Our Business
Greatbatch, Inc. is a leading developer and manufacturer of critical products used in medical devices for the cardiac rhythm management ("CRM"), neuromodulation, vascular, orthopaedic and interventional radiology markets. Additionally, Greatbatch, Inc. is a world leader in the design, manufacture and distribution of battery and wireless sensing technologies. 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 components and devices for the CRM, Neuromodulation, Vascular Access and Orthopaedic markets. These include batteries, capacitors, filtered feedthroughs, engineered components and enclosures used in Implantable Medical Devices ("IMDs") and more recently hip and knee replacement, trauma and spine as well as hip and shoulder implants and introducers, catheters, implantable stimulation leads and microcomponents. Additionally, the Greatbatch Medical business offers value-added assembly and design engineering services for products that incorporate Greatbatch Medical components. Electrochem is a world leader in the design, manufacture and distribution of electrochemical cells, battery packs and wireless sensors for demanding applications in markets such as energy, security, portable medical, environmental monitoring and more.

Our Customers
Our Greatbatch Medical customers include leading Original Equipment Manufacturers ("OEM"), in alphabetical order here and throughout this report, such as Biotronik, Boston Scientific, DePuy, Johnson & Johnson, Medtronic, Smith & Nephew, the Sorin Group, St. Jude Medical, Stryker and Zimmer Holdings, Inc. The nature and extent of our selling relationships with each Greatbatch Medical customer varies in terms of breadth of products purchased, purchased product volumes, length of contractual commitment, ordering patterns, inventory management and selling prices. During the first nine months of 2009, Boston Scientific, Johnson & Johnson, Medtronic and St. Jude Medical collectively accounted for 63% of our total sales.

Our Electrochem customers are primarily companies in markets such as energy, security, portable medical and environmental monitoring including General Electric, Halliburton Company, Scripps Institution of Oceanography, Thales, Weatherford International and Zoll Medical Corp.

Financial Overview
Consolidated sales for the nine months and third quarter ended October 2, 2009 were $396.0 million and $121.5 million, respectively, a decrease of 1% and 11% respectively, over the comparable 2008 periods. For the first three quarters of 2009, sales included CRM and Neuromodulation growth and the benefit of a full period of Orthopaedic operations (approximately $8 million) as compared to the 2008 period. In the third quarter of 2009, CRM and Neuromodulation growth moderated to more normal growth levels due to the timing of customer product launches and inventory adjustments. Offsetting these increases were lower Electrochem revenue due to a slow-down in the energy and portable medical markets and lower Orthopaedic sales due to the uncertain regulatory and economic environment. During the first half of 2009, Orthopaedic sales were impacted by the strong U.S. dollar, which reduced revenue by approximately $4 million. Additionally, 2008 sales included the release of backlog of approximately $3 million in both the second and third quarters. The higher mix of CRM/Neuromodulation revenue, as well as our ongoing consolidation initiatives, have positively impacted our gross profit percentage in 2009.

We have initiated various consolidation initiatives aimed at streamlining our operations and improving operating profitability. These initiatives have allowed us to maintain SG&A expenses constant in 2009. Additionally, we continue to increase research and development expenditures, as evidenced by the increase in gross RD&E to 9% of sales, in order to develop new technologies and provide solutions to our customers and ultimately create long-term growth opportunities. Operating results for the third quarter of 2009 included a $34.5 million litigation charge related to the Company's Electrochem business (See "Litigation"). Additionally, operating income for the first nine months and third quarter of 2009 included $8.3 million and $3.1 million, respectively, of acquisition related charges, consolidation costs and integration expenses, compared to $7.5 million and $3.6 million, respectively, for the same periods in 2008.

As of the end of the third quarter of 2009, cash and cash equivalents totaled $29.5 million. These funds, along with the cash generated from operations and the $128 million available under our line of credit, are sufficient to meet our operating and investment activities for the foreseeable future, including cash expenditures related to our consolidation initiatives, repayment of debt and potential litigation settlements. During the first three quarters of 2009, we repaid $25 million, or 19%, of the outstanding balance of our line of credit.

