UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

GREATBATCH, INC.

(Exact name of Registrant as specified in its charter)

Delaware		16-1531026
(State of Incorporation)		(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)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class:		Name of Each Exchange on Which Registered:
Common Stock, Par Value $0.001 Per Share		New York Stock Exchange
Preferred Stock Purchase Rights		New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.

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 Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of common stock of Greatbatch, Inc. held by non-affiliates as of July 2, 2009 (last business day of most recently completed second fiscal quarter), based on the last sale price of $22.00, as reported on the New York Stock Exchange: $501.2 million. Solely for the purpose of this calculation, shares held by directors and officers and 10 percent shareholders of the Registrant have been excluded. Such exclusion should not be deemed a determination by or an admission by the Registrant that these individuals are, in fact, affiliates of the Registrant. Shares of common stock outstanding on March 2, 2010: 23,216,407

DOCUMENTS INCORPORATED BY REFERENCE

The following documents, in whole or in part, are specifically incorporated by reference in the indicated part of the Company’s Proxy Statement:

Document		Part
Proxy Statement for the 2010 Annual Meeting of Stockholders		Part III, Item 10 “Directors, Executive Officers and Corporate Governance”
		Part III, Item 11 “Executive Compensation”
		Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”
		Part III, Item 13 “Certain Relationships and Related Transactions, and Director Independence”
		Part III, Item 14 “Principal Accounting Fees and Services”

 

 

TABLE OF CONTENTS

ITEM						PAGE
NUMBER						NUMBER
PART I
	1			Business			3
	1A			Risk Factors			16
	1B			Unresolved Staff Comments			26
	2			Properties			26
	3			Legal Proceedings			26
	4			Reserved			27
PART II
	5			Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			27
	6			Selected Financial Data			28
	7			Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
	7A			Quantitative and Qualitative Disclosures About Market Risk			57
	8			Financial Statements and Supplementary Data			59
	9			Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			107
	9A			Controls and Procedures			107
	9B			Other Information			108
PART III
	10			Directors, Executive Officers and Corporate Governance			108
	11			Executive Compensation			108
	12			Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			108
	13			Certain Relationships and Related Transactions, and Director Independence			109
	14			Principal Accounting Fees and Services			109
PART IV
	15			Exhibits, Financial Statement Schedules			109
				Signatures			110
Exhibit 3.2
Exhibit 10.10
Exhibit 10.11
Exhibit 12.1
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I

ITEM 1.		BUSINESS

OVERVIEW

Wilson Greatbatch, co-inventor of the first successful implanted pacemaker, founded the predecessor to Greatbatch, Inc. in 1970 to develop long-lived primary batteries to fuel pacemakers. His passion for reliability and innovation is the foundation for Greatbatch’s full portfolio of capabilities and offerings. Every day, Greatbatch supports and empowers its customers in their pursuit of revolutionary technology solutions. Greatbatch, Inc. provides these innovative technologies to industries that depend on reliable, long-lasting performance. When used in this report, the terms “we,” “us,” “our” and the “Company” mean Greatbatch, Inc. and its subsidiaries. We believe that our proprietary technology, close customer relationships, multiple product offerings, market leadership and dedication to quality provide us with competitive advantages and create a barrier to entry for potential market entrants.

We operate our business in two reportable segments — Greatbatch Medical and Electrochem Solutions (“Electrochem”). During 2009, we rebranded our Implantable Medical Component (“IMC”) segment as Greatbatch Medical. The Greatbatch Medical segment designs and manufactures systems, components and devices for the Cardiac Rhythm Management (“CRM”), Neuromodulation, Vascular Access and Orthopaedic markets. Our 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) instruments and delivery systems used in hip and knee replacement, trauma and spine surgeries as well as hip, knee and shoulder implants; and 3) introducers, catheters, steerable sheaths and implantable stimulation leads. Additionally, Greatbatch Medical offers value-added assembly and design engineering services for medical systems and devices within the markets in which it operates.

Electrochem is a leader in 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 founder, Wilson Greatbatch, our technology and superior quality and reliability is utilized in markets world-wide.

The Company is a Delaware corporation that was incorporated in 1997 and since that time has completed the following acquisitions:

Acquisition date		Acquired company		Business at time of acquisition
July 1997		Wilson Greatbatch Ltd.		Founded in 1970, designed and manufactured batteries for IMD’s and commercial applications.
August 1998		Hittman Materials and Medical Components, Inc.		Founded in 1962, designed and manufactured ceramic and glass feedthroughs and specialized porous coatings for electrodes used in IMDs.
August 2000		Battery Engineering, Inc.		Founded in 1983, designed and manufactured high-energy density batteries for industrial, commercial, military and medical applications.

Acquisition date		Acquired company		Business at time of acquisition
June 2001		Sierra-KD Components division of Maxwell Technologies, Inc.		Founded in 1986, designed and manufactured ceramic electromagnetic filtering capacitors and integrated them with wire feedthroughs for use in IMDs as well as military, aerospace and commercial applications.
July 2002		Globe Tool and Manufacturing Company, Inc.		Founded in 1954, designed and manufactured precision enclosures used in IMDs and commercial products used in the aerospace, electronic and automotive sectors.
March 2004		NanoGram Devices Corporation		Founded in 1996, developed nanoscale materials for battery and medical device applications.
April 2007		BIOMEC, Inc.		Established in 1998, provided medical device design and component integration to early-stage and established customers.
June 2007		Enpath Medical, Inc.		Founded in 1981, designed, developed, and manufactured venous introducers and dilators, implantable leadwires, steerable sheaths and steerable catheters.
October 2007		IntelliSensing LLC		Founded in 2005, designed and manufactured battery-powered wireless sensing solutions for commercial applications.
November 2007		Quan Emerteq LLC		Founded in 1998, designed, developed, and manufactured catheters, stimulation leadwires, microcomponents and assemblies.
November 2007		Engineered Assemblies Corporation		Founded in 1984, designed and integrated custom battery solutions and electronics focused on rechargeable systems.
January 2008		P Medical Holding SA		Founded in 1994, designed, manufactured and supplied delivery systems, instruments and implants for the orthopaedic industry.
February 2008		DePuy Orthopaedics’ Chaumont, France manufacturing facility		Manufactured hip and shoulder implants for DePuy.

FINANCIAL STATEMENT YEAR END

We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31^st. Fiscal years 2009, 2008 and 2007 ended on January 1, 2010, January 2, 2009 and December 28, 2007, respectively. Fiscal year 2008 contained fifty-three weeks while fiscal years 2009 and 2007 contained fifty-two weeks.

SEGMENT INFORMATION

We operate our business in two reportable segments — Greatbatch Medical and Electrochem. Segment information including sales from external customers, profit or loss, and assets by segment as well as sales from external customers and long-lived assets by geographic area are set forth at Note 13 “Business Segment Information” of the Notes to Consolidated Financial Statements contained at Item 8 of this report.

GREATBATCH MEDICAL

CRM & Neuromodulation — An IMD is an instrument that is surgically inserted into the body to provide diagnosis and/or therapy. One sector of the IMD market is CRM, which is comprised of devices such as implantable pacemakers, implantable cardioverter defibrillators (“ICDs”), cardiac resynchronization therapy (“CRT”) devices, and cardiac resynchronization therapy with backup defibrillation devices (“CRT-D”). A new emerging sector of the IMD market is neuromodulation, which is comprised of pacemaker-type devices that stimulate nerves for the treatment of various conditions. Beyond approved therapies of pain control, incontinence, Parkinson’s disease and epilepsy, nerve stimulation for the treatment of other disabilities such as migraines, obesity and depression has shown promising results.

The following table sets forth the main categories of battery-powered IMDs and the principal illness or symptom treated by each device:

Device		Principal Illness or Symptom
Pacemakers		Abnormally slow heartbeat (Bradycardia)
ICDs		Rapid and irregular heartbeat (Tachycardia)
CRT/CRT-Ds		Congestive heart failure
Neurostimulators		Chronic pain, movement disorders, epilepsy, obesity or depression
Drug pumps		Diabetes or chronic pain

We believe that the CRM and Neuromodulation markets continue to exhibit growth fundamentals and that we are well positioned to continue to participate in this market growth. Increased demand is being driven by the following factors:

	•		Advances in medical technology — new therapies will allow physicians to use IMDs to treat a wider range of patients with various heart diseases.
	•		New, more sophisticated implantable devices — device manufacturers are developing new CRM devices and adding new features to existing products (such as RF telemetry) which require increased energy and power. At the same time, device manufacturers are trying to reduce the size of their devices. We believe that our proprietary batteries and capacitors are well positioned to meet the needs of these more sophisticated, smaller devices.
	•		Expanding patient population — the patient groups that are eligible for CRM devices have increased. The number of people in the U.S. that are over age 50 is expected to double in the next 10 years.
	•		Growth within neuromodulation — neuromodulation applications are growing at a faster pace than our traditional markets and are expected to expand as new therapeutic applications are identified.
	•		New performance requirements — government regulators are increasingly requiring that IMDs be protected from electromagnetic interference (“EMI”).
	•		Global markets — increased market penetration worldwide.

Vascular Access — Includes introducers and catheters that deliver therapies for coronary and neurovascular disease, peripheral vascular disease, neuromodulation, CRM, as well as products for medical imaging and drug and pharmaceutical delivery. Introducers enable physicians to create a conduit through which they can insert infusion catheters, implantable ports, pacemaker leads and other therapeutic devices into a blood vessel. A catheter is a tube that can be inserted into a blood vessel to allow drainage, injection of fluids, or access by surgical instruments.

In order to introduce a catheter or pacemaker lead into a vein, a hypodermic needle is first used to access the vein. A guide wire is then inserted through the hypodermic needle and the needle is removed. An introducer consists of a hollow sheath and a dilator which is inserted over the guide wire to expand the opening. The guide wire and dilator are then removed, leaving only the hollow sheath through which the catheter or pacemaker lead is introduced. Once the catheter or pacemaker lead is in place, the vessel introducer sheath is removed. We market these introducer and catheter products in kits that contain the disposable devices necessary to perform procedures and also in bulk for packaging by the customer with its own devices.

These products seek to capitalize on the growth in the Neuromodulation and CRM markets, specifically with new indications for neuromodulation devices and procedures. In addition, we continue to see strong growth in the vascular markets because of stent delivery procedures, peripheral-vascular disease therapies, and new indications for tissue extraction or ablation. In addition to those factors that are driving CRM and Neuromodulation markets, increased demand is also being driven by continued focus on minimally invasive procedures. Patients and health care providers are looking for minimally invasive technologies to treat disease and are expanding their use of both catheter based procedures and associated vascular access therapies.

Orthopaedic — Orthopaedic implants are used in reconstructive surgeries to replace or repair hips, knees and other joints, such as shoulders, ankles and elbows that have deteriorated as a result of disease or injury. Trauma implant systems are used primarily to reattach or stabilize damaged bone or tissue while the body heals. Spinal implant systems are used by orthopaedic surgeons and neurosurgeons in the treatment of degenerative diseases, deformities and injuries in various regions of the spine.

Each implant system typically has an associated instrument set that is used in the surgical procedure to insert that specific implant system. Instruments included in a set vary by implant system. Usually, instrument sets are sterilized after each use and then reused, however, recent trends are moving towards disposable instrumentation, which the Company is positing itself to take advantage of. Cases are used to store, transport and arrange implant systems and other medical devices and related surgical instruments. Cases are generally designed to allow for sterilization and re-use after an implant or other surgical procedure is performed. The majority of cases are tailored for specific implant procedures so that the instruments, implants and other devices are arranged within the case to match the order of use in the procedure and are securely held in clearly labeled, custom-formed pockets.

Many of the factors affecting the orthopaedic market segment are similar to the CRM and Vascular Access markets. These factors include aging population, new implant and surgical technology, rising rates of obesity, a growing replacements market and emerging affluence in developing nations. As a result, we believe that the orthopaedic market has strong growth fundamentals.

The following table summarizes information about our Greatbatch Medical products:

PRODUCT		DESCRIPTION		PRINCIPAL PRODUCT ATTRIBUTES
Batteries		Power sources include: •     Lithium iodine (“Li Iodine”) •     Lithium silver vanadium oxide (“Li SVO”) •     Lithium carbon monoflouride (“Li CFx”) •     Lithium ion rechargeable (“Li Ion”) •     Lithium SVO/CFx (“QHR” & “QMR”)		High reliability and predictability Long service life Customized configuration Light weight Compact and less intrusive
Capacitors		Storage for energy generated by a battery before delivery to the heart. Used in ICDs and CRT-Ds.		Stores more energy per unit volume (energy density) than other existing technologies Customized configuration
EMI filters		Filters electromagnetic interference to limit undesirable response, malfunctioning or degradation in the performance of electronic equipment		High reliability attenuation of EMI RF over wide frequency ranges Customized design
Feedthroughs		Allow electrical signals to be brought from inside hermetically sealed IMD to an electrode		Ceramic to metal seal is substantially more durable than traditional seals Multifunctional
Coated electrodes		Deliver electric signal from the feedthrough to a body part undergoing stimulation		High quality coated surface Flexible in utilizing any combination of biocompatible coating surfaces Customized offering of surfaces and tips
Precision components		•     Machined •     Molded and over molded products		High level of manufacturing precision Broad manufacturing flexibility
Enclosures and related components		•     Titanium •     Stainless steel		Precision manufacturing, flexibility in configurations and materials
Value-added assemblies		Combination of multiple components in a single package/unit		Leveraging products and capabilities to provide subassemblies and assemblies Provides synergies in component technology and procurement systems
Leads		Cardiac, neuro and hearing restoration stimulation leads		Custom and unique configurations that increase therapy effectiveness, provide finished device design and manufacturing
Introducers		Creates a conduit to insert infusion catheters, guidewires, implantable ports, pacemaker leads and other therapeutic devices into a blood vessel		Variety of sizes and materials that facilitate problem-free access in a variety of clinical applications
Catheters		Delivers therapeutic devices to specific sites in the body		Enable safe, simple delivery of therapeutic and diagnostic devices, soft tip and steerability. Provide regulatory clearance and finished device
Trays		Delivery systems for cleaning and sterilizing orthopaedic instruments and implants		Deliver turn-key full service kits
Implants		Orthopaedic implants for reconstructive hip, knee, shoulder, trauma and spine procedures		Precision manufacturing, leveraging capabilities and products, complete processes including sterile packaging and coatings
Instruments		Orthopaedic instruments for reconstructive and trauma procedures		Designed to improve surgical techniques, reduce surgery time, increase surgical precision and decrease risk of contamination

A majority of the products Greatbatch Medical sells incorporate proprietary technologies. These proprietary technologies provide an entry barrier for new competitors, and further limit existing competitors from duplicating our products. In addition to these proprietary technologies, our proprietary “know-how” in the manufacture of these products provides further barriers to our competition.

