Integer Holdings Corp - Quarter Report: 2011 April (Form 10-Q)

Greatbatch, Inc.
Table of Contents for Form 10-Q
As of and for the Quarterly Period Ended April 1, 2011

		Page No.
PART I — FINANCIAL INFORMATION
ITEM 1. 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 Statement 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			37
ITEM 4. Controls and Procedures			38
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings			39
ITEM 1A. Risk Factors			39
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
ITEM 3. Defaults Upon Senior Securities			39
ITEM 4. (Removed and Reserved)			39
ITEM 5. Other Information			39
ITEM 6. Exhibits			39
SIGNATURES			40
EXHIBIT INDEX			40
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I — FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

GREATBATCH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS — Unaudited
(in thousands except share and per share data)

		As of
		April 1,				December 31,
		2011				2010
ASSETS
Current assets:
Cash and cash equivalents		$	51,678			$	22,883
Accounts receivable, net of allowance for doubtful accounts of $2.0 million in 2011 and $1.8 million in 2010			81,964				70,947
Inventories			102,738				101,440
Refundable income taxes			—				2,763
Deferred income taxes			7,265				7,398
Prepaid expenses and other current assets			6,400				6,078
Total current assets			250,045				211,509
Property, plant and equipment, net			146,949				146,380
Amortizing intangible assets, net			73,148				75,114
Trademarks and tradenames			20,288				20,288
Goodwill			308,123				307,451
Deferred income taxes			2,249				2,427
Other assets			7,740				13,807
Total assets		$	808,542			$	776,976
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	37,318			$	27,989
Income taxes payable			2,081				—
Deferred income taxes			607				514
Accrued expenses and other current liabilities			32,587				32,084
Total current liabilities			72,593				60,587
Long-term debt			223,145				220,629
Deferred income taxes			64,957				64,290
Other long-term liabilities			4,756				4,641
Total liabilities			365,451				350,147
Stockholders’ equity:
Preferred stock, $0.001 par value, authorized 100,000,000 shares; no shares issued or outstanding in 2011 or 2010			—				—
Common stock, $0.001 par value, authorized 100,000,000 shares; 23,347,309 shares issued and 23,302,625 shares outstanding in 2011 23,319,492 shares issued and 23,256,897 shares outstanding in 2010			23				23
Additional paid-in capital			299,817				298,405
Treasury stock, at cost, 44,684 shares in 2011 and 62,595 shares in 2010			(1,048	)			(1,469	)
Retained earnings			131,344				119,400
Accumulated other comprehensive income			12,955				10,470
Total stockholders’ equity			443,091				426,829
Total liabilities and stockholders’ equity		$	808,542			$	776,976

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

GREATBATCH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME — Unaudited
(in thousands except per share data)

		Three Months Ended
		April 1,				April 2,
		2011				2010
Sales		$	148,834			$	132,029
Cost of sales			101,664				90,365
Gross profit			47,170				41,664
Operating expenses:
Selling, general and administrative expenses			18,649				15,652
Research, development and engineering costs, net			10,388				11,024
Other operating expenses, net			167				992
Total operating expenses			29,204				27,668
Operating income			17,966				13,996
Interest expense			4,274				5,148
Interest income			(8	)			(2	)
Gain on sale of cost method investment			(4,549	)			—
Other expense, net			422				316
Income before provision for income taxes			17,827				8,534
Provision for income taxes			5,883				2,987
Net income		$	11,944			$	5,547
Earnings per share:
Basic		$	0.51			$	0.24
Diluted		$	0.51			$	0.24
Weighted average shares outstanding:
Basic			23,200				23,044
Diluted			23,587				23,907
Comprehensive income:
Net income		$	11,944			$	5,547
Foreign currency translation gain (loss)			2,215				(3,194	)
Net change in cash flow hedges, net of tax			270				473
Comprehensive income		$	14,429			$	2,826

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

GREATBATCH, INC.

