##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark one)
 þ
    
    Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the quarterly period ended July 1, 2006
 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
(State or other jurisdiction of incorporation or
organization)
    
    94-2340464
(I.R.S. Employer Identification No.)6035 Stoneridge Drive, Pleasanton, California
    
    94588(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (925) 847-8600
 Indicate by check mark whether the registrant: þ o
 Indicate by check mark whether the registrant is, a large accelerated filer, an accelerated filer
or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):
 þ o o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): o þ




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##### 



THORATEC CORPORATION AND SUBSIDIARIES
 TABLE OF CONTENTS
 Part I. Financial InformationItem 1. Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of July 1, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 1, 2006 and July 2, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 1, 2006 and July 2, 2005
    
    
    5Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended July 1, 2006 and
July 2, 2005
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosure of Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28Part II. Other InformationItem 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    31Item 4. Submission of Matters To a Vote of Security Holders
    
    
    32Item 6. Exhibits
    
    
    33Signatures
    
    
    34ExhibitsEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited)
(in thousands)
 July 1,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,636
    
    
    $
    35,109Short-term available-for-sale investments
    
    
    183,983
    
    
    
    175,827Restricted short-term investments
    
    
    3,315
    
    
    
    3,330Receivables, net of allowances of $630 and $634, respectively
    
    
    35,457
    
    
    
    35,904Inventories
    
    
    40,330
    
    
    
    41,671Deferred tax asset
    
    
    5,461
    
    
    
    5,461Prepaid expenses and other assets
    
    
    3,699
    
    
    
    3,582Total current assets
    
    
    284,881
    
    
    
    300,884Property, plant and equipment, net
    
    
    46,473
    
    
    
    28,906Restricted long-term investments
    
    
    
    
    
    
    1,610Goodwill
    
    
    94,097
    
    
    
    94,097Purchased intangible assets, net
    
    
    135,991
    
    
    
    141,938Other assets
    
    
    6,414
    
    
    
    6,483Total Assets
    
    $
    567,856
    
    
    $
    573,918LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    7,857
    
    
    $
    8,421Accrued compensation
    
    
    10,216
    
    
    
    15,707Accrued income taxes
    
    
    2,649
    
    
    
    3,659Other accrued liabilities
    
    
    4,435
    
    
    
    3,804Total current liabilities
    
    
    25,157
    
    
    
    31,591Senior subordinated convertible notes
    
    
    143,750
    
    
    
    143,750Long-term deferred tax liability and other
    
    
    48,677
    
    
    
    50,430Total Liabilities
    
    
    217,584
    
    
    
    225,771Shareholders equity:Common shares: authorized 100,000; issued and outstanding 51,927 and 51,737, respectively
    
    
    418,420
    
    
    
    407,531Deferred compensation
    
    
    
    
    
    
    (184
    )Accumulated deficit
    
    
    (68,195
    )
    
    
    (58,801
    )Accumulated other comprehensive income (loss):Unrealized loss on investments
    
    
    (127
    )
    
    
    (258
    )Cumulative translation adjustments
    
    
    174
    
    
    
    (141
    )Total accumulated other comprehensive income (loss)
    
    
    47
    
    
    
    (399
    )Total Shareholders Equity
    
    
    350,272
    
    
    
    348,147Total Liabilities and Shareholders Equity
    
    $
    567,856
    
    
    $
    573,918
  3




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##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
(in thousands, except per share data)
 Three Months Ended
    
    
    Six Months EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005Product sales
    
    $
    54,783
    
    
    $
    47,588
    
    
    $
    103,538
    
    
    $
    98,076Cost of product sales
    
    
    22,654
    
    
    
    18,387
    
    
    
    42,762
    
    
    
    38,435Gross profit
    
    
    32,129
    
    
    
    29,201
    
    
    
    60,776
    
    
    
    59,641Operating expenses:Selling, general and administrative
    
    
    19,191
    
    
    
    14,806
    
    
    
    37,251
    
    
    
    29,623Research and development
    
    
    9,757
    
    
    
    7,925
    
    
    
    19,342
    
    
    
    15,644Amortization of purchased intangible assets
    
    
    2,973
    
    
    
    2,800
    
    
    
    5,947
    
    
    
