Integer Holdings Corp - Quarter Report: 2010 April (Form 10-Q)

Form 10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarter ended April 2, 2010

Commission File Number 1-16137

GREATBATCH, INC.

(Exact name of Registrant as specified in its charter)

Delaware
(State of incorporation)

16-1531026
(I.R.S. employer identification no.)

10000 Wehrle Drive
Clarence, New York
14031
(Address of principal executive offices)

(716) 759-5600
(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 þ No o

Indicate by checkmark 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 o 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 the definitions 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 þ		Non-accelerated filer o		Smaller reporting company o

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

The number of shares outstanding of the Company’s common stock, $0.001 par value per share, as of May 12, 2010 was: 23,225,175 shares.

GREATBATCH, INC.
TABLE OF CONTENTS FOR FORM 10-Q
AS OF AND FOR THE THREE MONTHS ENDED APRIL 2, 2010


	Page
COVER PAGE		1

TABLE OF CONTENTS		2

PART I — FINANCIAL INFORMATION (unaudited)

ITEM 1. Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets — Unaudited		3

Condensed Consolidated Statements of Operations and Comprehensive Income — Unaudited		4

Condensed Consolidated Statements of Cash Flows — Unaudited		5

Condensed Consolidated Statements of Stockholders’ Equity — Unaudited		6

Notes to Condensed Consolidated Financial Statements — Unaudited		7

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		36

ITEM 4. Controls and Procedures		37

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings		38

ITEM 1A. Risk Factors		38

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		38

ITEM 3. Defaults Upon Senior Securities		38

ITEM 4. Reserved		38

ITEM 5. Other Information		38

ITEM 6. Exhibits		38

SIGNATURES		39

EXHIBIT INDEX		39

Exhibit 31.1
Exhibit 31.2
Exhibit 32

- 2 -

PART I — FINANCIAL INFORMATION


ITEM 1.		CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

GREATBATCH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS — Unaudited

(in thousands except share and per share data)


	As of
	April 2,			January 1,
	2010			2010
ASSETS
Current assets:
Cash and cash equivalents	$	56,317		$	37,864
Accounts receivable, net of allowance for doubtful accounts of $1.9 million in 2010 and $2.5 million in 2009		81,568			81,488
Inventories		105,924			106,609
Deferred income taxes		14,040			13,896
Prepaid expenses and other current assets		10,607			13,313

Total current assets		268,456			253,170
Property, plant and equipment, net		148,110			153,601
Amortizing intangible assets, net		79,092			82,076
Trademarks and tradenames		20,288			20,288
Goodwill		302,778			303,926
Deferred income taxes		1,764			2,458
Other assets		14,777			15,024

Total assets	$	835,265		$	830,543

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	30,450		$	30,450
Accounts payable		35,505			34,395
Income taxes payable		1,253			403
Accrued expenses and other current liabilities		63,040			67,996

Total current liabilities		130,248			133,244
Long-term debt		261,327			258,972
Deferred income taxes		55,625			54,043
Other long-term liabilities		4,406			4,560

Total liabilities		451,606			450,819

Stockholders’ equity:
Preferred stock, $0.001 par value, authorized 100,000,000 shares; no shares issued or outstanding in 2010 or 2009		—			—
Common stock, $0.001 par value, authorized 100,000,000 shares; 23,226,418 shares issued and 23,193,410 shares outstanding in 2010; 23,190,105 shares issued and 23,157,097 shares outstanding in 2009		23			23
Additional paid-in capital		293,035			291,926
Treasury stock, at cost, 33,008 shares in 2010 and 2009		(635	)		(635	)
Retained earnings		91,809			86,262
Accumulated other comprehensive income (loss)		(573	)		2,148

Total stockholders’ equity		383,659			379,724

Total liabilities and stockholders’ equity	$	835,265		$	830,543

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 3 -

GREATBATCH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME — Unaudited

(in thousands except per share data)


	Three months ended
	April 2,			April 3,
	2010			2009

Sales	$	132,029		$	139,818
Cost of sales		90,365			95,654

Gross profit		41,664			44,164
Operating expenses:
Selling, general and administrative expenses		15,652			18,687
Research, development and engineering costs, net		11,024			7,875
Other operating expenses, net		992			2,803

Total operating expenses		27,668			29,365
Operating income		13,996			14,799
Interest expense		5,148			4,889
Interest income		(2	)		(25	)
Other expense, net		316			207

Income before provision for income taxes		8,534			9,728
Provision for income taxes		2,987			3,064

Net income	$	5,547		$	6,664


Earnings per share:
Basic	$	0.24		$	0.29
Diluted	$	0.24		$	0.28

Weighted average shares outstanding:
Basic		23,044			22,814
Diluted		23,907			23,899

Comprehensive income:
Net income	$	5,547		$	6,664
Foreign currency translation loss		(3,194	)		(3,917	)
Unrealized gain on cash flow hedges, net of tax		473			266

Comprehensive income	$	2,826		$	3,013

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 4 -

GREATBATCH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — Unaudited

(in thousands)


	Three months ended
	April 2,			April 3,
	2010			2009
Cash flows from operating activities:
Net income	$	5,547		$	6,664
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,767			11,669
Stock-based compensation		1,092			2,861
Other non-cash losses		622			847
Deferred income taxes		1,934			2,158
Changes in operating assets and liabilities:
Accounts receivable		(506	)		(7,092	)
Inventories		75			(6,543	)
Prepaid expenses and other current assets		1,856			815
Accounts payable		1,912			(7,581	)
Accrued expenses and other current liabilities		(3,981	)		(3,503	)
Income taxes payable		898			(235	)

Net cash provided by operating activities		21,216			60


Cash flows from investing activities:
Acquisition of property, plant and equipment		(3,066	)		(5,416	)
Proceeds from sale of property, plant and equipment		1,092			—
Other investing activities		7			184

Net cash used in investing activities		(1,967	)		(5,232	)


Cash flows from financing activities:
Principal payments of long-term debt		—			(13,000	)
Proceeds from issuance of long-term debt		—			12,000
Other financing activities		(618	)		(722	)

Net cash used in financing activities		(618	)		(1,722	)


Effect of foreign currency exchange rates on cash and cash equivalents		(178	)		(71	)

Net increase (decrease) in cash and cash equivalents		18,453			(6,965	)
Cash and cash equivalents, beginning of year		37,864			22,063

Cash and cash equivalents, end of period	$	56,317		$	15,098

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 5 -

GREATBATCH, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY — Unaudited

(in thousands)


															Accumulated
					Additional		Treasury								Other			Total
	Common Stock				Paid-In		Stock						Retained		Comprehensive			Stockholders’
	Shares		Amount		Capital		Shares			Amount			Earnings		Income (Loss)			Equity

Balance, January 1, 2010		23,190	$	23	$	291,926		(33	)	$	(635	)	$	86,262	$	2,148		$	379,724
Stock-based compensation		—		—		1,092		—			—			—		—			1,092
Net shares issued under stock incentive plans		36		—		15		—			—			—		—			15
Income tax benefit from stock options and restricted stock		—		—		2		—			—			—		—			2
Net income		—		—		—		—			—			5,547		—			5,547
Total other comprehensive loss		—		—		—		—			—			—		(2,721	)		(2,721	)


Balance, April 2, 2010		23,226	$	23	$	293,035		(33	)	$	(635	)	$	91,809	$	(573	)	$	383,659

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 6 -

GREATBATCH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of Greatbatch, Inc. and its wholly-owned subsidiary Greatbatch Ltd. (collectively “Greatbatch” or the “Company”) for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. The January 1, 2010 condensed consolidated balance sheet data was derived from audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. For further information, refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended January 1, 2010. The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st. For 52-week years, each quarter contains 13 weeks. The first quarter of 2010 and 2009 each contained 13 weeks and ended on April 2, and April 3, respectively.

SUPPLEMENTAL CASH FLOW INFORMATION


	Three months ended
	April 2,		April 3,
	2010		2009
Noncash investing and financing activities (in thousands):
Unrealized gain on cash flow hedges, net	$	473	$	266
Common stock contributed to 401(k) Plan		—		4,015
Property, plant and equipment purchases included in accounts payable		290		1,636

Cash paid during the period for:
Interest	$	587	$	916
Income taxes		197		440

- 7 -

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited

INVENTORIES, NET

Inventories are comprised of the following (in thousands):


	April 2,		January 1,
	2010		2010
Raw materials	$	49,472	$	54,002
Work-in-process		31,052		28,329
Finished goods		25,400		24,278

Total	$	105,924	$	106,609

INTANGIBLE ASSETS

Amortizing intangible assets are comprised of the following (in thousands):


	Gross					Foreign
	carrying		Accumulated			currency		Net carrying
	amount		amortization			translation		amount
April 2, 2010
Purchased technology and patents	$	82,673	$	(43,751	)	$	161	$	39,083
Customer lists		46,818		(8,090	)		277		39,005
Other		3,519		(2,523	)		8		1,004

Total amortizing intangible assets	$	133,010	$	(54,364	)	$	446	$	79,092


January 1, 2010
Purchased technology and patents	$	82,673	$	(42,289	)	$	399	$	40,783
Customer lists		46,818		(7,264	)		612		40,166
Other		3,519		(2,410	)		18		1,127

Total amortizing intangible assets	$	133,010	$	(51,963	)	$	1,029	$	82,076

Aggregate amortization expense for the first quarter of 2010 and 2009 was $2.4 million and $2.6 million, respectively. As of April 2, 2010, annual amortization expense is estimated to be $7.2 million for the remainder of 2010, $9.5 million for 2011, $9.4 million for 2012, $8.6 million for 2013, and $7.9 million for 2014.

The change in goodwill during the first quarter of 2010 is as follows (in thousands):


	Greatbatch
	Medical			Electrochem		Total
Balance at January 1, 2010	$	293,983		$	9,943	$	303,926
Foreign currency translation		(1,148	)		—		(1,148	)

Balance at April 2, 2010	$	292,835		$	9,943	$	302,778

- 8 -

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited

DEBT

Long-term debt is comprised of the following (in thousands):


	April 2,			January 1,
	2010			2010
Revolving line of credit	$	98,000		$	98,000
2.25% convertible subordinated notes I, due 2013		30,450			30,450
2.25% convertible subordinated notes II, due 2013		197,782			197,782
Unamortized discount		(34,455	)		(36,810	)

Total debt		291,777			289,422
Less: current portion of long-term debt		(30,450	)		(30,450	)

Total long-term debt	$	261,327		$	258,972

Revolving Line of Credit — The Company has a senior credit facility (the “Credit Facility”) consisting of a $235 million revolving credit facility, which can be increased to $335 million upon the Company’s request and approval by a majority of the lenders. The Credit Facility also contains a $15 million letter of credit subfacility and a $15 million swingline subfacility. In connection with the Electrochem Litigation described in Note 10, the Company was required to bond the amount of the judgment and statutory interest in order to appeal. The Company satisfied this requirement by posting a bond, which required collateralization. The Company received approval from the lenders supporting the Credit Facility to increase the letter of credit subfacility by $35 million for use only in connection with bonding the appeal of the Electrochem Litigation.

