##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark one)
 þ
    
    Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2006
 or
 o
    
    Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the transition period from  to
 COMMISSION FILE NUMBER: 000-49798
 THORATEC CORPORATION
 (Exact name of registrant as specified in its charter)
 California
    
    94-2340464(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification No.)organization)6035 Stoneridge Drive, Pleasanton, California
    
    94588(Address of principal executive offices)
    
    (Zip Code)
 (925) 847-8600
(Registrants telephone number, including area code)
 Indicate by check mark whether the registrant: þ o
 Indicate by check mark whether the registrant is, a large accelerated filer, an accelerated filer
or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):
 þ o o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act):  o þ




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##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES
 TABLE OF CONTENTS
 Part I. Financial InformationItem 1. Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 and
October 1, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and October 1, 2005
    
    
    5Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30,
2006 and October 1, 2005
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosure of Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34Part II. Other Information
    
    
    35Item 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    36Item 6. Exhibits
    
    
    37Signatures
    
    
    38ExhibitsEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited)
(in thousands)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    63,331
    
    
    $
    35,109Short-term available-for-sale investments
    
    
    133,712
    
    
    
    175,827Restricted short-term investments
    
    
    3,360
    
    
    
    3,330Receivables, net of allowances of $511 and $634, respectively
    
    
    38,370
    
    
    
    35,904Inventories
    
    
    43,381
    
    
    
    41,671Deferred tax asset
    
    
    5,461
    
    
    
    5,461Prepaid expenses and other assets
    
    
    4,047
    
    
    
    3,582Total current assets
    
    
    291,662
    
    
    
    300,884Property, plant and equipment, net
    
    
    46,540
    
    
    
    28,906Restricted long-term investments
    
    
    
    
    
    
    1,610Goodwill
    
    
    94,097
    
    
    
    94,097Purchased intangible assets, net
    
    
    133,017
    
    
    
    141,938Other assets
    
    
    11,511
    
    
    
    6,483Total Assets
    
    $
    576,827
    
    
    $
    573,918LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    12,502
    
    
    $
    8,421Accrued compensation
    
    
    10,227
    
    
    
    15,707Accrued income taxes
    
    
    4,705
    
    
    
    3,659Other accrued liabilities
    
    
    4,877
    
    
    
    3,804Total current liabilities
    
    
    32,311
    
    
    
    31,591Senior subordinated convertible notes
    
    
    143,750
    
    
    
    143,750Long-term deferred tax liability and other
    
    
    45,845
    
    
    
    50,430Total Liabilities
    
    
    221,906
    
    
    
    225,771Shareholders equity:Common shares: authorized 100,000; issued and outstanding 52,008 and 51,737, respectively
    
    
    421,584
    
    
    
    407,531Deferred compensation
    
    
    
    
    
    
    (184
    )Accumulated deficit
    
    
    (66,735
    )
    
    
    (58,801
    )Accumulated other comprehensive income (loss):Unrealized loss on investments
    
    
    (38
    )
    
    
    (258
    )Cumulative translation adjustments
    
    
    110
    
    
    
    (141
    )Total accumulated other comprehensive income (loss)
    
    
    72
    
    
    
    (399
    )Total Shareholders Equity
    
    
    354,921
    
    
    
    348,147Total Liabilities and Shareholders Equity
    
    $
    576,827
    
    
    $
    573,918
  3




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THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
(in thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005Product sales
    
    $
    51,747
    
    
    $
    48,841
    
    
    $
    155,285
    
    
    $
    146,917Cost of product sales
    
    
    22,078
    
    
    
    18,610
    
    
    
    64,840
    
    
    
    57,045Gross profit
    
    
    29,669
    
    
    
    30,231
    
    
    
    90,445
    
    
    
    89,872Operating expenses:Selling, general and administrative
    
    
    17,977
    
    
    
    14,987
    
    
    
    55,228
    
    
    
    44,610Research and development
    
    
    8,766
    
    
    
    8,093
    
    
    
    28,108
    
    
    
    23,737Amortization of purchased intangible assets
    
    
    2,974
    
    
    
    2,800
    
    
    
    8,921
    
    
    
    8,404Litigation
    
    
    
    
    
    
    
    
    
    
    447
    
    
    
    177Total operating expenses
    
    
    29,717
    
    
    
    25,880
    
    
    
    92,704
    
    
    
    76,928Income (loss) from operations
    
    
    (48
    )
    
    
    4,351
    
    
    
    (2,259
    )
    
    
    12,944Other income and (expense):Interest expense
    
    
    (1,051
    )
    
    
    (1,037
    )
    
    
    (3,159
    )
    
    
    (3,082
    )Interest income and other
    
    
    2,186
    
    
    
    1,113
    
    
    
    5,678
    
    
    
    2,983Income before income tax benefit (expense)
    
    
    1,087
    
    
    
    4,427
    
    
    
    260
    
    
    
    12,845Income tax benefit (expense)
    
    
    403
    
    
    
    (1,325
    )
    
    
    637
    
    
    
    (4,187
    )Net income
    
    $
    1,490
    
    
    $
    3,102
    
    
    $
    897
    
    
    $
    8,658Net income per share:Basic
    
    $
    0.03
    
    
    $
    0.06
    
    
    $
    0.02
    
    
    $
    0.18Diluted
    
    $
    0.03
    
    
    $
    0.06
    
    
    $
    0.02
    
    
    $
    0.17Shares used to compute net income per share:Basic
    
    
    51,955
    
    
    