    5,604Litigation
    
    
    390
    
    
    
    (1
    )
    
    
    447
    
    
    
    177Total operating expenses
    
    
    32,311
    
    
    
    25,530
    
    
    
    62,987
    
    
    
    51,048Income (loss) from operations
    
    
    (182
    )
    
    
    3,671
    
    
    
    (2,211
    )
    
    
    8,593Other income and (expense):Interest expense
    
    
    (1,005
    )
    
    
    (1,037
    )
    
    
    (2,108
    )
    
    
    (2,045
    )Interest income and other
    
    
    1,791
    
    
    
    1,034
    
    
    
    3,492
    
    
    
    1,870Income (loss) before income tax benefit (expense)
    
    
    604
    
    
    
    3,668
    
    
    
    (827
    )
    
    
    8,418Income tax benefit (expense)
    
    
    (267
    )
    
    
    (1,247
    )
    
    
    234
    
    
    
    (2,862
    )Net income (loss)
    
    $
    337
    
    
    $
    2,421
    
    
    $
    (593
    )
    
    $
    5,556Net income (loss) per share, basic and diluted:
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    (0.01
    )
    
    $
    0.11Shares used to compute net income (loss) per share:Basic
    
    
    52,291
    
    
    
    48,735
    
    
    
    52,254
    
    
    
    48,470Diluted
    
    
    53,316
    
    
    
    50,146
    
    
    
    52,254
    
    
    
    49,530
  4




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##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
(in thousands)
 Six Months EndedJuly 1,
    
    
    July 2,2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    (593
    )
    
    $
    5,556Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    9,958
    
    
    
    9,445Investment discount amortization
    
    
    114
    
    
    
    288Non-cash interest and other expenses
    
    
    401
    
    
    
    313Tax benefit related to stock options
    
    
    2,120
    
    
    
    2,062Share-based compensation expense
    
    
    5,441
    
    
    
    481Excess tax benefits from share-based compensation
    
    
    (1,985
    )
    
    
    Loss on disposal of assets
    
    
    10
    
    
    
    158Change in net deferred tax liability
    
    
    (2,359
    )
    
    
    (2,111
    )Changes in assets and liabilities:Receivables
    
    
    447
    
    
    
    3,426Inventories
    
    
    694
    
    
    
    (1,564
    )Prepaid expenses and other assets
    
    
    (117
    )
    
    
    151Accounts payable and other liabilities
    
    
    (5,960
    )
    
    
    2,305Other
    
    
    (97
    )
    
    
    139Net cash provided by operating activities
    
    
    8,074
    
    
    
    20,649Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (111,475
    )
    
    
    (53,265
    )Sales of available-for-sale investments
    
    
    73,908
    
    
    
    20,808Maturities of available-for-sale investments and restricted investments
    
    
    31,020
    
    
    
    13,535Purchases of property, plant and equipment, net
    
    
    (20,802
    )
    
    
    (2,866
    )Net cash used in investing activities
    
    
    (27,349
    )
    
    
    (21,788
    )Cash flows from financing activities:Proceeds from stock option exercises
    
    
    9,754
    
    
    
    7,684Proceeds from stock issued under employee stock purchase plan
    
    
    860
    
    
    
    684Excess tax benefits from share-based compensation
    
    
    1,985
    
    
    
    Repurchase
and retirement of common shares
    
    
    (16,112
    )
    
    
    (2,238
    )Net cash provided by (used in) financing activities
    
    
    (3,513
    )
    
    
    6,130Effect of exchange rate changes on cash and cash equivalents
    
    
    315
    
    
    
    (612
    )Net increase (decrease) in cash and cash equivalents
    
    
    (22,473
    )
    
    
    4,379Cash and cash equivalents at beginning of period
    
    
    35,109
    
    
    
    16,017Cash and cash equivalents at end of period
    
    $
    12,636
    
    
    $
    20,396Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    1,042
    
    
    $
    1,044Cash paid for interest
    
    $
    1,707
    
    
    $
    1,707Supplemental disclosure of non-cash investing and financing activities:Transfers of equipment from inventory
    
    $
    855
    
    
    $
    752
  5




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##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (unaudited)
(in thousands)
 Three Months Ended
    
