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 June 30, 2008.
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 1-34020
MICREL, INCORPORATED
(Exact name of Registrant as specified in its charter)
| California | 94-2526744 |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) |
| incorporation or organization) |
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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x
As of August 4, 2008 there were 70,511,563 shares of common stock, no par value, outstanding.
MICREL, INCORPORATED INDEX TO REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED June 30, 2008 | ||
| Page | ||
| PART I. FINANCIAL INFORMATION | ||
Item 1. | Financial Statements (Unaudited): | |
| 3 | ||
| 4 | ||
| 5 | ||
| 6 | ||
| Item 2. | 17 | |
| Item 3. | 27 | |
| Item 4. | 27 | |
| PART II. OTHER INFORMATION | ||
| Item 1. | 28 | |
| Item 1A. | 28 | |
| Item 2. | 33 | |
| Item 4. | 33 | |
| Item 6. | 34 | |
| 35 |
ITEM 1. FINANCIAL STATEMENTS | ||||||||
| MICREL, INCORPORATED | ||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||
| (Unaudited) | ||||||||
| (In thousands, except share amounts) | ||||||||
| June 30, | December 31, | |||||||
| 2008 | 2007 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 74,183 | $ | 80,977 | ||||
Short term investments | 4,951 | 10,150 | ||||||
Accounts receivable, net | 34,669 | 29,614 | ||||||
Inventories | 35,223 | 35,660 | ||||||
| Income taxes receivable | 3,756 | 3,426 | ||||||
Prepaid expenses and other | 1,924 | 3,604 | ||||||
Deferred income taxes | 18,151 | 19,387 | ||||||
Total current assets | 172,857 | 182,818 | ||||||
| LONG-TERM INVESTMENTS | 14,127 | 16,552 | ||||||
| PROPERTY, PLANT AND EQUIPMENT, NET | 80,657 | 82,585 | ||||||
| DEFERRED INCOME TAXES | 9,968 | 9,286 | ||||||
| INTANGIBLE ASSETS, NET | 2,182 | 3,026 | ||||||
| OTHER ASSETS | 420 | 478 | ||||||
| TOTAL ASSETS | $ | 280,211 | $ | 294,745 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 15,920 | $ | 18,010 | ||||
Deferred income on shipments to distributors | 21,708 | 20,238 | ||||||
Other current liabilities | 11,017 | 14,097 | ||||||
Total current liabilities | 48,645 | 52,345 | ||||||
| LONG-TERM INCOME TAXES PAYABLE | 3,720 | 2,814 | ||||||
| OTHER LONG-TERM OBLIGATIONS | 309 | 335 | ||||||
| TOTAL LIABILITIES | 52,674 | 55,494 | ||||||
| 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: 2008 – 70,687,151 shares; 2007 – 74,001,360 shares | -- | -- | ||||||
Accumulated other comprehensive loss | (1,477 | ) | (32 | ) | ||||
Retained earnings | 229,014 | 239,283 | ||||||
Total shareholders’ equity | 227,537 | 239,251 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 280,211 | $ | 294,745 | ||||
| The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. | ||||||||
MICREL, INCORPORATED | ||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
| (Unaudited) | ||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
| NET REVENUES | $ | 70,593 | $ | 65,101 | $ | 136,645 | $ | 128,214 | ||||||||
COST OF REVENUES (1) | 30,779 | 27,994 | 59,540 | 54,420 | ||||||||||||
| GROSS PROFIT | 39,814 | 37,107 | 77,105 | 73,794 | ||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
Research and development (1) | 14,758 | 14,191 | 28,884 | 27,443 | ||||||||||||
Selling, general and administrative (1) | 11,557 | 11,115 | 23,482 | 23,252 | ||||||||||||
Restructuring charges (credits) | -- | 28 | (842 | ) | 72 | |||||||||||
Proxy contest expense | 2,656 | -- | 2,987 | -- | ||||||||||||
Other expense | -- | 86 | -- | 86 | ||||||||||||
Total operating expenses | 28,971 | 25,420 | 54,511 | 50,853 | ||||||||||||
| INCOME FROM OPERATIONS | 10,843 | 11,687 | 22,594 | 22,941 | ||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
Interest income | 645 | 1,661 | 1,730 | 3,162 | ||||||||||||
Interest (expense) / credit | (1 | ) | 80 | (1 | ) | (72 | ) | |||||||||
Litigation settlement and other income, net (Note 12) | 36 | 9 | 47 | 15,523 | ||||||||||||
Total other income, net | 680 | 1,750 | 1,776 | 18,613 | ||||||||||||
| INCOME BEFORE INCOME TAXES | 11,523 | 13,437 | 24,370 | 41,554 | ||||||||||||
| PROVISION FOR INCOME TAXES | 4,283 | 4,796 | 8,741 | 15,045 | ||||||||||||
| NET INCOME | $ | 7,240 | $ | 8,641 | $ | 15,629 | $ | 26,509 | ||||||||
| NET INCOME PER SHARE: | ||||||||||||||||
Basic | $ | 0.10 | $ | 0.11 | $ | 0.22 | $ | 0.34 | ||||||||
Diluted | $ | 0.10 | $ | 0.11 | $ | 0.22 | $ | 0.34 | ||||||||
| WEIGHTED AVERAGE SHARES USED IN | ||||||||||||||||
| COMPUTING PER SHARE AMOUNTS: | ||||||||||||||||
Basic | 71,118 | 77,740 | 71,682 | 77,739 | ||||||||||||
Diluted | 71,413 | 79,018 | 71,801 | 78,908 | ||||||||||||
| (1) Share-based compensation expense included in: | ||||||||||||||||
Cost of revenues | $ | 282 | $ | 286 | $ | 515 | $ | 588 | ||||||||
Research and development | 568 | 656 | 1,172 | 1,135 | ||||||||||||
Selling, general and administrative | 589 | 738 | 1,241 | 1,227 | ||||||||||||
| The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. | ||||||||||||||||
MICREL, INCORPORATED | ||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| (Unaudited) | ||||||||
| (In thousands) | Six Months Ended | |||||||
| June 30, | ||||||||
| 2008 | 2007 | |||||||
| NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: | ||||||||
Net income | $ | 15,629 | $ | 26,509 | ||||
Adjustments to reconcile net income to net cashprovided by operating activities: | ||||||||
Depreciation and amortization | 9,557 | 8,994 | ||||||
Share-based compensation expense | 2,928 | 2,950 | ||||||
Tax benefit on the exercise of employee stock options | 154 | 1,343 | ||||||
Excess tax benefits associated with share-based compensation | -- | (156 | ) | |||||
Gain on disposal of assets | (1 | ) | -- | |||||
Deferred rent | (26 | ) | (97 | ) | ||||
Deferred income taxes provision | 1,554 | 2,420 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (5,055 | ) | (1,170 | ) | ||||
Inventories | 474 | 2,312 | ||||||
Income taxes receivable | (330 | ) | -- | |||||
Prepaid expenses and other assets | 1,738 | (1,484 | ) | |||||
Accounts payable | (2,090 | ) | (4,303 | ) | ||||
Income taxes payable | 813 | 4,895 | ||||||
Other current liabilities | (3,159 | ) | (9,387 | ) | ||||
Deferred income on shipments to distributors | 1,470 | (769 | ) | |||||
Net cash provided by operating activities | 23,656 | 32,057 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Change in restricted cash | -- | 2,629 | ||||||
Purchases of property, plant and equipment, net | (6,784 | ) | (9,427 | ) | ||||
Purchases of investments | (8,851 | ) | (13,057 | ) | ||||
Proceeds from the sale of investments | 14,120 | 3,000 | ||||||
Net cash used in investing activities | (1,515 | ) | (16,855 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Repayments of long-term debt | -- | (38 | ) | |||||
Proceeds from the issuance of common stock | 1,211 | 9,559 | ||||||
Repurchases of common stock | (25,482 | ) | (14,508 | ) | ||||
Payment of cash dividends | (4,664 | ) | (2,332 | ) | ||||
Excess tax benefits associated with share-based compensation | -- | 156 | ||||||
Net cash used in financing activities | (28,935 | ) | (7,163 | ) | ||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (6,794 | ) | 8,039 | |||||
| CASH AND CASH EQUIVALENTS - Beginning of period | 80,977 | 92,259 | ||||||
| CASH AND CASH EQUIVALENTS - End of period | $ | 74,183 | $ | 100,298 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during the period for: | ||||||||
Interest | $ | 13 | $ | 814 | ||||
Income taxes | $ | 6,498 | $ | 7,774 | ||||
| The accompanying notes are an integral part of these unaudited 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 June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 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 statement 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. The Condensed Consolidated Balance Sheet as of December 31, 2007, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted ("GAAP") in the United States of America. These financial statements 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, 2007. These financial statements 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, 2007.