ELECTROCHEM

Our customized rechargeable and non-rechargeable battery solutions are used in a number of demanding industrial markets such as energy, security, portable medical, environmental monitoring and more. Applications in these segments cover a number of battery-powered systems including downhole drilling tools, hand-held military communications, automated external defibrillators, and more. Electrochem’s primary and non-rechargeable power and Wireless Sensing solutions are used in these core markets because of extreme operating conditions and long life requirements.

Our primary batteries operate reliably and safely at extremely high and low temperatures and with high shock and vibration. The product designs incorporate protective circuitry; glass-to-metal hermetic seals, fuses and diodes help ensure safe, reliable power as devices are subjected to harsh conditions.

Our secondary, or rechargeable, power solutions include a number of chemistries including lithium, nickel and lead acid, and incorporate advanced electronics, monitoring and security features and other capabilities. We provide value-added solutions to complement our secondary power systems such as charging and battery management.

Electrochem’s unique Wireless Sensing Systems are a complete solution, incorporating advanced, ruggedized sensors, intelligent gateways and customized software. Electrochem’s patented system utilizes our own batteries and offers control and monitoring for applications in existing markets such as energy, and new markets such as food and beverage and water/wastewater process control.

The following table summarizes information about our Electrochem products:

PRODUCT		DESCRIPTION		PRINCIPAL PRODUCT ATTRIBUTES
Cells		•     Moderate-rate •     Spiral (high rate)		Optimized rate capability, shock and vibration resistant, high and low temperature tolerant High energy density
Primary and rechargeable battery packs		Packaging of commercial batteries in a customer specific configuration		Increased power and recharging capabilities and ease of integration into customer applications
Wireless sensors		Operates where wired sensors are undesirable or impractical		Measures pressure, temperature and flow; withstands harsh environments

RESEARCH AND DEVELOPMENT

Our position as a leading developer and manufacturer of components for IMDs and Electrochem batteries is largely the result of our long history of technological innovation. We invest substantial resources in research, development and engineering. Our scientists, engineers and technicians focus on improving existing products, expanding the use of our products and developing new products. In addition to our internal technology and product development efforts, we also engage outside research institutions for unique technology projects.

In 2009, the Company formed the QiG Group LLC (“QiG”). QIG facilitates the introduction of new and improved technologies in medical device markets by investing in the development of innovations. This includes passive investments in startup companies as well as long-term systems level projects, which augment the Company’s Greatbatch Medical business. These investments support the development of ideas and technologies that can be used to better serve our OEM customers and typically have longer development times than our core Greatbatch Medical products.

PATENTS AND PROPRIETARY TECHNOLOGY

We rely on a combination of patents, licenses, trade secrets and know-how to establish and protect our proprietary rights to our technologies and products. We have 396 active U.S. patents and 295 active foreign patents. We also have 247 U.S. and 455 foreign pending patent applications at various stages of approval. During the past three years, we have been granted 63 new U.S. patents, of which 29 were granted in 2009. Corresponding foreign patents have been issued or are expected to be issued in the near future. Often, several patents covering various aspects of the design protect a single product. We believe this provides broad protection of the inventions employed.

We are also a party to several license agreements with third parties under which we have obtained, on varying terms, exclusive or non-exclusive rights to patents held by them. An example of these agreements is for the basic technology used in our wet tantalum capacitors, filtered feedthroughs and MRI compatible lead systems. We have also granted rights in our patents to others under license agreements.

It is our policy to require our management and technical employees, consultants and other parties having access to our confidential information to execute confidentiality agreements. These agreements prohibit disclosure of confidential information to third parties except in specified circumstances. In the case of employees and consultants, the agreements generally provide that all confidential information relating to our business is the exclusive property of the Company.

MANUFACTURING AND QUALITY CONTROL

While we have adequate capacity, we primarily manufacture small lot sizes, as most customer orders range from a few hundred to a few thousand units. As a result, our ability to remain flexible is an important factor in maintaining high levels of productivity. Each of our production teams receives assistance from a manufacturing support team, which typically consists of representatives from our quality control, engineering, manufacturing, materials and procurement departments. Our quality systems are compliant with and certified to various recognized international standards.

Our facilities in Raynham, MA, Alden, NY, Clarence, NY, and Minneapolis, MN are ISO-9001 registered, which requires compliance with regulations regarding quality systems of product design (where applicable), supplier control, manufacturing processes and management review. This certification can only be achieved after completion of an audit conducted by an independent authority.

The Quality Systems of our manufacturing facilities in Tijuana, Mexico, Plymouth, MN, Clarence, NY, Chaumont, France, Orvin, Switzerland, Columbia City, IN and Indianapolis, IN sites are certified to the requirements of ISO-13485(2003) for the design (where applicable) and manufacture of components, assemblies and finished medical devices. Along with ISO 13485: 2003, the facilities (where applicable) meet individual country and registration requirements in order to ship product worldwide. This certification gives us the ability to serve as a manufacturing partner to medical device manufacturers, which we believe will improve our competitive position in the Vascular Access, CRM and emerging Neuromodulation and Orthopaedic markets. Our Plymouth, MN and all Orthopaedic facilities are also registered with the FDA, thus enabling the manufacture and distribution of FDA cleared medical devices within the U.S.

Our existing manufacturing plants are audited by several notified bodies (TUV, G-Med, QMI, BSI, and the National Standards Authority of Ireland). To maintain certification, all facilities must be reexamined routinely by their respective notified body.

SALES AND MARKETING

Products from our Greatbatch Medical business are sold directly to our customers. In our Electrochem business, we utilize a combination of direct and indirect sales methods, depending on the particular product. In 2009, approximately 47% of our products were sold in the U.S. Sales outside the U.S. are primarily to customers whose corporate offices are located and headquartered in the U.S. Information regarding our sales by geographic area is set forth at Note 13 “Business Segment Information” of the Notes to Consolidated Financial Statements contained at Item 8 of this report.

Although the majority of our medical customers contract with us to develop custom components and assemblies to fit their product specifications, we also provide system level solutions ready for market distribution by OEM’s. As a result, we have established close working relationships between our internal program managers and our customers. We market our products and technologies at industry meetings and trade shows domestically and internationally.

Internal sales managers support all activity and involve engineers and technology professionals in the sales process to address customer requests appropriately. For system level solutions we partner with our customers’ Research, Marketing, and Clinical groups to jointly develop technology platforms in alignment with their product roadmaps and therapy needs.

We sell our Electrochem cells and battery packs directly to the end user, directly to manufacturers that incorporate our products into other devices for resale, and to distributors who sell our products to manufacturers and end users. Our sales managers are trained to assist our customers in selecting appropriate chemistries and configurations. We market our Electrochem products at various technical trade meetings, conferences and shows. We also place advertisements in relevant trade publications and on the Internet.

Firm backlog orders at January 1, 2010 and January 2, 2009 were approximately $178.2 million and $190.4 million, respectively. Most of these orders are expected to be shipped within one year. See Customers section below for further discussion.

CUSTOMERS

Our Greatbatch Medical customers include large multi-national OEMs and their affiliated subsidiaries such as, in alphabetical order here and throughout this report, Biotronik, Boston Scientific, DePuy, Johnson & Johnson, Medtronic, Smith & Nephew, Sorin Group, St. Jude Medical, Stryker and Zimmer. During 2009 and 2008, Boston Scientific, Johnson & Johnson, Medtronic and St. Jude Medical collectively accounted for 63% and 56% of our total sales, respectively.

The nature and extent of our selling relationship with each OEM customer is different in terms of 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, 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.

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 involved in demanding applications in markets such as energy, security, portable medical and environmental monitoring including Halliburton Company, Weatherford International, General Electric, Thales, Zoll Medical Corp. and Scripps Institution of Oceanography.

SUPPLIERS AND RAW MATERIALS

We purchase certain critical raw materials 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. In the past, we have not experienced any significant interruptions or delays in obtaining these raw materials. We maintain minimum safety stock levels of critical raw materials.

For other raw material purchases, we utilize competitive pricing methods such as bulk purchases, precious metal pool buys, blanket orders, and long-term contracts to secure supply. We believe that there are alternative suppliers or substitute products available at competitive prices for all of the materials we purchase.

COMPETITION

Existing and potential competitors in our Greatbatch Medical business include leading IMD manufacturers such as Biotronik, Boston Scientific, DePuy, Johnson & Johnson, Medtronic, Smith & Nephew, Sorin Group, St. Jude Medical, Stryker and Zimmer that currently have vertically integrated operations and may expand their vertical integration capability in the future. Competitors also include independent suppliers who typically specialize in one type of component.

Our known non-vertically integrated competitors include the following:

Product Line		Competitors
Medical batteries		Litronik (a subsidiary of Biotronik) Eagle-Picher
Capacitors		Critical Medical Components
Feedthroughs		Alberox (subsidiary of The Morgan Crucible Co. PLC)
EMI filtering		AVX (subsidiary of Kyocera) Eurofarad
Enclosures		Heraeus Hudson
Machined and molded components		Numerous
Value added assembly		Numerous
Catheters		Teleflex
Leads		Oscor
Orthopaedic trays, instruments and implants		Symmetry Paragon Accelent Teleflex Viasys Orchid

GOVERNMENT REGULATION

Except as described below, our business is not subject to direct governmental regulation other than the laws and regulations generally applicable to businesses in the jurisdictions in which we operate. We are subject to federal, state and local environmental laws and regulations governing the emission, discharge, use, storage and disposal of hazardous materials and the remediation of contamination associated with the release of these materials at our facilities and at off-site disposal locations. Our manufacturing and research, development and engineering activities may involve the controlled use of small amounts of hazardous materials. Liabilities associated with hazardous material releases arise principally under the federal Comprehensive Environmental Response, Compensation and Liability Act and analogous state laws that impose strict, joint and several liability on owners and operators of contaminated facilities and parties that arrange for the off-site disposal of hazardous materials. We are not aware of any material noncompliance with the environmental laws currently applicable to our business and we are not subject to any material claim for liability with respect to contamination at any Company facility or any off-site location. We cannot assure you that we will not become subject to such environmental liabilities in the future as a result of historic or current operations.

To varying degrees, our products are subject to regulation by numerous government agencies, including the FDA and comparable foreign agencies. The medical product components we manufacture are not subject to regulation by the FDA. We have “master files” on record with the FDA. Master files may be used to provide confidential detailed information about facilities, processes, or articles used in the manufacturing, processing, packaging and storing of one or more medical device components. These submissions may be used by device manufacturers to support the premarket notification process required by Section 510(k) of the Federal Food Drug & Cosmetic Act. This notification process is necessary to obtain clearance from the FDA to market a device for human use in the U.S.

The medical devices we manufacture and market are subject to regulation by the FDA and, in some instances, by state and foreign authorities. Pursuant to the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act and related regulations, medical devices intended for human use are classified into three categories (Classes I, II and III), depending upon the degree of regulatory control to which they will be subject.

In the U.S., our introducer and delivery catheter products are considered Class II devices. If a Class II device is substantially equivalent to an existing (predicate) device that has been continuously marketed since the effective date of the 1976 Amendments, FDA requirements may be satisfied through a Pre-market Notification Submission or 510(k) submission under which the applicant provides product information supporting its claim of substantial equivalence. In a 510(k) Submission, the FDA may also require that we provide clinical test results demonstrating the safety and efficacy of the device.

Generally, Class III devices are typically life-sustaining, life supporting, or implantable devices that must receive Pre-Market Approval (“PMA”) by the FDA to ensure their safety and effectiveness. A PMA is a more rigorous approval process typically requiring human clinical studies. Certain leads that we manufacture and market are Class III devices, but any required PMA is submitted by and issued to our customers.

As a manufacturer of medical devices, we are also subject to certain other FDA regulations and our device manufacturing processes and facilities are subject to on-going review by the FDA in order to ensure compliance with the current Good Manufacturing Practices Regulation (21 CFR 820). We believe that our manufacturing and quality and regulatory systems conform to the requirements of all pertinent FDA regulations. Our sales and marketing practices are subject to regulation by the U.S. Department of Health and Human Services pursuant to federal anti-kickback laws, and are also subject to similar state laws.

We are also subject to various other environmental, transportation and labor laws as well as various other directives and regulations both in the U.S. and abroad. We believe that compliance with these laws will not have a material impact on our capital expenditures, earnings or competitive position. Given the scope and nature of these laws, however, there can be no assurance that they will not have a material impact on our results of operations. We assess potential product related liabilities on a quarterly basis. At present, we are not aware of any such liabilities that would have a material impact on our business.

RECRUITING AND TRAINING

We invest substantial resources in our recruiting efforts that focus on supplying quality personnel to support our business objectives. We have established a number of programs that are designed to challenge and motivate our employees. All staff are encouraged to be proactive in contributing ideas. Feedback surveys are used to collect suggestions on ways that our business and operations can be improved. Our goal is to fill any open employment positions internally. We further meet our hiring needs through outside sources as required. We have a comprehensive succession program in place for senior management in order to ensure we will be able to implement our strategic plan.

We provide a training program for our new employees that is designed to educate them on safety, quality, business strategy, corporate culture, and the methodologies and technical competencies that are required for our business. Our safety training programs focus on such areas as basic industrial safety practices and emergency response procedures to deal with any potential fires or chemical spills. All of our employees are required to participate in a specialized training program that is designed to provide an understanding of our quality objectives. Supporting our lifelong learning environment, we offer our employees a tuition reimbursement program and encourage them to continue their education at accredited colleges and universities. Many of our employees attend seminars on topics that are related to our corporate objectives and strategies. We believe that comprehensive training is necessary to ensure that our employees have state of the art skills, utilize best practices, and have a common understanding of work practices.

EMPLOYEES

The following table provides a breakdown of employees as of January 1, 2010:

Manufacturing			1,442
General and administrative			126
Sales and marketing			52
Research, development and engineering			197
Chaumont, France facility			214
Switzerland facilities			214
Tijuana, Mexico facility			816
Total			3,061

We also employ a number of temporary employees to assist us with various projects and service functions and address peaks in staff requirements. Our employees at our Chaumont, France and Tijuana, Mexico facilities are represented by a union. Approximately 159 and 196 positions at our Switzerland and France locations, respectively, are manufacturing in nature. The positions at our Tijuana, Mexico facility are primarily manufacturing. We believe that we have a good relationship with our employees.

