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MCRL > SEC Filings for MCRL > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for MICREL INC

Form 10-Q for MICREL INC


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements contained in this quarterly 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, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including statements regarding the Company's expectations, hopes, intentions or strategies regarding the future. Forward-looking statements include, but are not limited to statements regarding: future revenues and dependence on standard products sales and international sales; the levels of international sales; the effect of global market conditions on revenue levels, profitability and results of operations; future products or product development; statements regarding fluctuations in the Company's results of operations; future returns and price adjustments and allowance; future uncollectible amounts and doubtful accounts allowance; future products or product development; future research and development spending and the Company's product development strategy; the Company's markets, product features and performance; product demand and inventory to service such demand; competitive threats and pricing pressure; the effect of dependence on third parties; the Company's future use and protection of its intellectual property; future expansion or utilization of manufacturing capacity; future expenditures; current or future acquisitions; the ability to meet anticipated short-term and long-term cash requirements and the sources of funds to meet such requirements; effect of changes in market interest rates on investments; the Company's ability to recover the cost basis on its investments; the Company's need and ability to attract and retain certain personnel; the cost and outcome of litigation and its effect on the Company; the impact of changes in laws and regulations; the future realization of tax benefits; the amount of future taxable income levels and the resolution of uncertain tax positions; and share-based incentive awards and expectations regarding future stock based compensation expense. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as, but not limited to, "believe," "estimate," "may," "can," "will," "could," "would," "should," "continue," "intend," "objective," "plan," "expect," "likely," "potential," "possible" or "anticipate" or the negative of these terms or other comparable terminology. All forward-looking statements included in this report are based on information available to the Company on the date of this report, and, except as required by law, the Company assumes no obligation to update any such forward-looking statements. These statements are subject to risks and uncertainties, including those risks discussed under "Risks Factors" and elsewhere in this report, which could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. Additional factors that may affect operating results are contained within the Company's Form 10-K for the year ended December 31, 2011.

Overview
Micrel designs, develops, manufactures and markets a range of high-performance analog integrated circuits ("ICs"), mixed-signal ICs and digital ICs. The Company currently ships approximately 3,000 standard products. These products address a wide range of end markets including cellular handsets, portable computing, enterprise and home networking, wide area and metropolitan area networks, digital televisions and industrial equipment. The Company also manufactures custom analog and mixed-signal circuits and provides wafer foundry services for customers that produce electronic systems for communications, consumer and military applications.
As part of keeping pace with the dynamics of an ever changing market landscape, the Company recently renamed its product groups to more accurately reflect current technology trends and customer needs. Analog is now called Micrel's high performance linear and power product group, high bandwidth product line is now the timing and communications product group and Micrel's Ethernet is now referred to as LAN solutions product group.
The Company's high performance linear and power products are characterized by high power density and small form factor. The demand for high performance linear and power circuits has been fueled by the growth of portable communications and computing devices, including for example, cellular handsets, tablet devices and notebook computers. The Company also has an extensive linear and power management offering for the networking and communications infrastructure markets including cloud and enterprise servers, network switches and routers, storage area networks and wireless base stations. In addition, the Company offers products that serve the solid state drive market and is seeing strength in the emergence of solid state drives and analog switches, including USB switches.


Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company's timing and communications circuits are used primarily for enterprise networks, storage area networks, access networks and metropolitan area networks. This product portfolio consists of timing, clock management and high speed Physical Media Devices ("PMD") products. With form factor, size reductions, and ease of use critical for system designs, Micrel utilizes innovative packaging and proprietary process technology to address these challenges. On April 2, 2012, the Company acquired a controlling interest of approximately 95% in PhaseLink, a private company based in Taiwan and in San Jose, California. The objective of the acquisition is to complement Micrel's high performance clock generation and distribution products for the communication market and to expand its product offerings into the consumer and industrial markets. PhaseLink provides high performance integrated timing solutions to system and oscillator manufacturers. The Company's condensed consolidated financial statements include the operating results of PhaseLink from the date of acquisition. Pro forma financial disclosures are not presented herein as the financial results of this acquisition are considered immaterial. The Company's family of LAN solutions products targets the digital home, enterprise, industrial and automotive markets. This product portfolio consists of physical layer transceivers ("PHY"), Media Access Controllers ("MAC"), switches, and System-On-Chip ("SoC") devices that support various LAN protocols supporting communication transmission speeds from 10 Megabits per second to a Gigabit per second.
The following table presents the Company's revenues by product group, as a percentage of total net revenues, for the periods presented.