The Credit Facility is secured by the Company’s non-realty assets including cash, accounts receivable and inventories, and has an expiration date of May 22, 2012 with a one-time option to extend to April 1, 2013 if no default has occurred. Interest rates under the Credit Facility are, at the Company’s option, based upon the current prime rate or the LIBOR rate plus a margin that varies with the Company’s leverage ratio, as defined in the credit agreement for the Credit Facility. If interest is paid based upon the prime rate, the applicable margin is between minus 1.25% and 0.00%. If interest is paid based upon the LIBOR rate, the applicable margin is between 1.00% and 2.00%. The Company is required to pay a fee on its outstanding letter of credit equal to a margin between 1.00% and 2.00%, depending on the Company’s leverage ratio, as defined in the credit agreement, plus 0.125%. The Company is also required to pay a commitment fee between 0.125% and 0.250% per annum on the unused portion of the Credit Facility based on the Company’s leverage ratio, as defined in the credit agreement.

The Credit Facility contains limitations on the incurrence of indebtedness, limitations on the incurrence of liens and licensing of intellectual property, limitations on investments and restrictions on certain payments. Except to the extent paid by the issuance of common stock of Greatbatch or paid out of cash on hand, the Credit Facility limits the amount paid for acquisitions in total to $100 million. The restrictions on payments, among other things, limit repurchase of Greatbatch stock to $60 million and limit the ability of the Company to make cash payments upon conversion of CSN II. These limitations can be waived upon the Company’s request and approval of a simple majority of the lenders.

The Credit Facility also requires the Company to maintain a ratio of adjusted EBITDA, as defined in the credit agreement, to interest expense of at least 3.00 to 1.00, and a total leverage ratio, as defined in the credit agreement, of not greater than 4.50 to 1.00. The calculation of adjusted EBITDA and leverage ratio exclude non-cash charges, as well as charges in connection with the Electrochem Litigation up to a limit of $35 million. As of April 2, 2010, the Company was in compliance with all required covenants.

- 9 -

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited

The Credit Facility contains customary events of default. Upon the occurrence and during the continuance of an event of default, a majority of the lenders may declare the outstanding advances and all other obligations under the Credit Facility immediately due and payable.

The weighted average interest rate on borrowings under the Company’s revolving line of credit as of April 2, 2010, which does not include the impact of the interest rate swaps described below, was 1.43% and resets based upon the six-month LIBOR rate. As of April 2, 2010, the Company had $114 million available under the Credit Facility. This amount may vary from period to period based upon the debt levels of the Company as well as the level of EBITDA which impacts the covenant calculations described above. The interest rate on the $23 million letter of credit outstanding as of April 2, 2010 was 1.125%.

Interest Rate Swaps — The Company has entered into three receive floating-pay fixed interest rate swaps indexed to the six-month LIBOR rate. The objective of these swaps is to hedge against potential changes in cash flows on the Company’s outstanding revolving line of credit, which is indexed to the six-month LIBOR rate. No credit risk was hedged. The receive variable leg of the swap and the variable rate paid on the revolving line of credit bear the same rate of interest, excluding the credit spread, and reset and pay interest on the same dates. The Company intends to continue electing the six-month LIBOR as the benchmark interest rate on the debt being hedged. If the Company repays the debt, it intends to replace the hedged item with similarly indexed forecasted cash flows. Information regarding the Company’s outstanding interest rate swaps is as follows:

Current

Fair

Pay

receive

value

Balance

Type of

Notional

Start

End

fixed

floating

April 2,

sheet

Instrument

hedge

amount

date

rate

2010

location

(In thousands)

Int. rate swap

Cash flow

80,000

3/5/2008

7/7/2010

3.09

1.08

(565

)

Other Current Liabilities

Int. rate swap

Cash flow

18,000

12/18/2008

12/18/2010

2.00

0.45

(585

)

Other Current Liabilities

Int. rate swap

Cash flow

50,000

7/7/2010

7/7/2011

2.16

6M LIBOR

(187

)

Other Long-Term Liabilities

(1,337

)

The estimated fair value of the interest rate swap agreements represents the amount the Company would have to pay to terminate the contracts. No portion of the change in fair value of the interest rate swaps during the first quarters of 2010 or 2009 was considered ineffective. The amount recorded as additional Interest Expense related to the interest rate swaps was $0.6 million and $0.2 million during the first quarters of 2010 and 2009, respectively.

Convertible Subordinated Notes — In May 2003, the Company completed a private placement of $170 million of 2.25% convertible subordinated notes, due June 15, 2013 (“CSN I”). In March 2007, the Company entered into separate, privately negotiated agreements to exchange $117.8 million of CSN I for an equivalent principal amount of a new series of 2.25% convertible subordinated notes due 2013 (“CSN II”) (collectively the “Exchange”) at a 5% discount. The primary purpose of the Exchange was to eliminate the June 15, 2010 call and put option that is included in the terms of CSN I. In connection with the Exchange, the Company issued an additional $80 million aggregate principal amount of CSN II at a price of $950 per $1,000 of principal. In December 2008, the Company entered into privately negotiated agreements under which it repurchased $21.8 million in aggregate principal amount of its outstanding CSN I at $845.38 per $1,000 of principal. The primary purpose of this transaction was to retire the notes, which contained a put option exercisable on June 15, 2010, at a discount.

- 10 -

GREATBATCH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited

The following is a summary of the significant terms of CSN I and CSN II:

CSN I — The notes bear interest at 2.25% per annum, payable semi-annually, and are due on June 15, 2013. Holders may convert the notes into shares of the Company’s common stock at a conversion price of $40.29 per share, which is equivalent to a conversion ratio of 24.8219 shares per $1,000 of principal, subject to adjustment, before the close of business on June 15, 2013 only under the following circumstances: (1) during any fiscal quarter commencing after July 4, 2003, if the closing sale price of the Company’s common stock exceeds 120% of the $40.29 conversion price for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the preceding fiscal quarter; (2) subject to certain exceptions, during the five business days after any five consecutive trading day period in which the trading price per $1,000 of principal for each day of such period was less than 98% of the product of the closing sale price of the Company’s common stock and the number of shares issuable upon conversion of $1,000 of principal; (3) if the notes have been called for redemption; or (4) upon the occurrence of certain corporate events. The fair value of CSN I as of April 2, 2010 was approximately $30 million and is based on recent sales prices.

Beginning June 20, 2010, the Company may redeem any of the notes at a redemption price of 100% of their principal amount, plus accrued interest. Note holders may require the Company to repurchase their notes on June 15, 2010 or at any time prior to their maturity following a fundamental change, as defined in the indenture agreement, at a repurchase price of 100% of their principal amount, plus accrued interest. As a result of this provision, the remaining balance of CSN I, along with the associated deferred tax liability and deferred fees, are classified as short-term in the Condensed Consolidated Balance Sheet and will be repaid with availability under the Company’s revolving line of credit or cash on hand. The notes are subordinated in right of payment to all of our senior indebtedness and effectively subordinated to all debts and other liabilities of the Company’s subsidiaries.

Beginning with the six-month interest period commencing June 15, 2010, the Company will pay additional contingent interest during any six-month interest period if the trading price of the notes for each of the five trading days immediately preceding the first day of the interest period equals or exceeds 120% of the principal amount of the notes.

CSN II — The notes bear interest at 2.25% per annum, payable semi-annually, and are due on June 15, 2013. The holders may convert the notes into shares of the Company’s common stock at a conversion price of $34.70 per share, which is equivalent to a conversion ratio of 28.8219 shares per $1,000 of principal. The conversion price and the conversion ratio will adjust automatically upon certain changes to the Company’s capitalization. CSN II notes were issued at a price of $950 per $1,000 of principal. The fair value of CSN II as of April 2, 2010 was approximately $177 million and is based on recent sales prices.

The effective interest rate of CSN II, which takes into consideration the amortization of the discount and deferred fees related to the issuance of these notes is 8.5%. The discount on CSN II is being amortized to the maturity date of the convertible notes utilizing the effective interest method. As of April 2, 2010, the carrying amount of the discount related to the CSN II conversion option value was $29.1 million. As of April 2, 2010, the if-converted value of CSN II notes does not exceed its principal amount as the Company’s closing stock price of $20.90 did not exceed the conversion price of $34.70 per share.

- 11 -

GREATBATCH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited

The contractual interest and discount amortization for CSN II were as follows (in thousands):


	Three months ended
	April 2,		April 3,
	2010		2009
Contractual interest	$	1,113	$	1,113
Discount amortization		2,354		2,204

The notes are convertible at the option of the holders at such time as: (i) the closing price of the Company’s common stock exceeds 150% of the conversion price of the notes for 20 out of 30 consecutive trading days; (ii) the trading price per $1,000 of principal is less than 98% of the product of the closing sale price of common stock for each day during any five consecutive trading day period and the conversion rate per $1,000 of principal; (iii) the notes have been called for redemption; (iv) the Company distributes to all holders of common stock rights or warrants entitling them to purchase additional shares of common stock at less than the average closing price of common stock for the ten trading days immediately preceding the announcement of the distribution; (v) the Company distributes to all holders of common stock any form of dividend which has a per share value exceeding 5% of the price of the common stock on the day prior to such date of distribution; (vi) the Company affects a consolidation, merger, share exchange or sale of assets pursuant to which its common stock is converted to cash or other property; (vii) the period beginning 60 days prior to but excluding June 15, 2013; and (viii) certain fundamental changes, as defined in the indenture agreement, occur or are approved by the Board of Directors.

Conversions in connection with corporate transactions that constitute a fundamental change require the Company to pay a premium make-whole amount, based upon a predetermined table as set forth in the indenture agreement, whereby the conversion ratio on the notes may be increased by up to 8.2 shares per $1,000 of principal. The premium make-whole amount will be paid in shares of common stock upon any such conversion, subject to the net share settlement feature of the notes described below.

CSN II contains a net share settlement feature that requires the Company to pay cash for each $1,000 of principal to be converted. Any amounts in excess of $1,000 will be settled in shares of the Company’s common stock, or at the Company’s option, cash. The Company has a one-time irrevocable election to pay the holders in shares of its common stock, which it currently does not plan to exercise.

The notes are redeemable by the Company at any time on or after June 20, 2012, or at the option of a holder upon the occurrence of certain fundamental changes, as defined in the agreement, affecting the Company. The notes are subordinated in right of payment to all of our senior indebtedness and effectively subordinated to all debts and other liabilities of the Company’s subsidiaries.

Deferred Financing Fees — The following is a reconciliation of deferred financing fees for the first three months of 2010 (in thousands):


Balance at January 1, 2010	$	3,028
Amortization during the period		(269	)

Balance at April 2, 2010	$	2,759

- 12 -

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited

PENSION PLANS

The Company is required to provide its employees located in Switzerland and France certain defined pension benefits. Under these plans, benefits accrue to employees based upon years of service, position, age and compensation. The defined benefit pension plan that provides benefits to the Company’s employees located in Switzerland is a funded contributory plan while the pension plan that provides benefits to the Company’s employees located in France is unfunded and noncontributory. The liability and corresponding expense related to these pension plans is based on actuarial computations of current and future benefits for employees. Pension expense is charged to current operating expenses.