    49,562
    
    
    
    52,154
    
    
    
    48,835Diluted
    
    
    52,755
    
    
    
    51,419
    
    
    
    53,510
    
    
    
    50,168
  4




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THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
(in thousands)
 Nine Months EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    897
    
    
    $
    8,658Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    15,016
    
    
    
    14,246Investment discount amortization
    
    
    88
    
    
    
    411Non-cash interest and other expenses
    
    
    1,483
    
    
    
    1,286Tax benefit related to stock options
    
    
    2,418
    
    
    
    4,106Share-based compensation expense
    
    
    7,644
    
    
    
    779Excess tax benefits from share-based compensation
    
    
    (2,283
    )
    
    
    Loss on disposal of assets
    
    
    9
    
    
    
    252Change in net deferred tax liability
    
    
    (5,234
    )
    
    
    (3,164
    )Changes in assets and liabilities:Receivables
    
    
    (2,466
    )
    
    
    1,540Inventories
    
    
    (2,734
    )
    
    
    (4,383
    )Prepaid expenses and other assets
    
    
    (464
    )
    
    
    (1,148
    )Accounts payable and other liabilities
    
    
    401
    
    
    
    4,159Other
    
    
    (258
    )
    
    
    150Net cash provided by operating activities
    
    
    14,517
    
    
    
    26,892Cash flows from investing activities:Purchases of investments
    
    
    (255,300
    )
    
    
    (100,540
    )Proceeds
from sale of investments
    
    
    245,359
    
    
    
    45,233Proceeds
from maturities and redemptions of investments
    
    
    53,795
    
    
    
    27,560Investment in convertible debenture
    
    
    (5,027
    )
    
    
    Purchases of property, plant and equipment, net
    
    
    (22,547
    )
    
    
    (4,428
    )Other
    
    
    (214
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    16,066
    
    
    
    (32,175
    )Cash flows from financing activities:Proceeds from stock option exercises
    
    
    10,447
    
    
    
    17,404Proceeds from stock issued under employee stock purchase plan
    
    
    860
    
    
    
    550Excess tax benefits from share-based compensation
    
    
    2,283
    
    
    
    Repurchase and retirement of common shares
    
    
    (16,201
    )
    
    
    (2,238
    )Net cash provided by (used in) financing activities
    
    
    (2,611
    )
    
    
    15,716Effect of exchange rate changes on cash and cash equivalents
    
    
    250
    
    
    
    (807
    )Net increase in cash and cash equivalents
    
    
    28,222
    
    
    
    9,626Cash and cash equivalents at beginning of period
    
    
    35,109
    
    
    
    16,017Cash and cash equivalents at end of period
    
    $
    63,331
    
    
    $
    25,643Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    1,496
    
    
    $
    1,903Cash paid for interest
    
    $
    1,707
    
    
    $
    1,728Supplemental disclosure of non-cash investing and financing activities:Transfers of equipment from inventory
    
    $
    1,260
    
    
    $
    1,114
  5




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THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (unaudited)
(in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    1,490
    
    
    $
    3,102
    
    
    $
    897
    
    
    $
    8,658Other net comprehensive income (loss):Unrealized gain on investments
(net of tax expense (benefit) of
$59 and $20 for the three months
ended and $146 and $69 for the
nine months ended September 30,
2006 and October 1, 2005,
respectively)
    
    
    89
    
    
    
    36
    
    
    
    220
    
    
    
    76Foreign currency translation
adjustments (net of tax expense
(benefit) of $(43)and $(75) for
the three months ended and $167
and $(230) for the nine months
ended September 30, 2006 and
October 1, 2005, respectively)
    
    
    (64
    )
    
    
    (195
    )
    
    
    251
    
    
    
    (807
    )Comprehensive income
    
    $
    1,515
    
    
    $
    2,943
    
    
    $
    1,368
    
    
    $
    7,927
  6




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THORATEC CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1. Basis of Presentation
   2. Share-Based Compensation
      7




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Three Months Ended
    
    
    Nine Months EndedOctober 1, 2005
    
    
    October 1, 2005(in thousands, except per share data)Net income:As reported
    
    $
    3,102
    
    
    $
    8,658Add: Share-based compensation
expense included in reported net
income, net of related tax
effects
    
    
    277
    
    
    
    595Deduct: Total share-based
compensation expense determined
under fair value based method
for all awards, net of related
tax effects
    
    
    (1,495
    )
    
    
    (4,994
    )Pro forma net income
    
    $
    1,884
    
    
    $
    4,259Basic and diluted net income per share:As reportedBasic
    
    $
    0.06
    
    
    $
    0.18Diluted
    
    $
    0.06
    
    
    $
    0.17Pro formaBasic
    
    $
    0.04
    
    
    $
    0.09Diluted
    
    $
    0.04
    
    
    $
    0.08
  Equity Plans
     8




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Stock Options
   Three Months Ended
    
    Nine Months EndedSeptember 30, 2006
    
    October 1, 2005
    
    September 30, 2006
    
    October 1, 2005Risk-free interest rate (weighted average)
    
    
    4.87
    %
    
    
    4.15
    %
    
    
    4.53
    %
    
    
    4.20
    %Expected volatility
    
    
    40
    %
    
    
    40
    %
    
    
    40
    %
    
    
    45
    %Expected option life (years)
    
