##### 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 27, 2008
 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
    
    (I.R.S. Employer Identification No.)incorporation or 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
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company 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 InformationItem 1. Condensed Consolidated Financial Statements (unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of September 27, 2008 and December 29, 2007
    
    
    3Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 27, 2008 and September 29, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 27, 2008 and September 29, 2007
    
    
    5Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 27, 2008 and September 29, 2007
    
    
    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 About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    35Part II. Other InformationItem 1A. Risk Factors
    
    
    36Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    37Item 6. Exhibits
    
    
    38Signatures
    
    
    39Exhibits
    
    
    40EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
     2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 THORATEC CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited)
(in thousands)
 September 27,
    
    
    December 29,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    65,493
    
    
    $
    20,689Short-term available-for-sale investments
    
    
    159,387
    
    
    
    197,661Receivables, net of allowances of $716 and $861, respectively
    
    
    57,554
    
    
    
    45,368Inventories
    
    
    59,228
    
    
    
    54,935Short-term deferred tax assets
    
    
    6,125
    
    
    
    6,077Prepaid expenses and other assets
    
    
    14,982
    
    
    
    6,379Total current assets
    
    
    362,769
    
    
    
    331,109Property, plant and equipment, net
    
    
    48,529
    
    
    
    46,477Goodwill
    
    
    98,368
    
    
    
    98,368Purchased intangible assets, net
    
    
    111,880
    
    
    
    121,767Long-term deferred tax assets
    
    
    3,123
    
    
    
    62Long-term income tax receivable
    
    
    2,729
    
    
    
    2,755Long-term available-for-sale investments
    
    
    30,554
    
    
    
    Other assets
    
    
    12,484
    
    
    
    13,181Total Assets
    
    $
    670,436
    
    
    $
    613,719LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    10,402
    
    
    $
    9,770Accrued compensation
    
    
    21,045
    
    
    
    14,314Accrued income taxes
    
    
    3,700
    
    
    
    Other accrued liabilities
    
    
    12,022
    
    
    
    5,289Total current liabilities
    
    
    47,169
    
    
    
    29,373Senior subordinated convertible notes
    
    
    143,750
    
    
    
    143,750Long-term deferred tax liability
    
    
    31,696
    
    
    
    35,953Other
    
    
    6,677
    
    
    
    6,614Total Liabilities
    
    
    229,292
    
    
    
    215,690Shareholders equity:Common shares: no par, authorized 100,000; issued and
outstanding 56,044 and 54,108 as of September 27, 2008 and
December 29, 2007, respectively
    
    
    
    
    
    
    Additional paid-in capital
    
    
    490,933
    
    
    
    458,383Accumulated deficit
    
    
    (45,950
    )
    
    
    (61,577
    )Accumulated other comprehensive (loss) income:Unrealized (loss) gain on investments
    
    
    (3,908
    )
    
    
    317Cumulative translation adjustments
    
    
    69
    
    
    
    906Total accumulated other comprehensive (loss) income
    
    
    (3,839
    )
    
    
    1,223Total Shareholders Equity
    
    
    441,144
    
    
    
    398,029Total Liabilities and Shareholders Equity
    
    $
    670,436
    
    
    $
    613,719
  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 27,
    
    
    September 29,
    
    
    September 27,
    
    
    September 29,2008
    
    
    2007
    
    
    2008
    
    
    2007Product sales
    
    $
    80,815
    
    
    $
    56,055
    
    
    $
    227,890
    
    
    $
    170,698Cost of product sales
    
    
    32,045
    
    
    
    23,707
    
    
    
    92,460
    
    
    
    70,152Gross profit
    
    
    48,770
    
    
    
    32,348
    
    
    
    135,430
    
    
    
    100,546Operating expenses:Selling, general and administrative
    
    
    23,845
    
    
    
    20,873
    
    
    
    68,338
    
    
    
    61,952Research and development
    
    
    13,443
    
    
    
    10,712
    
    
    
    38,801
    
    
    
    32,372Amortization of purchased intangible assets
    
    
    3,295
    
    
    
    3,143
    
    
    
    9,887
    
    
    
    9,439Total operating expenses
    
    
    40,583
    
    
    
    34,728
    
    
    
    117,026
    
    
    
    103,763Income (loss) from operations
    
    
    8,187
    
    
    
    (2,380
    )
    
    
    18,404
    
    
    
    (3,217
    )Other income and (expense):Interest expense
    
    
    (1,009
    )
    
    
    (1,016
    )
    
    
    (3,030
    )
    
