UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003.
or
[ ] 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 0-25236
M I C R E L, I N C O R P O R A T E D
(Exact name of Registrant as specified in its charter)
California 94-2526744
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2180 Fortune Drive, San Jose, CA 95131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 944-0800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. Yes [X] No [ ]
As of April 30, 2003 there were 92,105,715 shares of common stock, no par
value, outstanding.
MICREL, INCORPORATED
INDEX TO
REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2003
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - March 31, 2003 and
December 31, 2002 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Disclosure Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
Signature 27
Certifications 28
2
ITEM 1. FINANCIAL STATEMENTS
MICREL, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
March 31, December 31,
2003 2002 (1)
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 123,900 $ 117,363
Accounts receivable, net 30,334 29,577
Inventories 38,496 39,531
Other current assets 3,742 2,675
Deferred income taxes 30,702 30,828
---------- ----------
Total current assets 227,174 219,974
PROPERTY, PLANT AND EQUIPMENT, NET 91,226 92,318
DEFERRED INCOME TAXES 9,362 9,606
INTANGIBLE ASSETS, NET 7,665 8,387
OTHER ASSETS 395 390
---------- ----------
TOTAL $ 335,822 $ 330,675
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,160 $ 13,026
Taxes payable 3,509 3,405
Deferred income on shipments to distributors 11,689 9,832
Other current liabilities 13,013 10,645
Current portion of long-term debt 779 911
---------- ----------
Total current liabilities 42,150 37,819
LONG-TERM DEBT 10,807 10,983
OTHER LONG-TERM OBLIGATIONS 7,848 8,254
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - authorized:
5,000,000 shares; issued and outstanding: none -- --
Common stock, no par value - authorized:
250,000,000 shares; issued and outstanding:
2003 - 92,089,079 shares; 2002 - 92,006,571 shares 159,827 160,889
Deferred stock compensation (7,684) (9,971)
Accumulated other comprehensive loss (26) (25)
Retained earnings 122,900 122,726
---------- ----------
Total shareholders' equity 275,017 273,619
---------- ----------
TOTAL $ 335,822 $ 330,675
========== ==========
(1) Derived from the audited balance sheet included in the Annual Report on
Form 10-K of Micrel, Incorporated for the year ended December 31, 2002.
See Notes to Condensed Consolidated Financial Statements.
3
MICREL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
March 31,
-----------------------
2003 2002
---------- ----------
NET REVENUES $ 50,955 $ 48,325
COST OF REVENUES* 30,411 30,677
---------- ----------
GROSS PROFIT 20,544 17,648
---------- ----------
OPERATING EXPENSES:
Research and development 12,689 13,362
Selling, general and administrative 6,992 7,995
Amortization of deferred stock compensation* 766 2,593
---------- ----------
Total operating expenses 20,447 23,950
---------- ----------
INCOME (LOSS) FROM OPERATIONS 97 (6,302)
OTHER INCOME, NET 166 1,064
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 263 (5,238)
PROVISION (BENEFIT) FOR INCOME TAXES 89 (1,257)
---------- ----------
NET INCOME (LOSS) $ 174 $ (3,981)
========== ==========
NET INCOME (LOSS) PER SHARE:
Basic $ 0.00 $ (0.04)
========== ==========
Diluted $ 0.00 $ (0.04)
========== ==========
SHARES USED IN COMPUTING PER
SHARE AMOUNTS:
Basic 92,039 93,180
========== ==========
Diluted 92,739 93,180
========== ==========
* Amortization of deferred stock compensation
related to:
Cost of revenues $ 301 $ 768
========== ==========
Research and development $ 509 $ 1,360
Selling, general and administrative 257 1,233
---------- ----------
Total $ 766 $ 2,593
========== ==========
See Notes to Condensed Consolidated Financial Statements.
4
MICREL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
-----------------------
2003 2002
---------- ----------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ 174 $ (3,981)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 7,593 8,202
Stock based compensation 1,067 3,361
Loss on disposal of assets -- 1
Deferred rent 9 21
Deferred income taxes 370 (1,685)
Changes in operating assets and liabilities:
Accounts receivable (757) (2,815)
Inventories 1,035 (3,153)
Prepaid expenses and other assets (1,072) 4,940
Accounts payable 134 1,438
Income taxes (274) --
Other accrued liabilities 1,953 876
Deferred income on shipments to distributors 1,857 (1,489)
---------- ----------
Net cash provided by operating activities 12,089 5,716
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (5,779) (2,445)
Proceeds from sales and maturities of short-term
investments -- 3,007
---------- ----------
Net cash provided (used) by investing activities (5,779) 562
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (308) (1,154)
Proceeds from the issuance of common stock, net 535 3,122
Repurchase of common stock -- (5,369)
---------- ----------
Net cash provided (used) by financing activities 227 (3,401)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,537 2,877
CASH AND CASH EQUIVALENTS - Beginning of period 117,363 130,406
---------- ----------
CASH AND CASH EQUIVALENTS - End of period $ 123,900 $ 133,283
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 194 $ 62
========== ==========
Income taxes $ -- $ 68
========== ==========
Non-cash transactions:
Deferred stock compensation (reversal) $ (1,219) $ (972)
========== ==========
See Notes to Condensed Consolidated Financial Statements.
5
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information - The accompanying condensed consolidated
financial statements of Micrel, Incorporated and its wholly-owned
subsidiaries ("Micrel" or the "Company") as of March 31, 2003 and for the
three months ended March 31, 2003 and 2002 are unaudited. In the opinion
of management, the condensed consolidated financial statements include all
adjustments (consisting only of normal recurring accruals) that management
considers necessary for a fair presentation of its financial position,
operating results and cash flows for the interim periods presented.
Operating results and cash flows for interim periods are not necessarily
indicative of results for the entire year.
This financial data should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
This financial data should also be read in conjunction with the Company's
critical accounting policies included in Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
Net Income (Loss) Per Common and Equivalent Share - Basic net income (loss)
per share is computed by dividing net income (loss) by the number of
weighted average common shares outstanding. Diluted net income (loss) per
share reflects potential dilution from outstanding stock options using the
treasury stock method. The computation of diluted net loss per share, in
2002, excludes common equivalent shares since they are anti-dilutive in a
loss period. Reconciliation of weighted average shares used in computing
earnings per share is as follows (in thousands):
Three Months Ended
March 31,
-----------------------
2003 2002
---------- ----------
Weighted average common shares outstanding 92,039 93,180
Dilutive effect of stock options outstanding using
the treasury stock method 700 --
---------- ----------
Shares used in computing diluted net income (loss)
per share 92,739 93,180
========== ==========
For the three months ended March 31, 2003 and 2002, 4.2 million and 13.7
million stock options, respectively, have been excluded from the weighted-
average number of common shares outstanding for the diluted net income
(loss) per share computations as they were anti-dilutive.
Stock Based Awards - The Company accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees".
Deferred stock compensation balances are recorded as a contra-equity amount
and amortized as a charge to operating results over the applicable vesting
periods. As of March 31, 2003 total unamortized stock compensation was
$7.7 million.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income and earnings per share had the Company
applied the fair value method. Under SFAS 123, the fair value of stock-
based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value
of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations for the fair value of stock
options were made using the Black-Scholes option pricing model with the
following weighted average assumptions for the three months ended March 31,
2003 and 2002, respectively: expected life, 60 months; stock volatility,
85.8% and 86.1%; risk free interest rates, 2.92% and 2.94%; and no
dividends during the expected term. The Company's calculations are based on
a multiple option valuation approach and forfeitures are recognized as they
6
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
occur. The Company's calculations for the fair value of stock issued under the
employee stock purchase plan were made using the Black-Scholes option pricing
model with the following weighted average assumptions: expected life, 6 months;
stock volatility, 86.1% in 2003 and 2002; risk free interest rates, 1.92% in
2003 and 2.94% in 2002; and no dividends during the term.