    
    3.90
    
    
    
    3.93
    
    
    
    3.84 to 5.22
    
    
    
    3.75Dividends
    
    None
    
    None
    
    None
    
    None
   Number of
    
    
    Weighted
    
    
    Weighted AverageOptions
    
    
    Average Exercise
    
    
    Remaining Contract(in thousands)
    
    
    Price Per Share
    
    
    Life (years)Outstanding options at January 1, 2006
    
    
    6,445
    
    
    $
    12.80
    
    
    
    6.90Granted
    
    
    1,523
    
    
    
    21.04Exercised
    
    
    (846
    )
    
    
    12.42Forfeited or expired
    
    
    (299
    )
    
    
    15.50Outstanding options at September 30, 2006
    
    
    6,823
    
    
    
    14.57
    
    
    
    6.92Outstanding options exercisable at September 30, 2006
    
    
    4,033
    
    
    $
    12.81
    
    
    
    5.81
 9




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Restricted Stock
     Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair(in thousands)
    
    
    ValueOutstanding unvested restricted stock at January 1, 2006
    
    
    150
    
    
    $
    14.89Granted
    
    
    416
    
    
    
    18.23Vested
    
    
    (152
    )
    
    
    15.91Forfeited or expired
    
    
    (15
    )
    
    
    19.98Outstanding unvested restricted stock at September 30, 2006
    
    
    399
    
    
    $
    17.80
 Restricted Stock Units
  10




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Number of
    
    
    Weighted Average
    
    
    Weighted AverageUnits
    
    
    Grant Date Fair
    
    
    Remaining Contract(in thousands)
    
    
    Value
    
    
    (in years)Outstanding units at January 1, 2006
    
    
    
    
    
    
    Granted
    
    
    10
    
    
    $
    19.46Released
    
    
    
    
    
    
    Forfeited or expired
    
    
    
    
    
    
    Outstanding units at September 30, 2006
    
    
    10
    
    
    $
    19.46
    
    
    
    1.96
 Employee Stock Purchase Plan
   Risk-free interest rate (weighted average)
    
    
    4.98
    %Expected volatility
    
    
    40
    %Expected option life (years)
    
    
    0.5Dividends
    
    None
  3. Recently Issued Accounting Pronouncements
    11




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4. Cash and cash equivalents
  5. Investments
     6. Financial Instruments
    12




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7.
    
    InventoriesInventories consist of the following:
 As ofSeptember 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Finished goods
    
    $
    17,638
    
    
    $
    19,952Work in process
    
    
    9,595
    
    
    
    6,303Raw materials
    
    
    16,148
    
    
    
    15,416Total
    
    $
    43,381
    
    
    $
    41,671
 8.
    
    Property, Plant and Equipment, netProperty, plant and equipment, net, consist of the following:
 As ofSeptember 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Land
    
    $
    4,096
    
    
    $
    341Building
    
    
    12,040
    
    
    
    2,445Building lease
    
    
    2,285
    
    
    
    2,285Equipment
    
    
    48,244
    
    
    
    44,067Rental equipment
    
    
    8,264
    
    
    
    7,334Improvements
    
    
    15,750
    
    
    
    11,526Total
    
    
    90,679
    
    
    
    67,998Accumulated depreciation and amortization
    
    
    (44,139
    )
    
    
    (39,092
    )Property, plant and equipment, net
    
    $
    46,540
    
    
    $
    28,906
  9. Goodwill and Purchased Intangible Assets
   As of September 30, 2006Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount( in thousands)Patents and trademarks
    
    $
    37,815
    
    
    $
    (20,422
    )
    
    $
    17,393Core technology
    
    
    37,485
    
    
    
    (9,902
    )
    
    
    27,583Developed technology
    
    
    122,782
    
    
    
    (34,791
    )
    
    
    87,991Non-compete agreement
    
    
    90
    
    
    
    (40
    )
    
    
    50Total purchased intangible assets, net
    
    $
    198,172
    
    
    $
    (65,155
    )
    
    $
    133,017
 13




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As of December 31, 2005Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount(in thousands)Patents and trademarks
    
    $
    37,815
    
    
    $
    (17,692
    )
    
    $
    20,123Core technology
    
    
    37,485
    
    
    
    (8,762
    )
    
    
    28,723Developed technology
    
    
    122,782
    
    
    
    (29,750
    )
    
    
    93,032Non-compete agreement
    
    
    90
    
    
    
    (30
    )
    
    
    60Total purchased intangible assets, net
    
    $
    198,172
    
    
    $
    (56,234
    )
    
    $
    141,938
  10. Other Assets
   11. Long-Term Debt
    14




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Fiscal Year2004( in millions)Long Term Debt Offering Proceeds:Principal amount of convertible notes at maturity
    
    $
    247.4Original issue discount
    
    
    (103.7
    )Debt issuance costs
    
    
    (4.3
    )Net proceeds
    
    $
    139.4
      15




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12. Litigation
 Johnson v. Thoratec
Corporation, et al. Johnson In re
Thoratec Corp. Securities Litigation
 Wong v. Grossman
    13. Income Taxes
    16




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14. Net Income Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per share data)Net income
    
    $
    1,490
    
    
    $
    3,102
    
    
    $
    897
    
    
    $
    8,658Weighted average number of common shares-basic
    
    
    51,955
    
    
    
