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THOR > SEC Filings for THOR > Form 10-Q on 7-May-2014All Recent SEC Filings

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Form 10-Q for THORATEC CORP


7-May-2014

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 2013 Annual Report on Form 10-K (the "2013 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

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 "PVAD and IVAD 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.

On June 30, 2013, we acquired certain assets and assumed certain liabilities from Terumo Corporation ("Terumo") related to the DuraHeart II Left Ventricular Assist product line ("DuraHeart II") previously under development by Terumo. Under the terms of the acquisition, we made an up-front cash payment of $13.0 million, and we will be obligated to make potential future milestone payments, based on regulatory approvals and product sales, of up to $43.5 million.

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 our predecessor long-term LVAD and with only one moving part, 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, we completed the required conformity assessment procedure and design dossier reviews to be given authority from our Notified Body to affix the CE Mark to the HeartMate II for marketing in Europe. HeartMate II is the most widely used LVAD.


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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 thirty 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 up to thirty days. We completed the required conformity assessment procedure to affix the CE Mark to the CentriMag for marketing in Europe, and the device is marketed in Europe to provide support for up to thirty days for both cardiac and respiratory failure.

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 been CE Marked for marketing in Europe 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, we completed the required conformity assessment procedure and design dossier reviews to be given authority from our Notified Body to affix the CE Mark to the PVAD, 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, we completed the required conformity assessment procedure and design dossier reviews to be given authority from our Notified Body to affix the CE Mark to the IVAD, 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 28, 2013, 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 29, 2014.


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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 29,                      March 30,
                                            2014             %             2013             %

Product sales                          $      125,697        100.0 %  $      117,725        100.0 %
Cost of product sales                          40,026         31.8            35,073         29.8
Gross profit                                   85,671         68.2            82,652         70.2
Operating expenses:
Selling, general and administrative            35,501         28.3            34,745         29.5
Research and development                       23,339         18.6            24,513         20.8
Total operating expenses                       58,840         46.9            59,258         50.3
Income from operations                         26,831         21.3            23,394         19.9
Other income and (expense):
Interest expense and other                          -         (0.0 )              (4 )       (0.0 )
Interest income and other                         247          0.2             1,117          0.9
Income before income tax expense               27,078         21.5            24,507         20.8
Income tax expense                              8,839          7.0             6,337          5.4
Net income                             $       18,239         14.5    $       18,170         15.4

Three months ended March 29, 2014 and March 30, 2014

Product Sales



Product sales consisted of the following:



                        Three Months Ended
                      March 29,    March 30,
                         2014         2013      % Change
                          (in thousands)
Total product sales   $  125,697   $  117,725        6.8 %

In the first quarter of 2014 as compared to the first quarter of 2013, product sales increased by $8.0 million or 6.8%, driven by sales performance of our HeartMate II and CentriMag products. HeartMate II contributed $7.1 million to the increase, while CentriMag and PediMag product line contributed $2.6 million to the increase. The increase was partially offset by a decline of $1.7 million in sales of the PVAD and IVAD product line. From a regional perspective, the U.S. sales contributed $3.3 million to the increase, while international sales contributed $4.7 million.

Sales originating outside of the U.S. and U.S. export sales collectively accounted for 24% and 22% of our total product sales in the first quarter of 2014 and the first quarter of 2013, respectively.

Gross Profit



Gross profit and gross margin were as follows:



                                    Three Months Ended
                             March 29,             March 30,
                                2014                  2013
                            (in thousands, except percentages)
Total gross profit       $           85,671    $           82,652
Total gross margin                     68.2 %                70.2 %

In the first quarter of 2014 as compared to the first quarter of 2013, gross margin decreased by two percentage points, which was primarily due to inventory related charges and manufacturing variances, in part offset by favorable product mix and lower intangible amortization expense related to PVAD and IVAD intangible assets.


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Selling, General and Administrative Expenses



Selling, general and administrative expenses were as follows:



                                               Three Months Ended
                                             March 29,     March 30,
                                               2014          2013       % Change
                                                 (in thousands)
Total selling, general and administration   $    35,501   $    34,745        2.2 %

In the first quarter of 2014 as compared to the first quarter of 2013, selling, general and administrative expenses increased by $0.8 million primarily due to the remeasurement of our estimated contingent consideration associated with the DuraHeart II acquisition, in part offset by the decrease in other administrative expenses.

Research and Development Expenses



Research and development expenses were as follows:



                                    Three Months Ended
                                  March 29,     March 30,
                                    2014          2013       % Change
                                      (in thousands)
Total research and development   $    23,339   $    24,513       (4.8 )%

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 2014 as compared to the first quarter of 2013, R&D expenses decreased by $1.2 million primarily due to timing of projected-related expenses related to our next generation product development programs and the remeasurement of our estimated contingent consideration associated with the DuraHeart II acquisition, in part offset by personnel added from that acquisition which did not exist in the first quarter of 2013.

Interest Income and Other



Interest income and other consisted of the following:



                                      Three Months Ended
                                   March 29,      March 30,
                                     2014            2013       % Change
                                        (in thousands)
Interest income                   $       224    $        246       (8.9 )%
Foreign currency, net                     (57 )           336     (117.0 )%
Other                                      80             535      (85.0 )%
Total interest income and other   $       247    $      1,117

The changes in interest income and other were primarily driven by foreign currency and the mark-to-market value of our deferred compensation plan assets during the current period.

