##### 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 June 28, 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 incorporation
    
    (I.R.S. Employer Identification No.)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
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 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 June 28, 2008 and December 29, 2007
    
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 28, 2008 and June 30, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 28, 2008 and June 30, 2007
    
    
    5Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 28, 2008 and
June 30, 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 of Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    36Part II. Other Information
    
    
    37Item 1A. Risk Factors
    
    
    37Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    38Item 6. Exhibits
    
    
    39Signatures
    
    
    40ExhibitsEXHIBIT 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)
 June 28,
    
    
    December 29,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    61,106
    
    
    $
    20,689Short-term available-for-sale investments
    
    
    135,018
    
    
    
    197,661Receivables, net of allowances of $647 and $861, respectively
    
    
    55,710
    
    
    
    45,368Inventories
    
    
    56,000
    
    
    
    54,935Short-term deferred tax assets
    
    
    6,077
    
    
    
    6,077Prepaid expenses and other assets
    
    
    7,613
    
    
    
    6,379Total current assets
    
    
    321,524
    
    
    
    331,109Property, plant and equipment, net
    
    
    46,035
    
    
    
    46,477Goodwill
    
    
    98,368
    
    
    
    98,368Purchased intangible assets, net
    
    
    115,175
    
    
    
    121,767Long-term deferred tax assets
    
    
    2,112
    
    
    
    62Income tax receivable
    
    
    2,800
    
    
    
    2,755Long-term available-for-sale investments
    
    
    31,863
    
    
    
    Other assets
    
    
    12,793
    
    
    
    13,181Total Assets
    
    $
    630,670
    
    
    $
    613,719LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    9,536
    
    
    $
    9,770Accrued compensation
    
    
    15,666
    
    
    
    14,314Accrued income taxes
    
    
    2,566
    
    
    
    Other accrued liabilities
    
    
    9,125
    
    
    
    5,289Total current liabilities
    
    
    36,893
    
    
    
    29,373Senior subordinated convertible notes
    
    
    143,750
    
    
    
    143,750Long-term deferred tax liability
    
    
    33,485
    
    
    
    35,953Other
    
    
    6,673
    
    
    
    6,614Total Liabilities
    
    
    220,801
    
    
    
    215,690Shareholders equity:Common shares: no par, authorized 100,000; issued and
outstanding 54,633 and 54,108 as of June 28, 2008 and
December 29, 2007, respectively
    
    
    
    
    
    
    Additional paid-in capital
    
    
    464,900
    
    
    
    458,383Accumulated deficit
    
    
    (53,073
    )
    
    
    (61,577
    )Accumulated other comprehensive (loss) income:Unrealized (loss) gain on investments
    
    
    (2,838
    )
    
    
    317Cumulative translation adjustments
    
    
    880
    
    
    
    906Total accumulated other comprehensive (loss) income
    
    
    (1,958
    )
    
    
    1,223Total Shareholders Equity
    
    
    409,869
    
    
    
    398,029Total Liabilities and Shareholders Equity
    
    $
    630,670
    
    
    $
    613,719
  3




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THORATEC CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
(in thousands, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 28,
    
    
    June 30,
    
    
    June 28,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Product sales
    
    $
    82,648
    
    
    $
    57,333
    
    
    $
    147,075
    
    
    $
    114,643Cost of product sales
    
    
    31,825
    
    
    
    23,648
    
    
    
    60,415
    
    
    
    46,445Gross profit
    
    
    50,823
    
    
    
    33,685
    
    
    
    86,660
    
    
    
    68,198Operating expenses:Selling, general and administrative
    
    
    23,857
    
    
    
    19,134
    
    
    
    44,493
    
    
    
    41,079Research and development
    
    
    12,839
    
    
    
    10,767
    
    
    
    25,358
    
    
    
    21,660Amortization of purchased intangible assets
    
    
    3,296
    
    
    
    3,143
    
    
    
    6,592
    
    
    
    6,296Total operating expenses
    
    
    39,992
    
    
    
    33,044
    
    
    
    76,443
    
    
    
    69,035Income (loss) from operations
    
    
    10,831
    
    
    
    641
    
    
    
    10,217
    
    
    
    (837
    )Other income and (expense):Interest expense
    
    
    (1,131
    )
    
    
    (1,074
    )
    
    
    (2,021
    )
    
    
    (2,142
    )Interest income and other
    
    
    2,281
    
    
    
    1,766
    
    
    
