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 September 30, 2004.
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 November 1, 2004 there were 90,061,866 shares of common stock, no par
value, outstanding.
MICREL, INCORPORATED
INDEX TO
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 2004 and December 31, 2003 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Unregistered Sales and Use of Proceeds 31
Item 6. Exhibits 31
Signature 32
3
ITEM 1. FINANCIAL STATEMENTS
MICREL, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
September 30, December 31,
2004 2003 (1)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 112,321 $ 140,059
Short term investments 36,262 --
Accounts receivable, net 39,158 33,084
Inventories 37,218 31,108
Other current assets 1,642 2,132
Deferred income taxes 30,252 34,294
---------- ----------
Total current assets 256,853 240,677
PROPERTY, PLANT AND EQUIPMENT, NET 83,966 87,993
LONG TERM INVESTMENTS 2,009 --
DEFERRED INCOME TAXES -- 2,483
INTANGIBLE ASSETS, NET 7,659 5,771
OTHER ASSETS 454 515
---------- ----------
TOTAL $ 350,941 $ 337,439
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 18,057 $ 12,897
Taxes payable 4,848 7,627
Deferred income on shipments to distributors 16,336 12,272
Other current liabilities 15,229 12,152
Current portion of long-term debt 328 703
---------- ----------
Total current liabilities 54,798 45,651
LONG-TERM DEBT 3,350 3,280
DEFERRED INCOME TAXES 3,235 --
OTHER LONG-TERM OBLIGATIONS 2,243 4,899
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:
2004 - 90,500,420 shares;
2003 - 92,522,513 shares 135,216 160,015
Deferred stock compensation (1,598) (3,954)
Accumulated other comprehensive loss (35) (25)
Retained earnings 153,732 127,573
---------- ----------
Total shareholders, equity 287,315 283,609
---------- ----------
TOTAL $ 350,941 $ 337,439
========== ==========
(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, 2003.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
MICREL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
NET REVENUES $ 67,853 $ 53,364 $ 198,110 $ 153,428
COST OF REVENUES(1) (NOTE 11) 34,598 32,160 102,933 93,451
--------- --------- --------- ---------
GROSS PROFIT 33,255 21,204 95,177 59,977
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and development (NOTE 11) 11,145 11,500 31,390 36,325
Selling, general and
administrative (NOTE 11) 9,955 7,263 27,394 20,837
Amortization of deferred stock
compensation(1) 487 834 1,659 2,515
Purchased in-process technology -- -- 480 --
Manufacturing facility impairment -- (624) -- (624)
Restructuring expense 437 286 437 286
--------- --------- --------- ---------
Total operating expenses 22,024 19,259 61,360 59,339
--------- --------- --------- ---------
INCOME FROM OPERATIONS 11,231 1,945 33,817 638
OTHER INCOME, NET 363 150 901 497
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 11,594 2,095 34,718 1,135
PROVISION FOR INCOME TAXES (NOTE 11) 4,058 482 8,559 261
--------- --------- --------- ---------
NET INCOME $ 7,536 $ 1,613 $ 26,159 $ 874
========= ========= ========= =========
NET INCOME PER SHARE:
Basic $ 0.08 $ 0.02 $ 0.28 $ 0.01
========= ========= ========= =========
Diluted $ 0.08 $ 0.02 $ 0.28 $ 0.01
========= ========= ========= =========
WEIGHTED-AVERAGE SHARES USED IN
COMPUTING PER SHARE AMOUNTS:
Basic 91,252 92,032 91,968 92,174
========= ========= ========= =========
Diluted 91,996 93,735 93,735 93,317
========= ========= ========= =========
(1) Amortization of deferred stock
compensation:
Included in cost of revenues $ 109 $ 279 $ 479 $ 870
========= ========= ========= =========
Included in operating expenses
amortization of deferred stock
compensation related to:
Research and development $ 173 $ 462 $ 609 $ 1,471
Selling, general and
administrative 314 372 1,050 1,044
--------- --------- --------- ---------
Total operating expenses $ 487 $ 834 $ 1,659 $ 2,515
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
MICREL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
---------------------
2004 2003
--------- ---------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 26,159 $ 874
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,816 22,046
Stock based compensation 2,138 3,385
Manufacturing facility impairment -- (624)
Purchased in-process technology 480 --
(Gain) loss on disposal of assets 114 (3)
Deferred rent -- 19
Deferred income taxes 10,200 4,998
Changes in operating assets and liabilities,
net of effect of acquisition:
Accounts receivable (5,400) (2,629)
Inventories (5,930) 2,507
Prepaid expenses and other assets 693 (53)
Accounts payable 4,749 (1,659)
Income taxes (2,294) (4,319)
Other accrued liabilities (972) 32
Deferred income on shipments to distributors 4,064 1,298
--------- ---------
Net cash provided by operating activities 52,817 25,872
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (13,558) (15,758)
Purchase of intangible assets (1,030) --
Purchases of short-term investments (35,096) --
Purchases of long-term investments (3,185) --
Purchase of BlueChip Communications, net of
cash acquired (2,033) --
--------- ---------
Net cash used in investing activities (54,902) (15,758)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (587) (735)
Proceeds from the issuance of common stock, net 3,958 3,531
Repurchase of common stock (29,024) (3,501)
--------- ---------
Net cash provided by (used in)
financing activities (25,653) (705)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (27,738) 9,409
CASH AND CASH EQUIVALENTS - Beginning of period 140,059 117,363
--------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 112,321 $ 126,772
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 262 $ 513
========= =========
Income taxes $ 964 $ 661
========= =========
Non-cash transactions:
Deferred stock compensation (reversal) $ (218) $ (1,562)
========= =========
The accompanying notes are an integral part of these 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 September 30, 2004 and for
the three and nine months ended September 30, 2004 and 2003 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, 2003.
This financial data should also be read in conjunction with the Company's
critical accounting policies included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2003.
Net Income Per Common and Equivalent Share - Basic net income per share is
computed by dividing net income by the number of weighted-average common
shares outstanding. Diluted net income per share reflects potential
dilution from outstanding stock options using the treasury stock method.
Reconciliation of weighted average shares used in computing net income per
share is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Weighted-average common
shares outstanding 91,252 92,032 91,968 92,174
Dilutive effect of stock options
outstanding using the treasury
stock method 744 1,703 1,767 1,143
--------- --------- --------- ---------
Shares used in computing diluted
net income per share 91,996 93,735 93,735 93,317
========= ========= ========= =========
For the three and nine months ended September 30, 2004, 7.7 million and 4.7
million stock options, respectively, have been excluded from the weighted-
average number of common shares outstanding for the diluted net income per
share computations as they were anti-dilutive. For the three and nine
months ended September 30, 2003, 3.9 million and 5.0 million stock options,
respectively, have been excluded from the weighted-average number of common
shares outstanding for the diluted net 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".
Beginning in 1996, the Company began to follow a practice of granting
employee stock options on the date with the lowest closing price within the
thirty-day period subsequent to the employee's date of hire (the "Thirty-
Day Method"). The Company continued to utilize this method generally but
not uniformly, both for new hires and for replenishment grants to existing
employees, until December 20, 2001. At that time, the Company determined that
options granted using the Thirty-Day Method were compensatory under APB No 25,
and discontinued use of the Thirty-Day Method thereafter. As a result, the
Company restated its financial statements for the years ended December 31,
1998, 1999, and 2000, and the quarters ended March 31, 2001, June 30, 2001, and
September 30, 2001 to reflect previously unrecorded stock compensation expense
and related payroll tax and income tax effects of the Thirty-Day Method. For
financial reporting purposes, per APB No 25, the measurement date for
determining compensation cost in stock option plans is the first date on which
are known both (1) the number of shares that an individual is entitled to
receive and (2) the option purchase price. Compensation cost is calculated for
any difference between the option exercise price and the fair market value on
6
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the measurement date. When applying APB 25 to the Thirty-Day Method described
above, the measurement date was the thirtieth day following a new-hire's
commencement of employment, when the lowest price (the exercise price) within
the first thirty days following employment commencement was known. Compensation
expense related to options granted under the Thirty-Day Method was
calculated and recorded based on the price difference between the closing
price on the date of grant and the closing price on the thirtieth day
following a new-hire's commencement of employment multiplied by the number
of options granted and recognized as expense over the vesting period
(generally five years). The Company is continuing to recognize stock
compensation expense for amortization of options granted under the Thirty-
Day method.
In addition to the stock options granted using the Thirty-Day Method,
Micrel assumed certain stock options granted to employees of Kendin
Communications in connection with the acquisition of Kendin Communications
in the second quarter of 2001. Because the fair market value of the shares
subject to those options assumed in the Kendin acquisition exceeded their
exercise prices as of the date Micrel assumed them, the Company recorded
deferred stock compensation expense for the unvested portion of the assumed
options.