Our CEO's View
Our CRM, Neuromodulation, Vascular Access and Electrochem product line revenue were generally in line with initial expectations. However, our Orthopaedic sales have been impacted by reduced spending on elective procedures and increased emphasis on inventory management programs from customers amid an uncertain regulatory and economic environment, which is consistent with other orthopaedic OEM suppliers. We are pleased with the progress we have made on our consolidation and operational efficiency initiatives, which have helped mitigate the impact of this lower revenue. Our operating results continue to be positively impacted despite the reduced demand for our orthopaedic products.

During this economic downturn and challenging health care market environment, we continue to focus on the variables that are within our control. During the third quarter of 2009, we continued to take cost cutting measures to help offset the impact of our reduced revenue, continued to consolidate our Teterboro NJ facility into our Raynham MA facility, which is on schedule for completion in the fourth quarter, and converted two facilities to our ERP platform to further streamline operations. Additionally, we continued to invest in our sales and marketing infrastructure and the development of new technologies. We remain confident that our continued focus on these initiatives coupled with our strong cash generation will provide significant growth opportunities once the markets recover. We remain excited about the long-term prospects for our business and will continue to focus on diversifying our revenues, deepening relationships with both current and new customers, improving operational efficiencies and continuing to invest in the development of new technologies to support future growth.

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 the evolution of our Q series high rate ICD batteries;

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

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

4. To integrate Biomimetic coating technology with therapy delivery devices;

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

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

7. To develop disposable instrumentation for the orthopaedics industry;

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

9. To develop a charging platform for Electrochem secondary offering.

Approximately $2.3 million of the BIOMEC, Inc. ("BIOMEC") acquisition purchase price in April 2007 was allocated to the estimated fair value of acquired in-process research and development ("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 the second quarter of 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 Medical, Inc. ("Enpath") acquisition 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 by Enpath 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 timing of customer adoption and transition and technical difficulties of some of the projects. Additionally, future sales from our ViaSealTM introducer project are uncertain due to litigation (See "Litigation"). 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 P Medical Holding SA ("Precimed") acquisition purchase price was allocated to the preliminary 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 by Precimed which incorporate new enhancements and customer modifications. We commercially launched two of these products in 2008 and expect to launch another in 2009. Three of the other orthopaedic projects acquired have been delayed and two have been cancelled due to the timing of customer adoption, technical difficulties, inability to meet margin goals and feasibility assessments. These changes are not expected to have a material impact on operating income as these projects were expected to have lower margins.

Cost Savings and Consolidation Efforts
From 2005 to 2008, we recorded charges in other operating expenses related to our ongoing cost savings and consolidation efforts. Additional information is set forth in Note 10 - "Other Operating Expense" of the Notes to the Condensed Consolidated Financial Statements contained in this report.

2005 & 2006 facility shutdowns and consolidations - Beginning in the first quarter of 2005 and ending in the second quarter of 2006 we consolidated our medical capacitor manufacturing operations in Cheektowaga, NY, and our implantable medical battery manufacturing operations in Clarence, NY, into our advanced power source manufacturing facility in Alden, NY ("Alden Facility"). We also consolidated our capacitor research, development and engineering operations from our Cheektowaga, NY facility into our technology center in Clarence, NY.

In the first quarter of 2005, we announced our intent to close our Carson City, NV facility and consolidate the work performed at that facility into our Tijuana, Mexico facility. That consolidation project was completed in the third quarter of 2007.

In the fourth quarter of 2005, we announced our intent to close our Columbia, MD facility ("Columbia Facility") and Fremont, CA Advanced Research Laboratory ("ARL"). We also announced that the manufacturing operations at our Columbia Facility would be moved into our Tijuana Facility and that the research, development and engineering and product development functions at our Columbia Facility and at ARL would relocate to our technology center in Clarence, NY. The ARL portion of this consolidation project was completed in the fourth quarter of 2006. The Columbia Facility portion of this consolidation project was completed in the third quarter of 2008.