The change in the net pension liability for the first three months of 2010 is as follows (in thousands):


Balance at January 1, 2010	$	3,974
Net periodic pension cost		245
Benefit payments		(250	)
Foreign currency translation		(126	)

Balance at April 2, 2010	$	3,843

Net pension cost is comprised of the following (in thousands):


	Three months ended
	April 2, 2010			April 3, 2009
Service cost	$	240		$	210
Interest cost		106			96
Amortization of net loss		5			30
Expected return on plan assets		(106	)		(75	)

Net pension cost	$	245		$	261

STOCK-BASED COMPENSATION

Compensation costs related to share-based payments for the three months ended April 2, 2010 and April 3, 2009 totaled $1.1 million and $1.8 million, respectively. Stock-based compensation expense included in the Condensed Consolidated Statement of Cash Flows for the first quarter of 2009 includes costs recognized for the annual share contribution to the Company’s 401(k) Plan as well as for share-based payments.

The weighted average fair value and assumptions used to value options granted are as follows:


	Three months ended
	April 2,			April 3,
	2010			2009
Weighted average fair value	$	8.16		$	10.49
Risk-free interest rate		2.57	%		1.77	%
Expected volatility		40	%		40	%
Expected life (in years)		5			6
Expected dividend yield		0	%		0	%

- 13 -

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited

The following tables summarize time- and performance-vested stock option activity:


						Weighted
						average
				Weighted		remaining
	Number of			average		contractual		Aggregate
	time-vested			exercise		life		intrinsic value
	stock options			price		*(in years)*		*(in millions)*
Outstanding at January 1, 2010		1,362,123		$	23.94
Granted		191,272			20.36
Exercised		(1,000	)		15.00
Forfeited or expired		(21,325	)		22.66

Outstanding at April 2, 2010		1,531,070		$	23.51		6.9	$	0.9

Exercisable at April 2, 2010		1,010,897		$	24.06		6.0	$	0.7


						Weighted
						average
	Number of			Weighted		remaining
	performance-			average		contractual		Aggregate
	vested stock			exercise		life		intrinsic value
	options			price		*(in years)*		*(in millions)*
Outstanding at January 1, 2010		1,001,984		$	24.48
Granted		—			—
Forfeited or expired		(179,475	)		28.05

Outstanding at April 2, 2010		822,509		$	23.71		8.0	$	0.0

Exercisable at April 2, 2010		206,255		$	22.86		5.9	$	0.0

The following tables summarize time- and performance vested restricted stock and restricted stock unit activity:


	Time-vested			Weighted average
	Activity			fair value
Nonvested at January 1, 2010		160,998		$	24.28
Shares granted		77,175			20.34
Shares forfeited		(6,024	)		25.28

Nonvested at April 2, 2010		232,149		$	22.95


	Performance-vested			Weighted average
	Activity			fair value
Nonvested at January 1, 2010		24,000		$	22.59
Shares granted		285,198			14.46
Shares forfeited		(200	)		18.47

Nonvested at April 2, 2010		308,998		$	15.09

The performance-based restricted stock units granted in 2010 only vest if certain performance metrics are achieved. The amount of shares that ultimately vest range from 0 shares to 285,198 shares based upon the total shareholder return of the Company versus the Company’s compensation peer group, as disclosed in the Company’s definitive proxy statement filed on April 20, 2010, over a three year performance period beginning in the year of grant.

- 14 -

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited

OTHER OPERATING EXPENSES, NET

The following were recorded in other operating expense, net in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (in thousands):


	Three months ended
	April 2,		April 3,
	2010		2009

(a) 2007 & 2008 facility shutdowns and consolidations	$	320	$	1,899
(b) Integration costs		122		863
(c) Asset dispositions and other		550		41

	$	992	$	2,803

(a) 2007 & 2008 facility shutdowns and consolidations. In the first quarter of 2007, the Company announced that it would close its Electrochem manufacturing facility in Canton, MA and construct a new 81,000 square foot replacement facility in Raynham, MA. This initiative was not cost savings driven but capacity driven and was completed in the first quarter of 2009.

In the second quarter of 2007, the Company announced that it would consolidate its corporate offices in Clarence, NY into its existing research and development center also in Clarence, NY after an expansion of that facility was complete. This expansion and relocation was completed in the third quarter of 2008.

During the second and third quarters of 2008, the Company reorganized and consolidated various general and administrative and research and development functions throughout the organization in order to optimize those resources with the businesses it acquired in 2007 and 2008.

In the second half of 2008, the Company ceased manufacturing at its facility in Suzhou, China (Electrochem), closed its leased manufacturing facility in Orchard Park, NY (Electrochem), and consolidated its Saignelegier, Switzerland manufacturing facility (orthopaedics). The operations of these facilities were relocated to existing facilities that had excess capacity.

In the fourth quarter of 2008, management approved a plan for the consolidation of its Teterboro, NJ (Electrochem manufacturing), Blaine, Minnesota (vascular manufacturing) and Exton, Pennsylvania (orthopaedics corporate office) facilities into existing facilities that had excess capacity. The Blaine, MN and Exton, PA consolidations were completed in the second quarter of 2009. The Teterboro, NJ initiative was substantially completed in the fourth quarter of 2009.

The total cost incurred for these facility shutdowns and consolidations was $16.3 million and included the following:

Severance and retention — $4.5 million;

Production inefficiencies, moving and revalidation — $5.2 million;

Accelerated depreciation and asset write-offs — $4.2 million;

Personnel — $0.7 million; and

Other — $1.7 million.

- 15 -

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited

All categories of costs are considered to be cash expenditures, except accelerated depreciation and asset write-offs. Costs incurred during the first quarter of 2010 relating to these initiatives were included in the Electrochem business segment. For the first quarter of 2009, costs relating to these initiatives of $1.0 million and $0.9 million were included in the Greatbatch Medical and Electrochem business segments, respectively.

As a result of these consolidation initiatives, one Greatbatch Medical facility and one Electrochem facility are classified as held for sale as of April 2, 2010. These facilities are recorded at the lower of their carrying amount or estimated fair value less cost to sell. The fair value of these facilities is primarily determined by reference to recent sales data for comparable facilities taking into consideration recent offers, if any, received from prospective buyers of the facility, which is categorized as Level 2 in the fair value hierarchy. These facilities are expected to be sold within the next year and have a carrying value of $4.2 million as of April 2, 2010 and are included in Other Current Assets in the Condensed Consolidated Balance Sheet. During the first quarter of 2010, the Company sold its Saignelegier, Switzerland facility for $1.1 million, which was previously classified as held for sale. No gain or loss was recognized during the period related to this facility.

Accrued liabilities related to the 2007 & 2008 facility shutdowns and consolidations are comprised of the following (in thousands):


				Production			Accelerated
	Severance			inefficiencies,			depreciation/
	and			moving and			asset write-
	retention			revalidation			offs			Personnel			Other			Total
Balance, January 2, 2009	$	594		$	—		$	—		$	—		$	—		$	594
Restructuring charges		1,796			2,948			671			534			1,120			7,069
Write-offs		—			—			(671	)		—			—			(671	)
Cash payments		(1,466	)		(2,948	)		—			(534	)		(1,120	)		(6,068	)

Balance, January 1, 2010	$	924		$	—		$	—		$	—		$	—		$	924
Restructuring charges		—			153			—			68			99			320
Write-offs		—			—			—			—			—			—
Cash payments		(741	)		(153	)		—			(68	)		(99	)		(1,061	)

Balance, April 2, 2010	$	183		$	—		$	—		$	—		$	—		$	183


		*(b)* *Integration costs.* During the first quarter of 2010 and 2009, the Company incurred costs related to the integration of the companies acquired in 2007 and 2008. The integration initiatives include the implementation of the Oracle ERP system, training and compliance with Company policies as well as the implementation of lean manufacturing and six sigma initiatives. These expenses are primarily for consultants, relocation and travel costs that will not be required after the integrations are completed.

		*(c)* *Asset dispositions and other*. During the first quarter of 2010 and 2009, the Company recorded write-downs in connection with various asset disposals, which were partially offset by insurance proceeds received.

INCOME TAXES

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to several factors, including changes in the mix of the pre-tax income and the jurisdictions to which it relates, business acquisitions, settlements with taxing authorities and foreign currency fluctuations.

- 16 -

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited

During the first quarter of 2010, there has been no change in the balance of unrecognized tax benefits. Approximately $1.9 million of the balance of unrecognized tax benefits would favorably impact the effective tax rate (net of federal benefit on state issues), if recognized. It is reasonably possible that a reduction of approximately $0.7 million of the balance of unrecognized tax benefits may occur within the next twelve months as a result of the expiration of applicable statutes of limitation.

10.

COMMITMENTS AND CONTINGENCIES

Litigation — The Company is a party to various legal actions arising in the normal course of business. While the Company does not believe, except as indicated below, that the ultimate resolution of any such pending actions will have a material adverse effect on its results of operations, financial position or cash flows, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact in the period in which the ruling occurs.

As previously reported, the Company is appealing the September 2009 jury verdict in the Input/Output Marine Systems (“Input/Output”) action against the Company (“Electrochem Litigation”). During the third quarter of 2009, the Company accrued $34.5 million in connection with this litigation. No changes to this accrual have been made since that time. During the appeal process, interest on the judgment will accrue based upon the Louisiana statutory rate, which is currently 3.75%.

To date, the cost of defense in the Electrochem Litigation has been paid by the Company’s insurance carrier. As a result of the jury verdict in that case, the insurer has filed a declaratory judgment suit alleging that there is no coverage for the jury verdict, and that it has no further obligation to defend. Additionally, the insurer is seeking reimbursement of $1.3 million in defense costs expended prior to the jury verdict. The Company does not believe the insurer is entitled to reimbursement of the prior defense costs and is vigorously defending the suit.

With regard to the previously reported patent infringement action filed by Pressure Products Medical Supplies, Inc. (“Pressure Products”), the U.S. Court of Appeals for the Federal Circuit on March 24, 2010 ruled in favor of the Company by vacating the August 2008 patent infringement verdict that resulted in a $1.1 million damages award against the Company. The U.S. Appeals Court for the Federal Circuit concluded that the trial court erred in a definition it provided for a patent claim term and remanded the case back to the U.S. District Court for the Eastern District of Texas for further proceedings consistent with the appellate court’s findings. As a result of a post-trial motion and pending the appeal, the Company was permitted to continue to sell FlowGuard™ provided that it paid into an escrow fund a royalty of between $1.50 and $2.25 for each sale of a FlowGuard™ valved introducer. The amount paid into escrow during the first quarter of 2010 was $0.09 million and $1.49 million in total as of April 2, 2010.

Product Warranties — The Company generally warrants that its products will meet customer specifications and will be free from defects in materials and workmanship. The Company accrues its estimated exposure to warranty claims based upon recent historical experience and other specific information as it becomes available.