    4,459
    
    
    
    3,953Income before income taxes
    
    
    11,981
    
    
    
    1,333
    
    
    
    12,655
    
    
    
    974Income tax (expense) benefit
    
    
    (3,330
    )
    
    
    (80
    )
    
    
    (3,655
    )
    
    
    4Net income
    
    $
    8,651
    
    
    $
    1,253
    
    
    $
    9,000
    
    
    $
    978Net income per share:Basic
    
    $
    0.16
    
    
    $
    0.02
    
    
    $
    0.17
    
    
    $
    0.02Diluted
    
    $
    0.15
    
    
    $
    0.02
    
    
    $
    0.16
    
    
    $
    0.02Shares used to compute net income per share:Basic
    
    
    54,556
    
    
    
    53,370
    
    
    
    54,389
    
    
    
    53,055Diluted
    
    
    62,624
    
    
    
    54,728
    
    
    
    62,396
    
    
    
    54,421
  4




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THORATEC CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
(in thousands)
 Six Months EndedJune 28,
    
    
    June 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    9,000
    
    
    $
    978Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    11,565
    
    
    
    10,755Investment premium amortization (net)
    
    
    634
    
    
    
    369Write-down of investment
    
    
    
    
    
    
    215Non-cash interest and other expenses
    
    
    165
    
    
    
    542Tax benefit related to stock options
    
    
    
    
    
    
    1,961Share-based compensation expense
    
    
    5,493
    
    
    
    6,231Excess tax benefits from share-based compensation
    
    
    (68
    )
    
    
    (1,147
    )Loss on disposal of assets
    
    
    384
    
    
    
    50Change in net deferred tax liability
    
    
    (2,412
    )
    
    
    (925
    )Changes in assets and liabilities:Receivables
    
    
    (11,028
    )
    
    
    538Inventories
    
    
    (2,950
    )
    
    
    (10,094
    )Prepaid expenses and other assets
    
    
    (793
    )
    
    
    (1,240
    )Accounts payable and other liabilities
    
    
    4,933
    
    
    
    (5,172
    )Accrued income taxes, net
    
    
    3,045
    
    
    
    (4,137
    )Net cash provided by (used in) operating activities
    
    
    17,968
    
    
    
    (1,076
    )Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (98,548
    )
    
    
    (202,283
    )Sales of available-for-sale investments
    
    
    78,670
    
    
    
    144,375Maturities of available-for-sale investments and restricted investments
    
    
    44,765
    
    
    
    1,712Purchases of property, plant and equipment
    
    
    (3,251
    )
    
    
    (3,408
    )Net cash provided by (used in) investing activities
    
    
    21,636
    
    
    
    (59,604
    )Cash flows from financing activities:Excess income tax deficit on stock options exercises
    
    
    (111
    )
    
    
    Proceeds from stock option exercises
    
    
    871
    
    
    
    8,612Proceeds from stock issued under employee stock purchase plan
    
    
    1,050
    
    
    
    1,084Excess tax benefits from share-based compensation
    
    
    68
    
    
    
    1,147Repurchase and retirement of common shares
    
    
    (1,092
    )
    
    
    (775
    )Net cash provided by financing activities
    
    
    786
    
    
    
    10,068Effect of exchange rate changes on cash and cash equivalents
    
    
    27
    
    
    
    48Net increase (decrease) in cash and cash equivalents
    
    
    40,417
    
    
    
    (50,564
    )Cash and cash equivalents at beginning of period
    
    
    20,689
    
    
    
    67,453Cash and cash equivalents at end of period
    
    $
    61,106
    
    
    $
    16,889Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    3,507
    
    
    $
    3,600Cash 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
    
    $
    1,685
    
    
    $
    1,977
  5




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THORATEC CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (unaudited)
(in thousands)
 Three Months Ended
    
    
    Six Months EndedJune 28,
    
    
    June 30,
    
    
    June 28,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    8,651
    
    
    $
    1,253
    
    
    $
    9,000
    
    
    $
    978Other net comprehensive income (loss):Unrealized loss on investments (net of
taxes of $269 and $55 for the three
months ended and $2,103 and $55 for the
six months ended June 28, 2008 and June
30, 2007, respectively)
    
    
    (403
    )
    
    
    (83
    )
    
    
    (3,155
    )
    
    
    (82
    )Foreign currency translation adjustments
    
    
    (194
    )
    
    
    225
    
    
    