During the fourth quarter of 2006, we completed a plan for consolidating our corporate and business unit organization structure. A significant portion of the annual savings from this initiative was reinvested into research and development activities and business growth opportunities.

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

a. Severance and retention - $7.4 million;

b. Production inefficiencies, moving and revalidation - $4.6 million;

c. Accelerated depreciation and asset write-offs - $1.1 million;

d. Personnel - $8.4 million; and

e. Other - $3.2 million.

All categories of costs were considered to be cash expenditures, except accelerated depreciation and asset write-offs. All costs incurred during 2008 were included in the Greatbatch Medical business segment.

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

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

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

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

In the fourth quarter of 2008, we approved a plan for the closure of our Teterboro, NJ (Electrochem manufacturing), Blaine, MN (Vascular Access manufacturing) and Exton, PA (Orthopaedics corporate office) facilities. The Blaine, MN and Exton, PA consolidations were completed in the second quarter of 2009. The Teterboro, NJ initiative is expected to be completed in the fourth quarter of 2009.

The total cost for the 2007 & 2008 facility shutdowns and consolidations is expected to be approximately $15.5 million to $18.3 million, of which $13.8 million has been incurred through October 2, 2009. The major categories of costs consisted of the following:

a. Severance and retention - $4.5 million to $5.5 million;

b. Production inefficiencies, moving and revalidation - $4.0 million to $4.5 million;

c. Accelerated depreciation and asset write-offs - $3.8 million to $4.3 million;

d. Personnel - $1.2 million to $1.5 million; and

e. Other - $2.0 million to $2.5 million.

All categories of costs are considered to be cash expenditures, except accelerated depreciation and asset write-offs. For the nine months ended October 2, 2009, costs relating to these initiatives of $1.5 million and $3.4 million were included in the Greatbatch Medical and Electrochem business segments, respectively. Costs incurred during the first nine months of 2008 of $0.4 million, $1.5 million and $1.1 million were included in unallocated Corporate expenses, Greatbatch Medical and Electrochem business segments, respectively.

In November 2009 we announced plans to invest approximately $21 million into our Orthopaedic business. A significant portion of the investment will be dedicated to developing a new Rapid Prototyping Center. The new facility will be equipped with the latest technology available to support customers in our orthopaedic instrument and implant development and production. Construction is scheduled to begin in early 2010, with completion scheduled for the fourth quarter of 2010. 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 31st. For 52-week years, each quarter contains 13 weeks. The third quarter of 2009 and 2008 ended on October 2, and September 26, respectively. The commentary that follows should be read in conjunction with our Condensed Consolidated Financial Statements and related notes and with the Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K for the fiscal year ended January 2, 2009.

Beginning in 2009, we were required to adopt the amendments to the provisions of ASC 470-20 related to the accounting for convertible debt instruments that may be settled in cash upon conversion. These amendments require issuers of convertible debt instruments that may be settled in cash upon conversion, such as the Company's CSN II as described in Note 6 to the Condensed Consolidated Financial Statements contained in this report, to separately account for the liability and equity components of those instruments in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. These amendments require retrospective restatement for all prior periods presented in financial statements. Accordingly, the 2008 Condensed Consolidated Financial Statements presented in this report have been retroactively adjusted to reflect the accounting change for convertible debt as if it were in effect as of the date CSN II was originally issued. See Note 2 to the Condensed Consolidated Financial Statements.