- 17 -

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited

The change in aggregate product warranty liability for the quarter ended April 2, 2010 is as follows (in thousands):


Beginning balance at January 1, 2010	$	1,330
Additions to warranty reserve		645
Warranty claims paid		(283	)

Ending balance at April 2, 2010	$	1,692

Purchase Commitments — Contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are normally based on our current manufacturing needs and are fulfilled by our vendors within short time horizons. We enter into blanket orders with vendors that have preferred pricing and terms, however these orders are normally cancelable by us without penalty. As of April 2, 2010, the total contractual obligation related to such expenditures is approximately $12.8 million and will be financed by existing cash and cash equivalents or cash generated from operations over the next twelve months. We also enter into contracts for outsourced services; however, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty.

Operating Leases — The Company is a party to various operating lease agreements for buildings, equipment and software. Minimum future annual operating lease payments are $2.2 million for the remainder of 2010; $2.1 million in 2011; $2.1 million in 2012; $1.9 million in 2013; $1.6 million in 2014 and $1.7 million thereafter. The Company primarily leases buildings, which accounts for the majority of the future lease payments.

Foreign Currency Contracts — In February 2009, the Company entered into forward contracts to purchase 10 million Mexican pesos per month from March 2009 to December 2009 at an exchange rate of 14.85 pesos per one U.S. dollar. These contracts were entered into in order to hedge the risk of peso-denominated payments associated with the operations at the Company’s Tijuana, Mexico facility for 2009. These contracts were accounted for as cash flow hedges. No portion of the change in fair value of these foreign currency contracts during the first three months of 2009 was considered ineffective.

In December 2009, the Company entered into forward contracts to purchase 6.6 million Mexican pesos per month from January 2010 to December 2010 at an exchange rate of 13.159 pesos per one U.S. dollar. In February 2010, the Company entered into forward contracts to purchase an additional 3.3 million Mexican pesos per month from February 2010 to December 2010 at an exchange rate of 13.1595 pesos per one U.S. dollar. These contracts were entered into in order to hedge the risk of peso-denominated payments associated with the operations at the Company’s Tijuana, Mexico facility for 2010 and are being accounted for as cash flow hedges. As of April 2, 2010, these contracts had a positive fair value of $0.4 million, which is recorded within Other Current Assets in the Condensed Consolidated Balance Sheet. The amount recorded as a reduction of Cost of Sales during the first three months of 2010 related to these forward contracts was $0.2 million. No portion of the change in fair value of these foreign currency contracts during the first three months of 2010 was considered ineffective.

Self-Insured Medical Plan — In an attempt to help offset the cost of rising health care expenses, beginning in 2010, the Company began self-funding the medical insurance coverage for all of its U.S. based employees. The risk to the Company is being limited through the use of stop loss insurance which has annual deductibles in the amount of $0.2 million per covered participant and $9.9 million in the aggregate. As of April 2, 2010, the Company has $2.2 million accrued related to the self-insurance of its medical plan, which is recorded as Accrued Expenses and Other Current Liabilities in the Condensed Consolidated Balance Sheet, and is based upon prior years claim history.

- 18 -

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited

11.

EARNINGS PER SHARE

The following table reflects the calculation of basic and diluted earnings per share (in thousands, except per share amounts):


	Three months ended
	April 2,		April 3,
	2010		2009
Numerator for basic earnings per share:
Net income	$	5,547	$	6,664
Effect of dilutive securities:
Interest expense on convertible notes and related deferred financing fees, net of tax		130		130

Numerator for diluted earnings per share	$	5,677	$	6,794


Denominator for basic earnings per share:
Weighted average shares outstanding		23,044		22,814
Effect of dilutive securities:
Convertible subordinated notes		756		756
Stock options and unvested restricted stock		107		329

Denominator for diluted earnings per share		23,907		23,899


Basic earnings per share	$	0.24	$	0.29

Diluted earnings per share	$	0.24	$	0.28

The diluted weighted average share calculations do not include the following securities, which are not dilutive to the EPS calculations or the applicable performance criteria had not been met:


	Three months ended
	April 2,		April 3,
	2010		2009
Time based stock options, restricted stock and restricted stock units		1,621,000		1,510,000
Performance based stock options and restricted stock units		901,000		510,000

12.

COMPREHENSIVE INCOME

The Company’s comprehensive income as reported in the Condensed Consolidated Statements of Operations and Comprehensive Income includes net income, foreign currency translation losses and unrealized gains on cash flow hedges.

The Company translates all assets and liabilities of its foreign subsidiaries, where the U.S. dollar is not the functional currency, at the period-end exchange rate and translates income and expenses at the average exchange rates in effect during the period. The net effect of these translation adjustments is recorded in the condensed consolidated financial statements as comprehensive income (loss). Translation adjustments are not adjusted for income taxes as they relate to permanent investments in the Company’s foreign subsidiaries.

- 19 -

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited

The Company has designated its interest rate swaps and foreign currency contracts (See Notes 5 and 10) as cash flow hedges. Accordingly, the effective portion of any change in the fair value of these instruments is recorded in comprehensive income (loss), net of tax, and reclassified into earnings (Interest Expense — Swaps, Cost of Sales — FX Contracts) in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current earnings.

Accumulated other comprehensive income (loss) is comprised of the following (in thousands):


	Defined						Foreign
	benefit						currency
	pension plan			Cash flow			translation			Total pre-tax						Net-of tax-
	liability			hedges			adjustment			amount			Tax amount			amount

Balance at January 1, 2010	$	(1,455	)	$	(1,701	)	$	4,334		$	1,178		$	970		$	2,148
Unrealized gain on cash flow hedges		—			194			—			194			(68	)		126
Realized loss on cash flow hedges		—			534			—			534			(187	)		347
Foreign currency translation loss		—			—			(3,194	)		(3,194	)		—			(3,194	)

Balance at April 2, 2010	$	(1,455	)	$	(973	)	$	1,140		$	(1,288	)	$	715		$	(573	)

13.

FAIR VALUE MEASUREMENTS

The following table provides information regarding assets and liabilities recorded at fair value in the Company’s Condensed Consolidated Balance Sheet as of April 2, 2010 (in thousands):


				Fair value measurements using
				Quoted
				prices in
				active
				markets		Significant
				for		other			Significant
	At			identical		observable			unobservable
	April 2,			assets		inputs			inputs
Description	2010			(Level 1)		(Level 2)			(Level 3)
Assets
Foreign currency contracts	$	364		$	—	$	364		$	—

Liabilities
Interest rate swaps	$	(1,337	)	$	—	$	(1,337	)	$	—

Foreign currency contracts — The fair value of foreign currency contracts are determined through the use of cash flow models that utilize observable market data inputs to estimate fair value. These observable market data inputs include foreign exchange rate and credit spread curves. In addition to the above, the Company receives fair value estimates from the foreign currency contract counterparty to verify the reasonableness of the Company’s estimates. The Company’s foreign currency contracts are categorized in Level 2 of the fair value hierarchy.

Interest rate swaps — The fair value of interest rate swaps are determined through the use of cash flow models that utilize observable market data inputs to estimate fair value. These observable market data inputs include LIBOR and swap rates, and credit spread curves. In addition to the above, the Company receives fair value estimates from the interest rate swap counterparty to verify the reasonableness of the Company’s estimates. The Company’s interest rate swaps are categorized in Level 2 of the fair value hierarchy.

- 20 -

GREATBATCH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited

Convertible subordinated notes — The fair value of the Company’s convertible subordinated notes disclosed in Note 5 — “Debt” were determined based upon recent third-party transactions for the Company’s notes in an inactive market. The Company’s convertible subordinated notes are valued for disclosure purposes utilizing Level 2 measurements of the fair value hierarchy.

Cost method investments — The Company holds certain cost method investments that are measured at fair value on a non-recurring basis in periods subsequent to initial recognition. The fair value of a cost method investment is only estimated if there are identified events or changes in circumstances that indicate impairment may be present. The aggregate carrying amount of our cost method investments included in Other Assets was $11.9 million as of April 2, 2010 and January 1, 2010.

14.

BUSINESS SEGMENT, GEOGRAPHIC AND CONCENTRATION RISK INFORMATION

The Company operates its business in two reportable segments — Greatbatch Medical and Electrochem Solutions. The Greatbatch Medical segment designs and manufactures components and devices for the CRM, neuromodulation, vascular and orthopaedics markets. Additionally, the Greatbatch Medical business offers value-added assembly and design engineering services for products that incorporate Greatbatch Medical components.

Electrochem designs, manufactures and distributes of electrochemical cells, battery packs and wireless sensors for demanding applications in markets such as energy, security, portable medical, environmental monitoring and more.

The Company defines segment income from operations as sales less cost of sales including amortization and expenses attributable to segment-specific selling, general and administrative, research, development and engineering expenses, and other operating expenses. Segment income also includes a portion of non-segment specific selling, general and administrative, and research, development and engineering expenses based on allocations appropriate to the expense categories. The remaining unallocated operating expenses are primarily corporate headquarters and administrative function expenses. The unallocated operating expenses along with other income and expense are not allocated to reportable segments. Transactions between the two segments are not significant. An analysis and reconciliation of the Company’s business segment and product line information to the respective information in the condensed consolidated financial statements is presented below.


	Three months ended
	April 2,		April 3,
	2010		2009
Sales:
Greatbatch Medical
CRM/Neuromodulation	$	76,925	$	77,267
Vascular		8,166		10,733
Orthopaedics		29,442		34,083

Total Greatbatch Medical		114,533		122,083
Electrochem		17,496		17,735

Total sales	$	132,029	$	139,818

- 21 -

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited


	Three months ended
	April 2,			April 3,
	2010			2009
Segment income from operations:
Greatbatch Medical	$	14,030		$	16,638
Electrochem		3,753			1,395

Total segment income from operations		17,783			18,033
Unallocated operating expenses		(3,787	)		(3,234	)

Operating income as reported		13,996			14,799
Unallocated other expense		(5,462	)		(5,071	)

Income before provision for income taxes	$	8,534		$	9,728

Sales by geographic area are presented in the following table by allocating sales from external customers based on where the products are shipped to (in thousands):


	Three months ended
	April 2,		April 3,
	2010		2009
Sales by geographic area:
United States	$	58,219	$	71,222
Non-Domestic locations:
Puerto Rico		22,603		15,319
Belgium		16,185		65
United Kingdom & Ireland		13,628		15,372
France		2,043		19,704
Rest of world		19,351		18,136

Consolidated sales	$	132,029	$	139,818

Long-lived tangible assets by geographic area are as follows:


	As of
	April 2,		January 1,
	2010		2010
Long-lived tangible assets:
United States	$	128,762	$	132,605
Rest of world		35,889		38,478

Consolidated long-lived assets	$	164,651	$	171,083

Four customers accounted for a significant portion of the Company’s sales as follows:


	Three months ended
	April 2,			April 3,
	2010			2009
Customer A		24	%		21	%
Customer B		17	%		15	%
Customer C		13	%		12	%
Customer D		9	%		11	%

Total		63	%		59	%

- 22 -

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con’t) — Unaudited

15.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”), American Institute of Certified Public Accountants (“AICPA”) or other authoritative accounting bodies to determine the potential impact they may have on the Company’s Consolidated Financial Statements. Based upon this review, management does not expect any of the recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company’s Condensed Consolidated Financial Statements.