Deferred stock compensation expense balances are recorded as a contra-
equity amount and amortized as a charge to operating results over the
applicable vesting periods. As of September 30, 2004 total unamortized
stock compensation related to the Thirty-Day Method and the Kendin
Communication acquisition noted above was $1.6 million and approximately
$2.1 million and $3.4 million of compensation expense was recorded during
the nine months ended September 30, 2004 and 2003, respectively.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income (loss) and net income (loss) 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. Calculations are based on a
multiple option valuation approach with forfeitures recognized as they
occur and the following weighted average assumptions:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Expected life (months) 60 60 60 60
Stock volatility 85.2% 85.0% 83.9% 85.5%
Risk free interest rates 3.4% 3.2% 3.3% 2.8%
Dividends during expected terms none none none none
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:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Expected life (months) 6 6 6 6
Stock volatility 85.2% 85.0% 83.9% 85.5%
Risk free interest rates 2.0% 1.0% 1.5% 1.0%
Dividends during expected terms none none none none
SFAS No. 148 was issued in December 2002 and amended SFAS No. 123 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.
7
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Nine Months Ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income as reported $ 7,536 $ 1,613 $ 26,159 $ 874
Add: stock-based employee
compensation expense included
in reported net income, net
of tax effects 362 677 1,300 2,058
Deduct: stock-based employee
compensation expense determined
under fair value based method,
net of tax effects (2,972) (3,395) (9,007) (10,244)
--------- --------- --------- ---------
Pro forma net income (loss) $ 4,926 $ (1,105) $ 18,452 $ (7,312)
========= ========= ========= =========
Net income (loss) per
share as reported:
Basic $ 0.08 $ 0.02 $ 0.28 $ 0.01
========= ========= ========= =========
Diluted $ 0.08 $ 0.02 $ 0.28 $ 0.01
========= ========= ========= =========
Pro forma net income
(loss) per share:
Basic $ 0.05 $ (0.01) $ 0.20 $ (0.08)
========= ========= ========= =========
Diluted $ 0.06 $ (0.01) $ 0.20 $ (0.08)
========= ========= ========= =========
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." FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 is effective immediately for
all new variable interest entities created or acquired after January 31,
2003. In December 2003, the FASB issued a revision of FIN 46 that delays
the implementation date for certain interests created or acquired prior to
January 31, 2003 until the first interim or annual period ending after
March 15, 2004. The adoption of this statement had no material effect on
the Company's consolidated financial statements.
In May 2003, the FASB issued Statement of Accounting Standards No. 150
("SFAS No. 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 150 changes the
accounting guidance for certain financial instruments that, under previous
guidance, could be classified as equity or "mezzanine" equity by now
requiring those instruments to be classified as liabilities (or assets in
some circumstances) in the statement of financial position. Further, SFAS
No. 150 requires disclosure regarding the terms of those instruments and
settlement alternatives. SFAS No. 150 is generally effective for all
financial instruments entered into or modified after May 31, 2003, and is
otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. While the effective date of certain elements of SFAS
No. 150 have been deferred, the adoption of such elements when finalized is not
expected to have a material impact on the Company's financial position, results
of operations or cash flows.
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus
on recognition and measurement guidance previously discussed under EITF
Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." ("EITF 03-01"). The consensus
clarifies the meaning of other-than-temporary impairment and its
application to investments in debt and equity securities, in particular
investments within the scope of FASB Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and investments
8
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
accounted for under the cost method. This consensus is to be applied to
other-than-temporary impairment evaluations in reporting periods beginning
after June 15, 2004. The adoption of this statement had no material effect
on the Company's consolidated financial statements.
In April 2004, the Emerging Issues Task Force issued Statement No. 03-06
"Participating Securities and the Two-Class Method Under FASB Statement No.
128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that
have issued securities other than common stock that contractually entitle
the holder to participate in dividends and earnings of the company when,
and if, it declares dividends on its common stock. The issue also provides
further guidance in applying the two-class method of calculating earnings
per share, clarifying what constitutes a participating security and how to
apply the two-class method of computing earnings per share once it is
determined that a security is participating, including how to allocate
undistributed earnings to such a security. EITF 03-06 became effective
during the quarter ended June 30, 2004, the adoption of which did not have
any impact on the Company's calculation of net income per share.
3. INVESTMENTS
Short-term and long-term investments consist primarily of liquid debt
instruments and are classified as available-for-sale securities and are
stated at market value with unrealized gains and losses included in
shareholders' equity. Investments purchased with remaining maturity dates
of greater than three months and less than 12 months are classified as
short-term. Investments purchased with remaining maturity dates of 12
months or greater are classified as long-term as the Company expects, but
is not committed to hold them to maturity. A summary of investments at
September 30, 2004 is as follows (in thousands):
Unrealized Unrealized
Amortized Market Holding Holding
Cost Value Gains Losses
---------- ---------- ---------- -----------
Short-term investments $ 36,295 $ 36,262 $ -- $ 33
Long-term investments $ 2,011 $ 2,009 $ -- $ 2
4. INVENTORIES
Inventories consist of the following (in thousands):
September 30, December 31,
2004 2003
------------ ------------
Finished goods $ 16,055 $ 9,787
Work in process 20,102 20,425
Raw materials 1,061 896
---------- ----------
$ 37,218 $ 31,108
========== ==========
5. BORROWING ARRANGEMENTS
Borrowing arrangements consist of a $5 million revolving line of credit
from a commercial bank. The revolving line of credit agreement includes a
provision for the issuance of commercial or standby letters of credit by
the bank on behalf of the Company. The value of all letters of credit
outstanding reduces the total line of credit available. There were no
borrowings under the revolving line of credit at September 30, 2004, and
there were $550,000 in standby letters of credit outstanding. The
revolving line of credit agreement expires on June 30, 2005. Borrowings
under the revolving line of credit bear interest rates of, at the
Company's election, the prime rate (4.75% at September 30, 2004), or the
bank's revolving offshore rate, which approximates LIBOR (2.0% at
September 30, 2004) plus 2.0%. The agreement contains certain restrictive
covenants that include a restriction on the declaration and payment of
9
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
dividends without the lender's consent. The Company was in compliance
with all such covenants at September 30, 2004.
In September 2002, the Company borrowed $10.7 million through a commercial
mortgage financing agreement which was associated with the purchase of its
previously leased manufacturing facilities in San Jose, CA. Borrowings
under this agreement bear interest, at the Company's election, at the
daily floating prime rate (4.75% at September 30, 2004), or adjustable
monthly LIBOR (2.0% at September 30, 2004) plus 1.5%. The principal
balance of the loan is to be repaid in 59 consecutive monthly installments
of $16,890 and one final installment in the amount necessary to pay in
full the remaining outstanding principal balance, with no early payment
penalty. In December 2003, the company repaid $7.0 million of the loan,
resulting in a remaining loan balance of $3.3 million at September 30,
2004. The mortgage agreement contains certain restrictive covenants with
which the Company was in compliance at September 30, 2004.
As of September 30, 2004, the Company had $3.7 million under term notes
outstanding, including the commercial mortgage loan.
6. SIGNIFICANT CUSTOMERS
During the nine months ended September 30, 2004, two customers, a world wide
distributor and an Asian based stocking representative accounted for $27.5
million (14%) and $26.7 million (13%) of net revenues, respectively, and no
direct original equipment manufacturer ("OEM") accounted for 10% or more of
net revenues. During the nine months ended September 30, 2003, the same two
customers accounted for $19.4 million (13%) and $17.9 million (12%) of net
revenues, respectively, and no direct OEM accounted for more than 10% of net
revenues.
As of September 30, 2004, two customers, an Asian based stocking
representative and an OEM, accounted for 17% and 13%, respectively, of net
accounts receivable. At December 31, 2003, two customers accounted for 19%
and 13% of net accounts receivable.
7. COMPREHENSIVE INCOME
Comprehensive income, which was comprised of the Company's net income for
the periods and changes in unrealized gains or losses on investments, was
$7.5 million and $26.2 million for the three and nine months ended September
30, 2004, respectively, and $1.6 million and $874,000 for the three and nine
months ended September 30, 2003, respectively.
8. SEGMENT REPORTING
The Company follows the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information and operates in two
reportable segments: standard products and custom and foundry products. The
chief operating decision maker evaluates segment performance based primarily
on revenue. Accordingly, all expenses 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.
10
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Net Revenues by Segment
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net Revenues:
Standard Products $ 65,332 $ 48,182 $ 190,084 $ 137,016
Custom and Foundry Products 2,521 5,182 8,026 16,412
--------- --------- --------- ---------
Total net revenues $ 67,853 $ 53,364 $ 198,110 $ 153,428
========= ========= ========= =========
As a Percentage of Total Net Revenues:
Standard Products 96% 90% 96% 89%
Custom and Foundry Products 4% 10% 4% 11%
--------- --------- --------- ---------
Total net revenues 100% 100% 100% 100%
========= ========= ========= =========
9. 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 case is currently in the motion and hearing phase. The Company
intends to continue to defend itself against these claims.
