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| MCRL > SEC Filings for MCRL > Form 10-K on 26-Feb-2009 | All Recent SEC Filings |
26-Feb-2009
Annual Report
Overview
Micrel designs, develops, manufactures and markets a range of high-performance analog power ICs, mixed-signal and digital ICs. These products address a wide range of end markets including cellular handsets, enterprise and portable computing, enterprise and home networking, wide area and metropolitan area networks and industrial equipment. The Company also manufactures custom analog and mixed-signal circuits and provides wafer foundry services for customers who produce electronic systems for communications, consumer and military applications.
To enhance the readers' understanding of the Company's performance, the following chronological overview of the Company's results for the years 2006 through 2008 have been provided.
In the first quarter of 2006, broad based strength in customer demand, combined with continued lean channel inventories resulted in the highest quarterly booking level for Micrel since calendar year 2000. Net revenues increased 5% on a sequential basis to $68.2 million and were 12% above the net revenues of the year-ago period. The sequential growth in net revenues was primarily the result of increased demand from customers serving the wireline communications end market and higher resales of the Company's products through its distributors, partially offset by seasonal declines in sales to the wireless handset (primarily in Korea) and computing end markets. First quarter of 2006 gross margin of 58.0% was the highest quarterly gross margin as of that time in the Company's history.
In the second quarter of 2006, overall order rates moderated from the levels experienced in the first quarter. Second quarter 2006 net revenues of $70.2 million increased by 3% sequentially and were 13% above the prior year period. The growth in net revenues continued to be led by demand from customers serving the wireline communications end market. This growth was partially offset by continued weakness in demand from Korean-based customers serving the wireless handset end market as they experienced a sequential decline in handset shipments during the second quarter. Second quarter 2006 gross margin of 56.7% declined by 1.3% as compared to the first quarter of 2006.
In the third quarter of 2006, overall order rates declined on a sequential basis, primarily because the Company's sell-through distributors reduced orders and consumed backlog in an attempt to control inventory levels. Third quarter 2006 net revenues of $73.5 million increased by 5% sequentially. Continued strength from the industrial end market, combined with a rebound in the Company's wireless handset business, led the product revenue growth in the third quarter. Third quarter 2006 net revenues included $2.9 million associated with a patent license that was previously under litigation. Third quarter 2006 gross margin of 58.7% was the highest level in the Company's history. The settlement of intellectual property matters, and related licensing revenues and expenses, resulted in $2.2 million of net pre-tax operating income included in the third quarter, increasing third quarter 2006 net income by $0.02 per diluted share.
Fourth quarter 2006 order rates were slightly lower than the third quarter, and remained below the level of fourth quarter revenues as customers attempted to reduce inventory levels. Fourth quarter net revenues were $64.5 million, a decrease of 12% from third quarter revenues of $73.5 million. The sequential decline in sales resulted primarily from reduced demand from wireless handset manufacturers combined with lower distribution revenues and the absence of patent license revenue. Gross margin of 56.9% declined from the previous quarter primarily due to lower revenues and the impact of reduced manufacturing volumes leading to less absorption of fixed cost.
Micrel's overall financial performance in 2006 was one of the best on an annual basis in the Company's history. Revenues of $276.3 million were the second highest annual amount ever recorded. Total sales increased by 10.4% over the $250.4 million posted in 2005. Gross margin of 57.6% improved for the fourth consecutive year and reached the highest level in the Company's history, exceeding previous peak levels recorded in the year 2000 when revenues were 25% higher than 2006. Income from operations of $56.8 million increased by 66% from the $34.1 million recorded in 2005. Operating margin improved to 20.6% from 13.6% in 2005. Year 2006 net income was $37.7 million, or $0.46 per diluted share, an increase of 45% from $26.0 million, or $0.30 per diluted share in 2005. Year 2006 net income and earnings per share were the second highest ever recorded by Micrel on an annual basis. Operating cash flow for the year of 2006 was $59 million.
During the first quarter of 2007, customers continued to control their inventories closely. However, the order rates the Company experienced during the quarter suggested that customer and channel inventories had fallen to levels consistent with end demand. Micrel's first quarter bookings increased in all major geographic regions resulting in an 18% growth in orders compared with fourth quarter 2006 levels. The total overall amount of new orders booked in the first quarter exceeded revenues. The sequential improvement in bookings was driven by higher order levels from customers serving the high speed communications, wireless handset and industrial end markets. Order rates increased for both OEM customers and sell-through distributors, while bookings from Micrel's Asian-based sell-in distributors were flat from fourth quarter levels. First quarter revenues were $63.1 million, 2% less than the $64.5 million recorded in the fourth quarter 2006 and 7% lower than the $68.2 million posted in the first quarter of 2006. Seasonal declines in sales to customers serving the computing, wireless handset and consumer end markets were partially offset by higher resales through the Company's sell-through distributors. Gross margin increased sequentially to 58.0% despite lower revenues and inventory reduction due to a combination of lower manufacturing costs and a higher gross margin sales mix. First quarter operating profit was $11.2 million, or 18% of sales. The Company's on-hand inventory declined on a sequential basis. Overall channel inventories remained relatively flat from the end of 2006, with increases at the Company's sell-through distributors offset by lower inventory levels at Micrel's sell-in distributors.