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Business

We operate our business in two reportable segments — Greatbatch Medical and Electrochem Solutions (“Electrochem”). Greatbatch Medical designs and manufactures systems, components and devices for the cardiac rhythm management (“CRM”), neuromodulation, vascular and orthopaedics markets. Greatbatch Medical customers include large multi-national original equipment manufacturers (“OEMs”). Greatbatch Medical products include: 1) batteries, capacitors, filtered and unfiltered feedthroughs, engineered components and enclosures used in Implantable Medical Devices (“IMDs”); 2) introducers, catheters, steerable sheaths and implantable stimulation leads; and 3) instruments and delivery systems used in hip and knee replacement, trauma and spine surgeries as well as hip, knee and shoulder implants. Additionally, Greatbatch Medical offers value-added assembly and design engineering services for medical systems and devices within the markets in which it operates.

Electrochem provides technology solutions for critical industrial applications, including customized battery power and wireless sensing systems. Originating from the lithium cell invented for the implantable pacemaker by our Company’s founder, Wilson Greatbatch, Electrochem’s technology and superior quality and reliability is utilized in markets world-wide.

Our Customers

Greatbatch Medical customers include leading OEMs, in alphabetical order here and throughout this report, such as Biotronik, Boston Scientific, DePuy, Johnson & Johnson, Medtronic, Smith & Nephew, Sorin Group, St. Jude Medical, Stryker and Zimmer. The nature and extent of our selling relationships with each OEM varies in terms of breadth of products purchased, purchased product volumes, length of contractual commitment, ordering patterns, inventory management and selling prices. During the first three months of 2010, Boston Scientific, Johnson & Johnson, Medtronic and St. Jude Medical collectively accounted for 63% of our total sales.

The initial term of our supply agreement with Boston Scientific pursuant to which Boston Scientific purchases a certain percentage of the batteries, capacitors, filtered feedthroughs and case halves it uses in its IMDs ends on December 31, 2010. The agreement may be renewed for one or more four-year renewal terms upon mutual agreement of the parties. We are actively negotiating a follow-on agreement with targeted completion during 2010.

Our Electrochem customers are primarily companies in markets such as energy, security, portable medical and environmental monitoring including 3M, General Electric, Halliburton, Honeywell, Thales, Weatherford and Zoll Medical.

- 23 -

Financial Overview

Sales for the first quarter of 2010 were $132.0 million compared to $139.8 million in the comparable 2009 period and $125.8 million for the fourth quarter of 2009. The 6% decline from the prior year was due to inventory stocking by our customers in the 2009 period and the uncertain economic and regulatory environment, which primarily impacted our orthopaedics and energy markets. However, in comparison to the sequential 2009 fourth quarter, sales increased 5% driven by improvements across all of our product lines, including a 17% increase in orthopaedics and an 8% increase in vascular sales. Our sequential growth was broad-based and was supported by improvement in all of the underlying markets we serve and is a positive sign that those markets have begun to stabilize.

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Additionally, we consistently report and discuss in our quarterly earnings releases and investor presentations adjusted operating income and margin, adjusted net income and adjusted earnings per diluted share. These adjusted amounts consist of GAAP amounts excluding the following adjustments to the extent they occur during the period: (i) acquisition-related charges; (ii) facility consolidation; manufacturing transfer and system integration charges; (iii) asset write-down and disposition charges; (iv) litigation charges; (v) the impact of accounting changes and (vi) the income tax (benefit) related to these adjustments. We believe that reporting these amounts provides important supplemental information to our investors and creditors seeking to understand the financial and business trends relating to our financial condition and results of operations. Additionally, the performance-based compensation of our executive management is determined utilizing these adjusted amounts.

GAAP operating income for the first quarter of 2010 was $14.0 million, or 10.6% of sales, compared to $14.8 million, or 10.6% of sales, for the 2009 first quarter. Similarly, adjusted operating income was $15.0 million, or 11.4% of sales, in the first quarter 2010, compared to $17.6 million, or 12.6% of sales, for the comparable 2009 period. The decrease in GAAP and adjusted operating income from the prior year was mainly due to lower revenue levels, as described above, as well as a higher level of net research, development and engineering costs (“RD&E”), which, as expected, were higher in the current year period due to further investment in the development of new technologies in order to create long-term growth opportunities, as well as a lower level of customer cost reimbursements. The negative impact of these variances was partially offset by a lower level of selling, general and administrative expenses (“SG&A”) due to our various consolidation and cost cutting initiatives, as well as reduced 2010 performance-based compensation of approximately $1.6 million for the quarter compared to the 2009 period.

A reconciliation of GAAP operating income to adjusted operating income is as follows (in thousands):


	Three months ended
	April 2,			April 3,
	2010			2009
Operating income as reported:	$	13,996		$	14,799
Adjustments:
Consolidation costs		320			1,899
Integration expenses		122			863
Asset dispositions & other		550			41

Operating income — adjusted	$	14,988		$	17,602

Operating margin — adjusted		11.4	%		12.6	%

This lower operating income, as well as a higher effective tax rate in 2010, due to the expiration of the U.S. R&D tax credit at the end of 2009, caused GAAP diluted EPS for the first quarter 2010 to decrease to $0.24 per share compared to $0.28 per share for the first quarter 2009. Similarly, adjusted diluted EPS were $0.32 per share in the first quarter 2010 versus $0.41 for the comparable 2009 period.

- 24 -

A reconciliation of GAAP income before taxes to adjusted net income and adjusted diluted EPS is as follows (in thousands, except per share amounts):


	Three months ended
	April 2,		April 3,
	2010		2009
Income before taxes as reported:	$	8,534	$	9,728
Adjustments:
Consolidation costs		320		1,899
Integration expenses		122		863
Asset dispositions & other		550		41

Adjusted income before taxes		9,526		12,531
Incremental non-cash interest expense on CSN II convertible debt (Note 5)		1,914		1,775

Sub-total		11,440		14,306
Adjusted provision for income taxes		4,004		4,666

Adjusted net income	$	7,436	$	9,640

Adjusted diluted EPS	$	0.32	$	0.41

Number of shares		23,900		23,900

Cash flows from operations for the first quarter of 2010 were $21.2 million compared to $0.06 million for the 2009 first quarter and $21.5 million for the 2009 fourth quarter. The increase from the prior year first quarter is primarily due to our strategic initiatives designed to improve operational efficiency, which included initiatives to reduce inventory and receivable levels, as well as the timing of payments and lower consolidation and integrations costs. As of April 2, 2010, we had $56.3 million of cash and cash equivalents and $114 million of availability under our revolving line of credit. We currently expect that cash generated during 2010 will be used to support capital expenditures and to pay down debt.

Our CEO’s View

We carried the momentum that began in the fourth quarter of last year into 2010, delivering sequential sales growth for the second consecutive quarter. More importantly, our growth was broad-based and was supported by improvement in all of the underlying markets we serve. We are encouraged by this top-line growth and have reiterated our annual sales growth targets for the year.

During the quarter, we continued to take steps to improve our operating efficiency in order to fund our RD&E investments and we expect our operating margin to improve throughout the remainder of the year as sales increase and we further leverage our manufacturing capacity. We remain confident that our full-year adjusted operating margin will be in-line with our target of 12.0% to 13.5% of sales for 2010. Additionally, we remain committed to our long-term growth and profitability, which we believe will be fueled by our investments in innovative new products and solutions, as well as improved operational efficiencies across our business.

Government Regulation

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act (collectively “Health Care Reform”) legislating broad-based changes to the U.S. health care system. Health Care Reform could significantly impact our business operations and financial results, including higher or lower revenue, as well as higher employee medical costs and taxes. Many significant parts of the legislation will be phased in over the next eight years and require further guidance and clarification in the form of regulations. As a result, many of the impacts of Health Care Reform will not be known until those regulations are enacted, which we expect to occur over the next several years.

- 25 -

Product Development

Currently, we are developing a series of new products for customer applications in the CRM, neuromodulation, vascular, orthopaedics and Electrochem markets. Some of the key development initiatives include:

	1.		To continue to develop complete system solutions for our OEM customers in the markets we operate in;

	2.		To continue the evolution of our Q batteries;

	3.		To continue development of MRI compatible leadwires and other neuromodulation products;

	4.		To continue development of higher energy/higher density capacitors;

	5.		To integrate Biomimetic coating technology with our therapy delivery devices;

	6.		To complete the design of next generation steerable catheters and introducers;

	7.		To further develop minimally invasive surgical techniques for the orthopaedics industry;

	8.		To develop disposable instrumentation for the orthopaedics industry;

	9.		To provide wireless sensing solutions to Electrochem customers; and

	10.		To develop a charging platform for Electrochem’s secondary offering.

As a result of the investments we have made over the last two years, we are now in a position to provide our OEM customers with full “system” solutions. This includes providing comprehensive products and services, from development and regulatory submissions through manufacturing and supporting worldwide distribution. These systems are niche product solutions that complement our OEM customers’ products and utilize our expertise and capabilities. This strategy includes partnering with our OEM customers, including sharing technology and resources, in order to bring these solutions to market. The benefits to our OEM customers include shortening the time to market for these products by accelerating the velocity of innovation, optimizing their supply chain and ultimately providing them with cost efficiencies.

As previously disclosed, on March 15, 2010 Greatbatch Medical received clearance from the U.S. Food and Drug Administration for its OptiSeal™ Valved PTFE Peelable Introducer. We have also received approval in Canada and OptiSeal™ is CE marked for distribution in Europe. OptiSeal™ represents the first 510(k) regulatory clearance received under the Greatbatch Medical brand and is a result of the significant investments made over the last few years.

OptiSeal™ represents the type of niche “system” level products that we are trying to provide. That is, products that are complementary to the core products of our customers and utilize our expertise and capabilities. OptiSeal™ was developed in collaboration with our OEM customers, leverages our technology and provides our customers with value-added innovative features.

The market opportunity for the OptiSeal™ project is $10 — $20 million. Additionally, it provides us with an opportunity for expansion into the vascular and peripheral access markets. In the second half of this year we expect to finalize distribution agreements with our customers and OptiSeal™ will begin to provide a return on the R&D investment we have made over the last two years. We also expect to make additional announcements similar to OptiSeal™ over the next several years as more of these “system” level projects are commercialized.

Cost Savings and Consolidation Efforts

In the first quarter of 2010 and 2009, we recorded charges in other operating expenses related to our ongoing cost savings and consolidation efforts. Additional information regarding the timing, cash flow and amount of future expenditures is set forth in Note 8 — “Other Operating Expenses, Net” of the Notes to the Condensed Consolidated Financial Statements contained in this report.

Our Financial Results

We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st. For 52-week years, each quarter contains 13 weeks. The first quarter of 2010 and 2009 ended on April 2, and April 3, respectively. The commentary that follows should be read in conjunction with our Condensed Consolidated Financial Statements and related notes and with the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K for the fiscal year ended January 1, 2010.

