##### 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 October 3, 2009
 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)
 : þ o
 o o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 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 October 3, 2009 and January 3, 2009
    
    3Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
October 3, 2009 and September 27, 2008
    
    4Condensed Consolidated Statements of Shareholders Equity for the Nine Months Ended
October 3, 2009 and September 27, 2008
    
    5Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 3, 2009
and September 27, 2008
    
    6Notes to Condensed Consolidated Financial Statements
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    28Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    42Item 4. Controls and Procedures
    
    43Part II. Other Information
    
    44Item 1A. Risk Factors
    
    44Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    45Item 6. Exhibits
    
    46Signatures
    
    47ExhibitsEX-31.1EX-31.2EX-32.1EX-32.2
     2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1.
    
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 THORATEC CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited)
(in thousands)
 October 3, 2009
    
    
    January 3, 2009As adjusted (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    28,000
    
    
    $
    107,053Short-term available-for-sale investments
    
    
    235,328
    
    
    
    141,598Receivables, net of allowances of $1,346 and $947, respectively
    
    
    58,802
    
    
    
    55,065Inventories
    
    
    74,759
    
    
    
    61,373Deferred tax assets
    
    
    8,250
    
    
    
    8,397Prepaid expenses and other assets
    
    
    8,801
    
    
    
    7,415Total current assets
    
    
    413,940
    
    
    
    380,901Property, plant and equipment, net
    
    
    51,462
    
    
    
    50,138Goodwill
    
    
    99,287
    
    
    
    99,287Purchased intangible assets, net
    
    
    100,517
    
    
    
    108,584Long-term restricted cash and cash equivalents
    
    
    16,000
    
    
    
    Long-term available-for-sale investments
    
    
    24,620
    
    
    
    29,959Other long-term assets
    
    
    24,380
    
    
    
    15,216Total Assets
    
    $
    730,206
    
    
    $
    684,085LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    13,485
    
    
    $
    10,563Accrued compensation
    
    
    19,605
    
    
    
    25,550Other accrued liabilities
    
    
    15,729
    
    
    
    12,410Total current liabilities
    
    
    48,819
    
    
    
    48,523Senior subordinated convertible notes
    
    
    129,932
    
    
    
    124,115Long-term deferred tax liability
    
    
    35,804
    
    
    
    38,842Other
    
    
    8,265
    
    
    
    6,326Total Liabilities
    
    
    222,820
    
    
    
    217,806Shareholders equity:Common shares: no par, authorized 100,000; issued and
outstanding 56,806 and 56,395 as of October 3, 2009 and
January 3, 2009, respectively
    
    
    
    
    
    
    Additional paid-in capital
    
    
    549,300
    
    
    
    528,657Accumulated deficit
    
    
    (39,506
    )
    
    
    (56,634
    )Accumulated other comprehensive loss:Unrealized loss on investments
    
    
    (872
    )
    
    
    (3,337
    )Cumulative translation adjustments
    
    
    (1,536
    )
    
    
    (2,407
    )Total accumulated other comprehensive loss
    
    
    (2,408
    )
    
    
    (5,744
    )Total shareholders equity
    
    
    507,386
    
    
    
    466,279Total Liabilities and Shareholders Equity
    
    $
    730,206
    
    
    $
    684,085
 
 (1)
    
    Adjusted for the retrospective adoption of the accounting for convertible debt instruments
that may be settled in cash upon conversion, including partial settlements in accordance with
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
470-20, Debt.See Note 12, Long-Term Debt.  3




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##### Table of Contents



THORATEC CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
(in thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedOctober 3,
    
    
    September 27,
    
    
    October 3,
    
    
    September 27,2009
    
    
    2008
    
    
    2009
    
    
    2008As adjusted(1)
    
    
    
    
    
    
    As adjusted(1)Product sales
    
    $
    87,917
    
    
    $
    80,815
    
    
    $
    269,442
    
    
    $
    227,890Cost of product sales
    
    
    34,185
    
    
    
    32,045
    
    
    
    110,928
    
    
    
    92,460Gross profit
    
    
    53,732
    
    
    
    48,770
    
    
    
    158,514
    
    
    
    135,430Operating expenses:Selling, general and administrative
    
    
    24,226
    
    
    
    23,845
    
    
    
    82,457
    
    
    
    68,338Research and development
    
    
    13,350
    
    
    
    13,443
    
    
    
    40,862
    
    
    
    38,801Amortization of purchased intangible assets
    
    
    2,568
    
    
    
    3,295
    
    
    
    8,067
    
    
    
    9,887Total operating expenses
    
    
    40,144
    
    
    
    40,583
    
    
    
    131,386
    
    
    
    117,026Income from operations
    
    
    13,588
    
    
    
    8,187
    
    
    
    27,128
    
    
    
    18,404Other income and (expense):Interest expense and other
    
    
    (3,261
    )
    
    
    (2,834
    )
    
    
    (9,167
    )
    
    
    (8,249
    )Interest income and other
    
    
    7,134
    
    
    
    2,183
    
    
    
    9,759
    
    
    
    6,642Income before income taxes
    
    
    17,461
    
    
    
    7,536
    
    
    
    27,720
    
    
    
    16,797Income tax expense
    
    
    (5,684
    )
    
    
    (1,478
    )
    
    
    (8,483
    )
    
    
    (3,793
    )Net income
    
    $
    11,777
    
    
    $
    6,058
    
    
    $
    19,237
    
    
    $
    13,004Net income per share:Basic
    
    $
    0.21
    
    
    $
    0.11
    
    
    $
    0.34
    
    
    $
    0.24Diluted
    
    $
    0.20
    
    
    $
    0.11
    
    
    $
    0.33
    
    
    $
    0.23Shares used to compute net income per share:Basic
    
    
    56,683
    
    
    
    55,328
    
    
    
    56,511
    
    
    
    54,702Diluted
    
    
    58,006
    
    
    
    56,703
    
    
    
    57,859
    
    
    
    55,689
 
 (1)
    
    Adjusted for the retrospective adoption of the accounting for convertible debt instruments
that may be settled in cash upon conversion, including partial settlements, in accordance with
ASC 470-20, Debt.See Note 12, Long-Term Debt.  4




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THORATEC CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (unaudited)
 (in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    Total
    
    
    TotalCommon
    
    
    Paid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Shareholders
    
    
    ComprehensiveShares
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    Equity
    
    
    Income (loss)BALANCE, DECEMBER 29, 2007, as previously
reported
    
    
    54,108
    
    
    $
    458,383
    
    
    $
    (61,577
    )
    
    $
    1,223
    
    
    $
    398,029Retrospective application of accounting for
convertible debt , net of taxes
    
    
    
    
    
    
    28,462
    
    
    
    (12,682
    )
    
    
    
    
    
    
    15,780BALANCE, DECEMBER 29, 2007, as adjusted (1)
    