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

                                           Three months ended                                     Nine months ended
                                       Oct. 2,      Sept. 26,          $             %          Oct. 2,      Sept. 26,          $             %
In thousands, except per share data     2009           2008         Change        Change         2009           2008         Change         Change
Greatbatch Medical
CRM/Neuromodulation                   $  74,094     $   70,540     $   3,554             5 %   $ 229,387     $  206,424     $  22,963             11 %
Vascular Access                           8,375          8,840          (465 )          -5 %      28,260         28,249            11              0 %
Orthopaedic                              23,190         37,940       (14,750 )         -39 %      88,662        106,700       (18,038 )          -17 %
Total Greatbatch Medical                105,659        117,320       (11,661 )         -10 %     346,309        341,373         4,936              1 %
Electrochem                              15,811         18,922        (3,111 )         -16 %      49,704         58,671        (8,967 )          -15 %
Total sales                             121,470        136,242       (14,772 )         -11 %     396,013        400,044        (4,031 )           -1 %
Cost of sales                            82,333         94,489       (12,156 )         -13 %     271,240        290,997       (19,757 )           -7 %
Gross profit                             39,137         41,753        (2,616 )          -6 %     124,773        109,047        15,726             14 %
Gross profit as a % of sales               32.2 %         30.6 %                       1.6 %        31.5 %         27.3 %                        4.2 %

Selling, general, and
administrative expenses (SG&A)           15,790         15,681           109             1 %      52,362         52,685          (323 )           -1 %
SG&A as a % of sales                       13.0 %         11.5 %                       1.5 %        13.2 %         13.2 %                        0.0 %

Research, development and
engineering costs, net (RD&E)             9,701          6,793         2,908            43 %      26,270         23,722         2,548             11 %
RD&E as a % of sales                        8.0 %          5.0 %                       3.0 %         6.6 %          5.9 %                        0.7 %

Other operating expense, net             37,579          3,565        34,014            NA        42,806          9,714        33,092            341 %
Operating income (loss)                 (23,933 )       15,714       (39,647 )          NA         3,335         22,926       (19,591 )          -85 %
Operating margin                          -19.7 %         11.5 %                     -31.2 %         0.8 %          5.7 %                       -4.9 %

Interest expense                          4,895          4,981           (86 )          -2 %      14,714         14,948          (234 )           -2 %
Interest income                             (22 )         (142 )         120           -85 %         (49 )         (663 )         614            -93 %
Other (income) expense, net                (112 )         (234 )         122           -52 %        (509 )       (1,597 )       1,088            -68 %

Provision (benefit) for income
taxes                                    (8,001 )        4,593       (12,594 )          NA        (3,354 )        3,454        (6,808 )           NA
Effective tax rate                         27.9 %         41.3 %                     -13.4 %        31.0 %         33.7 %                       -2.7 %

Net income (loss)                     $ (20,693 )   $    6,516     $ (27,209 )          NA     $  (7,467 )   $    6,784     $ (14,251 )           NA
Net margin                                -17.0 %          4.8 %                     -21.8 %        -1.9 %          1.7 %                       -3.6 %

Sales
                                             Three months ended                                   Nine months ended
                               October 2,       September 26,           %           October 2,       September 26,           %
(Dollars in thousands)            2009              2008             Change            2009              2008             Change
Greatbatch Medical
CRM/Neuromodulation           $     74,094     $        70,540               5 %   $    229,387     $       206,424              11 %
Vascular Access                      8,375               8,840              -5 %         28,260              28,249               0 %
Orthopaedic                         23,190              37,940             -39 %         88,662             106,700             -17 %
Total Greatbatch Medical           105,659             117,320             -10 %        346,309             341,373               1 %
Electrochem                         15,811              18,922             -16 %         49,704              58,671             -15 %
Total sales                   $    121,470     $       136,242             -11 %   $    396,013     $       400,044              -1 %

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

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

Greatbatch Medical sales decreased 10% for the third quarter of 2009 when compared to the same period of 2008 as CRM and Neuromodulation revenue growth of 5% was offset by decreases in Vascular Access and Orthopaedic revenues. Greatbatch Medical sales for the first nine months of 2009 increased 1% over the comparable 2008 period. This growth was driven by CRM and Neuromodulation revenue and the benefit of a full nine months of Orthopaedic operations . . .