##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 29, 2007
 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 organization)
    
    (I.R.S. Employer Identification No.)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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##### 



THORATEC CORPORATION
 TABLE OF CONTENTS
 Part I. Financial Information
    
    
    3Item 1. Condensed Consolidated Financial Statements (unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of September 29, 2007 and December 30, 2006
    
    
    3Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 29, 2007 and
September 30, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 29, 2007 and September 30, 2006
    
    
    5Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 29,
2007 and September 30, 2006
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    30Part II. Other Information
    
    
    31Item 1A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 6. Exhibits
    
    
    33Signatures
    
    
    34ExhibitsEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  
 Thoratec, the Thoratec logo, Thoralon, TLC-II, HeartMate, and HeartMate II are registered
trademarks of Thoratec Corporation, and IVAD is a trademark of Thoratec Corporation.CentriMag is a registered trademark of Levitronix LLC.ITC, A-VOX Systems, AVOXimeter, HEMOCHRON, ProTime, Surgicutt, Tenderlett, Tenderfoot, and IRMA are
registered trademarks of International Technidyne Corporation (ITC), our wholly-owned subsidiary. 2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 THORATEC CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited)
(in thousands)
 September 29,
    
    
    December 30,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,499
    
    
    $
    67,453Short-term available-for-sale investments
    
    
    196,419
    
    
    
    127,025Restricted short-term investments
    
    
    
    
    
    
    1,681Receivables, net of allowances of $1,010 and $491, respectively
    
    
    39,963
    
    
    
    43,718Inventories
    
    
    58,857
    
    
    
    49,666Deferred tax assets
    
    
    5,965
    
    
    
    6,623Prepaid expenses and other assets
    
    
    13,549
    
    
    
    2,986Total current assets
    
    
    329,252
    
    
    
    299,152Property, plant and equipment, net
    
    
    46,480
    
    
    
    45,808Goodwill
    
    
    98,494
    
    
    
    98,494Purchased intangible assets, net
    
    
    124,910
    
    
    
    134,349Deferred tax assets
    
    
    
    
    
    
    1,006Other assets
    
    
    15,417
    
    
    
    12,326Total Assets
    
    $
    614,553
    
    
    $
    591,135LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    11,106
    
    
    $
    13,591Accrued compensation
    
    
    13,166
    
    
    
    12,043Accrued income taxes
    
    
    1,063
    
    
    
    3,691Other accrued liabilities
    
    
    5,608
    
    
    
    4,136Total current liabilities
    
    
    30,943
    
    
    
    33,461Senior subordinated convertible notes
    
    
    143,750
    
    
    
    143,750Long-term deferred tax liability
    
    
    43,395
    
    
    
    46,421Other
    
    
    6,966
    
    
    
    2,430Total Liabilities
    
    
    225,054
    
    
    
    226,062Shareholders equity:Common shares: authorized 100,000; issued and outstanding 53,988 and 52,329, respectively
    
    
    453,326
    
    
    
    427,941Accumulated deficit
    
    
    (65,165
    )
    
    
    (63,675
    )Accumulated other comprehensive income (loss):Unrealized gain (loss) on investments
    
    
    113
    
    
    
    (16
    )Cumulative translation adjustments
    
    
    1,225
    
    
    
    823Total accumulated other comprehensive income
    
    
    1,338
    
    
    
    807Total Shareholders Equity
    
    
    389,499
    
    
    
    365,073Total Liabilities and Shareholders Equity
    
    $
    614,553
    
    
    $
    591,135
  3




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THORATEC CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
(in thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 29,
    
    
    September 30,
    
    
    September 29,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Product sales
    
    $
    56,055
    
    
    $
    51,747
    
    
    $
    170,698
    
    
    $
    155,285Cost of product sales
    
    
    23,707
    
    
    
    22,078
    
    
    
    70,152
    
    
    
    64,840Gross profit
    
    
    32,348
    
    
    
    29,669
    
    
    
    100,546
    
    
    
    90,445Operating expenses:Selling, general and administrative
    
    
    20,873
    
    
    
    17,977
    
    
    
    61,952
    
    
    
    55,228Research and development
    
    
    10,712
    
    
    
    8,766
    
    
    
    32,372
    
    
    
    28,108Amortization of purchased intangible assets
    
    
    3,143
    
    
    
    2,974
    
    
    
    9,439
    
    
    