SFAS No. 148 amends SFAS No. 123 in December 2002 to require that
disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. The following table illustrates the
effect on the Company's net income (loss) and net income (loss) per share
if it had recorded compensation costs based on the estimated grant date
fair value as defined by SFAS No. 123 for all granted stock-based awards.
(in thousands, except per share amounts):
Three Months Ended
March 31,
-----------------------
2003 2002
---------- ----------
Net income (loss) as reported $ 174 $ (3,981)
========== ==========
Add: stock-based employee compensation
expense included in reported net income
(loss), net of tax effects 649 2,043
Deduct: stock-based employee compensation
expense determined under fair value based
method, net of tax effects (3,351) (6,022)
---------- ----------
Pro forma net income (loss) $ (2,528) $ (7,960)
========== ==========
Net income (loss) per share as reported:
Basic $ 0.00 $ (0.04)
========== ==========
Diluted $ 0.00 $ (0.04)
========== ==========
Pro forma net income (loss) per share:
Basic $ (0.03) $ (0.09)
========== ==========
Diluted $ (0.03) $ (0.09)
========== ==========
2. RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB" or the
"Board") issued Interpretation No. 46 ("FIN 46") "Consolidation of Variable
Interest Entities." Until this interpretation, a company generally included
another entity in its consolidated financial statements only if it
controlled the entity through voting interests. FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns. Management is currently evaluating the effect of this statement on
the Company's results of operations and financial position. FIN 46 is
effective for public entities for the first interim period beginning after
June 15, 2003 except for variable interest entities created after January
31, 2003 where it is effective immediately. The Company does not currently
anticipate this statement to have any effect on its financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue No. 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple
Deliverables." EITF 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets. The provisions of EITF 00-21 will
apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company does not believe the adoption of EITF 00-
21 will have a material impact on its financial position or results of
operations.
7
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In November 2002, the Board issued FASB Interpretation No. 45 ("FIN 45" or
the "Interpretation"), Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB
Interpretation No. 34. FIN 45 clarifies the requirements of FASB Statement
No. 5, Accounting for Contingencies ("FAS 5"), relating to the guarantor's
accounting for, and disclosure of, the issuance of certain types of
guarantees. FIN 45 is effective for guarantees entered into after December 31,
2002. The adoption of this standard did not have a material impact on the
Company's financial statements.
In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44,
and 64, Amendment of SFAS No. 13, and Technical Corrections" ("SFAS 145").
Among other things, SFAS 145 rescinds various pronouncements regarding
early extinguishment of debt and allows extraordinary accounting treatment
for early extinguishment only when the provisions of Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" are met. SFAS 145
provisions regarding early extinguishment of debt are generally effective
for fiscal years beginning after May 15, 2002. The Company does not
currently anticipate this statement to have any effect on it's financial
statements.
3. INVENTORIES
Inventories consist of the following (in thousands):
March 31, December 31,
2003 2002
---------- ----------
Finished goods $ 12,007 $ 15,597
Work in process 24,935 22,523
Raw materials 1,554 1,411
---------- ----------
$ 38,496 $ 39,531
========== ==========
4. BORROWING ARRANGEMENTS
Borrowing agreements consisted of $5.0 million revolving line of credit from
a commercial bank. There were no borrowings under the revolving line of
credit agreement at March 31, 2003. The revolving line of credit agreement
expires on June 30, 2003. Borrowings under the revolving line of credit
bear interest rates of, at the Company's election, the prime rate (4.25% at
March 31, 2003), or the bank's revolving offshore rate, which approximates
LIBOR (1.28% at March 31, 2003) plus 2.0%. The agreement contains certain
restrictive covenants that include a restriction on the declaration and
payment of dividends without the lender's consent. The Company was in
compliance with all such covenants at March 31, 2003.
As of March 31, 2003, the Company had $11.6 million under term notes
outstanding.
5. SIGNIFICANT CUSTOMERS
During the three months ended March 31, 2003, two customers, a world wide
distributor and an Asian based stocking representative, accounted for $8.0
million (16%) and $5.1 million (10%) of net revenues, respectively. No
direct O.E.M. customer accounted for more than 10% of net revenues. During
the three months ended March 31, 2002, one customer, an Asian based
stocking representative, accounted for $6.5 million (13.5%) of net
revenues.
8
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), which was comprised of the Company's net income
(loss) for the periods and changes in unrealized gains or losses on
investments, was a net income of $173,000 and a net loss of $4.0 million for
the three months ended March 31, 2003 and 2002, respectively.
7. SEGMENT REPORTING
The Company follows the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to
be presented in interim financial reports issued to stockholders. SFAS No.
131 also establishes standards for related disclosures about products and
services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial
information is available for evaluation by the chief operating decision
maker. The Company operates in two reportable segments: standard products
and custom and foundry products. The chief operating decision maker
evaluates segment performance based on revenue. Accordingly, all expenses
are considered corporate level activities and are not allocated to segments.
Therefore, it is not practical to show profit or loss by operating segments.
Also, the chief operating decision maker does not assign assets to these
segments. Consequently, it is not practical to show assets by operating
segments.
Net Revenues by Segment
(dollars in thousands)
Three Months Ended
March 31,
-----------------------
2003 2002
---------- ----------
Net Revenues:
Standard Products $ 45,254 $ 43,032
Custom and Foundry Products 5,701 5,293
---------- ----------
Total net revenues $ 50,955 $ 48,325
========== ==========
As a Percentage of Total Net Revenues:
Standard Products 89% 89%
Custom and Foundry Products 11 11
---------- ----------
Total net revenues 100% 100%
========== ==========
8. LITIGATION AND OTHER CONTINGENCIES
On February 26, 1999, the Lemelson Medical, Education & Research Foundation
(the "Lemelson Partnership") filed a complaint which was served on the
Company on June 15, 1999, entitled Lemelson Medical, Education & Research
Foundation, Limited Partnership v. Lucent Technologies Inc., et al. in the
United States District Court in Phoenix, Arizona, against eighty-eight
defendants, including the Company, alleging infringement of Lemelson
Foundation patents. The complaint in the lawsuit seeks unspecified
compensatory damages, treble damages and attorneys' fees, as well as
injunctive relief against further infringement of the Lemelson patents at
issue. The Company intends to continue to defend itself against these
claims. The case is currently in the motion and hearing phase.
On May 9, 1994, Linear Technology Corporation ("Linear" or "LTC"), a
competitor of the Company, filed a complaint against the Company, entitled
Linear Technology Corporation v. Micrel, Incorporated, in the United States
District Court in San Jose, California, alleging patent and copyright
infringement and unfair competition. All claims, except the patent
infringement claim, have been settled or dismissed. In this lawsuit,
Linear claimed that two of the Company's products infringed one of Linear's
patents. The complaint in the lawsuit sought unspecified compensatory
damages, treble damages and attorneys' fees as well as preliminary and
permanent injunctive relief against infringement of the Linear patent at
9
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
issue. On August 20, 1999, the United States District Court in San Jose
adjudicated in favor of the Company on a motion in this patent infringement
suit brought by the plaintiff. The plaintiff alleged in the suit that the
Company had infringed upon U.S. Patent No. 4,755,741, which covers design
techniques used to increase the efficiency of switching regulators. The
United States District Court in San Jose found the patent to be invalid
under the "on sale bar" defense as the plaintiff had placed integrated
circuits containing the alleged invention on sale more than a year before
filing its patent application. The United States District Court in San
Jose dismissed the plaintiff's complaint on the merits of the case and
awarded the Company its legal costs. A notice of appeal of the Judgment
was filed by Linear with the United States Court of Appeal for the Federal
Circuit ("CAFC") on September 17, 1999. After briefing and oral argument
by both companies, on December 28, 2001 the CAFC reversed the District
Court's judgment of invalidity and remanded the case to the District Court.