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 | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Weighted average common shares outstanding | 71,118 | 77,740 | 71,682 | 77,739 | ||||||||||||
Dilutive effect of stock options outstanding using the treasury stock method | 295 | 1,278 | 119 | 1,169 | ||||||||||||
Shares used in computing diluted net income per share | 71,413 | 79,018 | 71,801 | 78,908 | ||||||||||||
For the three and six months ended June 30, 2008, 9.1 million stock options and 10.9 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 six months ended June 30, 2007, 5.1 million stock options and 6.2 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.
| 2. | RECENTLY ISSUED ACCOUNTING STANDARDS |
In September 2006, the FASB issued Statement 157 (“SFAS 157”), “Fair Value Measurements”. SFAS 157 establishes a common definition for fair value to be applied to US GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position 157-2 (“FSP 157-2”), “Partial Deferral of the Effective Date of Statement 157”. FSP 157-2 delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company has adopted SFAS 157 as of January 1, 2008 related to financial assets and financial liabilities. Refer to Note 4 for additional discussion on fair value measurements. The Company is currently evaluating the impact of SFAS 157 related to nonfinancial assets and nonfinancial liabilities on the Company’s financial position, results of operations and cash flows.
6
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In February 2007, the FASB issued Statement No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115”, which permits an entity to measure certain financial assets and financial liabilities at fair value, with unrealized gains and losses reported in earnings at each subsequent measurement date. The fair value option may be elected on an instrument-by-instrument basis, as long as it is applied to the instrument in its entirety. The fair value option election is irrevocable, unless an event specified in SFAS 159 occurs that results in a new election date. This statement is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS 159 as of January 1, 2008 and has elected not to measure any additional financial instruments and other items at fair value.
In December 2007, the FASB issued Statement No. 141(R) (“SFAS 141(R)”), “Business Combinations”, which replaces FASB Statement No. 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after an entity’s fiscal year that begins after December 15, 2008. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs.
In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other applicable accounting literature. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact of FSP FAS 142-3 on its consolidated financial statements.
In May 2008, the FASB issued Statement No. 162 ("SFAS 162"), "The Hierarchy of Generally Accepted Accounting Principles". SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles". The Company does not expect that this standard will have a material impact on its results of operations, financial position or cash flows.
| 3. | SHARE-BASED COMPENSATION |
The Company accounts for share-based compensation under the provisions of Statement of Financial Accounting Standard No. 123 (revised 2004) ("SFAS 123R"), “Share-Based Payment”. Share-based compensation is measured at the grant date, based on the fair value of the award and is recognized over the employee's requisite service period. For further details regarding the Company's share-based compensation arrangements, refer to Note 6 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The following table summarizes total share-based compensation expense included in the Condensed Consolidated Statement of Operations:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Cost of revenues | $ | 282 | $ | 286 | $ | 515 | $ | 588 | ||||||||
Research and development | 568 | 656 | 1,172 | 1,135 | ||||||||||||
Selling, general and administrative | 589 | 738 | 1,241 | 1,227 | ||||||||||||
Pre-tax share-based compensation expense | 1,439 | 1,680 | 2,928 | 2,950 | ||||||||||||
Less income tax effect | (310 | ) | (305 | ) | (612 | ) | (452 | ) | ||||||||
Net share-based compensation expense | $ | 1,129 | $ | 1,375 | $ | 2,316 | $ | 2,498 | ||||||||
7
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the three months ended June 30, 2008 and 2007, the Company granted 189,025 and 458,765 stock options, respectively, at weighted average fair values of $4.79 and $6.22 per share, respectively. For the six months ended June 30, 2008 and 2007, the Company granted 1,120,165 and 1,152,775 stock options, respectively, at weighted average fair values of $3.41 and $6.36 per share, respectively.
The fair value of the Company’s stock options granted under the Option Plans was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Expected term (years) | 6.0 | 5.9 | 6.1 | 5.9 | ||||||||||||
Stock volatility | 48.3 | % | 51.6 | % | 48.7 | % | 52.0 | % | ||||||||
Risk free interest rates | 3.5 | % | 5.0 | % | 3.2 | % | 4.8 | % | ||||||||
Dividends during expected terms | 1.5 | % | 0.9 | % | 1.4 | % | 0.5 | % | ||||||||
As of June 30, 2008, there was $16.8 million of total unrecognized share-based compensation related to non-vested stock option awards which is expected to be recognized over a weighted-average period of 3.8 years. Total share-based compensation capitalized as part of inventory as of June 30, 2008 and December 31, 2007 was $159,000 and $122,000, respectively.
The Company accounts for its investment instruments in accordance with Statement of Financial Accounting Standards No. 115 (“SFAS 115”), “Accounting for Certain Investments in Debt and Equity 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 either as short-term or as long-term based on maturities and the Company's intent with regards to those securities (expectations of sales and redemptions). Short-term investments as of June 30, 2008 consist primarily of liquid corporate debt instruments and are classified as available-for-sale securities. Long-term investments as of June 30, 2008, consist of senior auction rate notes secured by student loans and are classified as available-for-sale securities. Per SFAS 115 available-for sale securities are stated at market value with unrealized gains and losses included in shareholders’ equity. Unrealized losses are charged against income when a decline in the fair market value of an individual security is determined to be other than temporary. Realized gains and losses on investments are included in other income or expense.
The Company adopted SFAS 157, “Fair Value Measurements” as of January 1, 2008 to measure the fair value of certain of its financial assets required to be measured on a recurring basis. Under SFAS 157, based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
| • | Level 1 - Quoted prices in active markets for identical assets or liabilities. |
| • | Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| • | Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
8
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of June 30, 2008 (in thousands):
| Fair Value Measurements as of June 30, 2008 | ||||||||||||||||
| Description | Quoted Prices in Active Markets for Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total | ||||||||||||
| Money market funds | $ | 56,220 | $ | 14,982 | $ | − | $ | 71,202 | ||||||||
| Short-term available-for-sale securities | 4,951 | − | − | 4,951 | ||||||||||||
| Auction rate notes | − | − | 14,127 | 14,127 | ||||||||||||
Total | $ | 61,171 | $ | 14,982 | $ | 14,127 | $ | 90,280 | ||||||||
As of June 30, 2008, the Company had $14.1 million of auction rate notes, the fair value of which has been measured using Level 3 inputs. Auction rate notes are securities that are structured with short-term interest rate reset dates of generally less than ninety days, but with contractual maturities that can be well in excess of ten years. At the end of each reset period, which occurs every seven or twenty eight days for the securities held by the Company, investors can sell or continue to hold the securities at par. During the first quarter of 2008 and continuing into the second quarter of 2008, the auction rate securities market experienced a significant increase in the number of failed auctions, which occurs when sell orders exceed buy orders. Auctions for the six student loan-backed notes held by the Company have failed as of June 30, 2008. To date we have collected all interest payable on all of our auction-rate securities when due and expect to continue to do so in the future. The principal associated with failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the issuers redeem the securities, issuers repay principal over time from cash flows prior to final maturity or final payments come due according to contractual maturities ranging from 24 to 37 years. As a result, the Company has classified all auction rate notes as long-term investments as of June 30, 2008. In the event of a failed auction, the notes bear interest at a predetermined maximum rate based on the credit rating of notes as determined by one or more nationally recognized statistical rating organizations. For the auction rate notes held by the Company as of June 30, 2008, the maximum interest rate is generally one month LIBOR plus 1.5% based on the notes’ AAA rating as of that date. The auction rate notes in the Company’s portfolio had successful auctions until February 2008 and as such, their fair value would have been measured using level 1 inputs at January 1, 2008. However, since auctions have failed as of June 30, 2008, for all auction rate notes held by the Company, the auction rate notes have been transferred from Level 1 to Level 3 category as of June 30, 2008.