    8,921Litigation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    447Total operating expenses
    
    
    34,728
    
    
    
    29,717
    
    
    
    103,763
    
    
    
    92,704Loss from operations
    
    
    (2,380
    )
    
    
    (48
    )
    
    
    (3,217
    )
    
    
    (2,259
    )Other income and (expense):Interest expense
    
    
    (1,016
    )
    
    
    (1,051
    )
    
    
    (3,158
    )
    
    
    (3,159
    )Interest income and other
    
    
    2,261
    
    
    
    2,186
    
    
    
    6,214
    
    
    
    5,678Income (loss) before income taxes
    
    
    (1,135
    )
    
    
    1,087
    
    
    
    (161
    )
    
    
    260Income tax benefit (expense)
    
    
    (273
    )
    
    
    403
    
    
    
    (269
    )
    
    
    637Net income (loss)
    
    $
    (1,408
    )
    
    $
    1,490
    
    
    $
    (430
    )
    
    $
    897Net income (loss) per share, basic and diluted
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    0.02Shares used to compute net income (loss) per share:Basic
    
    
    53,808
    
    
    
    51,955
    
    
    
    53,303
    
    
    
    52,154Diluted
    
    
    53,808
    
    
    
    52,755
    
    
    
    53,303
    
    
    
    53,510
  4




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THORATEC CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
(in thousands)
 Nine Months EndedSeptember 29,
    
    
    September 30,2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    (430
    )
    
    $
    897Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    16,183
    
    
    
    15,016Investment discount amortization
    
    
    664
    
    
    
    88Write-down of investment
    
    
    215
    
    
    
    Non-cash interest and other expenses
    
    
    1,523
    
    
    
    1,483Tax benefit related to stock options
    
    
    3,131
    
    
    
    2,418Share-based compensation expense
    
    
    8,132
    
    
    
    7,644Excess tax benefits from share-based compensation
    
    
    (1,861
    )
    
    
    (2,283
    )Loss on disposal of assets
    
    
    74
    
    
    
    9Change in net deferred tax liability
    
    
    (1,890
    )
    
    
    (5,234
    )Changes in assets and liabilities:Receivables
    
    
    2,201
    
    
    
    (2,466
    )Inventories
    
    
    (11,846
    )
    
    
    (2,734
    )Prepaid expenses and other assets
    
    
    (1,774
    )
    
    
    (464
    )Accounts payable and other liabilities
    
    
    (688
    )
    
    
    1,038Accrued income taxes
    
    
    (8,646
    )
    
    
    (637
    )Other
    
    
    (405
    )
    
    
    (258
    )Net cash provided by operating activities
    
    
    4,583
    
    
    
    14,517Cash flows from investing activities:Purchases of investments
    
    
    (247,363
    )
    
    
    (255,300
    )Sales of investments
    
    
    177,475
    
    
    
    245,359Maturities of investments and restricted investments
    
    
    1,712
    
    
    
    53,795Investment in convertible debenture
    
    
    
    
    
    
    (5,027
    )Purchases of property, plant and equipment, net
    
    
    (4,867
    )
    
    
    (22,547
    )Other
    
    
    
    
    
    
    (214
    )Net cash provided by (used in) investing activities
    
    
    (73,043
    )
    
    
    16,066Cash flows from financing activities:Proceeds from stock option exercises
    
    
    13,311
    
    
    
    10,447Proceeds from stock issued under employee stock purchase plan
    
    
    1,084
    
    
    
    860Excess tax benefits from share-based compensation
    
    
    1,861
    
    
    
    2,283Repurchase and retirement of common shares
    
    
    (878
    )
    
    
    (16,201
    )Net cash provided by (used in) financing activities
    
    
    15,378
    
    
    
    (2,611
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    128
    
    
    
    250Net increase (decrease) in cash and cash equivalents
    
    
    (52,954
    )
    
    
    28,222Cash and cash equivalents at beginning of period
    
    
    67,453
    
    
    
    35,109Cash and cash equivalents at end of period
    
    $
    14,499
    
    
    $
    63,331Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    8,642
    
    
    $
    1,496Cash paid for interest
    
    $
    1,707
    
    
    $
    1,707Supplemental disclosure of non-cash investing and financing activities:Transfers of equipment from inventory
    
    $
    2,820
    
    
    $
    1,260
  5




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THORATEC CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (unaudited)
(in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 29,
    