    
    Six Months EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    337
    
    
    $
    2,421
    
    
    $
    (593
    )
    
    $
    5,556Other net comprehensive income (loss):Unrealized gain on investments
(net of taxes of $49 and $(58) for
the three months ended and $87 and
$50 for the six months ended July
1, 2006 and July 2, 2005,
respectively)
    
    
    73
    
    
    
    97
    
    
    
    131
    
    
    
    40Foreign currency translation
adjustments (net of taxes of $79
and $122 for the three months
ended and $90 and $155 for the six
months ended July 1, 2006 and July
2, 2005, respectively)
    
    
    276
    
    
    
    (479
    )
    
    
    315
    
    
    
    (612
    )Comprehensive income (loss)
    
    $
    686
    
    
    $
    2,039
    
    
    $
    (147
    )
    
    $
    4,984
  6




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##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1. Basis of Presentation
   2. Share-Based Compensation
      7




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJuly 2, 2005
    
    
    July 2, 2005(in thousands, except per share data)Net income:As reported
    
    $
    2,421
    
    
    $
    5,556Add: Share-based
compensation expense
included in reported net
income, net of related tax
effects
    
    
    164
    
    
    
    318Deduct: Total share-based
compensation expense
determined under fair
value based method for all
awards, net of related tax
effects
    
    
    (1,475
    )
    
    
    (3,499
    )Pro forma net income
    
    $
    1,110
    
    
    $
    2,375Basic and diluted earnings per share:As reported
    
    $
    0.05
    
    
    $
    0.11Pro forma
    
    $
    0.02
    
    
    $
    0.05
 Equity Plans
      8




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##### Table of Contents



Stock Options
   Three Months Ended
    
    
    Six Months EndedJuly 1, 2006
    
    
    July 2, 2005
    
    
    July 1, 2006
    
    
    July 2, 2005Risk-free interest rate (weighted average)
    
    
    5.02
    %
    
    
    4.09
    %
    
    
    4.53
    %
    
    
    4.17
    %Expected volatility
    
    
    40
    %
    
    
    50
    %
    
    
    40
    %
    
    
    50
    %Expected option life (years)
    
    
    3.52 to 4.62
    
    
    
    3.44
    
    
    
    3.84 to 5.22
    
    
    
    3.58Dividends
    
    None
    
    
    None
    
    
    None

    
    None
   Number of
    
    
    Weighted
    
    
    Weighted AverageOptions
    
    
    Average Exercise
    
    
    Remaining Contract(in thousands)
    
    
    Price Per Share
    
    
    Life (years)Outstanding options at January 1, 2006
    
    
    6,445
    
    
    $
    12.80
    
    
    
    6.90Granted
    
    
    1,509
    
    
    
    21.10Exercised
    
    
    (773
    )
    
    
    12.67Forfeited or expired
    
    
    (179
    )
    
    
    15.21Outstanding options at July 1, 2006
    
    
    7,002
    
    
    
    14.54
    
    
    
    7.15Outstanding options exercisable at July 1, 2006
    
    
    3,936
    
    
    $
    12.82
    
    
    
    5.95
 Restricted Stock
  9




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##### Table of Contents



Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair(in thousands)
    
    
    ValueOutstanding unvested restricted stock at January 1, 2006
    
    
    150
    
    
    $
    14.89Granted
    
    
    390
    
    
    
    18.52Vested
    
    
    (133
    )
    
    
    15.94Forfeited or expired
    
    
    (4
    )
    
    
    20.27Outstanding unvested restricted stock at July 1, 2006
    
    
    403
    
    
    $
    18.01
 Restricted Stock Units
   Number of
    
    
    Weighted Average
    
    
    Weighted AverageUnits
    
    
    Grant Date Fair
    
    
    Remaining Contract(in thousands)
    
    
    Value
    
    
    (in years)Outstanding units at January 1, 2006
    
    
    
    
    
    
    Granted
    
    
    8
    
    
    $
    20.27Released
    
    
    
    
    
    
    Forfeited or expired
    
    
    
    
    
    
    Outstanding units at July 1, 2006
    
    
    8
    
    
    $
    20.27
    
    
    
    2.15
 10




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##### Table of Contents



Employee Stock Purchase Plan
   Risk-free interest rate (weighted average)
    