                                        Three Months Ended       Nine Months Ended
Net Revenues by Product Group             September 30,            September 30,
                                        2012         2011        2012         2011
As a Percentage of Total Net Revenues
High Performance Linear and Power         57 %         60 %        58 %         61 %
Timing and Communications                 20           17          20           18
LAN Solutions                             20           19          18           18
Total standard products                   97           96          96           97
Foundry, custom and other products         3            4           4            3
                                         100 %        100 %       100 %        100 %

The Company's products address a wide range of end markets. The following table presents the Company's revenues by end market as a percentage of total net revenues, for the periods presented.

                                        Three Months Ended       Nine Months Ended
Net Revenues by End Market                September 30,            September 30,
                                        2012         2011        2012         2011
As a Percentage of Total Net Revenues
Industrial                                38 %         40 %        41 %         41 %
High-speed communications                 33           34          32           32
Computer                                  11           10          10           12
Wireless handsets                         16           14          15           12
Military and other                         2            2           2            3
Total net revenues                       100 %        100 %       100 %        100 %

To enhance the readers' understanding of the Company's performance, the following is a chronological overview of the Company's results for the quarterly periods from January 1, 2011 through September 30, 2012.


Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

During the first quarter of 2011, revenues decreased 10.8% to $67.5 million from $75.6 million in the fourth quarter of 2010. This larger than normal seasonal decline in revenue from the fourth quarter of 2010 was mainly due to a larger than expected reduction in sales to a Korean wireless handset and consumer electronic device manufacturer which moderated product deliveries during the quarter to control its inventory levels. The Company also experienced a reduction in overall demand towards the end of the first quarter of 2011 related to disruptions in the worldwide electronics supply chain as a result of the earthquake and tsunami in Japan. In addition, the first quarter 2011 revenues were impacted by reduced shipments to certain Asian based stocking representative channel partners that reduced their inventory levels during the quarter. As compared to the same period last year, first quarter 2011 revenues increased by $0.3 million. First quarter 2011 book-to-bill ratio was below one, but showed improvement compared to the fourth quarter of 2010. First quarter 2011 gross margin was 56.1%, as compared to 55.8% in the fourth quarter of 2010. Despite the lower revenues, first quarter 2011 gross margin increased from the previous quarter primarily due to a larger proportion of higher margin products. Net income for the first quarter of 2011 was $9.1 million, or $0.15 per basic share and $0.14 per diluted share, as compared to net income of $13.7 million, or $0.22 per basic and diluted share, for the fourth quarter of 2010, and net income of $9.7 million, or $0.16 per basic and diluted share, for the first quarter of 2010. During the first quarter of 2011, cash flows from operations were $15.5 million. During the first quarter of 2011, cash and short-term investments increased by $12.4 million to $121.6 million. In addition to maintaining its quarterly $0.035 per share cash dividend, during the first quarter of 2011 the Company repurchased $5.8 million of its common stock. During the second quarter of 2011, revenues increased 1.5% to $68.5 million from $67.5 million in the first quarter of 2011. This increase resulted primarily from increased demand in the high-speed communications end market as well as a resumption of more normal shipment levels to a Korean wireless handset and consumer electronic device manufacturer which had moderated product deliveries during the previous quarter. The sequential increase in revenues was less than expected primarily due to lower than expected demand in the industrial end market. The second quarter 2011 book-to-bill ratio was above one for the first time since the second quarter of 2010. Second quarter 2011 gross margin increased to 58.3% as compared to 56.1% in the first quarter of 2011 primarily due to a larger proportion of higher margin products combined with decreased excess inventory charges. Net income for the second quarter of 2011 was $10.7 million, or $0.17 per basic and diluted share, as compared to net income of $9.1 million, or $0.15 per basic share and $0.14 per diluted share, for the first quarter of 2011, and net income of $12.4 million, or $0.20 per basic and diluted share, for the second quarter of 2010. During the second quarter of 2011, cash flows from operations were $12.4 million. During the second quarter of 2011, cash and short-term investments increased by $10.7 million to $132.3 million. In addition to maintaining its quarterly $0.035 per share cash dividend, during the second quarter of 2011 the Company repurchased $1.4 million of its common stock. During the third quarter of 2011, revenues decreased 6.2% to $64.2 million from $68.5 million in the second quarter of 2011. This decrease resulted primarily from lower customer demand in most of the Company's geographies and end markets due to overall weakness in the global economy. The third quarter 2011 book-to-bill ratio was below one. Third quarter 2011 gross margin decreased to 55.5% as compared to 58.3 % in the second quarter of 2011 primarily due to a larger proportion of lower margin consumer products combined with lower factory capacity utilization. Net income for the third quarter of 2011 was $9.2 million, or $0.15 per basic and diluted share, as compared to net income of $10.7 million, or $0.17 per basic and diluted share, for the second quarter of 2011, and net income of $14.9 million, or $0.24 per basic and diluted share, for the third quarter of 2010. During the third quarter of 2011, cash flows from operations were $19.1 million. During the third quarter of 2011, cash and short-term investments increased by $10.7 million to $143.0 million. In addition to increasing its quarterly cash dividend to $0.04 per share, during the third quarter of 2011 the Company repurchased $5.3 million of its common stock. During the fourth quarter of 2011, revenues decreased 8.5% to $58.8 million from $64.2 million in the third quarter of 2011. This sequential decrease resulted primarily from lower customer demand across the Company's geographies and end markets due to overall weakness in the global economy. The fourth quarter 2011 book-to-bill ratio was below one. Fourth quarter 2011 gross margin decreased to 50.5% as compared to 55.5 % in the third quarter of 2011 primarily due to a larger proportion of lower margin consumer products combined with lower factory capacity utilization. Net income for the fourth quarter of 2011 was $5.0 million, or $0.08 per basic and diluted share, as compared to net income of $9.2 million, or $0.15 per basic and diluted share, for the third quarter of 2011, and net income of $13.7 million, or $0.22 per basic and diluted share, for the fourth quarter of 2010. During the fourth quarter of 2011, cash flows from operations were $3.4 million. During the fourth quarter of 2011, cash and short-term investments decreased by $5.1 million to $138.0 million primarily due to repurchases of common stock. In addition to maintaining its quarterly $0.04 per share cash dividend, during the fourth quarter of 2011 the Company repurchased $7.8 million of its common stock.


Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the year ended December 31, 2011, revenues decreased 12.9% to $259.0 from $297.4 million for the year ended December 31, 2010. This decrease was due to lower customer demand across most of the Company's geographies and end markets, which resulted from global macro-economic conditions. Gross margin for 2011 decreased to 55.3% from 56.8% for 2010. This decrease was primarily due to a shift in mix to lower margin consumer-oriented products and lower factory utilization. Operating margin for 2011 was 18.1% which decreased from the record level of 25.2% in 2010. Net income was $34.0 million, or $0.55 per diluted share, compared with $50.7 million, or $0.81 per diluted share, in 2010. At December 31, 2011, cash, cash equivalents and short term investments were $137.9 million, an increase of $28.6 million from $109.2 million in 2010. The Company generated $50.1 million in cash flows from operations in 2011. In addition, in 2011 the Company repurchased $20.3 million of its common stock, and paid $9.4 million in dividends to shareholders.
During the first quarter of 2012, revenues increased 4.0% to $61.2 million from $58.8 million in the fourth quarter of 2011. This increase in revenue from the fourth quarter of 2011 was principally driven by overall demand from customers in most geographies and end markets. As compared to the same period last year, first quarter 2012 revenues decreased by $6.3 million. First quarter 2012 book-to-bill ratio was one, and showed improvement compared to the fourth quarter of 2011. First quarter 2012 gross margin was 54.3%, as compared to 50.5% in the fourth quarter of 2011. With the higher revenues compared to the fourth quarter of 2011, first quarter 2012 gross margin increased from the previous quarter primarily due to a higher percentage of distribution sales which carry higher margins, an increase in factory utilization, and lower inventory reserve charges. Net income for the first quarter of 2012 was $5.4 million, or $0.09 per basic and diluted share, as compared to net income of $5.0 million, or $0.08 per basic and diluted share, for the fourth quarter of 2011, and net income of $9.1 million, or $0.15 per basic share and $0.14 per diluted share, for the first quarter of 2011. During the first quarter of 2012, cash flows from operations were $8.7 million. During the first quarter of 2012, cash and short-term investments decreased by $0.6 million to $137.3 million. In addition to maintaining its quarterly $0.04 per share cash dividend, during the first quarter of 2012 the Company repurchased $6.0 million of its common stock. Revenues of $63.7 million in the second quarter of 2012 increased 4.2% from $61.2 million in the first quarter of 2012. The increase primarily resulted from stronger sales of the Company's timing and communications products, including contributions from the acquisition of PhaseLink. This growth was in part offset by weaker than expected demand from the Company's sell-through distributors primarily in Europe. The book-to-bill ratio in the second quarter of 2012 was above one. Second quarter 2012 gross margin increased to 55.2% as compared to 54.3% in the first quarter of 2012. The increase was principally due to a richer mix of higher-margin products and improved factory utilization. Net income attributable to Micrel, Incorporated shareholders for the second quarter of 2012 was $6.0 million, or $0.10 per basic and diluted share, as compared to net income of $5.4 million, or $0.09 per basic and diluted share, for the first quarter of 2012, and net income of $10.7 million, or $0.17 per basic and diluted share, for the second quarter of 2011. During the second quarter of 2012, cash flows from operations were $11.5 million. Cash and short term investments were $119.4 million at June 30, 2012 as compared to $137.3 million at March 31, 2012 which reflects a cash payment of $16.4 million (net of acquired cash) made on April 2, 2012 related to the PhaseLink acquisition. During the second quarter of 2012, the Company repurchased $8.7 million of its common stock. In addition, the Company maintained and paid its quarterly $0.04 per share cash dividend totaling approximately $2.5 million in the second quarter of 2012.
Third quarter 2012 revenues decreased 1.2% to $62.9 million from $63.7 million in the second quarter of 2012. The decrease was principally due to lower sales of the Company's timing and communications products partially offset by gathering momentum in LAN solutions product sales. The third quarter 2012 book-to-bill ratio was above one. Third quarter 2012 gross margin decreased to 52.9% as compared to 55.2 % in the second quarter of 2012 primarily due to a mix shift to lower margin consumer-related products and lower factory capacity utilization. The lower factory utilization was due to reducing production in an attempt to minimize building inventory. Net income attributable to the Company' shareholders for the third quarter of 2012 was $4.7 million, or $0.8 per basic and diluted share, as compared to net income of $6.0 million, or $0.10 per basic and diluted share, for the second quarter of 2012, and net income of $9.2 million, or $0.15 per basic and diluted share, for the third quarter of 2011. During the third quarter of 2012, cash flows from operations were $6.4 million. Cash and short term investments were $108.7 million at September 30, 2012 as compared to $119.4 million at June 30, 2012. During the third quarter of 2012, the Company spent $13.7 million repurchasing its common stock. Additionally, the Company maintained its quarterly $0.04 per share cash dividend for a total of approximately $2.2 million.


Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company derives a substantial portion of its net revenues from standard products. For both the three and nine months ended September 30, 2012, the Company's standard products sales accounted for 97% and 96%, 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 are 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 and customer acceptance of new products. These and other factors are described in further detail later in this discussion and in Part II Item 1A of this Quarterly Report on Form 10-Q titled "Risk Factors." 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 and cash flows.

Critical Accounting Policies and Estimates The financial statements included in this Quarterly Report on 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 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. The Company considers certain accounting policies related to revenue recognition and receivables, inventory valuation, share-based compensation, income taxes, and litigation to be critical to the fair presentation of its financial statements. For a detailed discussion of the Company's significant accounting policies, see Note 1 to Condensed Consolidated Financial Statements in this report and Note 1 of Notes to Consolidated Financial Statements in Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
Revenue Recognition and Receivables. Micrel generates revenue by selling products to OEMs, 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.
The Company 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 records an accounts receivable and relieves inventory at the time of initial product shipment. As standard terms are FOB shipping point, payment terms are enforced from shipment date and legal title and risk of inventory loss passes to the distributor upon shipment.
In addition, where revenue is deferred upon shipment and recognized on a sell-through basis, the Company may offer price adjustments to its distributors to allow the distributor to price the Company's products competitively for specific resale opportunities. The Company estimates and records an allowance for distributor price adjustments for which the specific resale transaction has been completed, but the price adjustment claim has not yet been received and recorded by the Company.


Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Sales to OEM customers and stocking representatives are recognized based upon the shipment terms of the sale transaction when all other revenue recognition criteria have been met. 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 is established based upon historical return rates, and an allowance for price adjustments is established based on an estimate of price adjustments to be granted. Actual future returns and price adjustments could be different than the allowance established.
The Company also maintains an allowance for doubtful accounts for estimated . . .

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