		Three Months Ended
		April 1,				April 2,
		2011				2010
Cash flows from operating activities:
Net income		$	11,944			$	5,547
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			11,599				11,767
Stock-based compensation			2,747				1,092
Gain on sale of cost method investment			(4,549	)			—
Other non-cash losses			172				622
Deferred income taxes			1,037				1,934
Changes in operating assets and liabilities:
Accounts receivable			(10,131	)			(506	)
Inventories			(712	)			75
Prepaid expenses and other current assets			(80	)			1,856
Accounts payable			8,189				1,912
Accrued expenses and other current liabilities			7				(3,981	)
Income taxes payable			4,783				898
Net cash provided by operating activities			25,006				21,216
Cash flows from investing activities:
Acquisition of property, plant and equipment			(6,047	)			(3,066	)
Proceeds from sale of property, plant and equipment			—				1,092
Proceeds from sale of cost method investments, net			10,365				—
Other investing activities			(98	)			7
Net cash provided by (used in) investing activities			4,220				(1,967	)
Cash flows from financing activities:
Issuance of common stock			409				—
Other financing activities			(1,090	)			(618	)
Net cash used in financing activities			(681	)			(618	)
Effect of foreign currency exchange rates on cash and cash equivalents			250				(178	)
Net increase in cash and cash equivalents			28,795				18,453
Cash and cash equivalents, beginning of period			22,883				37,864
Cash and cash equivalents, end of period		$	51,678			$	56,317

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

GREATBATCH, INC.

																										Accumulated
										Additional				Treasury												Other				Total
		Common Stock								Paid-In				Stock								Retained				Comprehensive				Stockholders’
		Shares				Amount				Capital				Shares				Amount				Earnings				Income				Equity
At December 31, 2010			23,319			$	23			$	298,405				(63	)		$	(1,469	)		$	119,400			$	10,470			$	426,829
Stock-based compensation			—				—				1,525				—				—				—				—				1,525
Net shares issued under stock incentive plans			28				—				(87	)			18				421				—				—				334
Income tax liability from stock options, restricted stock and restricted stock units			—				—				(26	)			—				—				—				—				(26	)
Net income			—				—				—				—				—				11,944				—				11,944
Total other comprehensive income			—				—				—				—				—				—				2,485				2,485
At April 1, 2011			23,347			$	23			$	299,817				(45	)		$	(1,048	)		$	131,344			$	12,955			$	443,091

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

GREATBATCH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

1.

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 materially from these estimates. The December 31, 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 December 31, 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 2011 and 2010 each contained 13 weeks and ended on April 1, and April 2, respectively.

2.

SUPPLEMENTAL CASH FLOW INFORMATION

		Three Months Ended
		April 1,				April 2,
		2011				2010
Noncash investing and financing activities (in thousands):
Unrealized gain on cash flow hedges, net		$	270			$	473
Net change in property, plant and equipment purchases included in accounts payable			(191	)			290
Cash paid during the period for:
Interest		$	424			$	587
Income taxes			118				197
Acquisition of noncash assets		$	125			$	—

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

3.

INVENTORIES

Inventories are comprised of the following (in thousands):

		As of
		April 1,				December 31,
		2011				2010
Raw materials		$	47,121			$	45,974
Work-in-process			33,941				34,659
Finished goods			21,676				20,807
Total		$	102,738			$	101,440

4.		INTANGIBLE ASSETS
		Amortizing intangible assets are comprised of the following (in thousands):

		Gross								Foreign				Net
		Carrying				Accumulated				Currency				Carrying
		Amount				Amortization				Translation				Amount
At April 1, 2011
Purchased technology and patents		$	83,273			$	(49,688	)		$	1,540			$	35,125
Customer lists			46,818				(11,426	)			2,028				37,420
Other			3,519				(2,967	)			51				603
Total amortizing intangible assets		$	133,610			$	(64,081	)		$	3,619			$	73,148
At December 31, 2010
Purchased technology and patents		$	83,023			$	(48,187	)		$	1,212			$	36,048
Customer lists			46,818				(10,577	)			2,119				38,360
Other			3,519				(2,862	)			49				706
Total amortizing intangible assets		$	133,360			$	(61,626	)		$	3,380			$	75,114

Aggregate amortization expense for the first quarter of 2011 and 2010 was $2.5 million and $2.4 million, respectively. As of April 1, 2011, annual amortization expense is estimated to be $7.4 million for the remainder of 2011, $9.7 million for 2012, $8.9 million for 2013, $8.2 million for 2014 and $7.2 million for 2015.

The change in goodwill is as follows (in thousands):

		Greatbatch
		Medical				Electrochem				Total
At December 31, 2010		$	297,508			$	9,943			$	307,451
Foreign currency translation			672				—				672
At April 1, 2011		$	298,180			$	9,943			$	308,123

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

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

		April 1,				December 31,
		2011				2010
Revolving line of credit		$	50,000			$	50,000
2.25% convertible subordinated notes, due 2013			197,782				197,782
Unamortized discount			(24,637	)			(27,153	)
Total long-term debt		$	223,145			$	220,629

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.