    
    (3,158
    )Interest income and other
    
    
    2,183
    
    
    
    2,261
    
    
    
    6,642
    
    
    
    6,214Income (loss) before income taxes
    
    
    9,361
    
    
    
    (1,135
    )
    
    
    22,016
    
    
    
    (161
    )Income tax expense
    
    
    (2,179
    )
    
    
    (273
    )
    
    
    (5,834
    )
    
    
    (269
    )Net income (loss)
    
    $
    7,182
    
    
    $
    (1,408
    )
    
    $
    16,182
    
    
    $
    (430
    )Net income (loss) per share:Basic
    
    $
    0.13
    
    
    $
    (0.03
    )
    
    $
    0.30
    
    
    $
    (0.01
    )Diluted
    
    $
    0.12
    
    
    $
    (0.03
    )
    
    $
    0.28
    
    
    $
    (0.01
    )Shares used to compute net income (loss) per share:Basic
    
    
    55,328
    
    
    
    53,808
    
    
    
    54,702
    
    
    
    53,303Diluted
    
    
    63,993
    
    
    
    53,808
    
    
    
    62,979
    
    
    
    53,303
  4




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THORATEC CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
(in thousands)
 Nine Months EndedSeptember 27,
    
    
    September 29,2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    16,182
    
    
    $
    (430
    )Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    17,675
    
    
    
    16,183Investment premium amortization (net)
    
    
    1,313
    
    
    
    664Write-down of investment
    
    
    490
    
    
    
    215Non-cash interest and other expenses
    
    
    355
    
    
    
    1,523Tax benefit related to stock options
    
    
    5,386
    
    
    
    3,131Share-based compensation expense
    
    
    7,967
    
    
    
    8,132Excess tax benefits from share-based compensation
    
    
    (3,598
    )
    
    
    (1,861
    )Loss on disposal of assets
    
    
    448
    
    
    
    74Change in net deferred tax liability
    
    
    (4,549
    )
    
    
    (1,890
    )Changes in assets and liabilities:Receivables
    
    
    (13,811
    )
    
    
    2,201Inventories
    
    
    (7,019
    )
    
    
    (11,846
    )Prepaid expenses and other assets
    
    
    322
    
    
    
    (1,774
    )Accounts payable and other liabilities
    
    
    12,114
    
    
    
    (1,093
    )Accrued income taxes, net
    
    
    (3,368
    )
    
    
    (8,646
    )Net cash provided by operating activities
    
    
    29,907
    
    
    
    4,583Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (143,797
    )
    
    
    (247,363
    )Sales of available-for-sale investments
    
    
    90,419
    
    
    
    177,475Maturities of available-for-sale investments and restricted investments
    
    
    52,742
    
    
    
    1,712Purchases of property, plant and equipment
    
    
    (6,876
    )
    
    
    (4,867
    )Net cash used in investing activities
    
    
    (7,512
    )
    
    
    (73,043
    )Cash flows from financing activities:Proceeds from stock option exercises
    
    
    18,959
    
    
    
    13,311Proceeds from stock issued under employee stock purchase plan
    
    
    1,050
    
    
    
    1,084Excess tax benefits from share-based compensation
    
    
    3,598
    
    
    
    1,861Repurchase and retirement of common shares
    
    
    (1,192
    )
    
    
    (878
    )Net cash provided by financing activities
    
    
    22,415
    
    
    
    15,378Effect of exchange rate changes on cash and cash equivalents
    
    
    (6
    )
    
    
    128Net increase (decrease) in cash and cash equivalents
    
    
    44,804
    
    
    
    (52,954
    )Cash and cash equivalents at beginning of period
    
    
    20,689
    
    
    
    67,453Cash and cash equivalents at end of period
    
    $
    65,493
    
    
    $
    14,499Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    8,701
    
    
    $
    8,642Cash paid for interest
    
    $
    1,707
    
    
    $
    1,707Supplemental disclosure of non-cash investing and financing activities:Transfers of equipment from inventory to property, plant and equipment
    
    $
    2,369
    
    
    $
    2,820
  5




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THORATEC CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (unaudited)
(in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 27,
    
    
    September 29,
    
    
    September 27,
    
    
    September 29,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    7,182
    
    
    $
    (1,408
    )
    
    $
    16,182
    
    
    $
    (430
    )Other comprehensive income (loss):Unrealized loss on investments (net of
taxes of $713 and $141 for the three
months ended and $2,817 and $86 for the
nine months ended September 27, 2008
and September 29, 2007, respectively)
    
    
    (1,070
    )
    
    
    211
    
    
    