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. The complaint in the
lawsuit seeks unspecified compensatory damages, treble damages and
attorneys' fees as well as preliminary and permanent injunctive relief
against infringement of the Linear patent at issue. On August 20, 1999, the
United States District Court in San Jose adjudicated in favor of the Company
on a motion, finding the patent to be invalid under the "on sale bar"
defense as the plaintiff had placed ICs 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. Linear appealed
the trial Court's decision to the United States Court of Appeal for the
Federal Circuit ("CAFC") on September 17, 1999. On December 28, 2001, the
CAFC reversed the District Court's judgment of invalidity and remanded the
case to the District Court. After the Company's Petition for Rehearing En
Banc by the Court of Appeal was denied, the Company filed a Petition for
Writ of Certiorari with the Supreme Court of the United States, which Linear
opposed. On May 19, 2003, the Supreme Court denied the Petition for Writ of
Certiorari. The District Court subsequently determined a schedule for
further discovery and hearing matters before the Court. A claim
construction hearing (also called a "Markman" hearing) was held before the
District Court on December 16, 2003. The Court issued its ruling on January
24, 2004, interpreting the claims at issue in the litigation. Furthermore,
the parties have attended three settlement conferences before the District
Court. A status conference was held with the Court on November 8, 2004. At
the status conference, a trial date was set for June 28, 2005. The Company
intends to continue to defend itself against the claims alleged in this
litigation.
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
11
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Company intends to vigorously
defend itself against these counterclaims. The case is currently in the
motion and discovery phase. A case management and settlement conference is
scheduled with the Court for December 7, 2004.
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.
In this lawsuit, Micrel is alleging that Deloitte negligently rendered
services as accountants to Micrel, breached certain agreements with Micrel
by failing to perform services using ordinary skill and competence and in
conformance with generally accepted principles for such work and made
certain false representations upon which Micrel justifiably relied. As a
direct result of Deloitte's actions, Micrel alleges damages including:
expenses incurred in the form of payments to various professionals to
address the impact on Micrel's financial statements and other effects of the
wrongful conduct; loss of cash as well as equity from stock options;
additional charges to earnings that Micrel would not incur but for the
wrongful advice; additional potential liability for taxes; potential
liability for tax penalties; and the harm to Micrel in both financial and
semiconductor markets resulting in loss of overall value of the company as a
whole. Deloitte has denied all allegations in the complaint. The complaint
seeks compensatory damages, costs of suit and such other relief that the
court may deem just and proper. The case is currently in the discovery
phase. A trial setting conference is scheduled with the Court for January
4, 2005.
Based on the status to date of the above litigation, 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 and, the Company believes it is not
reasonably possible that a material loss has been incurred. 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, in
addition to litigation mentioned herein, 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. Based on the status of the litigation described above,
the Company does not believe that any material and specific risk exists
related to the loss of use of patents, products or processes.
Certain additional claims have been filed by or 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.
12
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. STOCK REPURCHASE PROGRAM
On August 30, 2004, Micrel's Board of Directors amended the Company's
common stock repurchase program and authorized the repurchase of common
stock up to a maximum value of $75 million during the period from January
1, 2004 through June 30, 2005. 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) plan. During the nine months ended September
30, 2004, the Company repurchased 2,561,900 shares of its common stock for
$29.0 million.
11. INCOME TAXES
Deferred tax assets and liabilities result primarily from temporary
differences between book and tax bases of assets and liabilities, state
and federal research and development credit carryforwards and state
manufacturers credit carryforwards. The Company had net current deferred
tax assets of $30.3 million and net long-term deferred tax liabilities of
$3.2 million as of September 30, 2004. The Company must assess the
likelihood that future taxable income levels will be sufficient to
ultimately realize the tax benefits of these deferred tax assets. The
Company currently 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. Should the Company determine
that future realization of these tax benefits is not likely, a valuation
allowance would be established, which would increase the Company's tax
provision in the period of such determination.
The calculation of the Company's tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. The Company
records liabilities for anticipated tax audit issues based on its estimate
of whether, and the extent to which, additional taxes may be due. Actual
tax liabilities may be different than the recorded estimates and could
result in an additional charge or benefit to the tax provision in the
period when the ultimate tax assessment is determined.
During the second quarter of 2004, the Company reversed $3.8 million of
accrued income tax liabilities as a result of the completion of a federal
income tax audit. In May 2004, the Company received an audit report from
the Internal Revenue Service ("IRS") which recommended no changes to
Micrel's federal tax return filings covering the tax years 1994 through
2001. In addition, the Company subsequently received a notice dated July
6, 2004 from the Joint Committee on Taxation which stated that the
committee took no exceptions to conclusions in the IRS audit report. This
reversal of accrued income tax liabilities was recorded as a reduction to
provision for income taxes in the second quarter of 2004.
In addition, related to the federal tax audit completion, the Company also
reversed $3.9 million (offset in part by a $1.4 million income tax effect)
in accrued payroll tax liabilities, which were previously recorded as part
of the Company's restatement of financials for the years December 31,
1998, 1999, and 2000, and the quarters ended March 31, 2001, June 30,
2001, and September 30, 2001 to reflect previously unrecorded stock
compensation expense and related payroll tax and income tax effects.
The effects of these accrued tax liability reversals on the below-noted
items in the Company's statement of operations is summarized as follows
(there was no effect of these accrued tax liability reversals during the
three months ended September 30, 2004):
Nine Months
Ended
September 30,
2004
-------------
Cost of revenues $ (1,111)
Research and development (1,697)
Selling, general and administrative (1,140)
Provision (benefit) for income taxes (2,378)
---------
Net income (loss) $ (6,326)
=========
13
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The income tax provision for the three and nine months ended September 30,
2004 is based on the Company's estimated annual effective tax rate of 35%
of pretax income, reduced by the $3.8 million reversal of accrued income
tax liabilities recorded in the second quarter of 2004 and increased by
$168,000 as a result of $480,000 of non-deductible purchased in-process
technology charges recorded in the first quarter of 2004.
12. CLOSURE OF WAFER FABRICATION FACILITY
In September 2002, the Company approved a plan to close its Santa Clara,
California wafer fabrication facility to reduce costs and improve
operating efficiencies. The Company accrued $5.5 million in restructuring
expenses associated with the facility closure 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. During July 2003, the Company ceased all
manufacturing processes within the Santa Clara facility and completed the
relocation of all employees to its San Jose, CA facilities. During the
third quarter of 2004, the Company increased its accrued restructuring
expenses for contractual building lease costs by $437,000 due to a
reduction in estimated future sub-lease income. Estimated future sub-lease
income at September 30, 2004 was $148,000.
During the third quarter of 2003, the Company also incurred and paid
severance costs of $320,000 related to the termination of 46 employees
associated with the wafer fabrication facility closure. The affected
employees consisted primarily of wafer fabrication operators and
maintenance technicians. These termination costs have been reported as
restructuring expense in the statement of operations.
A summary of restructuring expense accrual is as follows: ($000)
Contractual
Severance Facility Equipment
Costs Costs Disposal Total
--------- ----------- --------- ---------
Balance December 31, 2002 $ -- $ 4,536 $ 1,000 $ 5,536
2003 Charges 320 466 (500) 286
Uses (320) (883) (89) (1,292)
--------- --------- --------- ---------
Balance December 31, 2003 $ -- $ 4,119 $ 411 $ 4,530
2004 Charges -- 437 -- 437
Uses -- (1,241) (51) (1,292)
--------- --------- --------- ---------
Balance September 30, 2004 $ -- $ 3,315 $ 360 $ 3,675
========= ========= ========= =========
Of the $3.7 million in accrued restructuring costs, $2.0 million has been
classified as other current liabilities and the remaining $1.7 million has
been classified as other long-term obligations as of September 30, 2004.
These restructuring costs are expected to be paid in cash over the
remaining facility lease term, which expires in October 2006. Actual
future costs or actual sublease income may be different than these
estimates and could require an adjustment to the restructuring accrual in
the period such determination is made.
Also related to the facility closure, in September 2002, the Company
recorded a $23.4 million impairment of long-lived assets to reduce the net
book value of the facility's leasehold improvements and equipment to fair
value. The fair value was determined by management based on the estimated
net realizable sales value. A number of factors were considered to
estimate the net realizable sales value including a third party appraisal
of the equipment to be sold, which was primarily based on comparable sales
from recent equipment auctions, liquidations and other used equipment
sales. In the third quarter of 2003, the company sold previously impaired
equipment which resulted in a $624,000 gain, recognized as an adjustment to
manufacturing facility impairment expense in the third quarter of 2003. As
of September 30, 2003, there was no remaining book value for equipment
previously impaired during the 2002 restructuring actions.
14
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. ACQUISITION
On March 3, 2004, Micrel acquired a controlling interest in BlueChip
Communications AS ("BlueChip") of Oslo, Norway. BlueChip is a fabless
semiconductor company that designs, develops and markets high performance
Radio Frequency integrated circuits and modules for the actuation and
connectivity markets. Micrel ultimately acquired 100% of the outstanding
BlueChip common stock and options to purchase BlueChip common stock in a
cash-for-stock transaction. Under the terms of the agreement, Micrel paid
approximately $2 million and incurred approximately $300,000 in direct
acquisition costs for the outstanding BlueChip securities and options.