    49,562
    
    
    
    52,154
    
    
    
    48,835Dilutive effect of stock options and Employee Stock Purchase Plan shares
    
    
    800
    
    
    
    1,857
    
    
    
    1,356
    
    
    
    1,333Weighted average number of common shares-diluted
    
    
    52,755
    
    
    
    51,419
    
    
    
    53,510
    
    
    
    50,168Net income per common share:Basic
    
    $
    0.03
    
    
    $
    0.06
    
    
    $
    0.02
    
    
    $
    0.18Diluted
    
    $
    0.03
    
    
    $
    0.06
    
    
    $
    0.02
    
    
    $
    0.17
   17




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15. Business Segment and Geographical Data
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    October 1
    
    
    September 30,
    
    
    October 12006
    
    
    2005
    
    
    2006
    
    
    2005Restated
    
    
    
    
    
    RestatedSee
Note 16
    
    
    
    
    

See
Note 16(in thousands)Product sales:Cardiovascular
    
    $
    31,612
    
    
    $
    30,630
    
    
    $
    97,224
    
    
    $
    91,472ITC
    
    
    20,135
    
    
    
    18,211
    
    
    
    58,061
    
    
    
    55,445Total product sales
    
    $
    51,747
    
    
    $
    48,841
    
    
    $
    155,285
    
    
    $
    146,917Income
(loss) before income taxes and other:Cardiovascular (a)(d)
    
    $
    493
    
    
    $
    4,414
    
    
    $
    3,873
    
    
    $
    11,470ITC(a)(d)
    
    
    2,194
    
    
    
    2,610
    
    
    
    3,636
    
    
    
    9,228Corporate (b)(d)
    
    
    (2,735
    )
    
    
    (2,673
    )
    
    
    (9,321
    )
    
    
    (7,577
    )Litigation (c)
    
    
    
    
    
    
    
    
    
    
    (447
    )
    
    
    (177
    )Income (loss) from operations
    
    
    (48
    )
    
    
    4,351
    
    
    
    (2,259
    )
    
    
    12,944Other income and (expense):Interest expense
    
    
    (1,051
    )
    
    
    (1,037
    )
    
    
    (3,159
    )
    
    
    (3,082
    )Interest income and other
    
    
    2,186
    
    
    
    1,113
    
    
    
    5,678
    
    
    
    2,983Income before income tax benefit (expense)
    
    $
    1,087
    
    
    $
    4,427
    
    
    $
    260
    
    
    $
    12,845
 
 (a)
    
    Includes amortization expense on purchased intangible assets of $2.9 million and $8.8 million
for the three and nine months ended September 30, 2006, respectively, and $2.7 million and
$8.3 million for the three and nine months ended October 1, 2005, respectively, related to the
Cardiovascular segment. The ITC segment includes amortization expense on purchased intangible
assets of $40,000 and $119,000 for the three and nine months ended September 30, 2006, and
$40,000 and $119,000 for the three and nine months ended October 1, 2005.(b)
    
    Represents primarily general and administrative items not specifically identified to a
particular business segment.(c)
    
    Relates to litigation expenses not specifically identified to a particular business segment.(d)
    
    Includes additional SFAS No. 123(R) expense of $1.2 million, $0.8 million and $0.2 million
for Cardiovascular, ITC and Corporate, respectively, for the three months ended September 30,
2006 and $4.0 million, $2.2 million and $1.0 million for Cardiovascular, ITC and Corporate,
respectively, for the nine months ended September 30, 2006.   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Domestic
    
    $
    39,942
    
    
    $
    38,432
    
    
    $
    118,653
    
    
    $
    113,583International
    
    
    11,805
    
    
    
    10,409
    
    
    
    36,632
    
    
    
    33,334Total product sales
    
    $
    51,747
    
    
    $
    48,841
    
    
    $
    155,285
    
    
    $
    146,917
 18




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##### Table of Contents



16. Restatement
    Three Months Ended
    
    
    Three Months EndedApril 1,
    
    
    April 1,
    
    
    April 2,
    
    
    April 2,2006
    
    
    2006
    
    
    2005
    
    
    2005As Previously
    
    
    As Restated
    
    
    As Previously
    
    
    As RestatedReported
    
    
    (b)
    
    
    Reported
    
    
    (b)(in thousands)Product sales:Cardiovascular
    
    $
    29,816
    
    
    $
    29,816
    
    
    $
    32,066
    
    
    $
    32,066ITC
    
    
    18,939
    
    
    
    18,939
    
    
    
    18,422
    
    
    
    18,422Total product sales
    
    $
    48,755
    
    
    $
    48,755
    
    
    $
    50,488
    
    
    $
    50,488Income
(loss) before income taxes and other:Cardiovascular (a)
    
    $
    2,257
    
    
    $
    636
    
    
    $
    6,128
    
    
    $
    4,623ITC(a)
    
    
    690
    
    
    
    690
    
    
    
    3,151
    
    
    
    3,151Corporate (a)
    
    
    (4,919
    )
    
    
    (3,298
    )
    
    
    (4,179
    )
    
    
    (2,674
    )Litigation
    
    
    (57
    )
    
    
    (57
    )
    
    
    (178
    )
    
    
    (178
    )Income (loss) from operations
    
    
    (2,029
    )
    
    
    (2,029
    )
    
    
    4,922
    
    
    