The Company has used a discounted cash flow model to determine the estimated fair value of its investment in auction rate notes as of June 30, 2008. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, estimates for discount rates using yields of comparable traded instruments adjusted for illiquidity and other risk factors, amount of cash flows and expected holding periods of the auction rate notes. Based on this assessment of fair value, as of June 30, 2008, the Company determined there was a decline in the fair value of its auction rate notes of approximately $2.3 million (recorded net of tax as an unrealized loss in accumulated other comprehensive income), which was deemed temporary as the Company currently has the ability and intent to hold these investments until a recovery of the auction process occurs, the issuers redeem the securities or principal is repaid by the issuers over time or at the contractual maturity date.
9
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||
| Beginning balance, December 31, 2007 | $ | − | ||
| Total gains or losses (realized/unrealized), before tax: | ||||
Included in earnings | − | |||
Included in other comprehensive income | (2,343 | ) | ||
| Purchases, issuances, and settlements | (50 | ) | ||
| Transfers in and/or out of Level 3 | 16,520 | |||
| Ending balance, June 30, 2008 | $ | 14,127 | ||
Inventories consist of the following (in thousands):
| June 30, | December 31, | |||||||
| 2008 | 2007 | |||||||
Finished goods | $ | 14,110 | $ | 14,261 | ||||
Work in process | 19,384 | 19,439 | ||||||
Raw materials | 1,729 | 1,960 | ||||||
| $ | 35,223 | $ | 35,660 | |||||
| 6. | INTANGIBLE ASSETS |
Components of intangible assets were as follows (in thousands):
| As of June 30, 2008 | As of December 31, 2007 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
Developed and core technology | $ | 8,718 | $ | 8,484 | $ | 234 | $ | 8,718 | $ | 8,349 | $ | 369 | ||||||||||||
Patents and trade name | 10,318 | 8,370 | 1,948 | 10,318 | 7,661 | 2,657 | ||||||||||||||||||
Customer relationships | 1,455 | 1,455 | -- | 1,455 | 1,455 | -- | ||||||||||||||||||
| $ | 20,491 | $ | 18,309 | $ | 2,182 | $ | 20,491 | $ | 17,465 | $ | 3,026 | |||||||||||||
Acquired technology, patents and other intangible assets continue to be amortized over their estimated useful lives of 3 to 7 years using the straight-line method. Total intangible amortization expense for the three and six month periods ended June 30, 2008 was $422,000 and $844,000, respectively. Total intangible amortization expense for the three and six month periods ended June 30, 2007 was $431,000 and $844,000, respectively.
The estimated future amortization expense of intangible assets as of June 30, 2008 was as follows (in thousands):
| Year Ending December 31, | ||||
2008 (six months) | $ | 844 | ||
2009 | 828 | |||
2010 | 255 | |||
2011 | 255 | |||
| Thereafter | - | |||
| $ | 2,182 | |||
10
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 7. | OTHER CURRENT LIABILITIES |
Other current liabilities consist of the following (in thousands):
| June 30, | December 31, | |||||||
| 2008 | 2007 | |||||||
Current portion of restructuring expenses (Note 16) | $ | - | $ | 1,787 | ||||
Accrued workers compensation and health insurance | 983 | 1,121 | ||||||
Accrued compensation | 7,185 | 8,579 | ||||||
Accrued commissions | 2,468 | 1,993 | ||||||
All other current accrued liabilities | 381 | 617 | ||||||
Total other current liabilities | $ | 11,017 | $ | 14,097 | ||||
| 8. | BORROWING ARRANGEMENTS |
Borrowing arrangements consist of a $6 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 June 30, 2008, and there were $325,000 in standby letters of credit outstanding. The revolving line of credit agreement expires on June 30, 2009. Borrowings under the revolving line of credit bear interest rates of, at the Company's election, the prime rate (5.0% at June 30, 2008), or the bank's revolving offshore rate, which approximates LIBOR plus 2% (4.78% at June 31, 2008). The agreement contains certain restrictive covenants. The Company was in compliance with all such covenants at June 30, 2008.
| 9. | SIGNIFICANT CUSTOMERS |
During the six months ended June 30, 2008, two customers, both worldwide distributors, accounted for $20.0 million (15%) and $19.8 million (15%) of net revenues, respectively. During the six months ended June 30, 2007, two customers, both worldwide distributors, accounted for $9.7 million (15%) and $6.9 million (11%) of net revenues, respectively.
As of June 30, 2008, two worldwide distributors and an Asian-based stocking representative accounted for 17%, 17% and 10%, respectively, of total accounts receivable. At December 31, 2007, two worldwide distributors and an Asian based stocking representative, accounted for 18%, 10% and 15%, respectively, of total accounts receivable
| 10. | 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, net of tax, was $6.9 million and $14.2 million for the three and six months ended June 30, 2008, respectively. Comprehensive income for the three and six months ended June 30, 2008 includes an unrecognized loss on available-for-sale auction rate notes, net of tax, of $323,000 and $1.4 million, respectively (see Note 4). Comprehensive income for the three and six months ended June 30, 2007 was $8.6 million and $26.5 million, respectively
11
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 11. | SEGMENT REPORTING |
The Company follows the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker. The Company has two reportable segments: standard products and other products, which consist primarily of custom and foundry products and revenues from the license of patents. The chief operating decision maker evaluates segment performance based on revenue. Accordingly, all expenses are considered corporate level activities and are not allocated to segments. Therefore, it is not practical to show profit or loss by reportable segments. Also, the chief operating decision maker does not assign assets to these segments. Consequently, it is not relevant to show assets by reportable segments.
Net Revenues by Segment | Three Months Ended | Six Months Ended | ||||||||||||||
(dollars in thousands) | June 30, | June 30, | ||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Net Revenues: | ||||||||||||||||
Standard Products | $ | 67,004 | $ | 59,913 | $ | 128,311 | $ | 118,197 | ||||||||
Other Products | 3,589 | 5,188 | 8,334 | 10,017 | ||||||||||||
Total net revenues | $ | 70,593 | $ | 65,101 | $ | 136,645 | $ | 128,214 | ||||||||
As a Percentage of Total Net Revenues: | ||||||||||||||||
Standard Products | 95 | % | 92 | % | 94 | % | 92 | % | ||||||||
Other Products | 5 | % | 8 | % | 6 | % | 8 | % | ||||||||
Total net revenues | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
| 12. | LITIGATION AND OTHER CONTINGENCIES |
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. The complaint sought compensatory damages, attorneys’ fees and costs associated with the 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. On July 22, 2005, a jury ruled against the Company and in favor of TRW in its counterclaim against Micrel, resulting in a judgment on July 26, 2005 awarding damages for the benefit of TRW in the amount of $9.3 million. The damages amount was accrued in other current liabilities in the Company’s second quarter 2005 financial statements. On January 13, 2006, the Company filed a notice of its intent to appeal the jury’s verdict and on October 24, 2006, filed an appeal brief in the United States District Court, Northern District of Ohio. On May 4, 2007, the Court of Appeals issued its ruling affirming the jury’s verdict. During the quarter ended June 30, 2007, the Company paid TRW the legal judgment for total damages and interest in the amount of $10.2 million.
12
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On April 21, 2003, the Company filed a complaint against its former independent public 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. The complaint sought compensatory damages, costs associated with the suit and such other relief that the court may deem just and proper. Deloitte denied all allegations in the complaint. On February 23, 2007, the parties entered into a Settlement Agreement and Mutual Releases. Under the terms of the Agreement, the parties agreed to dismiss with prejudice the pending litigation and Deloitte paid to Micrel a settlement amount of $15.5 million. The Company recorded the $15.5 million settlement amount, in the quarter ended March 31, 2007, as other non-operating income as the settlement payment did not represent, either directly or indirectly, income earned from the Company’s operations, nor did it represent reimbursement of operating expenses incurred.