Also, Micrel may pay additional consideration of approximately $1 million
if certain revenue and gross profit targets are met by the BlueChip
operation during calendar year 2004, however, such payment would not be
made until 2005. The acquisition was accounted for as a purchase under
SFAS 141 "Business Combinations" and, accordingly, the results of
operations of BlueChip from the date of acquisition forward have been
included in the Company's condensed consolidated financial statements.
An amount of $480,000 was allocated to purchased in-process technology,
which has not reached technological feasibility and has no alternative
future use, for which the Company recorded a charge to the line item
purchased in-process technology in the condensed consolidated statement of
operations for the three months ended March 31, 2004. In addition, $1.7
million was allocated to existing technology and $450,000 was allocated to
customer relationships and are included in intangible assets in the
accompanying condensed consolidated balance sheet. These intangible
assets are expected to be amortized over their useful lives of five and
three years, respectively. The amounts assigned to existing technology,
customer relationships and purchased in-process technology were determined
by management, based in part on a valuation by an independent appraisal
firm based on management's forecast of future revenues, cost of revenues
and operating expenses related to the purchased technologies. The
calculation gave consideration to relevant market sizes and growth
factors, expected industry trends, the anticipated nature and timing of
new product introductions, individual product cycles, and the estimated
lives of each of the products underlying the technology. In-process
research and development costs consist of five research and development
projects that had not yet reached technological feasibility at the time of
acquisition.
The Company has not presented supplemental pro-forma results of operations
reflecting the impact of the BlueChip acquisition as the effect is not
material.
In addition, Micrel has recorded an intangible asset of $800,000 for the
license of certain developed technology pursuant to a pre-acquisition
development and license agreement which was entered into with BlueChip in
2001. This intangible asset is being amortized over its estimated useful
life of five years.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
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;
statements regarding future research and development spending and the
Company's product development strategy; statements regarding the levels of
international sales; statements regarding future expansion or utilization of
manufacturing capacity; statements regarding future expenditures; and
statements regarding 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 the
Company's actual results could differ materially from those in such forward-
looking statements. Some of the factors that could cause 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, 2003.
Micrel designs, develops, manufactures and markets a range of high-
performance analog power integrated circuits ("ICs"), mixed-signal and digital
ICs. 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.
Rapid growth in worldwide dollar shipments of semiconductors of 38% in 2000
was followed by the most severe downturn in the history of the semiconductor
industry in 2001. Customer demand for the Company's products declined sharply
in 2001 as customers reacted to the economic recession in the United States
and high inventory levels of semiconductor components by reducing order rates.
The resulting environment, which continued from the beginning of 2001 through
the second quarter of 2003, was characterized by reduced demand for the
Company's products, especially from customers serving the high speed
communications market, and by poor visibility into future customer demand.
The Company's gross profit and net income declined in 2001 and 2002 due to
lower unit volume, declining selling prices for the Company's products and an
increased level of unabsorbed fixed costs due to lower utilization levels of
the Company's wafer fabrication lines. In response to this environment, the
Company focused on reducing costs in 2001, 2002 and 2003.
The Company's objective was to align its cost structure with the reduced
revenue levels while retaining sufficient manufacturing capacity, and
sustaining a level of research and development investment that should
facilitate future growth. In addition to reducing discretionary spending and
payroll costs, the Company sought to significantly reduce its manufacturing
costs. One of the Company's most significant cost reduction actions was the
consolidation of its Santa Clara, California wafer fabrication operation into
its San Jose, California wafer fabrication facility. This action commenced in
2002 and was completed in 2003 (see Note 12 of Notes to Condensed Consolidated
Financial Statements). By the end of 2003, the Company's manufacturing cost
reduction efforts had offset a substantial portion of the erosion in gross
profit resulting from the decline in average selling prices. The Company
continued to invest in research and development at a rate in excess of 20% of
revenues while selling, general and administrative spending was reduced to a
level in 2003 which approached 1999 spending. Throughout the 2001 to 2003
period the Company continued to generate positive cash flows from operations.
In 2003 the Company returned to profitability after recording a loss on an
annual basis for the first time in its history in 2002. The first half of
2003 was characterized by the continuation of limited visibility into, and
uncertainty of, customer demand. The uncertainty of demand was compounded in
the first half of 2003 by events such as the war in Iraq and the outbreak of
severe acute respiratory syndrome in Asia ("SARS"). The Company's quarterly
revenues remained relatively flat, averaging $50 million per quarter for the
first half of 2003. The Company recorded a small net loss for this period.
In the second half of 2003, customer demand increased as the United States'
and Asian economies began to grow more rapidly. The Company's new order
rates, or bookings, grew faster than revenue in the third and fourth quarter
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
of 2003, resulting in sequential growth in both revenues and order backlog.
The growth in new orders and revenues in the second half of 2003 was driven by
demand for the Company's standard products from customers serving the
communications, computing, industrial and wireless handset end markets. Gross
margins and net income increased in the second half of 2003.
In the first quarter of 2004, demand for the Company's products increased.
New order rates increased compared with both the first and fourth quarters of
2003. Customers increased order lead times in response to general concern
about the availability of semiconductor component supply. Strength in demand
from customers serving the industrial and wireline communications end markets
offset seasonal slowness in demand from customers in the computing and
wireless handset markets, resulting in higher revenues on both a sequential
and year-over-year basis. The combination of higher revenues, a richer,
higher margin sales mix and lower manufacturing costs led to an improved gross
profit margin of 45% in the first quarter.
In the second quarter of 2004, revenues, gross margin, operating margin and
net income continued to increase. Demand for the Company's products remained
solid with new order levels approximately equal to the level of revenue for
the quarter. Order lead times exiting the second quarter remained at
approximately seven to eight weeks, about the same as the end of the first
quarter. Gross profit margin increased on both a sequential and year-over-
year basis. The improvement in gross margin was due primarily due to higher
sales volume combined with higher factory utilization which spread fixed costs
over higher unit volume, and a more favorable product mix compared with the
second quarter of 2003. Second quarter and year-to-date operating expenses
were approximately $800 thousand less than the year ago period due to the
reversal of $2.8 million of accrued payroll tax liabilities associated with
the conclusion of a tax audit (see Note 11 of Notes to Condensed Consolidated
Financial Statements). Operating profit and net income increased for the
fourth consecutive quarter.
In the third quarter of 2004, demand was below normal seasonal levels as
customers reacted quickly to uncertain demand for their products, decreasing
semiconductor lead times and uncertain economic conditions by reducing their
order rates. Because of the lessons learned from the painful excess inventory
situation that occurred in 2001, the Company's customers appear to be more
sensitive to changes in end demand for their products and supplier lead times.
In the first half of 2004, most OEM customers, distributors and stocking
representatives increased the amount of inventory they held of the Company's
products in response to expanding lead times from many suppliers and
anticipated increases in end demand. In the third quarter, the Company's
customers serving the high speed communications, industrial, enterprise
computing and networking end markets appear to have experienced lower demand
for their end products than they anticipated. This factor, combined with
rapidly shrinking lead times from most semiconductor suppliers, led to lower
order rates for the Company's products as customers attempted to control their
inventory levels. Inventories at the Company's distributors declined on a
sequential basis as a result of sharply reduced order rates throughout the
third quarter. Inventories at the Company's stocking representatives
continued to grow in the third quarter due to lower than forecasted demand
from the enterprise computing, high speed communications and enterprise
networking end markets, and increased stocking in anticipation of stronger
seasonal demand trends which are typical in the second half of the calendar
year. The Company anticipates that the overall inventories at stocking
representatives will decline sequentially in the fourth quarter, which may
reduce the Company's revenues, as these customers purchase less of the
Company's products in an attempt to reduce the amount of inventory they hold.
The Company's level of on hand finished goods inventory has also increased in
the first nine months of 2004 as the Company has built safety stock in an
attempt to provide a high level of customer service. The level of finished
goods inventory on hand also increased on a sequential basis as result of
weaker than anticipated demand and maintenance of higher stocking levels to
respond to shorter customer lead times.
As a result of lower order rates, third quarter 2004 revenues declined by
2% on a sequential basis. However, revenues, gross margin, operating margin
and net income remained well above the year ago period. Gross profit,
operating profit and net income were below second quarter 2004 levels
primarily due to reversal of accrued payroll and income tax liabilities that
occurred in the second quarter as a result of the completion of a federal
income tax audit (see Note 11 of Notes to Condensed Consolidated Financial
Statements).