On January 11, 2002, the Company filed a Petition for Rehearing En Banc
with the Court of Appeal, which was subsequently denied. On July 3, 2002,
the Company filed a Petition for Writ of Certiorari with the Supreme Court
of the United States. Linear filed an opposition to the Petition on
September 6, 2002. The Company filed a reply to the opposition on
September 19, 2002. The Company is currently awaiting the Supreme Court's
decision.
On December 27, 2002, the Company filed a complaint against TRW, Inc.
("TRW") entitled Micrel, Incorporated v. TRW, Inc., dba TRW Automotive
Electronics Group, in the United States District Court, Northern District
of Ohio, Eastern Division, alleging various causes of action relating to
breach of a relationship surrounding the development of certain custom
products by Micrel for TRW. In this lawsuit, Micrel is alleging that TRW
breached various agreements to assist in Micrel's development of, and to
purchase, certain Application Specific Integrated Circuits. The complaint
seeks compensatory damages, attorneys' fees and costs of suit. On February
24, 2003, TRW filed an answer to the Company's complaint and a counterclaim
alleging various causes of action relating to breach of the above-mentioned
relationship concerning ASIC development. The case is currently in the
motion and discovery phase prior to an agreed-upon mediation scheduled to
take place in the summer of 2003.
On April 21, 2003, the Company filed a complaint against its former
principal accountants Deloitte & Touche LLP ("Deloitte") entitled Micrel,
Incorporated v. Deloitte & Touche LLP in the Superior Court of the State of
California, County of Santa Clara, alleging various causes of action relating
to certain professional advice received by Micrel from Deloitte. A summary of
the lawsuit can be found in the Company's Current Report on Form 8-K, dated
April, 21, 2003.
The Company believes that the ultimate outcome of the legal actions
discussed above will not result in a material adverse effect on the
Company's financial condition, results of operation or cash flows.
However, litigation is subject to inherent uncertainties, and no assurance
can be given that the Company will prevail in these lawsuits. Accordingly,
the pending lawsuits, as well as potential future litigation with other
companies, could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. To the extent
that the Company becomes involved in such intellectual property litigation,
it could result in substantial costs and diversion of resources to the
Company and could have a material adverse effect on the Company's financial
condition, results of operation or cash flows.
In the event of an adverse ruling in any intellectual property litigation
that now exists or might arise in the future, the Company might be required
to discontinue the use of certain processes, cease the manufacture, use and
sale of infringing products, expend significant resources to develop non-
infringing technology or obtain licenses to the infringing technology.
There can be no assurance, however, that under such circumstances, a
license would be available under reasonable terms or at all. In the event
of a successful claim against the Company and the Company's failure to
develop or license substitute technology on commercially reasonable terms,
the Company's financial condition, results of operations, or cash flows
could be adversely affected.
10
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Certain additional claims and lawsuits have arisen against the Company in
its normal course of business. The Company believes that these claims and
lawsuits will not have a material adverse effect on the Company's financial
condition, results of operation or cash flows.
9. STOCK REPURCHASE PROGRAM
In February 2002, the Company's Board of Directors announced a stock
repurchase program under which the Company may purchase up to $20.0 million
of its common stock. In July 2002, the Board of Directors approved an
additional $20.0 million stock repurchase program by increasing the total
authorized stock repurchase to $40.0 million of common stock in 2002. On
February 24, 2003 the Board of Directors extended the authorization to
repurchase shares of common stock through December 31, 2003, up to a
maximum purchase amount of $40 million for the years 2002 and 2003, of
which $10.9 million remains authorized for repurchases through December 31,
2003. Shares of common stock purchased pursuant to the repurchase program
are cancelled upon repurchase, and are intended to offset dilution from the
Company's stock option plans, employee stock purchase plans and 401(k).
The Company did not repurchase any shares of its common stock during the
quarter ended March 31, 2003.
10. STOCK OPTION EXCHANGE PROGRAM
On November 8, 2002 the Company filed a Schedule TO with the Securities and
Exchange Commission in order to initiate an offer to its employees to
exchange certain of their outstanding options for new options to be granted
six months and two days after expiration of the exchange offer. The
Company's Directors, CEO and CFO are not eligible to participate in the
stock option exchange program. This offer to exchange contemplates a grant
of new options to eligible employees in a ratio equivalent to one new
option granted for every two options elected for exchange and cancelled
with respect to employees who currently hold the position of vice president
or higher, and two new options granted for every three options elected for
exchange and cancelled with respect to all other employees.
The replacement options will have an exercise price equal to the closing
sales price of the Company's common stock as quoted on the Nasdaq National
Market on the date preceding the replacement grant date. The only options
eligible to be exchanged were those outstanding employee stock options with
an exercise price of $13 or higher. Options to purchase 3,330,401 shares of
the Company's common stock were surrendered on December 11, 2002 and will
be replaced with options to purchase approximately 2,131,675 shares on June
13, 2003 in this exchange offer.
11. CLOSURE OF WAFER FABRICATION FACILITY
In September 2002, the Company approved a plan to close its Santa Clara, CA
wafer fabrication facility to reduce costs and improve operating
efficiencies. Management believes that these actions are prudent given the
current excess capacity levels within its wafer fabrication facilities
combined with the uncertain demand in the high-speed communications market.
Associated with the facility closure, the Company accrued $5.5 million in
restructuring expenses which consisted of $1.0 million for equipment
disposal costs and $4.5 million in net contractual building lease costs,
excluding estimated sublease income, that will provide no future benefit.
These restructuring costs are expected to be paid in cash over the
remaining facility lease term, which expires in October 2006. Of the $5.5
million in accrued restructuring costs, $1.8 million has been classified as
other current liabilities and the remaining $3.7 million has been
classified as other long-term obligations as of March 31, 2003.
11
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Micrel designs, develops, manufactures and markets a range of high performance
standard analog integrated circuits and high-speed mixed-signal and digital
integrated circuits. These circuits are used in a wide variety of electronics
products, including those in the computer, telecommunications, industrial and
networking markets. In addition to standard products, the Company
manufactures custom analog and mixed-signal circuits and provides wafer
foundry services.
The Company derives a substantial portion of its net revenues from standard
products. For each of the three months ended March 31, 2003 and 2002 the
Company's standard products sales accounted for 89%, of the Company's net
revenues. The Company believes that a substantial portion of its net revenues
in the future will depend upon standard products sales, although such sales as
a proportion of net revenues may vary as the Company adjusts product output
levels to correspond with varying economic conditions and demand levels in the
markets which it serves. The standard products business is characterized by
short-term orders and shipment schedules, and customer orders typically can be
canceled or rescheduled without significant penalty to the customer. Since
most standard products backlog is cancelable without significant penalty, the
Company typically plans its production and inventory levels based on internal
forecasts of customer demand, which is highly unpredictable and can fluctuate
substantially. In addition, the Company is limited in its ability to reduce
costs quickly in response to any revenue shortfalls.
The Company may experience significant fluctuations in its results of
operations. Factors that affect the Company's results of operations include
the volume and timing of orders received, changes in the mix of products sold,
the utilization level of manufacturing capacity, competitive pricing pressures
and the successful development of new products. These and other factors are
described in further detail later in this discussion. As a result of the
foregoing or other factors, there can be no assurance that the Company will
not experience material fluctuations in future operating results on a
quarterly or annual basis, which could materially and adversely affect the
Company's business, financial condition, results of operations or cash flows.