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, at the Company’s option if no default has occurred. Interest rates under the Credit Facility are, at the Company’s option, based upon the current Base Rate, as defined in the credit agreement for the Credit Facility, or 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 Base 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 any outstanding letter of credit balance equal to a margin between 1.125% and 2.125%, depending on the Company’s leverage ratio. 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.

The Credit Facility contains limitations on the incurrence of indebtedness, liens and licensing of intellectual property, investments and certain payments. Additionally, the Credit Facility restricts payments, among other things, including limiting the repurchase of Greatbatch stock to $60 million and the ability of the Company to make cash payments upon conversion of its convertible subordinated notes. These limitations can be waived upon the Company’s request and approval of a simple majority of the lenders.

The Credit Facility 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 excludes non-cash charges. As of April 1, 2011, the Company was in compliance with all covenants.

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.

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

The weighted average interest rate on borrowings under the Credit Facility as of April 1, 2011, which does not include the impact of the interest rate swaps described below, was 1.46%. As of April 1, 2011, the Company had $185 million of borrowing capacity available under the Credit Facility and is paying a commitment fee of 0.125% on that amount. 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.

		Interest Rate Swaps —In 2008, the Company entered into three receive floating-pay fixed interest rate swaps indexed to the six-month LIBOR rate. As of April 1, 2011, only one of these swaps remains outstanding. The objective of these swaps was to hedge against potential changes in cash flows on the Company’s outstanding Credit Facility, which is indexed to the six-month LIBOR rate. No credit risk was hedged. The receive variable leg of the swaps and the variable rate paid on the Credit Facility 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 swap is as follows (dollars in thousands):

Current

Fair

Pay

Receive

Value

Balance

Type of

Notional

Start

End

Fixed

Floating

April 1,

Sheet

Instrument

Hedge

Amount

Date

Date

Rate

Rate

2011

Location

Int. rate swap

Cash flow

$

50,000

7/7/2010

7/7/2011

2.16

%

0.46

%

$

(229

)

Other Current Liabilities

The estimated fair value of the interest rate swap agreement represents the amount the Company would have to pay to terminate the contract. No portion of the change in fair value of the interest rate swaps during the 2011 or 2010 periods was considered ineffective. The amount recorded as additional Interest Expense related to the interest rate swaps for the first quarter of 2011 and 2010 was $0.2 million and $0.6 million, 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 was 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.

CSN II 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 were issued at a price of $950 per $1,000 of principal. The fair value of CSN II as of April 1, 2011 was approximately $199 million and is based on recent sales prices.

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

		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 1, 2011, the carrying amount of the discount related to the CSN II conversion option value was $20.9 million. As of April 1, 2011, the if-converted value of the CSN II notes does not exceed their principal amount as the Company’s closing stock price of $26.12 per share did not exceed the conversion price of $34.70 per share.
		The contractual interest and discount amortization for CSN II were as follows (in thousands):

		Three Months Ended
		April 1,				April 2,
		2011				2010
Contractual interest		$	1,113			$	1,113
Discount amortization			2,516				2,354

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 effects 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 governing the notes, 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 7.4 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 indenture, 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.

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

Deferred Financing Fees — The change in deferred financing fees is as follows (in thousands):

At December 31, 2010		$	2,005
Amortization during the period			(244	)
At April 1, 2011		$	1,761

6.

PENSION PLANS

		The Company is required to provide its employees located in Switzerland and France certain defined pension benefits. These 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 net pension liability is as follows (in thousands):

At December 31, 2010		$	4,647
Net periodic pension cost			277
Benefit payments			(263	)
Foreign currency translation			103
At April 1, 2011		$	4,764

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

		Three Months Ended
		April 1,				April 2,
		2011				2010
Service cost		$	257			$	240
Interest cost			111				106
Amortization of net loss and prior service cost			19				5
Expected return on plan assets			(110	)			(106	)
Net pension cost		$	277			$	245

7.

STOCK-BASED COMPENSATION

Compensation costs related to share-based payments for the three months ended April 1, 2011 and April 2, 2010 totaled $1.5 million and $1.1 million, respectively. Of these amounts $1.3 million and $1.0 million, respectively, are included in Selling, General and Administrative Expenses. Stock-based compensation expense included in the Condensed Consolidated Statement of Cash Flows includes costs recognized for the annual share contribution to the Company’s 401(k) plan of $1.2 million and $0 for the three months ended April 1, 2011 and April 2, 2010, respectively.