    (4,225
    )
    
    
    129Foreign currency translation adjustments
    
    
    (811
    )
    
    
    162
    
    
    
    (837
    )
    
    
    402Comprehensive income (loss)
    
    $
    5,301
    
    
    $
    (1,035
    )
    
    $
    11,120
    
    
    $
    101
  6




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THORATEC CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1. Basis of Presentation
   2. Fair Value Measurement
 Fair Value
Measurements
 Level 1:
    
    Quoted prices (unadjusted) in active markets for identical assets or liabilities.Level 2:
    
    Directly or indirectly observable market based inputs used in models or other valuation methodologies.Level 3:
    
    Unobservable inputs that are not corroborated by market data which require significant management judgment or
estimation.
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As of September 27, 2008SignificantQuoted prices in
    
    
    other
    
    
    Significantactive markets for
    
    
    observable
    
    
    unobservableidentical assets
    
    
    inputs
    
    
    inputsTotal
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(in thousands)AssetsShort term investments  municipal bonds
    
    $
    159,387
    
    
    $
    
    
    
    $
    159,387
    
    
    $
    Long term investments  auction rate securities
    
    
    30,554
    
    
    
    
    
    
    
    
    
    
    
    30,554Convertible debenture with Levitronix LLC (fair value for purposes of
disclosure in Note 9)
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    5,000$
    194,941
    
    
    $
    
    
    
    $
    159,387
    
    
    $
    35,554LiabilitiesMark to market on financial instruments (Note 6)
    
    $
    41
    
    
    $
    
    
    
    $
    41
    
    
    $
    Make-whole provision (Note 11)
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    66Senior subordinated convertible notes (fair value for purposes of
disclosure in Note 11)
    
    
    205,983
    
    
    
    205,983
    
    
    
    
    
    
    
    $
    206,090
    
    
    $
    205,983
    
    
    $
    41
    
    
    $
    66
   Fair Value Measurement Using SignificantUnobservable Inputs (Level 3)Auction Rate
    
    
    Other Long
    
    
    Other LongSecurities
    
    
    Term Assets
    
    
    Term Liabilities(in thousands)Balance at December 29, 2007
    
    $
    
    
    
    $
    5,000
    
    
    $
    96Transfer to Level 3
    
    
    46,050
    
    
    
    
    
    
    
    Settlements at par
    
    
    (8,850
    )
    
    
    
    
    
    
    Unrealized holding loss, included in interest income and other
    
    
    
    
    
    
    
    
    
    
    116Unrealized holding loss, included in other comprehensive loss
    
    
    (5,049
    )
    
    
    
    
    
    
    Balance at March 29, 2008
    
    $
    32,151
    
    
    $
    5,000
    
    
    $
    212Unrealized holding gain, included in interest income and other
    
    
    
    
    
    
    
    
    
    
    (59
    )Unrealized holding loss, included in other comprehensive loss
    
    
    (288
    )
    
    
    
    
    
    
    Balance at June 28, 2008
    
    $
    31,863
    
    
    $
    5,000
    
    
    $
    153Unrealized holding gain, included in interest income and other
    
    
    
    
    
    
    
    
    
    
    (87
    )Unrealized holding loss, included in other comprehensive loss
    
    
    (1,309
    )
    
    
    
    
    
    
    Balance at September 27, 2008
    
    $
    30,554
    
    
    $
    5,000
    
    
    $
    66
  8




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3. Investments in Available-for-Sale Securities
   As ofSeptember 27,
    
    
    December 29,2008
    
    
    2007(in thousands)Short-term investmentsUnrealized gains on municipal bonds (before taxes)
    
    $
    429
    
    
    $
    517Unrealized loss on municipal bonds (before taxes)
    
    
    (296
    )
    
    
    Long-term investmentsUnrealized loss on auction rate securities (before taxes)
    
    
    (6,646
    )
    
    
    Net unrealized (loss) gain (before taxes)
    
    $
    (6,513
    )
    
    $
    517
    4. Recently Issued Accounting Pronouncements
 Determining the Fair Value of a Financial Asset When the Market for
That Asset is Not Active,
 Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities
 9




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Accounting For
Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)
 Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles.
 Determination of the Useful Life of Intangible
Assets Goodwill and Other Intangible Assets
 Disclosures about Derivative Instruments and
Hedging Activities
 Effective Date of FASB Statement No. 157
 Business Combinations
 5. Cash and cash equivalents
  10




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6. Financial Instruments
   Accounting for
Derivative Instruments and Hedging Activities
 Three Months Ended
    