    
    September 30,
    
    
    September 29,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (1,408
    )
    
    $
    1,490
    
    
    $
    (430
    )
    
    $
    897Other net comprehensive income (loss):Unrealized gain on investments
(net of taxes of $141 and $59 for
the three months ended and $86 and
$146 for the nine months ended
September 29, 2007 and September
30, 2006, respectively)
    
    
    211
    
    
    
    89
    
    
    
    129
    
    
    
    220Foreign currency translation
adjustments (net of taxes of none
and $43 for the three months ended
and none and $167 for the nine
months ended September 29, 2007
and September 30, 2006,
respectively)
    
    
    162
    
    
    
    (64
    )
    
    
    402
    
    
    
    251Comprehensive income (loss)
    
    $
    (1,035
    )
    
    $
    1,515
    
    
    $
    101
    
    
    $
    1,368
  6




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THORATEC CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1. Basis of Presentation
   2. Income Taxes
     7




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Three Months Ended
    
    
    Nine Months EndedSeptember 29, 2007
    
    
    September 30, 2006
    
    
    September 29, 2007
    
    
    September 30, 2006(in thousands, except percentages)U.S. federal statutory income tax
benefit (expense)
    
    $
    398
    
    
    
    35.0
    %
    
    $
    (381
    )
    
    
    35.0
    %
    
    $
    56
    
    
    
    35.0
    %
    
    $
    (91
    )
    
    
    35.0
    %State income tax benefit, net of
federal tax expense
    
    
    15
    
    
    
    1.3
    
    
    
    (66
    )
    
    
    6.0
    
    
    
    2
    
    
    
    1.8
    
    
    
    (16
    )
    
    
    6.0Non-deductible expenses
    
    
    441
    
    
    
    38.8
    
    
    
    (349
    )
    
    
    32.1
    
    
    
    305
    
    
    
    189.9
    
    
    
    (84
    )
    
    
    32.1Foreign earnings permanently
reinvested
    
    
    (7
    )
    
    
    (0.6
    )
    
    
    5
    
    
    
    (0.5
    )
    
    
    (1
    )
    
    
    (0.9
    )
    
    
    1
    
    
    
    (0.5
    )Tax advantaged investment income
    
    
    (594
    )
    
    
    (52.3
    )
    
    
    338
    
    
    
    (31.0
    )
    
    
    (100
    )
    
    
    (62.6
    )
    
    
    81
    
    
    
    (31.0
    )Return to provision true-up and other
    
    
    (526
    )
    
    
    (46.2
    )
    
    
    856
    
    
    
    (78.6
    )
    
    
    (531
    )
    
    
    (330.3
    )
    
    
    746
    
    
    
    (286.2
    )Income tax benefit (expense)
    
    $
    (273
    )
    
    
    (24.0
    )%
    
    $
    403
    
    
    
    (37.0
    )%
    
    $
    (269
    )
    
    
    (167.1
    )%
    
    $
    637
    
    
    
    (244.6
    )%
  3. Recently Issued Accounting Pronouncements
 Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used
in Future Research and Development Activities,
 Definition of Settlement in
FASB Interpretation No. 48
 The Fair Value Option for Financial Assets
and Financial Liabilities.
 Fair Value Measurements
 8




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4. Cash and cash equivalents
  5. Investments
   9




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6. Financial Instruments
    Three Months Ended
    
    Nine Months EndedSeptember 29, 2007
    
    September 30, 2006
    
    September 29, 2007
    
    September 30, 2006( in thousands)Foreign currency
exchange gains
(losses) on foreign
currency contracts
    
    $
    (346
    )
    
    $
    59
    
    
    $
    (388
    )
    
    $
    (214
    )Foreign currency
exchange gains
(losses) on foreign
translation
adjustments
    
    
    431
    
    
    
    (43
    )
    
    
    433
    
    
    
    278
  
 7. Inventories
  As ofSeptember 29,
    
    
    December 30,2007
    
    
    2006(in thousands)Finished goods
    
    $
    24,164
    
    
    $
    22,527Work in process
    
    
    10,294
    
    
    
    7,008Raw materials
    
    
    24,399
    
    
    
    20,131Total
    
    $
    58,857
    
    
    $
    49,666
  10




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8. Property, Plant and Equipment, net
  As ofSeptember 29,
    