    (26
    )
    
    
    240Comprehensive income
    
    $
    8,054
    
    
    $
    1,395
    
    
    $
    5,819
    
    
    $
    1,136
  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.
 7




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As of June 28, 2008SignificantQuoted prices in
    
    
    other
    
    
    Significantactive markets for
    
    
    observable
    
    
    unobservableidentical assets
    
    
    inputs
    
    
    inputsTotal
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(in thousands)AssetsCash and cash equivalents
    
    $
    61,106
    
    
    $
    61,106
    
    
    $
    
    
    
    $
    Short term investments  municipal bonds
    
    
    135,018
    
    
    
    
    
    
    
    135,018
    
    
    
    Long term investments  auction rate securities
    
    
    31,863
    
    
    
    
    
    
    
    
    
    
    
    31,863Convertible debenture (fair value for purposes of disclosure in Note 9)
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    5,000$
    232,987
    
    
    $
    61,106
    
    
    $
    135,018
    
    
    $
    36,863LiabilitiesMark to market on financial instruments (fair value for purposes of
disclosure in Note 6)
    
    $
    58
    
    
    $
    
    
    
    $
    58
    
    
    $
    Make-whole provision (fair value for purposes of disclosure in Note 11)
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    153Senior subordinated convertible notes (fair value for purposes of
disclosure in note 11)
    
    
    156,201
    
    
    
    156,201
    
    
    
    
    
    
    
    $
    156,412
    
    
    $
    156,201
    
    
    $
    58
    
    
    $
    153
   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
    )
    
    
    
    
    
    
    Realized
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
    
    
    $
    212Realized
holding gain, included in interest income and other
    
    
    
    
    
    
    
    
    
    
    (59
    )Unrealized holding loss, included in other comprehensive loss
    
    
    (288
    )
    
    
    
    
    
    
    Balance at June 29, 2008
    
    $
    31,863
    
    
    $
    5,000
    
    
    $
    153
  8




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3. Investments in Available-for-Sale Securities
   As ofJune 28,
    
    
    December 29,2008
    
    
    2007(in thousands)Short-term investmentsUnrealized gains on corporate and
municipal bonds (before taxes)
    
    $
    782
    
    
    $
    517Unrealized loss on corporate and municipal
bonds (before taxes)
    
    
    (189
    )
    
    
    Long-term investmentsUnrealized loss on auction rate securities
(before taxes)
    
    
    (5,337
    )
    
    
    Net unrealized gain (loss) (before taxes)
    
    $
    (4,744
    )
    
    $
    517
    4. Recently Issued Accounting Pronouncements
 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
    
    
    Six Months EndedJune 28, 2008
    
    
    June 30, 2007
    
    
    June 28, 2008
    
    
    June 30, 2007( in thousands)Foreign currency
exchange gain
(loss) on foreign
currency contracts
    
    $
    (107
    )
    
    $
    41
    
    
    $
    (1,147
    )
    
    $
    (42
    )Foreign currency
exchange gain
(loss) on foreign
translation
adjustments
    
    
    122
    
    
    
    (54
    )
    
    
    1,230
    
    
    
    2
  
 7. Inventories
  As ofJune 28,
    
    
    December 29,2008
    
    
    2007(in thousands)Finished goods
    
    $
    21,198
    
    
    $
    20,732Work in process
    
    
    13,613
    
    
    
    10,053Raw materials
    
    
    21,189
    
    
    
    24,150Total
    
    $
    56,000
    
    
    $
    54,935
 11




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##### Table of Contents



8. Property, Plant and Equipment, net
  As ofJune 28,
    
    
    December 29,2008
    
    
    2007(in thousands)Land, building and improvements
    
    $
    16,135
    
    
    $
    16,135Equipment and capitalized software
    
    
    66,014
    
    
    
    61,886Furniture and leasehold improvements
    
    
    22,764
    
    
    
    22,804Total
    
    
    104,913
    
    
    
    100,825Less accumulated depreciation
    
    
    (58,878
    )
    
    
    (54,348
    )$
    46,035
    
    
    $
    46,477
  9. Other Assets
   12




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10. Goodwill and Purchased Intangible Assets
   As of June 28, 2008Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount(in thousands)Patents and trademarks
    
    $
    38,515
    
    
    $
    (26,945
    )
    
    $
    11,570Core technology
    
    
    37,485
    
    
    
    (12,779
    )
    