On March 3, 2004, Micrel acquired a controlling interest in BlueChip
Communications AS ("BlueChip") of Oslo, Norway. BlueChip is a fabless
semiconductor company that designs, develops and markets high performance
Radio Frequency integrated circuits and modules for the actuation and
connectivity markets. The acquisition was accounted for as a purchase under
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
SFAS 141 "Business Combinations" and, accordingly, the results of operations
of BlueChip from the date of acquisition forward have been included in the
Company's condensed consolidated financial statements. In addition, $480,000
was expensed to purchased in-process technology in the first quarter of 2004
(see Note 13 of Notes to Condensed Consolidated Financial Statements).
The Company derives a substantial portion of its net revenues from standard
products. For each of the three and nine month periods ended September 30,
2004 the Company's standard products sales accounted for 96%, of the Company's
net revenues as compared to 90% and 89%, respectively for the comparable
periods in 2003. 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 and Estimates
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 judgments. Management bases its estimates and judgments 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, 2003.
Revenue Recognition and Receivables. 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 or determinable and collection of the resulting receivable is
reasonably assured.
Micrel allows certain distributors, primarily located in North America and
Europe, and to a lesser extent Asia, significant return rights, price
protection and pricing adjustments subsequent to the initial product shipment.
As these returns and price concessions have historically been significant, and
future returns and price concessions are difficult to reliably estimate, the
Company 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. Although revenue recognition and related cost of
sales are deferred, the Company records an accounts receivable and relieves
inventory at the time of initial product shipment. As standard terms are FOB
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
shipping point, payment terms are enforced from shipment date and legal title
and risk of inventory loss passes to the distributor upon shipment.
Sales to OEM customers and Asian based stocking representatives are
recognized upon shipment. The Company does not grant return rights, price
protection or pricing adjustments to OEM customers. The Company offers
limited contractual stock rotation rights to stocking representatives. In
addition, the Company is not contractually obligated to offer, but may
infrequently grant, price adjustments or price protection to certain stocking
representatives on an exception basis. At the time of shipment to OEMs and
stocking representatives, an allowance for returns and price adjustments is
established based upon historical return rates. Actual future returns or
price adjustments 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 records 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 SEC Staff Accounting Bulletin 100 "Restructuring and
Impairment Charges."
Income Taxes. Deferred tax assets and liabilities result primarily from
temporary differences between book and tax bases of assets and liabilities,
state and federal research and development credit carryforwards and state
manufacturers credit carryforwards. The Company had net current deferred tax
assets of $30.3 million and net long-term deferred tax liabilities of $3.2
million as of September 30, 2004. The Company must assess the likelihood that
future taxable income levels will be sufficient to ultimately realize the tax
benefits of these deferred tax assets. The Company currently 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.
Should the Company determine that future realization of these tax benefits is
not likely, a valuation allowance would be established, which would increase
the Company's tax provision in the period of such determination.
In addition, the calculation of the Company's tax liabilities involves
dealing with uncertainties in the application of complex tax regulations. The
Company records liabilities for anticipated tax audit issues based on its
estimate of whether, and the extent to which, additional taxes may be due.
Actual tax liabilities may be different than the recorded estimates and could
result in an additional charge or benefit to the tax provision in the period
when the ultimate tax assessment is determined.
During the second quarter of 2004, the Company reversed $3.8 million of
accrued income tax liabilities as a result of the completion of a federal
income tax audit. In addition, related to the federal tax audit completion,
the Company also reversed $3.9 million in accrued payroll tax liabilities.
This reduction in accrued payroll tax liabilities has been recorded as a $1.1
million reduction in cost of revenues, a $1.7 million reduction in research
and development expense and a $1.1 million reduction in selling, general and
administrative expense in the second quarter of 2004 (see Note 11 of Notes to
Condensed Consolidated Financial Statements).
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 9 of Notes to Condensed Consolidated Financial Statements) and has not
accrued a 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 that it
is probable that a material loss has been incurred and the amount of loss can
be reasonably estimated. If the Company were to determine that such a
material loss was probable and could be reasonably estimated, the adjustment
would be charged to income in the period such determination was made.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 Nine Months Ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 51.0 60.3 52.0 60.9
--------- --------- --------- ---------
Gross profit 49.0 39.7 48.0 39.1
--------- --------- --------- ---------
Operating expenses:
Research and development 16.4 21.6 15.8 23.7
Selling, general and
administrative 14.7 13.6 13.8 13.6
Amortization of deferred stock
compensation 0.7 1.6 0.9 1.6
Purchased in-process technology - - 0.2 -
Manufacturing facility
impairment - (1.2) - (0.4)
Restructuring expense 0.6 0.5 0.2 0.2
--------- --------- --------- ---------
Total operating expenses 32.4 36.1 30.9 38.7
--------- --------- --------- ---------
Income from operations 16.6 3.6 17.1 0.4
Other income, net 0.5 0.3 0.4 0.3
--------- --------- --------- ---------
Income before income taxes 17.1 3.9 17.5 0.7
Provision for income taxes 6.0 0.9 4.3 0.1
--------- --------- --------- ---------
Net income 11.1% 3.0% 13.2% 0.6%
========= ========= ========= =========
Net Revenues. For the three months ended September 30, 2004, net revenues
increased 27% to $67.9 million from $53.4 million for the same period in the
prior year. For the nine months ended September 30, 2004, net revenues
increased 29% to $198.1 million from $153.4 million for the same period in the
prior year. These increases were primarily due to increased standard products
revenues, which were partially offset by decreased custom and foundry products
revenues.
Standard products revenues increased 36% to $65.3 million, for the three
months ended September 30, 2004, from $48.2 million for the same period in the
prior year. These increases resulted primarily from increased unit shipments
of standard products to the telecommunications, computer, high speed
communications and networking end markets. For the nine months ended September
30, 2004, standard products revenues increased 39% to $190.1 million from
$137.0 for the same period in the prior year. These increases resulted
primarily from increased unit shipments of standard products to the
telecommunications, computer, industrial, high speed communications and
networking end markets.
Custom and foundry products revenues decreased 51% to $2.5 million
representing 4% of net revenues, for the three months ended September 30,
2004, from $5.2 million or 10% of net revenues for the same period in the
prior year. For the nine months ended September 30, 2004, custom and foundry
products revenues decreased 51% to $8.0 million from $16.4 for the same period
in the prior year. The decrease resulted primarily from the cessation of low
margin foundry business with a single customer, Lexmark, in the fourth quarter
of 2003.
Customer demand for semiconductors can change quickly and unexpectedly.
From the middle of 2001 through 2003, customers perceived that semiconductor
components were readily available and ordered only for their short-term needs,
resulting in historically low order backlog levels. The Company's revenue
levels have been highly dependent on the amount of new orders that are
received for which product is requested to be delivered to the customer within
the same quarter. Within the semiconductor industry these orders that are
booked and shipped within the quarter are called "turns fill" orders. When
the turns fill level exceeds approximately 35% of quarterly revenue, it makes
it very difficult to predict near term revenues and income. Because of the
long cycle time to build its products, the Company's lack of visibility into
demand when turns fill is high makes it difficult to predict what product to
build to match future demand. The Company averaged approximately 55% turns
fill per quarter during 2003.
The turns fill for the third quarter of 2004 remained at the same level as
the second quarter, approximately 35%. After experiencing an increase in
order rates and backlog in the first six months of 2004, order rates in the
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
third quarter declined as customers quickly reduced new orders in an attempt
to control their inventories in response to uncertain demand for their end
products and lower supplier lead times. The Company's lead times decreased
during the third quarter to less than four weeks at the end of September,
compared with lead times of seven to eight weeks at the end of the second
quarter. Although overall semiconductor industry channel inventories appear
to be equal to or below long term historical trends, customers perceive
semiconductor components are readily available. Customers are cautious in
committing new orders, relying instead on short lead times and the willingness
of semiconductor manufacturers to hold inventory and react quickly to supply
their short term needs. The slowing of global economic growth rates, the
aversion to holding inventory and the hope of negotiating lower prices has
caused many customers to reduce order backlog on their suppliers. The
Company's backlog at September 30, 2004 declined on a sequential basis but
remains above the backlog level of September 30, 2003. The lower backlog
level, increased reliance on turns fill orders, unseasonable weakness in order
rates and the uncertain growth rate of the world economy make it difficult to
predict near term demand. Although the Company is reducing production levels
in response to lower order rates, the uncertainty in demand arising from these
factors, together with the uncertainty of product mix and pricing, make it
difficult to predict future levels of sales and profitability and may require
the Company to continue to carry higher levels of inventory.
International sales represented 77% and 70% of net revenues for the three
months ended September 30, 2004 and 2003, respectively. On a dollar basis,
international sales increased 40% to $52.2 million for the three months ended
September 30, 2004 from $37.2 million for the comparable period in 2003. For
the nine months ended September 30, 2004 and 2003, international sales
represented 76% and 69% of net revenues, respectively. On a dollar basis,
international sales increased 43% to $150.9 million for the nine months ended
September 30, 2004 from $105.3 million for the comparable period in 2003.
These increases resulted primarily from increased shipments of
telecommunications, networking communications and high speed communications
products, primarily in Asia and to a lesser extent Europe.