    
    4.98
    %Expected volatility
    
    
    40
    %Expected option life (years)
    
    
    0.5Dividends
    
    None
  3. Cash and cash equivalents
  4. Investments
    5. Financial Instruments
  11




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##### Table of Contents



6. Inventories
  As ofJuly 1,
    
    
    December 31,2006
    
    
    2005(in thousands)Finished goods
    
    $
    17,275
    
    
    $
    19,952Work in process
    
    
    7,843
    
    
    
    6,303Raw materials
    
    
    15,212
    
    
    
    15,416Total
    
    $
    40,330
    
    
    $
    41,671
 7. Property, Plant and Equipment, net
  As ofJuly 1,
    
    
    December 31,2006
    
    
    2005(in thousands)Land
    
    $
    4,096
    
    
    $
    341Building
    
    
    12,040
    
    
    
    2,445Building lease
    
    
    2,285
    
    
    
    2,285Equipment
    
    
    47,821
    
    
    
    44,067Rental equipment
    
    
    7,965
    
    
    
    7,334Improvements
    
    
    15,207
    
    
    
    11,526Total
    
    
    89,414
    
    
    
    67,998Accumulated depreciation and amortization
    
    
    (42,941
    )
    
    
    (39,092
    )Property, plant and equipment, net
    
    $
    46,473
    
    
    $
    28,906
 12




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##### Table of Contents



8. Goodwill and Purchased Intangible Assets
   As of July 1, 2006Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount( in thousands)Patents and trademarks
    
    $
    37,815
    
    
    $
    (19,512
    )
    
    $
    18,303Core technology
    
    
    37,485
    
    
    
    (9,523
    )
    
    
    27,962Developed technology
    
    
    122,782
    
    
    
    (33,109
    )
    
    
    89,673Non-compete agreement
    
    
    90
    
    
    
    (37
    )
    
    
    53Total purchased intangible assets, net
    
    $
    198,172
    
    
    $
    (62,181
    )
    
    $
    135,991
 As of December 31, 2005Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount(in thousands)Patents and trademarks
    
    $
    37,815
    
    
    $
    (17,692
    )
    
    $
    20,123Core technology
    
    
    37,485
    
    
    
    (8,762
    )
    
    
    28,723Developed technology
    
    
    122,782
    
    
    
    (29,750
    )
    
    
    93,032Non-compete agreement
    
    
    90
    
    
    
    (30
    )
    
    
    60Total purchased intangible assets, net
    
    $
    198,172
    
    
    $
    (56,234
    )
    
    $
    141,938
  9. Long-Term Debt
   13




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##### Table of Contents



Fiscal Year2004( in millions)Long Term Debt Offering Proceeds:Principal amount of convertible notes at maturity
    
    $
    247.4Original issue discount
    
    
    (103.7
    )Debt issuance costs
    
    
    (4.3
    )Net proceeds
    
    $
    139.4
      14




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##### Table of Contents



10. Litigation
 Johnson v. Thoratec
Corporation, et al. Johnson In re
Thoratec Corp. Securities Litigation
 Wong v. Grossman Wong v. Grossman
    11. Income Taxes
   15




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12. Net Income (Loss) Per Share
  Three Months Ended
    
    
    Six Months EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per share data)Net income (loss)
    
    $
    337
    
    
    $
    2,421
    
    
    $
    (593
    )
    
    $
    5,556Weighted average number of common shares-basic
    
    
    52,291
    
    
    
    48,735
    
    
    
    52,254
    
    
    
    48,470Dilutive effect of stock options and Employee Stock Purchase Plan shares
    
    
    1,025
    
    
    
    1,411
    
    
    
    
    
    
    
    1,060Weighted average number of common shares-diluted
    
    
    53,316
    
    
    
    50,146
    
    
    
    52,254
    
    
    
    49,530Net income (loss) per common share, basic and diluted
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    (0.01
    )
    
    $
    0.11
  13. Business Segment and Geographical Data
  16




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Three Months Ended

    
    
    Six Months EndedJuly 1,
    
    
    July 2
    
    
    July 1,
    
    
    July 22006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Product sales:Cardiovascular
    