EXECUTIVE OFFICERS OF THE COMPANY

Information concerning our executive officers is presented below as of March 2, 2010. The officers’ terms of office run until the first meeting of the Board of Directors after our Annual Meeting, which takes place immediately following our Annual Meeting of Stockholders and until their successors are elected and qualified, except in the case of earlier death, retirement, resignation or removal.

Mauricio Arellano, age 43, is Senior Vice President and the Business Leader for our Cardiac and Neurology Group and has served in that office since October 2008. He served as the Senior Vice President and Business Leader of our CRM and Neuromodulation Group from January 2008 to October 2008, our Medical Solutions Group from November 2006 to January 2008 and as Vice President of Greatbatch Mexico from January 2005 to November 2006. Mr. Arellano joined our Company in October 2003 as the Plant Manager of our former Carson City, NV facility. Prior to joining our Company, he served in a variety of human resources and operational roles with Tyco Healthcare — Especialidades Medicas Kenmex and with Sony de Tijuana Este.

Susan M. Bratton, age 53, is Senior Vice President and Business Leader for our Electrochem business and has served in that office since January 2005. She served as Vice President of Corporate Quality from March 2001 to January 2005, as General Manager of our Electrochem Division from July 1998 to March 2001 and as Director of Procurement from June 1991 to July 1998. Ms. Bratton has held various other positions with our Company since joining us in 1976.

Susan H. Campbell, age 45, is Senior Vice President and the Business Leader for our Orthopaedics Group and has served in that office since October 2008. Ms. Campbell had served as Senior Vice President for Global Manufacturing and Supply Chain from January 2008 until October 2008 and the Business Leader for our Medical Power Group from January 2005 until January 2008. She joined our Company in April 2003 as the Plant Manager for our medical battery facility. Prior to that time, Ms. Campbell was a plant manager for Delphi Corporation and General Motors Corporation.

Barbara M. Davis, age 59, is Vice President for Human Resources, and has served in that office since April 2004. She joined our Company in October 1998 as Director of Human Resources and Organization Development.

Thomas J. Hook, age 47, has served as our President & Chief Executive Officer since August 2006. Prior to August 2006, he was our Chief Operating Officer, a position he assumed upon joining our Company in September 2004. From August 2002 until September 2004, Mr. Hook was employed by CTI Molecular Imaging where he had served as President, CTI Solutions Group.

Thomas J. Mazza, age 56, is Senior Vice President & Chief Financial Officer, and has served in that office since August 2005. He joined our Company in November 2003 as Vice President and Corporate Controller. Prior to that, Mr. Mazza served in a variety of financial roles with Foster Wheeler Ltd., including Vice President and Corporate Controller.

Timothy G. McEvoy, age 52, is Vice President, General Counsel & Secretary, and has served in that office since joining our Company in February 2007. From 1992 until January 2007, he was employed in a variety of legal roles by Manufacturers and Traders Trust Company, most recently as Administrative Vice President and Deputy General Counsel.

AVAILABLE INFORMATION

We make available free of charge through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file those reports with, or furnish them to, the Securities and Exchange Commission. Our Internet address is www.greatbatch.com. The information contained on our website is not incorporated by reference in this annual report on Form 10-K and should not be considered a part of this report. These items may also be obtained free of charge by written request made to Christopher J. Thome, Manager of External Reporting and Investor Relations, Greatbatch, Inc., 10000 Wehrle Drive, Clarence, New York 14031.

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

Some of the statements contained in this annual report on Form 10-K 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 industry;
	•		our ability to execute our business model and our business strategy;
	•		our ability to identify trends within our industries and to offer products and services that meet the changing needs of those markets; and
	•		projected capital expenditures.

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 stated or implied 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; customer ordering patterns; product obsolescence; our inability to market current or future products; pricing pressure from customers; our ability to timely and successfully implement our cost reduction and plant consolidation initiatives; our reliance on third party suppliers for raw materials, products and subcomponents; fluctuating operating results; our inability to maintain high quality standards for our products; challenges to our intellectual property rights; product liability claims; our inability to successfully consummate and integrate acquisitions and to realize synergies and to operate these acquired businesses in accordance with expectations; our unsuccessful expansion into new markets; our inability to obtain licenses to key technology; regulatory changes or consolidation in the healthcare industry; global economic factors including currency exchange rates and interest rates; the resolution of various legal actions brought against the Company; and other risks and uncertainties that arise from time to time and are described in Item 1A “Risk Factors” of this report.

ITEM 1A. RISK FACTORS

Our business faces many risks. Any of the risks discussed below, or elsewhere in this report or in our other SEC filings, could have a material impact on our business, financial condition or results of operations. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations.

Risks Related To Our Business

We depend heavily on a limited number of customers, and if we lose any of them or they reduce their business with us, we would lose a substantial portion of our revenues.

In 2009, Boston Scientific, Johnson & Johnson, Medtronic and St. Jude Medical, collectively accounted for approximately 63% of our revenues. Our supply agreements with these customers might not be renewed. Furthermore, many of our supply agreements do not contain minimum purchase level requirements and therefore there is no guaranteed source of revenue that we can depend upon under these agreements. The loss of any large customer or a reduction of business with that customer for any reason would harm our business, financial condition and results of operations.

If we do not respond to changes in technology, our products may become obsolete and we may experience a loss of customers and lower revenues.

We sell our products to customers in several industries that are characterized by rapid technological changes, frequent new product introductions and evolving industry standards. Without the timely introduction of new products and enhancements, our products and services will likely become technologically obsolete over time and we may lose a significant number of our customers. In addition, other new products introduced by our customers may require fewer of our components. We dedicate a significant amount of resources to the development of our products and technologies and we would be harmed if we did not meet customer requirements and expectations. Our inability, for technological or other reasons, to successfully develop and introduce new and innovative products could result in a loss of customers and lower revenues.

If we are unable to successfully market our current or future products, our business will be harmed and our revenues and operating results will be reduced.

The market for our medical and commercial products has been growing in recent years. If the market for our products does not grow as rapidly as forecasted by industry experts, our revenues could be less than expected. In addition, it is difficult to predict the rate at which the market for our products will grow or at which new and increased competition will result in market saturation. Slower growth in the CRM, Orthopaedic, Vascular Access or Energy markets in particular would negatively impact our revenues. In addition, we face the risk that our products will lose widespread market acceptance. Our customers may not continue to utilize the products we offer and a market may not develop for our future products.

We may at times determine that it is not technically or economically feasible for us to continue to manufacture certain products and we may not be successful in developing or marketing them. Additionally, new technologies that we develop may not be rapidly accepted because of industry-specific factors, including the need for regulatory clearance, entrenched patterns of clinical practice and uncertainty over third party reimbursement. If this occurs, our business will be harmed and our operating results will be negatively affected.

We are subject to pricing pressures from customers, which could harm operating results.

We have made price reductions to some of our large customers in recent years and we expect customer pressure for price reductions will continue. Price concessions or reductions may cause our operating results to suffer. In addition, any delay or failure by a large customer to make payments due to us would harm our operating results and financial condition.

We rely on third party suppliers for raw materials, key products and subcomponents and if we are unable to obtain these materials, products and subcomponents on a timely basis or on terms acceptable to us, our ability to manufacture products will suffer.

Our business depends on a continuous supply of raw materials. The principal raw materials used in our business include lithium, iodine, tantalum, platinum, ruthenium, gallium trichloride, tantalum pellets, vanadium pentoxide, iridium, and titanium. The supply and price of these raw materials are susceptible to fluctuations due to transportation, government regulations, price controls, economic climate or other unforeseen circumstances. Increasing global demand for these raw materials we need for our business has caused the prices of these materials to increase significantly. In addition, there are a limited number of worldwide suppliers of several raw materials needed to manufacture our products. We may not be able to continue to procure raw materials critical to our business or to procure them at acceptable price levels.

We rely on third party manufacturers to supply many of our products and subcomponents. Manufacturing problems may occur with these and other outside sources, as a supplier may fail to develop and supply products and subcomponents to us on a timely basis, or may supply us with products and subcomponents that do not meet our quality, quantity and cost requirements. If any of these problems occur, we may be unable to obtain substitute sources for these products and subcomponents on a timely basis or on terms acceptable to us, which could harm our ability to manufacture our own products and components profitably or on time. In addition, to the extent the processes that our suppliers use to manufacture products and subcomponents are proprietary, we may be unable to obtain comparable subcomponents from alternative suppliers.

We may never realize the full value of our intangible assets, which represent a significant portion of our total assets.

At January 1, 2010, we had $406.3 million of intangible assets, representing 49% of our total assets. These intangible assets consist primarily of goodwill, trademarks, tradenames, customer lists and patented technology arising from our acquisitions. Goodwill and other intangible assets with indefinite lives are not amortized, but are tested annually or upon the occurrence of certain events that indicate that the assets may be impaired. Definite lived intangible assets are amortized over their estimated useful lives and are tested for impairment upon the occurrence of certain events that indicate that the assets may be impaired. We may not receive the recorded value for our intangible assets if we sell or liquidate our business or assets. In addition, the material concentration of intangible assets increases the risk of a large charge to earnings in the event that the recoverability of these intangible assets is impaired, and in the event of such a charge to earnings, the market price of our common stock could be adversely affected. In addition, intangible assets with definite lives, which represent $82.1 million of our net intangible assets at January 1, 2010, will continue to be amortized. We incurred total amortization expenses relating to these intangible assets of $10.1 million in 2009. These expenses will reduce our future earnings or increase our future losses.

Quality problems with our products could harm our reputation for producing high quality products, erode our competitive advantage.

Our products are held to high quality and performance standards. In the event that our products fail to meet these standards, our reputation for producing high quality products could be harmed, which would damage our competitive advantage and could result in lower revenues.

Quality problems with our products could result in warranty claims and additional costs.

We generally allow customers to return defective or damaged products for credit, replacement, or exchange. We generally warrant that our products will meet customer specifications and will be free from defects in materials and workmanship. Additionally, we carry a safety stock of inventory for our customers which may be impacted by warranty claims. We accrue for our exposure to warranty claims based upon recent historical experience and other specific information as it becomes available. However, such reserves may not be adequate to cover future warranty claims and additional warranty costs and/or inventory write-offs may be incurred which could harm our operating results or financial condition.

Regulatory issues resulting from product complaints, or recalls, or regulatory body audits could harm our ability to produce and supply products or bring new products to market.

Our products are designed, manufactured and distributed globally in compliance with all pertinent regulations and standards. However, a product complaint recall or negative regulatory body audit may cause products to be removed from the market which could harm our operating results or financial condition. In addition, during the corrective phase, regulatory bodies may not allow new products to be cleared for marketing and sale.

If we become subject to product liability claims, our operating results and financial condition could suffer.

The manufacturing and sale of our products expose us to potential product liability claims and product recalls, including those that may arise from failure to meet product specifications, misuse or malfunction of, or design flaws in our products, or use of our products with components or systems not manufactured or sold by us. Many of our products are components and function in interaction with our customers’ medical devices. For example, our batteries are produced to meet various electrical performance, longevity and other specifications, but the actual performance of those products is dependent on how they are in fact utilized as part of the customers’ devices over the lifetime of the products. Product performance and device interaction from time to time have been, and may in the future be, different than expected for a number of reasons. Consequently, it is possible that customers may experience problems with their medical devices that could require device recall or other corrective action, where our batteries met the specification at delivery, and for reasons that are not related primarily or at all to any failure by our product to perform in accordance with specifications. It is possible that our customers (or end-users) may in the future assert that our products caused or contributed to device failure. Even if these assertions do not lead to product liability or contract claims, they could harm our reputation and our customer relationships.

Provisions contained in our agreements with key customers attempting to limit our damages, including provisions to limit damages to liability for gross negligence, may not be enforceable in all instances or may otherwise fail to protect us from liability for damages. Product liability claims or product recalls, regardless of their ultimate outcome, could require us to spend significant time and money in litigation or require us to pay significant damages. The occurrence of product liability claims or product recalls could adversely affect our operating results and financial condition.

We carry liability insurance coverage that is limited in scope and amount. We may not be able to maintain this insurance at a reasonable cost or on reasonable terms, or at all. This insurance may not be adequate to protect us against a product liability claim that arises in the future.

Our operating results may fluctuate, which may make it difficult to forecast our future performance and may result in volatility in our stock price.

Our operating results have fluctuated in the past and are likely to fluctuate significantly from quarter to quarter due to a variety of factors, including but not limited to the following:

•		the fixed nature of a substantial percentage of our costs, which results in our operations being particularly sensitive to fluctuations in revenue;
•		changes in the relative portion of our revenue represented by our various products and customers, which could result in reductions in our profits if the relative portion of our revenue represented by lower margin products increases;
•		timing of orders placed by our principal customers who account for a significant portion of our revenues; and
•		increased costs of raw materials or supplies.

If we are unable to protect our intellectual property and proprietary rights, our business could be adversely affected.

We rely on a combination of patents, licenses, trade secrets and know-how to establish and protect our proprietary rights to our technologies and products. As of January 1, 2010, we held 396 active U.S. patents and 295 active foreign patents. However, the steps we have taken or will take to protect our proprietary rights may not be adequate to deter misappropriation of our intellectual property. In addition to seeking formal patent protection whenever possible, we attempt to protect our proprietary rights and trade secrets by entering into confidentiality and non-compete agreements with employees, consultants and third parties with which we do business. However, these agreements can be breached and, if they are, there may not be an adequate remedy available to us and we may be unable to prevent the unauthorized disclosure or use of our technical knowledge, practices or procedures. If our trade secrets become known, we may lose our competitive advantages.

If third parties infringe or misappropriate our patents or other proprietary rights, our business could be seriously harmed. We may be required to spend significant resources to monitor our intellectual property rights, we may not be able to detect infringement of these rights and may lose our competitive advantages associated with our intellectual property rights before we do so. In addition, competitors may design around our technology or develop competing technologies that do not infringe on our proprietary rights.

We may be subject to intellectual property claims, which could be costly and time consuming and could divert our management from our business operations.

