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THOR > SEC Filings for THOR > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for THORATEC CORP


3-May-2013

Quarterly Report


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 2012 Annual Report on Form 10-K (the "2012 Annual Report") and in other documents we file with the Securities and Exchange Commission ("SEC"). These forward-looking statements speak only as of the date hereof. We are not under any obligation, and we expressly disclaim any obligation, to publicly release any revisions or updates to these forward-looking statements that may be made to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

The following presentation of management's discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

OVERVIEW

Continuing Operations-Cardiovascular Business

Thoratec Corporation ("we," "our," "us", or the "Company") is the world leader in mechanical circulatory support with a product portfolio to treat the full range of clinical needs for advanced heart failure patients. We develop, manufacture and market proprietary medical devices used for mechanical circulatory support ("MCS") for the treatment of heart failure ("HF") patients. For chronic circulatory support for HF patients, our primary product lines are our ventricular assist devices ("VADs"): HeartMate II Left Ventricular Assist System ("HeartMate II"), Thoratec Paracorporeal Ventricular Assist Device ("PVAD"), and Thoratec Implantable Ventricular Assist Device ("IVAD"). We refer to HeartMate II as the "HeartMate product line" and PVAD and IVAD collectively as the "Thoratec product line." For acute circulatory support, our product lines are CentriMag Acute Circulatory System ("CentriMag") and for pediatric patients PediMag/PediVAS Acute Circulatory System ("PediMag/PediVAS"). HeartMate II, PVAD, IVAD, CentriMag and PediMag/PediVAS are approved by the U.S. Food and Drug Administration ("FDA"), and have received Conformité Européene ("CE") Mark approval in Europe.

MCS devices supplement the pumping function of the heart in patients with HF. In most cases, a cannula connects the left ventricle of the heart to a blood pump. Blood flows from the left ventricle to the pump chamber via the cannula, powered by an electric or air driven mechanism that drives the blood through another cannula into the aorta. From the aorta, the blood then circulates throughout the body. Mechanical or tissue valves enable unidirectional flow in some devices. Currently, the power source remains outside the body for all FDA-approved MCS devices. Some of our devices can also provide support for the right side of the heart.

HeartMate II

HeartMate II is an implantable, electrically powered, continuous flow, left ventricular assist device ("LVAD") consisting of a rotary blood pump designed to provide intermediate and long-term MCS. HeartMate II is designed to improve survival and quality of life for a broad range of advanced HF patients. Significantly smaller than previous ventricular assist devices and with only one moving part, the HeartMate II is simpler and designed to operate more quietly than pulsatile devices.

HeartMate II received FDA approval in April 2008 for bridge-to-transplantation ("BTT") and received FDA approval for use in HF patients who are not eligible for heart transplantation ("Destination Therapy" or "DT") in January 2010. In November 2005, HeartMate II received CE Mark approval. The HeartMate II is the most widely used LVAD.

CentriMag

CentriMag is an extracorporeal full-flow acute surgical support platform incorporating a polycarbonate pump, based on magnetically levitated bearingless motor technology. CentriMag is cleared by the FDA for use up to six hours in patients requiring short-term extracorporeal circulatory support during cardiac surgery. Additionally, CentriMag is approved under an FDA humanitarian device exemption ("HDE") to be used as a right ventricular assist device for periods of support up to 30 days in patients in cardiogenic shock due to acute right ventricular failure. We have an ongoing study to evaluate the effectiveness of the CentriMag for periods of support for up to 30 days. CentriMag has CE Mark approval to provide support for up to 30 days for both cardiac and respiratory failure.


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PediMag/PediVAS

PediMag and PediVAS are identical, extracorporeal full-flow acute surgical support platforms incorporating a polycarbonate pump, based on magnetically levitated bearingless motor technology, designed to provide acute surgical support to pediatric patients. The brand names differ according to indication for use, duration of support, and regulatory approval. PediMag is cleared by the FDA for use in conjunction with the CentriMag console and motor, for support periods of up to six hours. Outside the U.S., the device is branded as PediVAS. This device has CE Mark approval to provide support for up to 30 days for both cardiac and respiratory failure.

PVAD

PVAD is an external, pulsatile VAD, FDA approved for BTT, including home discharge, and post-cardiotomy myocardial recovery and provides left, right, and biventricular MCS. PVAD is a paracorporeal device that is less invasive than implantable VADs since only the cannula is implanted. The paracorporeal nature of PVAD provides several benefits including shorter implantation times (approximately two hours) and the ability to use the device in smaller patients.