    $
    35,797
    
    
    $
    28,776
    
    
    $
    65,612
    
    
    $
    60,842ITC
    
    
    18,986
    
    
    
    18,812
    
    
    
    37,926
    
    
    
    37,234Total product sales
    
    $
    54,783
    
    
    $
    47,588
    
    
    $
    103,538
    
    
    $
    98,076Income before income taxes:Cardiovascular (a)(d)
    
    $
    1,435
    
    
    $
    2,434
    
    
    $
    3,692
    
    
    $
    7,056ITC(a)(d)
    
    
    796
    
    
    
    3,467
    
    
    
    1,486
    
    
    
    6,618Corporate (b)(d)
    
    
    (2,023
    )
    
    
    (2,231
    )
    
    
    (6,942
    )
    
    
    (4,904
    )Litigation (c)
    
    
    (390
    )
    
    
    1
    
    
    
    (447
    )
    
    
    (177
    )Income (loss) from operations
    
    
    (182
    )
    
    
    3,671
    
    
    
    (2,211
    )
    
    
    8,593Other income and (expense):Interest expense
    
    
    (1,005
    )
    
    
    (1,037
    )
    
    
    (2,108
    )
    
    
    (2,045
    )Interest income and other
    
    
    1,791
    
    
    
    1,034
    
    
    
    3,492
    
    
    
    1,870Income (loss) before income tax benefit (expense)
    
    $
    604
    
    
    $
    3,668
    
    
    $
    (827
    )
    
    $
    8,418
 
 (a)
    
    Includes amortization expense on purchased intangible assets of $2.9 million and $5.9 million
for the three and six months ended July 1, 2006, respectively, and $2.8 million and $5.6
million for the three and six months ended July 2, 2005, respectively, related to the
Cardiovascular segment. The ITC segment includes amortization expense on purchased intangible
assets of $40,000 and $79,000 for both the three and six months ended July 1, 2006 and July
2, 2005, respectively.(b)
    
    Represents primarily general and administrative items not specifically identified to a
particular business segment.(c)
    
    Relates to litigation expenses not specifically identified to a particular business segment.(d)
    
    Includes additional SFAS No. 123(R) expense of $1.0 million, $0.8 million and $0.8 million
for Cardiovascular, ITC and Corporate, respectively, for the three months ended July 1, 2006
and $2.0 million, $1.5 million and $1.5 million for Cardiovascular, ITC and Corporate,
respectively, for the six months ended July 1, 2006.   Three Months Ended
    
    
    Six Months EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Domestic
    
    $
    42,065
    
    
    $
    35,948
    
    
    $
    78,711
    
    
    $
    75,151International
    
    
    12,718
    
    
    
    11,640
    
    
    
    24,827
    
    
    
    22,925Total product sales
    
    $
    54,783
    
    
    $
    47,588
    
    
    $
    103,538
    
    
    $
    98,076
 17




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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 2005 Annual Report on Form 10-K and in other documents we file with the Securities and
Exchange Commission (SEC). These forward-looking statements speak only as of the date hereof. We
are not under any obligation, and we expressly disclaim any obligation, to publicly release the
results of any revisions to these forward-looking statements that may be made to reflect events or
circumstances after the date hereof, or to reflect the occurrence of unanticipated events.
 The following presentation of managements discussion and analysis of our financial condition
and results of operations should be read together with our condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q .
 Overview
  Our Business Model
   
    
    Circulatory Support Products.Our circulatory support products include VADs for the
short, intermediate and long-term treatment of advanced heart failure. In addition,we have
developed small diameter grafts using our proprietary materials to address the vascular
access market. Our grafts are used for hemodialysis.
  
    
    Point-of-Care Diagnostics. Our point-of-care products include coagulation diagnostic test
systems that monitor blood coagulation for a patient while being administered certain
anticoagulants, blood gas/electrolyte and chemistry status, or anemia.
    
    Incision. Our incision products include devices used to obtain a patients blood sample
for diagnostic testing and screening for platelet function.
 Cardiovascular segment
  
    
    The Thoratec Ventricular Assist Device System is an external device for short to mid-term
cardiac support, which is sold worldwide. The device is approved to assist left, right and
biventricular support and is worn outside of the body. The Thoratec VAD is approved for use
in bridge-to-transplantation ( BTT), and for post-cardiotomy myocardial recovery.
    