    
    December 30,2007
    
    
    2006(in thousands)Land
    
    $
    4,096
    
    
    $
    4,096Building
    
    
    12,038
    
    
    
    12,038Building lease
    
    
    2,285
    
    
    
    2,285Equipment
    
    
    52,205
    
    
    
    47,904Rental equipment
    
    
    10,926
    
    
    
    8,612Building and leasehold improvements
    
    
    17,104
    
    
    
    16,258Total
    
    
    98,654
    
    
    
    91,193Accumulated depreciation and amortization
    
    
    (52,174
    )
    
    
    (45,385
    )Property, plant and equipment, net
    
    $
    46,480
    
    
    $
    45,808
  9. Goodwill and Purchased Intangible Assets
   As of September 29, 2007Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount(in thousands)Patents and trademarks
    
    $
    38,515
    
    
    $
    (24,156
    )
    
    $
    14,359Core technology
    
    
    37,485
    
    
    
    (11,414
    )
    
    
    26,071Developed technology
    
    
    125,742
    
    
    
    (41,950
    )
    
    
    83,792Customer and distributor relationships and other
    
    
    897
    
    
    
    (209
    )
    
    
    688Total purchased intangible assets
    
    $
    202,639
    
    
    $
    (77,729
    )
    
    $
    124,910
 As of December 30, 2006Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount(in thousands)Patents and trademarks
    
    $
    38,515
    
    
    $
    (21,350
    )
    
    $
    17,165Core technology
    
    
    37,485
    
    
    
    (10,275
    )
    
    
    27,210Developed technology
    
    
    125,742
    
    
    
    (36,564
    )
    
    
    89,178Customer and distributor relationships and other
    
    
    897
    
    
    
    (101
    )
    
    
    796Total purchased intangible assets
    
    $
    202,639
    
    
    $
    (68,290
    )
    
    $
    134,349
  11




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10. Other Assets
   11. Contingencies
  12. Long-Term Debt
   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
  12




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13. Share-Based Compensation
    13




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Equity Plans
     14




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Stock Options
    Three Months Ended
    
    Nine Months EndedSeptember 29, 2007
    
    September 30, 2006
    
    September 29, 2007
    
    September 30, 2006Risk-free interest rate (weighted average)
    
    
    4.45
    %
    
    
    4.87
    %
    
    
    4.79
    %
    
    
    4.53
    %Expected volatility
    
    
    40
    %
    
    
    40
    %
    
    
    40
    %
    
    
    40
    %Expected option life (years)
    
    
    5.06 to 5.92
    
    
    
    3.90
    
    
    
    5.08 to 6.05
    
    
    
    3.84 to 5.22Dividends
    
    None
    
    
    None
    
    
    None
    
    
    None
    Number of
    
    
    Weighted
    
    
    Weighted AverageOptions
    
    
    Average Exercise
    
    
    Remaining Contract(in thousands)
    
    
    Price Per Share
    
    
    Life (years)Outstanding options at December 30, 2006
    
    
    6,585
    
    
    $
    14.65
    
    
    
    6.74Granted
    
    
    583
    
    
    
    18.32Exercised
    
    
    (1,122
    )
    
    
    11.86Forfeited or expired
    
    
    (223
    )
    
    
    17.65Outstanding options at September 29, 2007
    
    
    5,823
    
    
    $
    15.44
    
    
    
    6.44Outstanding options exercisable at September 29, 2007
    
    
    3,937
    
    
    $
    13.71
    
    
    
    5.42Outstanding options exercisable and expected to become exercisable
at September 29, 2007
    
    
    5,235
    
    
    $
    14.99
    
    
    
    6.20
 Restricted Stock
  15




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Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair(in thousands)
    
    
    ValueOutstanding unvested restricted stock at December 30, 2006
    
    
    422
    
    
    $
    17.63Granted
    
    
    545
    
    
    
    18.34Vested
    
    
    (146
    )
    
    
    16.72Forfeited or expired
    
    
    (52
    )
    
    
    18.33Outstanding unvested restricted stock at September 29, 2007
    
    
    769
    
    
    $
    18.26
 Restricted Stock Units
   Number of
    
    
    Weighted Average
    
    
    Weighted AverageUnits
    
    
    Grant Date Fair
    
    
    Remaining Contract(in thousands)
    
    
    Value
    
    
    Life (in years)Outstanding units at December 30, 2006
    
    
    10
    
    
    $
    19.08
    
    
    