    
    24,706Developed technology
    
    
    125,742
    
    
    
    (47,422
    )
    
    
    78,320Customer and distributor relationships and other
    
    
    897
    
    
    
    (318
    )
    
    
    579Total purchased intangible assets
    
    $
    202,639
    
    
    $
    (87,464
    )
    
    $
    115,175
 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
  13




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11. Long-Term Debt
       14




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12. Share-Based Compensation
 Share-Based
Payments
  Three Months Ended
    
    
    Six Months EndedJune 28,
    
    
    June 30,
    
    
    June 28,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)Cost of product sales
    
    $
    574
    
    
    $
    381
    
    
    $
    913
    
    
    $
    738Selling, general and administrative
    
    
    1,562
    
    
    
    1,757
    
    
    
    3,236
    
    
    
    4,105Research and development
    
    
    596
    
    
    
    591
    
    
    
    1,343
    
    
    
    1,389$
    2,732
    
    
    $
    2,729
    
    
    $
    5,492
    
    
    $
    6,232
    Equity Plan
  15




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Stock Options
   Three Months Ended
    
    Six Months EndedJune 28, 2008
    
    June 30, 2007
    
    June 28, 2008
    
    June 30, 2007Risk-free interest rate (weighted average)
    
    
    3.10
    %
    
    
    4.73
    %
    
    
    3.25
    %
    
    
    4.81
    %Expected volatility
    
    
    40
    %
    
    
    40
    %
    
    
    40
    %
    
    
    40
    %Expected option term (years)
    
    
    5.09 to 6.07
    
    
    
    5.02 to 6.06
    
    
    
    5.09 to 6.07
    
    
    
    5.08 to 6.06Dividends
    
    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
    
    
    380
    
    
    
    14.97Exercised
    
    
    (78
    )
    
    
    11.58Forfeited or expired
    
    
    (79
    )
    
    
    18.81Outstanding options at June 28, 2008
    
    
    5,971
    
    
    $
    15.43
    
    
    
    5.97Outstanding options exercisable at June 28, 2008
    
    
    4,353
    
    
    $
    14.40
    
    
    
    5.08Outstanding
options vested at June 28, 2008 and expected to vest
    
    
    5,766
    
    
    $
    15.35
    
    
    
    5.87
 16




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##### Table of Contents



Restricted Stock
    Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair(in thousands)
    
    
    ValueOutstanding unvested restricted stock at December 29, 2007
    
    
    768
    
    
    $
    18.29Granted
    
    
    467
    
    
    
    15.02Vested
    
    
    (196
    )
    
    
    18.20Forfeited or expired
    
    
    (33
    )
    
    
    18.38Outstanding unvested restricted stock at June 28, 2008
    
    
    1,006
    
    
    $
    16.79
 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
    
    
    14
    
    
    
    14.84Released
    
    
    (6
    )
    
    
    18.61Forfeited or expired
    
    
    
    
    
    
    Outstanding units at June 28, 2008
    
    
    29
    
    
    $
    16.74
    
    
    
    2.97
 17




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##### Table of Contents



Employee Stock Purchase Plan
   Risk-free interest rate
    
    
    1.73
    %Expected volatility
    
    
    40
    %Expected option life
    
    0.50 yearsDividends
    
    None
  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 Per Share
  Three Months Ended
    
    
    Six Months EndedJune 28,
    
    
    June 30,
    
    
    June 28,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands, except per share data)Net income for basic share calculation
    
    $
    8,651
    
    
    $
    1,253
    
    
    $
    9,000
    
    
    $
    978Interest expense on senior subordinated convertible notes (after tax)
    
    
    512
    
    
    
    
    
    
    
    1,024
    
    
    
    Net income for diluted share calculation
    
    $
    9,163
    
    
    $
    1,253
    
    
    $
    10,024
    
    
    $
    978Weighted average number of common shares-basic
    
    
    54,556
    
    
    
    53,370
    
    
    
    54,389
    
    
    
    53,055Dilutive effect of stock-based compensation plans
    
    
    778
    
    
    
    1,358
    
    
    
    717
    
    
    
    1,366Dilutive effect on conversion of senior subordinated convertible notes
    
    
    7,290
    
    
    
    
    
    
    
    7,290
    
    
    
    Weighted average number of common shares-diluted
    
    
    62,624
    
    
    
    54,728
    
    
    
    62,396
    
    
    