A pneumatic power source drives PVAD. It is designed for short-to-intermediate duration for post-cardiotomy myocardial recovery following cardiac surgery and BTT. PVAD and IVAD, described below, offer left, right or biventricular support for use for BTT. This characteristic is significant because the vast majority of BTT patients treated with PVAD and IVAD require right as well as left-side ventricular assistance. PVAD and IVAD are also the only devices approved for both BTT and recovery following cardiac surgery. PVAD incorporates our proprietary biomaterial, Thoralon, which has excellent tissue and blood compatibility and is resistant to blood clots.

PVAD received FDA approval for BTT in December 1995 and for recovery (post-cardiotomy) in May 1998. In June 1998, PVAD received CE Mark approval, allowing for its commercial sale in Europe.

IVAD

IVAD is an implantable, pulsatile VAD, FDA approved for BTT, including home discharge, and post-cardiotomy myocardial recovery and provides left, right or biventricular MCS. IVAD maintains the same blood flow path, valves and blood pumping mechanism as PVAD, but has an outer housing made of a titanium alloy that makes it suitable for implantation.

IVAD received FDA approval for BTT and recovery (post-cardiotomy) in August 2004. In June 2003, the IVAD received CE Mark approval, allowing for its commercial sale in Europe.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012, in the Notes to the Consolidated Financial Statements (Note
1) and the Critical Accounting Policies and Estimates section in Management's Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes in these significant accounting policies during the three months ended March 30, 2013.


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Results of Operations



The following table sets forth selected unaudited condensed consolidated
statements of operations data for the periods indicated and as a percentage of
total product sales:



                                                           Three Months Ended
                                               (in thousands, except for percentage data)
                                         March 30,                      March 31,
                                            2013             %             2012             %

Product sales                          $      117,725        100.0 %  $      126,769        100.0 %
Cost of product sales                          35,073         29.8            38,887         30.7
Gross profit                                   82,652         70.2            87,882         69.3
Operating expenses:
Selling, general and administrative            34,745         29.5            31,201         24.6
Research and development                       24,513         20.8            19,696         15.5
Total operating expenses                       59,258         50.3            50,897         40.1
Income from operations                         23,394         19.9            36,985         29.2
Other income and (expense):
Interest expense and other                         (4 )       (0.0 )              (3 )       (0.0 )
Interest income and other                       1,117          0.9               734          0.6
Income before income tax expense               24,507         20.8            37,716         29.8
Income tax expense                              6,337          5.4            12,230          9.7
Net income                             $       18,170         15.4    $       25,486         20.1

Three months ended March 30, 2013 and March 31, 2012

Product Sales



Product sales consisted of the following:



                        Three Months Ended
                      March 30,    March 31,
                         2013         2012      % Change
                          (in thousands)

Total product sales   $  117,725   $  126,769       (7.1 )%

In the first quarter of 2013 as compared to the first quarter of 2012, product sales decreased by $9.0 million or 7.1% driven by weaker sales volume across the HeartMate and Thoratec product lines. The HeartMate product line declined by $8.8 million, due primarily to the commercial launch of a competitive device, a dynamic that may continue to affect our results. Additionally, the Thoratec product line declined by $2.0 million. This was partially offset by the CentriMag and PediMag product line, which increased by $1.7 million. From a regional perspective, U.S. sales decreased by $11.5 million, while international sales increased by $2.5 million. In the U.S., three HeartMate II centers were added during the first quarter of 2013, bringing the total to 167 centers. Internationally, we added five centers during the first quarter of 2013, bringing the total to 164 centers.

Sales originating outside of the U.S. and U.S. export sales accounted for approximately 22% and 18% of our total product sales for each of the three months ended March 30, 2013 and March 31, 2012, respectively.

Gross Profit



Gross profit and gross margin were as follows:



                                Three Months Ended
                         March 30,             March 31,
                            2013                  2012
                        (in thousands, except percentages)
Total gross profit   $           82,652    $           87,882
Total gross margin                 70.2 %                69.3 %

In the first quarter of 2013 as compared to the first quarter of 2012, gross margin increased by 0.9 percentage point, which was due primarily to manufacturing efficiency, lower warranty and amortization expenses, and the absence of fair value inventory adjustments in the first quarter of 2013, in part offset by the U.S. medical device excise tax, which we recorded for the first time in the first quarter of 2013 and which deducted approximately 0.9 percentage points from our gross margins.


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Selling, General and Administrative Expenses



Selling, general and administrative expenses were as follows:



                                               Three Months Ended
                                             March 30,     March 31,
                                               2013          2012       % Change
                                                 (in thousands)
Total selling, general and administration   $    34,745   $    31,201       11.4 %

In the first quarter of 2013 as compared to the first quarter of 2012, selling, general and administrative expenses increased by $3.5 million primarily due to market development initiatives including sales force expansion, increased travel and other expenses, and an increase in share-based compensation associated with incremental headcount.