    1.74Granted
    
    
    14
    
    
    
    18.28Released
    
    
    (3
    )
    
    
    19.49Forfeited or Expired
    
    
    
    
    
    
    Outstanding units at September 29, 2007
    
    
    21
    
    
    $
    18.55
    
    
    
    1.73
 Employee Stock Purchase Plan
   Risk-free interest rate
    
    
    5.04
    %Expected volatility
    
    
    40
    %Expected option life
    
    0.50 yearsDividends
    
    None
 16




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##### Table of Contents



14. Net Income (Loss) Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 29,
    
    
    September 30,
    
    
    September 29,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands, except per share data)Net income (loss)
    
    $
    (1,408
    )
    
    $
    1,490
    
    
    $
    (430
    )
    
    $
    897Weighted average number of common shares-basic
    
    
    53,808
    
    
    
    51,955
    
    
    
    53,303
    
    
    
    52,154Dilutive effect of stock-based compensation plans
    
    
    
    
    
    
    800
    
    
    
    
    
    
    
    1,356Weighted average number of common shares-diluted
    
    
    53,808
    
    
    
    52,755
    
    
    
    53,303
    
    
    
    53,510Net income (loss) per common share, basic and diluted
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    0.02
  Three Months Ended
    
    Nine Months EndedSeptember 29,
    
    September 30,
    
    September 29,
    
    September 30,2007
    
    2006
    
    2007
    
    2006(in thousands)Options to purchase
shares not included
in the computation
of diluted income
(loss) per share
because their
inclusion would be
antidilutive
    
    
    1,911
    
    
    
    3,583
    
    
    
    1,907
    
    
    
    1,819
   17




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##### Table of Contents



15. Business Segment and Geographical Data
   Three Months Ended
    
    
    Nine Months EndedSeptember 29,
    
    
    September 30,
    
    
    September 29,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands)Product sales:Cardiovascular
    
    $
    34,016
    
    
    $
    31,612
    
    
    $
    103,707
    
    
    $
    97,224ITC
    
    
    22,039
    
    
    
    20,135
    
    
    
    66,991
    
    
    
    58,061Total product sales
    
    $
    56,055
    
    
    $
    51,747
    
    
    $
    170,698
    
    
    $
    155,285Income (loss) before income taxes and other:Cardiovascular (a)(d)
    
    $
    (426
    )
    
    $
    493
    
    
    $
    1,969
    
    
    $
    3,873ITC(a)(d)
    
    
    2,203
    
    
    
    2,194
    
    
    
    5,462
    
    
    
    3,636Corporate (b)(d)
    
    
    (4,157
    )
    
    
    (2,735
    )
    
    
    (10,648
    )
    
    
    (9,321
    )Litigation (c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (447
    )Income (loss) from operations
    
    
    (2,380
    )
    
    
    (48
    )
    
    
    (3,217
    )
    
    
    (2,259
    )Other income and (expense):Interest expense (b)
    
    
    (1,016
    )
    
    
    (1,051
    )
    
    
    (3,158
    )
    
    
    (3,159
    )Interest income and other (b)
    
    
    2,261
    
    
    
    2,186
    
    
    
    6,214
    
    
    
    5,678Income (loss) before income tax benefit (expense)
    
    $
    (1,135
    )
    
    $
    1,087
    
    
    $
    (161
    )
    
    $
    260
 As ofSeptember 29,
    
    
    December 30,2007
    
    
    2006(in thousands)Total assets:Cardiovascular
    
    $
    316,378
    
    
    $
    319,604ITC
    
    
    62,993
    
    
    
    58,030Corporate (b)
    
    
    235,182
    
    
    
    213,501Total assets
    
    $
    614,553
    
    
    $
    591,135
 
 (a)
    
    Includes amortization expense on purchased intangible assets of $2.9 million and $0.2 million
for Cardiovascular and ITC, respectively, for the three months ended September 29, 2007, and
$8.8 million and $0.6 million for Cardiovascular and ITC, respectively, for the nine months
ended September 29, 2007. Includes amortization expense of $2.9 million and $0.1 million for
Cardiovascular and ITC, respectively for the three months ended September 30, 2006 and $8.8
million and $0.1 million for Cardiovascular and ITC respectively, for the nine months ended
September 30, 2006.(b)
    
    Represents unallocated costs and assets not specifically identified to any particular
business segment.(c)
    