The trend for the Company's customers to move their electronics
manufacturing to Asian countries has brought increased pricing pressure for
Micrel and other semiconductor manufacturers. Asian based manufacturers are
typically more concerned about cost and less concerned about the capability of
the integrated circuits they purchase. This can make it more difficult for
United States based companies to differentiate themselves except by price.
The increased concentration of electronics procurement and manufacturing in
the Asia Pacific region has led, and may continue to lead, to continued price
pressure for the Company's products in the future.
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. The Company's gross margin increased to
49% for the three months ended September 30, 2004 from 40% for the comparable
period in 2003. For the nine months ended September 30, 2004, gross margin
increased to 48% from 39% for the comparable period in 2003. These increases
in gross margin resulted primarily from a greater sales mix of higher margin
products, decreased wafer fabrication costs, and decreased external assembly
and test costs. During the three and nine months ended September 30, 2004,
the company reduced sales of low margin foundry products and increased sales
of higher margin analog and high speed communications standard products as
compared to the same periods in 2003. In 2004, the Company benefited from
decreased wafer fabrication costs resulting from the Company's wafer
fabrication consolidation project (see Note 12 of Notes to Condensed
Consolidated Financial Statements) and lower costs for external assembly and
test manufacturing services. The Company's gross profit margin has also
benefited from spreading fixed costs over a higher sales volume. In addition,
gross profit for the nine months ended September 30, 2004 includes the reversal
of $1.1 million of accrued payroll tax liabilities, recorded in the second
quarter of 2004, associated with the conclusion of a tax audit (see Note 11 of
Notes to Condensed Consolidated Financial Statements). Depreciation
and amortization (excluding amortization of deferred stock compensation) as a
percent of sales has declined to 9% for the nine months ended September 20,
2004 from 14% for the same periods in 2003.
In response to the decline in order rates during the third quarter and the
uncertainty of end demand, the Company is reducing its planned level of
production in the fourth quarter of 2004. The Company is acting to reduce
the effect on gross margin from lower factory utilization by taking a holiday
shutdown and controlling expenses. Should global economic growth remain
strong and demand for the Company's products rebound, the Company has the
ability to rapidly increase manufacturing output.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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.
Research and development expenses represented 16% and 22% as a percentage
of net revenues, for the three months ended September 30, 2004 and 2003,
respectively. On a dollar basis, research and development expenses decreased
$355,000 or 3% to $11.1 million for the three months ended September 30, 2004
from $11.5 million for the comparable period in 2003. For the nine months
ended September 30, 2004 and 2003, research and development expenses
represented 16% and 24% as a percentage of net revenues, respectively. On a
dollar basis, research and development expenses decreased $4.9 million or 14%
to $31.4 million for the nine months ended September 30, 2004 from $36.3
million for the comparable period in 2003. This decrease was primarily due to
decreased prototype fabrication costs and the reversal of $1.7 million of
accrued payroll tax liabilities in the second quarter of 2004, associated with
the conclusion of a tax audit (see Note 11 of Notes to Condensed Consolidated
Financial Statements). 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 15% and 14%
for the three months ended September 30, 2004 and 2003, respectively. On a
dollar basis, selling, general and administrative expenses increased $2.7
million or 37% to $10.0 million for the three months ended September 30, 2004
from $7.3 million for the comparable period in 2003. This dollar increase was
principally attributable to increased commissions related to higher revenues,
increased staffing costs and profit sharing accruals and increased outside
legal costs. For the nine months ended September 30, 2004 and 2003, selling,
general and administrative expenses represented 14% as a percentage of net
revenues, respectively. On a dollar basis, selling, general and
administrative expenses increased $6.6 million or 32% to $27.4 million for the
nine months ended September 30, 2004 from $20.8 million for the comparable
period in 2003. This dollar increase was principally attributable to
increased commissions related to higher revenues, increased staffing costs and
profit sharing accruals and increased outside legal costs which were partially
offset by the reversal of $1.1 million of accrued payroll tax liabilities in
the second quarter of 2004, associated with the conclusion of a tax audit (see
Note 11 of Notes to Condensed Consolidated Financial Statements).
Purchased in-process technology. Associated with the acquisition of
BlueChip, Micrel allocated $2.6 million of the total purchase cost to
intangible assets. Of that amount, $480,000 was expensed to purchased in-
process technology, which has not reached technological feasibility and has no
alternative future use, in the three months ended March 31, 2004. The
remaining intangible assets of $2.1 million, consisting of $1.7 million in
existing technology and $450,000 in customer relationships, are included in
intangible assets in the accompanying condensed consolidated balance sheets
and are being amortized over their useful lives of three to five years (see
Note 13 of Notes to Condensed Consolidated Financial Statements).
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 increased $213,000 to
$363,000 for the three months ended September 30, 2004 from $150,000 for the
comparable period in 2003. Other income, net increased $404,000 to $901,000
for the nine months ended September 30, 2004 from $497,000 for the comparable
period in 2003. These increases were primarily due to increased interest
income on increased cash and investment balances and decreased interest
expense resulting from a decrease in average debt.
Provision for Income Taxes. The income tax provision for the three and
nine months ended September 30, 2004 is based on the Company's estimated
annual effective tax rate of 35% of pretax income, reduced by a $3.8 million
reversal of accrued income tax liabilities in the second quarter of 2004, as a
result of the completion of a federal income tax audit (see Note 11 of Notes
to Condensed Consolidated Financial Statements), and increased by $168,000 as
a result of $480,000 of non-deductible purchased in-process technology charges
recorded in the first quarter of 2004. For the three and nine months ended
September 30, 2003, the provision for income taxes was 23% of pretax income.
The income tax provision for such interim periods reflects the Company's
estimated annual income tax rate and differs from taxes computed at the
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
federal statutory rate primarily due to the effect of state income taxes and
state research and development credits.
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 September 30, 2004, consisted of cash and short-term
investments of $149 million and a $5 million revolving line of credit from a
commercial bank. The revolving line of credit agreement includes a provision
for the issuance of commercial or standby letters of credit by the bank on
behalf of the Company. The value of all letters of credit outstanding reduces
the total line of credit available. There were no borrowings under the
revolving line of credit at September 30, 2004 and there were $550,000 in
standby letters of credit outstanding. The revolving line of credit agreement
expires on June 30, 2005. Borrowings under the revolving line of credit bear
interest rates of, at the Company's election, the prime rate (4.75% at
September 30, 2004), or the bank's revolving offshore rate, which approximates
LIBOR (2.0% at September 30, 2004) 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 September 30, 2004.
In September 2002, the Company borrowed $10.7 million through a commercial
mortgage financing agreement which was associated with the purchase of its
previously leased manufacturing facilities in San Jose, CA. Borrowings under
this agreement bear interest, at the Company's election, at the daily floating
prime rate (4.75% at September 30, 2004), or adjustable monthly LIBOR (2.0% at
September 30, 2004) plus 1.5%. The principal balance of the loan is to be
repaid in 59 consecutive monthly installments of $16,890 and one final
installment in the amount necessary to pay in full the remaining outstanding
principal balance, with no early payment penalty. In December 2003, the
company repaid $7.0 million of the loan, resulting in a remaining loan balance
of $3.3 million at September 30, 2004. The mortgage agreement contains
certain restrictive covenants with which the Company was in compliance at
September 30, 2004.
The Company generated $52.8 million in cash flows from operating activities
for the nine months ended September 30, 2004 as compared to $25.9 million for
the same period in the prior year. The $52.8 million in cash flows from
operating activities generated by the Company, during the nine months ended
September 30, 2004, were primarily attributable to net income of $26.2 million
plus additions for non-cash activities of $31.7 million and a $4.7 million
increase in accounts payable, which was partially offset by a $5.4 million
increase in accounts receivables, as a result of increased revenues and a $5.9
million increase in inventories as a result of increased manufacturing
activity and an increase in finished goods stock in an attempt to provide a
high level of customer service.
The $25.9 million in cash flows from operating activities generated by the
Company in the nine months ended September 30, 2003 were primarily
attributable to net income of $874,000 plus additions for non-cash activities
of $29.8 million combined with a $2.5 million decrease in inventory, which
were partially offset by a $4.3 million decrease in income taxes payable and a
$2.6 million increase in accounts receivable.
The Company used $54.9 million of cash in investing activities during the
nine months ended September 30, 2004 comprised of $13.6 million in purchases
of property, plant and equipment, $38.3 million in purchases of short term and
long-term investments, $2.0 million for the purchase of BlueChip
Communications and $1.0 million for the purchase of intangible assets. Cash
used in investing activities during the nine months ended September 30, 2003
resulted from $15.8 in net purchases of property, plant and equipment.