Critical Accounting Policies
The financial statements included in this Form 10-Q and discussed within this
Management's Discussion and Analysis of Financial Condition and Results of
Operations have been prepared in accordance with accounting principles
generally accepted in the United States. Preparation of these financial
statements requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates
and judgements. Management bases its estimates and judgements on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. For a detailed discussion
of the Company's significant accounting policies, see Note 1 of Notes to
Consolidated Financial Statements in Item 14 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
Revenue Recognition. Micrel generates revenue by selling products to original
equipment manufacturers ("OEM"s), distributors and stocking representatives.
Stocking representative firms may buy and stock the Company's products for
resale or may act as the Company's sales representative in arranging for
direct sales from the Company to an OEM customer. The Company's policy is to
recognize revenue from sales to customers when the rights and risks of
ownership have passed to the customer, when persuasive evidence of an
arrangement exists, the product has been delivered, the price is fixed and
determinable and collection of the resulting receivable is reasonably assured.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Micrel allows certain distributors, primarily located in North America and
Europe, significant return rights and pricing adjustments subsequent to the
initial product shipment. Micrel defers recognition of revenue and related
cost of sales (in the balance sheet line item "deferred income on shipments to
distributors") derived from sales to these distributors until they have resold
the Company's products to their customers. Sales to OEM customers and stocking
representatives, primarily located in Asia, which have limited return rights
and pricing adjustments, are recognized upon shipment and a related returns
allowance is established based upon historical return rates. Actual future
returns could be different than the returns allowance established. The
Company also maintains an allowance for doubtful accounts for estimated
uncollectible accounts receivables. This estimate is based on an analysis of
specific customer creditworthiness and historical bad debts experience.
Actual future uncollectible amounts could exceed the doubtful accounts
allowance established.
Inventory Valuation. Inventories are stated at the lower of cost (first-in,
first-out method) or market. The Company has taken adjustments to write-down
the cost of obsolete and excess inventory to the estimated market value based
on historical and forecasted demand for its products. If actual future demand
for the Company's products is less than currently forecasted, additional
inventory adjustments may be required. Once a reserve is established, it is
maintained until the product to which it relates is sold or otherwise disposed
of. This treatment is in accordance with Accounting Research Bulletin 43 and
Staff Accounting Bulletin 100 "Restructuring and Impairment Charges."
Income Taxes. As of March 31, 2003, the Company had net deferred tax assets of
$40.1 million, resulting from temporary timing differences between book and
tax valuation of assets and liabilities. The Company believes that future
taxable income levels will be sufficient to realize the tax benefits of these
deferred tax assets and has not established a valuation allowance.
Litigation. The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. The Company is
currently involved in such intellectual property litigation (see Note 8 of
Notes to Condensed Consolidated Financial Statements) and has not accrued any
liability for such litigation. The Company regularly evaluates current
information available to determine whether such accruals should be made. An
estimated liability would be accrued when it is determined to be probable that
a liability has been incurred and the amount of loss can be reasonably
estimated. If the Company were to determine that such a liability was probable
and could be reasonably estimated, the adjustment would be charged to income in
the period such determination was made.
Results of Operations
The following table sets forth certain operating data as a percentage of total
net revenues for the periods indicated:
Three Months Ended
March 31,
-----------------------
2003 2002
------- -------
Net revenues 100.0% 100.0%
Cost of revenues 59.7 63.5
------- -------
Gross profit 40.3 36.5
------- -------
Operating expenses:
Research and development 24.9 27.6
Selling, general and administrative 13.7 16.5
Amortization of deferred stock
compensation 1.5 5.4
------- -------
Total operating expenses 40.1 49.5
------- -------
Income (loss) from operations 0.2 (13.0)
Other income, net 0.3 2.2
------- -------
Income (loss) before income taxes 0.5 (10.8)
Provision (benefit) for income taxes 0.2 (2.6)
------- -------
Net income (loss) 0.3% (8.2)%
======= =======
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Net Revenues. For the three months ended March 31, 2003, net revenues
increased 5% to $51.0 million from $48.3 million for the same period in the
prior year. This increase was primarily due to increased standard products
revenues and to a lessor extent, increased custom and foundry products
revenues. The Company derives a substantial portion of its net revenues from
standard products, which represented 89% of net revenues for each of the three
months ended March 31, 2003 and 2002.
For the three months ended March 31, 2003, standard products revenues increased
5% to $45.3 million from $43.0 million for the same period in the prior year.
Such increases resulted from increased unit shipments, which were partially
offset by decreased average selling prices. Sales of standard products by the
Company during the three months ended March 31, 2003 were led by low dropout
regulators, Ethernet communications and computer peripheral products. Such
products were sold primarily to manufacturers within the computer, industrial,
telecommunications and network communications markets.
For the three months ended March 31, 2003, custom and foundry products revenues
increased 8% to $5.7 million representing 11% of net revenues from $5.3 million
or 11% of net revenues for the same period in the prior year. Such increases
were due to increased unit shipments of foundry products.
Customer demand for semiconductors can change quickly and unexpectedly. As a
result of the slowing global economy, a rapid build-up of semiconductor
inventories in global sales channels occurred during 2001, causing lead times
for components to fall precipitously. Although it is generally believed that
industry wide channel inventories have decreased substantially since 2001, the
short lead time environment has continued from the middle of 2001 through the
end of the first quarter of 2003 as a result of underutilization of
manufacturing capacity and relatively high levels of work-in-process
inventories within the semiconductor industry. Customers perceive that
semiconductor components are readily available and continue to order only for
their short-term needs, resulting in order backlog levels which are not
sufficient for the Company to predict future revenue levels with certainty.
The Company's revenue levels are highly dependent on the amount of new orders
that are received for which product can be delivered to the customer within
the same period. Within the semiconductor industry these orders that are
booked and shipped within the period are called "turns fill" orders. During the
three months ended March 31, 2003, 58% of the Company's shipments resulted from
turns-fill orders. The Company believes the current high turns-fill
requirements and continuing pricing pressure will continue until the
semiconductor industry recovers from the current downturn. The Company
believes the key metrics that will evidence such an industry recovery are: a
cumulative annual growth rate in worldwide semiconductor shiplments of 14% or
greater, backlog levels at or above 70% of the following quarters shipments,
manufacturing capacity utilization levels at or above 80% of equipped capacity,
a growth in aggregate channel inventories for a least two consecutive quarters
and an increase in average selling prices of at least 20% from the downturn low
point. Currently, the uncertainty of customer demand, the high turns fill
requirement, and associated uncertainty of product mix and pricing, make it
difficult to predict future levels of sales and profitability.
International sales represented 68% and 70% of net revenues for the three
months ended March 31, 2003 and 2002, respectively. On a dollar basis,
international sales increased 3% to $34.8 million for the three months ended
March 31, 2003 from $33.9 million for the comparable period in 2002. This
increase in international sales resulted primarily from increased shipments of
telecommunications and personal computer products, primarily in Asia and to a
lessor extent Europe, offset in part by decreased shipments of Ethernet
communications products, primarily in Asia.
The Company's international sales are denominated in U.S. currency.