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

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

		Three Months Ended
		April 1,				April 2,
		2011				2010
Weighted average fair value		$	9.42			$	8.16
Risk-free interest rate			2.04	%			2.57	%
Expected volatility			40	%			40	%
Expected life (in years)			5				5
Expected dividend yield			0	%			0	%

The following table summarizes time-vested stock option activity:

										Weighted
										Average
						Weighted				Remaining				Aggregate
		Number of				Average				Contractual				Intrinsic
		Time-Vested				Exercise				Life				Value
		Stock Options				Price				(In Years)				(In Millions)
Outstanding at December 31, 2010			1,463,556			$	23.46
Granted			292,959				24.15
Exercised			(13,907	)			21.24
Forfeited or expired			(37,911	)			23.69
Outstanding at April 1, 2011			1,704,697			$	23.59				6.7			$	5.4
Exercisable at April 1, 2011			1,174,573			$	23.66				5.7			$	3.9

The following table summarizes performance-vested stock option activity:

										Weighted
										Average
		Number of				Weighted				Remaining				Aggregate
		Performance-				Average				Contractual				Intrinsic
		Vested Stock				Exercise				Life				Value
		Options				Price				(In Years)				(In Millions)
Outstanding at December 31, 2010			744,523			$	23.68
Exercised			(4,948	)			22.95
Forfeited or expired			(216,501	)			22.08
Outstanding at April 1, 2011			523,074			$	24.35				6.6			$	1.0
Exercisable at April 1, 2011			292,616			$	22.63				5.7			$	1.0

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

The following table summarizes time-vested restricted stock and unit activity:

						Weighted
		Time-Vested				Average
		Activity				Fair Value
Nonvested at December 31, 2010			123,386			$	22.57
Granted			21,114				24.15
Vested			(7,993	)			21.98
Forfeited or expired			(1,750	)			23.96
Nonvested at April 1, 2011			134,757			$	22.83

The following table summarizes performance-vested restricted stock and unit activity:

		Performance-				Weighted
		Vested				Average
		Activity				Fair Value
Nonvested at December 31, 2010			283,797			$	15.10
Granted			182,150				17.06
Vested			(200	)			18.47
Nonvested at April 1, 2011			465,747			$	15.86

The performance-based restricted stock units granted in 2011 only vest if certain market-based performance metrics are achieved. The amount of shares that ultimately vest range from 0 shares to 182,150 shares based upon the total shareholder return of the Company relative to the Company’s compensation peer group, as disclosed in the Company’s definitive proxy statement filed on April 15, 2011, over a three year performance period beginning in the year of grant. The fair value of the restricted stock units was determined by utilizing a Monte Carlo simulation model, which projects the value of Greatbatch stock versus the peer group under numerous scenarios and determines the value of the award based upon the present value of these projected outcomes.

On February 28, 2011, the Board of Directors adopted the Greatbatch, Inc. 2011 Stock Incentive Plan (the “2011 Plan”), which is subject to stockholder approval at the Company’s 2011 Annual Meeting of Stockholders to be held on May 17, 2011. If adopted, the 2011 Plan will authorize the issuance of up to 1,000,000 shares of equity incentive awards including nonqualified and incentive stock options, restricted stock, restricted stock units, stock bonuses and stock appreciation rights, subject to the terms of the 2011 Plan.

The Compensation Committee of the Board of Directors approved an annual long-term incentive program award of restricted stock units to senior level managers of the Company effective January 1, 2011. Since there were not enough shares available under the Company’s existing stock incentive plans to fund the entire 2011 award, a total of 97,265 shares of performance-based restricted stock units granted are subject to the approval of the 2011 Plan by the Company’s stockholders.

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

8.

OTHER OPERATING EXPENSES, NET

Other Operating Expenses, Net is comprised of the following (in thousands):

		Three Months Ended
		April 1,				April 2,
		2011				2010
Orthopaedic facility optimization(a)		$	239			$	—
2007 & 2008 facility shutdowns and consolidations(b)			—				320
Integration costs(c)			—				122
Asset dispositions and other(d)			(72	)			550
		$	167			$	992

(a) Orthopaedic facility optimization. In the third quarter of 2010, the Company began updating its Indianapolis, IN facility to streamline operations, consolidate two buildings, increase capacity, further expand capabilities and reduce dependence on outside suppliers. Ultimately these updates will further reduce lead times, improve quality and allow us to better meet the needs of customers. Total investment in this facility is expected to be approximately $6 million.

In the first quarter of 2011, the Company announced that it would construct an 80,000 square foot manufacturing facility in Allen County, IN and transfer the manufacturing operations currently being performed at its Columbia City, IN location into this new facility. Total investment is expected to be approximately $17 million.