Research and Development Expenses



Research and development expenses were as follows:



                                    Three Months Ended
                                  March 30,     March 31,
                                    2013          2012       % Change
                                      (in thousands)
Total research and development   $    24,513   $    19,696       24.5 %

Research and development (R&D) expenses are largely project driven, and fluctuate based on the level of project activity planned and subsequently approved and conducted.

In the first quarter of 2013 as compared to the first quarter of 2012, R&D expenses increased by $4.8 million due to incremental R&D headcount and activities, and next generation product development costs primarily related to HeartMate III, PHP, and the fully implantable system.

Interest Expense and Other



                                Three Months Ended
                             March 30,      March 31,
                                2013           2012      % Change
                                  (in thousands)
Interest expense and other   $       (4 )   $       (3 )     33.3 %

The change in interest expense and other was not significant.

Interest Income and Other



Interest income and other consisted of the following:



                                      Three Months Ended
                                   March 30,       March 31,
                                      2013           2012       % Change
                                        (in thousands)
Interest income                   $        246    $       291      (15.5 )%
Foreign currency, net                      336            189       77.8 %
Other                                      535            254      110.6 %
Total interest income and other   $      1,117    $       734

The changes in interest income and foreign currency (net) were not significant. The change in other items was due the mark-to-market value of our deferred compensation plan assets during the current period.

Income Taxes

On January 2, 2013, the U.S. President signed into law The American Taxpayer Relief Act of 2012. This Act extends the research tax credit for two years to December 31, 2013. The extension of the research tax credit is retroactive and includes amounts paid or incurred after December 31, 2011. As a result of the enactment after the Company's 2012 year end, we recognized, in the first quarter of 2013, a benefit of approximately $1.3 million for qualifying amounts incurred in 2012.


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Our effective income tax rates for the three months ended March 30, 2013 and March 31, 2012, were 25.9% and 32.4%, respectively. The decrease is primarily attributable to the 2012 federal research tax credits, which we recognized in first quarter of 2013 (in the period of enactment), as well as the 2013 federal research tax credits.

Our effective tax rate is calculated based on the statutory tax rates imposed on projected annual pre-tax income or loss in various jurisdictions. Because changes in our forecasted profitability for 2013 can significantly affect our projected annual effective tax rate, our quarterly tax rate could fluctuate significantly depending on our profitability.

Liquidity and Capital Resources

Cash, Cash Equivalents and Investments

Cash and cash equivalents include highly liquid financial instruments that are readily convertible to cash and have maturities of 90 days or less from the date of purchase.

Investments classified as short-term consist of various financial instruments such as municipal bonds, corporate bonds, variable demand notes, commercial paper and certificate of deposit. Bonds with high credit quality with maturities of greater than 90 days when purchased are classified as short-term available-for-sale investments. Investments classified as long-term consist of our investments in auction rate securities.

Following is a summary of our cash, cash equivalents and investments:

                                               March 30,     December 29,
                                                  2013           2012
                                                     (in thousands)
Cash and cash equivalents                      $   91,459   $      101,322
Short-term investments                            160,505          148,426
Long-term investments                              10,092           10,607
Total cash, cash equivalents and investments   $  262,056   $      260,355

We believe that cash and cash equivalents, short-term available-for-sale investments on hand and expected cash flows from operations will be sufficient to fund our operations, capital requirements, and share repurchase programs for at least the next 12 months.

Cash Flow Activities



                                                                 March 30,       March 31,
                                                                    2013            2012
                                                                       (in thousands)
Net cash provided by operating activities                       $     13,496    $     41,256
Net cash provided by investing activities                            (16,348 )         4,249
Net cash used in financing activities                                 (6,239 )        (1,736 )
Effect of exchange rate changes on cash and cash equivalents            (772 )           449
Net increase (decrease) in cash and cash equivalents                  (9,863 )        44,218

Cash Provided by Operating Activities

Cash provided by operating activities in the three months ended March 30, 2013 was $13.5 million and consisted of net income of $18.2 million, adjustments for non-cash items of $11.2 million, and cash used by working capital of $15.9 million. Adjustments for non-cash items primarily consisted of $6.2 million of share-based compensation expense, and $4.5 million of depreciation and amortization expense, offset by $0.7 million related to deferred income taxes and $1.3 million for excess tax benefits from share-based compensation. Cash used by working capital activities was primarily due to an increase in inventory of $11.1 million and a reduction of current and non-current liabilities totaling $7.3M. This was in part offset by lower accounts receivable of $2.8 million.