On June 9, 2006, Deerfield 3250 Scott, LLC ("Deerfield"), the building owner of Micrel's Santa Clara Wafer Fab facility which was closed in 2003, filed a complaint against the Company entitled "Deerfield 3250 Scott, LLC vs. Micrel, Inc. et al" in the Superior Court of the State of California, County of Santa Clara. In February 2006, Micrel terminated this building lease under the terms of the lease agreement due to major vandalism rendering the building unusable. Deerfield disputes that Micrel had a right to terminate, alleging that the vandalism took place because of the negligence of Micrel and that Micrel should not be able to benefit from its own negligence. The complaint sought damages in an unspecified amount for rent through the remaining term of the lease (from March 1 through October 31, 2006), alleged damages to the premises, and for wrongful removal of equipment. On July 21, 2006, Micrel answered the complaint with a denial of any liability and the filing of a cross-complaint against Deerfield seeking return of the security deposit and rent paid from the date of the casualty, January 20, 2006 through February 28, 2006. On February 13, 2008, the parties participated in a mediation session. Ultimately, on March 5, 2008, the Company and Deerfield entered into a Settlement Agreement, agreeing to dismiss with prejudice all claims and counterclaims in the litigation. Under the terms of the Agreement, the Company paid Deerfield $875,000 in the first quarter of 2008. The payment to Deerfield reduced previously accrued restructuring expenses (see Note 16).
With the exception of the previously recorded operating expenses, the Company believes it is not reasonably possible that an unrecorded material loss has been incurred. Generally, litigation is subject to inherent uncertainties, and no assurance can be given that the Company will prevail in any particular lawsuit. 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.
Additional claims have been filed by or have arisen against the Company in its normal course of business. The Company believes that the ultimate resolution of these claims and lawsuits will not have a material adverse effect on the Company's financial condition, results of operations or cash flows.
| 13. | SHARE REPURCHASE PROGRAM |
On October 22, 2007, the Company's Board of Directors approved a $50 million share repurchase program for calendar year 2008. Repurchases may occur from time to time in the open market or in privately negotiated transactions through December 31, 2008. During the six months ended June 30, 2008, the Company repurchased 3,510,807 shares of its common stock for $25.5 million.
Share repurchases are recorded as a reduction of common stock to the extent available. Any amounts in excess of common stock are recorded as a reduction of retained earnings.
13
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 14. | SHAREHOLDER RIGHTS PLAN |
The Company has adopted a limited duration Shareholder Rights Plan (the “Rights Plan”). The Rights Plan is designed to ensure that all of the Company’s shareholders receive fair and equal treatment in the event of any unsolicited takeover of the Company and to protect shareholders from partial tender offers, open market accumulations and other abusive or coercive tactics to gain control of the Company without offering an adequate price to all shareholders. The Rights Plan is not intended to prevent a takeover, but rather to encourage anyone seeking to acquire the Company to negotiate with the Board of Directors prior to attempting a takeover. The Rights Plan is intended to enable all of the Company’s shareholders to realize the long-term value of their investment in the Company.
As a result of the Board’s adoption of the Rights Plan, one preferred stock purchase right was distributed as a dividend on each common share held of record as of the close of business on April 15, 2008 (a “Right”). Each Right, if and when it becomes exercisable, entitles the holder to buy one one-thousandth of a share of a new series of participating preferred stock for $36.00.
Initially the rights will be represented by the Company’s Common Stock certificates and will not be exercisable. If any person or group becomes the beneficial owner of 15% or more of Micrel’s Common Stock (which includes for this purpose stock referenced in derivative transactions and securities) at any time after the March 24, 2008 date of adoption of the Rights Plan (with certain limited exceptions including the result of an acquisition of Common Shares by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such person or group to 15% or more of the Common Shares of the Company then outstanding) or if any additional such securities are acquired in the case or a person or group that owned 15% or more of such securities as of the date of adoption of the Rights Plan (an “Acquiring Person”), then each Right not owned by such Acquiring Person will entitle its holder to purchase, at the Right’s then-current exercise price, shares of Common Stock having a market value of twice the Right’s then-current exercise price. In addition, if, after any person has become an Acquiring Person, the Company is involved in a merger or other business combination transaction with another person, each Right will entitle its holder (other than such Acquiring Person) to purchase, at the Right’s then-current exercise price, common shares of the acquiring company having a value of twice the Right’s then-current exercise price.
The Company may redeem the Rights at a price of $.01 per Right at any time prior to the date on which any person has become an Acquiring Person. The Rights Plan will continue in effect until the close of business March 24, 2009, unless earlier redeemed or terminated by Micrel, as provided in the Rights Plan.
| 15. | INCOME TAXES |
The income tax provision for the three and six months ended June 30, 2008, as a percentage of income before taxes, was 37.2% and 35.9%, respectively, compared to 35.7% and 36.2%, respectively, for the same periods in the prior year. The income tax provision for such interim periods differs from taxes computed at the federal statutory rate primarily due to the effect of non-deductible share-based compensation expense, state income taxes, federal and state research and development credits and federal qualified production activity deductions.
As of June 30, 2008, the gross liability for uncertain tax positions was $8.5 million, as compared to $8.0 million as of December 31, 2007. The net liability as of June 30, 2008, reduced for the federal effects of potential state tax exposures, was $5.8 million as compared to $5.4 million as of December 31, 2007. If these uncertain tax positions are sustained upon tax authority audit, or otherwise become certain, the net $5.8 million would favorably affect the Company’s tax provision in such future periods. Included in the $5.8 million is $2.1 million which has not yet reduced income tax payments, and, therefore, has been netted against non-current deferred tax assets. The remaining $3.7 liability is included in long-term income taxes payable. The Company does not anticipate a significant change to the net liability for uncertain income tax positions within the next 12 months.
14
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company continues to recognize interest and penalties related to income tax matters as part of the income tax provision. As of June 30, 2008 and December 31, 2007, the Company had $339,000 and $251,000, respectively, accrued for interest and $0 accrued for penalties for both periods. These accruals are included as a component of long-term income taxes payable.
The Company is required to file U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Company may be subject to examination by the Internal Revenue Service (“IRS”) for calendar years 2003 and forward. Significant state tax jurisdictions include California, New York and Texas, and generally, the Company is subject to routine examination for years 2002 and forward in these jurisdictions. In addition, any research and development credit carryforwards that were generated in prior years and utilized in these years may also be subject to examination by respective state taxing authorities. Generally, the Company is subject to routine examination for years 2001 and forward in various immaterial foreign tax jurisdictions in which it operates.
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 $18.2 million and net long-term deferred tax assets of $10.0 million as of June 30, 2008. The Company must regularly 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.
| 16. | RESTRUCTURING AND MANUFACTURING FACILITY IMPAIRMENT |
During 2003 the Company closed its Santa Clara wafer fabrication facility. In February 2006, the Company terminated the facility lease under the terms of the lease agreement due to major vandalism rendering the building unusable. The facility Lessor disputed the termination of the lease. In March 2008, the Company entered into a Settlement and Mutual Release agreement with the Lessor. Under the terms of the agreement, the Company paid $875,000 to the Lessor and released a $70,000 security deposit for full settlement of all obligations under the lease (see Note 12). The remaining unused restructuring expense accruals were credited to restructuring charges (credits) in the statement of operations during the first quarter of 2008. A summary of restructuring expense accruals associated with this facility closure is as follows: ($000)
Contractual Facility Costs | Other Disposal Costs | Total | ||||||||||
Balance December 31, 2005 | $ | 1,399 | $ | 360 | $ | 1,759 | ||||||
2006Charges | 117 | 152 | 269 | |||||||||
2006Uses | (259 | ) | (195 | ) | (454 | ) | ||||||
Balance December 31, 2006 | 1,257 | 317 | 1,574 | |||||||||
2007Charges | 128 | -- | 128 | |||||||||
2007Other | 85 | -- | 85 | |||||||||
Balance December 31, 2007 | 1,470 | 317 | 1,787 | |||||||||
2008Uses | (945 | ) | -- | (945 | ) | |||||||
2008Other reductions | (525 | ) | (317 | ) | (842 | ) | ||||||
Balance June 30, 2008 | $ | -- | $ | -- | $ | -- | ||||||
15
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 17. |
On April 24, 2008 the Company's Board of Directors declared a cash dividend of $0.035 per outstanding share of common stock. The payment of $2.5 million was made on May 22, 2008, to shareholders of record at the close of business on May 6, 2008. During the first quarter of 2008, the company paid cash dividends of $2.2 million ($0.03 per outstanding share of common stock).
| 18. | SUBSEQUENT EVENT |
On July 23, 2008 the Company's Board of Directors declared a cash dividend of $0.035 per outstanding share of common stock payable on August 21, 2008, to shareholders of record at the close of business on August 5, 2008. This dividend will be recorded in the third quarter of 2008 and is expected to be approximately $2.5 million.