    
    54,108
    
    
    
    486,845
    
    
    
    (74,259
    )
    
    
    1,223
    
    
    
    413,809Exercise of common stock options for cash
    
    
    1,484
    
    
    
    18,959
    
    
    
    
    
    
    
    
    
    
    
    18,959Issuance of common shares under Employee Stock
Purchase Plan
    
    
    77
    
    
    
    1,050
    
    
    
    
    
    
    
    
    
    
    
    1,050Repurchase of common shares, net
    
    
    375
    
    
    
    (637
    )
    
    
    (555
    )
    
    
    
    
    
    
    (1,192
    )Share-based compensation
    
    
    
    
    
    
    7,792
    
    
    
    
    
    
    
    
    
    
    
    7,792Tax
deduction related to employees and directors stock plans
    
    
    
    
    
    
    5,386
    
    
    
    
    
    
    
    
    
    
    
    5,386Comprehensive income (loss):Unrealized loss on available-for-sale
investments (net of taxes of $2,104)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,225
    )
    
    
    (4,225
    )
    
    $
    (4,225
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (837
    )
    
    
    (837
    )
    
    
    (837
    )Net income (1)
    
    
    
    
    
    
    
    
    
    
    13,004
    
    
    
    
    
    
    
    13,004
    
    
    
    13,004Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,942BALANCE, SEPTEMBER 27, 2008 (1)
    
    
    56,044
    
    
    $
    519,395
    
    
    $
    (61,810
    )
    
    $
    (3,839
    )
    
    $
    453,746BALANCE, JANUARY 3, 2009, as previously
reported
    
    
    56,395
    
    
    $
    500,195
    
    
    $
    (39,751
    )
    
    $
    (5,744
    )
    
    $
    454,700Retrospective application of accounting for
convertible debt , net of taxes
    
    
    
    
    
    
    28,462
    
    
    
    (16,883
    )
    
    
    
    
    
    
    11,579BALANCE, JANUARY 3, 2009, as adjusted (1)
    
    
    56,395
    
    
    
    528,657
    
    
    
    (56,634
    )
    
    
    (5,744
    )
    
    
    466,279Exercise of common stock options for cash
    
    
    463
    
    
    
    6,598
    
    
    
    
    
    
    
    
    
    
    
    6,598Issuance of common shares under Employee Stock
Purchase Plan
    
    
    76
    
    
    
    1,628
    
    
    
    
    
    
    
    
    
    
    
    1,628Tax deduction related to employees and
directors stock plans
    
    
    
    
    
    
    2,883
    
    
    
    
    
    
    
    
    
    
    
    2,883Repurchase and retirement of common shares, net
    
    
    (128
    )
    
    
    (1,146
    )
    
    
    (2,109
    )
    
    
    
    
    
    
    (3,255
    )Share-based compensation
    
    
    
    
    
    
    10,680
    
    
    
    
    
    
    
    
    
    
    
    10,680Comprehensive income (loss):Unrealized gain on available-for-sale
investments (net of taxes of $1,643)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,465
    
    
    
    2,465
    
    
    $
    2,465Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    871
    
    
    
    871
    
    
    
    871Net income
    
    
    
    
    
    
    
    
    
    
    19,237
    
    
    
    
    
    
    
    19,237
    
    
    
    19,237Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    22,573BALANCE, OCTOBER 3, 2009
    
    
    56,806
    
    
    $
    549,300
    
    
    $
    (39,506
    )
    
    $
    (2,408
    )
    
    $
    507,386
 
 (1)
    
    Adjusted for the retrospective adoption of the accounting for convertible debt instruments
that may be settled in cash upon conversion, including partial settlements, in accordance with
ASC 470-20, Debt.See Note 12, Long-Term Debt.  5




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THORATEC CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Nine Months EndedOctober 3,
    
    
    September 27,2009
    
    
    2008As adjusted (1)Cash flows from operating activities:Net income
    
    $
    19,237
    
    
    $
    13,004Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    16,441
    
    
    
    17,675Investment premium amortization, net
    
    
    2,099
    
    
    
    1,313Write-down of investment
    
    
    
    
    
    
    490Non-cash expenses, net
    
    
    1,836
    
    
    
    198Non-cash interest on convertible subordinated debt
    
    
    5,816
    
    
    
    5,376Mark-to-market
adjustment on  HeartWare International, Inc. (HeartWare)
conversion option
    
    
    (1,786
    )
    
    
    Recording of fair value of conversion option upon termination of the HeartWare merger
agreement
    
    
    (3,454
    )
    
    
    Tax benefit related to stock options
    
    
    2,885
    
    
    
    5,386Share-based compensation expense
    
    
    10,685
    
    
    
    7,967Excess tax benefits from share-based compensation
    
    
    (2,397
    )
    
    
    (3,598
    )Loss on disposal of assets
    
    
    146
    
    
    
    448Change in net deferred tax liability
    
    
    (3,528
    )
    
    
    (6,590
    )Changes in assets and liabilities:Receivables
    
    
    (3,456
    )
    
    
    (13,811
    )Inventories
    
    
    (14,825
    )
    
    
    (7,019
    )Prepaid expenses and other assets
    
    
    (5,412
    )
    
    
    322Accounts payable and other liabilities
    
    
    40
    
    
    
    12,114Accrued income taxes, net
    
    
    1,607
    
    
    
    (3,368
    )Net cash provided by operating activities
    
    
    25,934
    
    
    
    29,907Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (224,817
    )
    
    
    (143,797
    )Sales of available-for-sale investments
    
    
    97,577
    
    
    
    90,419Maturities of available-for-sale investments
    
    
    44,773
    
    
    
    52,742Restricted cash and cash equivalents
    
    
    (16,000
    )
    
    
    HeartWare
loan receivable
    
    
    (4,000
    )
    
    
    Purchases of property, plant and equipment
    
    
    (9,681
    )
    
    
    (6,876
    )Net cash (used in) investing activities
    
    
    (112,148
    )
    
    
    (7,512
    )Cash flows from financing activities:Excess tax benefits from share-based compensation
    
    
    2,397
    
    
    
    3,598Proceeds from stock option exercises
    
    
    6,598
    
    
    
    18,959Proceeds from stock issued under employee stock purchase plan
    
    
    1,628
    
    
    
    1,050Repurchase and retirement of common shares
    
    
    (3,255
    )
    
    
    (1,192
    )Net cash provided by financing activities
    
    
    7,368
    
    
    
    22,415Effect of exchange rate changes on cash and cash equivalents
    
    
    (207
    )
    
    
    (6
    )Net (decrease) increase in cash and cash equivalents
    
    
    (79,053
    )
    
    
    44,804Cash and cash equivalents at beginning of period
    
    
    107,053
    
    
    
    20,689Cash and cash equivalents at end of period
    
    $
    28,000
    
    
    $
    65,493Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    7,834
    
    
    $
    8,701Cash paid for interest
    
    $
    1,707
    
    
    $
    1,707Supplemental disclosure of non-cash investing and financing activities:Transfers of equipment from inventory
    
    $
    1,732
    
    
    $
    2,369Purchases of property, plant and equipment through accounts payable and other liabilities
    
    $
    1,682
    
    
    $
    1,184
 
 (1)
    
    Adjusted for the retrospective adoption of the accounting for convertible debt
instruments that may be settled in cash upon conversion, including partial settlements, in
accordance with ASC 470-20, Debt.See Note 12, Long-Term Debt.  6




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##### Table of Contents



THORATEC CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1. Operations and Significant Accounting Policies
 Basis of Presentation
 Debt.
  Subsequent
Events
 Revenue Recognition and Product Warranty
   7




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Three Months Ended
    
    
    Nine Months EndedOctober 3,
    
    
    September 27,
    
    
    October 3,
    
    
    September 27,2009
    
    
    2008
    
    
    2009
    
    
    2008(in thousands)Balance at beginning of period
    
    $
    1,762
    
    
    $
    1,367
    
    
    $
    1,071
    
    
    $
    1,006Accruals for warranties issued
    
    
    1,201
    
    
    
    281
    
    
    
    3,506
    
    
    
    1,170Settlements made
    
    
    (682
    )
    
    
    (682
    )
    
    
    (2,296
    )
    
    
    (1,210
    )Balance at end of period
    
    $
    2,281
    
    
    $
    966
    
    
    $
    2,281
    
    
    $
    966
 2. Recently Issued Accounting Standards
 Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB
Emerging Issues Task Force Revenue Recognition: Multiple-Element
Arrangements
 Software (Topic 985): Certain Revenue
Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task Force). Software: Revenue Recognition,
 Fair Value Measurements and Disclosures
(Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent) Fair Value Measurements and DisclosuresOverall
 8




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##### Table of Contents



Topic 105  Generally Accepted
Accounting Principles Generally
Accepted Accounting Principles
 Investments  Debt and Equity Securities
 Fair Value Measurements and Disclosures
 Business
Combinations Income Taxes
 Business
Combinations Contingencies
 9




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Risks and
Uncertainties Intangibles  Goodwill and
Other
 3. Cash and Cash Equivalents
  4. Investments in Available-for-Sale Securities
     GrossAmortized
    
    
    unrealized
    
    
    Faircost
    
    
    gains (losses)
    
    
    value(in thousands)October 3, 2009:Short-term investments:Municipal bonds, variable demand notes and corporate bonds
    
    $
    233,698
    
    
    $
    1,630
    
    
    $
    235,328Long-term investments:Auction rate securities
    
    $
    27,800
    
    
    $
    (3,180
    )
    
    $
    24,620January 3, 2009:Short-term investments:Municipal bonds
    
    $
    139,931
    
    
    $
    1,667
    
    
    $
    141,598Long-term investments:Auction rate securities
    
    $
    37,200
    
    
    $
    (7,241
    )
    
    $
    29,959
  10




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5. Long-Term Restricted Cash and Cash Equivalents
   6. Fair Value Measurements
 Fair Value Measurements and Disclosure.
 11




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##### Table of Contents



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.
  October 3, 2009Assets and
    
    
    
    
    
    
    
    
    
    
    Significantliabilities
    
    
    
    
    
    
    Quoted prices in
    
    
    Other
    
    
    Significantat carrying
    
    
    Total
    
    
    active markets for
    
    
    observable
    
    
    unobservablevalue
    
    
    fair value
    
    
    identical assets
    
    
    inputs
    
    
    inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(in thousands)AssetsShort-term investments  municipal bonds,
variable demand notes and corporate bonds
    
    $
    235,328
    
    
    $
    235,328
    
    
    $
    
    
    
    $
    235,328
    
    
    $
    Long-term investments  auction rate securities
    
    
    24,620
    
    
    
    24,620
    
    
    
    
    
    
    
    
    
    
    
    24,620Mark to market on foreign exchange instruments
(Note 7)
    
    
    70
    
    
    
    70
    
    
    
    
    
    
    
    70
    
    
    
    Convertible debenture with Levitronix LLC
(disclosure only)
    
    
    5,792
    
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    6,000HeartWare loan receivable (Note 11)
(disclosure only)
    
    
    4,000
    
    
    
    4,174
    
    
    
    
    
    
    
    
    
    
    
    4,174Conversion option on HeartWare loan agreement
(Note 11)
    
    
    5,240
    
    
    
    5,240
    
    
    
    
    
    
    
    
    
    
    
    5,240LiabilitiesMake-whole provision (Note 12)
    
    
    31
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    31Senior subordinated convertible notes (fair
value for purposes of disclosure in Note 12)
    
    
    129,932
    
    
    
    224,540
    
    
    
    
    
    
    
    224,540
    
    
    
    
 January 3, 2009Assets and
    
    
    
    
    
    
    
    
    
    
    Significantliabilities at
    
    
    
    
    
    
    Quoted prices in
    
    
    Other
    
    
    Significantcarrying
    
    
    Total
    
    
    active markets for
    
    
    observable
    
    
    unobservablevalue
    
    
    fair value
    
    
    identical assets
    
    
    inputs
    
    
    inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(in thousands)AssetsShort-term investments  municipal bonds
    
    $
    141,598
    
    
    $
    141,598
    
    
    $
    
    
    
    $
    141,598
    
    
    $
    Long-term investments  auction rate securities
    
    
    29,959
    
    
    
    29,959
    
    
    
    
    
    
    
    
    
    
    
    29,959Convertible debenture with Levitronix LLC
(disclosure only)
    
    
    5,711
    
    
    
    4,200
    
    
    
    
    
    
    
    
    
    
    
    4,200LiabilitiesMark to market on foreign exchange instruments
(Note 7)
    
    
    73
    
    
    
    73
    
    
    
    
    
    
    
    73
    
    
    
    Make-whole provision (Note 12)
    
    
    46
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    46Senior subordinated convertible notes (fair
value for purposes of disclosure in Note 12)
    
    
    124,115
    
    
    
    215,880
    
    
    
    
    
    
    
    215,880
    
    
    
    
 12




---



##### Table of Contents



Fair Value Measurement Using SignificantUnobservable Inputs (Level 3)Fair ValueUnobservableInputs(Level 3)
    
    
    Assets
    
    
    Liabilities(in thousands)Balance at January 3, 2009
    
    $
    29,959
    
    
    $
    
    
    
    $
    46Settlement at par
    
    
    (100
    )
    
    
    
    
    
    
    Unrealized holding loss on make-whole provision, included in interest income and other
    
    
    
    
    
    
    
    
    
    
    25Unrealized holding gain on auction rate securities, included in other comprehensive income
    
    
    69
    
    
    
    
    
    
    
    Balance at April 4, 2009
    
    $
    29,928
    
    
    $
    
    
    
    $
    71Settlements at par
    
    
    (9,300
    )
    
    
    
    
    
    
    Unrealized holding gain on make-whole provision, included in interest income and other
    
    
    
    
    
    
    
    
    
    
    (20
    )Unrealized holding gain on auction rate securities, included in other comprehensive income
    
    
    4,054
    
    
    
    
    
    
    
    Balance at July 4, 2009
    
    $
    24,682
    
    
    $
    
    
    
    $
    51Unrealized holding gain on make-whole provision, included in interest income and other
    
    
    
    
    
    
    
    
    
    
    (20
    )Recording of fair value of conversion option upon termination of
the HeartWare merger agreement (Note 11)
    
    
    
    
    
    
    3,454
    
    
    
    Mark-to-market adjustment on conversion option for Heartware loan agrement (Note 11)
    
    
    
    
    
    
    1,786
    
    
    
    Unrealized holding loss on auction rate securities, included in other comprehensive income
    
    
    (62
    )
    
    
    
    
    
    
    Balance at October 3, 2009
    
    $
    24,620
    
    
    $
    5,240
    
    
    $
    31
   13




---



##### Table of Contents



7. Foreign Exchange Instruments
  Derivatives and
Hedging
 Notional AmountsOctober 3,
    
    
    September 27,2009
    
    
    2008(in thousands)Purchases
    
    $
    8,816
    
    
    $
    8,570Sales
    
    
    13,900
    
    
    
    9,461
  
  Three Months Ended
    
    
    Nine Months EndedOctober 3,
    
    
    September 27,
    
    
    October 3,
    
    
    September 27,2009
    
    
    2008
    
    
    2009
    
    
    2008(in thousands)Foreign
currency exchange
(loss) gain on
foreign currency
contracts
    
    $
    (803
    )
    
    $
    325
    
    
    $
    132
    
    
    $
    (822
    )Foreign currency
exchange gain
(loss) on foreign
translation
adjustments
    
    
    1,042
    
    
    
    (303
    )
    
    
    (406
    )
    
    
    928
 14




---



##### Table of Contents



8. Inventories
  October 3,
    
    
    January 3,2009
    
    
    2009(in thousands)Finished goods
    
    $
    24,008
    
    
    $
    24,373Work in process
    
    
    11,011
    
    
    
    9,174Raw materials
    
    
    39,740
    
    
    
    27,826Total
    
    $
    74,759
    
    
    $
    61,373
 9. Property, Plant and Equipment, net
  October 3,
    
    
    January 3,2009
    
    
    2009(in thousands)Land, building and improvements
    
    $
    16,135
    
    
    $
    16,135Equipment and capitalized software
    
    
    72,101
    
    
    
    68,029Furniture and leasehold improvements
    
    
    30,986
    
    
    
    27,424Total
    
    
    119,222
    
    
    
    111,588Less accumulated depreciation
    
    
    (67,760
    )
    
    
    (61,450
    )Total
    
    $
    51,462
    
    
    $
    50,138
  10. Goodwill and Purchased Intangible Assets
   October 3, 2009
    
    
    January 3, 2009(in thousands)Balance at the beginning of the fiscal period
    
    $
    99,287
    
    
    $
    98,368Adjustment for the acquisition related to the Cardiovascular division
    
    
    
    
    
    
    919Balance at the end of the fiscal period
    
    $
    99,287
    
    
    $
    99,287
  15




---



##### Table of Contents



October 3, 2009Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount(in thousands)Patents and trademarks
    
    $
    38,515
    
    
    $
    (29,771
    )
    
    $
    8,744Core technology
    
    
    37,485
    
    
    
    (15,243
    )
    
    
    22,242Developed technology
    
    
    125,742
    
    
    
    (56,610
    )
    
    
    69,132Customer and distributor relationships and other
    
    
    897
    
    
    
    (498
    )
    
    
    399Total purchased intangible assets
    
    $
    202,639
    
    
    $
    (102,122
    )
    
    $
    100,517
 January 3, 2009Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount(in thousands)Patents and trademarks
    
    $
    38,515
    
    
    $
    (28,803
    )
    
    $
    9,712Core technology
    
    
    37,485
    
    
    
    (13,765
    )
    
    
    23,720Developed technology
    
    
    125,742
    
    
    
    (51,098
    )
    
    
    74,644Customer and distributor relationships and other
    
    
    897
    
    
    
    (389
    )
    
    
    508Total purchased intangible assets
    
    $
    202,639
    
    
    $
    (94,055
    )
    
    $
    108,584
  11. Other Assets
 HeartWare Loan Agreement
   16




---



##### Table of Contents



Derivatives and Hedging
    Levitronix Convertible Debenture:
   17




---



##### Table of Contents



12. Long-Term Debt
      Debt
 18




---



##### Table of Contents




    
    The Companys estimated non-convertible borrowing rate as of May 16, 2004  the date the
senior subordinated convertible notes were issued;
    
    The amount and timing of cash flows; and
    
    The expected life.
   Three Months Ended October 3, 2009
    
    
    Nine Months Ended October 3, 2009Incremental
    
    
    
    
    
    
    
    
    
    
    IncrementalExcluding
    
    
    impact
    
    
    
    
    
    
    Excluding
    
    
    impactimpact of
    
    
    of adoption of
    
    
    
    
    
    
    impact of
    
    
    of adoption ofASC 470-20
    
    
    ASC 470-20
    
    
    As reported
    
    
    ASC 470-20
    
    
    ASC 470-20
    
    
    As reported(in thousands, except per share amounts)Net income before
interest and
amortization expense
(net of tax)
    
    $
    13,553
    
    
    
    
    
    
    $
    13,553
    
    
    $
    24,325
    
    
    
    
    
    
    $
    24,325Interest and
amortization expense
(net of tax):Interest expense
    
    
    (853
    )
    
    $
    (1,996
    )
    
    
    (2,849
    )
    
    
    (2,559
    )
    
    $
    (5,816
    )
    
    
    (8,375
    )Amortization of
debt issuance costs
    
    
    (155
    )
    
    
    52
    
    
    
    (103
    )
    
    
    (465
    )
    
    
    156
    
    
    
    (309
    )Income tax benefit
    
    
    398
    
    
    
    778
    
    
    
    1,176
    
    
    
    1,194
    
    
    
    2,402
    
    
    
    3,596Impact on net income
    
    
    (610
    )
    
    $
    (1,166
    )
    
    
    (1,776
    )
    
    
    (1,830
    )
    
    $
    (3,258
    )
    
    
    (5,088
    )Net income
    
    $
    12,943
    
    
    
    
    
    
    $
    11,777
    
    
    $
    22,495
    
    
    
    
    
    
    $
    19,237Net income per share:Basic
    
    $
    0.23
    
    
    
    
    
    
    $
    0.21
    
    
    $
    0.40
    
    
    
    
    
    
    $
    0.34Diluted
    
    $
    0.21
    
    
    
    
    
    
    $
    0.20
    
    
    $
    0.37
    
    
    
    
    
    
    $
    0.33Shares used to
compute net income
per shareBasic
    
    
    56,683
    
    
    
    
    
    
    
    56,683
    
    
    
    56,511
    
    
    
    
    
    
    
    56,511Diluted
    
    
    65,296
    
    
    
    
    
    
    
    58,006
    
    
    
    65,149
    
    
    
    
    
    
    
    57,859
 19




---



##### Table of Contents



Three Months Ended September 27, 2008
    
    
    Nine Months Ended September 27, 2008Incremental
    
    
    
    
    
    
    
    
    
    
    IncrementalExcluding
    
    
    impact
    
    
    
    
    
    
    Excluding
    
    
    impactimpact of
    
    
    of adoption of
    
    
    
    
    
    
    impact of
    
    
    of adoption ofASC 470-20

    
    
    ASC 470-20
    
    
    As reported
    
    
    ASC 470-20
    
    
    ASC 470-20
    
    
    As reported(in thousands, except per share amounts)Net income before
interest and
amortization expense
(net of tax)
    
    $
    7,792
    
    
    
    
    
    
    $
    7,792
    
    
    $
    18,012
    
    
    
    
    
    
    $
    18,012Interest and
amortization expense
(net of tax):Interest expense
    
    
    (853
    )
    
    $
    (1,878
    )
    
    
    (2,731
    )
    
    
    (2,559
    )
    
    $
    (5,376
    )
    
    
    (7,935
    )Amortization of
debt issuance costs
    
    
    (155
    )
    
    
    53
    
    
    
    (102
    )
    
    
    (465
    )
    
    
    157
    
    
    
    (308
    )Income tax benefit
    
    
    398
    
    
    
    701
    
    
    
    1,099
    
    
    
    1,194
    
    
    
    2,041
    
    
    
    3,235Impact on net income
    
    
    (610
    )
    
    $
    (1,124
    )
    
    
    (1,734
    )
    
    
    (1,830
    )
    
    $
    (3,178
    )
    
    
    (5,008
    )Net income
    
    $
    7,182
    
    
    
    
    
    
    $
    6,058
    
    
    $
    16,182
    
    
    
    
    
    
    $
    13,004Net income per share:Basic
    
    $
    0.13
    
    
    
    
    
    
    $
    0.11
    
    
    $
    0.30
    
    
    
    
    
    
    $
    0.24Diluted
    
    $
    0.12
    
    
    
    
    
    
    $
    0.11
    
    
    $
    0.28
    
    
    
    
    
    
    $
    0.23Shares used to compute
net income per
shareBasic
    
    
    55,328
    
    
    
    
    
    
    
    55,328
    
    
    
    54,702
    
    
    
    
    
    
    
    54,702Diluted
    
    
    63,993
    
    
    
    
    
    
    
    56,703
    
    
    
    62,979
    
    
    
    
    
    
    
    55,689
  Net Increase (Decrease)AdditionalLong-term
    
    
    Debt issuance
    
    
    Deferred tax
    
    
    paid-indebt
    
    
    Costs
    
    
    liability
    
    
    capital
    
    
    Deficit(in thousands)Allocation of long-term debt proceeds and
issuance costs to equity component on issuance date
    
    $
    (48,508
    )
    
    $
    (1,462
    )
    
    $
    18,584
    
    
    $
    28,462
    
    
    $
    Cumulative retrospective impact from amortization of
discount on liability component and debt issuance
costs
    
    
    21,718
    
    
    
    754
    
    
    
    (8,282
    )
    
    
    
    
    
    
    12,682Cumulative retrospective impact as of December 29,
2007
    
    
    (26,790
    )
    
    
    (708
    )
    
    
    10,302
    
    
    
    28,462
    
    
    
    12,682Retrospective impact from amortization of discount
on liability component and debt issuance costs
during the period
    
    
    7,155
    
    
    
    209
    
    
    
    (2,745
    )
    
    
    
    
    
    
    4,201Cumulative retrospective impact as of January 3, 2009
    
    $
    (19,635
    )
    
    $
    (499
    )
    
    $
    7,557
    
    
    $
    28,462
    
    
    $
    16,883
 AdditionalLong-term
    
    
    Debt issuance
    
    
    Deferred tax
    
    
    paid-indebt
    
    
    costs
    
    
    liability
    
    
    capital
    
    
    Deficit(in thousands)January 3, 2009, balance as previously reported
    
    $
    143,750
    
    
    $
    1,475
    
    
    $
    31,285
    
    
    $
    500,195
    
    
    $
    39,751Cumulative retrospective impact as of January 3, 2009
    
    
    (19,635
    )
    
    
    (499
    )
    
    
    7,557
    
    
    
    28,462
    
    
    
    16,883January 3, 2009, as adjusted
    
    $
    124,115
    
    
    $
    976
    
    
    $
    38,842
    
    
    $
    528,657
    
    
    $
    56,634
 20




---



##### Table of Contents



October 3, 2009
    
    
    January 3, 2009(in thousands)Long-term debtPrincipal amount
    
    $
    143,750
    
    
    $
    143,750Unamortized discount
    
    
    (13,818
    )
    
    
    (19,635
    )Net carrying amount
    
    $
    129,932
    
    
    $
    124,115Equity component, net of income tax benefit
    
    $
    28,462
    
    
    $
    28,462
   13. Share-Based Compensation
   Three Months Ended
    
    
    Nine Months EndedOctober 3,
    
    
    September 27,
    
    
    October 3,
    
    
    September 27,2009
    
    
    2008
    
    
    2009
    
    
    2008(in thousands)Cost of product sales
    
    $
    515
    
    
    $
    371
    
    
    $
    1,535
    
    
    $
    1,284Selling, general and administrative
    
    
    1,993
    
    
    
    1,511
    
    
    
    6,459
    
    
    
    4,747Research and development
    
    
    792
    
    
    
    593
    
    
    
    2,691
    
    
    
    1,936Total share-based compensation expense before taxes
    
    
    3,300
    
    
    
    2,475
    
    
    
    10,685
    
    
    
    7,967Tax benefit for share-based compensation expense
    
    
    1,159
    
    
    
    1,124
    
    
    
    3,219
    
    
    
    2,919Total share-based compensation (net of taxes)
    
    $
    2,141
    
    
    $
    1,351
    
    
    $
    7,466
    
    
    $
    5,048
   21




---



##### Table of Contents



Equity Plan
  Stock Options
   Three Months Ended
    
    Nine Months EndedOctober 3, 2009
    
    September 27, 2008
    
    October 3, 2009
    
    September 27, 2008Risk-free interest rate (weighted average)
    
    
    3.08
    %
    
    
    3.12
    %
    
    
    2.34
    %
    
    
    3.25
    %Expected volatility
    
    
    53
    %
    
    
    40
    %
    
    
    53
    %
    
    
    40
    %Expected option term (years)
    
    
    4.90 to 6.03
    
    
    
    4.89 to 6.07
    
    
    
    4.91 to 6.02
    
    
    
    5.08 to 6.07Dividends
    
    None
    
    None
    
    None
    
    None
   22




---



##### Table of Contents



Weighted AverageNumber of
    
    
    Weighted
    
    
    RemainingOptions
    
    
    Average Exercise
    
    
    Contractual(in thousands)
    
    
    Price Per Share
    
    
    Term (years)Outstanding options at January 3, 2009
    
    
    4,259
    
    
    $
    16.37
    
    
    
    5.98Granted
    
    
    344
    
    
    
    24.01Exercised
    
    
    (463
    )
    
    
    14.26Forfeited or expired
    
    
    (84
    )
    
    
    23.27Outstanding options at October 3, 2009
    
    
    4,056
    
    
    $
    17.11
    
    
    
    5.77Outstanding options exercisable at October 3, 2009
    
    
    2,841
    
    
    $
    15.99
    
    
    
    4.86Outstanding options vested at October 3, 2009 and
expected to vest
    
    
    3,936
    
    
    $
    17.02
    
    
    
    5.69
  Restricted Stock
    Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair(in thousands)
    
    
    ValueOutstanding unvested
restricted stock awards at January
3, 2009
    
    
    983
    
    
    $
    16.83Granted
    
    
    
    
    
    
    Vested
    
    
    (313
    )
    
    
    17.07Forfeited or expired
    
    
    (39
    )
    
    
    17.32Outstanding unvested restricted
stock awards at October 3, 2009
    
    
    631
    
    
    $
    16.68
 23




---



##### Table of Contents



Restricted Stock Units
   Number of
    
    
    Weighted Average
    
    
    Weighted AverageUnits
    
    
    Grant Date Fair
    
    
    Remaining Contractual(in thousands)
    
    
    Value
    
    
    Term (in years)Outstanding units at January 3, 2009
    
    
    28
    
    
    $
    16.66
    
    
    
    2.46Granted
    
    
    482
    
    
    
    24.49Released
    
    
    (40
    )
    
    
    23.91Forfeited or expired
    
    
    (11
    )
    
    
    23.93Outstanding units at October 3, 2009
    
    
    459
    
    
    $
    24.09
    
    
    
    3.36
 Employee Stock Purchase Plan
   Risk-free interest rate
    
    
    0.31
    %Expected volatility
    
    
    55
    %Expected option life
    
    0.50 yearsDividends
    
    None
  14. Income Taxes
   24




---



##### Table of Contents



15. Net Income Per Share
  Three Months Ended
    
    
    Nine Months EndedOctober 3,
    
    
    September 27,
    
    
    October 3,
    
    
    September 27,2009
    
    
    2008
    
    
    2009
    
    
    2008(in thousands, except per share data)Net income for basic and diluted share calculation
    
    $
    11,777
    
    
    $
    6,058
    
    
    $
    19,237
    
    
    $
    13,004Weighted average number of common shares-basic
    
    
    56,683
    
    
    
    55,328
    
    
    
    56,511
    
    
    
    54,702Dilutive effect of stock-based compensation plans
    
    
    1,323
    
    
    
    1,375
    
    
    
    1,348
    
    
    
    987Weighted average number of common shares-diluted
    
    
    58,006
    
    
    
    56,703
    
    
    
    57,859
    
    
    
    55,689Net income per common share:Basic
    
    $
    0.21
    
    
    $
    0.11
    
    
    $
    0.34
    
    
    $
    0.24Diluted
    
    $
    0.20
    
    
    $
    0.11
    
    
    $
    0.33
    
    
    $
    0.23
  Three Months Ended
    
    Nine Months EndedOctober 3,
    
    September 27,
    
    October 3,
    
    September 27,2009
    
    2008
    
    2009
    
    2008(in thousands)Options to purchase
shares not included
in the computation
of diluted income
per share because
their inclusion
would be
antidilutive
    
    
    333
    
    
    
    506
    
    
    
    280
    
    
    
    2,131
  25




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##### Table of Contents



16. Enterprise and Related Geographic Information
   Three Months Ended
    
    
    Nine Months EndedOctober 3,
    
    
    September 27,
    
    
    October 3,
    
    
    September 27,2009
    
    
    2008
    
    
    2009
    
    
    2008(in thousands)Product sales:Cardiovascular
    
    $
    65,114
    
    
    $
    57,091
    
    
    $
    198,964
    
    
    $
    154,818ITC
    
    
    22,803
    
    
    
    23,724
    
    
    
    70,478
    
    
    
    73,072Total product sales
    
    $
    87,917
    
    
    $
    80,815
    
    
    $
    269,442
    
    
    $
    227,890Income (loss) before income taxes and other:Cardiovascular (a)(c)
    
    $
    19,264
    
    
    $
    11,647
    
    
    $
    54,850
    
    
    $
    26,871ITC(a)(c)
    
    
    (602
    )
    
    
    793
    
    
    
    (3,865
    )
    
    
    2,870Corporate (b)(c)
    
    
    (5,074
    )
    
    
    (4,253
    )
    
    
    (23,857
    )
    
    
    (11,337
    )Income from operations
    
    
    13,588
    
    
    
    8,187
    
    
    
    27,128
    
    
    
    18,404Other income and (expense):Interest expense (b)
    
    
    (3,261
    )
    
    
    (2,834
    )
    
    
    (9,167
    )
    
    
    (8,249
    )Interest income and other (b)
    
    
    7,134
    
    
    
    2,183
    
    
    
    9,759
    
    
    
    6,642Income before income taxes
    
    $
    17,461
    
    
    $
    7,536
    
    
    $
    27,720
    
    
    $
    16,797
 October 3,
    
    
    January 3,2009
    
    
    2009(in thousands)Total assets:Cardiovascular
    
    $
    343,770
    
    
    $
    321,605ITC
    
    
    59,147
    
    
    
    61,552Corporate (b)
    
    
    327,289
    
    
    
    300,928Total assets
    
    $
    730,206
    
    
    $
    684,085
 
 (a)
    
    The Cardiovascular segment includes amortization expense on purchased intangible assets of
$2.4 million and $7.5 million for the three and nine months ended October 3, 2009,
respectively, and $3.1 million and $9.3 million for the
three and nine months ended September
27, 2008, respectively. The ITC segment also includes amortization expense of $0.2 million and
$0.6 million for the three and nine months ended October 3, 2009, respectively, and $0.2
million and $0.6 million for the three and nine months ended September 27, 2008, respectively.(b)
    
    Represents unallocated costs or assets, not specifically identified to any particular
business segment.(c)
    
    Includes share-based compensation expense of $1.9 million, $1.0 million and $0.4 million for
Cardiovascular, ITC and Corporate, respectively, for the three months ended October 3, 2009
and $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 share-based compensation
expense of $6.1 million, $3.1 million and $1.5 million for Cardiovascular, ITC and Corporate,
respectively, for the nine months ended October 3, 2009; and $4.7 million, $2.1 million and
$1.2 million for Cardiovascular, ITC and Corporate, respectively, for the nine months ended
September 27, 2008. 26




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedOctober 3, 2009
    
    
    September 27, 2008
    
    
    October 3, 2009
    
    
    September 27, 2008(in thousands)Domestic
    
    $
    66,297
    
    
    $
    61,674
    
    
    $
    203,448
    
    
    $
    167,731International
    
    
    21,620
    
    
    
    19,141
    
    
    
    65,994
    
    
    
    60,159Total product sales
    
    $
    87,917
    
    
    $
    80,815
    
    
    $
    269,442
    
    
    $
    227,890
 27




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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 2008 Annual Report on Form 10-K (the 2008 Annual Report), the Risk Factors section of
our first quarter 2009 Quarterly Report on Form 10-Q (Q1 2009 Quarterly 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
     28




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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
   29




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##### Table of Contents



The Implantable Ventricular Assist Device
  The HeartMate XVE
  The HeartMate II
  The CentriMag
  Vascular Graft Products
  30




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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
   31




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##### Table of Contents



Incision Products
   Critical Accounting Policies and Estimates
  Revenue Recognition
    Reserves
   32




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##### Table of Contents



Income Taxes
    Evaluation of Purchased Intangibles and Goodwill for Impairment
   33




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##### Table of Contents



Valuation of Share-Based Awards
  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. 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 primarily include municipal
bonds, variable demand notes, corporate bonds and our senior subordinated convertible
notes, except the make-whole provision, which uses Level 3 inputs, described below.
    
    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, our HeartWare Loan
Agreement 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.
   34




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    
    Nine Months EndedOctober 3, 2009
    
    
    September 27, 2008
    
    
    October 3, 2009
    
    
    September 27, 2008(in thousand, except percentages)As adjusted (1)
    
    
    
    
    
    
    
    
    
    
    As adjusted (1)Product sales
    
    $
    87,917
    
    
    
    100
    %
    
    $
    80,815
    
    
    
    100
    %
    
    $
    269,442
    
    
    
    100
    %
    
    $
    227,890
    
    
    
    100
    %Cost of product sales
    
    
    34,185
    
    
    
    39
    
    
    
    32,045
    
    
    
    40
    
    
    
    110,928
    
    
    
    41
    
    
    
    92,460
    
    
    
    41Gross profit
    
    
    53,732
    
    
    
    61
    
    
    
    48,770
    
    
    
    60
    
    
    
    158,514
    
    
    
    59
    
    
    
    135,430
    
    
    
    59Operating expenses:Selling, general and
administrative
    
    
    24,226
    
    
    
    28
    
    
    
    23,845
    
    
    
    29
    
    
    
    82,457
    
    
    
    31
    
    
    
    68,338
    
    
    
    30Research and development
    
    
    13,350
    
    
    
    15
    
    
    
    13,443
    
    
    
    17
    
    
    
    40,862
    
    
    
    15
    
    
    
    38,801
    
    
    
    17Amortization of
purchased intangible
assets
    
    
    2,568
    
    
    
    3
    
    
    
    3,295
    
    
    
    4
    
    
    
    8,067
    
    
    
    3
    
    
    
    9,887
    
    
    
    4Total operating expenses
    
    
    40,144
    
    
    
    46
    
    
    
    40,583
    
    
    
    50
    
    
    
    131,386
    
    
    
    49
    
    
    
    117,026
    
    
    
    51Income from operations
    
    
    13,588
    
    
    
    15
    
    
    
    8,187
    
    
    
    10
    
    
    
    27,128
    
    
    
    10
    
    
    
    18,404
    
    
    
    8Other income and (expense):Interest expense and other
    
    
    (3,261
    )
    
    
    (4
    )
    
    
    (2,834
    )
    
    
    (3
    )
    
    
    (9,167
    )
    
    
    (4
    )
    
    
    (8,249
    )
    
    
    (4
    )Interest income and other
    
    
    7,134
    
    
    
    8
    
    
    
    2,183
    
    
    
    3
    
    
    
    9,759
    
    
    
    4
    
    
    
    6,642
    
    
    
    3Income before income taxes
    
    
    17,461
    
    
    
    19
    
    
    
    7,536
    
    
    
    10
    
    
    
    27,720
    
    
    
    10
    
    
    
    16,797
    
    
    
    7Income tax expense
    
    
    (5,684
    )
    
    
    (6
    )
    
    
    (1,478
    )
    
    
    (2
    )
    
    
    (8,483
    )
    
    
    (3
    )
    
    
    (3,793
    )
    
    
    (2
    )Net income
    
    $
    11,777
    
    
    
    13
    
    
    $
    6,058
    
    
    
    8
    
    
    $
    19,237
    
    
    
    7
    
    
    $
    13,004
    
    
    
    5
 
 (1)
    
    Adjusted for the retrospective adoption of the accounting for convertible debt instruments
that may be settled in cash upon conversion, including partial settlements, in accordance with
ASC 470-20, Debt.See Note 12, Long-Term Debt to our unaudited condensed consolidated
financial statements.  35




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##### Table of Contents



Three and nine months ended October 3, 2009 and September 27, 2008
 Product Sales
  Three Months Ended
    
    
    Nine Months EndedOctober 3,
    
    
    September 27,
    
    
    
    
    
    
    October 3,
    
    
    September 27,2009
    
    
    2008
    
    
    % Change
    
    
    2009
    
    
    2008
    
    
    % Change(in thousands)
    
    
    
    
    
    
    (in thousands)Cardiovascular
    
    $
    65,114
    
    
    $
    57,091
    
    
    
    14.0
    
    
    $
    198,964
    
    
    $
    154,818
    
    
    
    28.5ITC
    
    
    22,803
    
    
    
    23,724
    
    
    
    3.9
    
    
    
    70,478
    
    
    
    73,072
    
    
    
    3.5Total product sales
    
    $
    87,917
    
    
    $
    80,815
    
    
    
    8.8
    
    
    $
    269,442
    
    
    $
    227,890
    
    
    
    18.2
    Gross Profit
  Three Months Ended
    
    
    Nine Months EndedOctober 3,
    
    
    September 27,
    
    
    October 3,
    
    
    September 27,2009
    
    
    2008
    
    
    2009
    
    
    2008(in thousands, except percentages)Total gross profit
    
    $
    53,732
    
    
    $
    48,770
    
    
    
    158,514
    
    
    $
    135,430Total gross margin
    
    
    61.1
    %
    
    
    60.3
    %
    
    
    58.8
    %
    
    
    59.4
    %
  36




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##### Table of Contents



Selling, General and Administrative
  Three Months Ended
    
    
    Nine Months EndedOctober 3,
    
    
    September 27,
    
    
    %
    
    
    October 3,
    
    
    September 27,
    
    
    %2009
    
    
    2008
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    Change(in thousands)
    
    
    
    
    
    
    (in thousands)Total selling,
general and
administration
    
    $
    24,226
    
    
    $
    23,845
    
    
    
    1.6
    
    
    $
    82,457
    
    
    $
    68,338
    
    
    
    20.7
   Research and Development
  Three Months Ended
    
    
    Nine Months EndedOctober 3,
    
    
    September 27,
    
    
    %
    
    
    October 3,
    
    
    September 27,
    
    
    %2009
    
    
    2008
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    Change(in thousands)
    
    
    
    
    
    
    (in thousands)Total research and
development costs
    
    $
    13,350
    
    
    $
    13,443
    
    
    
    0.1
    
    
    $
    40,862
    
    
    $
    38,801
    
    
    
    5.3
    37




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##### Table of Contents



Amortization of Purchased Intangible Assets
  Interest Expense and Other
  Three Months Ended
    
    
    Nine Months EndedOctober 3,
    
    
    September 27,
    
    
    
    
    
    October 3,
    
    
    September 27,2009
    
    
    2008
    
    
    % Change

    
    
    2009
    
    
    2008
    
    
    % Change(in thousands)
    
    
    
    
    
    
    (in thousands)Interest expense
    
    $
    3,158
    
    
    $
    2,732
    
    
    
    15.6
    
    
    $
    8,858
    
    
    $
    7,941
    
    
    
    11.5Amortization of debt
issuance costs
related to senior
subordinated
convertible notes
    
    
    103
    
    
    
    102
    
    
    
    
    
    
    
    309
    
    
    
    308
    
    
    
    Total interest expense
    
    $
    3,261
    
    
    $
    2,834
    
    
    
    15.1
    
    
    $
    9,167
    
    
    $
    8,249
    
    
    
    11.1
  Interest Income and Other
  Three Months Ended
    
    
    Nine Months EndedOctober 3,
    
    
    September 27,
    
    
    
    
    
    October 3,
    
    
    September 27,2009
    
    
    2008
    
    
 % Change

    
    
    2009
    
    
    2008
    
    
 % Change(in thousands)
    
    
    
    
    
    
    (in thousands)Interest income
    
    $
    1,561
    
    
    $
    1,954
    
    
    
    20.1
    
    
    $
    4,284
    
    
    $
    6,203
    
    
    
    30.9Foreign currency, net
    
    
    239
    
    
    
    22
    
    
    
    986.4
    
    
    
    (274
    )
    
    
    106
    
    
    
    358.5Recording of conversion option
upon termination on merger
agreement
    
    
    3,454
    
    
    
    
    
    
    
    
    
    
    
    3,454
    
    
    
    
    
    
    
    Mark-to-market adjustment on
HearWare conversion option
    
    
    1,786
    
    
    
    
    
    
    
    
    
    
    
    1,786
    
    
    
    
    
    
    
    Other
    
    
    94
    
    
    
    207
    
    
    
    54.6
    
    
    
    509
    
    
    
    333
    
    
    
    52.8Total interest income and other
    
    $
    7,134
    
    
    $
    2,183
    
    
    
    226.8
    
    
    $
    9,759
    
    
    $
    6,642
    
    
    
    46.9
   38




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##### Table of Contents



Income Taxes
    Liquidity and Capital Resources
 Cash, Cash Equivalents and Investments
   39




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##### Table of Contents



October 3,
    
    
    January 3,2009
    
    
    2009(in thousands)Cash and cash equivalents
    
    $
    28,000
    
    
    $
    107,053Short-term investments
    
    
    235,328
    
    
    
    141,598Long-term restricted cash and cash equivalents
    
    
    16,000
    
    
    
    Long-term investments
    
    
    24,620
    
    
    
    29,959Total cash, cash equivalents and investments
    
    $
    303,948
    
    
    $
    278,610
    40




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##### Table of Contents



Long-term obligation
  Cash Flow Activities
  October 3,
    
    
    September 27,2009
    
    
    2008(in thousands)Net cash provided by operating activities
    
    $
    25,934
    
    
    $
    29,907Net cash (used in) investing activities
    
    
    (112,148
    )
    
    
    (7,512
    )Net cash provided by financing activities
    
    
    7,368
    
    
    
    22,415Effect of exchange rate changes on cash and cash equivalents
    
    
    (207
    )
    
    
    (6
    )Net (decrease) increase in cash and cash equivalents
    
    $
    (79,053
    )
    
    $
    44,804
 Cash Provided by Operating Activities
  Cash Used in Investing Activities
  Cash Provided by Financing Activities
  41




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##### Table of Contents



Off Balance Sheet Arrangements
  Contractual Obligations
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
 Interest Rate Risk
  Foreign Currency Rate Fluctuations
   
 42




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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
  43




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
  44




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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)July 5, 2009 through August 1, 2009
    
    
    2.3
    
    
    $
    25.34
    
    
    
    
    
    
    $
    August 2, 2009 through August 29, 2009
    
    
    1.9
    
    
    
    26.80
    
    
    
    
    
    
    
    August 30 through October 3, 2009
    
    
    1.7
    
    
    
    28.26
    
    
    
    
    
    
    
    Total
    
    
    5.9
    
    
    $
    26.62
    
    
    
    
    
    
    $
    
 
 (1)
    
    Our share repurchase programs, which authorized us to repurchase up to a total of $130
million of our common shares, were announced on February 11, 2004 as a $25 million program, on
May 12, 2004 as a $60 million program, on July 29, 2004 as a $25 million program and on
February 2, 2006 as a $20 million program. These programs authorize us to acquire shares in
the open market or in privately negotiated transactions and do not have an expiration date. No
shares were repurchased under these programs during the three months
ended October 3, 2009. As of
October 3, 2009, we have $10.1 million remaining under our share repurchase programs.(2)
    
    Shares purchased that were not part of our publicly announced repurchase programs represent
the surrender value of shares of restricted stock awards and restricted stock units 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. 45




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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.
 46




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##### Table of Contents



SIGNATURES
  THORATEC CORPORATIONDate: November 12, 2009
    /s/ Gerhard F. BurbachGerhard F. BurbachChief Executive OfficerDate: November 12, 2009
    /s/ David V. SmithDavid V. SmithExecutive Vice President,
Chief Financial Officer (Principal Accounting Officer) 47