    Relates to litigation expenses not specifically identified to a particular business segment.(d)
    
    Includes SFAS No. 123(R) expense of $1.2 million, $0.6 million and $0.1 million for
Cardiovascular, ITC and Corporate, respectively, for the three months ended September 29, 2007
and $4.6 million, $2.2 million and $1.3 million for Cardiovascular, ITC and Corporate,
respectively, for the nine months ended September 29, 2007. Includes 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. 18




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 29,
    
    
    September 30,
    
    
    September 29,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands)Domestic
    
    $
    40,956
    
    
    $
    39,942
    
    
    $
    125,856
    
    
    $
    118,653International
    
    
    15,099
    
    
    
    11,805
    
    
    
    44,842
    
    
    
    36,632Total product sales
    
    $
    56,055
    
    
    $
    51,747
    
    
    $
    170,698
    
    
    $
    155,285
 16. Subsequent Event
   19




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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 2006 Annual Report on Form 10-K (the 2006 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 mechanical circulatory support products include the
PVAD, IVAD, HeartMate XVE, HeartMate II and CentriMag for acute, intermediate and long-term
mechanical circulatory support for patients with advanced HF. We also manufacture and sell
small diameter grafts using our proprietary materials to address the vascular access market
for hemodialysis.
  
    
    Point-of-Care Diagnostics.Our point-of-care products include diagnostic test systems
that monitor blood coagulation while a patient is being administered certain anticoagulants,
as well as monitor blood gas/electrolytes, oxygenation and chemistry status.
 20




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##### Table of Contents




    
    Incision. Our incision products include devices used to obtain a patients blood sample
for diagnostic testing and screening for platelet function.
 Cardiovascular Division
  
    
    The PVAD is an external, pulsatile, ventricular assist device for short to
intermediate-term mechanical circulatory support. This device provides left, right and
biventricular mechanical circulatory support. The PVAD is approved by the FDA for use as a
bridge-to-transplantation (BTT), including home discharge, and post-cardiotomy myocardial
recovery.
    
    The IVAD is an implantable, pulsatile, ventricular assist device approved for BTT,
including home discharge, and post-cardiotomy myocardial recovery and provides left, right,
or biventricular mechanical circulatory support. The IVAD utilizes the same internal working
components as the PVAD, but has an outer housing made of a titanium alloy that makes it more
suitable for implantation.
    
    The HeartMate XVE is an implantable, pulsatile, left ventricular assist device for
intermediate and longer-term mechanical circulatory support and is the only device approved
in the U.S., Europe and Canada for permanent support of patients ineligible for heart
transplantation. The unique, textured, blood-contacting surface of this device eliminates
the need for systemic anticoagulation. The system is comprised of the blood pump and a
wearable controller and batteries providing a high degree of patient freedom and mobility.
    
    The HeartMate II is an implantable, continuous flow, left ventricular assist device
consisting of a miniature rotary blood pump designed to provide intermediate and long-term
mechanical circulatory support. Its design is intended to be not only smaller, but also
simpler, quieter, and longer lasting than other commercially available ventricular assist
devices. The HeartMate II is CE Mark approved for distribution in Europe, and is in Phase II
pivotal trial in the U.S.
    
    CentriMag is an external device for short-term mechanical circulatory support consisting
of a single-use blood pump, a motor and a device console. This device is 510(k) approved by
the FDA for patients requiring extracorporeal circulatory support during cardiac surgery.
     21




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##### Table of Contents



ITC Division
  
    
    The HEMOCHRON Whole Blood Coagulation System (HEMOCHRON) is used to quantitatively
monitor a patients coagulation while being administered anticoagulants at various settings.
For instance, it is used in the cardiovascular operating room and cardiac catheterization
lab to monitor the drug Heparin, and in an anticoagulation clinic to monitor the drug
warfarin. This system consists of a small portable instrument and disposable test cuvettes
or tubes and delivers results in minutes.
    
    The IRMA TRUpoint Blood Analysis System (IRMA) is used to quantitatively monitor a
patients blood gas, electrolyte and chemistry status. This instrument is a self-contained,
portable system which uses disposable test cartridges and delivers results in minutes.
    
    The AVOXimeter Whole Blood Co-Oximeter/Oximeter System (AVOXimeter) is used to assess a
patients oxygenation status and is commonly used in the cardiac catherization lab, the
intensive care unit (ICU), the neonatal intensive care unit (NICU) and the emergency
department. This portable instrument uses small, single-use test cuvettes and delivers
results in less than ten seconds.
    