    The Thoratec IVAD is the only implantable blood pump approved for both BTT and
post-cardiotomy myocardial recovery. It can be used for left, right, or biventricular
support. The IVAD utilizes the same internal working components as the Thoratec
VAD System, but has an outer housing made of a titanium alloy that makes it suitable for
implantation.
    
    The HeartMate XVE Left Ventricular Assist System, (LVAS), is an implantable device for
mid to long-term cardiac support and the only device approved in the U.S., Europe and Canada
for permanent support, or Destination Therapy, of those patients ineligible for heart
transplantation. The HeartMate XVE is also approved for use in BTT.
    
    The HeartMate II, which is currently in clinical trials for BTT and Destination Therapy,
is an implantable device consisting of a miniature rotary blood pump designed to provide
long-term cardiac support. Its design is intended to be not only smaller, but also simpler,
quieter, and longer lasting than the current generation of ventricular assist devices. We
received CE mark approval to commercially market this device in Europe in November 2005.
 18




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##### Table of Contents



ITC Segment
  
    
    The Hemochron POC coagulation system, is used to monitor a patients coagulation while
being administered anticoagulants in various settings, including in the cardiovascular
operating room and cardiac catheterization lab to monitor the drug Heparin, and in an
anticoagulation clinic to monitor the drug Coumadin. Hemochron is considered a moderately
complex device and must be used by professionally trained personnel. The system consists of
a small, portable analytical instrument and disposable test cuvettes.
    
    The IRMA POC blood gas/electrolyte and chemistry system, is used to monitor a patients
blood gas/electrolyte and chemistry status. It is considered moderately complex and its use
requires supervision by professionally trained personnel. The system consists of a small,
portable analytical instrument and disposable test cartridges.
    
    The ProTime coagulation monitoring system, is used to monitor patients coagulation while
they are taking oral anticoagulants such as Warfarin, and can be prescribed for use by
patients at home or can be used in the physicians office or clinic. The system consists of
a small, portable, analytical instrument and disposable test cuvettes.
    
    The Hemoglobin Pro, or Hgb Pro, is used by professionals, mainly in the doctors office
to test for anemia. It provides quick results from a very small blood sample. The system
consists of a small, hand held test meter and disposable test strips.
    
    Tenderfoot, Tenderlett and Surgicutt incision products, are used by professionals to
obtain a patients blood sample for diagnostic testing. The Tenderfoot is a heel stick
used for infant testing, the Tenderlett is used for finger incisions
and the Surgicutt is used to perform screening tests to determine platelet function. All products
feature permanently retracting blades for safe, virtually pain-free incision.
   19




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Critical Accounting Policies and Estimates
  Revenue Recognition
    Reserves
     20




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Income Taxes
    Evaluation of Purchased Intangibles and Goodwill for Impairment
   Valuation of share-based awards
  21




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Make-Whole Premium
   Recently Issued Accounting Pronouncements
  Results of Operations
  Three Months Ended
    
    Six Months EndedJuly 1,
    
    July 2,
    
    July 1,
    
    July 2,2006
    
    2005
    
    2006
    
    2005Product sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of product sales
    
    
    41
    
    
    
    39
    
    
    
    41
    
    
    
    39Gross profit
    
    
    59
    
    
    
    61
    
    
    
    59
    
    
    
    61Operating expenses:Selling, general and administrative
    
    
    35
    
    
    
    31
    
    
    
    36
    
    
    
    30Research and development
    
    
    18
    
    
    
    16
    
    
    
    19
    
    
    
    16Amortization of purchased intangible assets
    
    
    5
    
    
    
    6
    
    
    
    6
    
    
    
    6Litigation
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    59
    
    
    
    53
    
    
    
    61
    
    
    
    52Income (loss) from operations
    
    
    
    
    
    
    8
    
    
    
    (2
    )
    
    
    9Other income and (expense):Interest expense
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Interest income and other
    
    
    3
    
    
    
    2
    
    
    
    3
    
    
    
    2Income (loss) before income tax benefit (expense)
    
    
    1
    
    
    
    8
    
    
    
    (1
    )
    
    
    9Income tax benefit (expense)
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Net income (loss)
    
    
    1
    %
    
    
    5
    %
    
    
    (1
    )%
    
    
    6
    %
   22




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Three months ended July 1, 2006 and July 2, 2005
 Product Sales
  
    
    VAD product sales increased $7.8 million. The increase came from higher sales from both
our HeartMate and Thortec product lines.
    