    4,922Other income and (expense):Interest expense
    
    
    (1,103
    )
    
    
    (1,103
    )
    
    
    (1,008
    )
    
    
    (1,008
    )Interest income and other
    
    
    1,701
    
    
    
    1,701
    
    
    
    836
    
    
    
    836Income (loss) before income tax benefit (expense)
    
    $
    (1,431
    )
    
    $
    (1,431
    )
    
    $
    4,750
    
    
    $
    4,750
 
 (a)
    
    Includes additional SFAS No. 123(R) expense of $1.4 million, $0.7 million and $0.3 million
for Cardiovascular, ITC and Corporate, respectively, for the three months ended April 1, 2006.(b)
    
    The restatement is to reclassify certain general and administrative expenses from the
Corporate to the Cardiovascular segment on a consistent basis to the 2005 Annual Report. As a
result of the restatement, for the three months ended April 1, 2006, income before taxes from
the Cardiovascular segment decreased by $1.6 million and the loss before taxes from Corporate
decreased by $1.6 million. In addition, for the three months ended April 2, 2005, income
before taxes from the Cardiovascular segment decreased by $1.5 million and the loss before
taxes from Corporate decreased by $1.5 million. 
 19




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##### Table of Contents



Three Months Ended
    
    
    Three Months EndedJuly 1,
    
    
    July 1,
    
    
    July 2,
    
    
    July 2,2006
    
    
    2006
    
    
    2005
    
    
    2005As Previously
    
    
    As Restated
    
    
    As Previously
    
    
    As RestatedReported
    
    
    (b)
    
    
    Reported
    
    
    (b)(in thousands)Product sales:Cardiovascular
    
    $
    35,797
    
    
    $
    35,797
    
    
    $
    28,776
    
    
    $
    28,776ITC
    
    
    18,986
    
    
    
    18,986
    
    
    
    18,812
    
    
    
    18,812Total product sales
    
    $
    54,783
    
    
    $
    54,783
    
    
    $
    47,588
    
    
    $
    47,588Income
(loss) before income taxes and other:Cardiovascular (a)
    
    $
    1,435
    
    
    $
    2,700
    
    
    $
    4,262
    
    
    $
    2,433ITC(a)
    
    
    796
    
    
    
    796
    
    
    
    3,467
    
    
    
    3,467Corporate ((a)
    
    
    (2,023
    )
    
    
    (3,288
    )
    
    
    (4,059
    )
    
    
    (2,230
    )Litigation
    
    
    (390
    )
    
    
    (390
    )
    
    
    1
    
    
    
    1Income (loss) from operations
    
    
    (182
    )
    
    
    (182
    )
    
    
    3,671
    
    
    
    3,671Other income and (expense):Interest expense
    
    
    (1,005
    )
    
    
    (1,005
    )
    
    
    (1,037
    )
    
    
    (1,037
    )Interest income and other
    
    
    1,791
    
    
    
    1,791
    
    
    
    1,034
    
    
    
    1,034Income before income tax benefit (expense)
    
    $
    604
    
    
    $
    604
    
    
    $
    3,668
    
    
    $
    3,668Six Months Ended
    
    
    Six Months EndedJuly 1,
    
    
    July 1,
    
    
    July 2,
    
    
    July 2,2006
    
    
    2006
    
    
    2005
    
    
    2005As Previously
    
    
    As Restated
    
    
    As Previously
    
    
    As RestatedReported
    
    
    (b)
    
    
    Reported
    
    
    (b)(in thousands)Product sales:Cardiovascular
    
    $
    65,612
    
    
    $
    65,612
    
    
    $
    60,842
    
    
    $
    60,842ITC
    
    
    37,926
    
    
    
    37,926
    
    
    
    37,234
    
    
    
    37,234Total product sales
    
    $
    103,538
    
    
    $
    103,538
    
    
    $
    98,076
    
    
    $
    98,076Income
(loss) before income taxes and other:Cardiovascular (a)
    
    $
    3,692
    
    
    $
    3,336
    
    
    $
    10,391
    
    
    $
    7,056ITC(a)
    
    
    1,486
    
    
    
    1,486
    
    
    
    6,618
    
    
    
    6,618Corporate (a)
    
    
    (6,942
    )
    
    
    (6,586
    )
    
    
    (8,239
    )
    
    
    (4,904
    )Litigation
    
    
    (447
    )
    
    
    (447
    )
    
    
    (177
    )
    
    
    (177
    )Income (loss) from operations
    
    
    (2,211
    )
    
    
    (2,211
    )
    
    
    8,593
    
    
    
    8,593Other income and (expense):Interest expense
    
    
    (2,108
    )
    
    
    (2,108
    )
    
    
    (2,045
    )
    
    
    (2,045
    )Interest income and other
    
    
    3,492
    
    
    
    3,492
    
    
    
    1,870
    
    
    
    1,870Income (loss) before income tax benefit (expense)
    
    $
    (827
    )
    
    $
    (827
    )
    
    $
    8,418
    
    
    $
    8,418
 
 (a)
    
    Includes additional SFAS No. 123(R) expense of $1.4 million, $0.8 million and $0.4 million
for Cardiovascular, ITC and Corporate, respectively, for the three months ended July 1, 2006
and $2.8 million, $1.5 million and $0.7 million for Cardiovascular, ITC and Corporate,
respectively, for the six months ended July 1, 2006.(b)
    