In producing our products, third parties may claim that we are infringing on their intellectual property rights, and we may be found to have infringed those intellectual property rights. We may be unaware of intellectual property rights of others that may be used in our technology and products. In addition, third parties may claim that our patents have been improperly granted and may seek to invalidate our existing or future patents. If any claim for invalidation prevailed, the result could be greatly expanded opportunities for third parties to manufacture and sell products that compete with our products and our revenues from any related license agreements would decrease accordingly. We also typically do not receive significant indemnification from parties which license technology to us against third party claims of intellectual property infringement.

Any litigation or other challenges regarding our patents or other intellectual property could be costly and time consuming and could divert our management and key personnel from our business operations. The complexity of the technology involved in producing our products, and the uncertainty of intellectual property litigation increases these risks. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements. However, we may not be able to obtain royalty or license agreements on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against development and sale of our products.

We are dependent upon our senior management team and key personnel and the loss of any of them could significantly harm us.

Our future performance depends to a significant degree upon the continued contributions of our senior management team and key technical personnel. Our products are highly technical in nature. In general, only highly qualified and trained scientists have the necessary skills to develop our products. The loss or unavailability to us of any member of our senior management team or a key technical employee could significantly harm us. We face intense competition for these professionals from our competitors, customers and companies operating in our industry. To the extent that the services of members of our senior management team and key technical personnel would be unavailable to us for any reason, we would be required to hire other personnel to manage and operate our company and to develop our products and technology. We may not be able to locate or employ such qualified personnel on acceptable terms.

We may not be able to attract, train and retain a sufficient number of qualified employees to maintain and grow our business.

Our success will depend in large part upon our ability to attract, train, retain and motivate highly skilled employees. There is currently aggressive competition for employees who have experience in technology and engineering. We compete intensely with other companies to recruit and hire from this limited pool. The industries in which we compete for employees are characterized by high levels of employee attrition. Although we believe we offer competitive salaries and benefits, we may have to increase spending in order to attract, train and retain personnel.

We may make acquisitions that could subject us to a number of operational risks and we may not be successful in integrating companies we acquire into our existing operations.

We have made and expect to make in the future acquisitions that complement our core competencies in technology and manufacturing to enable us to manufacture and sell additional products to our existing customers and to expand our business into related markets. Implementation of our acquisition strategy entails a number of risks, including:

•		inaccurate assessments of potential liabilities associated with the acquired businesses;
•		the existence of unknown or undisclosed liabilities associated with the acquired businesses;
•		diversion of our management’s attention from our core businesses;
•		potential loss of key employees or customers of the acquired businesses;
•		difficulties in integrating the operations and products of an acquired business or in realizing projected revenue growth, efficiencies and cost savings; and
•		increases in indebtedness and limitation in our ability to access capital if needed.

Our acquisitions have increased the size and scope of our operations, and may place a strain on our managerial, operational and financial resources and systems. Any failure by us to manage this growth and successfully integrate these acquisitions could harm our business and our financial condition and results.

If we are not successful in making acquisitions to expand and develop our business, our operating results may suffer.

One facet of our growth strategy is to make acquisitions that complement our core competencies in technology and manufacturing to enable us to manufacture and sell additional products to our existing customers and to expand our business into related markets. Our continued growth may depend on our ability to identify and acquire companies that complement or enhance our business on acceptable terms. We may not be able to identify or complete future acquisitions. Some of the risks that we may encounter include expenses associated with and difficulties in identifying potential targets, the costs associated with unsuccessful acquisitions, and higher prices for acquired companies because of competition for attractive acquisition targets.

We may face competition that could harm our business and we may be unable to compete successfully against new entrants and established companies with greater resources.

Competition in connection with the manufacturing of our medical products may intensify in the future. One or more of our medical customers may undertake additional vertical integration initiatives and begin to manufacture some or all of their components that we currently supply them which could cause our operating results to suffer. The market for commercial power sources is competitive, fragmented and subject to rapid technological change. Many other commercial power source suppliers are larger and have greater financial, operational, personnel, sales, technical and marketing resources than our company. These and other companies may develop products that are superior to ours, which could result in lower revenues and operating results.

Accidents at one of our facilities could delay production and adversely affect our operations.

Our business involves complex manufacturing processes and hazardous materials that can be dangerous to our employees. Although we employ safety procedures in the design and operation of our facilities, there is a risk that an accident or death could occur in one of our facilities. Any accident, such as a chemical spill, could result in significant manufacturing delays or claims for damages resulting from injuries, which would harm our operations and financial condition. The potential liability resulting from any such accident or death, to the extent not covered by insurance, could harm our financial condition or operating results. Any disruption of operations at any of our facilities could harm our business.

We intend to develop new products and expand into new markets, which may not be successful and could harm our operating results.

We intend to expand into new markets and develop new products based on our existing technologies and engineering capabilities. These efforts have required and will continue to require us to make substantial investments, including significant research, development and engineering expenditures and capital expenditures for new, expanded or improved manufacturing facilities. Additionally, many of the new products we are working on take longer and more resources to develop and commercialize, including obtaining regulatory approval. Specific risks in connection with expanding into new markets include the inability to transfer our quality standards and technology into new products, failure to receive regulatory approval for our new products, the failure of customers to accept our new products, longer product development cycles and competition. We may not be able to successfully manage expansion into new markets and products and these unsuccessful efforts may harm our financial condition and operating results.

Our failure to obtain licenses from third parties for new technologies or the loss of these licenses could impair our ability to design and manufacture new products and reduce our revenues.

We occasionally license technologies from third parties rather than depending exclusively on our own proprietary technology and developments. For example, we license a capacitor patent from another company. Our ability to license new technologies from third parties is and will continue to be critical to our ability to offer new and improved products. We may not be able to continue to identify new technologies developed by others and even if we are able to identify new technologies, we may not be able to negotiate licenses on favorable terms, or at all. Additionally, we could lose rights granted under licenses for reasons beyond our control.

Our international operations and sales are subject to a variety of risks and costs that could adversely affect our profitability and operating results.

Our sales outside the U.S., which accounted for 53% of sales for 2009, and our Mexico, Switzerland and France locations are subject to certain foreign country risks. Our international sales and operations are, and will continue to be, subject to a number of risks and potential costs, including:

•		changes in foreign regulatory requirements;
•		local product preferences and product requirements;
•		longer-term receivables than are typical in the U.S.;
•		difficulties in enforcing agreements through certain foreign legal systems;
•		less protection of intellectual property in some countries outside of the U.S.;
•		trade protection measures and import and export licensing requirements;
•		work force instability;
•		political and economic instability; and
•		complex tax and cash management issues.

We earn revenue and incur expenses related to our foreign sales and operations that are denominated in a foreign currency. Historically, foreign currency fluctuations have not had a material effect on our consolidated financial statements. However, fluctuations in foreign currency exchange rates could have a significant negative impact on our profitability and operating results.

The current economic environment and credit market uncertainty could interrupt our access to capital markets, borrowings, or financial transactions to hedge certain risks, which could adversely affect our financial condition.

As of January 1, 2010, we had $289.4 million of debt with varying maturities, including our convertible subordinated notes and revolving line of credit. These arrangements have allowed us to make investments in growth opportunities and fund working capital requirements. In addition, we enter into financial transactions to hedge certain risks, including foreign exchange and interest rate risk. Our continued access to capital markets, the stability of our lenders and their willingness to support our needs, and the stability of the parties to our financial transactions that hedge risks are essential for us to meet our current obligations, fund operations, and fund our strategic initiatives. An interruption in our access to external financing or financial transactions to hedge risk could adversely affect our business prospects and financial condition.

Risks Related To Our Industries

The healthcare industry is subject to various political, economic and regulatory changes that could force us to modify how we develop and price our products.

The healthcare industry is highly regulated and is influenced by changing political, economic and regulatory factors. Several of our product lines are subject to international, federal, state and local health and safety, packaging and product content regulations. In addition, IMDs produced by our medical customers are subject to regulation by the FDA and similar governmental agencies. This regulation covers a wide variety of product activities from design and development to labeling, manufacturing, promotion, sales and distribution. Compliance with this regulation may be time consuming, burdensome and expensive and could negatively affect our customers’ abilities to sell their products, which in turn would adversely affect our ability to sell our products. This may result in higher than anticipated costs or lower than anticipated revenues.

Regulations issued in the healthcare industry are also complex, change frequently and have tended to become more stringent over time. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state levels. In addition, these regulations may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. We may be required to incur significant expenses to comply with these regulations or remedy past violations of these regulations. Any failure by our company to comply with applicable government regulations could also result in cessation of portions or all of our operations, impositions of fines and restrictions on our ability to carry on or expand our operations. In addition, because many of our products are sold into regulated industries, we must comply with additional regulations in marketing our products.

In response to perceived increases in health care costs in recent years, there have been and continue to be proposals by the Obama administration, members of Congress, state governments, regulators and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system. Certain of these proposals would limit the prices our OEM customers are able to charge for their products or the amounts of reimbursement available for their products, and could limit the acceptance and availability of those products. Additionally, legislative proposals currently pending would impose significant new taxes on medical device makers such as our customers which may then be passed on to their suppliers such as us.

These taxes, if implemented, would result in a significant increase in the tax burden on our industry, which could have a material, negative impact on our results of operations and our cash flows. Draft legislation would also impose new payroll taxes, excise taxes, income taxes and other taxes; implement changes to Medicare and Medicaid; establish a government health insurance option and allow the government to mandate minimum levels of coverage and make comparative effectiveness recommendations. In summary, if legislation is enacted and depending on the form it takes, it could change the way healthcare is developed and delivered, and may materially impact numerous aspects of our business, results of operations and financial condition.

Our business is subject to environmental regulations that could be costly to comply with.

Federal, state and local regulations impose various environmental controls on the manufacturing, transportation, storage, use and disposal of batteries and hazardous chemicals and other materials used in, and hazardous waste produced by, the manufacturing of power sources and components. Conditions relating to our historical operations may require expenditures for clean-up in the future and changes in environmental laws and regulations may impose costly compliance requirements on us or otherwise subject us to future liabilities. Additional or modified regulations relating to the manufacture, transportation, storage, use and disposal of materials used to manufacture our products or restricting disposal of batteries may be imposed. In addition, we cannot predict the effect that additional or modified environmental regulations may have on us or our customers.

Consolidation in the healthcare industry could result in greater competition and reduce our Greatbatch Medical revenues and harm our business.

Many healthcare industry companies are consolidating to create new companies with greater market power. As the healthcare industry consolidates, competition to provide products and services to industry participants will become more intense. These industry participants may try to use their market power to negotiate price concessions or reductions for our products. If we are forced to reduce our prices because of consolidation in the healthcare industry, our revenues would decrease and our operating results would suffer.

Our Greatbatch Medical business is indirectly subject to healthcare industry cost containment measures that could result in reduced sales of our products.

Several of our customers rely on third party payors, such as government programs and private health insurance plans, to reimburse some or all of the cost of the procedures in which our products are used. The continuing efforts of government, insurance companies and other payors of healthcare costs to contain or reduce those costs could lead to patients being unable to obtain approval for payment from these third party payors. If that occurred, sales of medical devices may decline significantly, and our customers may reduce or eliminate purchases of our products. The cost containment measures that healthcare payors are instituting, both in the U.S. and internationally, could reduce our revenues and harm our operating results.

Our Electrochem revenues are dependent on conditions in the oil and natural gas industry, which historically have been volatile.

Sales of our commercial products depend to a great extent upon the condition of the oil and gas industry. In the past, oil and natural gas prices have been volatile and the oil and gas exploration and production industry has been cyclical, and it is likely that oil and natural gas prices will continue to fluctuate in the future. The current and anticipated prices of oil and natural gas influence the oil and gas exploration and production business and are affected by a variety of political and economic factors beyond our control, including worldwide demand for oil and natural gas, worldwide and domestic supplies of oil and natural gas, the ability of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels and pricing, the level of production of non-OPEC countries, the price and availability of alternative fuels, political stability in oil producing regions and the policies of the various governments regarding exploration and development of their oil and natural gas reserves. An adverse change in the oil and gas exploration and production industry or a reduction in the exploration and production expenditures of oil and gas companies could cause our revenues from Electrochem product sales to decline.

ITEM 1B.		UNRESOLVED STAFF COMMENTS

None.

ITEM 2.		PROPERTIES

The following table sets forth information about our significant facilities as of January 1, 2010:

Location		Sq. Ft.				Own/Lease		Principal Use
Alden, NY			125,000			Own		Medical battery and capacitor manufacturing
Chaumont, France			59,200			Own		Manufacturing of orthopaedic and surgical goods
Clarence, NY			117,800			Own		Corporate offices and RD&E
Clarence, NY			20,800			Own		Machining and assembly of components
Clarence, NY			18,600			Lease		Machining and assembly of components
Cleveland, OH			16,900			Lease		Office and lab space for design engineering team
Columbia City, IN			40,000			Lease		Manufacturing of orthopaedic and surgical goods
Corgemont, Switzerland			34,400			Lease		Manufacturing of orthopaedic and surgical goods
Indianapolis, IN			82,600			Own		Manufacturing of orthopaedic and surgical goods
Minneapolis, MN			72,000			Own		Enclosure manufacturing and engineering
Orvin, Switzerland			34,400			Own		Manufacturing of orthopaedic and surgical goods
Plymouth, MN			95,700			Lease		Introducers, catheters and leads manufacturing and engineering
Raynham, MA			81,000			Own		Commercial battery manufacturing and RD&E
Tijuana, Mexico			144,000			Lease		Value-added assembly, and feedthrough, electrode and EMI filtering manufacturing

In general, we believe these facilities are suitable and adequate for our current business and have capacity to meet our future growth objectives without the need for additional expansion. In 2010, we announced the opening of our Orthopaedic design center located in Warsaw, IN. The new facility will be equipped with the latest rapid prototyping equipment and is being leased. Additionally, further investment is planned over the next three years to drive improvements and growth in all Orthopaedic locations. In 2009, we ceased operations at our Blaine, MN, Canton, MA and Teterboro, NJ facilities.

ITEM 3.		LEGAL PROCEEDINGS

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 11 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained at Item 8 of this report. Except for the items set forth in Note 11, 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 and beyond.