    54,421Net income per common shareBasic
    
    $
    0.16
    
    
    $
    0.02
    
    
    $
    0.17
    
    
    $
    0.02Diluted
    
    $
    0.15
    
    
    $
    0.02
    
    
    $
    0.16
    
    
    $
    0.02
  Three Months Ended
    
    Six Months EndedJune 28,
    
    June 30,
    
    June 28,
    
    June 30,2008
    
    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
    
    
    2,411
    
    
    
    1,992
    
    
    
    2,486
    
    
    
    1,977
   19




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##### Table of Contents



15. Business Segment and Geographical Data
   Three Months Ended
    
    
    Six Months EndedJune 28,
    
    
    June 30,
    
    
    June 28,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)Product sales:Cardiovascular
    
    $
    57,506
    
    
    $
    34,153
    
    
    $
    97,727
    
    
    $
    69,691ITC
    
    
    25,142
    
    
    
    23,180
    
    
    
    49,348
    
    
    
    44,952Total product sales
    
    $
    82,648
    
    
    $
    57,333
    
    
    $
    147,075
    
    
    $
    114,643Income (loss) before income taxes and other:Cardiovascular (a)(c)
    
    $
    13,399
    
    
    $
    1,268
    
    
    $
    15,225
    
    
    $
    2,395ITC(a)(c)
    
    
    1,272
    
    
    
    1,861
    
    
    
    2,077
    
    
    
    3,259Corporate (b)(c)
    
    
    (3,840
    )
    
    
    (2,488
    )
    
    
    (7,085
    )
    
    
    (6,491
    )Income (loss) from operations
    
    
    10,831
    
    
    
    641
    
    
    
    10,217
    
    
    
    (837
    )Other income and (expense):Interest expense (b)
    
    
    (1,131
    )
    
    
    (1,074
    )
    
    
    (2,021
    )
    
    
    (2,142
    )Interest income and other (b)
    
    
    2,281
    
    
    
    1,766
    
    
    
    4,459
    
    
    
    3,953Income before income taxes
    
    $
    11,981
    
    
    $
    1,333
    
    
    $
    12,655
    
    
    $
    974
 As ofJune 28,
    
    
    December 29,2008
    
    
    2007(in thousands)Total assets:Cardiovascular
    
    $
    320,288
    
    
    $
    312,691ITC
    
    
    62,468
    
    
    
    62,642Corporate (b)
    
    
    247,914
    
    
    
    238,386Total assets
    
    $
    630,670
    
    
    $
    613,719
 
 (a)
    
    The Cardiovascular segment includes amortization expense on purchased intangible assets of
$3.1 million and $6.2 million for the three and six months ended June 28, 2008, respectively,
and $2.9 million and $5.9 million for the three and six months ended June 30, 2007,
respectively. The ITC segment includes amortization expense on purchased intangible assets of
$0.2 million and $0.4 million for both of the three and six months ended June 28, 2008 and
June 30, 2007, respectively.(b)
    
    Represents unallocated costs, income and assets, not specifically identified to any
particular business segment.(c)
    
    Includes SFAS No. 123(R) expense of $1.6 million, $0.7 million and $0.4 million for
Cardiovascular, ITC and Corporate, respectively, for the three months ended June 28, 2008 and
$1.5 million, $0.8 million and $0.6 million for Cardiovascular, ITC and Corporate,
respectively, for the three months ended June 30, 2007 and SFAS No. 123(R) expense of $3.2
million, $1.4 million and $0.8 million for Cardiovascular, ITC and Corporate, respectively,
for the six months ended June 28, 2008 and $3.4 million, $1.6 million and $1.2 million for
Cardiovascular, ITC and Corporate, respectively, for the six months ended June 30, 2007. 20




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 28, 2008
    
    
    June 30, 2007
    
    
    June 28, 2008
    
    
    June 30, 2007(in thousands)Domestic
    
    $
    60,684
    
    
    $
    41,222
    
    
    $
    106,057
    
    
    $
    84,900International
    
    
    21,964
    
    
    
    16,111
    
    
    
    41,018
    
    
    
    29,743Total product sales
    
    $
    82,648
    
    
    $
    57,333
    
    
    $
    147,075
    
    
    $
    114,643
 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




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##### 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
   25




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##### Table of Contents



Incision Products
   Critical Accounting Policies and Estimates
  Revenue Recognition
    Reserves
   26