		The total expense for these optimization projects is expected to be approximately $2 million of which $0.5 million has been incurred to date. All expenses are cash expenditures, except accelerated depreciation and asset write-offs and are recorded within the Greatbatch Medical segment.
		The change in accrued liabilities related to the orthopaedic facility optimization is as follows (in thousands):

						Production				Accelerated
		Severance				inefficiencies,				Depreciation/
		and				moving and				Asset Write-
		Retention				revalidation				offs				Other				Total
At December 31, 2010		$	—			$	—			$	—			$	—			$	—
Restructuring charges			—				229				—				10				239
Cash payments			—				(229	)			—				(10	)			(239	)
At April 1, 2011		$	—			$	—			$	—			$	—			$	—

(b) 2007 & 2008 facility shutdowns and consolidations. From 2007 to 2010, the Company completed the following facility shutdowns and consolidation initiatives:

	•		Consolidated its Electrochem manufacturing facilities in Canton, MA, Teterboro, NJ and Suzhou, China, into a newly constructed facility in Raynham, MA;
	•		Consolidated its corporate offices in Clarence, NY into its technology center also in Clarence, NY;

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

•

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;

•

Consolidated its Orchard Park, NY (Electrochem manufacturing), Exton, PA (Orthopaedic corporate office) and Saignelegier, Switzerland (Orthopaedic manufacturing) facilities into existing facilities that had excess capacity; and

•

Consolidated its manufacturing operations in Blaine, MN into its Plymouth, MN facility.

The total expenses incurred for these facility shutdowns and consolidations was $17.3 million and included the following:

	•		Severance and retention — $4.4 million;
	•		Production inefficiencies, moving and revalidation — $5.2 million;
	•		Accelerated depreciation and asset write-offs — $5.3 million;
	•		Personnel — $0.7 million; and
	•		Other — $1.7 million.

All categories of expenses were cash expenditures, except accelerated depreciation and asset write-offs. Costs incurred during the first quarter of 2010 related to the Electrochem Solutions segment.

(c) Integration costs. During 2010, 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.

(d) Asset dispositions and other. During 2011 and 2010, the Company recorded (gains) write-downs in connection with various asset disposals.

9.

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.

During the first quarter of 2011, there has been no change in the balance of unrecognized tax benefits. Approximately $1.8 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 in the range of approximately $0.0 million to $1.0 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.

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

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 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.

		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.
		The change in aggregate product warranty liability for the quarter is as follows (in thousands):

At December 31, 2010		$	2,313
Additions to warranty reserve			78
Warranty claims paid			(156	)
Foreign currency effect			3
At April 1, 2011		$	2,238

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 1, 2011, the total contractual obligation related to such expenditures is approximately $31.8 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 $1.9 million for the remainder of 2011; $2.3 million in 2012; $2.1 million in 2013; $2.2 million in 2014; $1.8 million in 2015 and $4.7 million thereafter. The Company primarily leases buildings, which accounts for the majority of the future lease payments.

Foreign Currency Contracts — In December 2009 and February 2010, the Company entered into forward contracts to purchase 6.6 million and 3.3 million, respectively, Mexican pesos per month through December 2010 at an exchange rate of 13.159 pesos and 13.1595 pesos per one U.S. dollar, respectively. 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 were accounted for as cash flow hedges.

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

In July 2010 and February 2011, the Company entered into forward contracts to purchase 6.6 million and 3.7 million, respectively, Mexican pesos per month through December 2011 at an exchange rate of 13.2231 pesos and 12.2761 pesos per one U.S. dollar, respectively. These contracts were entered into in order to hedge the risk of peso-denominated payments associated with a portion of the operations at the Company’s Tijuana, Mexico facility for 2011 and are being accounted for as cash flow hedges.

As of April 1, 2011, these contracts had a positive fair value of $0.5 million, which is recorded within Prepaid Expenses and Other Current Assets in the Condensed Consolidated Balance Sheet. The amount recorded as a reduction of Cost of Sales during the three months ended April 1, 2011 and April 2, 2010 related to these forward contracts was $0.1 million and $0.2 million, respectively. No portion of the change in fair value of the Company’s foreign currency contracts during the three months ended April 1, 2011 or April 2, 2010 was considered ineffective.