The Company used $25.7 million of cash in financing activities during the
nine months ended September 30, 2004 primarily for the repurchase of $29.0
million of the Company's common stock, which was partially offset by $3.9
million in proceeds from employee stock transactions. Cash used in financing
activities during the nine months ended September 30, 2003 was $705,000 and
resulted from the repurchase of $3.5 million of the Company's common stock
combined with $735,000 in repayments of long-term debt, which was partially
offset by $3.5 million in proceeds from employee stock transactions.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company currently intends to purchase approximately $18 million to $25
million in capital equipment and improvements during the next 12 months
primarily for manufacturing equipment for wafer fabrication and product
testing and additional research and development related software and
equipment. The Company is currently authorized by its Board of Directors to
repurchase an additional $46.0 million of its common stock through June 30,
2005. The Company expects that its cash requirements through 2004 will be met
by its cash from operations, existing cash balances and short-term
investments, and its credit facility. In the longer term, the Company
believes future cash requirements will continue to be met by its cash from
operations, and future debt or equity financings as required.
Recently Issued Accounting Standards
Please refer to Note 2 of Notes to Condensed Consolidate Financial
Statements for a discussion of the expected impact of recently issued
accounting standards.
Contractual Obligations and Commitments
The Company's contractual obligations disclosure in its Annual Report on
Form 10-K for the year ended December 31, 2003 has not materially changed
since that report was filed. During the nine months ended September 30, 2004
payments of $1.9 million were made under previously existing operating leases,
repayments of $587,000 were made under previously existing long-term debt
agreements and a $2.0 payment was made for other long-term liabilities. Open
purchase orders were approximately $20 million and are all due within one
year. These obligations primarily relate to future purchases of wafer
fabrication raw materials, wafer fabrication masks, foundry wafers, assembly
and testing services.
Borrowing agreements consisted of a $5 million revolving line of credit
from a commercial bank. The revolving line of credit agreement includes a
provision for the issuance of commercial or standby letters of credit by the
bank on behalf of the Company. The value of all letters of credit outstanding
reduces the total line of credit available. There were no borrowings under
the revolving line of credit at September 30, 2004 and there were $550,000 in
standby letters of credit outstanding. The letters of credit are issued to
guarantee payments for the Company's workers compensation program.
The Company has no other off-balance sheet arrangements and has not entered
into any transactions involving unconsolidated, limited purpose entities or
commodity contracts.
Factors That May Affect Operating Results
If a company's operating results are below the expectations of public
market analysts or investors, then the market price of its Common Stock could
decline. Many factors that can affect a company's quarterly and annual results
are difficult to control or predict. Some of the factors which can affect a
multinational semiconductor business such as the Company are described below.
Geopolitical and Macroeconomic Risks That May Affect Multinational Enterprises
Demand for semiconductor components is increasingly dependent upon the rate
of growth of the global economy. If the rate of global economic growth
slows, or contracts, customer demand for products could be adversely affected,
which in turn could negatively affect revenues, results of operations and
financial condition. Many factors could adversely affect regional or global
economic growth. Some of the factors that could slow global economic growth
include: rising interest rates in the United States, a slowdown in the rate
of growth of the Chinese economy, a significant act of terrorism which
disrupts global trade or consumer confidence, geopolitical tensions including
war and civil unrest. Reduced levels of economic activity, or disruptions of
international transportation, could adversely affect sales on either a global
basis or in specific geographic regions
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, acts of terrorism,
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 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.
Market conditions may lead the Company to initiate additional cost
reduction plans, which may negatively affect near term operating results.
Weak customer demand, competitive pricing pressures, excess capacity, weak
economic conditions or other factors, may cause the Company to initiate
additional 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 international sales are denominated in U.S. currency.
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 Financial Accounting Standards Board ("FASB") has issued a proposed
accounting standard which would require all companies to treat the value of
stock options granted to employees as an expense in the Company's Consolidated
Statement of Operations. Should the proposal become effective, Micrel and
other companies that have issued stock options would be required to record a
compensation expense equal to the value of each stock option granted, which
would negatively impact GAAP profitability. In addition, the FASB has
proposed a choice of valuation models to estimate the fair value of employee
stock options. These models, including the Black-Scholes and Binomial option-
pricing models, use varying methods and inputs and may yield significantly
different results.
The Company does not agree with the FASB proposal to treat employee stock
options as compensation expense and has stated so in writing to the FASB. The
Company believes that employee stock option transactions are not consistent
with or comparable to other forms of employee compensation but are consistent
with and comparable to an equity investment and therefore should continue to
be recorded as such upon exercise. The Company believes that employee stock
options do not meet that part of the legal definition of compensation as
payment for services rendered, since stock options are offered as an
inducement prior to service. Unlike most other employee benefits, stock
options are not a controllable expense, since the Company has no control over
the market value of its stock and therefore has no control over the ultimate
value, if any, received by the employee. Expensing a calculated value of
stock options will negatively distort the Company's financial performance in a
way it cannot control unless the Company ceases to issue stock options. In
addition, the estimated value of employee stock options, using option-pricing
models, is currently disclosed annually and quarterly in the notes to the
Company's consolidated financial statements. Therefore for those investors
who are concerned about the effect of employee stock options on the Company,
the effect of expensing employee stock options is already reported.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the
Securities and Exchange Commission adopted rules requiring public companies to
include a report of management on the Company's internal controls over
financial reporting in their annual reports on Form 10-K. If the Company is
unable to complete its assessment as to the adequacy of its internal controls
over financial reporting as of December 31, 2004 and future year-ends as
required by section 404 of the Sarbanes-Oxley act of 2002, or in the course of
such assessments identify and report in Form 10-K material weaknesses in
controls, investors could lose confidence in the reliability of the Company's
internal control over financial reporting, which could result in a decrease in
the value of its common stock.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
This report is required to contain an assessment by management of the
effectiveness of the Company's internal control over financial reporting. In
addition, the public accounting firm auditing a public company's financial
statements must attest to and report on management's assessment of the
effectiveness of a company's internal control over financial reporting. This
requirement will first apply to Micrel for the year ending December 31, 2004.
Although the Company intends to diligently and vigorously review internal
controls over financial reporting in order to ensure compliance with the
Section 404 requirements, and has been expending significant resources in
developing the necessary documentation and testing procedures required by
Section 404, there is a risk that the Company may not comply with all of the
requirements imposed by Section 404. If the Company fails to complete its
assessment of internal controls in a timely manner, or fails to meet the
requirements of Section 404, the Company's independent registered public
accounting firm may issue a report that is qualified. In addition, the limited
size of the Company could lead to conditions that could be considered material
weaknesses, such as those related to segregation of duties that is possible in
larger organizations but more difficult in smaller organizations. Also,
controls related to general information technology infrastructure may not be as
comprehensive as in the case of a larger organization with more sophisticated
capabilities. It is not clear how such circumstances should be interpreted in
the context of an assessment of internal controls over financial reporting. If
the Company fails to implement required new or improved controls, it may be
unable to comply with the requirements of Section 404 in a timely manner.
Semiconductor Industry Specific Risks
The volatility of customer demand in the semiconductor industry limits a
company's ability to predict future levels of sales and profitability.
Semiconductor suppliers can rapidly increase production output, leading 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 products can result in excess
quantities of certain 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. The Company's quarterly revenues are highly
dependent upon turns fill orders (orders booked and shipped in the same
quarter). The short-term and volatile nature of customer demand makes it
extremely difficult to predict near term revenues and profits.
The short lead time environment in the semiconductor industry has allowed
many end consumers to rely on stocking representatives and distributors to
carry inventory to meet short term requirements and minimize their investment
in on-hand inventory. Since the end of 2003 some of the Company's stocking
representatives and distributors have increased their inventory levels to
service the volatile short-term demand of the end customer. Should the
relationship with a distributor or stocking representative be terminated, the
future level of product returns could be higher than the returns allowance
established, which could negatively affect the Company's revenues and results
of operations.
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 and
price; timing of product introductions; emergence of new computer and
communications standards; quality and customer support.
During a period when economic growth and customer demand have been less
certain, both the semiconductor industry and the Company have experienced
significant price erosion since the beginning of 2001. If price erosion
continues, it will have the effect of reducing revenue levels and gross
margins in future periods. Furthermore, the trend for the Company's customers
to move their electronics manufacturing to Asian countries has brought
increased pricing pressure for Micrel and the semiconductor industry. Asian
based manufacturers are typically more concerned about cost and less concerned
about the capability of the integrated circuits they purchase. The increased
concentration of electronics procurement and manufacturing in the Asia Pacific
region may lead to continued price pressure and additional product advertising
costs for the Company's products in the future.
Customer demand for semiconductor products typically fluctuates based on
seasonal patterns. Demand in the third and fourth quarter of the calendar
year is typically higher due to the seasonal buying patterns related to the
Christmas period. Demand in the first calendar quarter is typically lower due
to the post-Christmas decline in consumption. Third quarter demand was
unseasonably weak. Should actual seasonal demand patterns in the fourth
quarter of 2004 be different than historical patterns, revenues and financial
results may be adversely affected.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The wireless handset market comprises a significant portion of the
Company's standard product revenues. Due to the highly competitive and fast
changing environment in which the Company's wireless handset customers
operate, demand for the product the Company sells into this end market can
change rapidly and unexpectedly. If the Company's wireless handset customers
lose market share, or accumulate too much inventory of completed handsets, the
demand for the Company's products can decline sharply which could adversely
affect the Company's revenues and results of operations.