ITEM 4.		RESERVED

PART II

ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The Company’s common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “GB.” The following table sets forth for the periods indicated the high, low and closing sales prices per share for the common stock as reported by the NYSE:

		High				Low				Close
2008
First Quarter		$	23.48			$	17.18			$	18.79
Second Quarter			19.79				15.49				17.20
Third Quarter			27.08				16.86				25.78
Fourth Quarter			27.41				17.72				26.72
2009
First Quarter		$	27.45			$	17.27			$	19.71
Second Quarter			23.48				18.50				22.00
Third Quarter			23.20				20.06				21.63
Fourth Quarter			22.21				17.99				19.23

As of March 2, 2010, there were approximately 240 record holders of the Company’s common stock. The Company stock account included in our 401(k) plan is considered one record holder for the purposes of this calculation. There are approximately 1,700 accounts holding Company stock in the 401(k) plan including accounts for active and former employees. We have not paid cash dividends and currently intend to retain any earnings to further develop and grow our business.

PERFORMANCE GRAPH

The following graph compares for the five year period ended January 1, 2010, the cumulative total stockholder return for Greatbatch, Inc., the S&P SmallCap 600 Index, and the Hemscott Peer Group Index. The Hemscott Peer Group Index includes over 300 comparable companies included in the Hemscott Industry Group 520 Medical Instruments & Supplies and 521 Medical Appliances & Equipment. The graph assumes that $100 was invested on December 31, 2004 and assumes reinvestment of dividends. The stock price performance shown on the following graph is not necessarily indicative of future price performance:

ITEM 6. SELECTED FINANCIAL DATA

The following table provides selected financial data of our Company for the periods indicated. You should read this data along with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data” appearing elsewhere in this report. The consolidated statement of operations data and the consolidated balance sheet data for the fiscal years indicated have been derived from our consolidated financial statements and related notes.

		Jan. 1,				Jan. 2,				Dec. 28,				Dec. 29,				Dec. 30,
Years ended		2010 (1)(4)(5)				2009 (1)(3)(4)				2007 (1)(3)(4)				2006 (1)				2005 (1)(2)
		(in thousands, except per share data)
Consolidated Statement of Operations Data:
Sales		$	521,821			$	546,644			$	318,746			$	271,142			$	241,097
Income (loss) before income taxes			(18,177	)			20,517				23,919				23,534				15,464
Income (loss) per share
Basic		$	(0.39	)		$	0.63			$	0.54			$	0.74			$	0.47
Diluted			(0.39	)			0.62				0.53				0.73				0.46
Consolidated Balance Sheet Data:
Working capital		$	119,926			$	142,219			$	116,816			$	199,051			$	151,958
Total assets			830,543				848,033				662,769				547,827				512,911
Long-term obligations			317,575				379,890				247,239				205,859				200,261

ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT.

Overview

Our Business

	•		Our business
	•		Our acquisitions
	•		Our customers
	•		Financial overview
	•		CEO message
	•		Product development

Our Critical Accounting Estimates

	•		Valuation of goodwill, other identifiable intangible assets and IPR&D
	•		Stock-based compensation
	•		Inventories
	•		Tangible long-lived assets
	•		Provision for income taxes

Cost Savings and Consolidation Efforts

Our Financial Results

	•		Results of operations table
	•		Fiscal 2009 compared with fiscal 2008
	•		Fiscal 2008 compared with fiscal 2007
	•		Liquidity and capital resources
	•		Off-balance sheet arrangements
	•		Litigation
	•		Contractual obligations
	•		Inflation
	•		Impact of recently issued accounting standards

Our Business

We operate our business in two reportable segments — Greatbatch Medical and Electrochem Solutions (“Electrochem”). During 2009, we rebranded our Implantable Medical Component (“IMC”) segment as Greatbatch Medical. The Greatbatch Medical segment designs and manufactures systems, components and devices for the Cardiac Rhythm Management (“CRM”), Neuromodulation, Vascular Access and Orthopaedic markets.

Our Greatbatch Medical customers include large multi-national original equipment manufacturers (“OEMs”). Our products include: 1) batteries, capacitors, filtered and unfiltered feedthroughs, engineered components and enclosures used in Implantable Medical Devices (“IMDs”); 2) instruments and delivery systems used in hip and knee replacement, trauma and spine surgeries as well as hip, knee and shoulder implants; and 3) introducers, catheters, steerable sheaths and implantable stimulation leads. Additionally, Greatbatch Medical offers value-added assembly and design engineering services for medical systems and devices within the markets in which it operates.

Electrochem is a leader in 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 founder, Wilson Greatbatch, our technology and superior quality and reliability is utilized in markets world-wide.

Our Acquisitions

On April 3, 2007, we acquired substantially all of the assets of BIOMEC, Inc. (“BIOMEC”). BIOMEC was a biomedical device company based in Cleveland, OH. The results of BIOMEC’s operations were included in our Greatbatch Medical business from the date of acquisition. The purchase price and other direct costs of BIOMEC totaled $11.4 million, which we paid in cash. Total assets acquired from BIOMEC were $12.0 million, of which $7.4 million were intangible assets, including $2.3 million of in-process research and development (“IPR&D”), which we immediately expensed, and $5.1 million of goodwill.

On June 15, 2007, we completed our acquisition of Enpath Medical, Inc. (“Enpath”). Enpath designed, developed, manufactured and marketed single use medical device products for the cardiac rhythm management, neuromodulation and interventional radiology markets. The results of Enpath’s operations were included in our Greatbatch Medical business from the date of acquisition. The purchase price and other direct costs of Enpath totaled $98.4 million, which we paid in cash. Total assets acquired from Enpath were $113.8 million, of which $91.3 million were intangible assets, including $13.8 million of IPR&D, which we immediately expensed, and $48.9 million of goodwill.

On October 26, 2007, we acquired substantially all of the assets of IntelliSensing, LLC (“IntelliSensing”). IntelliSensing designed and manufactured wireless sensor solutions that measure temperature, pressure, flow and other critical data. The results of IntelliSensing’s operations were included in our Electrochem business from the date of acquisition. The purchase price and other direct costs of IntelliSensing totaled $3.9 million, which we paid in cash. Total assets acquired from IntelliSensing were $4.0 million, of which $3.8 million were intangible assets, including $1.9 million of goodwill.

On November 16, 2007, we acquired substantially all of the assets of Quan Emerteq, LLC (“Quan”). Quan designed, developed and manufactured single use medical device products for the vascular, CRM and neuromodulation markets. The results of Quan’s operations were included in our Greatbatch Medical business from the date of acquisition. The purchase price and other direct costs of Quan totaled $60.0 million, which we primarily paid in cash. Total assets acquired from Quan were $62.8 million, of which $52.4 million were intangible assets, including $32.2 million of goodwill.

On November 16, 2007, we acquired substantially all of the assets of Engineered Assemblies Corporation (“EAC”). EAC was a leading provider of custom battery solutions and electronics integration focused on rechargeable battery systems. The results of EAC’s operations were included in our Electrochem business from the date of acquisition. The purchase price and other direct costs of EAC totaled $15.1 million, which we paid in cash. Total assets acquired from EAC were $16.7 million, of which $7.9 million were intangible assets, including $5.5 million of goodwill.

On January 7, 2008, we acquired P Medical Holding SA (“Precimed”) which had administrative offices in Orvin, Switzerland and Exton, PA, manufacturing operations in Switzerland and Indiana and sales offices in Japan, China and the United Kingdom. Precimed was a leading technology-driven supplier to the orthopaedic industry. The results of Precimed’s operations were included in our Greatbatch Medical business from the date of acquisition. The purchase price and other direct costs of Precimed totaled $85.0 million, which we paid in cash. Total assets acquired from Precimed were $143.0 million, of which $82.3 million were intangible assets, including $2.2 million of IPR&D which we immediately expensed, and $47.2 million of goodwill.

On February 11, 2008, Precimed completed its previously announced acquisition of DePuy Orthopaedics (“DePuy”) Chaumont, France manufacturing facility (the “Chaumont Facility”). The Chaumont Facility produces hip and shoulder implants for DePuy Ireland who distributes them worldwide through various DePuy selling entities. This transaction included a new four year supply agreement with DePuy. The results of DePuy’s operations were included in our Greatbatch Medical business from the date of acquisition. The purchase price and other direct costs of the Chaumont Facility totaled $28.7 million, which we paid in cash. Total assets acquired from the Chaumont Facility were $29.3 million, of which $6.6 million was goodwill.

Going forward, we expect the pace of acquisitions to be less than the 2008 and 2007 levels. However, we will continue to pursue strategically targeted and opportunistic acquisitions.

Our Customers

Our products are designed to provide reliable, long-lasting solutions that meet the evolving requirements and needs of our customers and the end users of their products. The nature and extent of our selling relationships with each customer are different in terms of breadth of products purchased, purchased product volumes, length of contractual commitment, ordering patterns, inventory management and selling prices.

Our Greatbatch Medical customers include large multi-national OEMs, such as Biotronik, Boston Scientific, DePuy, Johnson & Johnson, Medtronic, Smith & Nephew, Sorin Group, St. Jude Medical, Stryker and Zimmer. During 2007 and in the first quarter of 2008, we completed seven acquisitions in order to diversify our customer base and market concentration. During 2009 and 2008, Boston Scientific, Johnson & Johnson, Medtronic and St. Jude Medical collectively accounted for 63% and 56% of our total sales, respectively.

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 involved in demanding applications in markets such as energy, security, portable medical and environmental monitoring including Halliburton Company, Weatherford International, General Electric, Thales, Zoll Medical Corp. and Scripps Institution of Oceanography.

Financial Overview

For 2009, revenue totaled $521.8 million, a 5% decrease from 2008, which included the benefit of an additional week of operations due to our fiscal year ending on the closest Friday to December 31. This additional week added approximately $10 million to 2008 sales. During 2009, 7% CRM/Neuromodulation revenue growth was offset by decreases in Orthopaedic, Vascular and Electrochem revenue which were impacted by the uncertain health care and economic environment. For 2008, sales were $546.6 million, an increase of 71% over 2007. In addition to the extra week of operations, 2008 revenue benefitted from our acquisitions in 2008 and 2007, which added approximately $208.2 million of incremental revenue, as well as organic growth of 7%.

Over the last three years, we were extremely focused on the integration of our acquisitions. As a result, we incurred additional costs related to the implementation of numerous cost savings, consolidation and integration initiatives. Additionally, during 2009, we accrued $34.5 million in connection with our Electrochem Litigation (See Note 11 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report) and incurred a $15.9 million tradename write-down due to the successful rebranding of our Greatbatch Medical segment. During 2008 and 2007, we incurred IPR&D charges and inventory step-up amortization expense related to our acquisitions of $8.7 million and $18.4 million, respectively. Including these charges, operating income for 2009, 2008 and 2007 was $1.0 million, $34.9 million and $20.0 million, respectively.

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 (i) acquisition-related charges, (ii) facility consolidation, manufacturing transfer and system integration charges, (iii) asset write-down and disposition charges, (iv) litigation charges and (v) 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.

Adjusted operating income for 2009, 2008 and 2007 was $62.6 million, $58.1 million and $43.7 million, respectively. Adjusted operating income expressed as a percentage of sales, or adjusted operating margin, was 12.0%, 10.6% and 13.7%. The decrease in this percentage from 2007 was a direct result of our acquisitions. Our goal is to improve adjusted operating margin to approximately 20% over the next three to five years through our initiatives to improve the operating performance of the acquired companies and through the development of innovative products to drive future revenue growth. Evidence of the progress we have made in these initiatives can be seen in the improvement of adjusted operating margin from 2008 to 2009. Our adjusted operating margin is expected to be between 12.0% and 13.5% for 2010.

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

		Year Ended
		January 1,				January 2,				December 28,
		2010				2009				2007
Operating income as reported:		$	1,048			$	34,894			$	20,020
IPR&D write-down			—				2,240				16,093
Acquisition charges (inventory step-up)			—				6,422				2,276
Electrochem litigation charge			34,500				—				—
Write-down of intangible assets			15,921				—				—
Consolidation costs			7,069				9,010				5,228
Integration costs			3,077				5,369				—
Asset dispositions & other			948				199				96
Operating income — adjusted		$	62,563			$	58,134			$	43,713
Operating margin — adjusted			12.0	%			10.6	%			13.7	%

Beginning in 2009, we adopted a change in accounting that required issuers of convertible debt that may be settled in cash upon conversion, such as our CSN II (See Note 6 “Debt” of the Notes to Consolidated Financial Statements contained in Item 8 of this report), to recognize interest expense on those instruments at their nonconvertible debt borrowing rate. As required, the 2008 and 2007 Consolidated Financial Statements presented in this report have been retroactively adjusted to reflect the adoption of this change in accounting (See Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report).

Our GAAP diluted earnings (loss) per share (“EPS”) for 2009, 2008 and 2007 were ($0.39), $0.62 and $0.53, respectively. Adjusted diluted earnings per share, which excludes the items discussed above, were $1.52, $1.40 and $1.27, respectively. A reconciliation of GAAP income (loss) before taxes to adjusted net income and adjusted diluted EPS is as follows (in thousands, except per share amounts):

		Year Ended
		January 1,				January 2,				December 28,
		2010				2009				2007
Income (loss) before taxes as reported:		$	(18,177	)		$	20,517			$	23,919
IPR&D write-down			—				2,240				16,093
Acquisition charges (inventory step-up)			—				6,422				2,276
Electrochem litigation charge			34,500				—				—
Write-down of intangible assets			15,921				—				—
Consolidation costs			7,069				9,010				5,228
Integration costs			3,077				5,369				—
Asset dispositions & other			948				199				96
Sub-total			43,338				43,757				47,612
Convertible debt accounting change			7,311				6,786				4,769
Gain on extinguishment of debt & sale of investment security			—				(3,242	)			(8,474	)
Adjusted income before taxes			50,649				47,301				43,907
Adjusted provision for income taxes			14,688				14,427				14,270
Adjusted net income		$	35,961			$	32,874			$	29,637
Adjusted diluted EPS		$	1.52			$	1.40			$	1.27
Number of shares (thousands)			24,000				24,100				24,400

We completed five acquisitions in 2007 and two in the first two months of 2008. These acquisitions were enabled by our cash position and the financing we put in place during 2007. During 2009, we generated $71.8 million of cash flow from operations compared to $57.1 million and $43.0 million in 2008 and 2007, respectively. This improvement is a direct result of the strategic initiatives discussed in “Cost Savings and Consolidation Efforts,” which were designed to improve operational efficiency.

As of January 1, 2010, we had $37.9 million in cash and cash equivalents and $289.4 million of debt including $30.5 million that comes due in June 2010. The remaining debt matures in 2012 and 2013.