In the second quarter of 2007, order lead times remained in the four to six week range. Although customers continued to closely monitor their inventories, the dollar amount of second quarter bookings exceeded the Company's revenue level. Second quarter revenues were $65.1 million, a sequential increase of 3% over the $63.1 million recorded in the first quarter, and 7% lower than the $70.2 million posted in the year-ago period. The sequential growth in second quarter revenues was led by increased sales to customers serving the communications and computing end markets, offsetting lower sales of the Company's products to major Korean wireless handset customers. Gross margin of 57.4% increased 0.7% from the prior year period and decreased by 0.6% from the first quarter. During the second quarter, the Company operated at a lower level of factory utilization, which had the combined effect of reducing both inventory levels and gross margin. Channel inventories also declined on a sequential basis as the Company's major global sell-through distributors attempted to take advantage of readily available semiconductor component supplies to increase their working capital turns.
Demand for the Company's products in the third quarter of 2007 was generally seasonal in nature. Bookings from industrial and wireline communication customers softened, while holiday and back-to-school related markets such as wireless handsets, computing and consumer were more robust. Faced with concerns about the growth of the U.S. economy, the Company's sell-through distributors were cautious throughout the third quarter as they saw their orders slow and inventories build. The overall amount of orders booked by the Company in the third quarter was approximately the same as the revenue level for the quarter. Customers continued to control their inventories very closely during the third quarter in the face of short lead times, due in part to their belief that the semiconductor industry had sufficient inventory and/or the ability to deliver sufficient quantities to meet customer demand in this shorter lead time environment. Micrel's order lead times decreased throughout the quarter, starting out at about five weeks in July and declining to three to four weeks in September. Third quarter revenues were $65.2 million, up slightly compared to the second quarter, and 11% lower than the $73.5 million posted in the year-ago period. An increase in third quarter sales to customers in the wireless handset and consumer end market was offset by lower revenues from customers in the wireline communications end market, arising from lower shipments to major Chinese communications customers as they trimmed inventory levels. Gross margin decreased from 57.4% in the second quarter to 56.6% in the third quarter of 2007, and decreased from 58.7% in the year ago period. During the third quarter, the Company reduced on-hand inventory levels despite a higher level of factory utilization. Channel inventories increased by approximately one week over the second quarter due to seasonally slower distribution sales of the Company's products. Third quarter operating profit was $12.4 million, or 18.9% of revenues.
In the fourth quarter of 2007, the increasingly uncertain macroeconomic environment appeared to heighten the Company's customer's focus on maintaining lean inventories. Global distributors and certain OEM customers informed the Company that they attempted to minimize inventory at year-end. As a consequence, customer orders and purchases declined more quickly than usual in the month of December, resulting in a quarterly book-to-bill ratio of less than one, and impacting fourth quarter revenues. Revenues for the fourth quarter of 2007 decreased 1% from the third quarter to $64.6 million and were essentially flat to the revenues in the year-ago period. Sales to customers serving the consumer, computing and the wire line communications end markets declined on a sequential basis, partially offset by increased sales of the Company's Ethernet products during the quarter. Gross margin decreased to 55.7% in the fourth quarter from 56.6% in the third quarter primarily as a result of a less favorable sales mix. Fourth quarter operating profit was $11.6 million, or 18% of revenues. On-hand inventories increased during the fourth quarter, while channel inventories decreased by approximately one week from the end of the third quarter.
Micrel's financial performance in 2007 remained solid. Total year gross margin of 56.9% was the second highest in the Company history. Net income for fiscal 2007 increased 16.8% to $44.1 million, or $0.57 per diluted share, compared with net income of $37.7 million, or $0.46 per diluted share in 2006. Included in 2007 pre-tax income was a $15.5 million gain associated with a first quarter legal settlement, which after income taxes, was equivalent to $9.5 million or $0.12 per diluted share. Cash flows from operations of $67.8 million during the year enabled the repurchase of 5.5 million shares of common stock for $55.1 million, representing approximately 7% of the shares outstanding at the beginning of the year. In addition, the Company commenced a $0.03 per common share cash dividend payment to shareholders in the second quarter of 2007.