Consequently, changes in exchange rates that strengthen the U.S. dollar could
increase the price in local currencies of the Company's products in foreign
markets and make the Company's products relatively more expensive than
competitors' products that are denominated in local currencies, leading to a
reduction in sales or profitability in those foreign markets. The Company has
not taken any protective measures against exchange rate fluctuations, such as
purchasing hedging instruments with respect to such fluctuations.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Gross Profit. Gross profit is affected by a variety of factors including the
volume of product sales, product mix, manufacturing utilization, product yields
and average selling prices. For the three months ended March 31, 2003 the
Company's gross margin increased to 40% from 37% for the comparable period in
2002. This increase in gross margin resulted primarily from a greater sales
mix of higher margin products combined with decreased wafer fabrication costs
resulting from the Company's wafer fabrication consolidation project (see Note
11 of Notes to Condensed Consolidated Financial Statements) and lower costs for
external assembly and test manufacturing services, which were partially offset
by decreased average selling prices as compared to the same period in 2002.
The Company believes pricing pressure will continue to affect gross profit
until industry manufacturing capacity utilization levels increase and order
lead times extend significantly beyond current levels.
Research and Development Expenses. Research and development expenses include
costs associated with the development of new processes and the definition,
design and development of new products. The Company also expenses prototype
wafers and new production mask sets related to new products as research and
development costs until products based on new designs are fully characterized
by the Company and are demonstrated to support published data sheets and
satisfy reliability tests.
As a percentage of net revenues, research and development expenses represented
25% and 28% for the three months ended March 31, 2003 and 2002, respectively.
On a dollar basis, research and development expenses decreased $673,000 or 5%
to $12.7 million for the three months ended March 31, 2003 from $13.4 million
for the comparable period in 2002. The dollar decreases were primarily due to
decreased prototype fabrication costs combined with reduced staffing costs.
The Company believes that the development and introduction of new products is
critical to its future success and expects to continue its investment in
research and development activities in the future.
Selling, General and Administrative Expenses. As a percentage of net revenues,
selling, general and administrative expenses represented 14% and 17% for the
three months ended March 31, 2003 and 2002, respectively. On a dollar basis,
selling, general and administrative expenses decreased $1.0 million or 13% to
$7.0 million for the three months ended March 31, 2003 from $8.0 million for
the comparable period in 2002. The dollar decreases were principally
attributable to decreased outside legal costs combined with decreased
advertising expenses.
Amortization of deferred stock compensation. The Company accounts for stock-
based awards to employees using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees". Certain Company practices in effect prior to January
2002 related to employee stock option pricing resulted in stock compensation
expense under APB 25. For the three months ended March 31, 2003 total
amortization of deferred stock compensation was $1.1 million of which $301,000
was included in cost of revenues and $766,000 was included in amortization of
deferred stock compensation. For the three months ended March 31, 2002 total
amortization of deferred stock compensation was $3.4 million of which $768,000
was included in cost of revenues and $2.6 million was included in amortization
of deferred stock compensation. As of March 31, 2003 total unamortized stock
compensation was $7.7 million.
Other Income, Net. Other income, net reflects interest income from investments
in short-term, investment-grade, securities and money market funds offset by
interest expense incurred on term notes, combined with other non-operating
income or expenses. Other income, net decreased $898,000 to $166,000 for the
three months ended March 31, 2003 from $1.1 million for the comparable period
in 2002. The decrease was primarily due to decreased rates of return on cash,
cash equivalents and short-term investments combined with increased interest
expense due to an increase in average debt and the inclusion of $490,000 in
non-recurring other income in the prior year period.
Provision (Benefit) for Income Taxes. For the three months ended March 31,
2003 and 2002, the provision (benefit) for income taxes was 34% of pretax
income and 24% of pretax loss, respectively. The income tax provision
(benefit) for such interim periods reflects the Company's estimated annual
income tax rate. The estimated provision (benefit) for income taxes differs
from taxes computed at the federal statutory rate primarily due to the effect
of state income taxes, state research and development credits, and state
manufacturing credits.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
Since inception, the Company's principal sources of funding have been its cash
from operations, bank borrowings and sales of common stock. Principal sources
of liquidity at March 31, 2003 consisted of cash and cash equivalents of $123.9
million and bank borrowing arrangements. Borrowing agreements consisted of
$5.0 million under a revolving line of credit. There were no borrowings under
this agreement as of March 31, 2003 (for a discussion of borrowing
arrangements, see Note 4 of Notes to Condensed Consolidated Financial
Statements).
The Company's working capital increased by $2.8 million to $185.0 million as
of March 31, 2003 from $182.2 million as of December 31, 2002. The increase
was primarily attributable to a $6.5 million increase in cash and cash
equivalents which was partially offset by a $4.3 million increase in current
liabilities.
The Company's cash flows from operating activities were $12.1 million for the
three months ended March 31, 2003 as compared to $5.7 million for the same
period in the prior year. This cash flow increase resulted primarily from an
increase in net income adjusted for non-cash activities combined with an
increase in current liabilities. The cash flows from operating activities
generated by the Company in the three months ended March 31, 2003 were
primarily attributable to a net income of $174,000 plus additions for non-cash
activities of $9.0 million combined with a $3.7 million increase in current
liabilities, which was partially offset by a $794,000 increase in current
assets.
For the quarter ended March 31, 2002, the Company's cash flows from operating
activities were $5.7 million and were primarily attributable to net income
after adding back non-cash activities of $5.9 million combined with a decrease
in prepaid expenses and other of $5.6 million and an increase in accounts
payable of $1.4 million, which were partially offset by increases in
inventories of $3.2 million, accounts receivables of $2.8 million and a
decrease in deferred income on shipments to distributors of $1.5 million.
The Company's investing activities during the three months ended March 31,
2003 used cash of $5.8 million as compared to $562,000 of cash provided during
the comparable period in the prior year. This increase in cash used resulted
primarily from a $3.0 million decrease in net sales of short-term investments
combined with a $3.3 million increase in net purchases of property, plant and
equipment. Cash used by investing activities during the three months ended
March 31, 2003 resulted from the purchase of $5.8 in net purchases of
property, plant and equipment.
For the quarter ended March 31, 2002, the Company's investing activities
provided cash of $562,000 which resulted from net sales of short-term
investments of $3.0 million, which was partially offset by net purchases of
property, plant and equipment of $2.4 million.
The Company's financing activities during the three months ended March 31,
2003 provided cash of $227,000 as compared to cash used of $3.4 million during
the comparable period in the prior year. This increase in cash provided
resulted primarily from a $5.4 million decrease in the repurchase of common
stock, which was partially offset by decreased proceeds from the issuance of
common stock. Cash provided by financing activities during the three months
ended March 31, 2003 was the result of $535,000 in proceeds from the issuance
of common stock through employee stock transactions, which was partially
offset by $308,000 in repayments of long-term debt.
For the quarter ended March 31, 2002, the Company's financing activities used
cash of $3.4 million as a result of $5.4 million in repurchases of common stock
and $1.2 million in repayments of long-term debt which was partially offset by
proceeds from the issuance of common stock through the exercise of employee
stock options of $3.1 million.
The Company currently intends to purchase approximately $15 million to $25
million in capital equipment and improvements during 2003. The majority of
the anticipated 2003 capital spending is related to equipment and building
improvements associated with the consolidation of wafer fabrication operations
in its San Jose facility and new production mask sets. The Company also
expects to purchase additional research and development related software and
equipment, and manufacturing equipment for product testing of new products.
The Company is currently authorized by its Board of Directors to repurchase an
additional $10.9 million of its common stock in 2003. The Company expects that
its cash requirements through 2003 will be met by its cash from operations,
existing cash balances and short-term investments, and its credit facility.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Recently Issued Accounting Standards
In January 2003, the Financial Accounting Standards Board ("FASB" or the
"Board") issued Interpretation No. 46 ("FIN 46") "Consolidation of Variable
Interest Entities." Until this interpretation, a company generally included
another entity in its consolidated financial statements only if it controlled
the entity through voting interests. FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns. Management is currently
evaluating the effect of this statement on the Company's results of operations
and financial position. FIN 46 is effective for public entities for the first
interim period beginning after June 15, 2003 except for variable interest
entities created after January 31, 2003 where it is effective immediately. The
Company does not currently anticipate this statement to have any effect on its
financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus on Issue
No. 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables."