CEO Message

I am proud of our strategic accomplishments in 2009. This year provided additional evidence of our execution and progress towards achieving both our short-term operational goals and long-term strategic objectives. With that said, I was not satisfied with the level of revenue we achieved in 2009. Despite the turbulent global economy and uncertain healthcare environment, the markets we operate in provide us opportunities. We have taken and will continue to take measures and actions that enable us to capitalize on those opportunities.

Improving operating performance is a critical part of our long-term plan to drive shareholder value. During 2009, we completed a number of strategic initiatives designed to improve operational efficiency, including the consolidation of five facilities, the completion of four ERP system and back office integrations, and the streamlining of our Orthopaedic operations to improve on-time delivery and lead-time. Additionally, during 2009, we took steps and made difficult cost cutting decisions to help offset the impact of lower revenue levels and higher R&D investment on our profitability. The benefit of these initiatives can be seen in our financial results, which included the achievement of our 12% adjusted operating margin goal for 2009, 26% growth in cash flow from operations to $72 million as well as the expansion of our gross margin to 31.9%. I consider these significant accomplishments given the difficult operating environment. We will continue to institute our operating discipline to improve performance, and are making strategic investments to drive both new product developments as well as greater operational efficiency. We are certain that our dedication to improving the business and closely following our strategic priorities has placed us in a strong position to benefit as the broader economy and healthcare industry improves and to experience continued success in 2010 and beyond.

Product Development

Currently, we are developing a series of new products for customer applications in the CRM, Neuromodulation, Vascular Access, Orthopaedic and Electrochem markets. Some of the key development initiatives include:

	1.		To continue to develop complete systems solutions for our OEM customers in the markets we operate in;
	2.		To continue the evolution of our Q series high rate ICD 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 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.

Approximately $2.3 million of the BIOMEC purchase price in April 2007 was allocated to the estimated fair value of acquired IPR&D projects that had not yet reached technological feasibility and had no alternative future use, thus were immediately expensed on the date of acquisition. The value assigned to IPR&D related to projects that incorporate BIOMEC’s novel-polymer coating (biomimetic) technology that mimics the surface of endothelial cells of blood vessels. An agreement was reached in 2008 with an OEM partner to provide coating material and services for their catheter products. The 510(k) application was approved by the Food and Drug Administration (“FDA”) and sales began in 2009, which did not materially impact our results of operations. There have been no significant changes from our original estimates with regard to these projects.

Approximately $13.8 million of the Enpath purchase price in June 2007 was allocated to the estimated fair value of acquired IPR&D projects that had not yet reached technological feasibility and had no alternative future use, thus were immediately expensed on the date of acquisition. These projects primarily represent the next generation of introducer and catheter products already being sold, which incorporate new enhancements and customer modifications. One introducer project was launched near the end of 2008. We expect to commercially launch the other introducer products under development in 2010, which will replace existing products. These introducer projects acquired have been delayed due to the timing of customer adoption and resolution of technical difficulties on some of the projects. Additionally, future sales from our ViaSeal^TM introducer project are uncertain due to litigation (See Note 11 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report). The catheter IPR&D project, to which a portion of the Enpath purchase price was allocated, has been put on hold indefinitely in order to allocate resources to other projects. The lost revenue from the delays in these introducer and catheter projects are expected to be partially offset with revenue from other projects initiated after the acquisition of Enpath.

Approximately $2.2 million of the Precimed purchase price was allocated to the estimated fair value of acquired IPR&D projects that had not yet reached technological feasibility and had no alternative future use, thus were immediately expensed on the date of acquisition. The value assigned to IPR&D related to Reamer, Instrument Kit, Locking Plate and Cutting Guide projects. These projects primarily represent the next generation of products already being sold, which incorporate new enhancements and customer modifications. We commercially launched two of these products in 2008, one in 2009 and another is expected in 2010. Two of the other orthopaedic projects acquired have been delayed and three have been cancelled due to the timing of customer adoption, technical difficulties and the inability of the projects to meet margin feasibility assessments. These changes are not expected to have a material impact on operating income as these projects were expected to have lower operating margins.

Our Critical Accounting Estimates

The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements. Management considers an accounting estimate to be critical if 1) It requires assumptions to be made that were uncertain at the time the estimate was made; and 2) Changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations, financial position or cash flows. Our most critical accounting estimates are described below. We also have other policies that we consider key accounting policies, such as our policies for revenue recognition; however, these policies do not meet the definition of critical accounting estimates, because they do not generally require us to make estimates or judgments that are difficult or subjective.

Balance Sheet Caption /				Effect of
Nature of Critical				Variations of Key
Estimate Item		Assumptions / Approach Used		Assumptions Used
Valuation of goodwill, other identifiable intangible assets and IPR&D When we acquire a company, we allocate the purchase price to the assets we acquire and liabilities we assume based on their fair value at the date of acquisition. We then allocate the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including IPR&D. Other indefinite lived intangible assets, such as trademarks and tradenames, are considered non-amortizing intangible assets as they are expected to generate cash flows indefinitely. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Indefinite lived intangibles and goodwill are required to be assessed for impairment on an annual basis or more frequent if certain indicators are present. Definite-lived intangible assets are amortized over their estimated useful lives and are assessed for impairment if certain indicators are present.		We base the fair value of identifiable tangible and intangible assets (including IPR&D) on detailed valuations that use information and assumptions provided by management. The fair values of the assets acquired and liabilities assumed are determined using one of three valuation approaches: market, income and cost. The selection of a particular method for a given asset depends on the reliability of available data and the nature of the asset, among other considerations. The market approach values the subject asset based on available market pricing for comparable assets. The income approach values the subject asset based on the present value of risk adjusted cash flows projected to be generated by the asset. The projected cash flows for each asset considers multiple factors, including current revenue from existing customers, attrition trends, reasonable contract renewal assumptions from the perspective of a marketplace participant, and expected profit margins giving consideration to historical and expected margins. The cost approach values the subject asset by determining the current cost of replacing that asset with another of equivalent economic utility. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation or obsolescence, with specific consideration given to economic obsolescence if indicated. We perform an annual review on the last day of each fiscal year, or more frequently if indicators of potential impairment exist, to determine if the recorded goodwill and other indefinite lived intangible assets are impaired. We assess goodwill for impairment by comparing the fair value of our reporting units to their carrying value to determine if there is potential impairment. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value. Fair values for reporting units are determined based in-part on the income approach, and where appropriate, the market approach or appraised values are also considered. Definite-lived intangible assets such as purchased technology, patents and customer lists are reviewed at least quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in their remaining useful life. Indefinite lived intangible assets such as trademarks and tradenames are evaluated for impairment by using the income approach.		The use of alternative valuation assumptions, including estimated cash flows and discount rates, and alternative estimated useful life assumptions could result in different purchase price allocations. In arriving at the value of the IPR&D, we additionally consider among other factors: the in-process projects stage of completion; commercial feasibility of the project; the complexity of the work completed as of the acquisition date; the projected costs to complete; the expected introduction date and the estimated useful life of the technology. Significant changes in these estimates and assumptions could impact the value of the assets and liabilities recorded which would change the amount and timing of future intangible asset amortization expense. We make certain estimates and assumptions that affect the determination of the expected future cash flows from our reporting units for our goodwill impairment testing. These include sales growth, cost of capital, and projections of future cash flows. Significant changes in these estimates and assumptions could create future impairment losses to our goodwill. For indefinite lived assets such as trademarks and tradenames, we make certain estimates of revenue streams, royalty rates and other future benefits. Significant changes in these estimates could create future impairments of these indefinite lived intangible assets. Estimation of the useful lives of definite-lived intangible assets are based upon the estimated cash flows of the respective intangible asset and requires significant management judgment. Events could occur that would materially affect our estimates of the useful lives. Significant changes in these estimates and assumptions could change the amount of future amortization expense or could create future impairments of these definite-lived intangible assets. A 1% change in the amortization of our intangible assets would increase/decrease 2009 net income by approximately $0.07 million, or approximately $0.003 per diluted share. As of January 1, 2010, we have $406.3 million of intangible assets recorded on our balance sheet representing 49% of total assets. This includes $82.1 million of amortizing intangible assets, $20.3 million of indefinite lived intangible assets and $303.9 million of goodwill.

Balance Sheet Caption /				Effect of
Nature of Critical				Variations of Key
Estimate Item		Assumptions / Approach Used		Assumptions Used
Stock-based compensation We record compensation costs related to our stock-based awards which include stock options, restricted stock and restricted stock units. We measure stock-based compensation cost at the grant date based on the fair value of the award. Compensation cost for service-based awards is recognized ratably over the applicable vesting period. Compensation cost for performance-based awards is reassessed each period and recognized based upon the probability that the performance targets will be achieved. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. The total expense recognized over the vesting period will only be for those awards that ultimately vest.		We utilize the Black-Scholes Options Pricing Model to determine the fair value of stock options. We are required to make certain assumptions with respect to selected Black Scholes model inputs, including expected volatility, expected life, expected dividend yield and the risk-free interest rate. Expected volatility is based on the historical volatility of our stock over the most recent period commensurate with the estimated expected life of the stock options. The expected life of stock options granted, which represents the period of time that the stock options are expected to be outstanding, is based, primarily, on historical data. The expected dividend yield is based on our history and expectation of dividend payouts. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period commensurate with the estimated expected life. For restricted stock and restricted stock unit awards, the fair market value is determined based upon the closing value of our stock price on the grant date. Compensation cost for performance-based awards is reassessed each period and recognized based upon the probability that the performance targets will be achieved. That assessment is based upon our actual and expected future performance as well as that of the individuals who have been granted performance-based awards. Stock-based compensation expense is only recorded for those awards that are expected to vest. Forfeiture estimates for determining appropriate stock-based compensation expense are estimated at the time of grant based on historical experience and demographic characteristics. Revisions are made to those estimates in subsequent periods if actual forfeitures differ from estimated forfeitures.		Option pricing models were developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. Because our share-based payments have characteristics significantly different from those of freely traded options, and because changes in the subjective input assumptions can materially affect our estimates of fair values, existing valuation models may not provide reliable measures of the fair values of our share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards may bear little resemblance to the actual values realized upon the exercise, expiration or forfeiture of those share-based payments in the future. Stock options may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our consolidated financial statements. Alternatively, value may be realized from these instruments that is significantly in excess of the fair values originally estimated on the grant date and reported in our consolidated financial statements. There are significant differences among valuation models. This may result in a lack of comparability with other companies that use different models, methods and assumptions. There is a high degree of subjectivity involved in selecting assumptions to be utilized to determine fair value and forfeiture assumptions. If factors change and result in different assumptions in future periods, the expense that we record for future grants may differ significantly from what we have recorded in the current period. Additionally, changes in performance of the Company or individuals who have been granted performance-based awards that affect the likelihood that performance based targets are achieved could materially impact the amount of stock-based compensation expense recognized. A 1% change in our stock based compensation expense would increase/decrease 2009 net income by approximately $0.03 million, or approximately $0.001 per diluted share.

Balance Sheet Caption /				Effect of
Nature of Critical				Variations of Key
Estimate Item		Assumptions / Approach Used		Assumptions Used
Inventories Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market.		Inventory costing requires complex calculations that include assumptions for overhead absorption, scrap, sample calculations, manufacturing yield estimates and the determination of which costs may be capitalized. The valuation of inventory requires us to estimate obsolete or excess inventory as well as inventory that is not of saleable quality.		Variations in methods or assumptions could have a material impact on our results. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to record additional inventory write-downs or expense a greater amount of overhead costs, which would have a negative impact on our net income. A 1% write-down of our inventory would decrease 2009 net income by approximately $0.7 million, or approximately $0.03 per diluted share. As of January 1, 2010 we have $106.6 million of inventory recorded on our balance sheet representing 13% of total assets.
Tangible long-lived assets Property, plant and equipment and other tangible long-lived assets are carried at cost. The cost of property, plant and equipment is charged to depreciation expense over the estimated life of the operating assets primarily using straight-line rates. Tangible long-lived assets are subject to impairment assessment.		We assess the impairment of tangible long-lived assets when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Factors that we consider in deciding when to perform an impairment review include: a significant decrease in the market price of the asset or asset group; a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction; a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Recoverability potential is measured by comparing the carrying amount of the asset group to the related total future undiscounted cash flows. The projected cash flows for each asset group considers multiple factors, including current revenue from existing customers, proceeds from the sale of the asset group, reasonable contract renewal assumptions from the perspective of a marketplace participant, and expected profit margins giving consideration to historical and expected margins. If an asset group’s carrying value is not recoverable through related cash flows, the asset group is considered to be impaired. Impairment is measured by comparing the asset group’s carrying amount to its fair value. When it is determined that useful lives of assets are shorter than originally estimated, and there are sufficient cash flows to support the carrying value of the assets, we accelerate the rate of depreciation in order to fully depreciate the assets over their shorter useful lives.		Estimation of the useful lives of tangible assets that are long-lived requires significant management judgment. Events could occur, including changes in cash flow that would materially affect our estimates and assumptions related to depreciation. Unforeseen changes in operations or technology could substantially alter the assumptions regarding the ability to realize the return of our investment in long-lived assets. Also, as we make manufacturing process conversions and other facility consolidation decisions, we must make subjective judgments regarding the remaining useful lives of our assets, primarily manufacturing equipment and buildings. Significant changes in these estimates and assumptions could change the amount of future depreciation expense or could create future impairments of these long-lived assets. A 1% write-down in our tangible long-lived assets would decrease 2009 net income by approximately $1.1 million, or approximately $0.05 per diluted share. As of January 1, 2010 we have $171.1 million of tangible long-lived assets recorded on our balance sheet representing 21% of total assets.