Self-Insured Medical Plan — The Company self-funds the medical insurance coverage provided to its U.S. based employees. The risk to the Company is being limited through the use of stop loss insurance, which has an annual deductible of $0.2 million per covered participant. The maximum aggregate loss (the sum of all claims under the $0.2 million deductible) is limited to $14.2 million with a maximum benefit of $1.0 million. As of April 1, 2011, the Company has $3.2 million accrued related to the self-insurance of its medical plan, which is recorded in Accrued Expenses and Other Current Liabilities in the Condensed Consolidated Balance Sheet, and is primarily based upon claim history.

11.		EARNINGS PER SHARE (“EPS”)
		The following table illustrates the calculation of Basic and Diluted EPS (in thousands, except per share amounts):

		Three Months Ended
		April 1,				April 2,
		2011				2010
Numerator for basic EPS:
Net income		$	11,944			$	5,547
Effect of dilutive securities:
Interest expense on CSN I and related deferred financing fees, net of tax			—				130
Numerator for diluted EPS		$	11,944			$	5,677
Denominator for basic EPS:
Weighted average shares outstanding			23,200				23,044
Effect of dilutive securities:
Convertible subordinated notes			—				756
Stock options, restricted stock and restricted stock units			387				107
Denominator for diluted EPS			23,587				23,907
Basic EPS		$	0.51			$	0.24
Diluted EPS		$	0.51			$	0.24

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

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

		Three Months Ended
		April 1,				April 2,
		2011				2010
Time-vested stock options, restricted stock and restricted stock units			1,016,000				1,621,000
Performance-vested stock options and restricted stock units			529,000				901,000

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 gain (loss), and realized and unrealized gain (loss) 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. Translation adjustments are not adjusted for income taxes as they relate to permanent investments in the Company’s foreign subsidiaries.

		The Company has designated its interest rate swaps and foreign currency contracts (See Note 5 “Debt” and Note 10 “Commitments and Contingencies”) as cash flow hedges. Accordingly, the effective portion of any change in the fair value of these instruments is recorded in comprehensive income, net of tax, and reclassified into earnings (Interest Expense — swaps, Cost of Sales — foreign currency contracts) in the same period or periods during which the hedged transaction affects earnings.
		Accumulated Other Comprehensive Income is comprised of the following (in thousands):

		Defined
		Benefit								Foreign
		Pension				Cash				Currency				Total								Net-of-
		Plan				Flow				Translation				Pre-Tax								Tax
		Liability				Hedges				Adjustment				Amount				Tax				Amount
At December 31, 2010		$	(2,014	)		$	(121	)		$	12,230			$	10,095			$	375			$	10,470
Unrealized gain on cash flow hedges			—				346				—				346				(121	)			225
Realized loss on cash flow hedges			—				69				—				69				(24	)			45
Foreign currency translation gain			—				—				2,215				2,215				—				2,215
At April 1, 2011		$	(2,014	)		$	294			$	14,445			$	12,725			$	230			$	12,955

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

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 1, 2011 (in thousands):

		Fair Value Measurements Using
						Quoted
						Prices in				Significant
						Active Markets				Other				Significant
		At				for Identical				Observable				Unobservable
		April 1,				Assets				Inputs				Inputs
Description		2011				(Level 1)				(Level 2)				(Level 3)
Assets
Foreign currency contracts		$	523			$	—			$	523			$	—
Liabilities
Interest rate swap		$	229			$	—			$	229			$	—

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 swap — The fair value of the Company’s interest rate swap is 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 swap is categorized in Level 2 of the fair value hierarchy.

Convertible subordinated notes — The fair value of the Company’s convertible subordinated notes disclosed in Note 5 “Debt” was 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 $6.0 million and $11.8 million as of April 1, 2011 and December 31, 2010, respectively. On January 5, 2011, the Company sold its cost method investment in IntElect Medical, Inc. (“IntElect”) in conjunction with Boston Scientific’s acquisition of IntElect. This transaction resulted in a pre-tax gain of $4.5 million ($3.0 million net of tax).

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

14.

BUSINESS SEGMENT, GEOGRAPHIC AND CONCENTRATION RISK INFORMATION

The Company operates its business in two reportable segments — Greatbatch Medical and Electrochem Solutions (“Electrochem”). The Greatbatch Medical segment designs and manufactures medical devices and components for the cardiac rhythm management (“CRM”), neuromodulation, vascular access and orthopaedic markets. Additionally, Greatbatch Medical offers value-added assembly and design engineering services for products that incorporate Greatbatch Medical components. As a result of the strategy put in place over three years ago, Greatbatch Medical now offers its customers complete medical devices including design, development, manufacturing, regulatory submission and supporting worldwide distribution. This medical device strategy is being facilitated through the QiG Group and leverages the component technology of Greatbatch Medical and Electrochem in the Company’s core markets: cardiovascular, neuromodulation and orthopaedic.