    Graft product sales decreased by $0.8 million.
    
    ITCs hospital point-of-care diagnostic product sales increased $0.6 million, primarily
due to an increase in sales of our Hemochron Signature Elite product.
    
    Incision product sales decreased by $0.7 million.
    
    ITCs alternate site point-of-care sales increased by $0.3 million due to higher international sales.
  Gross Profit
  
    
    Costs related to share-based compensation of $0.2 million that were incurred in 2006 but
not in 2005.
    
    Cardiovascular segment gross profit decreased by 2% due to higher manufacturing costs
from capitalized variances. These variances were related to lower manufacturing volumes and
production mix experienced in the fourth quarter of 2005 and recognized in the second
quarter of 2006.
    
    ITC segment gross profit decreased by 5%, due to higher manufacturing and shipping costs
resulting from backorders and scrapped lots.
 Selling, General and Administrative
  
    
    Costs related to share-based compensation of $1.7 million that were incurred in 2006 but
not in 2005.
    
    Increased sales and marketing costs for the Cardiovascular segment of $1.2 million
resulted from increased personnel, travel and meeting expenses, primarily related to market
development and preparing for our HeartMate II launch for BTT.
    
    Increased sales and marketing costs in our ITC segment of $0.9 million, primarily due to
increased personnel costs.
    
    Higher corporate spending of $0.6 million primarily due to increased expense related to
our new headquarters facility purchased in January of 2006 and increases in personnel and
professional fees.
 23




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##### Table of Contents



Research and Development
  Amortization of Purchased Intangible Assets
  Litigation
  Interest Expense
  Interest Income and Other
  Income Taxes
    24




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##### Table of Contents



Six months ended July 1, 2006 and July 2, 2005
 Product Sales
  
    
    VAD product sales increased $6.0 million. The increase came from higher sales within our
HeartMate product line partially offset by lower sales in our Thoratec product line.
    
    Graft product sales decreased by $1.2 million.
    
    ITCs hospital point-of-care diagnostic product sales increased $0.4 million, primarily
due to an increase in sales of our Hemochron Signature Elite product.
    
    Incision product sales decreased by $0.6 million.
    
    ITCs alternate site point-of-care sales increased by $0.9 million, primarily due to higher cuvette sales. .
  Gross Profit
  
    
    Costs related to share-based compensation of $0.7 million that were incurred in 2006 but
not in 2005.
    
    Cardiovascular segment gross profit increased by 1% due to higher average sales prices
partially offset by capitalized variances. These variances were related to lower
manufacturing volumes and production mix experienced in the fourth quarter of 2005 and
recognized in the second quarter of 2006.
    
    ITC segment gross profit decreased by 6%, due to higher manufacturing and shipping costs.
 Selling, General and Administrative
  
    
    Costs related to share-based compensation of $3.2 million that were incurred in 2006 but
not in 2005.
    
    Sales and marketing costs related to the Cardiovascular segment were higher by $2.2
million due to increased costs of $1.8 million for personnel, travel and meetings expenses
primarily related to market development in anticipation of HeartMate II launch of BTT and
$0.4 million for advertising and tradeshows.
    
    Sales and marketing costs related to the ITC segment were higher due to increased
personnel costs of $1.3 million and an increase in Group Purchasing Organization costs of
$0.2 million.
    