Balance Sheet Caption /				Effect of
Nature of Critical				Variations of Key
Estimate Item		Assumptions / Approach Used		Assumptions Used
Provision for income taxes In accordance with the liability method of accounting for income taxes, the provision for income taxes is the sum of income taxes both currently payable and deferred. The changes in deferred tax assets and liabilities are determined based upon the changes in differences between the bases of assets and liabilities for financial reporting purposes and the tax bases of assets and liabilities as measured by the enacted tax rates that management estimates will be in effect when the differences reverse.		In relation to recording the provision for income taxes, management must estimate the future tax rates applicable to the reversal of temporary differences, make certain assumptions regarding whether book/tax differences are permanent or temporary and if temporary, the related timing of expected reversal. Also, estimates are made as to whether taxable operating income in future periods will be sufficient to fully recognize any gross deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. Alternatively, we may make estimates about the potential usage of deferred tax assets that decrease our valuation allowances. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for uncertain tax positions when we believe that certain tax positions do not meet the more likely than not threshold. We adjust these reserves in light of changing facts and circumstances, such as the outcome of a tax audit or the lapse of the statute of limitations. The provision for income taxes includes the impact of reserve provisions and changes to the reserves that are considered appropriate.		Changes could occur that would materially affect our estimates and assumptions regarding deferred taxes. Changes in current tax laws and tax rates could affect the valuation of deferred tax assets and liabilities, thereby changing the income tax provision. Also, significant declines in taxable income could materially impact the realizable value of deferred tax assets. At January 1, 2010, we had $36.0 million of deferred tax assets on our balance sheet and a valuation allowance of $5.7 million has been established for certain deferred tax assets as it is more likely than not that they will not be realized . A 1% change in the effective tax rate would impact the current year benefit by $0.2 million, and 2009 diluted loss per share by $0.01 per diluted share.

Cost Savings and Consolidation Efforts

From 2005 to 2008, we recorded charges in other operating expenses, net related to our ongoing cost savings and consolidation efforts. Additional information is set forth in Note 9 — “Other Operating Expenses, Net” of the Notes to Consolidated Financial Statements contained in Item 8 of this report.

2005 & 2006 facility shutdowns and consolidations — Beginning in the first quarter of 2005 and ending in the third quarter of 2008 we consolidated six facilities into existing facilities with excess capacity. The purpose of these consolidation projects was to streamline operations in order to improve operating margins.

The total cost of these initiatives was $24.7 million, which was incurred from 2005 to 2008, and consisted of the following:

•		Severance and retention — $7.4 million;
•		Production inefficiencies, moving and revalidation — $4.6 million;
•		Accelerated depreciation and asset write-offs — $1.1 million;
•		Personnel — $8.4 million; and
•		Other — $3.2 million.

All categories of costs were considered to be cash expenditures, except accelerated depreciation and asset write-offs. Approximately $23.6 million of these expenses for the facility shutdowns and consolidations were included in our Greatbatch Medical business segment, $0.1 million in our Electrochem segment and $1.0 million was recorded in unallocated operating expenses. No costs related to these projects were incurred during 2009 as consolidations were complete and all payments have been made.

2007 & 2008 facility shutdowns and consolidations — Beginning in the first quarter of 2007 and ending in the fourth quarter of 2009, we consolidated six facilities into newly constructed facilities or existing facilities with excess capacity. The purpose of these consolidation projects was to streamline operations in order to improve operating margins.

The total cost incurred for these initiatives was $16.0 million and included the following:

•		Severance and retention — $4.5 million;
•		Production inefficiencies, moving and revalidation — $5.0 million;
•		Accelerated depreciation and asset write-offs — $4.2 million;
•		Personnel — $0.6 million; and
•		Other — $1.7 million.

All categories of costs are considered to be cash expenditures, except accelerated depreciation and asset write-offs. For 2009, costs relating to these initiatives of $1.6 million and $5.5 million were included in the Greatbatch Medical and Electrochem business segments, respectively. Costs incurred during 2008 of $0.3 million, $4.7 million and $3.3 million were included in unallocated Corporate expenses, Greatbatch Medical and Electrochem business segments, respectively. The $0.5 million of costs incurred in 2007 were included in our Electrochem segment. The annual anticipated cost savings from these initiatives is estimated to be approximately $5 million to $6 million and will not be fully realized until 2010.

In 2010, we announced the opening of our orthopaedic design center located in Warsaw, IN. The new facility will be equipped with the latest rapid prototyping equipment and is being leased. Additionally, further investment is planned over the next three years to drive improvements and growth in all orthopaedic locations.

Our Financial Results

We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31^st. Fiscal years 2009, 2008 and 2007 ended on January 1, 2010, January 2, 2009 and December 28, 2007, respectively. Fiscal year 2008 contained fifty-three weeks while fiscal years 2009 and 2007 contained fifty-two weeks.

Beginning in 2009, we adopted a change in accounting which required issuers of convertible debt that may be settled in cash upon conversion, such as our CSN II (See Note 6 “Debt” of the Notes to Consolidated Financial Statements contained in Item 8 of this report), to recognize interest expense on those instruments at their nonconvertible debt borrowing rate. As required, the 2008 and 2007 Consolidated Financial Statements presented in this report have been retroactively adjusted to reflect the adoption of this change in accounting (See Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report).

Results of Operations Table

		Year ended												2009-2008								2008-2007
		Jan. 1,				Jan. 2,				Dec. 28,				$				%				$				%
Dollars in thousands, except per share data		2010				2009 (1)				2007 (1)				Change				Change				Change				Change
Greatbatch Medical
CRM/Neuromodulation		$	305,354			$	286,251			$	253,676			$	19,103				7	%		$	32,575				13	%
Vascular Access			35,816				39,443				16,146				(3,627	)			-9	%			23,297				144	%
Orthopaedic			113,897				142,446				—				(28,549	)			-20	%			142,446			NA
Total Greatbatch Medical			455,067				468,140				269,822				(13,073	)			-3	%			198,318				73	%
Electrochem			66,754				78,504				48,924				(11,750	)			-15	%			29,580				60	%
Total sales			521,821				546,644				318,746				(24,823	)			-5	%			227,898				71	%
Cost of sales			355,402				390,855				202,721				(35,453	)			-9	%			188,134				93	%
Gross profit			166,419				155,789				116,025				10,630				7	%			39,764				34	%
Gross profit as a % of sales			31.9	%			28.5	%			36.4	%							3.4	%							-7.9	%
Selling, general, and administrative expenses			70,294				72,633				44,674				(2,339	)			-3	%			27,959				63	%
SG&A as a % of sales			13.5	%			13.3	%			14.0	%							0.2	%							-0.7	%
Research, development and engineering costs, net			33,562				31,444				29,914				2,118				7	%			1,530				5	%
RD&E as a % of sales			6.4	%			5.8	%			9.4	%							0.6	%							-3.6	%
Other operating expenses, net			61,515				16,818				21,417				44,697				266	%			(4,599	)			-21	%
Operating income			1,048				34,894				20,020				(33,846	)			-97	%			14,874				74	%
Operating margin			0.2	%			6.4	%			6.3	%							-6.2	%							0.1	%
Interest expense			20,071				19,954				12,072				117				1	%			7,882				65	%
Interest income			(324	)			(711	)			(7,050	)			387				-54	%			6,339				-90	%
Gain on sale of investment security			—				—				(4,001	)			—			NA					4,001			NA
Gain on extinguishment of debt			—				(3,242	)			(4,473	)			3,242				-100	%			1,231				-28	%
Other income, net			(522	)			(1,624	)			(447	)			1,102				-68	%			(1,177	)			263	%
Provision (benefit) for income taxes			(9,176	)			6,369				11,969				(15,545	)			-244	%			(5,600	)			-47	%
Effective tax rate			50.5	%			31.0	%			50.0	%							19.5	%							-19.0	%
Net income (loss)		$	(9,001	)		$	14,148			$	11,950			$	(23,149	)			-164	%		$	2,198				18	%
Net margin			-1.7	%			2.6	%			3.7	%							-4.3	%							-1.1	%
Diluted earnings (loss) per share		$	(0.39	)		$	0.62			$	0.53			$	(1.01	)			-163	%		$	0.09				17	%

Fiscal 2009 Compared with Fiscal 2008

Sales

Changes to sales by major product lines were as follows (in thousands):

		Year Ended
		January 1,				January 2,				$				%
Product Lines		2010				2009				Change				Change
Greatbatch Medical
CRM/Neuromodulation		$	305,354			$	286,251			$	19,103				7	%
Vascular Access			35,816				39,443				(3,627	)			-9	%
Orthopaedic			113,897				142,446				(28,549	)			-20	%
Total Greatbatch Medical			455,067				468,140				(13,073	)			-3	%
Electrochem			66,754				78,504				(11,750	)			-15	%
Total Sales		$	521,821			$	546,644			$	(24,823	)			-5	%

For 2009, revenue totaled $521.8 million compared to $546.6 million in 2008. 2008 results include the benefit of an additional week of operations due to the Company’s fiscal year ending on the closest Friday to December 31. This additional week added approximately $10 million to 2008 sales. Excluding this additional week of operations, 2009 annual revenue was 3% below the 2008 period as CRM/Neuromodulation revenue growth was offset by decreases in our other product lines, which were impacted by the uncertain health care and economic environment.

Greatbatch Medical — Our 2009 revenue from our Greatbatch Medical business decreased $13.1 million or 3% from 2008. Excluding the additional week of sales, this decline was 1% as 9% CRM/Neuromodulation revenue growth was offset by decreases in the Vascular Access and Orthopaedic product lines, which were impacted by the uncertain health care environment.

For the year, CRM and Neuromodulation revenue increased 7%, driven by higher filtered feedthrough, coated component and assembly revenue offset by lower battery and capacitor revenue. CRM revenue is significantly impacted each quarter due to the timing of various customer product launches, shifts in customer market share, customer inventory management initiatives as well as marketplace field actions. During the first half of 2009, CRM revenue benefited from the timing of various customer product launches and, as expected, began to return to more normalized growth levels for the second half of 2009. Additionally, battery and capacitor sales for 2009 were impacted by customer inventory adjustments and are expected to return to more normalized levels in 2010.

For the year, Vascular Access revenue was $35.8 million versus $39.4 million in 2008. These decreases were primarily due to lower introducer sales as a result of customer inventory stocking that took place during the first quarter of 2009 in connection with our on-going introducer litigation (See Note 11 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report). Sales were also lower in comparison to the prior year due to the one less week of operations. 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 generate revenue until the second half of 2010.

Our Orthopaedic product line revenues were $113.9 million for 2009, a decrease of 20% from the $142.4 million in 2008. This decrease was primarily due to reduced spending on elective procedures and an increased emphasis on inventory management programs from our customers as a result of the uncertain economic and regulatory environment. Additionally, Orthopaedic sales declined approximately $5 million as 2008 revenue included the favorable impact of the release of acquired backlog, favorable currency exchange rates and the additional week of sales in the fourth quarter offset by the fact that we had our orthopaedic product line for the full year in 2009 versus a partial year in 2008. During this industry downturn, we continue to streamline and invest in our orthopaedic operations, which we believe present significant opportunities. We anticipate that these challenging market conditions will persist through the first half of 2010.

Electrochem — 2009 sales for the Electrochem business segment were $66.8 million, compared to $78.5 million in 2008. 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 began to ease in the fourth quarter of 2009 but still remain a challenge and are expected to continue into the first half of 2010. We continue to actively manage our business so that we will be better prepared to meet the needs of our customers once the markets recover.

2010 Sales Outlook — 2010 annual revenue product line growth rates are expected to be as follows:

•

CRM & Neuromodulation: 2% to 5%

•

Vascular Access: 3% to 7%

•

Orthopaedic: 3% to 7%

•

Electrochem: 0% to 5%

These growth projections may be impacted by a variety of factors including a continued softening in the orthopaedic and commercial energy markets, continued delays in elective surgeries, changes in pricing or exchange rates and changes in health care reimbursement policies. See “Cautionary Factors That May Affect Future Results” section contained in Item 1 of this report.

Gross Profit

Changes to gross profit as a percentage of sales were primarily due to the following:

		2009-2008
		% Increase
Inventory step-up amortization (a)			1.2	%
Manufacturing efficiencies (b)			1.8	%
Selling price (c)			-1.1	%
Mix change (d)			1.1	%
Foreign currency (e)			0.5	%
Performance-based compensation (f)			0.5	%
Other			-0.6	%
Total percentage point change to gross profit as a percentage of sales			3.4	%

We expect our gross profit as a percentage of sales to increase over the next several years as a result of our consolidation and “Lean” initiatives. Additionally, over the long term, we expect new product introductions resulting from current research and development efforts to help drive gross margin expansion.

SG&A Expenses

Changes to SG&A expenses were primarily due to the following (in thousands):

		2009-2008
		$ Decrease
Legal costs (a)		$	(3,027	)
Performance-based compensation (b)			(2,907	)
IT and Consulting (c)			1,658
Rebranding initiative (d)			722
Bad debt expense (e)			371
Other			844
Net decrease in SG&A		$	(2,339	)

We expect to maintain SG&A expenses at the current levels as normal inflationary cost increases and investment in sales and marketing are offset by cost cutting and consolidation initiatives.

RD&E Expenses

Net research, development and engineering costs were as follows (in thousands):

		Year ended
		January 1,				January 2,
		2010				2009
Research and development costs		$	17,707			$	18,750
Engineering costs			26,438				22,447
Less cost reimbursements			(10,583	)			(9,753	)
Engineering costs, net			15,855				12,694
Total RD&E		$	33,562			$	31,444

Net research, development and engineering costs for 2009, as expected, were higher versus 2008 due to the strategic decision in 2009 to further invest resources in the development of new technologies in order to provide solutions for our customers and ultimately drive long-term growth. Reimbursement on product development projects is dependent upon the timing of the achievement of milestones and are netted against gross spending. In 2009, cost reimbursements also decreased as a percentage of total engineering costs in comparison to 2008 due to the expiration of grants acquired from BIOMEC, which are not expected to be replaced.

We expect net RD&E costs to continue to increase in 2010 as we further invest resources in the development of new technologies, including the development of systems solutions for our customers, and lower cost reimbursements. These systems projects (such as MRI compatibility and wireless sensing) are niche product solutions that are not a core product of our OEM customer, but which fit perfectly into our expertise and capabilities. 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 for these niche products by accelerating the velocity of innovation, optimizing their supply chain and ultimately provide them with cost efficiencies. The revenue growth projections we provided in “2010 Sales Outlook” include the benefits of some of these system level projects, primarily in the Vascular market. However, we are anticipating that most of the revenue from these projects will not be realized until the 2011 to 2014 time frame.

Other Operating Expenses, Net

Electrochem litigation charge — On October 1, 2009, a Louisiana jury found in favor of a former Electrochem customer on their claims made in connection with a failed business transaction dating back to 1997. The jury awarded damages, including interest, of approximately $33 million. Our post-trial motion for a new trial was denied, and we have appealed the judgment to the Louisiana Court of Appeal. To date, the cost of defense in this litigation has been paid by our insurance carrier. As a result of the jury verdict, 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. Based upon our best estimate of loss given the range of possible outcomes at this time, we recorded a $34.5 million charge related to this litigation in 2009 (See Note 11 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report). This accrual does not include the interest that will accrue on the award during the appeal process at the Louisiana statutory rate and was included in our Electrochem segment.