In the first quarter of 2008, bookings levels rebounded from the fourth quarter of 2007, resulting in the highest quarterly booking level since Q1 2006 and a book-to-bill ratio significantly above one. First quarter revenues of $66.1 million increased 2% sequentially compared to fourth quarter 2007 revenues of $64.6 million and increased 5% compared to revenues of $63.1 million recorded in the prior year period. The increase in revenues was primarily due to stronger demand from the wire line communications, digital TV, industrial and voice-over-IP end markets, which offset seasonal declines in sales to the computing and wireless handset end markets. Revenues through Micrel's sell-through distributors increased in the first quarter and the number of weeks of distribution channel inventory decreased slightly on a sequential basis. Gross margin improved to 56.3% in the first quarter of 2008 from 55.7% in the fourth quarter of 2007 while at the same time inventory levels were reduced. First quarter operating profit was $11.6 million, or 18% of revenues. Earnings per diluted share for the first quarter of 2008 increased to $0.12 per share from $0.11 per share reported in the fourth quarter of 2007.
During the first quarter of 2008, the Company became engaged in its first proxy contest since going public in 1994, with a small activist hedge fund, Obrem Capital Management LLC ("OCM"). This issue resulted in Micrel incurring incremental operating expenses on this matter of $331,000 during the first quarter, $2.4 million in the second quarter, $349,000 in the third quarter and $1.1 million in the fourth quarter of 2008. See "Proxy Contest Expense in the Results of Operations" section in "Management Discussions and Analysis of Financial Conditions and Results of Operations".
In the second quarter of 2008, total bookings remained firm, resulting in a book-to-bill ratio above one. Second quarter bookings were paced by demand from customers serving the communications, industrial, and wireless handset end markets. Customers remained very cautious, which continued to keep order lead times in the 4 to 5 week range. In the second quarter, Micrel posted its highest sequential revenue growth rate in four years. Second quarter revenues of $70.6 million came in at the high end of the Company's guidance, increasing by $4.5 million, or 7%, from the first quarter, and were up by $5.5 million, or 8% from the prior year period. The growth in revenues was led by stronger demand from customers serving the wireline communications, wireless handset, and wi-fi voice-over-IP end markets, combined with record sales through the Company's global sell-through distributors. The turns fill percentage for the second quarter was slightly above 50%. Gross margin was 56.4%, which was about the same as the first quarter of 2008. Second quarter operating profit was $11.1 million, or 16% of sales. A total of $2.4 million of proxy contest expenses reduced Micrel's operating income by approximately 18% in the second quarter, and also had the effect of reducing operating margin by approximately 3% in the second quarter. Second quarter 2008 net income was $7.4 million, or $0.10 per diluted share. This compares with first quarter 2008 net income of $8.3 million, or $0.12 per diluted share, and net income of $8.8 million or $0.11 per diluted share in the prior year period. Expenses related to the Company's proxy contest reduced net income by $0.02 per share in the second quarter.
Financial markets in the United States, Europe and Asia experienced extreme disruption in the second half of the fiscal year ending December 31, 2008, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. In the third quarter of 2008, concerns related to the deterioration in the global financial and credit markets, including with respect to the availability and cost of credit, contributed to instability in worldwide capital and credit markets and diminished expectations for the U.S. and global economy. These conditions worsened in the fourth quarter of 2008, and combined with uncertainty about the global economy in general, contributed to volatility of unprecedented levels and a further economic slowdown. Although governments have taken unprecedented actions in an attempt to alleviate the credit crisis, customers and consumers began to cut back on spending in order to conserve cash in the third quarter of 2008. This resulted in the slowing of orders from Micrel's distributors and direct OEM customers, which continued into the fourth quarter of 2008.
During the third quarter of 2008, total bookings were less than revenues, resulting in a book-to-bill ratio of less than one. Third quarter bookings decreased abruptly in the last two weeks of the quarter. Notwithstanding the order decrease, resales of the Company's products from global sell-through distributors remained strong throughout the quarter and represented an all-time record for the Company. In the third quarter, Micrel posted $67.5 million in revenue, a decrease of 4% sequentially and an increase of 4% from third quarter of 2007. The sequential quarter decrease in sales primarily resulted from reduced demand from customers serving the wireline communications, Wi-FI voice-over IP and foundry sales to a major solar end customer. This was offset by slight increases in the computer and consumer markets. The OEM turns fill percentage for the third quarter was approximately 50%. Third quarter gross margin was 55.3%, down 1.1% from 56.4% in Q2. Research and development spending was $13.8 million, or 20% of revenues in the third quarter compared to $14.8 million or 21% of revenues in the second quarter. Selling, general and administrative expenses were $11.3 million, or 17% of sales, down from $11.6 million in the second quarter. GAAP operating income was $11.9 million, or 18% of sales. This compares to operating income of $11.1 million in the second quarter and $12.3 million in the prior year period. Other income, net was unchanged quarter to quarter at $700 thousand. The effective tax rate was 38.9% for the third quarter. Third quarter net income was $7.7 million, or $0.11 per diluted share. This compares with second quarter net income of $7.4 million, or $0.10 per diluted share, and GAAP net income of $9.1 million or $0.12 per diluted share in the year ago.