    The restatement is to reclassify certain general and administrative expenses from the
Corporate to the Cardiovascular segment on a consistent basis to the 2005 Annual Report. As a
result of this restatement, for the three months ended July 1, 2006, income before taxes from
the Cardiovascular segment increased by $1.3 million and the loss before taxes from Corporate
increased by $1.3 million. In addition, for the six months ended July 1, 2006, income before
taxes from the Cardiovascular segment decreased by $0.4 million and the loss before taxes from
Corporate decreased by $0.4 million. Further, for the three months ended July 2, 2005, income
before taxes from the Cardiovascular segment decreased by $1.8 million and the loss before
taxes from Corporate segment decreased by $1.8 million. Finally, for the six months ended
July 2, 2005, income before taxes from the Cardiovascular segment decreased by $3.3 million
and the loss before taxes from Corporate segment decreased by $3.3 million. 
 20




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedOctober 1,
    
    
    October 1,
    
   
    October 1,

        
    October 1,2005
    
    
    2005
    
    
    2005
    
    
    2005As Previously
    
    
    As Restated
    
    
    As Previously
    
    
    As RestatedReported
    
    
    (a)
    
    
    Reported
    
    
    (a)(in thousands)Product sales:Cardiovascular
    
    $
    30,630
    
    
    $
    30,630
    
    
    $
    91,473
    
    
    $
    91,473ITC
    
    
    18,211
    
    
    
    18,211
    
    
    
    55,444
    
    
    
    55,444Total product sales
    
    $
    48,841
    
    
    $
    48,841
    
    
    $
    146,917
    
    
    $
    146,917Income
(loss) before income taxes and other:Cardiovascular
    
    $
    6,181
    
    
    $
    4,414
    
    
    $
    16,571
    
    
    $
    11,470ITC
    
    
    2,610
    
    
    
    2,610
    
    
    
    9,228
    
    
    
    9,228Corporate
    
    
    (4,440
    )
    
    
    (2,673
    )
    
    
    (12,678
    )
    
    
    (7,577
    )Litigation
    
    
    
    
    
    
    
    
    
    
    (177
    )
    
    
    (177
    )Income from operations
    
    
    4,351
    
    
    
    4,351
    
    
    
    12,944
    
    
    
    12,944Other income and (expense):Interest expense
    
    
    (1,037
    )
    
    
    (1,037
    )
    
    
    (3,082
    )
    
    
    (3,082
    )Interest income and other
    
    
    1,113
    
    
    
    1,113
    
    
    
    2,983
    
    
    
    2,983Income before income tax benefit (expense)
    
    $
    4,427
    
    
    $
    4,427
    
    
    $
    12,845
    
    
    $
    12,845
 
 (a)
    
    The October 1, 2005 have been restated to allocate corporate expense to the Cardiovascular
segment on a basis consistent with the 2005 Annual Report. As a result of this restatement,
for the three months ended October 1, 2005, income before taxes from the Cardiovascular
segment decreased by $1.8 million and the loss before taxes from Corporate decreased by $1.8
million. In addition, for the nine months ended October 1, 2005, income before taxes from the
Cardiovascular segment decreased by $5.1 million and the loss before taxes from Corporate
decreased by $5.1 million. 17. Subsequent Events
  21




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
 This Quarterly Report on Form 10-Q includes 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. These statements can be identified by the words expects, projects,
hopes, believes, intends, should, estimate, will, would, may, anticipates,
plans, could and other similar words. Actual results, events or performance could differ
materially from these forward-looking statements based on a variety of factors, many of which are
beyond our control. Therefore, readers are cautioned not to put undue reliance on these statements.
Factors that could cause actual results or conditions to differ from those anticipated by these and
other forward-looking statements include those more fully described in the Risk Factors section
of our 2005 Annual Report on Form 10-K (the 2005 Annual Report) and in other documents we file
with the Securities and Exchange Commission (SEC). These forward-looking statements speak only as
of the date hereof. We are not under any obligation, and we expressly disclaim any obligation, to
publicly release the results of any revisions to these forward-looking statements that may be made
to reflect events or circumstances after the date hereof, or to reflect the occurrence of
unanticipated events.
 The following presentation of managements discussion and analysis of our financial condition
and results of operations should be read together with our condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q .
 Overview
  Our Business Model
   
    
    Circulatory Support Products.Our circulatory support products include VADs for the
short, intermediate and long-term treatment of advanced heart failure. In addition,we have
developed small diameter grafts using our proprietary materials to address the vascular
access market. Our grafts are used for hemodialysis.
  
    
    Point-of-Care Diagnostics. Our point-of-care products include diagnostic test systems
that monitor blood coagulation for a patient while being administered certain
anticoagulants, blood gas/electrolyte, oxygenation and chemistry status, including total
hemoglobin.
    
    Incision. Our incision products include devices used to obtain a patients blood sample
for diagnostic testing and screening for platelet function.
 22




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##### Table of Contents



Cardiovascular segment
  
    
    The Thoratec Ventricular Assist Device System, which is sold worldwide, is an external
device for short to mid-term cardiac support. The device is approved to assist left, right
and biventricular support and is worn outside of the body. The Thoratec VAD is approved for
use in bridge-to-transplantation ( BTT), and for post-cardiotomy myocardial recovery.
    