- 26 -

The following table presents certain selected condensed consolidated financial statement information for the periods presented:


	Three months ended
	April 2,			April 3,			$			%
In thousands, except per share data	2010			2009			Change			Change
Greatbatch Medical
CRM/Neuromodulation	$	76,925		$	77,267		$	(342	)		0	%
Vascular		8,166			10,733			(2,567	)		-24	%
Orthopaedics		29,442			34,083			(4,641	)		-14	%

Total Greatbatch Medical		114,533			122,083			(7,550	)		-6	%
Electrochem		17,496			17,735			(239	)		-1	%

Total sales		132,029			139,818			(7,789	)		-6	%
Cost of sales		90,365			95,654			(5,289	)		-6	%

Gross profit		41,664			44,164			(2,500	)		-6	%
Gross profit as a % of sales		31.6	%		31.6	%					0.0	%

SG&A		15,652			18,687			(3,035	)		-16	%
SG&A as a % of sales		11.9	%		13.4	%					-1.5	%

RD&E, net		11,024			7,875			3,149			40	%
RD&E, net as a % of sales		8.3	%		5.6	%					2.7	%

Other operating expenses, net		992			2,803			(1,811	)		-65	%

Operating income		13,996			14,799			(803	)		-5	%
Operating margin		10.6	%		10.6	%					0.0	%

Interest expense		5,148			4,889			259			5	%
Interest income		(2	)		(25	)		23			-92	%
Other expense, net		316			207			109			53	%
Provision for income taxes		2,987			3,064			(77	)		-3	%
Effective tax rate		35.0	%		31.5	%					3.5	%


Net income	$	5,547		$	6,664		$	(1,117	)		-17	%

Net margin		4.2	%		4.8	%					-0.6	%

Diluted earnings per share	$	0.24		$	0.28		$	(0.04	)		-14	%

Sales (Dollars in thousands)


	Three months ended
	April 2,		April 3,		%			January 1,		%
Product Lines	2010		2009		Change			2010		Change
Greatbatch Medical
CRM/Neuromodulation	$	76,925	$	77,267		0	%	$	75,969		1	%
Vascular		8,166		10,733		-24	%		7,556		8	%
Orthopaedics		29,442		34,083		-14	%		25,233		17	%

Total Greatbatch Medical		114,533		122,083		-6	%		108,758		5	%
Electrochem		17,496		17,735		-1	%		17,050		3	%

Total Sales	$	132,029	$	139,818		-6	%	$	125,808		5	%

- 27 -

Greatbatch Medical — The nature and extent of our selling relationship with each OEM customer is different in terms of component products purchased, selling prices, product volumes, ordering patterns and inventory management. For customers with long-term contracts, we have negotiated fixed pricing arrangements for pre-determined volume levels with pricing fixed within each level. In general, the higher the volume level, the lower the pricing. We have pricing arrangements with our customers that at times do not specify minimum order quantities. We recognize revenue when it is realized or realizable and earned. This occurs when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, the buyer is obligated to pay us (i.e., not contingent on a future event), the risk of loss is transferred, there is no obligation of future performance, collectability is reasonably assured and the amount of future returns can reasonably be estimated. Those criteria are met at the time of shipment when title passes.

Our visibility to customer ordering patterns is over a relatively short period of time. Our customers may have inventory management programs and alternate supply arrangements of which we are unaware. Additionally, the relative market share among the OEM manufacturers changes periodically. Consequently, these and other factors can significantly impact our sales in any given period. Our customers may initiate field actions with respect to market-released products. These actions may include product recalls or communications with a significant number of physicians about a product or labeling issue. The scope of such actions can range from very minor issues affecting a small number of units to more significant actions. There are a number of factors, both short-term and long-term, related to these field actions that may impact our results. In the short-term, if a product has to be replaced, or customer inventory levels have to be restored, component demand will increase. Also, changing customer order patterns due to market share shifts or accelerated device replacements may also have a positive or negative impact on our sales results in the near-term. These same factors may have longer-term implications as well. Customer inventory levels may ultimately have to be rebalanced to match new demand.

Greatbatch Medical sales decreased 6% for the first quarter 2010 when compared to the same 2009 period due to inventory stocking by customers in the 2009 period and the uncertain economic and regulatory environment, which primarily impacted our orthopaedics market.

CRM and neuromodulation sales remained consistent with the prior year first quarter. Current quarter sales includes the benefit of further adoption of the Company’s Q batteries, which empower new device features and reduce the overall size of medical devices, as well as increased assembly revenue due to customer market share shifts. Offsetting these increases was lower filtered feedthrough sales as the first quarter 2009 included the benefit of customer product launches and customer market share shifts.

First quarter 2010 sales for our vascular product line were $8.2 million, compared to prior year sales of $10.7 million. This decrease was primarily due to lower introducer sales as a result of customer inventory stocking during the first half of 2009 in connection with our on-going introducer litigation. The impact of this inventory stocking began to ease during the first quarter of 2010 as vascular sales increased 8% from the sequential quarter. We remain optimistic about the potential of this product line as we continue to work with customers on developing systems level products. However, many of the projects that we are currently working on will not begin to generate sales until the second half of 2010 and beyond.

Our orthopaedics product line sales were $29.4 million for the first quarter 2010 compared to $34.1 million for the same 2009 period. Similar to prior quarters, this decrease is due to the uncertain economic and regulatory environment, which caused reduced spending on elective procedures and increased emphasis on inventory management programs from our customers. As expected, the impact of these factors eased further during the current quarter as sales increased 17% over the sequential quarter. During this industry downturn, we continue to streamline and invest in our orthopaedics operations, which we believe present significant opportunities. Going forward, we expect year over year comparables to be more favorable for this product line.

- 28 -

Electrochem — First quarter 2010 sales for the Electrochem business segment were $17.5 million, slightly below the $17.7 million in the first quarter 2009. The decrease from the prior year primarily related to the slowdown in the energy and portable medical markets, which caused customers to reduce inventory levels and push back projects. These conditions continued to ease in the first quarter of 2010, but are still expected to be a challenge for the next two quarters.

2010 Sales Outlook — At this time, we expect 2010 annual sales growth by product line to be as follows:


• CRM & Neuromodulation	2% to 5	%
• Vascular	3% to 7	%
• Orthopaedics	3% to 7	%
• Electrochem	0% to 5	%

Our 2010 sales growth outlook may be impacted by a variety of factors including, but not limited to, a further softening in the orthopaedics and Electrochem markets, potential delays in elective surgeries, the current financial market unrest, changes in exchange rates and Health Care Reform (See “Forward-Looking Statements”). Within the markets we serve, the orthopaedics market represents the least predictable market due to the elective nature of many of the surgeries and procedures in which our products are used. Additionally, recently enacted Health Care Reform, including the medical device innovation tax and expanded health care insurance coverage, could significantly impact our revenue. The extent to which Health Care Reform will impact our revenue, and whether that impact will be positive, negative or both, is not fully known at this time, and will not be fully known until further guidance and clarification, in the form of regulation, is issued.

Gross Profit

Changes to gross profit as a percentage of sales from the prior year period were primarily due to the following:


	Three months ended
	April 2, 2010
Performance-based compensation ^(a)		1.7	%
Excess capacity ^(b)		-0.9	%
Selling price ^(c)		-0.5	%
Mix change ^(d)		-0.4	%
Other		0.1	%

Total percentage point change to gross profit as a percentage of sales		0.0	%


(a)		Amount represents lower performance-based compensation, recorded based upon the results of the current quarter. Performance-based compensation for the remainder of 2010 is expected to increase as our revenue and operating results improve.

(b)		Our gross profit percentage was negatively impacted from excess capacity costs driven by the lower volumes primarily for the orthopaedics product line. In accordance with our inventory accounting policy, excess capacity costs are expensed.

(c)		Our gross profit percentage was negatively impacted due to contractual volume price reductions and price concessions made to our larger OEM customers on certain product lines. We expect this pricing pressure to continue in the future.

(d)		Our gross profit percentage was negatively impacted from a decrease in sales of higher margin products, mainly filtered feedthroughs, as a percentage of total sales.

We expect our gross profit as a percentage of sales to increase for the remainder of 2010 and over the next several years as sales levels increase and we further leverage our manufacturing capacity. Additionally, further consolidation and new product introductions, resulting from current research and development efforts, are expected to help drive gross margin expansion.

- 29 -

SG&A Expenses

Changes to SG&A expenses from the prior year period were due to the following (in thousands):


	Change from prior year
	Three months
Performance-based compensation^(a)	$	(1,645	)
Allowance for doubtful accounts ^(b)		(952	)
Other		(438	)

Net decrease in SG&A	$	(3,035	)


(a)		Amount represents lower performance-based compensation, recorded based upon the results of the current quarter, compared to the 2009 period. Performance-based compensation for the remainder of 2010 is expected to increase as our revenue and operating results improve.

(b)		Amounts primarily relate to lower losses incurred on uncollectible receivables compared to the 2009 period, which included higher Electrochem and orthopaedics write-offs due to the economic slowdown.

Throughout the remainder of 2010, we expect SG&A expenses to increase slightly from the current levels due to normal inflationary cost increases, investment in sales and marketing and higher performance-based compensation as our revenue and operating results improve.

RD&E Expenses, Net

Net RD&E costs are as follows (in thousands):


	Three months ended
	April 2,			April 3,
	2010			2009

Research and development costs	$	4,528		$	4,501


Engineering costs		8,013			5,956
Less cost reimbursements		(1,517	)		(2,582	)

Engineering costs, net		6,496			3,374

Total research and development and engineering costs, net	$	11,024		$	7,875

As expected, net RD&E expenses for the 2010 first quarter of $11.0 million were above the comparable 2009 period of $7.9 million, due to further investment in the development of new technologies. Additionally, during the quarter we received a lower level of customer cost reimbursements. These cost reimbursements can vary significantly from period to period due to the timing of the achievement of milestones on development projects. Excluding these customer cost reimbursements, RD&E was 9.5% of sales for the current quarter compared to 7.5% of sales in the first quarter of 2009. We anticipate that, while cost reimbursements will return to more normal levels, the higher level of RD&E investment will continue for the remainder of 2010, consistent with our long-term growth strategy. Our long-term growth strategy includes investing resources in new technologies, including system level solutions for our customers. This strategy also includes partnering with our OEM customers, including sharing technology and resources, in order to bring these solutions to market. The benefits to our OEM customers is that it will shorten their time to market by accelerating the velocity of innovation, optimizing their supply chain and ultimately providing them with cost efficiencies. As mentioned previously, OptiSeal^TMis one example of these system level projects. The timeline for approval of our vascular market systems projects is shorter than for our other markets. We anticipate making announcements similar to OptiSeal^TMin the next several quarters.

- 30 -

Other Operating Expenses, Net

Other operating expenses, net are comprised of the following costs (in thousands):


	Three months ended
	April 2,		April 3,
	2010		2009

(a) 2007 & 2008 facility shutdowns and consolidations	$	320	$	1,899
(b) Integration costs		122		863
(c) Asset dispositions and other		550		41

	$	992	$	2,803


(a)		Refer to “Cost Savings and Consolidation Efforts.” We have completed all of our publicly announced consolidation initiatives. However, we continually analyze our business to find ways to improve our operational efficiency and we expect to take additional steps to drive further improvements, particularly with respect to our orthopaedics product line.