16
| ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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, as amended, 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; 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; effect of changes in market interest rates on 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 future realization of tax benefits; and share based incentive awards and expectations regarding future stock based compensation expense and estimates made under SFAS No. 123R. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as "believe," "estimate," "may," "can," "will," "could," "would," "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 document are based on information available to the Company on the date of this report, and the Company assumes no obligation to update any such forward-looking statements. These statements are subject to risks and uncertainties that 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, 2007.
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 quarterly periods from January 1, 2007 through June 30, 2008 has been provided.
During the first quarter of 2007, customers controlled 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 2007 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. 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 58.1% 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 $11.3 million, or 18% of sales.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 57.0% was flat to the prior year period and decreased by approximately 1% 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.
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 increased from 57.0% in the second quarter to 57.5% in the third quarter of 2007, and decreased from 58.6% in the year ago period. Third quarter operating profit was $12.9 million, or 19.8% of revenues.
In the fourth quarter of 2007, the increasingly uncertain macroeconomic environment appeared to heighten our 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 55.8% in the fourth quarter from 57.5% in the third quarter primarily as a result of a less favorable sales mix. Fourth quarter operating profit was $11.7 million, or 18% of revenues.
In 2007 total year gross margin of 57% was the second highest in the Company history. Net income for fiscal 2007 increased 15.8% to $44.4 million, or $0.57 per diluted share, compared with net income of $38.3 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 $9.9 million or $0.13 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.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 year-ago 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 56.5% in the first quarter of 2008 from 55.8% in the fourth quarter of 2007 while at the same time inventory levels were reduced. First quarter operating profit was $11.8 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.
Also 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. This issue resulted in Micrel incurring an incremental $330,000 of operating expenses during the first quarter and $2.7 million in the second quarter of 2008. See Proxy Contest Expense in the Results of Operations section in Management’s Discussion and Analysis of Financial Condition 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. In the current, uncertain economic environment, customers remain 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 our 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 a little over 50%. Gross margin was 56.4%, about the same as the first quarter of 2008. Second quarter operating profit was $10.8 million, or 15% of sales. A total of $2.7 million of proxy contest expenses reduced Micrel’s operating income by approximately 20% in the second quarter, and also had the effect of reducing operating margin by approximately 4% in the second quarter. Second quarter 2008 net income was $7.2 million, or $0.10 per diluted share. This compares with first quarter 2008 net income of $8.4 million, or $0.12 per diluted share, and net income of $8.6 million or $0.11 per diluted share in the year ago period. Expenses related to the Company’s proxy contest reduced net income by $0.023 per share in the second quarter.
The Company derives a substantial portion of its net revenues from standard products. For the three and six month periods ended June 30, 2008 the Company's standard products sales accounted for 94% of the Company's net revenues. For the three and six month periods ended June 30, 2007 the Company's standard products sales accounted for 92% of the Company's net revenues. The Company believes that a substantial portion of its net revenues in the future will depend upon standard products sales, although such sales as a proportion of net revenues may vary as the Company adjusts product output levels to correspond with varying economic conditions and demand levels in the markets which it serves. The standard products business is characterized by short-term orders and shipment schedules, and customer orders typically can be canceled or rescheduled without significant penalty to the customer. Since most standard products backlog is cancelable without significant penalty, the Company typically plans its production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. In addition, the Company is limited in its ability to reduce costs quickly in response to any revenue shortfalls.
The Company may experience significant fluctuations in its results of operations. Factors that affect the Company's results of operations include the volume and timing of orders received, changes in the mix of products sold, the utilization level of manufacturing capacity, competitive pricing pressures and the successful development of new products. These and other factors are described in further detail later in this discussion and in Item 1A “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 or cash flows.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 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 valuation of 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 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, 2007.
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 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 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.
Sales to OEM customers and Asian based 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 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.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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. This treatment is in accordance with Accounting Research Bulletin 43 and SEC Staff Accounting Bulletin 100 "Restructuring and Impairment Charges."
Share-Based Compensation. Under SFAS 123R share-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense in the statement of operations. To determine fair value, the Company uses the Black-Scholes valuation model which requires input factors such as expected term, stock price volatility, dividend yield and risk free interest rate. In addition, SFAS 123R requires an estimate of expected forfeiture rates of stock grants and share-based compensation expense is to be only recognized for those shares expected to vest. Determining the input factors, such as expected term, expected volatility and estimated forfeiture rates, requires significant judgment based on subjective future expectations.
Income Taxes. Deferred tax assets and liabilities result primarily from temporary timing differences between book and tax valuation of assets and liabilities, and state research and development credit carryforwards. The Company must regularly assess the likelihood that future taxable income levels will be sufficient to ultimately realize the tax benefits of these deferred tax assets. As of June 30, 2008, the Company believes that future taxable income levels will be sufficient to realize the tax benefits of these deferred tax assets and has not established a valuation allowance. Should the Company determine that future realization of these tax benefits is not more likely than not, a valuation allowance would be established, which would increase the Company's tax provision in the period of such determination.
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.
Litigation. The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. An estimated liability is accrued when it is determined to be probable that a liability has been incurred and the amount of loss can be reasonably estimated. The liability accrual is charged to income in the period such determination is made. The Company regularly evaluates current information available to determine whether such accruals should be made.
21
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 | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
| Net revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Cost of revenues | 43.6 | 43.0 | 43.6 | 42.4 | ||||||||||||
Gross profit | 56.4 | 57.0 | 56.4 | 57.6 | ||||||||||||
| Operating expenses: | ||||||||||||||||
Research and development | 20.9 | 21.8 | 21.1 | 21.4 | ||||||||||||
Selling, general and administrative | 16.4 | 17.1 | 17.2 | 18.1 | ||||||||||||
Restructuring charges (credits) | -- | -- | (0.6 | ) | 0.1 | |||||||||||
Proxy contest expense | 3.7 | -- | 2.2 | -- | ||||||||||||
Other expense | -- | 0.1 | -- | 0.1 | ||||||||||||
Total operating expenses | 41.0 | 39.0 | 39.9 | 39.7 | ||||||||||||
| Income from operations | 15.4 | 18.0 | 16.5 | 17.9 | ||||||||||||
| Other income (expense): | ||||||||||||||||
Interest income | 0.9 | 2.6 | 1.3 | 2.5 | ||||||||||||
Interest expense | -- | 0.1 | -- | (0.1 | ) | |||||||||||
Litigation settlement and other income, net | -- | -- | -- | 12.1 | ||||||||||||
Total other income, net | 0.9 | 2.7 | 1.3 | 14.5 | ||||||||||||
| Income before income taxes | 16.3 | 20.7 | 17.8 | 32.4 | ||||||||||||
| Provision for income taxes | 6.0 | 7.4 | 6.4 | 11.7 | ||||||||||||
| Net income | 10.3 | % | 13.3 | % | 11.4 | % | 20.7 | % | ||||||||
Standard products revenues for the three months ended June 30, 2008 increased 12% to $67.0 million from $59.9 million for the same period in the prior year. For the six months ended June 30, 2007, standard products revenues increased 9% to $128.3 million from $118.2 million for the same period in the prior year. These increases resulted primarily from increased sales of standard products to the networking, high speed communications, consumer and telecommunications end markets.
Other products, which consist primarily of custom and foundry products revenues and revenues from the license of patents, for the three months ended June 30, 2008 decreased 31% to $3.6 million from $5.2 million for the same period in the prior year. For the six months ended June 30, 2008, other products revenues decreased 17% to $8.3 million from $10.0 million for the same period in the prior year. These decreases resulted primarily from decreased unit shipments of foundry products.
Customer demand for semiconductors can change quickly and unexpectedly. 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. During 2007, the Company averaged approximately 50% to 60% OEM turns fill per quarter. During the first six months of 2008, turns fill rate for OEM and stocking representatives was approximately 55%.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
As noted in Item 1A “Risk Factors” and above in the overview section of this “Management's Discussion and Analysis of Financial Condition and Results of Operations”, a trend has developed over the last several years whereby customers in the semiconductor supply chain have worked to minimize the amount of inventory of semiconductors they hold. As a consequence, customers are generally providing less order backlog to the Company and other semiconductor suppliers, and relying on short lead times to buffer their build schedules. Shorter lead times reduce visibility into end demand and increase the reliance on turns fill orders. To deal with these market forces while maintaining reliable service levels, the Company and other semiconductor suppliers are carrying higher relative levels of inventory compared with historical averages prior to 2001. The reluctance of customers to provide order backlog together with short lead times and the uncertain growth rate of the world economy, make it difficult to precisely predict future levels of sales and profitability.