    The Thoratec IVAD is the only implantable blood pump approved for both BTT and
post-cardiotomy myocardial recovery. It can be used for left, right or biventricular
support. The IVAD utilizes the same internal working components as the Thoratec VAD System,
but has an outer housing made of a titanium alloy that makes it suitable for implantation.
    
    The HeartMate XVE Left Ventricular Assist System (LVAS) is an implantable device for
mid to long-term cardiac support and the only device approved in the U.S., Europe and
Canada for permanent support, or Destination Therapy, of those patients ineligible for
heart transplantation. The HeartMate XVE is also approved for use in BTT.
    
    The HeartMate II, which is currently in clinical trials for BTT and Destination
Therapy, is an implantable device consisting of a miniature rotary blood pump designed to
provide long-term cardiac support. Its design is intended to be not only smaller, but also
simpler, quieter and longer lasting, than the current generation of ventricular assist
devices. We received CE mark approval to commercially market this device in Europe in
November 2005.
      ITC Segment
  
    
    The Hemochron POC coagulation system is used to monitor a patients coagulation while
being administered anticoagulants in various settings, including in the cardiovascular
operating room and cardiac catheterization lab to monitor the drug Heparin, and in an
anticoagulation clinic to monitor the drug Coumadin. Hemochron is considered a moderately
complex device and must be used by professionally trained personnel. The system consists of a small, portable
analytical instrument and disposable test cuvettes.
 23




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##### Table of Contents




    
    The IRMA POC blood gas/electrolyte and chemistry system is used to monitor a patients
blood gas/electrolyte and chemistry status. It is considered moderately complex and its use
requires supervision by professionally trained personnel. The system consists of a small,
portable analytical instrument and disposable test cartridges.
    
    The ProTime coagulation monitoring system is used to monitor patients coagulation
while they are taking oral anticoagulants such as Warfarin, and can be prescribed for use
by patients at home or can be used in the physicians office or clinic. The system consists
of a small, portable, analytical instrument and disposable test cuvettes.
    
    The Hemoglobin Pro, or Hgb Pro, is used by professionals, mainly in the doctors office
to test for anemia. It provides quick results from a very small blood sample. The system
consists of a small, hand held test meter and disposable test strips.
    
    Tenderfoot, Tenderlett and Surgicutt incision products are used by professionals to
obtain a patients blood sample for diagnostic testing. The Tenderfoot is a heel stick
used for infant testing, the Tenderlett is used for finger incisions and the Surgicutt is
used to perform screening tests to determine platelet function. All products feature
permanently retracting blades for safe, virtually pain-free incision.
    Critical Accounting Policies and Estimates
  Revenue Recognition
   24




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##### Table of Contents



Reserves
     Income Taxes
    Evaluation of Purchased Intangibles and Goodwill for Impairment
  25




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##### Table of Contents



Valuation of share-based awards
  Make-Whole Premium
   Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005Product sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of product sales
    
    
    43
    
    
    
    38
    
    
    
    42
    
    
    
    39Gross profit
    
    
    57
    
    
    
    62
    
    
    
    58
    
    
    
    61Operating expenses:Selling, general and administrative
    
    
    35
    
    
    
    31
    
    
    
    36
    
    
    
    30Research and development
    
    
    17
    
    
    
    16
    
    
    
    18
    
    
    
    16Amortization of purchased intangible assets
    
    
    5
    
    
    
    6
    
    
    
    6
    
    
    
    6Litigation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    57
    
    
    
    53
    
    
    
    60
    
    
    
    52Income (loss) from operations
    
    
    
    
    
    
    9
    
    
    
    (2
    )
    
    
    9Other income and (expense):Interest expense
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Interest income and other
    
    
    4
    
    
    
    2
    
    
    
    4
    
    
    
    2Income before income tax benefit (expense)
    
    
    2
    
    
    
    9
    
    
    
    
    
    
    
    9Income tax benefit (expense)
    
    
    1
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Net income
    
    
    3
    %
    
    
    6
    %
    
    
    
    %
    
    
    6
    %
 26




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##### Table of Contents



Three months ended September 30, 2006 and October 1, 2005
 Product Sales
  
    
    Sales of HeartMate products increased $4.1 million, primarily due to increase in sales
of HMII pumps.
    
    Sales of Thoratec products decreased $2.3 million, primarily due to lower VAD sales and
partially offset by an increase in non pump sales.
    
    Sales of graft products decreased by $0.8 million, partly due to the recognition of a
payment of $0.5 million in 2005 related to the modification of our distribution agreement
with one of our graft distributors.
    
    ITCs hospital point-of-care diagnostic product sales increased $0.6 million.
    
    Incision product sales increased by $0.2 million.
    
    ITCs alternate site point-of-care sales increased by $1.1 million, primarily due to higher cuvette sales.
  Gross Profit
  
    
    Cardiovascular segment gross profit decreased by 5% partly due to higher manufacturing
costs from capitalized variances and the recognition of a payment of $0.5 million in 2005
related to the modification of our distribution agreement with one of our graft
distributors. The capitalized variances related to lower manufacturing volumes and
production mix experienced in the first quarter of 2006 and recognized in the third quarter
of 2006.
    
    ITC segment gross profit decreased by 2%, primarily due to unfavorable product mix and
higher shipping costs.
    