    Nine Months EndedSeptember 27,
    
    September 29,
    
    September 27,
    
    September 29,2008
    
    2007
    
    2008
    
    2007( in thousands)Foreign currency
exchange gain
(loss) on foreign
currency contracts
    
    $
    325
    
    
    $
    (346
    )
    
    $
    (822
    )
    
    $
    (388
    )Foreign currency
exchange (loss)
gain on foreign
translation
adjustments
    
    
    (302
    )
    
    
    431
    
    
    
    928
    
    
    
    433
  
 11




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7. Inventories
  As ofSeptember 27,
    
    
    December 29,2008
    
    
    2007(in thousands)Finished goods
    
    $
    21,929
    
    
    $
    20,732Work in process
    
    
    14,030
    
    
    
    10,053Raw materials
    
    
    23,269
    
    
    
    24,150Total
    
    $
    59,228
    
    
    $
    54,935
 8. Property, Plant and Equipment, net
  As ofSeptember 27,
    
    
    December 29,2008
    
    
    2007(in thousands)Land, building and improvements
    
    $
    16,135
    
    
    $
    16,135Equipment and capitalized software
    
    
    68,350
    
    
    
    61,886Furniture and leasehold improvements
    
    
    25,332
    
    
    
    22,804Total
    
    
    109,817
    
    
    
    100,825Less accumulated depreciation
    
    
    (61,288
    )
    
    
    (54,348
    )$
    48,529
    
    
    $
    46,477
  9. Other Assets
   12




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10. Goodwill and Purchased Intangible Assets
   As of September 27, 2008Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount(in thousands)Patents and trademarks
    
    $
    38,515
    
    
    $
    (27,874
    )
    
    $
    10,641Core technology
    
    
    37,485
    
    
    
    (13,272
    )
    
    
    24,213Developed technology
    
    
    125,742
    
    
    
    (49,260
    )
    
    
    76,482Customer and distributor relationships and other
    
    
    897
    
    
    
    (353
    )
    
    
    544Total purchased intangible assets
    
    $
    202,639
    
    
    $
    (90,759
    )
    
    $
    111,880
 As of December 29, 2007Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount(in thousands)Patents and trademarks
    
    $
    38,515
    
    
    $
    (25,086
    )
    
    $
    13,429Core technology
    
    
    37,485
    
    
    
    (11,793
    )
    
    
    25,692Developed technology
    
    
    125,742
    
    
    
    (43,748
    )
    
    
    81,994Customer and distributor relationships and other
    
    
    897
    
    
    
    (245
    )
    
    
    652Total purchased intangible assets
    
    $
    202,639
    
    
    $
    (80,872
    )
    
    $
    121,767
  11. Long-Term Debt
  13




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14




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12. Share-Based Compensation
 Share-Based
Payments
  Three Months Ended
    
    
    Nine Months EndedSeptember 27,
    
    
    September 29,
    
    
    September 27,
    
    
    September 29,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)Cost of product sales
    
    $
    371
    
    
    $
    456
    
    
    $
    1,284
    
    
    $
    1,193Selling, general and administrative
    
    
    1,511
    
    
    
    963
    
    
    
    4,747
    
    
    
    5,069Research and development
    
    
    593
    
    
    
    481
    
    
    
    1,936
    
    
    
    1,870$
    2,475
    
    
    $
    1,900
    
    
    $
    7,967
    
    
    $
    8,132
    Equity Plan
  15




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Stock Options
   Three Months Ended
    
    Nine Months EndedSeptember 27, 2008
    
    September 29, 2007
    
    September 27, 2008
    
    September 29, 2007Risk-free interest rate (weighted average)
    
    
    3.12
    %
    
    
    4.45
    %
    
    
    3.25
    %
    
    
    4.79
    %Expected volatility
    
    
    40
    %
    
    
    40
    %
    
    
    40
    %
    
    
    40
    %Expected option term (years)
    
    
    4.89 to 6.07
    
    
    
    5.06 to 5.92
    
    
    
    5.08 to 6.07
    
    
    
    5.08 to 6.05Dividends
    
    None
    
    
    None
    
    
    None
    
    
    None
    Number of
    
    
    Weighted
    
    
    Weighted AverageOptions
    
    
    Average Exercise
    
    
    Remaining Contract(in thousands)
    
    
    Price Per Share
    
    
    Life (years)Outstanding options at December 29, 2007
    
    
    5,748
    
    
    $
    15.46
    
    
    
    6.19Granted
    
    
    382
    
    
    