International sales represented 68% and 69% of net revenues for the three months ended June 30, 2008 and 2007, respectively. On a dollar basis, international sales increased 7% to $47.8 million for the three months ended June 30, 2008 from $44.7 million for the comparable period in 2007. For the each of six months ended June 30, 2008 and 2007, international sales represented 68% of net revenues, respectively. For the six months ended June 30, 2008 international sales increased 6% to $92.8 million from $87.4 million for the comparable period in 2007. This increase resulted primarily from increased shipments of standard products to the networking and high speed communications and the telecommunications end markets, 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.
Share-Based Compensation. The Company accounts for share-based compensation under the fair value recognition provisions of SFAS 123R. The Company's results of operations for the three month periods ended June 30, 2008 and 2007 include $1.4 million and $1.7 million, respectively, of non-cash expense related to the fair value of share-based compensation awards. For the six month periods ended June 30, 2008 and 2007, the Company's results of operations include $2.9 million and $3.0 million, respectively, of non-cash expense related to the fair value of share-based compensation awards (see Note 3 of Notes to Condensed Consolidated Financial Statements.)
Gross Profit. Gross profit is affected by a variety of factors including the volume of product sales, product mix, manufacturing capacity utilization, product yields and average selling prices. The Company's gross margin decreased to 56.4% for the three months ended June 30, 2008 from 57.0% for the comparable period in 2007. For the six months ended June 30, 2008, the Company's gross margin decreased to 56.4% from 57.6% for the comparable period in 2007. These decreases in gross margin resulted primarily from an increase in sales mix of lower margin wireline communications products in 2008 as compared to the same period in 2007.
Research and Development Expenses. Research and development expenses as a percentage of net revenues represented 20.9% and 21.8%, for the three months ended June 30, 2008 and 2007, respectively. On a dollar basis, research and development expenses increased $568,000 or 4% to $14.8 million for the three months ended June 30, 2008 from $14.2 million for the comparable period in 2007. For the six months ended June 30, 2008 and 2007, research and development expenses as a percentage of net revenues represented 21.1% and 21.4%, respectively. On a dollar basis, research and development expenses increased $1.4 million or 5% to $28.9 million for the six months ended June 30, 2008 from $27.4 million for the comparable period in 2007. These increases were primarily due to increased staffing costs combined with increased prototype fabrication costs. The Company believes that the development and introduction of new products is critical to its future success and expects to continue its investment in research and development activities in the future.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Selling, General and Administrative Expenses. As a percentage of net revenues, selling, general and administrative expenses represented 16.4% and 17.1% for the three months ended June 30, 2008 and 2007, respectively. On a dollar basis, selling, general and administrative expenses increased $442,000 or 4% to $11.6 million for the three months ended June 30, 2008 from $11.1 million for the comparable period in 2007. For the six months ended June 30, 2008 and 2007, as a percentage of net revenues, selling, general and administrative expenses represented 17.2% and 18.1%, respectively. On a dollar basis, selling, general and administrative expenses increased $230,000 or 1% to $23.5 million for the six months ended June 30, 2008 from $23.3 million for the comparable period in 2007. These increases were primarily due to increased staffing costs which were partially offset by a decrease in outside legal costs related to litigation.
Proxy contest expense. 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. This issue resulted in Micrel incurring an incremental $330,000 of operating expenses during the first quarter and $2.7 million in the second quarter of 2008 on this matter. Subsequent to a special meeting of shareholders on May 22, 2008, Micrel announced on July 9, 2008 that Obrem Capital Management LLC had agreed to withdraw its slate of nominees for the board of directors, and support Micrel’s board nominees at the upcoming annual meeting of shareholders.
Restructuring charges (credits). During 2003 the Company closed its Santa Clara wafer fabrication facility. In February 2006, the Company terminated the facility lease under the terms of the lease agreement due to major vandalism rendering the building unusable. The facility Lessor disputed the termination of the lease. In March 2008, the Company entered into a Settlement and Mutual Release agreement with the Lessor. Under the terms of the agreement, the Company paid $875,000 to the Lessor and released a $70,000 security deposit for full settlement of all obligations under the lease (see Note 12). The remaining $842,000 unused restructuring expense accruals were credited to restructuring charges (credits) in the statement of operations during the first quarter of 2008 (see Note 16 of Notes to Condensed Consolidated Financial Statements).
Other Income (Expense). Other income (expense) reflects interest income from investments in short-term and long-term investment grade securities and money market funds and other non-operating income, offset by interest expense incurred on term notes and accrued interest related to the settlement of certain previously provided for payroll tax liabilities. For the three months ended June 30, 2008, interest income decreased $1.0 million to $645,000 from $1.7 million for the comparable period in the prior year. This decrease resulted from a decrease in average cash and investment balances combined with reduced average interest rates earned. For the six months ended June 30, 2007, other income includes $15.5 million in non-operating income resulting from the settlement of litigation (see Note 12 of Notes to Condensed Consolidated Financial Statements).
Provision for Income Taxes. The income tax provision for the three and six months ended June 30, 2008, as a percentage of income before taxes, was 37.2% and 35.9%, respectively, compared to 35.7% and 36.2%, respectively, for the same periods in the prior year. The income tax provision for such interim periods differs from taxes computed at the federal statutory rate primarily due to the effect of non-deductible share-based compensation expense, state income taxes, federal and state research and development credits and federal qualified production activity deductions.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
Since inception, the Company's principal sources of funding have been its cash from operations, bank borrowings and proceeds from sales of common stock. Principal sources of liquidity at June 30, 2008, consisted of cash and short-term investments of $79.1 million and a $6 million revolving line of credit from a commercial bank under which the Company could borrow $5.7 million. The revolving line of credit agreement expires on June 30, 2009 (see Note 8 of Notes to Condensed Consolidated Financial Statements).
The Company generated $23.7 million in cash flows from operating activities for the six months ended June 30, 2008, primarily attributable to net income of $15.6 million plus additions for non-cash activities of $14.2 million (consisting primarily of $9.6 million in depreciation and amortization, $2.9 million in share-based compensation expense and a $1.6 million decrease in deferred tax provisions) combined with a $1.7 million decrease in prepaid expense and other assets and a $1.5 million increase in deferred income on shipments to distributors, which were partially offset by a $5.5 million increase in accounts receivable a $3.2 million decrease in other current liabilities and a $2.1 million decrease in accounts payable.
At June 30, 2008, the Company held $16.5 million in principal of senior auction rate notes secured by student loans. During the first quarter of 2008 and continuing into the second quarter of 2008, the auction rate securities market experienced a significant increase in the number of failed auctions, which occurs when sell orders exceed buy orders. Auctions for the six student loan-backed notes held by the Company have failed as of June 30, 2008. The funds associated with failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the issuers redeem the securities or the underlying securities have matured. As a result the Company’s ability to liquidate its investment and fully recover the carrying value of our investment in the near term may be limited or not exist. During the first quarter of 2008, the Company recorded a $1.8 million pre-tax temporary impairment of these securities to other comprehensive income, a component of shareholders’ equity. In the second quarter of 2008, the company recorded an additional $526,000 pre-tax temporary impairment of these auction rate securities to other comprehensive income. The Company currently has the ability and intent to hold these investments until a recovery of the auction process occurs or the issuers redeem the securities. For additional information regarding the Company's investments, see Note 4 of Notes to Condensed Consolidated Financial Statements.
For the six months ended June 30, 2007, the Company generated $32.1 million in cash flows from operating activities primarily attributable to net income of $26.5 million plus additions for non-cash activities of $15.5 million (consisting primarily of $9.0 million in depreciation and amortization, $3.0 million in share-based compensation and a $2.4 million decrease in deferred tax assets) combined with a $4.9 million increase in income taxes payable and a $2.3 million decrease in inventories, which were partially offset by a $9.4 million decrease in other current liabilities, resulting primarily from the payment of a legal judgment, and a $4.3 million decrease in accounts payable.