Income Taxes

Our effective income tax rates in the first quarter of 2014 and 2013 were 32.6% and 25.9%, respectively. The increase is primarily due to the lack of federal R&D credits in the absence of enacted legislation in 2014. In the first quarter of 2013, we recognized a benefit of approximately $1.6 million for qualifying amounts, of which $1.3 million relates to the 2012 credits recognized as a result of the timing of legislation.

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 earnings for 2014 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.


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Investments classified as short-term consist of various financial instruments such as municipal bonds, corporate bonds, variable demand notes, commercial paper, certificate of deposit, and asset-backed securities. 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 29,     December 28,
                                                  2014           2013
                                                     (in thousands)
Cash and cash equivalents                      $  108,653   $      139,099
Short-term investments                            186,535          166,691
Long-term investments                               4,247            4,234
Total cash, cash equivalents and investments   $  299,435   $      310,024

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 29, 2014     March 30, 2013
                                                              (in thousands)
Net cash provided by operating activities           $         17,429    $        13,496
Net cash used in investing activities                        (23,582 )          (16,348 )
Net cash used in financing activities                        (24,841 )           (6,239 )
Effect of exchange rate changes on cash and cash
equivalents                                                      548               (772 )
Net decrease in cash and cash equivalents           $        (30,446 )  $        (9,863 )

Cash Provided by Operating Activities

Cash provided by operating activities in the three months ended March 29, 2014 was $17.4 million and consisted of net income of $18.2 million, adjustments for non-cash items of $11.1 million, and cash used in working capital of $11.9 million. Adjustments for non-cash items primarily consisted of $6.8 million of stock-based compensation expense and $4.2 million of depreciation and amortization expense, offset in part by the remeasurement of the contingent consideration of $0.5 million and excess tax benefits from stock-based compensation of $0.9 million. The decrease in cash from the changes in working capital activities primarily consisted of an increase in accounts receivable of $5.0 million due in part to a large international order in the first quarter of 2014. Decreases to accounts payable and other liabilities totaling $7.0 million also contributed to decrease in 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 $7.3million. This was in part offset by lower accounts receivable of $2.8 million.

Cash Used in Investing Activities

Cash used in investing activities in the three months ended March 29, 2014 of $23.6 million was primarily attributable to purchases of available for sale investments of $71.4 million and capital expenditures of $2.2 million to support our manufacturing facilities and administration growth, which was offset by the maturities and sales of available for sale investments of $50.0 million.

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 Used in Financing Activities

Cash used in financing activities in the three months ended March 29, 2014 of $24.8 million was primarily comprised of $13.5 million used for repurchases of 374,000 shares of our common stock under the stock repurchase programs authorized, $6.7 million used to repurchase vested restricted stock units for settlement of income tax withholding liabilities and $6.1 million paid in contingent consideration. This amount was offset in part by $2.7 million of proceeds related to stock option exercises, and $0.9 million from excess tax benefits for share-based compensation.


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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.

Stock Repurchase Program

On December 5, 2013, the Board of Directors authorized a new program to repurchase up to $200.0 million of our shares of common stock ("December 2013 program"), which will expire on December 31, 2015. In the three months ended March 29, 2014, we repurchased $12.3 million worth of shares of our common stock under the December 2013 program, of which $0.6 million was accrued on the condensed consolidated balance sheet as of March 29, 2014. In addition, we repurchased $1.2 million worth of shares of our common stock in the first quarter of 2014 under our previous November 2012 program which expired on December 31, 2013. As of March 29, 2014, $187.7 million was available for repurchases of shares of our common stock under the December 2013 program.

We are incorporated in California, and as California law does not recognize treasury stock, the shares repurchased decreased the common shares outstanding. We recorded the $13.5 million of shares repurchased in the three months ended March 29, 2014 by reducing the additional paid-in-capital ("APIC") balance by the average value per share reflected in the account prior to the repurchase and allocating the excess as a reduction of retained earnings. Based on this allocation, APIC decreased by $4.7 million and retained earnings decreased by $8.8 million in the consolidated statement of shareholders' equity.

We also purchased shares of our common stock that were not part of our publicly announced repurchase program, which represent the surrender value of shares of restricted stock 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 shares purchased in the three months ended March 29, 2014 was $6.7 million, which decreased APIC and retained earnings by $2.3 million and $4.4 million, respectively, based on the same allocation methodology discussed above. The aggregate value of shares purchased in the three months ended March 28, 2013 was $5.8 million, which decreased APIC and retained earnings by $1.9 million and $3.9 million, respectively.

Credit Facility

On December 19, 2011, we signed an unsecured revolving credit facility agreement that provides for up to $50.0 million 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 financial covenants with which we were in compliance as of March 29, 2014. The credit agreement permits us to use the facility for working capital and general corporate purposes. We did not have any borrowings under this credit facility during the three months ended March 29, 2014 or March 30, 2013.

Contractual Obligations

As of March 29, 2014, the liability for uncertain tax positions was $8.5 million, including interest and penalties. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.

During the three months ended March 29, 2014, there were no material changes to our contractual obligations reported in our 2013 Annual Report on Form 10-K.


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