(b)		For the first quarter of 2010 and 2009, we incurred costs related to the integration of the companies acquired in 2007 and 2008. The integration initiatives include the implementation of the Oracle ERP system, training and compliance with policies, as well as the implementation of lean manufacturing and six sigma initiatives. The expenses are primarily for consultants, relocation and travel costs that will not be required after the integrations are completed.

(c)		During the first quarter of 2010 and 2009, the Company recorded write-downs in connection with various asset disposals.

In 2010, consolidation and integration expenses are expected to be approximately $4 million to $6 million.

Interest Expense and Interest Income

Interest expense and interest income for the first quarter of 2010 were consistent with the same periods of 2009. Going forward, we expect interest expense to remain at current levels as the benefit of paying down our long-term debt with excess cash flow from operations is expected to be offset by increased discount amortization and interest expense associated with the Electrochem Litigation appeal (See “Litigation”).

Other Expense, Net

Other expense, net primarily includes the impact of foreign currency exchange rate fluctuations on transactions denominated in foreign currencies, which did not materially impact our results in the first quarter of 2010 or 2009. The Company generally does not expect foreign currency exchange rate fluctuations to have a material impact on its net income.

Provision for Income Taxes

The effective tax rate for the first quarter of 2010 was 35.0% compared to 31.5% for the first quarter of 2009. The current period rate reflects a tax benefit from having operations outside the U.S., which are taxed at rates lower than the U.S. statutory rate of 35%. This benefit was offset by the impact of non-deductible items and the absence of the research & development tax credit, which expired at the end of 2009. Pending legislation would retroactively reinstate the R&D tax credit to the beginning of 2010. This legislation, if enacted, would positively impact the effective tax rate in the period that it is enacted.

We believe that it is reasonably possible that a reduction of approximately $0.7 million of the balance of unrecognized tax benefits may occur within the next twelve months as a result of the expiration of applicable statutes of limitation, which would positively impact our effective tax rate in the period of reduction.

- 31 -

Liquidity and Capital Resources


	April 2,		January 1,
(Dollars in millions)	2010		2010

Cash and cash equivalents^(a)	$	56.3	$	37.9
Working capital^(a)	$	138.2	$	119.9
Current ratio ^(a)		2.1:1.0		1.9:1.0


(a)		These increases primarily relate to the cash flow generated from operations of $21.2 million for the first quarter of 2010 partially offset by net expenditures for property, plant and equipment of $2.0 million. The increase in cash flow from operations over the prior year first quarter is primarily due to our strategic initiatives designed to improve operational efficiency including initiatives to reduce inventory and receivable levels. Additionally, our cash flow from operations was higher than the prior year due to the timing of payments and lower consolidation and integrations costs.

Revolving Line of Credit — We have a senior credit facility (the “Credit Facility”) consisting of a $235 million revolving line of credit, which can be increased to $335 million upon our request and approval by a majority of the lenders. The Credit Facility also contains a $15 million letter of credit subfacility and a $15 million swingline subfacility. In connection with the Electrochem Litigation we were required to bond the amount of the judgment and statutory interest in order to appeal. We satisfied this requirement by posting a bond, which required collateralization. We received approval from the lenders supporting our Credit Facility to increase the letter of credit subfacility by $35 million for use only in connection with bonding the appeal of the Electrochem Litigation. The Credit Facility is secured by our non-realty assets including cash, accounts and notes receivable, and inventories, and has an expiration date of May 22, 2012 with a one-time option to extend to April 1, 2013 if no default has occurred.

The Credit Facility is supported by a consortium of six banks with no bank controlling more than 25% of the facility. As of April 2, 2010, each bank supporting the Credit Facility has an S&P credit rating of at least BBB- or better, which is considered investment grade.

Interest rates under the Credit Facility are, at our option, based upon the current prime rate or the LIBOR rate plus a margin that varies with our leverage ratio. If interest is paid based upon the prime rate, the applicable margin is between minus 1.25% and 0.00%. If interest is paid based upon the LIBOR rate, the applicable margin is between 1.00% and 2.00%. We are also required to pay a fee on our outstanding letter of credit equal to a margin between 1.00% and 2.00%, depending on our leverage ratio, plus 0.125%. We are also required to pay a commitment fee between 0.125% and 0.250% per annum on the unused portion of the Credit Facility based on our leverage ratio.

The weighted average interest rate on borrowings under our revolving line of credit as of April 2, 2010, which does not include the impact of the interest rate swaps, was 1.43% and resets based upon the six-month LIBOR rate. As of April 2, 2010, we had $114 million available under the Credit Facility. This amount may vary from period to period based upon our debt and EBITDA levels, which impacts the covenant calculations. The interest rate on the $23 million letter of credit outstanding as of April 2, 2010 was 1.125%.

The Credit Facility contains limitations on the incurrence of indebtedness, limitations on the incurrence of liens and licensing of intellectual property, limitations on investments and restrictions on certain payments. Except to the extent paid by the issuance of common stock of Greatbatch or paid out of cash on hand, the Credit Facility limits the amount paid for acquisitions in total to $100 million. The restrictions on payments, among other things, limits repurchase of our stock to $60 million and limit the ability of the Company to make cash payments upon conversion of CSN II. These limitations can be waived upon the Company’s request and approval of a simple majority of the lenders.

- 32 -

The Credit Facility requires us to maintain a ratio of adjusted EBITDA, as defined in the credit agreement, to interest expense of at least 3.00 to 1.00. For the twelve month period ending April 2, 2010, our ratio of adjusted EBITDA to interest expense, calculated in accordance with our credit agreement, was 9.0 to 1.00, well above the required limit. The Credit Facility also requires us to maintain a total leverage ratio, as defined in the credit agreement, of not greater than 4.50 to 1.00. As of April 2, 2010 our total leverage ratio, calculated in accordance with our credit agreement, was 3.35 to 1.00, well below the required limit. The calculation of adjusted EBITDA and leverage ratio exclude non-cash charges, as well as charges in connection with the Electrochem Litigation up to a limit of $35 million.

Based upon our current capital needs, we anticipate utilizing free cash flow (cash flow from operations less capital expenditures) to make principal payments on our long-term debt.

Operating activities — Cash flows from operations for the first quarter of 2010 were $21.2 million compared to $0.06 million for the 2009 first quarter and $21.5 million for the 2009 fourth quarter. The increase from the prior year first quarter is primarily due to the our strategic initiatives designed to improve operational efficiency, which included initiatives to reduce inventory and receivable levels, as well as the timing of payments and lower consolidation and integrations costs. We anticipate that cash on hand along with cash flow from operations and availability under our revolving line of credit will be sufficient to meet our operating (including any potential legal settlements) needs.

Investing activities — Net cash used in investing activities for the first three months of 2010 were $2.0 million and was primarily related to maintenance capital expenditures. Our current expectation is that capital spending for the remainder of 2010 will be in the range of $20 million to $30 million, of which approximately half is discretionary in nature. These purchases relate to routine investments to support our internal growth, as well as additional investment in our orthopaedics business in order to further drive improvements and growth including the purchase of rapid prototyping equipment for our new orthopaedics design center opened in February 2010.

We anticipate that cash on hand along with cash flow from operations and availability under our revolving line of credit will be sufficient to fund these capital expenditures. We regularly engage in discussions relating to potential acquisitions. Going forward, we will continue to consider strategically targeted and opportunistic acquisitions.

Financing activities — Net cash used in financing activities for the 2010 first quarter were $0.6 million. As of April 2, 2010, we have outstanding $30.5 million of CSN I, which contain a put option exercisable on June 15, 2010 and is classified as a current liability. We currently expect to repay this current portion of long-term debt, and the associated deferred tax liability of $6.2 million in June 2010 with cash on hand, which totaled $56.3 million as of April 2, 2010. After June 2010, we expect excess cash flow to be used to pay down amounts outstanding under our revolving line of credit. We continually assess our financing facilities and capital structure to ensure liquidity and capital levels are sufficient to meet our strategic objectives. In the future, we may adjust our capital structure as funding opportunities present themselves.

Capital Structure — As of April 2, 2010, our capital structure consisted of $228.2 million of convertible subordinated notes, $98.0 million of debt under our revolving line of credit and 23.2 million shares of common stock outstanding. Additionally, we had $56.3 million in cash and cash equivalents, which is sufficient to meet our short-term operating cash needs. If necessary, we have access to $114 million under our available line of credit and are authorized to issue 100 million shares of common stock and 100 million shares of preferred stock. The market value of our outstanding common stock since our initial public offering has exceeded our book value; accordingly, we believe that if needed we can access public markets to raise additional capital. Our capital structure allows us to support our internal growth and provides liquidity for corporate development initiatives.

- 33 -

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements within the meaning of Item 303(a)(4) of Regulation S-K.

Contractual Obligations

The following table summarizes our significant contractual obligations at April 2, 2010:


	Payments due by period
			Less than 1						More than 5
CONTRACTUAL OBLIGATIONS	Total		year		1-3 years		3-5 years		years

Debt obligations ^(a)	$	355,347	$	43,025	$	112,315	$	200,007	$	—
Operating lease obligations^(b)		11,603		2,192		4,234		3,513		1,664
Purchase obligations ^(b)		12,771		12,265		506		—		—
Foreign currency contracts ^(b)		6,750		6,750		—		—		—
Pension obligations ^(c)		10,903		621		1,982		2,286		6,014

Total	$	397,374	$	64,853	$	119,037	$	205,806	$	7,678


(a)		Includes the annual interest expense on our convertible debentures of 2.25%, which is paid semi-annually. These amounts assume the June 2010 put option is exercised on the $30.5 million of CSN I and we are required to pay the $6.2 million of deferred taxes related to these notes. Amounts also include the expected interest expense on the $98.0 million outstanding on our line of credit based upon the period end weighted average interest rate of 3.9%, which includes the impact of our interest rate swaps outstanding. See Note 5— “Debt” of the Notes to Condensed Consolidated Financial Statements in this report for additional information about our debt obligations.

(b)		See Note 10 — “Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements in this report for additional information about our operating lease, purchase obligations and foreign currency contracts.

(c)		See Note 6 — “Pension Plans” of the Notes to Condensed Consolidated Financial Statements in this report for additional information about our pension plan obligations. These amounts do not include any potential future contributions to our pension plan that may be necessary if the rate of return earned on pension plan assets is not sufficient to fund the rate of increase of our pension liability. Future cash contributions may be required. As of January 1, 2010, the most recent valuation date, our actuarially determined pension benefit obligation exceeded the plans assets by $4.0 million.

This table does not reflect $3.4 million of unrecognized tax benefits as we are uncertain as to if or when such amounts may be settled. Refer to Note 9 — “Income Taxes” of the Notes to Condensed Consolidated Financial Statements in this report for additional information about these unrecognized tax benefits. Additionally, the table does not include any potential payments that may be due in connection with the Electrochem Litigation (See Note 10 “Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements contained in this report).