The Company used $1.5 million of cash from investing activities during the six months ended June 30, 2008, comprised of $6.8 million in purchases of property, plant and equipment which was partially offset by $5.3 million in net purchases of investments.
During the six months ended June 30, 2007, the Company used $16.9 million of cash in investing activities comprised of $10.1 million in net purchases of short-term investments and $9.4 million in purchases of property, plant and equipment which was partially offset by a $2.6 million decease in restricted cash.
The Company used $28.9 million of cash in financing activities during the six months ended June 30, 2008 primarily for the repurchase of $25.5 million of the Company's common stock and $4.7 million for the payment of cash dividends, which were partially offset by $1.2 million in proceeds from the exercise of employee stock awards.
During the six months ended June 30, 2007, the Company used $7.2 million of cash in financing activities primarily for the repurchase of $14.5 million of the Company's common stock and $2.3 million for the payment of cash dividends, which was partially offset by $9.6 million in proceeds from the exercise of employee stock awards.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company currently intends to spend approximately $18 million to $23 million to purchase capital equipment and make facility improvements during the next 12 months primarily 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 $24.5 million of its common stock through December 31, 2008. In addition, on July 23, 2008, the Company's Board of Directors declared a $0.035 per common share cash dividend, payable August 21, 2008 to shareholders of record on August 5, 2008. The cash dividend payout by the Company on August 21, 2008 is expected to be approximately $2.5 million. Since inception, the Company's principal sources of funding have been its cash from operations, bank borrowings and sales of common stock. The Company believes that its cash flows from operations, existing cash balances and short-term investments, and its credit facility will be sufficient to meet its cash requirements for at least the next 12 months. In the longer term, the Company believes future cash requirements will continue to be met by its cash from operations, credit arrangements and future debt or equity financings as required.
Recently Issued Accounting Standards
Please refer to Note 2 of Notes to Condensed Consolidated Financial Statements for a discussion of the expected impact of recently issued accounting standards.
Contractual Obligations and Commitments
As of June 30, 2008, the Company had the following contractual obligations and commitments:
(in thousands) | Payments Due By Period | |||||||||||||||||||
Total | Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | ||||||||||||||||
Operating leases | $ | 5,444 | $ | 2,093 | $ | 3,155 | $ | 196 | $ | — | ||||||||||
Open purchase orders | 12,482 | 12,482 | — | — | — | |||||||||||||||
Total | $ | 17,926 | $ | 14,575 | $ | 3,155 | $ | 196 | $ | — | ||||||||||
Open purchase orders are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable pricing provisions; and the approximate timing of the transactions.
Borrowing agreements consisted of a $6.0 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 June 30, 2008 and there were $325,000 in standby letters of credit outstanding as of June 30, 2008. The letters of credit are issued to guarantee payments for the Company's workers compensation program.
Effective January 1, 2007, the Company adopted the provisions of FIN 48 (see Note 15 of Notes to Condensed Consolidated Financial Statements.) As of June 30, 2008, the liability for uncertain tax positions, net of federal impacts on state tax issues was $5.8 million, of which, none is expected to be paid within one year. Included in the $5.8 million is $2.1 million which has not yet reduced income tax payments, and, therefore, has been netted against non-current deferred tax assets. The remaining $3.7 liability is included in long-term income taxes payable. The Company does not anticipate a significant change to the net liability for uncertain income tax positions within the next 12 months.
The Company has no other off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2008, the Company held $5.0 million in short-term investments. Short-term investments consist primarily of liquid debt instruments and are classified as available-for-sale securities. The short-term investments held at June 30, 2008 are primarily fixed rate securities. 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 June 30, 2008, the fair value of the short-term investments would decline by an immaterial amount.
At June 30, 2008, the Company held $16.5 million in principal of senior auction rate notes secured by student loans. As of June 30, 2008, all of these auction rate securities have failed to auction successfully due to sell orders exceeding buy orders. During the first quarter of 2008, the company recorded a $1.8 million pre-tax temporary impairment of these securities to other comprehensive income, a component of shareholders’ equity. In the second quarter of 2008, the company recorded an additional $526,000 pre-tax temporary impairment of these auction rate securities to other comprehensive income. If it is determined that the fair value of these securities is other than temporarily impaired, the Company would record a loss, which could be material, in its statement of operations in the period such other than temporary decline in fair value is determined. For additional information regarding the Company's investments, see Note 4 of Notes to Condensed Consolidated Financial Statements.
At June 30, 2008, the Company had no fixed-rate long-term debt subject to interest rate risk.
ITEM 4: CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). In designing and evaluating the disclosure controls and procedures, management recognizes that any disclosure 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.
Under the supervision and with the participation of the Company's management, including its principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2008.
There has been no change in the Company’s internal control 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information included in Note 12 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 1A. RISK FACTORS
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: continued volatility in the United States and global credit markets, increased price inflation for goods, services or materials, a slowdown in the rate of growth of the Chinese economy, a significant act of terrorism which disrupts global trade or consumer confidence, and 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.
Market conditions may lead the Company to initiate additional cost reduction plans, which may negatively affect near term operating results. Weaker 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 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 the U.S. or foreign governments, acts of terrorism, foreign government instability, 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. 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. 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.
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 accurately predict near term revenues and profits.
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. If the Company is unable to compete favorably in these areas, revenues and profits could be negatively affected.
The short lead time environment in the semiconductor industry has allowed many end consumers to rely on semiconductor suppliers, stocking representatives and distributors to carry inventory to meet short term requirements and minimize their investment in on-hand inventory. Over the past several years, customers have worked to minimize the amount of inventory of semiconductors they hold. Original equipment manufacturers, distributors and contract manufacturers within the electronics industry have reduced their semiconductor component days of inventory on hand by approximately 20% over the past six years. Over the same six years, the industry average for semiconductor manufacturers inventory days on hand has increased by approximately 25%. As a consequence customers are generally providing less order backlog to the Company and other semiconductor suppliers, resulting in short order lead times and reduced visibility into customer demand. As a consequence of the short lead time environment and corresponding unpredictability of customer demand, the Company has increased its inventories approximately 20% over the past five to six years to maintain reliable service levels. If actual customer demand for the Company’s products is different from the Company’s estimated demand, product inventory may have to be scrapped, or the carrying value reduced, which could adversely affect the Company's business, financial condition, results of operations, or cash flows. In addition, the Company maintains a network of stocking representatives and distributors that carry inventory 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.
During periods when economic growth and customer demand have been less certain, both the semiconductor industry and the Company have experienced significant price erosion. If price erosion occurs, 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.
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. The occurrence of any of these events 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.
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. Many of these competitors have substantially greater technical, financial and marketing resources and greater name recognition than the Company. The Company may not be able to compete successfully in either the standard products or custom and foundry products business in the future and competitive pressures may adversely affect the Company's financial condition, results of operations, or cash flows.
The success of companies in the semiconductor industry depends in part upon intellectual property, including patents, trade secrets, know-how and continuing technology innovation. The success of companies like Micrel may depend on their ability to obtain necessary intellectual property rights and protect such rights. There can be no assurance that the steps taken by the Company to protect its intellectual property will be adequate to prevent misappropriation or that others will not develop competitive technologies or products. There can be no assurance that any patent owned by the Company will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages or that any of its pending or future patent applications will be issued with the scope of the claims sought, if at all. Furthermore, others may 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. Claims alleging infringement of intellectual property rights have been asserted against the Company in the past and could be asserted against the Company in the future. These claims could result in the Company having to discontinue the use of certain processes; cease the manufacture, use and sale of infringing products; incur significant litigation costs and damages; attempt to obtain a license to the relevant intellectual property and develop non-infringing technology. The Company may not be able to obtain or renew such licenses on acceptable terms or to develop non-infringing technology. Existing claims or other assertions or claims for indemnity resulting from infringement claims, or the failure to obtain a key license or renew or renegotiate existing licenses on favorable terms could adversely affect the Company's business, 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.
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.
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.
The Statement of Financial Accounting Standards No. 123R, "Share-Based Payment” requires the Company to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. As discussed in Note 3 of the Notes to Consolidated Financial Statements, the effect of the adoption of this accounting standard in 2006 has significantly increased stock based compensation expense in 2007 and 2008 and such expense is expected to continue in future periods. The requirement to recognize the cost of stock option awards as an expense in the financial statements has and will continue to reduce net income and earnings per share and may have an adverse affect on the value of the Company’s common stock. If the Company reduces the number of stock option grants to employees to minimize the cost associated with share based incentive awards, it will most likely be more difficult for the Company to hire and retain employees.