---



##### Table of Contents



Income Taxes
    Evaluation of Purchased Intangibles and Goodwill for Impairment
 Accounting
for the Impairment or Disposal of Long-Lived Assets
 Goodwill and Other Intangible Assets
 27




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##### Table of Contents



Valuation of Share-Based Awards
 Share-Based Payment
 Fair Value Measurements
 Fair Value Measurements,
  
    
    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. Our estimates are subject to significant judgment
by management.
   28




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    Six Months EndedJune 28,
    
    June 30,
    
    June 28,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Product sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of product sales
    
    
    38
    
    
    
    41
    
    
    
    41
    
    
    
    40Gross profit
    
    
    62
    
    
    
    59
    
    
    
    59
    
    
    
    60Operating expenses:Selling, general and administrative
    
    
    29
    
    
    
    33
    
    
    
    30
    
    
    
    36Research and development
    
    
    16
    
    
    
    19
    
    
    
    17
    
    
    
    19Amortization of purchased intangible assets
    
    
    4
    
    
    
    6
    
    
    
    5
    
    
    
    6Total operating expenses
    
    
    49
    
    
    
    58
    
    
    
    52
    
    
    
    61Income (loss) from operations
    
    
    13
    
    
    
    1
    
    
    
    7
    
    
    
    (1
    )Interest expense
    
    
    (1
    )
    
    
    (2
    )
    
    
    (1
    )
    
    
    (2
    )Interest income and other
    
    
    3
    
    
    
    3
    
    
    
    3
    
    
    
    4Income before income taxes
    
    
    15
    
    
    
    2
    
    
    
    9
    
    
    
    1Income tax expense
    
    
    (4
    )
    
    
    
    
    
    
    (3
    )
    
    
    Net income
    
    
    11
    %
    
    
    2
    %
    
    
    6
    %
    
    
    1
    %
  Three months ended June 28, 2008 and June 30, 2007
 Product Sales
  
    
    Cardiovascular product sales increased by
$23.3 million primarily due to higher sales
from our HeartMate product line. These higher sales resulted from increased HeartMate II
volume, partly attributable to FDA BTT commercial approval in April 2008,
including the
addition of twenty-six U.S. centers, and commercial price increase on our HeartMate II
pumps. In addition, favorable foreign currency translation contributed to our increased
product sales.
    
    ITC product sales increased by $2.0 million primarily due to higher international sales
of our Alternate Site products, AVOXimeter and HEMOCHRON product lines.
  29




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##### Table of Contents



Gross Profit
  
    
    Cardiovascular gross margin percentage increased by 4% primarily due to HeartMate II pump
price increases, improved manufacturing variances, favorable pump product mix, and favorable
foreign currency translations.
    
    ITC division gross margin percentage decreased by 5% due to unfavorable geographic mix,
product mix and competitive pricing pressure on our skin incision business during the second
quarter of 2008 as compared to the second quarter of 2007, in addition to a favorable
variance from returned units in 2007.
 Selling, General and Administrative
  
    
    Cardiovascular costs increased by $3.0 million in the second quarter of 2008 as compared
to the second quarter 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 second quarter of 2008 as compared to the
second quarter of 2007 primarily due to higher compensation and consulting expenses.
    
    Corporate costs increased by $1.4 million in the second quarter of 2008 as compared to
the second quarter of 2007 primarily due to higher compensation and various other corporate
expenses.
 Research and Development
  Amortization of Purchased Intangible Assets
  Interest Expense
  30




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##### Table of Contents



Interest Income and Other
  Income Taxes
   Six months ended June 28, 2008 and June 30, 2007
 Product Sales
  
    
    Cardiovascular product sales increased by
$28.0 million primarily due to higher sales
from our HeartMate product line These higher sales resulted from increased HeartMate II
volume partly attributable to FDA BTT approval, including the addition of twenty-six
U.S. centers, and commercial price increase on our HeartMate II pumps. In addition,
favorable foreign currency translation contributed to our increased product sales.
    
    ITC product sales increased by $4.5 million due primarily to higher international and
domestic sales of our Alternate Site products and HEMOCHRON product lines.
  Gross Profit
  
    
    Cardiovascular gross margin percentage was the same for the first half of 2008 and 2007. The
major fluctuations in 2008 were the HeartMate II pump price increased and favorable foreign
currency translations, offset by less favorable manufacturing variances.
    