    14.98Exercised
    
    
    (1,484
    )
    
    
    12.77Forfeited or expired
    
    
    (98
    )
    
    
    18.81Outstanding options at September 27, 2008
    
    
    4,548
    
    
    $
    16.22
    
    
    
    6.17Outstanding options exercisable at September 27, 2008
    
    
    2,972
    
    
    $
    15.13
    
    
    
    5.13Outstanding options vested at September 27, 2008 and expected to vest
    
    
    4,377
    
    
    $
    16.16
    
    
    
    6.08
 Restricted Stock
   16




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##### Table of Contents



Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair(in thousands)
    
    
    ValueOutstanding unvested restricted stock at December 29, 2007
    
    
    768
    
    
    $
    18.29Granted
    
    
    487
    
    
    
    15.24Vested
    
    
    (209
    )
    
    
    18.28Forfeited or expired
    
    
    (44
    )
    
    
    18.00Outstanding unvested restricted stock at September 27, 2008
    
    
    1,002
    
    
    $
    16.82
 Restricted Stock Units
   Number of
    
    
    Weighted Average
    
    
    Weighted AverageUnits
    
    
    Grant Date Fair
    
    
    Remaining Contract(in thousands)
    
    
    Value
    
    
    Life (in years)Outstanding units at December 29, 2007
    
    
    21
    
    
    $
    18.58
    
    
    
    2.82Granted
    
    
    15
    
    
    
    14.93Released
    
    
    (6
    )
    
    
    18.51Forfeited or expired
    
    
    (1
    )
    
    
    17.75Outstanding units at September 27, 2008
    
    
    29
    
    
    $
    16.75
    
    
    
    2.73
 Employee Stock Purchase Plan
   Risk-free interest rate
    
    
    1.73
    %Expected volatility
    
    
    40
    %Expected option life
    
    0.50 yearsDividends
    
    None
  17




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##### Table of Contents



13. Income Taxes
     Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No.
109,
   18




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##### Table of Contents



14. Net Income (Loss) Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 27,
    
    
    September 29,
    
    
    September 27,
    
    
    September 29,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands, except per share data)Net income (loss) for basic share calculation
    
    $
    7,182
    
    
    $
    (1,408
    )
    
    $
    16,182
    
    
    $
    (430
    )Interest expense on senior subordinated convertible notes (after tax)
    
    
    512
    
    
    
    
    
    
    
    1,536
    
    
    
    Net income for diluted share calculation
    
    $
    7,694
    
    
    $
    (1,408
    )
    
    $
    17,718
    
    
    $
    (430
    )Weighted average number of common shares-basic
    
    
    55,328
    
    
    
    53,808
    
    
    
    54,702
    
    
    
    53,303Dilutive effect of stock-based compensation plans
    
    
    1,375
    
    
    
    
    
    
    
    987
    
    
    
    Dilutive effect on conversion of senior subordinated convertible notes
    
    
    7,290
    
    
    
    
    
    
    
    7,290
    
    
    
    Weighted average number of common shares-diluted
    
    
    63,993
    
    
    
    53,808
    
    
    
    62,979
    
    
    
    53,303Net income (loss) per common shareBasic
    
    $
    0.13
    
    
    $
    (0.03
    )
    
    $
    0.30
    
    
    $
    (0.01
    )Diluted
    
    $
    0.12
    
    
    $
    (0.03
    )
    
    $
    0.28
    
    
    $
    (0.01
    )
  Three Months Ended
    
    Nine Months EndedSeptember 27,
    
    September 29,
    
    September 27,
    
    September 29,2008
    
    2007
    
    2008
    
    2007(in thousands)Options to purchase
shares not included
in the computation
of diluted income
per share because
their inclusion
would be
antidilutive
    
    
    506
    
    
    
    1,911
    
    
    
    2,131
    
    
    
    1,907
   19




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##### Table of Contents



15. Business Segment and Geographical Data
   Three Months Ended
    
    
    Nine Months EndedSeptember 27,
    
    
    September 29,
    
    
    September 27,
    
    
    September 29,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)Product sales:Cardiovascular
    
    $
    57,091
    
    
    $
    34,016
    
    
    $
    154,818
    
    
    $
    103,707ITC
    
    
    23,724
    
    
    
    22,039
    
    
    
    73,072
    
    
    
    66,991Total product sales
    
    $
    80,815
    
    
    $
    56,055
    
    
    $
    227,890
    
    
    $
    170,698Income (loss) before income taxes and other:Cardiovascular (a)(c)
    
    $
    11,647
    
    
    $
    (426
    )
    