Electrochem designs, manufactures and distributes 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 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 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, product line and geographic information to the respective information in the Condensed Consolidated Financial Statements follows. Sales by geographic area are presented by allocating sales from external customers based on where the products are shipped to (in thousands):

		Three Months Ended
		April 1,				April 2,
		2011				2010
Sales:
Greatbatch Medical
CRM/Neuromodulation		$	78,037			$	76,925
Vascular Access			10,474				8,166
Orthopaedic			39,589				29,442
Total Greatbatch Medical			128,100				114,533
Electrochem			20,734				17,496
Total sales		$	148,834			$	132,029

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

		Three Months Ended
		April 1,				April 2,
		2011				2010
Segment income from operations:
Greatbatch Medical		$	18,947			$	14,030
Electrochem			4,407				3,753
Total segment income from operations			23,354				17,783
Unallocated operating expenses			(5,388	)			(3,787	)
Operating income as reported			17,966				13,996
Unallocated other expense			(139	)			(5,462	)
Income before provision for income taxes		$	17,827			$	8,534

		Three Months Ended
		April 1,				April 2,
		2011				2010
Sales by geographic area:
United States		$	65,201			$	58,219
Non-Domestic locations:
Puerto Rico			26,181				22,603
Belgium			18,969				16,185
United Kingdom & Ireland			10,493				13,628
Rest of world			27,990				21,394
Total sales		$	148,834			$	132,029

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

		Three Months Ended
		April 1,				April 2,
		2011				2010
Customer A			22	%			24	%
Customer B			17	%			17	%
Customer C			14	%			13	%
Customer D			7	%			9	%
			60	%			63	%

GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited

Long-lived tangible assets by geographic area are as follows (in thousands):

		As of
		April 1,				December 31,
		2011				2010
United States		$	120,519			$	126,519
Rest of world			36,419				36,095
Total		$	156,938			$	162,614

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, Securities and Exchange Commission, Emerging Issues Task Force, American Institute of Certified Public Accountants or other authoritative accounting bodies to determine the potential impact they may have on the Company’s Condensed 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 medical devices and components for the cardiac rhythm management (“CRM”), neuromodulation, vascular access and orthopaedic markets. Greatbatch Medical’s component 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 reconstructive, 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. As a result of the strategy put in place over three years ago, Greatbatch Medical now offers its customers complete medical devices including design, development, manufacturing, regulatory submission and supporting worldwide distribution. This medical device strategy is being facilitated through the QiG Group (“QiG”) and leverages the component technology of Greatbatch Medical and Electrochem in our core markets: cardiovascular, neuromodulation and orthopaedic.

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 worldwide.

Our Customers

Greatbatch Medical customers include leading original equipment manufacturers (“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 three months ended April 1, 2011, Boston Scientific, Johnson & Johnson, Medtronic and St. Jude Medical collectively accounted for 60% of our total sales.

Our Electrochem customers operate in the energy, security, portable medical and environmental monitoring markets and include 3M, General Electric, Halliburton, Honeywell, Weatherford and Zoll Medical. During the first quarter of 2011, Electrochem entered into long-term supply agreements with three of its larger OEM customers securing approximately $15 million of revenue over the next three years. These contracts are significant because they are with customers in markets that historically have not committed to long-term supply agreements, and provide a good example of how Electrochem is deepening its relationship with customers.

Financial Overview

First quarter 2011 sales grew 13% over the prior year period to $148.8 million, reflecting double digit growth in our vascular access, orthopaedic and Electrochem product lines. Compared to the 2010 fourth quarter, sales increased 12%. This strong growth reflects the benefits of our diversified revenue base, as well as the investments made over the last several years to add to our capabilities and to implement our medical device strategy.

We prepare our 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) facility consolidation, manufacturing transfer and system integration charges, (ii) asset write-down and disposition charges, (iii) severance charges in connection with corporate realignments or a reduction in force (iv) the impact of non-cash charges to interest expense due to the accounting change governing convertible debt, (v) unusual or infrequently occurring items, (vi) certain R&D expenditures (such as medical device design verification testing (“DVT”) expenses), (vii) gain/loss on the sale of investments and (viii) 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, certain performance-based compensation incentives provided to our executives are determined utilizing adjusted amounts.