    Higher corporate spending of $0.6 million, primarily related to our new headquarters
facility purchased in January 2006.
 25




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Research and Development
  Amortization of Purchased Intangible Assets
  Litigation
  Interest Expense
  Interest Income and Other
  Income Taxes
   26




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Liquidity and Capital Resources
       Off Balance Sheet Arrangements
  Contractual Obligations
  27




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
 Interest Rate Risk
   Foreign Currency Rate Fluctuations
   
 ITEM 4. CONTROLS AND PROCEDURES
  Disclosure Controls and Procedures
  28




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##### Table of Contents



Changes to Internal Controls
  Inherent Limitations on Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Johnson v. Thoratec
Corporation, et al. Johnson In re
Thoratec Corp. Securities Litigation
 29




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##### Table of Contents



Wong v. Grossman Wong v. Grossman
    
 ITEM 1A. RISK FACTORS
  30




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##### Table of Contents



ITEM 2: UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
   Total number
    
    
    Approximateof shares
    
    
    value of sharespurchased
    
    
    authorized to beunder
    
    
    purchased underTotal number
    
    
    
    
    
    
    publicly
    
    
    publiclyof shares
    
    
    Average price
    
    
    announced
    
    
    announcedpurchased
    
    
    paid per share
    
    
    programs (1)
    
    
    programs(in thousands, except per share data)April 2, 2006 through April 29, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    April 30, 2006 through May 27, 2006
    
    
    622
    
    
    
    16.10
    
    
    
    622
    
    
    
    10,005May 28, 2006 through July 1, 2006
    
    
    346
    
    
    
    14.47
    
    
    
    346
    
    
    
    5,007Total
    
    
    968
    (3)
    
    $
    15.52
    
    
    
    968
    (2)
    
    $
    15,012
    (3)
 
 (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.(2)
    
    Through December 2005, we repurchased 8.5 million shares of our common shares for $104.9
million under these combined programs. During the six months ended July 1, 2006, we
repurchased 1.0 million shares of our common stock for $15.0 million under these combined
programs and during the six months ended July 2, 2005 we repurchased 0.2 million shares of
our common shares for $2.2 million. All repurchased shares have been retired.(3)
    
    As of July 1, 2006, we repurchased commons shares for $15 million under our share
repurchase programs and a balance of $10 million is remaining. 31




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1.
    
    To elect the following directors to serve for the ensuing year until their successors are
elected:
 Number of VotesFor
    
    WithheldGerhard F. Burbach
    
    
    50,060,364
    
    
    
    326,462Howard E. Chase
    
    
    49,921,459
    
    
    
    465,367J. Daniel Cole
    
    
    50,211,656
    
    
    
    175,170Neil F. Dimick
    
    
    50,169,057
    
    
    
    217,769D. Keith Grossman
    
    
    50,002,710
    
    
    
    384,116J. Donald Hill
    
    
    49,878,390
    
    
    
    508,436William M. Hitchcock
    
    
    50,204,440
    
    
    
    182,386George W. Holbrook, Jr.
    
    
    49,876,040
    
    
    
    510,786Daniel M. Mulvena
    
    
    50,139,477
    
    
    
    247,349
 2.
    
    To ratify of the appointment of Deloitte & Touche LLP as the Companys independent
auditors for its fiscal year ending December 30, 2006:
 Number of VotesFor
    
    Against
    
    Abstain50,041,017
    
    
    340,392
    
    
    
    5,417
 3.
    
    To approve the Thoratec Corporation 2006 Incentive Stock Plan
 Number of VotesFor
    
    Against
    
    Abstain
    
    Broker Non Votes32,524,103
    
    
    7,286,223
    
    
    
    1,326,053
    
    
    
    9,250,447
 32




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##### Table of Contents



ITEM 6. EXHIBITS
 10.33
    
    First Amendment to Employment Agreement by and between the Company and Gerhard F. Burbach,
dated May 12, 2006. (1)10.34
    
    First Amendment to Officer Letter Agreement by and between the Company and Cynthia Lucchese,
dated May 12, 2006. (1)10.35
    
    Amendment and Restated Thoratec Corporation 2006 Incentive Stock Plan.(2)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.
 
  (1)
    
    Filed as an Exhibit to Thoratecs Form 8-K filed with the SEC on May 16, 2006.(2)
    
    Filed as an Exhibit to Thoratecs Form 8-K filed with the SEC on June 1, 2006. 33




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##### Table of Contents



SIGNATURES
  THORATEC CORPORATIONDate: August 10, 2006
    /s/ Gerhard F. BurbachGerhard F. BurbachChief Executive OfficerDate: August 10, 2006
    /s/ Cynthia L. LuccheseCynthia L. LuccheseChief Financial Officer 34