    $
    26,871
    
    
    $
    1,969ITC(a)(c)
    
    
    793
    
    
    
    2,203
    
    
    
    2,870
    
    
    
    5,462Corporate (b)(c)
    
    
    (4,253
    )
    
    
    (4,157
    )
    
    
    (11,337
    )
    
    
    (10,648
    )Income (loss) from operations
    
    
    8,187
    
    
    
    (2,380
    )
    
    
    18,404
    
    
    
    (3,217
    )Other income and (expense):Interest expense (b)
    
    
    (1,009
    )
    
    
    (1,016
    )
    
    
    (3,030
    )
    
    
    (3,158
    )Interest income and other (b)
    
    
    2,183
    
    
    
    2,261
    
    
    
    6,642
    
    
    
    6,214Income (loss) before income taxes
    
    $
    9,361
    
    
    $
    (1,135
    )
    
    $
    22,016
    
    
    $
    (161
    )
 As ofSeptember 27,
    
    
    December 29,2008
    
    
    2007(in thousands)Total assets:Cardiovascular
    
    $
    322,798
    
    
    $
    312,691ITC
    
    
    63,070
    
    
    
    62,642Corporate (b)
    
    
    284,568
    
    
    
    238,386Total assets
    
    $
    670,436
    
    
    $
    613,719
 
 (a)
    
    The Cardiovascular segment includes amortization expense on purchased intangible assets of
$3.1 million and $9.3 million for the three and nine months ended September 27, 2008,
respectively, and $2.9 million and $8.8 million for the three and nine months ended September
29, 2007, respectively. The ITC segment includes amortization expense on purchased intangible
assets of $0.2 million and $0.6 million for the three and nine months ended September 27,
2008, respectively, and $0.2 million and $0.6 million for the three and nine months ended
September 29, 2007, respectively.(b)
    
    Represents unallocated costs, income and assets, not specifically identified to any
particular business segment.(c)
    
    Includes share-based compensation expense of $1.4 million, $0.7 million and $0.4 million for
Cardiovascular, ITC and Corporate, respectively, for the three months ended September 27, 2008
and $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 share-based compensation expense of
$4.7 million, $2.1 million and $1.2 million for Cardiovascular, ITC and Corporate,
respectively, for the nine months ended September 27, 2008 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. 20




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 27,
    
    
    September 29,
    
    
    September 27,
    
    
    September 29,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)Domestic
    
    $
    61,674
    
    
    $
    40,956
    
    
    $
    167,731
    
    
    $
    125,856International
    
    
    19,141
    
    
    
    15,099
    
    
    
    60,159
    
    
    
    44,842Total product sales
    
    $
    80,815
    
    
    $
    56,055
    
    
    $
    227,890
    
    
    $
    170,698
 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 2007 Annual Report on Form 10-K (the 2007 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 any revisions or updates 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 unaudited condensed consolidated
financial statements included in this Quarterly Report on Form 10-Q .
 OVERVIEW
     22




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##### Table of Contents



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.
    
    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 Paracorporeal Ventricular Assist Device
   23




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##### Table of Contents



The Implantable Ventricular Assist Device
   The HeartMate XVE
   The HeartMate II
  The CentriMag
  Vascular Graft Products
  24




---



##### Table of Contents



ITC Division
  Hospital point-of-care
 The HEMOCHRON Whole Blood Coagulation System
  The IRMA TRUpoint Blood Analysis System
  The AVOXimeter Whole Blood Co-Oximeter/Oximeter System
   Alternate site point-of-care
 The ProTime Microcoagulation System
  The Hgb Pro Professional Hemoglobin Testing System
   Incision Products
   25




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##### Table of Contents



Critical Accounting Policies and Estimates
  Revenue Recognition
    Reserves
     Income Taxes
  26




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##### Table of Contents



Evaluation of Purchased Intangibles and Goodwill for Impairment
 Accounting
for the Impairment or Disposal of Long-Lived Assets
 Goodwill and Other Intangible Assets
 Valuation of Share-Based Awards
 Share-Based Payment
 Fair Value Measurements
 Fair Value Measurements,
  27




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##### Table of Contents




    
    Level 1-Valuations based on quoted prices in active markets for identical assets or
liabilities that we have the ability to access. Assets and liabilities utilizing Level 1
inputs include broker-dealer quote securities that can be traded in an active market. We
used Level I assumptions for our cash and cash equivalents, for auction rate securities
called at par in April 2008 and for the straight convertible debt feature of our senior
subordinated convertible debt notes, except for the make-whole provision using a Level 3
input, described below. Since valuations are based on quoted prices that are readily and
regularly available in an active market, a significant degree of judgment is not required.
    