In an attempt to help offset the cost of rising health care expenses, beginning in 2010, we began self-funding the medical insurance coverage for all of our U.S. based employees. Our risk is being limited through the use of stop loss insurance which has deductibles in the amount of $0.2 million per covered participant and $9.9 million in the aggregate per year. As of April 2, 2010, we have $2.2 million accrued related to the self-insurance of our medical plan, which is recorded as Accrued Expenses and Other Current Liabilities in the Condensed Consolidated Balance Sheet and is not included in the contractual obligations table above.

- 34 -

Litigation

We are party to various legal actions arising in the normal course of business. A complete list of all material pending legal actions against the company are set forth at Note 10 “Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements contained in this report. Except for the items set forth in Note 10, we do not believe that the ultimate resolution of any pending legal actions will have a material adverse effect on our consolidated results of operations, financial position or cash flows. However, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact in the period in which the ruling occurs.

Inflation

We utilize certain critical raw materials (including precious metals) in our products that we obtain from a limited number of suppliers due to the technically challenging requirements of the supplied product and/or the lengthy process required to qualify these materials with our customers. We cannot quickly establish additional or replacement suppliers for these materials because of these requirements. Our results may be negatively impacted by an increase in the price of these critical raw materials. This risk is partially mitigated as many of the supply agreements with our customers allow us to partially adjust prices for the impact of any raw material price increases and the supply agreements with our vendors have final one-time buy clauses to meet a long-term need. Historically, raw material price increases have not materially impacted our results of operations.

Impact of Recently Issued Accounting Standards

In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”), American Institute of Certified Public Accountants (“AICPA”) or other authoritative accounting body to determine the potential impact they may have on our Consolidated Financial Statements. Based upon this review, we do not expect any of the recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company’s Consolidated Financial Statements.

Application of Critical Accounting Estimates

Our unaudited Condensed Consolidated Financial Statements are based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make significant assumptions. We believe that some of the more critical estimates and related assumptions that affect our financial condition and results of operations are in the areas of the valuation of goodwill, other identifiable intangible assets, stock-based compensation, inventories, tangible long-lived assets and the provision for income taxes. For further information, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 “Financial Statements and Supplementary Data” in our Annual Report on Form 10-K for the year ended January 1, 2010. During the three months ended April 2, 2010, we did not change or adopt any new accounting policies that had a material effect on our Consolidated Financial Statements.

Forward-Looking Statements

Some of the statements contained in this Quarterly Report on Form 10-Q and other written and oral statements made from time to time by us and our representatives are not statements of historical or current fact. As such, they are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations, which are subject to known and unknown risks, uncertainties and assumptions. They include statements relating to:

	•		future sales, expenses and profitability;

	•		the future development and expected growth of our business and the markets we operate in;

	•		our ability to successfully execute our business model and our business strategy;

	•		our ability to identify trends within the implantable medical devices, medical components, and Electrochem markets and to offer products and services that meet the changing needs of those markets;

	•		projected capital expenditures; and

	•		trends in government regulation.

- 35 -

You can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those suggested by these forward-looking statements. In evaluating these statements and our prospects generally, you should carefully consider the factors set forth below. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary factors and to others contained throughout this report. We are under no duty to update any of the forward-looking statements after the date of this report or to conform these statements to actual results.

Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from the results expressed or implied by our forward-looking statements or that may affect our future results, some of these factors include the following: dependence upon a limited number of customers, product obsolescence, inability to market current or future products, pricing pressure from customers, reliance on third party suppliers for raw materials, products and subcomponents, fluctuating operating results, inability to maintain high quality standards for our products, challenges to our intellectual property rights, product liability claims, inability to successfully consummate and integrate acquisitions, unsuccessful expansion into new markets, competition, inability to obtain licenses to key technology, regulatory changes or consolidation in the healthcare industry, and other risks and uncertainties that arise from time to time as described in the Company’s Annual Report on Form 10-K and other periodic filings with the Securities and Exchange Commission.


ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Foreign Currency — We have significant foreign operations in France, Mexico and Switzerland, which expose the Company to foreign currency exchange rate fluctuations due to transactions denominated in Euros, Pesos and Swiss Francs, respectively. We continuously evaluate our foreign currency risk and will take action from time to time in order to best mitigate these risks, which includes the use of various derivative instruments such as forward currency exchange contracts. A hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign currency exposures would have had an impact of approximately $8 million on our annual sales. This amount is not indicative of the hypothetical net earnings impact due to partially offsetting impacts on cost of sales and operating expenses in those currencies.

In February 2009, we entered into forward contracts to purchase 10 million Mexican pesos per month from March 2009 to December 2009 at an exchange rate of 14.85 pesos per one U.S. dollar. These contracts were entered into in order to hedge the risk of peso-denominated payments associated with the operations at our Tijuana, Mexico facility for 2009. These contracts were accounted for as cash flow hedges. No portion of the changes in fair value of the foreign currency contracts during the first three months of 2009 was considered ineffective.

In December 2009, we entered into forward contracts to purchase 6.6 million Mexican pesos per month from January 2010 to December 2010 at an exchange rate of 13.159 pesos per one U.S. dollar. In February 2010, we entered into forward contracts to purchase an additional 3.3 million Mexican pesos per month from February 2010 to December 2010 at an exchange rate of 13.1595 pesos per one U.S. dollar. These contracts were entered into in order to hedge the risk of peso-denominated payments associated with the operations at our Tijuana, Mexico facility for 2010 and are being accounted for as cash flow hedges. As of April 2, 2010 these contracts had a positive fair value of $0.4 million, which is recorded within Other Current Assets in the Condensed Consolidated Balance Sheet. The amount recorded as a reduction of Cost of Sales during the first three months of 2010 related to these forward contracts was $0.2 million. No portion of the change in fair value of these foreign currency contracts during the first three months of 2010 was considered ineffective.

We translate all assets and liabilities of our foreign operations, where the U.S. dollar is not the functional currency, at the period-end exchange rate and translate sales and expenses at the average exchange rates in effect during the period. The net effect of these translation adjustments is recorded in the Condensed Consolidated Financial Statements as Comprehensive Income (Loss). The cumulative translation adjustment as of April 2, 2010 was a $1.1 million gain. Translation adjustments are not adjusted for income taxes as they relate to permanent investments in our foreign subsidiaries. Net foreign currency transaction gains and losses included in Other Expense, Net amounted to a gain of $0.3 million and a loss of $0.2 million for the first quarter of 2010 and 2009, respectively. A hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign currency net assets would have had an impact of approximately $9 million on our foreign net assets as of April 2, 2010.

- 36 -

Interest Rate Swaps — As of April 2, 2010, we had $98 million outstanding on our revolving line of credit. Interest rates reset on this debt based upon the six-month LIBOR rate, thus subjecting us to interest rate risk. During 2008, we entered into three receive floating-pay fixed interest rate swaps indexed to the six-month LIBOR rate. The objective of these swaps is to hedge against potential changes in cash flows on our outstanding revolving line of credit. No credit risk was hedged. The receive variable leg of the swaps and the variable rate paid on the revolving line of credit bear the same rate of interest, excluding the credit spread, and reset and pay interest on the same dates.

Information regarding our outstanding interest rate swaps is as follows:

Current

Fair

Pay

receive

value

Balance

Type of

Notional

Start

End

fixed

floating

April 2,

sheet

Instrument

hedge

amount

date

rate

2010

location

(In thousands)

Int. rate swap

Cash flow

80,000

3/5/2008

7/7/2010

3.09

1.08

(565

)

Other Current Liabilities

Int. rate swap

Cash flow

18,000

12/18/2008

12/18/2010

2.00

0.45

(585

)

Other Current Liabilities

Int. rate swap

Cash flow

50,000

7/7/2010

7/7/2011

2.16

6M LIBOR

(187

)

Other Long-Term Liabilities

(1,337

)

The estimated fair value of the interest rate swap agreements represents the amount we would have to pay to terminate the contracts. No portion of the change in fair value of the interest rate swaps during the first quarters of 2010 or 2009 was considered ineffective. The amount recorded as additional Interest Expense related to the interest rate swaps was $0.6 million and $0.2 million during the first quarters of 2010 and 2009, respectively.

Any change in the LIBOR interest rate would not have an impact on our interest expense relating to the $98 million of floating rate revolving line of credit debt outstanding due to the interest rate swap agreements we have in place.


ITEM 4.		CONTROLS AND PROCEDURES.

a. Evaluation of Disclosure Controls and Procedures.

Our management, including the principal executive officer and principal financial officer, evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) related to the recording, processing, summarization and reporting of information in our reports that we file with the SEC as of April 2, 2010. These disclosure controls and procedures have been designed to provide reasonable assurance that material information relating to us, including our subsidiaries, is made known to our management, including these officers, by other of our employees, and that this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SEC’s rules and forms. Based on their evaluation, as of April 2, 2010, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective.

- 37 -

b. Changes in Internal Control Over Financial Reporting.

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION


ITEM 1.		LEGAL PROCEEDINGS.

With regard to the previously reported patent infringement action filed by Pressure Products Medical Supplies, Inc. (“Pressure Products”), the U.S. Court of Appeals for the Federal Circuit on March 24, 2010 ruled in favor of the Company by vacating the August 2008 patent infringement verdict that resulted in a $1.1 million damages award against the Company. The U.S. Appeals Court for the Federal Circuit concluded that the trial court erred in a definition it provided for a patent claim term and remanded the case back to the U.S. District Court for the Eastern District of Texas for further proceedings consistent with the appellate court’s findings. Except as disclosed above, there have been no material changes to those legal proceedings as previously disclosed in the Company’s Form 10-K for the year ended January 1, 2010.


ITEM 1A.		RISK FACTORS.

There have been no material changes in risk factors as previously disclosed in the Company’s Form 10-K for the year ended January 1, 2010.


ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.


ITEM 3.		DEFAULTS UPON SENIOR SECURITIES.

None.


ITEM 4.		[RESERVED]


ITEM 5.		OTHER INFORMATION.

None.


ITEM 6.		EXHIBITS.

See the Exhibit Index for a list of those exhibits filed herewith.

- 38 -

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Dated: May 12, 2010	GREATBATCH, INC.
	By	/s/ Thomas J. Hook
		Thomas J. Hook
		President and Chief Executive Officer (Principal Executive Officer)

	By	/s/ Thomas J. Mazza
		Thomas J. Mazza
		Senior Vice President and Chief Financial Officer (Principal Financial Officer)

	By	/s/ Marco F. Benedetti
		Marco F. Benedetti
		Corporate Controller & Treasurer (Principal Accounting Officer)

EXHIBIT INDEX


Exhibit No.			Description

	3.1		Amended and Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to our quarterly report on Form 10-Q for the period ended June 27, 2008).

	3.2		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our annual report on Form 10-K for the period ended January 1, 2010).

	31.1	*	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

	31.2	*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

	32	*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		- Filed herewith.

- 39 -

Integer Holdings Corp - Quarter Report: 2010 April (Form 10-Q)

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents