##### 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 1934For the quarterly period ended April 3, 2010
 or
 o
    
    Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934For 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
(Do not check if smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



THORATEC CORPORATION
 TABLE OF CONTENTS
 Part I. Financial InformationItem 1. Unaudited Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of April 3, 2010 and January 2, 2010
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended April 3, 2010 and April 4, 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 3, 2010 and April 4, 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    35Part II. Other InformationItem 1A. Risk Factors
    
    
    36Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    36Item 6. Exhibits
    
    
    37Signatures
    
    
    38ExhibitsEX-10.34EX-10.35EX-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)
 April 3, 2010
    
    
    January 2, 2010ASSETSCurrent assets:Cash and cash equivalents
    
    $
    31,798
    
    
    $
    26,461Short-term available-for-sale investments
    
    
    282,364
    
    
    
    279,174Receivables, net of allowances of $738 and $844, respectively
    
    
    73,596
    
    
    
    66,088Inventories
    
    
    63,562
    
    
    
    66,935Deferred tax assets
    
    
    12,561
    
    
    
    12,261Prepaid expenses and other assets
    
    
    10,637
    
    
    
    6,947Total current assets
    
    
    474,518
    
    
    
    457,866Property, plant and equipment, net
    
    
    52,276
    
    
    
    51,852Goodwill
    
    
    99,287
    
    
    
    99,287Purchased intangible assets, net
    
    
    98,659
    
    
    
    99,859Long-term available-for-sale investments
    
    
    23,946
    
    
    
    24,634Other long-term assets
    
    
    10,918
    
    
    
    13,059Total Assets
    
    $
    759,604
    
    
    $
    746,557LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    12,600
    
    
    $
    8,532Accrued compensation
    
    
    15,277
    
    
    
    22,407Other accrued liabilities
    
    
    12,494
    
    
    
    14,772Total current liabilities
    
    
    40,371
    
    
    
    45,711Senior subordinated convertible notes
    
    
    134,015
    
    
    
    131,929Long-term deferred tax liability
    
    
    29,986
    
    
    
    31,720Other
    
    
    11,440
    
    
    
    12,069Total Liabilities
    
    
    215,812
    
    
    
    221,429Shareholders equity:Common shares: no par, authorized 100,000; issued and
outstanding 57,309 and 57,043 as of April 3, 2010 and
January 2, 2010, respectively
    
    
    
    
    
    
    Additional paid-in capital
    
    
    567,913
    
    
    
    557,418Accumulated deficit
    
    
    (20,686
    )
    
    
    (30,321
    )Accumulated other comprehensive loss:Unrealized loss on investments
    
    
    (1,308
    )
    
    
    (648
    )Cumulative translation adjustments
    
    
    (2,127
    )
    
    
    (1,321
    )Total accumulated other comprehensive loss
    
    
    (3,435
    )
    
    
    (1,969
    )Total Shareholders Equity
    
    
    543,792
    
    
    
    525,128Total Liabilities and Shareholders Equity
    
    $
    759,604
    
    
    $
    746,557
  3




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##### Table of Contents



THORATEC CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
(in thousands, except per share data)
 Three Months EndedApril 3,
    
    
    April 4,2010
    
    
    2009Product sales
    
    $
    121,578
    
    
    $
    89,466Cost of product sales
    
    
    45,705
    
    
    
    35,439Gross profit
    
    
    75,873
    
    
    
    54,027Operating expenses:Selling, general and administrative
    
    
    28,470
    
    
    
    27,455Research and development
    
    
    23,068
    
    
    
    14,086Amortization of purchased intangible assets
    
    
    2,614
    
    
    
    2,931Total operating expenses
    
    
    54,152
    
    
    
    44,472Income from operations
    
    
    21,721
    
    
    
    9,555Other income and (expense):Interest expense and other
    
    
    (2,880
    )
    
    
    (2,866
    )Interest income and other
    
    
    1,708
    
    
    
    988Impairment on investment
    
    
    (2,000
    )
    
    
    Income before income taxes
    
    
    18,549
    
    
    
    7,677Income tax expense
    
    
    (6,116
    )
    
    
    (2,050
    )Net income
    
    $
    12,433
    
    
    $
    5,627Net income per share:Basic
    
    $
    0.22
    
    
    $
    0.10Diluted
    
    $
    0.21
    
    
    $
    0.10Shares used to compute net income per share (1):Basic
    
    
    56,638
    
    
    
    55,527Diluted
    
    
    58,106
    
    
    
    56,882
  
  4




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THORATEC CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
(in thousands)
 Three Months EndedApril 3,
    
    
    April 4,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    12,433
    
    
    $
    5,627Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    5,179
    
    
    
    5,537Investment premium amortization, net
    
    
    1,250
    
    
    
    691Non-cash expenses, net
    
    
    (573
    )
    
    
    (47
    )Non-cash interest expense
    
    
    2,940
    
    
    
    2,763Impairment on investment
    
    
    2,000
    
    
    
    Tax benefit related to stock options
    
    
    2,446
    
    
    
    1,119Share-based compensation expense
    
    
    4,684
    
    
    
    4,036Excess tax benefits from share-based compensation
    
    
    (2,185
    )
    
    
    (1,041
    )Loss on disposal of assets
    
    
    19
    
    
    
    Change in net deferred tax liability
    
    
    (1,729
    )
    
    
    (2,801
    )Changes in assets and liabilities:Receivables
    
    
    (7,979
    )
    
    
    (4,552
    )Inventories
    
    
    2,135
    
    
    
    (4,264
    )Prepaid expenses and other assets
    
    
    (889
    )
    
    
    (110
    )Accounts payable and other liabilities
    
    
    (3,760
    )
    
    
    (7,103
    )Accrued income taxes, net
    
    
    (5,067
    )
    
    
    1,501Net cash provided by operating activities
    
    
    10,904
    
    
    
    1,356Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (117,447
    )
    
    
    Sales of available-for-sale investments
    
    
    80,536
    
    
    
    20,808Maturities of available-for-sale investments
    
    
    32,090
    
    
    
    10,460Restricted cash and cash equivalents
    
    
    
    
    
    
    (20,000
    )Purchase of patents
    
    
    (1,414
    )
    
    
    Purchases of property, plant and equipment
    
    
    (2,018
    )
    
    
    (3,646
    )Net cash (used in) provided by investing activities
    
    
    (8,253
    )
    
    
    7,622Cash flows from financing activities:Excess tax benefits from share-based compensation
    
    
    2,185
    
    
    
    1,041Proceeds from stock option exercises
    
    
    4,772
    
    
    
    1,033Repurchase and retirement of common shares
    
    
    (4,222
    )
    
    
    (2,894
    )Net cash provided by (used in) financing activities
    
    
    2,735
    
    
    
    (820
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (49
    )
    
    
    163Net increase in cash and cash equivalents
    
    
    5,337
    
    
    
    8,321Cash and cash equivalents at beginning of period
    
    
    26,461
    
    
    
    107,053Cash and cash equivalents at end of period
    
    $
    31,798
    
    
    $
    115,374Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    10,532
    
    
    $
    2,180Supplemental disclosure of non-cash investing and financing activities:Transfers of equipment from inventory
    
    $
    1,237
    
    
    $
    41Purchases of property, plant and equipment through accounts payable and accrued liabilities
    
    $
    79
    
    
    $
    149
  5




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THORATEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 1. Operations and Significant Accounting Policies
 Basis of Presentation
   Revenue Recognition and Product Warranty
   Balance
    
    
    Accruals of
    
    
    
    
    
    BalanceBeginning
    
    
    Warranties
    
    
    Settlements
    
    
    Endof Period
    
    
    Issued
    
    
    Made
    
    
    of Period(in thousands)Three months ended April 3, 2010
    
    $
    2,472
    
    
    $
    835
    
    
    $
    (815
    )
    
    $
    2,492Three months ended April 4, 2009
    
    $
    1,071
    
    
    $
    1,072
    
    
    $
    (882
    )
    
    $
    1,261
 6




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2. Accounting Standards
 Fair Value Measurements and Disclosures
(Topic 820): Improving Disclosures about Fair Value Measurements
 Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force Revenue Recognition: Multiple-Element Arrangements
 3. Cash and Cash Equivalents
 Fair Value Measurements and Disclosures
 4. Investments
     GrossAmortized
    
    
    unrealized
    
    
    Faircost
    
    
    gains (losses)
    
    
    value(in thousands)April 3, 2010:Short-term investments:Municipal bonds
    
    $
    201,612
    
    
    $
    1,139
    
    
    $
    202,751Variable demand notes
    
    
    62,447
    
    
    
    
    
    
    
    62,447Corporate bonds
    
    
    13,826
    
    
    
    353
    
    
    
    14,179Commercial paper
    
    
    2,987
    
    
    
    
    
    
    
    2,987$
    280,872
    
    
    $
    1,492
    
    
    $
    282,364Long-term investments:Auction rate securities
    
    $
    27,700
    
    
    $
    (3,754
    )
    
    $
    23,946January 2, 2010:Short-term investments:Municipal bonds
    
    $
    196,650
    
    
    $
    1,526
    
    
    $
    198,176Variable demand notes
    
    
    66,865
    
    
    
    
    
    
    
    66,865Corporate bonds
    
    
    13,785
    
    
    
    348
    
    
    
    14,133$
    277,300
    
    
    $
    1,874
    
    
    $
    279,174Long-term investments:Auction rate securities
    
    $
    27,700
    
    
    $
    (3,066
    )
    
    $
    24,634
 7




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FairValue(in thousands)April 3, 2010:Other long-term assets  carrying value of investments  deferred compensation plan
    
    $
    2,590January 2, 2010:Other long-term assets  carrying value of investments  deferred compensation plan
    
    $
    2,436
  5. Fair Value Measurements
 Fair Value Measurements and Disclosure
  8




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Level 1:
    
    Quoted prices in active markets for identical assets or liabilities.Level 2:
    
    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.Level 3:
    
    Inputs that are unobservable and significant to the overall fair value measurement.
  April 3, 2010Assets 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
    
    $
    202,751
    
    
    $
    202,751
    
    
    $
    
    
    
    $
    202,751
    
    
    $
    Variable demand notes
    
    
    62,447
    
    
    
    62,447
    
    
    
    
    
    
    
    62,447
    
    
    
    Corporate bonds
    
    
    14,179
    
    
    
    14,179
    
    
    
    
    
    
    
    14,179
    
    
    
    Commercial paper
    
    
    2,987
    
    
    
    2,987
    
    
    
    
    
    
    
    2,987
    
    
    
    Prepaid expenses and other assets  mark to
market on foreign exchange instruments (Note
6)
    
    
    37
    
    
    
    37
    
    
    
    
    
    
    
    37
    
    
    
    Long-term investments  auction rate securities
    
    
    23,946
    
    
    
    23,946
    
    
    
    
    
    
    
    
    
    
    
    23,946Other long-term assets  carrying value of
investments  deferred compensation plan
    
    
    2,590
    
    
    
    2,590
    
    
    
    
    
    
    
    2,590
    
    
    
    LiabilitiesMake-whole provision (Note 10)
    
    
    12
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    12
 January 2, 2010Assets 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
    
    $
    198,176
    
    
    $
    198,176
    
    
    $
    
    
    
    $
    198,176
    
    
    $
    Variable demand notes
    
    
    66,865
    
    
    
    66,865
    
    
    
    
    
    
    
    66,865
    
    
    
    Corporate bonds
    
    
    14,133
    
    
    
    14,133
    
    
    
    
    
    
    
    14,133
    
    
    
    Prepaid expenses and other assets  mark to
market on foreign exchange instruments (Note
6)
    
    
    8
    
    
    
    8
    
    
    
    
    
    
    
    8
    
    
    
    Long-term investments  auction rate securities
    
    
    24,634
    
    
    
    24,634
    
    
    
    
    
    
    
    
    
    
    
    24,634Other long-term assets  carrying value of
investments  deferred compensation plan
    
    
    2,436
    
    
    
    2,436
    
    
    
    
    
    
    
    2,436
    
    
    
    LiabilitiesMake-whole provision (Note 10)
    
    
    23
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    23
  9




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Fair Value Measurement UsingSignificant Unobservable Inputs(Level 3)AuctionRateSecurities
    
    
    Liabilities(in thousands)Balance as of January 2, 2010
    
    $
    24,634
    
    
    $
    23Unrealized holding gain on
make-whole provision, included in
interest income and other
    
    
    
    
    
    
    (11
    )Unrealized holding loss on
auction rate securities, included
in other comprehensive income
    
    
    (688
    )
    
    
    Balance as of April 3, 2010
    
    $
    23,946
    
    
    $
    12
  6. Foreign Exchange Instruments
  10




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Notional AmountsApril 3,            2010
    
    
    April 4,            2009(in thousands)Purchases
    
    $
    
    
    
    $
    9,231Sales
    
    
    7,583
    
    
    
    11,342
   Three Months EndedApril 3, 2010
    
    
    April 4, 2009(in thousands)Foreign currency exchange gain on foreign currency contracts
    
    $
    264
    
    
    $
    448Foreign currency exchange loss on foreign translation adjustments
    
    
    (330
    )
    
    
    (950
    )
 7. Inventories
  April 3,
    
    
    January 2,2010
    
    
    2010(in thousands)Finished goods
    
    $
    15,179
    
    
    $
    18,003Work in process
    
    
    12,377
    
    
    
    10,418Raw materials
    
    
    36,006
    
    
    
    38,514Total
    
    $
    63,562
    
    
    $
    66,935
 11




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##### Table of Contents



8. Property, Plant and Equipment, net
  April 3,
    
    
    January 2,2010
    
    
    2010(in thousands)Land, building and improvements
    
    $
    22,749
    
    
    $
    22,740Equipment and capitalized software
    
    
    75,962
    
    
    
    73,746Furniture and leasehold improvements
    
    
    23,851
    
    
    
    23,753Total
    
    
    122,562
    
    
    
    120,239Less accumulated depreciation
    
    
    (70,286
    )
    
    
    (68,387
    )Total
    
    $
    52,276
    
    
    $
    51,852
  9. Purchased Intangible Assets and Goodwill
  Intangibles  Goodwill and Other
   April 3, 2010Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount(in thousands)Patents and trademarks
    
    $
    41,868
    
    
    $
    (30,264
    )
    
    $
    11,604Core technology
    
    
    37,485
    
    
    
    (16,230
    )
    
    
    21,255Developed technology
    
    
    125,742
    
    
    
    (60,285
    )
    
    
    65,457Customer and distributor relationships and other
    
    
    897
    
    
    
    (554
    )
    
    
    343Total purchased intangible assets
    
    $
    205,992
    
    
    $
    (107,333
    )
    
    $
    98,659
 January 2, 2010Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount(in thousands)Patents and trademarks
    
    $
    40,454
    
    
    $
    (30,008
    )
    
    $
    10,446Core technology
    
    
    37,485
    
    
    
    (15,737
    )
    
    
    21,748Developed technology
    
    
    125,742
    
    
    
    (58,448
    )
    
    
    67,294Customer and distributor relationships and other
    
    
    897
    
    
    
    (526
    )
    
    
    371Total purchased intangible assets
    
    $
    204,578
    
    
    $
    (104,719
    )
    
    $
    99,859
  12




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10. Long-Term Debt
      Debt
 13




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Three Months EndedApril 3, 2010
    
    
    April 4, 2009(in thousands)Interest expense  cash component
    
    $
    854
    
    
    $
    853Interest expense  non-cash component
    
    
    2,086
    
    
    
    1,910
  April 3, 2010
    
    
    January 2, 2010(in thousands)Long-term debtPrincipal amount
    
    $
    143,750
    
    
    $
    143,750Unamortized discount
    
    
    (9,735
    )
    
    
    (11,821
    )Net carrying amount
    
    $
    134,015
    
    
    $
    131,929Equity component, net of income tax benefit
    
    $
    28,462
    
    
    $
    28,462
   11. Comprehensive Income
  Three Months EndedApril 3, 2010
    
    
    April 4, 2009(in thousands)Net income
    
    $
    12,433
    
    
    $
    5,627Unrealized losses on investments (net
of taxes of $440 and $64 for the three
months ended April 3, 2010 and April 4,
2009, respectively)
    
    
    (660
    )
    
    
    (96
    )Foreign currency translation adjustments
    
    
    (806
    )
    
    
    47Comprehensive income
    
    $
    10,967
    
    
    $
    5,578
 14




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12. Share-Based Compensation
   Three Months EndedApril 3, 2010
    
    
    April 4, 2009(in thousands)Cost of goods sold
    
    $
    553
    
    
    $
    511Selling, general and administrative
    
    
    2,693
    
    
    
    2,406Research and development
    
    
    1,438
    
    
    
    1,119Total share based compensation expense before taxes
    
    
    4,684
    
    
    
    4,036Tax benefit for share-based compensation expense
    
    
    1,990
    
    
    
    1,122Total share-based compensation (net of taxes)
    
    $
    2,694
    
    
    $
    2,914
    Equity Plan
  15




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Stock Options
   Three Months EndedApril 3, 2010
    
    
    April 4, 2009Risk-free interest rate
    
    
    3.05
    %
    
    
    2.30
    %Expected volatility
    
    
    40
    %
    
    
    53
    %Expected option life
    
    
    4.88 to 6.04 years
    
    
    
    4.91 to 6.02 yearsDividends
    
    None
    
    
    None
     Number of
    
    
    Weighted
    
    
    Weighted AverageOptions
    
    
    Average Exercise
    
    
    Remaining Contract(in thousands)
    
    
    Price Per Share
    
    
    Life (years)Outstanding options at January 2, 2010
    
    
    3,857
    
    
    $
    17.29
    
    
    
    5.60Granted
    
    
    434
    
    
    
    29.90Exercised
    
    
    (304
    )
    
    
    15.69Forfeited or expired
    
    
    (24
    )
    
    
    19.31Outstanding options at April 3, 2010
    
    
    3,963
    
    
    $
    18.78
    
    
    
    5.86Outstanding options exercisable at April 3, 2010
    
    
    2,941
    
    
    $
    16.98
    
    
    
    4.82Outstanding options vested at April 3, 2010 and expected to vest
    
    
    3,816
    
    
    $
    18.52
    
    
    
    5.73
  16




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##### Table of Contents



Restricted Stock Awards and Units
  Restricted Stock Awards
   Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair(in thousands)
    
    
    ValueOutstanding unvested restricted stock at January 2, 2010
    
    
    609
    
    
    $
    16.63Granted
    
    
    
    
    
    
    Released
    
    
    (239
    )
    
    
    17.06Forfeited or expired
    
    
    (12
    )
    
    
    16.15Outstanding unvested restricted stock at April 3, 2010
    
    
    358
    
    
    $
    16.37
 Restricted Stock Units
   Number of
    
    
    Weighted Average
    
    
    Weighted AverageUnits
    
    
    Grant Date Fair
    
    
    Remaining Contract(in thousands)
    
    
    Value
    
    
    Life (in years)Outstanding units at January 2, 2010
    
    
    463
    
    
    $
    24.17
    
    
    
    3.12Granted
    
    
    533
    
    
    
    29.86Released
    
    
    (119
    )
    
    
    24.33Forfeited or expired
    
    
    (11
    )
    
    
    24.13Outstanding units at April 3, 2010
    
    
    866
    
    
    $
    27.65
    
    
    
    2.18
 Employee Stock Purchase Plan
  17




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##### Table of Contents



Risk-free- interest rate
    
    
    0.17
    %Expected volatility
    
    
    40
    %Expected option life
    
    0.50 yearsDividends
    
    None
  13. Income Taxes
    14. Net Income Per Share
  18




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##### Table of Contents



Three Months EndedApril 3, 2010
    
    
    April 4, 2009(stated in thousands, except per share amounts)Basic net income per common share calculationNet income
    
    $
    12,433
    
    
    $
    5,627Net income allocated to participating securities
    
    
    108
    
    
    
    85Net income attributable to common shareholders
    
    $
    12,325
    
    
    $
    5,542Weighted average number of common shares used to
compute basic net income per common share
    
    
    56,638
    
    
    
    55,527Basic net income per common share
    
    $
    0.22
    
    
    $
    0.10Diluted net income per common share calculationNet income
    
    $
    12,433
    
    
    $
    5,627Net income allocated to participating securities
    
    
    105
    
    
    
    83Net income attributable to common shareholders
    
    $
    12,328
    
    
    $
    5,544Weighted average number of common shares used to
compute basic net income per common share
attributable to common shares
    
    
    56,638
    
    
    
    55,527Dilutive effect of stock-based compensation plans
    
    
    1,468
    
    
    
    1,355Weighted average number of common shares used to
compute diluted net income per common share
    
    
    58,106
    
    
    
    56,882Diluted net income per common share
    
    $
    0.21
    
    
    $
    0.10
    Three Months EndedApril 3, 2010
    
    
    April 4, 2009(in thousands)Options to purchase shares not
included in the computation of diluted net
income per common share because their
inclusion would be antidilutive
    
    
    179
    
    
    
    164
  19




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##### Table of Contents



15. Enterprise and Related Geographic Information
   Three Months EndedApril 3,
    
    
    April 4,2010
    
    
    2009(in thousands)Product sales:Cardiovascular
    
    $
    99,272
    
    
    $
    64,629ITC
    
    
    22,306
    
    
    
    24,837Total product sales
    
    $
    121,578
    
    
    $
    89,466Income (loss) before income taxes:Cardiovascular (a)(c)
    
    $
    28,405
    
    
    $
    18,526ITC (a)(c)
    
    
    (2,516
    )
    
    
    (1,065
    )Corporate (b)(c)
    
    
    (4,168
    )
    
    
    (7,906
    )Total operating income
    
    
    21,721
    
    
    
    9,555Other income and (expense):Interest expense and other
    
    
    (2,880
    )
    
    
    (2,866
    )Interest income and other
    
    
    1,708
    
    
    
    988Impairment on investment
    
    
    (2,000
    )
    
    
    Income before income tax expense
    
    $
    18,549
    
    
    $
    7,677
 
 (a)
    
    Includes amortization expense of $2.4 million for the three months ended April 3, 2010 and
$2.7 million for the three months ended April 4, 2009, related to the Cardiovascular segment.
The ITC segment also includes amortization expense of $0.2 million for each of the three
months ended April 3, 2010 and April 4, 2009.(b)
    
    Represents unallocated costs or assets, not specifically identified to any particular
business segment.(c)
    
    Includes share-based compensation expense of $2.8 million, $1.3 million and $0.6 million for
Cardiovascular, ITC and Corporate, respectively, for the three months ended April 3, 2010 and
$2.3 million, $1.1 million and $0.6 million for Cardiovascular, ITC and Corporate,
respectively, for the three months ended April 4, 2009.   Three Months EndedApril 3,
    
    
    April 4,2010
    
    
    2009(in thousands)Domestic
    
    $
    94,803
    
    
    $
    67,425International
    
    
    26,775
    
    
    
    22,041Total product sales
    
    $
    121,578
    
    
    $
    89,466
 20




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16. Subsequent Event
  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 2009 Annual Report on Form 10-K (the 2009 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 .
 OUR BUSINESS
   
    
    Circulatory Support Products.Our mechanical circulatory support products include the
HeartMate II, HeartMate XVE, PVAD, IVAD and CentriMag for acute, intermediate and long-term
mechanical circulatory support for patients with advanced heart failure (HF). We also
manufacture and sell small diameter grafts using our proprietary materials to address the
vascular access market for hemodialysis.
 The product lines of our ITC division are:
 
    
    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.
 22




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##### Table of Contents



Cardiovascular Division
      The HeartMate II
    The HeartMate XVE
   23




---



##### Table of Contents



The Paracorporeal Ventricular Assist Device
    The Implantable Ventricular Assist Device
   The CentriMag
  Vascular Graft Products
  ITC Division
  24




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##### Table of Contents



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




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##### Table of Contents



Sale of ITC
  Critical Accounting Policies and Estimates
  Revenue Recognition
    Reserves
     26




---



##### Table of Contents



Income Taxes
    Evaluation of Purchased Intangible Assets and Goodwill for Impairment
   Valuation of Share-Based Awards
  27




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##### Table of Contents



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 quoted securities that are 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, commercial paper, carrying value of investments on our deferred compensation
plan 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
auction rate securities, our convertible debenture with Levitronix, our purchased
intangible asset valuations 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.
   28




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##### Table of Contents



Results of Operations
  Three Months Ended(in thousand, except for percentage data)April 3,
    
    
    
    
    
    
    April 4,2010
    
    
    %
    
    
    2009
    
    
    %Product sales
    
    $
    121,578
    
    
    
    100
    %
    
    $
    89,466
    
    
    
    100
    %Cost of product sales
    
    
    45,705
    
    
    
    38
    
    
    
    35,439
    
    
    
    40Gross profit
    
    
    75,873
    
    
    
    62
    
    
    
    54,027
    
    
    
    60Operating expenses:Selling, general and administrative
    
    
    28,470
    
    
    
    23
    
    
    
    27,455
    
    
    
    31Research and development
    
    
    23,068
    
    
    
    19
    
    
    
    14,086
    
    
    
    16Amortization of purchased intangible assets
    
    
    2,614
    
    
    
    2
    
    
    
    2,931
    
    
    
    3Total operating expenses
    
    
    54,152
    
    
    
    44
    
    
    
    44,472
    
    
    
    50Income from operations
    
    
    21,721
    
    
    
    18
    
    
    
    9,555
    
    
    
    10Other income and (expense):Interest expense and other
    
    
    (2,880
    )
    
    
    (2
    )
    
    
    (2,866
    )
    
    
    (3
    )Interest income and other
    
    
    1,708
    
    
    
    1
    
    
    
    988
    
    
    
    1Impairment on investment
    
    
    (2,000
    )
    
    
    (2
    )
    
    
    
    
    
    
    Income before income tax expense
    
    
    18,549
    
    
    
    15
    
    
    
    7,677
    
    
    
    8Income tax expense
    
    
    (6,116
    )
    
    
    (5
    )
    
    
    (2,050
    )
    
    
    (2
    )Net income
    
    $
    12,433
    
    
    
    10
    
    
    $
    5,627
    
    
    
    6
  Three months ended April 3, 2010 and April 4, 2009
 Product Sales
  Three Months EndedApril 3,
    
    
    April 4,2010
    
    
    2009
    
    
    % Change(in thousands)Cardiovascular
    
    $
    99,272
    
    
    $
    64,629
    
    
    
    54
    %ITC
    
    
    22,306
    
    
    
    24,837
    
    
    
    (10
    )%Total product sales
    
    $
    121,578
    
    
    $
    89,466
    
    
    
    36
    %
   29




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##### Table of Contents



Gross Profit
  Three Months EndedApril 3,
    
    
    April 4,2010
    
    
    2009(in thousands, except percentages)Total gross profit
    
    $
    75,873
    
    
    $
    54,027Total gross margin
    
    
    62
    %
    
    
    60
    %
  Selling, General and Administrative
  Three Months EndedApril 3,
    
    
    April 4,2010
    
    
    2009
    
    
    % Change(in thousands)Total selling, general and administration
    
    $
    28,470
    
    
    $
    27,455
    
    
    
    4
    %
  Research and Development
  Three Months EndedApril 3,
    
    
    April 4,2010
    
    
    2009
    
    
    % Change(in thousands)Total research and development
    
    $
    23,068
    
    
    $
    14,086
    
    
    
    64
    %
   30




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##### Table of Contents



Amortization of Purchased Intangible Assets
  Interest Expense and Other
  Three Months EndedApril 3,
    
    
    April 4,2010
    
    
    2009
    
    
    % Change(in thousands)Interest expense
    
    $
    2,777
    
    
    $
    2,763
    
    
    
    0.5
    %Amortization of debt issuance costs related to senior subordinated convertible notes
    
    
    103
    
    
    
    103
    
    
    
    Total interest expense and other
    
    $
    2,880
    
    
    $
    2,866
  Interest Income and Other
  Three Months EndedApril 3,
    
    
    April 4,2010
    
    
    2009
    
    
    % Change(in thousands)Interest income
    
    $
    1,666
    
    
    $
    1,304
    
    
    
    28
    %Foreign currency, net
    
    
    (66
    )
    
    
    (502
    )
    
    
    87
    %Other
    
    
    108
    
    
    
    186
    
    
    
    (42
    )%Total interest income and other
    
    $
    1,708
    
    
    $
    988
  Impairment on Investment
  Income Taxes
   31




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##### Table of Contents



Liquidity and Capital Resources
 Cash, Cash Equivalents and Investments
    April 3,
    
    
    April 4,2010
    
    
    2009(in thousands)Cash and cash equivalents
    
    $
    31,798
    
    
    $
    115,374Short-term investments
    
    
    282,364
    
    
    
    109,505Restricted cash
    
    
    
    
    
    
    20,000Long-term investments
    
    
    23,946
    
    
    
    29,928Total cash, cash equivalents and investments
    
    $
    338,108
    
    
    $
    274,807
      32




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##### Table of Contents



Long-term obligation
 Debt
 Cash Flow Activities
  April 3,
    
    
    April 4,2010
    
    
    2009(in thousands)Net cash provided by operating activities
    
    $
    10,904
    
    
    $
    1,356Net cash (used in) provided by investing activities
    
    
    (8,253
    )
    
    
    7,622Net cash provided by (used in) financing activities
    
    
    2,735
    
    
    
    (820
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (49
    )
    
    
    163Net increase in cash and cash equivalents
    
    $
    5,337
    
    
    $
    8,321
 Cash Provided by Operating Activities
  Cash Used in Investing Activities
  33




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##### Table of Contents



Cash Provided by Financing Activities
  Off Balance Sheet Arrangements
  Contractual Obligations
   
 ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Interest Rate Risk
  Foreign Currency Rate Fluctuations
   34




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##### Table of Contents



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




---



##### 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)January 3, 2010 through January 30, 2010
    
    
    6.0
    
    
    $
    29.26
    
    
    
    
    
    
    $
    January 31, 2010 through February 27, 2010
    
    
    96.8
    
    
    
    28.72
    
    
    
    
    
    
    
    February 28, 2010 through April 3, 2010
    
    
    43.0
    
    
    
    29.40
    
    
    
    
    
    
    
    Total
    
    
    145.8
    
    
    $
    28.94
    
    
    
    
    
    
    $
    
 
 (1)
    
    Our share repurchase programs, which authorized us to repurchase up to a total of $130
million of the Companys common shares, were announced on February 11, 2004 as a $25 million
program, on May 12, 2004 as a $60 million program, on July 29, 2004 as a $25 million program
and on February 2, 2006 as a $20 million program. These programs authorize us to acquire
shares in the open market or in privately negotiated transactions and do not have an
expiration date. No shares were repurchased under these programs during the three months ended
April 3, 2010. As of April 3, 2010, 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 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. 36




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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.
 37




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##### Table of Contents



SIGNATURES
  THORATEC CORPORATIONDate: May 5, 2010
    /s/ Gerhard F. BurbachGerhard F. BurbachChief Executive OfficerDate: May 5, 2010
    /s/ David V. SmithDavid V. SmithChief Financial Officer and Principal Accounting Officer 38