EITF 00-21 provides guidance on how to account for arrangements that involve
the delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company does not
believe the adoption of EITF 00-21 will have a material impact on its financial
position or results of operations.
In November 2002, the Board issued FASB Interpretation No. 45 ("FIN 45" or the
"Interpretation"), Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB
Interpretation No. 34. FIN 45 clarifies the requirements of FASB Statement No.
5, Accounting for Contingencies ("FAS 5"), relating to the guarantor's
accounting for, and disclosure of, the issuance of certain types of guarantees.
FIN 45 is effective for guarantees entered into after December 31, 2002. The
adoption of this standard did not have a material impact on the Company's
financial statements.
In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and
64, Amendment of SFAS No. 13, and Technical Corrections" ("SFAS 145"). Among
other things, SFAS 145 rescinds various pronouncements regarding early
extinguishment of debt and allows extraordinary accounting treatment for early
extinguishment only when the provisions of Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" are met. SFAS 145 provisions regarding early
extinguishment of debt are generally effective for fiscal years beginning after
May 15, 2002. The Company does not currently anticipate this statement to have
any effect on it's financial statements.
Contractual Obligations and Commitments
The Company's contractual obligations disclosure in its Annual Report on Form
10-K for the year ended December 31, 2002 has not materially changed since
that report was filed. During the three months ended March 31, 2003 payments
of $721,000 were made under previously existing operating leases and
repayments of $308,000 were made under previously existing long-term debt
agreements.
Factors That May Affect Operating Results
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements
include statements regarding: future products or product development; future
research and development spending and the Company's product development
strategy; the levels of international sales; future expansion or utilization of
manufacturing capacity; future expenditures; and current or future
acquisitions. All forward-looking statements included in this document are
based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements. It
is important to note that actual results could differ materially from those
in such forward-looking statements. Some of the factors that could cause
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
actual results to differ materially are set forth below. Additional factors
that may affect operating results are contained within the Company's Form 10-K
for the year ended December 31, 2002.
The Company is exposed to risks because of the uncertain rate of growth in the
global economy.
Although the global economy appears to have grown during 2002 after shrinking
for a period in 2001, reduced corporate profits and weak capital spending,
especially for technology related end markets that the Company serves such as
the high-speed communications, enterprise computing and telecommunications
markets, continue to dampen demand for the Company's products. In addition,
the Company is unable to determine the future impact of various geo-political
issues, as well as the recent outbreak of severe acute respiratory syndrome
("SARS"), on global and regional economies. If economic conditions in the
global or regional economies worsen, or if a wider global economic recession
materializes, the Company's business, financial condition and results of
operations may be materially and adversely affected.
The Company's operating results may fluctuate because of a number of factors,
many of which are beyond its control.
If the Company's operating results are below the expectations of public
market analysts or investors, then the market price of its Common Stock could
decline. Some of the factors that affect the Company's quarterly and annual
results, but which are difficult for the Company to control or predict are:
- - disruption of customer demand, transportation or supplier operations due to
war or terrorism
- - disruption of customer demand, transportation or supplier operations due to
SARS
- - the volume and timing of orders received
- - changes in the mix of products sold
- - market acceptance of the Company's products and its customers' products
- - competitive pricing pressures
- - cyclical semiconductor industry conditions
- - dependence on third party suppliers
- - the ability to introduce new products on a timely basis
- - the timing of new product announcements and introductions by the Company or
its competitors
- - the timing and extent of research and development expenses
- - fluctuations in manufacturing yields
- - the ability to hire and retain key technical and management personnel
- - access to advanced process technologies
- - the timing and extent of process development costs
Customer demand for the Company's products is volatile and difficult to
predict.
The Company's customers continuously adjust their inventories in response to
changes in end market demand for their products and the availability of
semiconductor components. This results in frequent changes in demand for the
Company's products. The volatility of customer demand limits the Company's
ability to predict future levels of sales and profitability. The supply of
semiconductors can quickly and unexpectedly match or exceed demand because end
customer demand can change very quickly. Also, semiconductor suppliers can
rapidly increase production output. This can lead to a sudden oversupply
situation and a subsequent reduction in order rates and revenues as customers
adjust their inventories to true demand rates. A rapid and sudden decline in
customer demand for the Company's products can result in excess quantities of
certain of the Company's products relative to demand. Should this occur the
Company's operating results may be adversely affected as a result of charges to
reduce the carrying value of the Company's inventory to the estimated demand
level or market price.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The weakness in the global economy in 2001 and 2002 has caused the end
markets that the Company's customers serve to grow less rapidly, or in some
cases, contract. The resulting uncertainty of demand has caused most of the
Company's customers to err on the side of caution until they see signs of order
strength for their end products. In addition, many customers are continuing to
deplete inventories in response to short supplier lead times. Semiconductors
are perceived to be readily available and supplier lead times are at or near
historic lows. In this environment, customers are not making large purchase
commitments, only ordering small quantities to fill known short-term
requirements, greatly reducing the Company's visibility into customer demand.
As a result, the Company's revenues are highly dependent upon turns fill orders
(orders booked and shipped in the same quarter). The reduced level of order
backlog coupled with the short-term nature of customer demand makes it
extremely difficult to predict near term revenues and profits.
The semiconductor industry is highly competitive.
The semiconductor industry is highly competitive and subject to rapid
technological change, price-erosion and increased international competition.
Significant competitive factors include:
- - product features
- - performance
- - price
- - timing of product introductions
- - emergence of new computer and communications standards
- - quality and customer support
In times when economic growth and customer demand is less certain, such as
the semiconductor industry is now experiencing, price competition becomes more
prevalent. Both the semiconductor industry and the Company have experienced
significant price erosion since the beginning of 2001. If this price erosion
continues it will have the effect of reducing revenue levels and gross margins
in future periods.
Because the standard products market for integrated circuits is diverse and
highly fragmented, the Company encounters different competitors in various
market areas. Most of these competitors have substantially greater technical,
financial and marketing resources and greater name recognition than the Company
has. Increased competition could adversely affect the Company's financial
condition or results of operations. There can be no assurance that the Company
will be able to compete successfully in either the standard products or custom
and foundry products business in the future or that competitive pressures will
not adversely affect the Company's financial condition, results of operations,
or cash flows.
The cost reduction actions the Company has initiated may not materialize as
expected, or be sustained as business improves.
The Company has implemented or initiated a variety of cost reduction
actions. The expected future cost savings from these programs may not
materialize as anticipated resulting in a smaller benefit to the Company's
financial results of operations. Furthermore, when customer demand improves
and revenues increase, it is unclear whether Micrel will continue to benefit
from all of the cost reduction actions that have been implemented.
The consolidation of wafer fabrication operations into the Company's San Jose
facility may negatively impact the results of operations or fail to result in
expected cost savings.
In September 2002, the Company approved a plan to close its Santa Clara, CA
wafer fabrication facility and transfer the production and research and
development processes and certain equipment into its San Jose, CA facility. If
the transfer of the equipment and manufacturing processes is not successful or
is delayed, this could result in the Company's inability to manufacture certain
products and delay certain new product development. In addition, expected cost
savings related to this consolidation may be delayed or unachieved. Either of
these factors could have an adverse effect on the Company's results of
operations and financial condition.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Market conditions may lead the Company to initiate additional cost reduction
plans, which may negatively affect near term operating results.