    The ProTime Microcoagulation System (ProTime) is designed to safely monitor the
clotting activity in blood in patients on anticoagulant therapy, specifically warfarin. The
system 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 portable, quantitative instrument and disposable
test cuvettes and delivers results in minutes.
    
    The Hgb Pro Professional Hemoglobin Testing System (Hgb Pro) is used by professionals,
mainly in the doctors office, to test for anemia. Hgb Pro delivers quick results from a
small blood sample placed on a disposable test strip inserted into a hand-held test meter.
    
    The Tenderfoot Heel Incision Device (Tenderfoot), the Tenderlett Finger Incision Device
(Tenderlett) and the Surgicutt Bleeding Time Device (Surgicutt) are used by medical
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. These devices
feature permanently retracting blades for safe incision with minimal pain, as compared to
traditional lancets, which puncture the skin.
   22




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Critical Accounting Policies and Estimates
  Revenue Recognition
    Reserves
    Income Taxes
   23




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##### Table of Contents



Evaluation of Purchased Intangibles and Goodwill for Impairment
   Valuation of Share-Based Awards
  24




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 29,
    
    September 30,
    
    September 29,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Product sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of product sales
    
    
    42
    
    
    
    43
    
    
    
    41
    
    
    
    42Gross profit
    
    
    58
    
    
    
    57
    
    
    
    59
    
    
    
    58Operating expenses:Selling, general and administrative
    
    
    37
    
    
    
    35
    
    
    
    36
    
    
    
    36Research and development
    
    
    19
    
    
    
    17
    
    
    
    19
    
    
    
    18Amortization of purchased intangible assets
    
    
    6
    
    
    
    5
    
    
    
    6
    
    
    
    6Litigation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    62
    
    
    
    57
    
    
    
    61
    
    
    
    60Income (loss) from operations
    
    
    (4
    )
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Interest expense
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Interest income and other
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4Income (loss) before income tax benefit (expense)
    
    
    (2
    )
    
    
    2
    
    
    
    
    
    
    
    Income tax benefit (expense)
    
    
    (1
    )
    
    
    1
    
    
    
    
    
    
    
    Net income (loss)
    
    
    (3
    )%
    
    
    3
    %
    
    
    
    %
    
    
    
    %
  Three months ended September 29, 2007 and September 30, 2006
 Product Sales
  
    
    Cardiovascular product sales increased by $2.5 million, primarily due to increased
international sales of HeartMate II, partially offset by lower sales in our Thoratec product
line as a result of variability in the BTT market. In addition, product sales of CentriMag
contributed to increased sales in the third quarter of 2007 with no comparative sales in the
third quarter of 2006.
    
    Point-of-care diagnostic product sales increased by $1.9 million, due primarily to
increases in sales of our international alternate site and hospital point-of-care products
resulting from market growth and greater market penetration. In addition, sales of
AVOXimeters contributed to the increase in sales in the third quarter of 2007, with no
comparative sales in the third quarter of 2006.
  Gross Profit
  
    
    Cardiovascular gross profit percentage increased by 0.4%, as a result of improved foreign
currency exchange rates and favorable manufacturing variances, partially offset by
unfavorable product mix.
    
    ITC gross profit percentage increased by 0.5% due to improved manufacturing variances
partially offset by unfavorable product/customer mix.
 25




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##### Table of Contents



Selling, General and Administrative
  
    
    Cardiovascular costs decreased by $0.4 million, primarily due to a decrease in
share-based compensation costs.
    
    ITC costs increased by $0.8 million, primarily due to higher personnel costs and reserves
for overdue accounts receivable. In addition, there was an increase in costs related to
AVOXimeter products with no comparative costs in the third quarter of 2006.
    
    Corporate costs increased by $2.5 million because of market research and compliance
consulting.
 Research and Development
  Amortization of Purchased Intangible Assets
  Interest Expense
  Interest Income and Other
  Income Taxes
   26




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##### Table of Contents



Nine months ended September 29, 2007 and September 30, 2006
 Product Sales
  
    
    Cardiovascular product sales increased $6.5 million, primarily due to increased
international sales of HeartMate II, partially offset by lower sales in our Thoratec product
line as a result of variability in the BTT market and increased usage of short term
devices. In addition, total product sales from CentriMag contributed to the increase in
sales in the first nine months of 2007, with no comparative sales in the first nine months
of 2006.
    