    Level 2-Valuations based on quoted prices of similar investments in active markets, of
similar or identical investments in markets that are not active or model based valuations
for which all significant inputs and value drivers are observable, directly or indirectly.
Assets and liabilities utilizing Level 2 inputs include primarily municipal bonds.
    
    Level 3-Valuations based on inputs that are unobservable and significant to the overall
fair value measurement. Assets and liabilities utilizing Level 3 inputs include certain
auction rate securities, our Levitronix convertible debenture and the make-whole feature of
our senior subordinated convertible notes. Given the current credit
market illiquidity for auction rate securities, our estimates are
subject to significant judgment by management.
   Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 27,
    
    September 29,
    
    September 27,
    
    September 29,2008
    
    2007
    
    2008
    
    2007Product sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of product sales
    
    
    40
    
    
    
    42
    
    
    
    41
    
    
    
    41Gross profit
    
    
    60
    
    
    
    58
    
    
    
    59
    
    
    
    59Operating expenses:Selling, general and administrative
    
    
    29
    
    
    
    37
    
    
    
    30
    
    
    
    36Research and development
    
    
    17
    
    
    
    19
    
    
    
    17
    
    
    
    19Amortization of purchased intangible assets
    
    
    4
    
    
    
    6
    
    
    
    4
    
    
    
    6Total operating expenses
    
    
    50
    
    
    
    62
    
    
    
    51
    
    
    
    61Income (loss) from operations
    
    
    10
    
    
    
    (4
    )
    
    
    8
    
    
    
    (2
    )Interest expense
    
    
    (1
    )
    
    
    (2
    )
    
    
    (1
    )
    
    
    (2
    )Interest income and other
    
    
    3
    
    
    
    4
    
    
    
    3
    
    
    
    4Income before income taxes
    
    
    12
    
    
    
    (2
    )
    
    
    10
    
    
    
    Income tax expense
    
    
    (3
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    Net income (loss)
    
    
    9
    %
    
    
    (3
    )%
    
    
    7
    %
    
    
    
    %
  28




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##### Table of Contents



Three months ended September 27, 2008 and September 29, 2007
 Product Sales
  
    
    Cardiovascular product sales increased by $23.0 million primarily due to higher sales
from our HeartMate product line. These higher sales resulted from increased HeartMate II
volume, partly attributable to increased implant activity subsequent to the FDA BTT
commercial approval in April 2008, a commercial price increase for HeartMate II in North America and
the addition of seventeen new HeartMate II centers. In addition, favorable foreign currency
translation contributed to our increased product sales.
    
    ITC product sales increased by $1.7 million primarily due to higher international sales
of our Alternate Site product line, partly offset by the decrease of our sales of the
incision product line.
  Gross Profit
  
    
    Cardiovascular gross margin percentage increased by 4% primarily due to HeartMate II
commercial price increases and favorable foreign currency translations partially offset by
the increased percentage of non-pump product sales.
    
    ITC division gross margin percentage decreased by 5% due to unfavorable geographic and
product mix and unfavorable manufacturing variances.
 Selling, General and Administrative
  
    
    Cardiovascular costs increased by $2.8 million in the third quarter of 2008 as compared
to the third quarter of 2007 primarily due to market development initiatives,
commercialization efforts around the HeartMate II and higher compensation expense.
    
    ITC costs decreased by $0.2 million in the third quarter of 2008 as compared to the third
quarter of 2007 primarily due to lower consulting expenses.
    
    Corporate costs increased by $0.4 million in the third quarter of 2008 as compared to the
third quarter of 2007 primarily due to higher compensation and various other corporate
expenses.
 Research and Development
  29




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##### Table of Contents



Amortization of Purchased Intangible Assets
  Interest Expense
  Interest Income and Other
  Income Taxes
  Nine months ended September 27, 2008 and September 29, 2007
 Product Sales
  
    
    Cardiovascular product sales increased by $51.1 million primarily due to higher sales
from our HeartMate product line. The higher sales resulted from increased HeartMate II
volume partially attributable to implant activity subsequent to the FDA BTT approval, and stocking revenue associated
with the addition of forty-three new HeartMate II centers, along with a commercial price
increase on our HeartMate II in North America. Additionally, favorable foreign currency
translation contributed to our increased product sales.
    