An important part of the Company's strategy is to continue to focus on the
market for high-speed communications ICs. If the recovery in the
telecommunications infrastructure and wire line networking markets is not
sustainable, resulting in reduced demand for the Company's high bandwidth
products, the Company's future revenue growth and profitability could be
adversely affected.
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.
Because the standard products market for ICs 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. 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 significant investment in semiconductor manufacturing capacity and the
rapid growth of circuit design centers in China may present a competitive
threat to established semiconductor companies due to the current low cost of
labor and capital in China. The emergence of low cost competitors in China
could reduce the revenues and profitability of established semiconductor
manufacturers.
Many semiconductor companies face risks associated with a dependence upon
third parties that manufacture, assemble or package certain of its products.
These risks include reduced control over delivery schedules and quality;
inadequate manufacturing yields and excessive costs; the potential lack of
adequate capacity during periods of excess demand; difficulties selecting and
integrating new subcontractors; potential increases in prices; disruption in
supply due to civil unrest, terrorism or other events which may occur in the
countries in which the subcontractors operate; and 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.
There is intense competition for qualified personnel in the semiconductor
industry, in particular design engineers. 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 success of companies in the semiconductor industry depends in part upon
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
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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.
Companies in the semiconductor industry are 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 its manufacturing process. Any failure to comply with present or
future regulations could result in the imposition of fines, the suspension of
production, alteration of manufacturing processes or a cessation of
operations. In addition, these regulations could restrict the Company's
ability to expand its facilities at their present locations or construct or
operate a new wafer fabrication facility or could require the Company to
acquire costly equipment or incur other significant expenses to comply with
environmental regulations or clean up prior discharges. The Company's failure
to appropriately 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 its business.
Company-Specific Risks
In addition to the risks that affect multinational semiconductor companies
listed above, there are additional risks which are more specific to the
Company such as:
The Company's gross margin, operating margin and net income are highly
dependent on the level of revenue and capacity utilization that the Company
experiences. 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 profit margins. The Company
has increased utilization of its production capacity through the first nine
months of 2004. If the decrease in customer demand experienced in the third
quarter continues and production activity is reduced in response to lower
demand, gross margin, operating margin and net income may deteriorate.
The Company derives a significant portion of its revenues from customers
located in certain geographic regions or countries. Three of the Company's
top ten direct customers are located in South Korea. In the event that
political tensions surrounding North Korea evolve into military or social
conflict, or other factors disrupt the Korean economy, the Company's revenues,
results of operations, cash flow and financial condition could be adversely
affected. A significant portion of the Company's revenues come from customers
located in Taiwan and China. In the event that economic activity in these two
countries declines, or is disrupted by geopolitical events, the Company's
revenues and results of operations could be adversely affected.
The Company manufactures most of its semiconductors at its San Jose,
California fabrication facilities. The Company's existing wafer fabrication
facility, located in Northern California, 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. Furthermore,
manufacturing semiconductors requires manufacturing tools that are unique to
each product being produced. If one of these unique manufacturing tools was
damaged or destroyed, 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 ICs 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. The Company
maintains approximately two to three months of inventory that has completed
the wafer fabrication manufacturing process. This inventory is generally
located offshore at third party subcontractors and can act to buffer some of
the adverse impact from a disruption to the Company's San Jose wafer
fabrication activity arising from a natural disaster such as an earthquake.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2004, the Company held $36.2 million in short-term
investments and $2.0 million in long-term investments. Short-term and long-
term investments consist primarily of liquid debt instruments and are
classified as available-for-sale securities. Investments purchased with
remaining maturity dates of greater than three months and less than 12 months
are classified as short-term. Investments purchased with remaining maturity
dates of 12 months or greater are classified as long-term. These available-
for-sale securities are subject to interest rate risk and will fall in value
if market interest rates increase. If market interest rates were to increase
immediately and uniformly by 10 percent from levels at September 30, 2004, the
fair value of the short-term investments would decline by an immaterial
amount. The Company generally expects to have the ability to hold its fixed
income investments until maturity and therefore would not expect operating
results or cash flows to be affected to any significant degree by the effect
of a sudden change in market interest rates on short-term investments.
At September 30, 2004, the Company held no fixed-rate long-term debt
subject to interest rate risk.
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 recognizes 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 is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As required by Securities and Exchange Commission Rule 13a-15(b), 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 as of
the end of the period covered by this report. Based on the foregoing, the
Company's chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures are effective at the
reasonable assurance level.
There has been no change in the Company's internal controls over financial
reporting during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Sarbanes-Oxley Section 404 Compliance
The Securities and Exchange Commission, as directed by Section 404 of the
Sarbanes-Oxley Act of 2002 (the "Act") adopted rules requiring public
companies to include a report from management on the Company's internal
control over financial reporting in Annual Reports on Form 10-K. This
requirement will first apply to Micrel's Annual Report on Form 10-K for the
year ending December 31, 2004 and in subsequent Annual Reports thereafter. The
report from management must include the following: (1) a statement of
management's responsibility for establishing and maintaining adequate internal
control over financial reporting, (2) a statement identifying the framework
used by management to conduct the required evaluation of the effectiveness of
the Company's internal control over financial reporting, (3) management's
assessment of the effectiveness of the Company's internal control over
financial reporting as of December 31, 2004, including a statement as to
whether or not internal control over financial reporting is effective, and (4)
a statement that the Company's independent auditors have issued an attestation
report on management's assessment of internal control over financial
reporting.
29
Management acknowledges its responsibility for establishing and maintaining
internal control over financial reporting and seeks to continually improve
those controls. In order to achieve compliance with Section 404 of the Act
within the required timeframe, the Company has been conducting a process to
document and evaluate internal control over financial reporting over the first
ten months of 2004. In this regard, the Company has dedicated internal
resources, engaged temporary employees, and adopted a detailed work plan to:
(i) assess and document the adequacy of its internal control over financial
reporting; (ii) take steps to improve internal control processes where
required; (iii) validate through testing that internal controls are
functioning as documented; and (iv) implement a continuous reporting and
improvement process for internal control over financial reporting. We believe
the Company's process for documenting, evaluating and monitoring its internal
control over financial reporting is consistent with the objectives of Section
404 of the Act.
We have prepared initial documentation of the Company's internal control
over financial reporting and have recently commenced testing of those controls
but have not yet completed this testing. Although the Company intends to
diligently and vigorously review internal control over financial reporting, no
assurance can be provided as to management's, or the Company's independent
auditor's conclusions at December 31, 2004 with respect to the effectiveness
of the Company's internal control over financial reporting, or that the
Company will be able to complete the required assessment in a timely manner.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the control system are met. In addition, the design of any
control system is based in part upon certain assumptions about the likelihood
of future events. Because of these and other inherent limitations of control
systems, there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions, regardless of how
remote.
30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information included in Note 9 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. UNREGISTERED SALES AND USE OF PROCEEDS
Dividend Payment Restrictions
The Company has entered into borrowing agreements that contain 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.
Issuer Purchases of Equity Securities
Issuer Purchases of Equity Securities
Maximum Dollar
Total Number of Value of Shares
Total Shares Purchased that May Yet be
Number Average as Part of Repurchased Under
of Shares Price Paid Publicly Announced the Plans or
Period Purchased Per Share Plans or Programs Programs ($000)
- ----------------- --------- ---------- ------------------ -----------------
January 2004 42,550 $ 16.70 42,550 $ 8,670
February 2004 75,350 $ 15.91 75,350 $ 7,471
March 2004 167,150 $ 13.75 167,150 $ 20,792
April 2004 138,850 $ 13.11 138,850 $ 18,972
May 2004 96,600 $ 12.83 96,600 $ 17,733
June 2004 482,600 $ 13.03 482,600 $ 11,447
July 2004 501,600 $ 10.31 501,600 $ 6,274
August 2004 581,100 $ 9.44 581,100 $ 50,790
September 2004 476,100 $ 10.11 476,100 $ 45,976
--------- ------- ---------
Total 2,561,900 $ 11.33 2,561,900
In February 2002, the Company's Board of Directors approved a plan to
repurchase shares of the Company's common stock in the open market. 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) plan. The Company has
previously disclosed purchase activity and amendments to this plan in its
Annual and Quarterly Reports on Form 10-K and Form 10-Q in the Notes to
Consolidated Financial Statements. In August, 2004 the Board of Directors
amended the repurchase program and authorized the repurchase of common stock
up to a maximum value of $75 million during the period from January 1, 2004
through June 30, 2005.
ITEM 6. EXHIBITS
Exhibit No. Description
----------- -----------
31 Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
31
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: November 8, 2004 By /s/ Richard D. Crowley, Jr.
---------------------------
Richard D. Crowley, Jr.
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
32