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MCRL > SEC Filings for MCRL > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for MICREL INC


8-Aug-2013

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 may be 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, 2012.
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 3,100 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.

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.

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. In 2012, the Company acquired PhaseLink Company Limited ("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.


Table of Contents

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

The Company's family of LAN solutions products target 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       Six Months Ended
Net Revenues by Product Group                June 30,                June 30,
                                        2013         2012        2013         2012
As a Percentage of Total Net Revenues
Linear and Power                          58 %         57 %        57 %         59 %
Timing and Communications                 20           22          20           19
LAN Solutions                             19           17          20           18
Total standard products                   97           96          97           96
Foundry, custom and other products         3            4           3            4
                                         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       Six Months Ended
Net Revenues by End Market                   June 30,                June 30,
                                        2013         2012        2013         2012
As a Percentage of Total Net Revenues
Industrial                                54 %         50 %        54 %         50 %
Communications                            17           19          16           18
Wireless handsets                         11           13          12           15
Computing                                 14           15          14           14
Consumer and other                         4            3           4            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, 2012 through March 31, 2013.
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 $5.9 million, or $0.10 per basic and diluted share, as compared to net income of $4.9 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.


Table of Contents

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

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 $5.9 million, or $0.10 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 $4.9 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.
During the fourth quarter of 2012, revenues decreased slightly by 1.0 % to $62.3 million from $62.9 million in the third quarter of 2012. The decrease reflects lower sales in a difficult macroeconomic and industry environment. The fourth quarter 2012 book-to-bill ratio seasonally declined from the third quarter 2012 and was below one. Compared to the fourth quarter of 2011, revenues increased by $3.6 million, or 6.1%, primarily due to added revenues from the acquisition of PhaseLink. Fourth quarter 2012 gross margin declined sequentially to 50.3% from 52.9% in the third quarter of 2012 principally due to lower factory capacity utilization and increased inventory reserves. The lower factory utilization resulted from attempting to minimize building inventory. Net loss for the fourth quarter of 2012 was $4.5 million, or a loss of $0.08 per basic and diluted share, as compared to net income of $4.9 million, or $0.08 per basic and diluted share, for the third quarter of 2012, and net income of $4.9 million, or $0.08 per basic and diluted share, for the fourth quarter of 2011. Net loss for the fourth quarter of 2012 included a write-off of deferred tax assets totaling $7.6 million due to a change of California tax laws. During the fourth quarter of 2012, cash flows from operations were $6.0 million. Cash and short term investments were $103.6 million at December 31, 2012 as compared to $108.7 million at September 30, 2012. In the fourth quarter of 2012, the Company spent $6.1 million repurchasing its common stock and increased its quarterly cash dividend to $0.0425 per share for a total of approximately $2.5 million which was paid in November 2012. In addition, during December 2012, the Company declared an accelerated cash dividend of $0.0425 per share of common stock totaling $2.5 million paid on December 27, 2012 to shareholders of record as of December 18, 2012. The accelerated dividend was in lieu of the quarterly dividend that the Company would have otherwise announced with its quarterly financial results for the fourth quarter of 2012, and that would have been paid in the first quarter of 2013.

For the year ended December 31, 2012, revenues decreased 3.4% to $250.1 million from $259.0 million for the year ended December 31, 2011. The decrease was primarily due to the continued global downturn which impacted Europe to a greater degree resulting in less demand of the Company's products, partially offset by an increase of revenues from Asia due to added revenues from the acquisition of PhaseLink since the second quarter of 2012. The book-to-bill ratio was approximately one for the full year of 2012. Gross margin for 2012 decreased to 53.1% from 55.3% for 2011. The decrease was primarily due to lower factory utilization and increased inventory reserve charges. Operating margin for 2012 decreased to 11.1% from 18.1% for 2011 principally due to lower sales and increased spending in research and development. Net income was $12.3 million, or $0.20 per diluted share, compared with $33.9 million, or $0.54 per diluted share, in 2011. During 2012, cash, cash equivalents and short term investments decreased by $34.2 million from $137.9 million primarily due to repurchases of the Company's common stock totaling $34.6 million and $12.1 million paid in dividends to shareholders. Additionally, during 2012, the Company paid a total of $17.4 million net of cash acquired for the acquisition of PhaseLink.