    ITC division gross margin percentage decreased by 4% due to unfavorable geographic and
product mix during the first half of 2008 in comparison to the first half of 2007, in
addition to favorable manufacturing variances.
 31




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##### Table of Contents



Selling, General and Administrative
  
    
    Cardiovascular costs increased by $3.0 million in the first half of 2008 as compared to
the first half of 2007 primarily due to market development initiatives, commercialization efforts around the
HeartMate II and higher compensation expense.
    
    ITC costs increased by $0.6 million in the first half
of 2008 as compared to the first
half of 2007 primarily due to higher sales and marketing personnel and travel cost
    
    Corporate costs decreased by $0.2 million during the first half of 2008 as
compared to the first half of 2007 primarily due to consulting fees during the first half of
2007 related to a stock option review that did not recur in the first half of 2008, offset
by higher compensation expense during the first half of 2008.
 Research and Development
  Amortization of Purchased Intangible Assets
  Interest Expense
  Interest Income and Other
  Income Taxes
 Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No.
109
 32




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Liquidity and Capital Resources
       33




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##### Table of Contents



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
    )
    
    
    
    
    
    
    Realized
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
    
    
    $
    212Realized
holding gain, included in interest income and other
    
    
    
    
    
    
    
    
    
    
    (59
    )Unrealized holding loss, included in other comprehensive loss
    
    
    (288
    )
    
    
    
    
    
    
    Balance at June 29, 2008
    
    $
    31,863
    
    
    $
    5,000
    
    
    $
    153
   Off Balance Sheet Arrangements
  Contractual Obligations
   34




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
 Interest Rate Risk
   Foreign Currency Rate Fluctuations
    Three Months Ended
    
    Six Months EndedJune 28, 2008
    
    June 30, 2007
    
    June 28, 2008
    
    June 30, 2007( in thousands)Foreign currency
exchange gain
(loss) on foreign
currency contracts
    
    $
    (107
    )
    
    $
    41
    
    
    $
    (1,147
    )
    
    $
    (42
    )Foreign currency
exchange gain
(loss) on foreign
translation
adjustments
    
    
    122
    
    
    
    (54
    )
    
    
    1,230
    
    
    
    2
  
 35




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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
  36




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
  
 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)March 30, 2008 through April 26, 2008
    
    
    3.5
    
    
    $
    15.36
    
    
    
    
    
    
    $
    April 27, 2008 through May 24, 2008
    
    
    1.7
    
    
    
    16.11
    
    
    
    
    
    
    
    May 25, 2008 through June 28, 2008
    
    
    2.6
    
    
    
    17.66
    
    
    
    
    
    
    
    Total
    
    
    7.8
    
    
    $
    16.27
    
    
    
    
    
    
    $
    
 
 (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 six
months ended June 28, 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 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1.
    
    To elect the following directors to serve for the ensuing year until their successors are
elected:
 Number of VotesFor
    
    WithheldGerhard F. Burbach
    
    
    42,626,960
    
    
    
    5,541,657Howard E. Chase
    
    
    42,607,967
    
    
    
    5,560,650J. Daniel Cole
    
    
    42,631,209
    
    
    
    5,537,408Steven H. Collis
    
    
    42,132,624
    
    
    
    6,035,993Neil F. Dimick
    
    
    42,183,779
    
    
    
    5,984,838Elisha W. Finney
    
    
    42,905,274
    
    
    
    5,263,343D. Keith Grossman
    
    
    42,591,048
    
    
    
    5,577,569J. Donald Hill
    
    
    41,707,848
    
    
    
    6,460,769Daniel M. Mulvena
    
    
    41,758,549
    
    
    
    6,410,068
 2.
    
    To approve the amendment of the Thoratec Corporation 2006 Incentive Stock Plan:
 Number ofVotesFor
    
    
    38,299,562Against
    
    
    4,118,019Abstain
    
    
    831,562Broker Non-Votes
    
    
    4,919,384
 3.
    
    To ratify of the appointment of Deloitte & Touche LLP as the Companys independent auditors
for its fiscal year ending January 3, 2009:
 Number ofVotesFor
    
    
    47,794,327Against
    
    
    347,707Abstain
    
    
    26,583
 38




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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.
 39




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##### Table of Contents



SIGNATURES
  THORATEC CORPORATIONDate: August 6, 2008
    /s/ Gerhard F. BurbachGerhard F. BurbachChief Executive OfficerDate: August 6, 2008
    /s/ David V. SmithDavid V. SmithChief Financial Officer 40




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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.