As a result of weak customer demand, competitive pricing pressures, excess
capacity, weak economic conditions or other factors, the Company may decide to
initiate actions to reduce the Company's cost structure and improve the
Company's future operating results. The cost reduction actions may require
incremental costs to implement, which could negatively affect the Company's
operating results in periods when the incremental costs or liabilities are
incurred.
The Company's product offering, while diversified, is highly dependent on
certain select end markets.
The Company currently sells a significant portion of its products in the
high-speed communications, computer, networking and wireless handset markets.
These markets are characterized by short product life cycles, rapidly changing
customer demand, evolving and competing industry standards and seasonal demand
trends. Additionally, there can be no assurance that these markets will
continue to grow. If the markets for high speed communications, computers,
networking or wireless handsets that the Company serves fail to grow, or grow
more slowly than it currently anticipates, or if there is increased competition
in these markets, the Company's business, results of operations and financial
condition could be adversely affected.
An important part of the Company's strategy is to continue to focus on the
market for high-speed communications integrated circuits. If the severe
downturn in the telecommunications infrastructure industry continues resulting
in lack of demand for the Company's high bandwidth products, the Company's
future revenue growth and profitability could be adversely affected.
The Company's Ethernet products have become an important portion of the
Company's revenues. If the Company fails to develop new products to serve this
market in a timely manner, or if the market acceptance of the Company's new
Ethernet products is poor, if a competitor's products unfavorably affect
pricing or demand for the Company's products, the Company's revenues and
results of operations could be adversely affected.
The Company currently derives the majority of its product revenues from
sales of standard analog and mixed-signal integrated circuits and expects these
products to continue to account for the majority of its revenues for the
foreseeable future. As a result, factors adversely affecting the pricing of or
demand for standard analog integrated and mixed-signal circuits, such as
competition, product performance or technological change, could have a material
adverse effect on the Company's business and consolidated results of operations
and financial condition.
The markets that the Company serves frequently undergo transitions in which
products rapidly incorporate new features and performance standards on an
industry-wide basis. If the Company's products are unable to support the new
features or performance levels required by OEMs in these markets, it would
likely lose business from existing or potential customers and would not have
the opportunity to compete for new design wins until the next product
transition. If the Company fails to develop products with required features or
performance standards, or experiences even a short delay in bringing a new
product to market, or if its customers fail to achieve market acceptance of
their products, its revenues could be significantly reduced for a substantial
period of time.
The Company encounters risks associated with its international operations,
including geopolitical risks.
It is unclear what effect prolonged military conflict would have on world
trade or on economic conditions in specific regions of the world. Reduced
levels of economic activity, or disruptions of international transportation,
could adversely affect the Company's sales on either a global basis or in
specific geographic regions. Two of the Company's top ten direct customers are
located in South Korea. In the event that current political tensions
surrounding North Korea evolve into military or social conflict, the Company's
revenues, results of operations, cash flow and financial condition could be
adversely affected.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company has generated a substantial portion of its net revenues from
export sales. The Company believes that a substantial portion of its future
net revenues will depend on export sales to customers in international markets,
including Asia. International markets are subject to a variety of risks,
including changes in policy by foreign governments, social conditions such as
civil unrest, economic conditions including high levels of inflation,
fluctuation in the value of foreign currencies and currency exchange rates and
trade restrictions or prohibitions. In addition, the Company sells to domestic
customers that do business worldwide and cannot predict how the businesses of
these customers may be affected by economic or political conditions in Asia or
elsewhere in the world. Such factors could adversely affect the Company's
future revenues, financial condition, results of operations or cash flows.
The Company is reliant on certain key suppliers for wafer fabrication,
circuit assembly and testing services. Most of these suppliers are based
outside of the U.S. The Company's supply could be interrupted as a result of
any of the previously mentioned risk factors relating to international markets.
The Company's international sales are primarily denominated in U.S.
currency. Consequently, changes in exchange rates that strengthen the U.S.
dollar could increase the price of the Company's products in the local
currencies of the foreign markets it serves. This would result in making the
Company's products relatively more expensive than its competitors' products
that are denominated in local currencies, leading to a reduction in sales or
profitability in those foreign markets. The Company has not taken any
protective measures against exchange rate fluctuations, such as purchasing
hedging instruments.
The Company's gross margin is dependent upon a number of factors, including the
level of capacity utilization.
Semiconductor manufacturing is a capital-intensive business resulting in
high fixed costs. If the Company is unable to utilize its installed wafer
fabrication or test capacity at a high level, the costs associated with these
facilities and equipment would not be fully absorbed, resulting in higher
average unit costs and lower sales margins. The decline in new customer order
rates has resulted in reduced capacity utilization of the Company's factories
as it has attempted to match production with anticipated customer demand. The
Company's gross margins have declined as a result of this reduced utilization
of production capacity. Gross margins may deteriorate further should
production activity be curtailed in response to lower customer demand in the
future.
Dependence on third-party manufacturing and supply relationships increases the
risk that the Company will not have an adequate supply of products to meet
demand or that its cost of materials will be higher than expected.
The Company faces many risks associated with its dependence upon third
parties that manufacture, assemble or package certain of it's products. These
risks include:
- - reduced control over delivery schedules and quality
- - risks of inadequate manufacturing yields and excessive costs
- - the potential lack of adequate capacity during periods of excess demand
- - difficulties selecting and integrating new subcontractors
- - limited warranties on wafers or products supplied to the Company
- - potential increases in prices
- - potential misappropriation of the Company's intellectual property
Any of these risks may lead to increased costs or delay delivery of the
Company's products, which would harm its profitability and customer
relationships.
Additionally, the Company's wafer and product requirements typically
represent a relatively small portion of the total production of the third-party
foundries and outside assembly, testing and packaging contractors. As a
result, Micrel is subject to the risk that a foundry will provide delivery or
capacity priority to other larger customers at the expense of Micrel, resulting
in an inadequate supply to meet customer demand or higher costs to obtain the
necessary product supply. Also, there is a risk that a third party
manufacturer will cease production on an older or lower volume process that it
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
uses to produce the Company's products. The Company cannot be certain that its
outside manufacturers will continue to devote resources to the production of
its products or continue to advance the process design technologies on which
the manufacturing of its products are based. Each of these events could
increase the Company's costs and harm its ability to deliver products on
time.
The Company is subject to the risk of litigation and regulatory action in
connection with the restatement of its financial statements, and the potential
liability from any such litigation or regulatory action could harm its
business.
On January 28, 2002, the Company announced that it would restate its
consolidated financial statements for the fiscal years ended December 31, 1998,
1999, and 2000, and the fiscal quarters ended March 31, 2001, June 30, 2001,
and September 30, 2001. As a result of this restatement, the Company could
become subject to litigation or regulatory proceedings, or both. As of the
date hereof, the Company is not aware of any litigation having been commenced
against it related to this restatement. However, such litigation could be
commenced against the Company in the future and, if so, the Company cannot
predict the outcome of any such action at this time. However, if an
unfavorable result occurred in any such action, the Company's business and
financial condition could be harmed. In addition, regulatory agencies, such as
the Securities and Exchange Commission, could commence a formal investigation
of the Company's restatement. At this time management cannot predict whether
or not any regulatory investigation related to the restatement will be
commenced or, if it is, the outcome of any such investigation. However, if any
such investigation were to result in a regulatory proceeding or action against
the Company, its business and financial condition could be harmed. The
restatement also involves certain tax issues that need to be resolved with the
appropriate taxing authorities. The Company has recorded a liability in its
financial statements with respect to these tax issues. The Company cannot
predict the results of its discussions with the appropriate tax authorities
regarding the tax implications of its restatement and accordingly, the amount
of actual financial impact may differ from the amount recorded in the Company's
financial statements.