Cash provided by operating activities in the three months ended March 31, 2012 was $41.3 million and consisted of net income of $25.5 million, adjustments for non-cash items of $9.1 million, and cash provided by working capital of $6.7 million. Adjustments for non-cash items primarily consisted of $4.9 million of share-based compensation expense, and $4.9 million of depreciation and amortization expense, offset by $0.8 million related to deferred income taxes and $1.5 million for excess tax benefits from share-based compensation. Cash provided by working capital activities was primarily due to a decrease in inventory of $7.5 million and higher current and non-current liabilities totaling $10.8 million. This was in part offset by higher accounts receivable of $10.5 million.


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Cash Provided by Investing Activities

Cash used in investing activities in the three months ended March 30, 2013 of $16.3 million was primarily attributable to the purchase of available for sale investments of $ 48.7 million and capital expenditures of $3.8 million to support our manufacturing facilities and administration growth. This was partially offset by maturities and sales of available for sale investments of $36.2 million.

Cash provided in investing activities in the three months ended March 31, 2012 of $4.2 million was primarily attributable to the maturities and sales of available for sale investments of $62.2 million. This was partially offset by the purchase of available for sale investments of $56.4 million and capital expenditures of $1.6 million to support our manufacturing facilities and administration growth.

Cash Used in Financing Activities

Cash used in financing activities in the three months ended March 30, 2013 of $6.2 million was primarily comprised of $5.8 million used to repurchase vested restricted stock units for settlement of income tax withholding liabilities and the payment of contingent consideration of $4.2 million. This was partially offset by proceeds of $2.5 million related to stock option exercises and $1.3 million from excess tax benefits for share-based compensation.

Cash used in financing activities in the three months ended March 31, 2012 of $1.7 million was primarily comprised of $4.7 million used to repurchase vested restricted stock units for settlement of income tax withholding liabilities and the payment of contingent consideration of $1.5 million. This was partially offset by proceeds of $3.0 million related to stock option exercises and $1.5 million from excess tax benefits for share-based compensation.

Stock Repurchase Program

On November 26, 2012, our Board of Directors authorized the repurchase of up to $150 million shares of the Company's `common stock ("November 2012 program"). As part of the authorization, the Company entered into an Accelerated Share Repurchase (ASR) agreement with J.P. Morgan, under which we agreed to repurchase an aggregate of $75.0 million of our common stock. Under the ASR program, we paid $75.0 million and received an initial delivery of approximately 1.5 million shares, which represented 75% of the ASR program's estimated value at inception. At the maturity of the program in the first quarter of 2013, an additional 0.6 million shares were delivered to the Company. The total value of the shares repurchased by the Company under the ASR program was based on a per share price of $36.00, representing the volume-weighted average price of our common stock during the repurchase period, less an agreed upon discount. As of March 30, 2013, $75.0 million is available for repurchases of shares of our common stock under the November 2012 program.

Shares of our common stock purchased that were not part of our publicly announced repurchase programs represent the surrender value of shares of restricted stock awards and units withheld in order to satisfy tax withholding obligations upon vesting. The shares purchased do not reduce the dollar value that may yet be purchased under our publicly announced repurchase programs. The aggregate value of 163,290 shares purchased during the three months ended March 30, 2013 was $5.8 million, and the aggregate value of 136,430 shares purchased during the three months ended March 31, 2012 was $4.7 million.

Off Balance Sheet Arrangements

We maintain an Irrevocable Standby Letter of Credit as part of our workers' compensation insurance program. The Letter of Credit is not collateralized and automatically renews on June 30th of each year, unless terminated by one of the parties. As of March 30, 2013, our Letter of Credit balance was approximately $0.8 million.

Credit Facility

On December 19, 2011, we obtained an unsecured revolving credit facility that provides for up to $50.0 million in revolving credit that will expire on December 19, 2016. The interest rate charged on the amounts borrowed is LIBOR plus a margin (ranging from 0.75% to 1.25%). The agreement contains certain financial covenants. We were in compliance with all such covenants as of March 30, 2013. The credit agreement permits us to use the facility for working capital and general corporate purposes. As of March 30, 2013, there were no borrowings under this credit facility.


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Contractual Obligations

As of March 30, 2013, the liability for uncertain tax positions was $11.7 million, including interest and penalties. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with this liability, we are unable to make a reasonably reliable estimate of the amount and period in which this liability might be paid.

During the three months ended March 30, 2013 there were no material changes to our contractual obligations reported in our 2012 Annual Report on Form 10-K outside our normal course of business.

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