GAAP operating income for the first quarter of 2011 was $18.0 million, compared to $14.0 million for the 2010 first quarter. Adjusted operating income was $18.7 million, or 12.6% of sales in the first quarter of 2011, compared to $15.0 million, or 11.4% of sales, for the comparable 2010 period. These improvements reflect the benefit of the higher revenue during the quarter, as well as our various lean initiatives, which helped to offset the negotiated price reductions given to some of our larger OEM customers at the end of last year in exchange for long-term contracts. Additionally, during the quarter we continued to make significant investment in the development of complete medical devices for our OEM customers and reached several key milestones, including the initiation of design verification testing (“DVT”) of our neuromodulation platform, which includes our Algostim spinal cord stimulation device that we introduced at our Investor Day on March 24, 2011.

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

		Three Months Ended
		April 1,				April 2,
		2011				2010
Operating income as reported		$	17,966			$	13,996
Adjustments:
Medical device DVT expenses (RD&E)			590				—
Consolidation costs			239				320
Integration expenses			—				122
Asset dispositions and other			(72	)			550
Adjusted operating income		$	18,723			$	14,988
Adjusted operating margin			12.6	%			11.4	%

GAAP and adjusted diluted EPS for the first quarter 2011 were $0.51 and $0.46 per share, respectively, compared to $0.24 and $0.32 per share, respectively, for the first quarter 2010. As previously disclosed, the 2011 GAAP amounts include a $4.5 million ($3.0 million net of tax) gain from the sale of a cost method investment.

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

		Three Months Ended
		April 1,				April 2,
		2011				2010
Income before taxes as reported		$	17,827			$	8,534
Adjustments:
Medical device DVT expenses (RD&E)			590				—
Gain on sale of cost method investment			(4,549	)			—
Consolidation costs			239				320
Integration expenses			—				122
Asset dispositions and other			(72	)			550
CSN II conversion option discount amortization			2,062				1,914
Adjusted income before taxes			16,097				11,440
Adjusted provision for income taxes			5,278				4,004
Adjusted net income		$	10,819			$	7,436
Adjusted diluted EPS		$	0.46			$	0.32
Number of shares			23,587				23,907

Our CEO’s View

We are pleased with the results for the first quarter, which exceeded our plans. Our diversified revenue base helped us to deliver record sales for the quarter and put us well on our way to meeting our financial targets for the year. With that said, as we all know, one quarter does not make a year and we still have a lot of hard work ahead of us given the market dynamics we are facing.

During the quarter we continued to execute on our long-term strategy, which is being enabled by our strong financial performance. The initiatives we have implemented over the last several years have provided us with an efficient manufacturing base, which more than accommodated the increased volume during the current quarter and helped offset continued pricing pressure from our customers. At our Investor Day in March, we provided further insight into our strategy of delivering complete medical devices to our customers, which is designed to raise the growth and profitability profile of our Company. We are happy to report that during the quarter we began to see the first revenues from this strategy.

We are cautiously optimistic that 2011 will be another successful year both strategically and operationally for Greatbatch.

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. Health Care Reform imposes significant new taxes on OEMs of approximately $20 billion over ten years, which will result in a significant increase in the tax burden on our industry and which could have a material, negative impact on our results of operations and our cash flows. Other elements of Health Care Reform such as comparative effectiveness research, an independent payment advisory board, payment system reforms including shared savings pilots and other provisions could meaningfully change the way healthcare is developed and delivered, and may materially impact numerous aspects of our business, results of operations and financial condition. Many significant parts of Health Care Reform 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.

In January 2010, the U.S. Department of Transportation, and the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) issued a Notice of Proposed Rulemaking, “Hazardous Materials: Transportation of Lithium Batteries” in the federal register. PMHSA, in conjunction with the Federal Aviation Administration is proposing to amend requirements in the hazardous materials regulations on the transportation of lithium cells and batteries, including lithium cells and batteries packed or contained in equipment. The Company is actively monitoring this rulemaking process because of the potential negative effect the rule, as currently proposed, could have on our Greatbatch Medical and Electrochem businesses.

Product Development

We continue to develop new component products for applications in our core markets, such as:

1.

Q power solutions QHR® & QMR®, which maximize device performance and longevity with minimal size;

2.

QCAPS™ which, when paired with QHR batteries, provides the smallest, longest-lived, highest energy power solutions for tachycardia devices;

	3.		orthopaedic capabilities in order to improve quality and shorten lead-times including the opening of additional regional development centers;
	4.		minimally invasive surgical techniques for the orthopaedic industry;
	5.		disposable instrumentation for the orthopaedic industry; and
	6.		charging platform for Electrochem’s secondary offering.