet and capital structure. We have retained financial advisors and are in discussions with certain of our financial creditors regarding alternatives to the Company's capital structure. As part of the process, a filing under Chapter 11 in the near future may provide the most expeditious manner in which to effect a plan of reorganization that may be proposed by the Company. Management currently expects that a Chapter 11 filing would only involve our U.S. subsidiaries. We would expect to continue our ongoing, ordinary course operations during and following any Chapter 11 proceeding.

Given the likelihood of a Chapter 11 filing, we and our U.S. subsidiaries have obtained commitments from certain lenders to provide debtor-in-possession financing ("DIP Facilities"). The proposed DIP Facilities would be comprised of a $270 asset-based revolving loan and a $300 term loan. Such commitments are contingent upon, among other things, us and our subsidiaries commencing a filing under Chapter 11.

As a result of the substantial doubt about our ability to continue as a going concern for the next twelve months, and the associated steps that have been undertaken to restructure our balance sheet and capital structure, our expected cash outflows related to debt service in 2014 are difficult to predict at this time.

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 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.

36-------------------------------------------------------------------------------- Table of Contents Sources and Uses of Cash Following are highlights from our Consolidated Statements of Cash Flows: Year-ended December 31, 2013 2012 2011 Sources (uses) of cash: Operating activities $ (150 ) $ (95 ) $ 106 Investing activities (88 ) (102 ) (120 ) Financing activities 220 111 (41 ) Effect of exchange rates on cash flow (3 ) (3 ) 4 Net decrease in cash and cash equivalents $ (21 ) $ (89 ) $ (51 ) Operating Activities In 2013, operations used $150 of cash. Net loss of $464 included $364 of non-cash expense items, of which $171 was for depreciation and amortization, $81 was for the write-off of unamortized deferred financing costs, $86 was for deferred tax expense, $10 was for the amortization of debt discount and issuance costs and $12 was for unrealized foreign currency losses. Net working capital (defined as accounts receivable and inventory less accounts payable) used $47 of cash, primarily driven by an increase in accounts receivable of $39, which was primarily due to the increase in sales volumes, and a decrease in accounts payable of $7. Changes in other assets and liabilities, due to/from affiliates and income taxes payable used cash of $3, and are driven by the timing of when items were expensed versus paid, which primarily included interest expense, taxes, pension plan contributions and restructuring expenses.

In 2012, operations used $95 of cash. Net loss of $365 included $250 of non-cash expense items, of which $187 was for depreciation and amortization, $18 was for the amortization of debt discount and deferred issuance costs, $57 was for loss on extinguishment of debt and $1 was for unrealized foreign currency losses.

These items were partially offset by a $10 deferred tax benefit. Net working capital used $7 of cash, driven by a decrease in accounts payables of $36, partially offset by a decrease in accounts receivable of $16 and a decrease in inventory of $13. Changes in other assets and liabilities, due to/from affiliates and income taxes payable provided cash of $27 due to the timing of when items were expensed versus paid, which primarily included interest expense, taxes and restructuring expenses.

In 2011, operations provided $106 of cash. Net loss of $140 included $221 of non-cash expense items, of which $197 was for depreciation and amortization, $15 was for the amortization of debt discount and deferred issuance costs, $9 was for deferred income taxes and $7 was for unrealized foreign currency losses.

These items were partially offset by a $7 gain on extinguishment of debt. Net working capital provided $4 of cash, driven by a decrease in accounts receivable of $22 and an increase in accounts payables of $1, partially offset by an increase in inventory of $19. Changes in other assets and liabilities, due to/from affiliates and income taxes payable provided cash of $21 due to the timing of when items were expensed versus paid, which primarily included interest expense, taxes and restructuring expenses.

Investing Activities In 2013, investing activities used $88. We spent $81 for ongoing capital expenditures (including capitalized interest) related to environmental, health and safety compliance and maintenance projects. We also spent $3 on the acquisition of intangible assets, and an increase in restricted cash used $5.

These expenditures were partially offset by proceeds of $1 from the sale of certain assets.

In 2012, investing activities used $102. We spent $107 for ongoing capital expenditures related to environmental, health and safety compliance and maintenance projects. We also spent $2 on the acquisition of intangible assets.

These expenditures were partially offset by proceeds of $7 from the sale of assets.

In 2011, investing activities used $120. We spent $112 for ongoing capital expenditures related to environmental, health and safety compliance and maintenance projects. We also spent $2 on the acquisition of intangible assets and made a $6 capital contribution to our siloxane joint venture in China.

Financing Activities In 2013, financing activities provided $220. Net long-term debt borrowings were $132, which primarily consisted of net borrowings under our ABL Facility of $135. Net short-term debt repayments were $2. We also paid $12 in financing fees related to our new ABL Facility, and received proceeds from a capital contribution of $102 from our parent.

In 2012, financing activities provided $111. Net long-term debt borrowings were $192, which consisted primarily of proceeds of $250 from the issuance of 10% Senior Secured Notes due October 2020 and $175 of incremental term loans due May 2015, partially offset by the repayment of $240 of term loans maturing May 2015 and $178 of term loans maturing December 2013, all as part of our refinancing transactions in 2012. These increases were partially offset by $51 of original issue discounts and tender premiums and $33 for the payment of debt issuance costs related to these refinancing transactions.

37-------------------------------------------------------------------------------- Table of Contents In 2011, financing activities used $41, which primarily consisted of net long-term debt repayments of $36, as well as $5 for the payment of debt issuance costs. We also paid $1 in dividends to our parent.

At December 31, 2013, our senior secured revolving credit facilities consisted of our $270 ABL Facility and our $75 Cash Flow Facility. The ABL Facility and Cash Flow Facility, which were entered into in April 2013, replaced our prior senior secured credit facility that consisted of a $300 revolving credit facility and a $33 synthetic letter of credit facility. At December 31, 2013, there were $135 of borrowings outstanding under the ABL Facility and no borrowings outstanding under the Cash Flow Facility. The outstanding letters of credit under the ABL Facility at December 31, 2013 were $69, leaving unused borrowing capacity under the ABL Facility and Cash Flow Facility of $107 (without triggering the financial maintenance covenant under the ABL Facility).

The credit agreements governing our senior secured revolving credit facilities contain various restrictive covenants that prohibit us and/or restrict our ability to prepay indebtedness, including our First Lien Notes, Senior Secured Notes, Second-Priority Springing Lien Notes and Senior Subordinated Notes (collectively, the "notes"). In addition, the credit agreements governing our senior secured revolving 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.

There are certain restrictions on the ability of certain of our subsidiaries to transfer funds to the parent of such subsidiaries in the form of cash dividends, loans or otherwise, which primarily arise as a result of certain foreign government regulations or as a result of restrictions within certain subsidiaries' financing agreements that limit such transfers to the amounts of available earnings and profits or otherwise limit the amount of dividends that can be distributed. In either case, we have alternative methods to obtain cash from these subsidiaries in the form of intercompany loans and/or returns of capital in such instances where payment of dividends is limited to the extent of earnings and profits.

We have recorded deferred taxes on the earnings of our foreign subsidiaries, as they are not considered to be permanently reinvested as those foreign earnings are needed for operations in the United States.

Covenants under our Senior Secured Revolving Credit Facilities and the Notes The instruments that govern our indebtedness contain, among other provisions, restrictive covenants (and incurrence tests in certain cases) regarding indebtedness, dividends and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and the maintenance of certain financial ratios (depending on certain conditions). Payment of borrowings under our senior secured revolving credit facilities and our notes may be accelerated if there is an event of default as determined under the governing debt instrument. Events of default under the credit agreements governing our senior secured revolving credit facilities include the failure to pay principal and interest when due, a material breach of a representation or warranty, events of bankruptcy, a change of control and most covenant defaults, including the issuance of an opinion by our independent registered public accounting firm which contains qualifications as to our ability to continue as a going concern and the failure to furnish our financial statements to the lenders within 95 days of our fiscal year end. Events of default under the indentures governing our notes include the failure to pay principal and interest, a failure to comply with covenants, subject to a 30-day grace period in certain instances, and certain events of bankruptcy.

Our auditors, PricewaterhouseCoopers LLP, have expressed in their opinion to our consolidated financial statements included in Item 8 on this Annual Report on Form 10-K that there is substantial doubt about our ability to continue as a going concern for the next twelve months. Additionally, we did not furnish our financial statements for the fiscal year ended December 31, 2013 to the lenders under the ABL Facility and Cash Flow Facility within the required time frame of 95 days from such fiscal year end. Both of these events trigger a violation of the covenants under our ABL Facility and Cash Flow Facility. If such covenant violations are not waived or cured within a specified cure period, such violations may give rise to an acceleration under our ABL Facility and Cash Flow Facility and may also trigger cross-acceleration clauses under the indentures that govern our notes. Accordingly, we are in the process of obtaining waivers of these covenant violations from our lenders under the ABL Facility and Cash Flow Facility. Pursuant to such waivers, the lenders would also agree, subject to certain conditions and/or ongoing covenants and termination events, to waive any defaults or events of default arising under the ABL Facility or the Cash Flow Facility as a result of the commencement of a Chapter 11 filing. We expect to obtain these waivers.

The ABL Facility does not have any financial maintenance covenant other than a minimum fixed charge coverage ratio of 1.0 to 1.0 that would only apply if our availability under the ABL Facility at any time is less than the greater of (a) 12.5% of the lesser of the borrowing base and the total ABL Facility commitments at such time and (b) $27. The fixed charge coverage ratio under the credit agreement governing the ABL Facility is generally defined as the ratio of (a) Adjusted EBITDA minus non-financed capital expenditures and cash taxes to (b) debt service plus cash interest expense plus certain restricted payments, each measured on a last twelve months, or LTM, basis and calculated as of the last day of the applicable fiscal quarter. We do not currently meet such minimum ratio, and therefore we do not expect to allow our availability under the ABL Facility to fall below such levels.

The financial maintenance covenant in the credit agreement governing our Cash Flow Facility provides that beginning in the third quarter of 2014, the first full quarter following the one year anniversary of our entry into the Cash Flow Facility, at any time that loans are outstanding under the facility, we will be required 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) to trailing twelve month Adjusted EBITDA (as adjusted per the credit agreement) may not exceed 5.25 to 1.0 as of the last day of the applicable quarter (beginning with the last day of the third quarter of 2014). Although we were not required to meet such ratio requirement, as of December 31, 2013, we had a Senior Secured Leverage Ratio of 5.11 to 1.0 under the Cash Flow Facility.

38-------------------------------------------------------------------------------- Table of Contents In addition to the financial maintenance covenants described above, we are also subject to certain incurrence tests under the credit agreements governing our senior secured revolving credit facilities and the indentures governing our notes that restrict our ability to take certain actions if we are unable to meet specified ratios. For instance, the indentures governing our notes contain an incurrence test that restricts our ability to incur indebtedness or make investments, among other actions, if we do not maintain an Adjusted EBITDA to Fixed Charges ratio (measured on a LTM basis) of at least 2.00 to 1.00. The Adjusted EBITDA to Fixed Charges ratio under the indentures is generally defined as the ratio of (a) Adjusted EBITDA to (b) net interest expense excluding the amortization or write-off of deferred financing costs, each measured on a LTM basis. 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 revolving credit facilities.

At December 31, 2013, we were in compliance with all covenants under the credit agreements governing our senior secured revolving credit facilities and under the indentures governing the notes.

Adjusted EBITDA is defined as EBITDA adjusted for certain non-cash and certain non-recurring items and other adjustments calculated on a pro-forma basis, including the expected future cost savings from business optimization or other programs and the expected future impact of acquisitions, in each case as determined under the governing debt instrument. As we are highly leveraged, we believe that including the supplemental adjustments that are made to calculate Adjusted EBITDA provides additional information to investors about our ability to comply with our financial covenants and to obtain additional debt in the future. Adjusted EBITDA is not a defined term under U.S. GAAP. Adjusted EBITDA is not a measure of financial condition, liquidity or profitability, and should not be considered as an alternative to net income (loss) determined in accordance with U.S. GAAP or operating cash flows determined in accordance with U.S. GAAP. Additionally, EBITDA is not intended to be a measure of free cash flow for management's discretionary use, as it does not take into account certain items such as interest and principal payments on our indebtedness, depreciation and amortization expense (because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue), working capital needs, tax payments (because the payment of taxes is part of our operations, it is a necessary element of our costs and ability to operate), non-recurring expenses and capital expenditures.

Fixed Charges under the indentures should not be considered as an alternative to interest expense.

The following table reconciles net loss to EBITDA and Adjusted EBITDA, and calculates the ratio of Senior Secured net Debt to Adjusted EBITDA (as calculated under our credit agreements and as substantially calculated under our indentures) for the period presented: Year Ended December 31, 2013 Net loss $ (464 ) Interest expense, net 394 Income tax expense 104 Depreciation and amortization 171 EBITDA 205 Restructuring and other costs (a) 21 Non-cash charges (b) 12 Pro forma savings from Shared Services Agreement (c) 1 Pro forma savings from other initiatives (d) 5 Exclusion of Unrestricted Subsidiary results (e) (15 ) Adjusted EBITDA $ 229 Key calculations under the Credit Agreement governing the Cash Flow Facility Total Senior Secured Net Debt $ 1,170 Senior Secured Leverage Ratio as of December 31, 2013 (f) 5.11 (a) Relates primarily to one-time payments for services and integration expenses.

(b) 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) impairments or disposals. For the year ended December 31, 2013, non-cash items primarily include: (i) pension curtailment gains of $3, (ii) unrealized foreign currency exchange losses of $12, (iii) stock-based compensation expense of $1 and (iv) loss of asset disposals of $4.

(c) Primarily represents pro forma impact of expected savings from the Shared Services Agreement with MSC. Savings from the Shared Services Agreement represent the unrealized savings from shared services and logistics optimization, best-of-source contractual terms, procurement savings, and regional site rationalization as a result of the Momentive Combination, and represent our estimate of the unrealized savings from such initiatives that would have been realized had the related actions been completed at the beginning of the LTM period. Best of source contractual terms, procurement and logistics savings relate to cost savings as a result of lower cost contracts for raw materials and logistics as a result of better leverage with vendors.

(d) Represents pro forma impact of in-process cost reduction programs savings.

Cost reduction program savings represent the unrealized headcount reduction savings and plant rationalization savings related to cost reduction programs and other unrealized savings associated with the Company's business realignments activities, and represent our estimate of the unrealized savings from such initiatives that 39-------------------------------------------------------------------------------- Table of Contents would have been realized had the related actions been completed at the beginning of the LTM period. The savings are calculated based on actual costs of exiting headcount and elimination or reduction of site costs.

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

(f) The Senior Secured Leverage Ratio measures the ratio of Senior Secured Net Debt to Adjusted EBITDA. The Senior Secured Leverage Ratio maintenance covenant under the Cash Flow Facility will not begin to apply until the third quarter of 2014.

Contractual Obligations The following table presents our contractual cash obligations at December 31, 2013. Our contractual cash obligations consist of legal commitments at December 31, 2013 that require us to make fixed or determinable cash payments, regardless of the contractual requirements of the specific vendor to provide us with future goods or services. This table does not include information about most of our recurring purchases of materials used in our production; our raw material purchase contracts do not meet this definition since they generally do not require fixed or minimum quantities. Contracts with cancellation clauses are not included, unless a cancellation would result in a major disruption to our business. These contractual obligations are grouped in the same manner as they are classified in the Consolidated Statements of Cash Flows in order to provide a better understanding of the nature of the obligations.

Payments Due By Year 2019 and Contractual Obligations 2014 2015 2016 2017 2018 beyond Total Operating activities: Purchase obligations (1) $ 125 $ 122 $ 94 $ 94 $ 94 $ 750 $ 1,279 Interest on fixed rate debt obligations (4) 288 288 285 244 244 478 1,827 Interest on variable rate debt obligations (2)(4) 6 4 3 3 1 - 17 Operating lease obligations 16 9 7 3 2 3 40 Funding of pension and other postretirement obligations (3) 24 13 17 17 17 - 88 Restructuring reserves 4 - - - - - 4 Investing activities: Investment in joint venture (4) 26 - - - - - 26 Financing activities: Long-term debt, including current maturities (5) 39 7 382 - 135 2,694 3,257 Total $ 528 $ 443 $ 788 $ 361 $ 493 $ 3,925 $ 6,538 (1) Purchase obligations are comprised of the fixed or minimum amounts of goods and/or services under long-term contracts and assumes that certain contracts are terminated in accordance with their terms after giving the requisite notice which is generally two to three years for most of these contracts; however, under certain circumstances, some of these minimum commitment term periods could be further reduced which would significantly decrease these contractual obligations.

(2) Based on applicable interest rates in effect at December 31, 2013.

(3) Pension and other postretirement contributions have been included in the above table for the next five years. These amounts include estimated benefit payments to be made for unfunded foreign defined benefit pension plans as well as estimated contributions to our funded defined benefit plans. The assumptions used by our actuaries in calculating these projections includes a weighted average annual return on pension assets of approximately 7% for the years 2014 - 2018 and the continuation of current law and plan provisions. These estimated payments may vary based on the actual return on our plan assets or changes in current law or plan provisions. See Note 12 to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for more information on our pension and postretirement obligations.

(4) We previously planned to make additional capital contributions of $26 to our siloxane joint venture in China in 2014; however, the joint venture partners are in discussions regarding the timing and amounts of any future contributions.

(5) As of December 31, 2013, all outstanding debt related to related to the ABL Facility, the First Lien Notes, the Senior Secured Notes, the Springing Lien Notes and the Senior Subordinated Notes has been classified as "Debt payable within one year" in the Consolidated Balance Sheets in Item 8 of Part II of this Annual Report on Form 10-K. See Note 7 to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for more information.

The table above excludes payments for income taxes and environmental obligations since, at this time, we cannot determine either the timing or the amounts of all payments beyond 2014. At December 31, 2013, we recorded unrecognized tax benefits and related interest and penalties of $54. We estimate that we will pay approximately $18 in 2014 for local, state and international income taxes. We expect non-capital environmental expenditures for 2014 through 2018 totaling $2.

See Notes 10 and 11 to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on 10-K for more information on these obligations.

40-------------------------------------------------------------------------------- Table of Contents Critical Accounting Estimates In preparing our financial statements in conformity with accounting principles generally accepted in the United States, we have to make estimates and assumptions about future events that affect the amounts of reported assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Some of these accounting policies require the application of significant judgment by management to select the appropriate assumptions to determine these estimates.

By their nature, these judgments are subject to an inherent degree of uncertainty; therefore, actual results may differ significantly from estimated results. We base these judgments on our historical experience, advice from experienced consultants, forecasts and other available information, as appropriate. Our significant accounting policies are more fully described in Note 2 to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment dates.

Deferred tax assets are subject to valuation allowances based upon management's estimates of realizability.

At December 31, 2013 and 2012, we had valuation allowances of $972 and $812 respectively, against our deferred income tax assets. At December 31, 2013, we had a $790 valuation allowance against all of our net U.S. federal and state deferred tax assets, as well as a valuation allowance of $182 against a portion of our net foreign deferred income tax assets, primarily in Germany. At December 31, 2012, we had a $685 valuation allowance against all of our net U.S. federal and state deferred tax assets, as well as a valuation allowance of $127 against a portion of our net foreign deferred income tax assets, primarily in Germany.

The valuation allowances require an assessment of both negative and positive evidence, such as operating results during the most recent three-year period.

This evidence is given more weight than our expectations of future profitability, which are inherently uncertain.

The Company considered all available evidence, both positive and negative, in assessing the need for a valuation allowance for deferred tax assets. The Company evaluated four possible sources of taxable income when assessing the realization of deferred tax assets: • Taxable income in prior carryback years; • Future reversal of existing taxable temporary differences; • Tax planning strategies; and • Future taxable income exclusive of reversing temporary differences and carryforwards.

In 2013, a new valuation allowance of $20 was established in certain non-U.S.

jurisdictions based on the Company's assessment that the net deferred tax assets will likely not be realized. The negative evidence used in the determination to establish the valuation allowance is discussed in Note 10 to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

The Income Taxes Topic, ASC 740, clarifies the accounting for uncertainty in income taxes recognized in the financial statements. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in its tax return. We also apply the guidance relating to de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The calculation of our income tax liabilities involves dealing with uncertainties in the application of complex domestic and foreign income tax regulations. Unrecognized tax benefits are generated when there are differences between tax positions taken in a tax return and amounts recognized in the Consolidated Financial Statements. Tax benefits are recognized in the Consolidated Financial Statements when it is more likely than not that a tax position will be sustained upon examination. Tax benefits are measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective income tax rate in a given period could be materially impacted. An unfavorable income tax settlement would require the use of cash and result in an increase in our effective income tax rate in the year it is resolved. A favorable income tax settlement would be recognized as a reduction in the effective income tax rate in the year of resolution. At December 31, 2013 and 2012, we recorded unrecognized tax benefits and related interest and penalties of $54 and $39, respectively.

41-------------------------------------------------------------------------------- Table of Contents Pensions The amounts that we recognize in our financial statements for pension benefit obligations are determined by actuarial valuations. Inherent in these valuations are certain assumptions, the more significant of which are: • The weighted average rate used for discounting the liability; • The weighted average expected long-term rate of return on pension plan assets; • The method used to determine market-related value of pension plan assets; • The weighted average rate of future salary increases; and • The anticipated mortality rate tables.

The discount rate reflects the rate at which pensions could be effectively settled. When selecting a discount rate, our actuaries provide us with a cash flow model that uses the yields of high-grade corporate bonds with maturities consistent with our anticipated cash flow projections.

The expected long-term rate of return on plan assets is determined based on the various plans' current and projected asset mix. To determine the expected overall long-term rate of return on assets, we take into account the rates on long-term debt investments that are held in the portfolio, as well as expected trends in the equity markets, for plans including equity securities.

The rate of increase in future compensation levels is determined based on salary and wage trends in the chemical and other similar industries, as well as our specific compensation targets.

The mortality tables that are used represent the most commonly used mortality projections for each particular country and reflect projected mortality improvements.

We believe the current assumptions used to estimate plan obligations and pension expense are appropriate in the current economic environment. However, as economic conditions change, we may change some of our assumptions, which could have a material impact on our financial condition and results of operations.

The following table presents the sensitivity of our projected pension benefit obligation ("PBO"), accumulated benefit obligation ("ABO"), deficit ("Deficit") and 2014 pension expense to the following changes in key assumptions: Increase / (Decrease) at Increase / December 31, 2013 (Decrease) PBO ABO Deficit 2014 Expense Assumption: Increase in discount rate of 0.5% $ (26 ) $ (24 ) $ 21 $ (1 ) Decrease in discount rate of 0.5% 28 27 (24 ) 1 Increase in estimated return on assets of 1.0% N/A N/A N/A (1 ) Decrease in estimated return on assets of 1.0% N/A N/A N/A 1 Impairment of Long-Lived Assets, Goodwill and Other Intangible Assets As events warrant, we evaluate the recoverability of long-lived assets, other than goodwill and other indefinite-lived intangibles, by assessing whether the carrying value can be recovered over their remaining useful lives through the expected future undiscounted operating cash flows of the underlying business.

Impairment indicators include, but are not limited to, a significant decrease in the market price of a long-lived asset; a significant adverse change in the manner in which the asset is being used or in its physical condition; a significant adverse change in legal factors or the business climate that could affect the value of a long-lived asset; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; current period operating or cash flow losses combined with a history of operating or cash flow losses associated with the use of the asset; or a current expectation that it is more likely than not that a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. As a result, future decisions to change our manufacturing process, exit certain businesses, reduce excess capacity, temporarily idle facilities and close facilities could result in material impairment charges. Long-lived assets are grouped together at the lowest level for which identifiable cash flows are largely independent of cash flows of other groups of long-lived assets. Any impairment loss that may be required is determined by comparing the carrying value of the assets to their estimated fair value. We do not have any indefinite-lived intangibles, other than goodwill.

We perform an annual assessment of qualitative factors to determine whether the existence of any events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than the carrying amount of the reporting unit's net assets. If, after assessing all events and circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than the carrying amount of the reporting unit's net assets, we use a probability weighted market and income approach to estimate the fair value of the reporting unit. Our market approach is a comparable analysis technique commonly used in the investment banking and private equity industries based on the EBITDA multiple technique. Under this technique, estimated fair value is the result of a market based EBITDA multiple that is applied to an appropriate historical EBITDA amount, adjusted for the additional fair value that would be assigned by a market participant obtaining control over the reporting unit. Our income approach is a discounted cash flow model. The discounted cash flow model requires management to project revenues, operating expenses, working capital investment, capital spending and cash flows over a multiyear period, as 42-------------------------------------------------------------------------------- Table of Contents well as determine the weighted average cost of capital to be used as a discount rate. Applying this discount rate to the multiyear projections provides an estimate of fair value for the reporting unit. The discounted cash flow model does not include cash flows related to interest payments and debt service, as the related debt has not been pushed down to the reporting unit level. Our reporting units include silicones and quartz. Our reporting units are one level below our operating segments for which discrete financial information is available and reviewed by segment management.

At both October 1, 2013 and 2012, the estimated fair value of each of our reporting units was deemed to be substantially in excess of the carrying amount of assets (including goodwill) and liabilities assigned to each unit. The Quartz reporting unit's goodwill has been fully impaired.

Recently Issued Accounting Standards Newly Adopted Accounting Standards On February 5, 2013, we adopted the provisions of Accounting Standards Update No. 2013-02: Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). ASU 2013-02 amended existing comprehensive income guidance and is intended to improve the reporting of reclassifications out of accumulated other comprehensive income.

The guidance requires additional detail about the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income. ASU 2013-02 allows an entity to provide information about the effects on net income of significant amounts reclassified out of each component of accumulated other comprehensive income on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements. The adoption of ASU 2013-02 did not have a material impact on our Consolidated Financial Statements. See Note 14 in Item 8 of Part II of this Annual Report of Form 10-K for the disclosures required by the adoption of ASU 2013-02.

Newly Issued Accounting Standards In July 2013, the FASB issued Accounting Standards Update No. 2013-11: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). ASU 2013-11 amended existing income tax guidance and is intended to reduce the diversity in practice by providing guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses or tax credit carryforwards exist. We elected to adopt ASU 2013-11 during the year ended December 31, 2013. The adoption of ASU 2013-11 did not have a material impact on our Consolidated Financial Statements.

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