    Point-of-care diagnostic product sales increased by $8.9 million, primarily due to an
increase in sales of our hospital point-of-care along with an increase in alternate site and
incision products resulting from market expansion and competitor product recalls. In
addition, product sales of AVOXimeters also contributed to the increase in sales in the
first nine months of 2007, with no comparative sales in the first nine months of 2006.
  Gross Profit
  
    
    Cardiovascular gross profit percentage increased 0.3% due to improved foreign currency
exchange rates partially offset by unfavorable product mix.
    
    ITC gross profit percentage increased by 2.1% due to improved manufacturing variances
partially offset by product/customer mix.
 Selling, General and Administrative
  
    
    Cardiovascular costs increased by $0.4 million, primarily due to an increase in personnel
costs related to our preparation for the launch of HeartMate II and related increase in
share-based compensation costs.
    
    ITC costs increased by $1.9 million, primarily due to higher personnel costs, consulting
fees and reserves for overdue accounts receivable. The 2007 period also includes costs
related to the AVOXimeter products with no comparative costs in the first nine months of
2006.
    
    Corporate costs increased by $4.5 million because of higher consulting and legal expenses
related to the review we conducted of our stock option granting practices, market research
and compliance consulting during the first nine months of 2007 as compared to the first nine
months of 2006.
 27




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##### Table of Contents



Research and Development
  Amortization of Purchased Intangible Assets
  Interest Expense
  Interest Income and Other
  Income Taxes
   Liquidity and Capital Resources
   28




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##### Table of Contents



Off Balance Sheet Arrangements
  Contractual Obligations
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Interest Rate Risk
   29




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##### Table of Contents



Foreign Currency Rate Fluctuations
    Three Months Ended
    
    Nine Months EndedSeptember 29, 2007
    
    September 30, 2006
    
    September 29, 2007
    
    September 30, 2006( in thousands)Foreign currency
exchange gains
(losses) on foreign
currency contracts
    
    $
    (346
    )
    
    $
    59
    
    
    $
    (387
    )
    
    $
    (214
    )Foreign currency
exchange gains
(losses) on foreign
translation
adjustments
    
    
    431
    
    
    
    (43
    )
    
    
    433
    
    
    
    278
  
 
 ITEM 4. CONTROLS AND PROCEDURES
  Disclosure Controls and Procedures
   30




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##### Table of Contents



Changes to Internal Controls
  Inherent Limitations on Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
 If we fail to obtain
approval from the FDA and from foreign regulatory authorities, we cannot market and sell our
products under development in the U.S. and in other countries, and if we fail to adhere to ongoing
FDA Quality System Regulations, the FDA may withdraw our market clearance or take other action,
 31




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##### Table of Contents



ITEM 2: UNREGISTERED SALES 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 (1)
    
    
    paid per share
    
    
    programs (2)
    
    
    programs(in thousands, except per share data)July 1, 2007 through July 28, 2007
    
    
    0.1
    
    
    $
    19.72
    
    
    
    
    
    
    $
    July 29, 2007 through August 25, 2007
    
    
    1.5
    
    
    
    20.08
    
    
    
    
    
    
    
    August 26, 2007 through September 29, 2007
    
    
    2.7
    
    
    
    20.05
    
    
    
    
    
    
    
    Total
    
    
    5.2
    
    
    $
    20.00
    
    
    
    
    
    
    $
    
 
 (1)
    
    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.(2)
    
    Our share repurchase programs, which authorized us to repurchase up to a total of $130
million of the Companys common shares, were publicly 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 29, 2007. 32




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##### Table of Contents



ITEM 6. EXHIBITS
 31.1
    
    Section 302 Certification of Chief Executive Officer.31.2
    
    Section 302 Certification of Chief Financial Officer.32.1
    
    Section 906 Certification of Chief Executive Officer.32.2
    
    Section 906 Certification of Chief Financial Officer.
 33




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##### Table of Contents



SIGNATURES
  THORATEC CORPORATIONDate: November 8, 2007
    /s/ Gerhard F. BurbachGerhard F. BurbachChief Executive OfficerDate: November 8, 2007
    /s/ David V. SmithDavid V. SmithChief Financial Officer 34