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 has invested in certain auction rate securities that may not be accessible for in excess of 12 months and these auction rate securities may experience an other than temporary decline in value, which would adversely affect the Company’s income. At June 30, 2008, the Company held $16.5 million in principal of senior auction rate notes secured by student loans. As of June 30, 2008, all of these auction rate securities have failed to auction successfully due to sell orders exceeding buy orders. During the first half of 2008, the company recorded a $2.3 million pre-tax temporary impairment of these securities to other comprehensive income, a component of shareholders’ equity. If it is determined that the fair value of these securities is other than temporarily impaired, the Company would record a loss, which could be material, in its statement of operations in the period such other than temporary decline in fair value is determined. For additional information regarding the Company's investments, see Note 4 of Notes to Condensed Consolidated Financial Statements.
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.
An important part of the Company's strategy is to continue to focus on the market for high-speed communications IC’s. Should demand from the Company’s customers in this end market decrease, or if lower customer demand for the Company’s high bandwidth products materializes, the Company's future revenue growth and profitability could be adversely affected.
The cellular telephone (wireless handset) market comprises a significant portion of the Company’s standard product revenues. The Company derives a significant portion of its net revenues from customers serving the cellular telephone market. Due to the highly competitive and fast changing environment in which the Company’s cellular telephone customers operate, demand for the product the Company sells into this end market can change rapidly and unexpectedly. If the Company’s cellular telephone customers acceptance of Micrel’s products decreases, or if these 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.
The Company faces various risks associated with the trend in increased shareholder activism. In the first half of 2008, the Company became engaged in a proxy contest with a large shareholder. This dispute led to a significant increase in operating expenses which appreciably reduced the Company’s operating profit and net income. The Company prevailed in the contest and has subsequently engaged in discussions with the activist shareholder. To-date, this has resolved the dispute and limited further operating expenses. See Item 4, Submission of Matters to a Vote of Security Holders. However, if the Company should become engaged in another proxy battle with either this same shareholder, or another large shareholder, a new proxy contest would require significant additional management time and increased operating expenses which could adversely affect the Company’s profitability and cash flows.
The Company derives a significant portion of its net revenues from customers located in certain geographic regions or countries. A significant portion of the Company’s net revenues come from customers 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 net 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 semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. To the extent that the Company becomes involved in such intellectual property litigation, it could result in substantial costs and diversion of resources to the Company and could have a material adverse effect on the Company's financial condition, results of operation or cash flows.
In the event of an adverse ruling in any intellectual property litigation that 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. The Company does not believe that any material and specific risk currently exists related to the loss of use of patents, products or processes.
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, and 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Dividend Policy
On January 31, 2008 Micrel’s Board of Directors declared a cash dividend of $0.03 per outstanding share of common stock. The payment of $2.2 million was made on February 26, 2008 to shareholders of record as of February 11, 2008.
On April 24, 2008 the Company's Board of Directors declared a cash dividend of $0.035 per outstanding share of common stock. The payment of $2.5 million was made on May 22, 2008 to shareholders of record as of May 6, 2008.
On July 23, 2008 the Company's Board of Directors declared a cash dividend of $0.035 per outstanding share of common stock payable on August 21, 2008, to shareholders of record at the close of business on August 5, 2008. This dividend will be recorded in the third quarter of 2008 and is expected to be approximately $2.5 million.
Issuer Repurchases of Equity Securities
On October 22, 2007, the Company's Board of Directors approved a $50 million share repurchase program for calendar year 2008. Shares of common stock purchased pursuant to the repurchase program are cancelled from outstanding shares upon repurchase and credited to an authorized and un-issued reserve account, and are intended to reduce the number of outstanding shares of Common Stock to increase shareholder value and offset dilution from the Company's stock option plans, employee stock purchase plan and 401(k) plan. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors.
Repurchases of the Company's common stock during 2008 were as follows:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares that May Yet be Repurchased Under the Plans or Programs ($000) | ||||||||||||
January 2008 | 1,623,470 | $ | 6.27 | 1,623,470 | $ | 39,814 | ||||||||||
February 2008 | 732,000 | $ | 6.32 | 732,000 | $ | 35,191 | ||||||||||
March 2008 | 267,400 | $ | 8.15 | 267,400 | $ | 33,012 | ||||||||||
Total Q1 2008 | 2,622,870 | $ | 6.48 | 2,622,870 | ||||||||||||
April 2008 | 247,300 | $ | 9.36 | 247,300 | $ | 30,696 | ||||||||||
May 2008 | 330,337 | $ | 9.73 | 330,337 | $ | 27,483 | ||||||||||
June 2008 | 310,300 | $ | 9.56 | 310,300 | $ | 24,518 | ||||||||||
Total Q2 2008 | 887,937 | $ | 9.57 | 887,937 | ||||||||||||
Total 2008 | 3,510,807 | $ | 7.26 | 3,510,807 | ||||||||||||
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders was held on May 20, 2008. The special meeting was requested by Andrew Rechtschaffen, Obrem Capital Management, LLC, Obrem Capital (GP), LLC, Obrem Capital Offshore Master, L.P., and Obrem Capital (QP), L.P., which we collectively refer to as Obrem, to consider and vote on the following proposals made by Obrem and opposed by Micrel’s Board of Directors and management: (i) to remove all five current members of the Company’s Board of Directors; (ii) to amend the Company’s bylaws to permit the shareholders to fix the exact number of directors of Micrel within a range of four to seven directors; (iii) to amend the Company’s bylaws to fix the Board size at six, until changed in the manner set forth in the Company’s bylaws; (iv) to elect six persons nominated by Obrem to fill any vacancies created on the Company’s Board as a result of the preceding proposals, and (v) to approve a non-binding shareholder resolution recommending that the Board rescind the Shareholder Rights Plan that was adopted by the Company’s Board of Directors on March 24, 2008. The proposals were voted upon and rejected in the manner set forth below:
Proposal No. 1 - To remove all five current members of our Board of Directors:
| FOR | AGAINST | ABSTAIN |
| 12,726,161 | 51,361,457 | 528,806 |
Proposal No. 2 - To amend the Company’s bylaws to permit the shareholders to fix the exact number of directors of Micrel within a range of four to seven directors:
| FOR | AGAINST | ABSTAIN |
| 27,803,084 | 36,292,774 | 520,565 |
Proposal No. 3 - To amend the Company’s bylaws to fix the Board size at six, until changed in the manner set forth in the Company’s bylaws:
| FOR | AGAINST | ABSTAIN |
| 27,727,804 | 36,365,500 | 523,119 |
Proposal No. 4 - To elect six persons nominated by Obrem to fill any vacancies created on the Company’s Board as a result of the preceding proposals:
| Obrem Nominees | FOR | AGAINST | ABSTAIN |
| Keith R. Gollust | 12,182,526 | 12,167,435 | 2,860,143 |
| Keith M. Kolerus | 26,801,618 | 405,212 | 3,273 |
| Bill R. Bradford | 12,185,510 | 12,164,471 | 2,860,123 |
| Andrew V. Rechtshaffen | 12,178,621 | 12,171,359 | 2,860,123 |
| Eric W. Gomberg | 25,271,580 | 1,935,250 | 3,273 |
| Benjamin J. Goren | 12,179,949 | 12,169,872 | 2,860,283 |
Proposal No. 5 - To approve a non-binding shareholder resolution recommending that the Board rescind the Shareholder Rights Plan that was adopted by the Company’s Board of Directors on March 24, 2008:
| FOR | AGAINST | ABSTAIN |
| 19,732,169 | 44,153,694 | 730,557 |
Based on the shareholders vote to reject Obrem’s proposals one through four, there were no changes to Micrel’s board composition following the special meeting. Subsequent to the special meeting, Micrel announced on July 9, 2008 that Obrem had agreed to withdraw its slate of nominees for the board of directors, and support Micrel’s board nominees at the upcoming annual meeting of shareholders.
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 |
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: August 8, 2008 | By /s/ Richard D. Crowley, Jr. | |
Richard D. Crowley, Jr. | ||
Vice President, Finance and | ||
Chief Financial Officer | ||
(Authorized Officer and | ||
Principal Financial Officer) |
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