Table of Contents

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

During the first quarter of 2013, revenues decreased 4.2% to $59.7 million from $62.3 million in the fourth quarter of 2012. With continued global macro-economic challenges, this decrease resulted primarily from lower demand in the computing and communications end markets, partially offset by an increase in revenues from the consumer end market. As compared to the same period last year, first quarter 2013 revenues decreased by $1.4 million, or 2.3%. First quarter 2013 book-to-bill ratio was 1:1 driven by strength in the industrial end market. First quarter 2013 gross margin was 52.0%, as compared to 50.3% in the fourth quarter of 2012. This increase in gross margin from the previous quarter was primarily due to a higher percentage of distribution sales which carry higher margins. Net income for the first quarter of 2013 was $5.2 million, or $0.09 per basic and diluted share, as compared to net loss of $4.5 million, or a loss of $0.08 per basic and diluted share, for the fourth quarter of 2012, and net income of $5.9 million, or $0.10 per basic and diluted share, for the first quarter of 2012. During the first quarter of 2013, cash flows from operations were $7.7 million. During the first quarter of 2013, cash and short-term investments increased by $8.1 million to $111.7 million. The increase was partly due to the cash dividend of $0.0425 per share of common stock totaling $2.5 million, which would have been paid in the first quarter of 2013, was accelerated and paid on December 27, 2012 to shareholders of record as of December 18, 2012. In addition, the Company did not repurchase any shares of its common stock.
Revenues for the second quarter of 2013 totaled $59.2 million, representing a decrease of $0.6 million, or 0.9%, from $59.7 million in the first quarter of 2013. The decrease was primarily due to lower sales to the Company's wireless handset end market which were down by 18.2%, partially offset by higher sales in the communications, computing, consumer and industrial end markets. As compared to the same quarter last year, second quarter of 2013 revenues decreased by $4.5 million, or 7.1%, principally resulting from lower demand from customers in the communications and wireless handset end markets. The book-to-bill ratio in the second quarter of 2013 was above one. The gross margin in the second quarter of 2013 was 52.5%, as compared to 52.0% in the first quarter of 2013. This increase was largely due to a product mix favoring a greater percentage of higher margin communications, computing and industrial products. The Company's operating margin for the second quarter of 2013 increased to 10.4%, as compared to 9.1% in the first quarter of 2013. Net income for the second quarter of 2013 was $5.0 million, or $0.09 per basic and diluted share, as compared to net income of $5.2 million, or $0.09 per basic and diluted share, for the first quarter of 2013, and net income of $6.0 million, or $0.10 per basic and diluted share, for the second quarter of 2012. During the second quarter of 2013, cash flows from operations were $2.0 million. Cash and short term investments were $104.9 million at June 30, 2013 as compared to $111.7 million at March 31, 2013. During the second quarter of 2013, the Company repurchased $4.7 million of its common stock and maintained its quarterly $0.0425 per share dividend totaling $2.5 million.
The Company derives a substantial portion of its net revenues from standard products. For the three and six months ended June 30, 2013 and 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, levels of inventory and resales by distributors, 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.


Table of Contents

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

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, and income taxes 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, 2012.
Revenue Recognition and Receivables. The Company generates revenue by selling products to original equipment manufacturer ("OEM") customers, sell-through distributors and sell-in distributors. Sell-in distributors 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 sell-through distributors located in North America and Europe, and in certain countries in Asia, to have price protection and pricing adjustments subsequent to the initial product shipment. As these price concessions have historically been significant, 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 sell-through 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 sell-through 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 sell-through 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 by the Company.

Sales to OEM customers and sell-in distributors 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 sell-in distributors. In addition, the Company is not contractually obligated to offer, but may infrequently grant, price adjustments or price protection to certain sell-in distributors on an exception basis. At the time of shipment to OEMs and sell-in distributors, 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 uncollectible accounts receivable. 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 an inventory write-down provision is established, it is maintained until the product to which it relates is sold or otherwise disposed of.


Table of Contents

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

Share-Based Compensation. Share-based compensation is measured at the grant date . . .

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