Fourth quarter revenue of $55.2 million decreased by $12.4 million, or 18%, from $67.5 million in the third quarter. Fourth quarter revenues were lower by $9.4 million, or 15%, from $64.6 million in the same period last year. The sequential and year-over-year decrease in revenues was due to tight year-end inventory control in most geographies, channels and end markets as a result of the worldwide financial crisis. The worldwide macroeconomic recession in the fourth quarter caused the Company's customers to focus on maintaining lean inventories. The Company's global distributors and a number of major OEM customers took action to minimize inventories at year-end. As a consequence, customer orders and purchases declined in November and December after strong activity in October. For the fourth quarter, Micrel's overall book-to-bill ratio was below one. Order lead times from the Company's customers remained relatively short at from three to six weeks during the quarter.
Fourth quarter gross margin was 52.0%, compared to 55.3% in the third quarter. The decrease in gross margin was the result of factory underutilization and additional inventory reserves due to a lower sales forecast. Fourth quarter 2008 net income of $4.9 million, or $0.07 per diluted share compares with third quarter 2008 net income of $7.7 million, or $0.11 per diluted share, and net income of $8.4 million or $0.11 per diluted share in the same period in 2007.
For the year ended December 31, 2008, Micrel's financial performance continued to be solid, especially in light of the current economic conditions. The Company performed well in a difficult environment. Full year revenues of $259.4 million were up slightly, compared with $258.0 million in 2007. Net income for fiscal 2008 was $28.3 million, or $0.40 per diluted share, compared with net income of $44.1 million, or $0.57 per diluted share in 2007. Included in 2007 net income was a $15.5 million pre-tax gain associated with a first quarter legal settlement, which after income taxes, is equivalent to $0.12 per diluted share. Gross margins for 2008 were 55.1% compared to 56.9% in 2007. The Company's design efforts resulted in a record number of new product releases in 2008. Solid cash flows from operations of $53.3 million during the year enabled the repurchase of 7.1 million shares of common stock, or approximately 9.6% of the shares outstanding at the beginning of the year. In addition, Micrel continued a dividend payment to shareholders in 2008, representing management's confidence in Micrel's operating performance and commitment to enhancing shareholder value.
The Company derives a substantial portion of its net revenues from standard products. For 2008, 2007 and 2006 the Company's standard products sales accounted for 95%, 92%, and 93%, respectively, of the Company's net revenues. The Company believes that a substantial portion of its net revenues in the future will depend upon standard products sales, although such sales as a proportion of net revenues may vary as the Company adjusts product output levels to correspond with varying economic conditions and demand levels in the markets which it serves. The standard products business is characterized by short-term orders and shipment schedules, and customer orders typically can be canceled or rescheduled without significant penalty to the customer. Since most standard products backlog is cancelable without significant penalty, the Company typically plans its production and inventory levels based on 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 and in Item 1A. As a result of the foregoing or other factors, including the global economic crisis, 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.
Revision of Prior Period Financial Statements
During the fourth quarter of 2008, the Company identified an error related to its calculation of deferred income on shipments to distributors ("deferred income"). Upon review of its calculations, management determined that the estimated shipping margin percentage used to calculate the deferred income balance was incorrect and this resulted in an understatement of deferred income and related cost of sales. The Company assessed the materiality of this error on prior periods financial statements in accordance with the SEC's Staff Accounting Bulletin No. 99 ("SAB 99"), and concluded that the error was not material to any prior annual or interim periods but would be material to the year ended December 31, 2008 if the entire correction was recorded in the current year. Accordingly, in accordance with the SEC's Staff Accounting Bulletin No. 108 ("SAB 108"), the 2007 and 2006 financial statements presented herein have been revised to correct for the immaterial error. In addition, an adjustment was also recorded to reduce the beginning retained earnings at January 1, 2006 for the cumulative impact of this error on prior periods. The revision had no net impact on the Company's Consolidated Statement of Cash Flows for the years ended December 31, 2008, 2007 and 2006 (See Note 2 of Notes to Consolidated Financial Statements).
Critical Accounting Policies and Estimates
The financial statements included in this Form 10-K 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 of America. 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. The Company considers certain accounting policies related to revenue recognition, inventory valuation, share-based accounting, income taxes, and litigation to be critical to the fair presentation of its financial statements.
Revenue Recognition and Receivables. Micrel generates revenue by selling products to 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 located in North America and Europe, and in certain countries in 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 and related cost of sales are not recognized, the Company . . .
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