The Company may not be able to protect its intellectual property adequately, or
could be harmed by litigation involving its patents and proprietary rights.
The Company's future success depends in part upon its intellectual property,
including patents, trade secrets, know-how and continuing technology
innovation. There can be no assurance that the steps taken by the Company to
protect its intellectual property will be adequate to prevent misappropriation
or that others will not develop competitive technologies or products. There
can be no assurance that any patent owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder
will provide competitive advantages or that any of its pending or future patent
applications will be issued with the scope of the claims sought, if at all.
Furthermore, there can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology,
duplicate technology or design around the patents owned by the Company.
Additionally, the semiconductor industry is characterized by frequent
litigation regarding patent and other intellectual property rights. There can
be no assurance that existing claims or any other assertions or claims for
indemnity resulting from infringement claims will not adversely affect the
Company's business, financial condition, results of operations, or cash flows.
The Company's operating results substantially depend on manufacturing output
and yields, which may not meet expectations.
The Company manufactures most of its semiconductors at its San Jose and
Santa Clara, California fabrication facilities. Manufacturing semiconductors
requires manufacturing tools that are unique to each product being produced.
If one of these unique manufacturing tools was damaged or destroyed, then the
Company's ability to manufacture the related product would be impaired and its
business would suffer until the tool was repaired or replaced. Additionally,
the fabrication of integrated circuits is a highly complex and precise process.
Small impurities, contaminants in the manufacturing environment, difficulties
in the fabrication process, defects in the masks used to print circuits on a
wafer, manufacturing equipment failures, wafer breakage or other factors can
cause a substantial percentage of wafers to be rejected or numerous die on each
wafer to be nonfunctional.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company faces risks associated with acquisitions it has completed and will
face risks associated with any future acquisitions.
The Company has made acquisitions in the past and may make acquisitions in
the future. The risks involved with acquisitions include:
- - diversion of management's attention
- - failure to retain key personnel
- - amortization of acquired intangible assets
- - customer dissatisfaction or performance problems with the acquired company
- - the cost associated with acquisitions and the integration of acquired
operations
- - assumption of unknown liabilities
Any of these risks could materially harm the Company's business, financial
condition and results of operations. Additionally, any acquisition involves a
significant amount of integration of two companies that have previously
operated independently. No assurance can be given that difficulties will not
be encountered in integrating certain products, technologies or operations of
the acquired companies or that the benefits expected from such integration will
be realized. There can be no assurance that any of the acquired companies will
retain its key personnel, that the engineering teams of Micrel and the acquired
companies will successfully cooperate and realize any technological benefits or
that Micrel or the acquired companies will realize any of the other anticipated
benefits of the acquisitions. In addition, the consummation of an acquisition
could result in the cancellation, termination or non-renewal of arrangements
with the acquired company by suppliers, distributors or customers, or the
termination of negotiations or delays in ordering by prospective customers as a
result of uncertainties that may be perceived as a result of the acquisition.
Any significant amount of cancellations, terminations, delays or non-renewals
of arrangements with the acquired company or loss of key employees or
termination of negotiations or delays in ordering could have a material adverse
effect on the business, operating results or financial condition of the
acquired company and Micrel after the acquisition.
In addition, some of the past acquisitions have been accounted for using the
pooling-of-interests method of accounting which means the acquisitions are
subject to rules established by the Financial Accounting Standards Board and
the Securities and Exchange Commission. These rules are complex and the
interpretation of them is subject to change. Additionally, the availability of
pooling of interests accounting treatment for a business combination depends in
part upon circumstances and events occurring after the acquisition. The
failure of a past business combination that has been accounted for under the
pooling of interests accounting method to qualify for this accounting treatment
would materially harm the Company's reported and future earnings and likely,
the price of its Common Stock.
The Company's future success depends in part on the continued service of its
key design engineering, sales, marketing and executive personnel and its
ability to identify, hire and retain additional personnel.
There is intense competition for qualified personnel in the semiconductor
industry, in particular design engineers, and the Company may not be able to
continue to attract and train engineers or other qualified personnel necessary
for the development of its business or to replace engineers or other qualified
personnel who may leave its employ in the future. Loss of the services of, or
failure to recruit, key design engineers or other technical and management
personnel could be significantly detrimental to the Company's product and
process development programs.
The Company's ability to manufacture sufficient wafers to meet demand could be
severely hampered by natural disasters.
The Company's existing wafer fabrication facilities are located in Northern
California and these facilities may be subject to natural disasters such as
earthquakes. A significant natural disaster, such as an earthquake or prolonged
drought, could have a material adverse impact on the Company's business,
financial condition and operating results.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company's business could be adversely affected by electrical power or
natural gas supply interruptions.
The majority of the Company's administrative, technical and manufacturing
facilities are located in Northern California and these facilities may be
subject to electrical power or natural gas supply interruptions. In recent
months, electrical power suppliers have experienced shortages in electrical
power which has resulted in brief electrical power interruptions. The weak
financial condition of California's Public Utilities may aggravate the
situation and shortages may develop for natural gas. Semiconductor
manufacturing depends upon a controlled environment that requires high usage of
electrical power and natural gas. Frequent or extended electrical power
interruptions could have a negative impact on production output, manufacturing
yields, and manufacturing efficiencies and could have a material adverse impact
on the Company's business, financial condition and operating results.
The Company could incur substantial fines or litigation costs associated with
the storage, use and disposal of hazardous materials.
The Company is subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in it's manufacturing process.
Any failure to comply with present or future regulations could result in the
imposition of fines, the suspension of production, alteration of the Company's
manufacturing processes or a cessation of operations. In addition, these
regulations could restrict the Company's ability to expand it's facilities at
their present locations or construct or operate a new wafer fabrication
facility or could require it to acquire costly equipment or incur other
significant expenses to comply with environmental regulations or clean up prior
discharges. The Company's failure to control the use of, disposal or storage
of, or adequately restrict the discharge of, hazardous substances could subject
it to future liabilities and could have a material adverse effect on it's
business.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in the Company's 2002 Form 10-K
for the year ended December 31, 2002 have not changed significantly during
the three months ended March 31, 2003.
ITEM 4: CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports
under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and that such information is accumulated
and communicated to the Company's management, including its chief executive
officer and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's chief executive officer and chief
financial officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's chief executive officer and chief financial officer concluded that
the Company's disclosure controls and procedures appear to be effective.
There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information included in Note 8 of Notes to Condensed Consolidated
Financial Statements under the caption "Litigation and Other Contingencies" in
Item 1 of Part I is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) Dividend Payment Restrictions
The Company has entered into borrowing agreements that contains restrictions on
the declaration and payment of dividends without the lender's consent. In
addition, the Company currently intends to retain future earnings to fund
operations, and does not anticipate paying dividends on its common stock in the
foreseeable future.
(c) None.
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K. The Company did not file any Reports on Form 8-K
during the quarter ended March 31, 2003.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICREL, INCORPORATED
--------------------
(Registrant)
Date: May 15, 2003 By /s/ Richard D. Crowley, Jr.
----------------------------
Richard D. Crowley, Jr.
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
27
CERTIFICATIONS
I, Raymond D. Zinn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Micrel,
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003 By /s/ Raymond D. Zinn
------------------------
Raymond D. Zinn
President, Chief Executive
Officer and Director
(Principal Executive Officer)
28
I, Richard D. Crowley, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Micrel,
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003 By /s/ Richard D. Crowley, Jr.
-----------------------------
Richard D. Crowley, Jr.
Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
29