    ITC product sales increased by $6.1 million due primarily to higher international and
domestic sales of our Alternate Site products and HEMOCHRON product lines.
  Gross Profit
  
    
    Cardiovascular gross margin percentage increased by 1% primarily due to increased
HeartMate II prices in North America, favorable foreign currency translations, partially
offset by the increased percentage of non-pump revenue and unfavorable manufacturing
variances.
    
    ITC division gross margin percentage decreased by 5% due to unfavorable geographic and
product mix and increased unfavorable manufacturing variances.
 30




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##### Table of Contents



Selling, General and Administrative
  
    
    Cardiovascular costs increased by $5.7 million in the first nine months of 2008 as
compared to the first nine months of 2007 primarily due to market development initiatives,
commercialization efforts around the HeartMate II and higher compensation expense.
    
    ITC costs increased by $0.4 million in the first nine months of 2008 as compared to the
first nine months of 2007 primarily due to higher sales and marketing personnel and travel
cost.
    
    Corporate costs increased by $0.2 million during the first nine months of 2008 as
compared to the first nine months of 2007 primarily due to higher compensation expense
during the first nine months of 2008, which was partially offset by higher consulting fees
incurred during the first nine months of 2007 related to a stock option review that did not
recur .
 Research and Development
  Amortization of Purchased Intangible Assets
  Interest Expense
  Interest Income and Other
  31




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##### Table of Contents



Income Taxes
 Accounting for Uncertainty in Income Taxes, an interpretation of
SFAS No. 109
 Liquidity and Capital Resources
      32




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##### Table of Contents



Auction RateSecuritiesBalance at December 29, 2007
    
    $
    Transfer to Level 3
    
    
    46,050Settlements at par
    
    
    (8,850
    )Unrealized holding loss, included in other comprehensive loss
    
    
    (5,049
    )Balance at March 29, 2008
    
    $
    32,151Unrealized holding loss, included in other comprehensive loss
    
    
    (288
    )Balance at June 28, 2008
    
    $
    31,863Unrealized holding loss, included in other comprehensive loss
    
    
    (1,309
    )Balance at September 27, 2008
    
    $
    30,554
    Off Balance Sheet Arrangements
  Contractual Obligations
   33




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Interest Rate Risk
   Foreign Currency Rate Fluctuations
   Accounting for
Derivative Instruments and Hedging Activities
 Three Months Ended
    
    Nine Months EndedSeptember 27,
    
    September 29,
    
    September 27,
    
    September 29,2008
    
    2007
    
    2008
    
    2007( in thousands)Foreign currency
exchange gain
(loss) on foreign
currency contracts
    
    $
    325
    
    
    $
    (346
    )
    
    $
    (822
    )
    
    $
    (388
    )Foreign currency
exchange (loss)
gain on foreign
translation
adjustments
    
    
    (302
    )
    
    
    431
    
    
    
    928
    
    
    
    433
  
  34




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
  Disclosure Controls and Procedures
   Changes to Internal Controls
  Inherent Limitations on Controls and Procedures
   35




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##### Table of Contents



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, or our products experience certain adverse
events, the FDA may withdraw our market clearance or take other action.
      36




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##### Table of Contents



ITEM 2: UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
   Total number
    
    
    Approximateof shares
    
    
    value of sharesTotal
    
    
    
    
    
    
    purchased
    
    
    authorized to benumber
    
    
    
    
    
    
    under
    
    
    purchased underof shares
    
    
    Average
    
    
    publicly
    
    
    publiclypurchased
    
    
    price paid
    
    
    announced
    
    
    announced(2)
    
    
    per share
    
    
    programs (1)
    
    
    programs(in thousands, except per share data)June 29, 2008 through July 26, 2008
    
    
    1.8
    
    
    $
    16.99
    
    
    
    
    
    
    $
    July 27, 2008 through August 23, 2008
    
    
    1.6
    
    
    
    21.61
    
    
    
    
    
    
    
    August 24, 2008 through September 27, 2008
    
    
    1.3
    
    
    
    27.04
    
    
    
    
    
    
    
    Total
    
    
    4.7
    
    
    $
    21.31
    
    
    
    
    
    
    $
    
 
 (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 and nine
months ended September 27, 2008.(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. 37




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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.
 38




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##### Table of Contents



SIGNATURES
  THORATEC CORPORATIONDate: November 5, 2008
    /s/ Gerhard F. BurbachGerhard F. BurbachChief Executive OfficerDate: November 5, 2008
    /s/ David V. SmithDavid V. SmithChief Financial Officer 39




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##### Table of Contents



EXHIBIT INDEX
 Number
    
    Description31.1
    
    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.
 40