    Costs related to share-based compensation of $0.3 million that were incurred in the
third quarter of 2006 but not in the third quarter of 2005.
 Selling, General and Administrative
  
    
    Costs related to share-based compensation of $1.3 million that were incurred in the
third quarter of 2006 but not in the third quarter of 2005.
 27




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##### Table of Contents




    
    Increased sales and marketing costs for the Cardiovascular segment of $1.9 million that
resulted from increased personnel and travel and meeting expenses, primarily related to
market development.
    
    Increased sales and marketing costs in our ITC segment of $0.2 million, primarily due
to increased personnel costs.
    
    Decrease in corporate spending of $0.4 million primarily due to the reversal of the CFO
relocation costs and lower general corporate costs in the third quarter of 2006 as compared
to the third quarter of 2005. In the third quarter of 2005, we accrued $0.6 million of CEO
transition costs.
 Research and Development
  Amortization of Purchased Intangible Assets
  Interest Expense
  Interest Income and Other
  Income Taxes
   28




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##### Table of Contents



Nine months ended September 30, 2006 and October 1, 2005
 Product Sales
  
    
    Sales of HeartMate products increased $13.4 million primarily due to higher HMII pump
sales partially offset by lower HM XVE pump sales.
    
    Sales of Thoratec products decreased $5.6 million, primarily due to lower VAD and non
pump sales.
    
    Sales of graft products decreased by $2.0 million, partly due to recognition of a
payment for $1.0 million in 2005 related to the modification of our distribution agreement
with one of our graft distributors.
    
    ITCs hospital point-of-care diagnostic product sales increased $1.0 million.
    
    Incision product sales decreased by $0.3 million.
    
    ITCs alternate site point-of-care sales increased by $1.9 million, primarily due to higher cuvette sales.
  Gross Profit
  
    
    Cardiovascular segment gross profit decreased by 1% due to capitalized variances and
the recognition of a payment for $1.0 million in 2005 related to the modification of our
distribution agreement with one of our graft distributors, partially offset by higher
average sales price. The capitalized variances related to lower manufacturing volumes and
product mix experienced in the fourth quarter of 2005, and lower manufacturing volumes
experienced in the first quarter of 2006 and recognized in the first nine months of 2006.
    
    ITC segment gross profit decreased by 5%, primarily due to unfavorable product mix and higher shipping costs.
    
    Costs related to share-based compensation of $1.0 million that were incurred in 2006 and not 2005.
 Selling, General and Administrative
  
    
    Costs related to share-based compensation of $4.5 million that were incurred in 2006
but not in 2005.
 
    
    Sales and marketing costs related to the Cardiovascular segment were higher by $4.0
million due to increased costs of $3.1 million for personnel, travel and meetings expenses
primarily related to market development and $1.1 million for advertising and tradeshows.
    
    Sales and marketing costs related to the ITC segment were higher by $1.8 million
primarily due to increased personnel costs.
    
    Higher corporate spending of $0.3 million, primarily related to our new headquarters
facility purchased in January 2006, partially offset by lower CFO relocation costs.
 29




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Research and Development
  Amortization of Purchased Intangible Assets
  Litigation
  Interest Expense
  Interest Income and Other
  Income Taxes
  30




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Liquidity and Capital Resources
       Off Balance Sheet Arrangements
  Contractual Obligations
  31




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
 Interest Rate Risk
   Foreign Currency Rate Fluctuations
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ITEM 4. CONTROLS AND PROCEDURES
  Disclosure Controls and Procedures
   Changes to Internal Controls
  Inherent Limitations on Controls and Procedures
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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Johnson v. Thoratec
Corporation, et al. Johnson In re
Thoratec Corp. Securities Litigation
 Wong v. Grossman
    
 ITEM 1A. RISK FACTORS
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ITEM 2: UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
   Total number
    
    
    Approximateof shares
    
    
    value of sharespurchased
    
    
    authorized to beunder
    
    
    purchased underTotal number
    
    
    
    
    
    
    publicly
    
    
    publiclyof shares
    
    
    Average price
    
    
    announced
    
    
    announcedpurchased
    
    
    paid per share
    
    
    programs (1)
    
    
    programs(in thousands, except per share data)July 1, 2006 through August 1, 2006
    
    
    6
    
    
    $
    11.87
    
    
    
    
    
    
    $
    August 2, 2006 through September 2, 2006
    
    
    1
    
    
    
    14.85Total
    
    
    7
    (2)
    
    $
    12.19
    
    
    
    
    
    
    $
 
 (1)
    
    Our share repurchase programs, which authorized us to repurchase up to a total of $130
million of the Companys common shares, were announced on February 11, 2004 as a $25 million
program, on May 12, 2004 as a $60 million program, on July 29, 2004 as a $25 million program
and on February 2, 2006 as a $20 million program. These programs authorize us to acquire
shares in the open market or in privately negotiated transactions and do not have an
expiration date. No shares were repurchased under these programs during the three months
ended September 30, 2006.(2)
    
    Shares purchased that were not part of our publicly announced repurchase programs represent
the surrender value of shares of restricted stock used to pay income taxes due upon vesting,
and do not reduce the dollar value that may yet be purchased under our publicly announced
repurchase programs. 
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ITEM 6. EXHIBITS
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SIGNATURES
  THORATEC CORPORATIONDate: November 9, 2006
    /s/ Gerhard F. BurbachGerhard F. BurbachChief Executive Officer Date: November 9, 2006
    /s/ Cynthia L. LuccheseCynthia L. LuccheseChief Financial Officer 38