Intangible asset write-down — As a result of the successful rebranding of our IMC segment to Greatbatch Medical, during the fourth quarter of 2009, we wrote-down our non-Greatbatch trademarks and tradenames by $15.9 million, which is included in the results for our Greatbatch Medical segment. This charge was recorded based upon Management’s decision to discontinue use of the associated tradenames and its determination that there would be no market participants willing to purchase the previously acquired tradenames.

We do not believe that the remaining Greatbatch tradename is at risk of being impaired in the future. Additionally, based upon our annual impairment analysis for goodwill, we do not believe that the goodwill that is allocated to our Greatbatch Medical or Electrochem segments is at risk of failing step one of our annual impairment test unless operating conditions for those segments significantly deteriorates from current levels or we change our reporting structure. The assumptions used in our annual impairment tests incorporate the growth rates disclosed in “2010 Sales Outlook” of this section.

Acquired In-Process Research and Development — Approximately $2.2 million of the purchase price related to our 2008 acquisitions was allocated to IPR&D projects acquired. These projects had not yet reached technological feasibility and had no alternative future use as of the acquisition date, thus were immediately expensed on the date of acquisition.

The remaining other operating expenses, net were as follows (in thousands):

		Year ended
		January 1,				January 2,
		2010				2009
(a) 2005 & 2006 facility shutdowns and consolidations		$	—			$	663
(a) 2007 & 2008 facility shutdowns and consolidations			7,069				8,347
(b) Integration costs			3,077				5,369
(c) Asset dispositions and other			948				199
		$	11,094			$	14,578

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

Interest Expense and Interest Income

Interest expense, which includes the impact of the adoption of the new accounting for convertible debt in both the 2009 and 2008 periods, and interest income for 2009 were consistent with the same periods of 2008. 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 borrowing costs in connection with the Electrochem Litigation (See Note 11 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report), which required bonding in order to appeal.

Gain on extinguishment of debt

In December 2008, we entered into privately negotiated agreements under which we repurchased $21.8 million in aggregate principal amount of our original $170.0 million of 2.25% convertible subordinated notes due 2013 (“CSN I”) at $845.38 per $1,000 of principal. The primary purpose of this transaction was to retire the debentures, which contained a put option exercisable on June 15, 2010, at a discount. This transaction was funded with availability under our existing line of credit. This transaction was accounted for as an extinguishment of debt and resulted in a pre-tax gain of $3.2 million.

Other income, net

Gain on foreign currency contracts — In December 2007 and January 2008, we entered into three forward currency contracts to purchase Swiss Francs and Euros in order to partially fund our acquisition of Precimed, which was payable in Swiss Francs, and the Chaumont Facility, which was payable in Euros. The net result of the above transactions was a gain of $2.4 million, $1.6 million of which was recorded in the first quarter of 2008 as Other Income, Net.

The remainder of other income, net primarily includes the impact of foreign currency exchange rate fluctuations on our transactions denominated in foreign currencies. We generally do not expect foreign currency exchange rate fluctuations to have a material impact on our net income.

Provision for Income Taxes

The effective tax rate (benefit) for 2009 was (50.5%) compared to 31.0% for 2008. The 2009 effective tax rate (benefit) includes the favorable impact of the resolution of tax audits and the lapse of statutes of limitation on certain tax items. Additionally, the 2009 and 2008 effective tax rate (benefit) includes the benefit of the Federal research and development tax credit. See Note 10 “Income Taxes” of the Notes to Consolidated Financial Statements contained at Item 8 of this report for a reconciliation of the U.S. statutory rate to our effective tax rate (benefit). For 2010, we currently expect our effective tax rate to approximate the 35% statutory rate due to the expiration of the research and development tax credit at the end of 2009.

In February 2010, President Obama’s administration announced various proposals to modify certain aspects of the rules governing the U.S. taxation of certain non-U.S. subsidiaries. Many details of the proposals remain unknown and any legislation enacting such modifications would require Congressional approval; however, changes to these rules could significantly impact our effective tax rate.

Fiscal 2008 Compared with Fiscal 2007

Sales

Changes to sales by major product lines were as follows (in thousands):

		Year Ended
		January 2,				December 28,				$				%
Product Lines		2009				2007				Change				Change
Greatbatch Medical
CRM/Neuromodulation		$	286,251			$	253,676			$	32,575				13	%
Vascular Access			39,443				16,146				23,297				144	%
Orthopaedic			142,446				—				142,446			NA
Total Greatbatch Medical			468,140				269,822				198,318				73	%
Electrochem			78,504				48,924				29,580				60	%
Total Sales		$	546,644			$	318,746			$	227,898				71	%

Sales were $546.6 million in 2008, an increase of 71% compared to 2007. This growth was achieved through acquisitions and organic growth of 7%. Our acquisitions contributed $208.2 million incremental revenue in 2008. Revenue for 2008 also included approximately $10 million of additional sales as a result of 2008 being a 53 week fiscal year versus 2007 which had 52 weeks.

Greatbatch Medical — Our 2008 revenue from our Greatbatch Medical segment increased $198.3 million or 73% over 2007. Our acquisitions in 2007 and 2008 contributed $183.2 million to this increase. Included in our Greatbatch Medical segment is our CRM/Neuromodulation product line which saw year over year growth of $32.6 million, $17.5 million of which was attributable to our acquisitions in 2007. 2008 revenue from our Greatbatch Medical segment also includes sales from our Vascular Access and Orthopaedic product lines which increased $23.3 million and $142.4 million, respectively over the prior year and were acquired near the end of 2007 and beginning of 2008. The additional week of sales added approximately $9 million to our Greatbatch Medical revenue in 2008. Additionally, Vascular Access revenue benefited from the timing of customer inventory stocking for introducers in the fourth quarter of 2008. Orthopaedic sales during the first three quarters of 2008 benefited from the release of excess backlog that was on hand at the time of the Precimed acquisitions of approximately $6 million, which was fulfilled in 2008.

The $15.1 million of non-acquisition related increase in CRM/Neuromodulation revenue in 2008 was primarily due to higher feedthrough, and assembly revenue partially offset by lower ICD battery, coated components and ICD capacitor sales. The increase in feedthrough revenue can be attributed to market growth as well as the timing of customer product launches. The increase in assembly sales reflected an increase in price during 2008 due to contractual agreements related to material price increases. The decrease in ICD battery revenue is primarily due to customer vertical integration partially offset by increased adoption of our Q Series high rate ICD batteries. The decline in coated component sales is primarily the result of a customer changing product mix near the end of 2007 due to marketplace field actions. Revenues in 2007 included an increased level of capacitor sales due to a customer supply issue in the first half of 2007.

Electrochem — Electrochem sales grew $29.6 million or 60% in 2008 to $78.5 million. This included $25.0 million of incremental revenue from our acquisitions in 2007. On an organic basis Electrochem revenue increased 11%, which includes approximately $1 million of additional revenue as a result of 2008 being a 53 week fiscal year versus 2007 which had 52 weeks. The core growth in Electrochem sales primarily came from our energy markets as drilling activity was strong in 2008.

Gross Profit

Changes to gross profit as a percentage of sales were primarily due to the following:

		2008-2007
		% Decrease
Impact of 2008 and 2007 acquisitions (a)			-8.5	%
Inventory step-up amortization (b)			-1.5	%
Mix change (c)			-1.2	%
Volume change (d)			1.0	%
Price change (e)			0.8	%
Impact of annualized consolidation savings (f)			1.5	%
Total percentage point change to gross profit as a percentage of sales			-7.9	%

SG&A Expenses

Changes to SG&A expenses were primarily due to the following (in thousands):

		2008-2007
		$ Increase
Headcount increases associated with acquisitions (a)		$	18,854
Amortization (b)			2,839
Enpath legal expense (c)			4,018
Other (d)			2,248
Net increase in SG&A		$	27,959

RD&E Expenses

Net research, development and engineering costs were as follows (in thousands):

		Year ended
		January 2,				December 28,
		2009				2007
Research and development costs		$	18,750			$	16,141
Engineering costs			22,447				18,929
Less cost reimbursements			(9,753	)			(5,156	)
Engineering costs, net			12,694				13,773
Total RD&E		$	31,444			$	29,914

The increase in RD&E expenses for 2008 was primarily due to our acquisitions in 2007 and 2008 which added $5.3 million of incremental research and development costs, $4.1 million of incremental engineering costs and $2.7 million of incremental cost reimbursements. These increases were offset by our efforts to streamline these functions in 2008 to better align resources as well as the timing of cost reimbursements.

Other Operating Expenses, Net

Acquired In-Process Research and Development — Approximately $2.2 million and $16.1 million of the purchase price related to the 2008 and 2007 acquisitions, respectively, was allocated to IPR&D projects acquired. These projects had not yet reached technological feasibility and had no alternative future use as of the acquisition date, thus were immediately expensed on the date of acquisition. Additional information regarding these projects is set forth in the “Product Development” section of this Item.

The remaining other operating expenses, net are as follows (in thousands):

		Year ended
		January 2,				December 28,
		2009				2007
(a) 2005 & 2006 facility shutdowns and consolidations		$	663			$	4,697
(a) 2007 & 2008 facility shutdowns and consolidations			8,347				531
(b) Integration costs			5,369				—
(c) Asset dispositions and other			199				96
		$	14,578			$	5,324

Interest Expense and Interest Income

Interest expense for 2008 is $7.9 million higher than 2007 primarily due to the additional $80 million of 2.25% convertible notes issued at the beginning of 2007 as well as the additional interest expense associated with line of credit draws used to fund our acquisitions and debt extinguishment in 2008.

Interest income for 2008 decreased by $6.3 million in comparison to the prior year primarily due to the cash deployed in connection with our acquisitions in 2007 and 2008.

Gain on sale of investment security

In the second quarter of 2007, we sold an investment security which resulted in a pre-tax gain of $4.0 million.

Gain on extinguishment of debt

In December 2008, we entered into privately negotiated agreements under which we repurchased $21.8 million in aggregate principal amount of our CSN I at $845.38 per $1,000 of principal. The primary purpose of this transaction was to retire the debentures, which contained a put option exercisable on June 15, 2010, at a discount. This transaction was funded with availability under our existing line of credit. This transaction was accounted for as an extinguishment of debt and resulted in a pre-tax gain of $3.2 million.

In the first quarter of 2007, we exchanged $117.8 million of our original $170.0 million of CSN I for an equivalent principal amount of a new series of 2.25% convertible subordinated notes due 2013 (“CSN II”). The primary purpose of this transaction was to eliminate the June 15, 2010 call and put option that is included in the terms of the exchanged CSN I. We accounted for this exchange as an extinguishment of debt, which resulted in a net pre-tax gain of $4.5 million.

Other (income) expense, net

In December 2007 and January 2008, we entered into three forward currency contracts to purchase Swiss Francs and Euros in order to partially fund our acquisition of Precimed, which was payable in Swiss Francs, and the Chaumont Facility, which was payable in Euros. The net result of the above transactions was a gain of $2.4 million, $1.6 million of which was recorded in the first quarter of 2008 as Other Income, Net.

Provision for Income Taxes

Our effective tax rate for fiscal year 2008 of 31.0% is lower than the U.S. statutory rate primarily as a result of the Swiss Tax Holiday tax benefit, offset in part by the IPR&D charge from the acquisition of Precimed, which was not deductible for income tax purposes. Our effective tax rate for fiscal year 2007 of 50.0% was higher than the U.S. statutory rate primarily as a result of the IPR&D charge from the acquisition of Enpath, which was not deductible for income tax purposes.

Liquidity and Capital Resources

		January 1,				January 2,
(Dollars in millions)		2010				2009
Cash and cash equivalents(a)		$	37.9			$	22.1
Working capital (b)		$	119.9			$	142.2
Current ratio (b)			1.9:1.0				2.5:1.0

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 January 1, 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 January 1, 2010, which does not include the impact of the interest rate swaps, was 2.0% and resets based upon the six-month LIBOR rate. As of January 1, 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 January 1, 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, limit repurchases of our stock to $60 million and limits 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 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 January 1, 2010, our ratio of adjusted EBITDA to interest expense, calculated in accordance with our credit agreement, was 9.11 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 January 1, 2010 our total leverage ratio, calculated in accordance with our credit agreement, was 3.55 to 1.00, well below the required limit. The calculation of adjusted EBITDA and leverage ratio exclude certain “extraordinary, unusual or non-recurring” expenses and non-cash charges such as facility shutdown and consolidation costs (subject to certain limits as defined in the agreement), as well as charges up to $35 million in connection with the Electrochem Litigation.

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.

As of January 1, 2010, we had $114 million available under our revolving line of credit. 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 — Net cash flows from operating activities for 2009 were $71.8 million, and were generated from net income excluding non-cash items (i.e. depreciation, amortization, stock-based compensation, non-cash charges and non-cash gains/losses) and were partially offset by decreases in accounts payable and accrued expenses. Included in accounts receivable as of January 2, 2009 was an $11.6 million value added tax (“VAT”) receivable with the French government related to inventory purchases for the Chaumont Facility. During 2009, we received payment of this receivable. 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 2009 were $21.1 million and was primarily related to maintenance capital expenditures. Our current expectation is that capital spending will be in the range of $35 million to $45 million for 2010, 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 orthopaedic business in order to further drive improvements and growth including the purchase of rapid prototyping equipment for our new orthopaedic 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 — Cash flow used for financing activities for 2009 primarily related to $34.0 million net repayment of long-term borrowings. 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.

As of January 1, 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 expect to repay this current portion of long-term debt with cash on hand or availability under our existing revolving line of credit in June 2010.

Capital Structure — As of January 1, 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 $37.9 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.

Off-Balance Sheet Arrangements

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

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 11 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained at Item 8 of this report. Except for the items set forth in Note 11, 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.

Contractual Obligations

The following table summarizes our significant contractual obligations at January 1, 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)		$	357,587			$	45,265			$	112,315			$	200,007			$	—
Operating lease obligations (b)			12,079				2,835				4,066				3,500				1,678
Purchase obligations (b)			20,795				20,289				506				—				—
Foreign currency contracts (b)			6,000				6,000				—				—				—
Pension obligations (c)			11,410				848				2,032				2,349				6,181
Total		$	407,871			$	75,237			$	118,919			$	205,856			$	7,859