Micrel (MCRL) 10-Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________

FORM 10-Q

________________________________

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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 incorporation or organization)	(I.R.S. Employer Identification No.)

2180 Fortune Drive, San Jose, CA	95131
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (408) 944-0800

________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    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 the definitions of “large accelerated filer”, “accelerated filer” and” “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	ý
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  ý

As of November 2, 2012 there were 58,026,999 shares of common stock, no par value, outstanding.

MICREL, INCORPORATED

INDEX TO

REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

		Page
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets - at September 30, 2012 and at December 31, 2011	3
	Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2012 and 2011	4
	Condensed Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2012 and 2011	5
	Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2012 and 2011	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	28
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6.	Exhibits	37
	Signature	38

2

ITEM 1. FINANCIAL STATEMENTS

MICREL, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share amounts)

	September 30, 2012			December 31, 2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	31,561		$	60,610
Short-term investments	77,131			77,265
Accounts receivable, less allowances: 2012, $1,281; 2011, $1,294	32,958			25,385
Inventories	38,945			36,286
Income taxes receivable	2,205			6,881
Prepaid expenses and other	1,973			2,883
Deferred income taxes	22,902			22,854
Total current assets	207,675			232,164
LONG-TERM INVESTMENTS	6,884			6,857
PROPERTY, PLANT AND EQUIPMENT, NET	60,099			60,884
GOODWILL	6,189			—
INTANGIBLE ASSETS, NET	8,181			—
DEFERRED INCOME TAXES	9,976			8,657
OTHER ASSETS	1,761			1,413
TOTAL	$	300,765		$	309,975
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	18,745		$	17,096
Deferred income on shipments to distributors	29,469			30,671
Other current liabilities	10,033			9,329
Total current liabilities	58,247			57,096
LONG-TERM INCOME TAXES PAYABLE	6,004			6,450
LONG-TERM DEFERRED INCOME TAXES	908			—
Total liabilities	65,159			63,546
COMMITMENTS AND CONTINGENCIES (Note 14)
MICREL, INCORPORATED 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: 2012 - 58,633,519 shares; 2011 - 61,038,507 shares	—			206
Accumulated other comprehensive loss	(748		)	(887		)
Retained earnings	235,364			247,110
Total Micrel, Incorporated shareholders’ equity	234,616			246,429
NONCONTROLLING INTEREST	990			—
Total shareholders’ equity	235,606			246,429
TOTAL	$	300,765		$	309,975

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

MICREL, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012			2011		2012			2011
NET REVENUES	$	62,928		$	64,244	$	187,778		$	200,248
COST OF REVENUES (1)	29,661			28,567		86,201			86,797
GROSS PROFIT	33,267			35,677		101,577			113,451
OPERATING EXPENSES:
Research and development (1)	15,341			12,637		42,585			37,389
Selling, general and administrative (1)	11,847			10,985		35,186			34,748
Total operating expenses	27,188			23,622		77,771			72,137
INCOME FROM OPERATIONS	6,079			12,055		23,806			41,314
OTHER INCOME (EXPENSE):
Interest income	166			186		554			553
Interest expense	47			—		—			(18		)
Other income (expense), net	2			66		(121		)	141
Total other income, net	215			252		433			676
INCOME BEFORE INCOME TAXES AND NONCONTROLLING INTEREST	6,294			12,307		24,239			41,990
PROVISION FOR INCOME TAXES	1,600			3,095		8,098			12,992
NET INCOME	4,694			9,212		16,141			28,998
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST	(9		)	—		(13		)	—
NET INCOME ATTRIBUTABLE TO MICREL, INCORPORATED SHAREHOLDERS	$	4,685		$	9,212	$	16,128		$	28,998
NET INCOME PER SHARE ATTRIBUTABLE TO MICREL, INCORPORATED SHAREHOLDERS:
Basic	$	0.08		$	0.15	$	0.27		$	0.47
Diluted	$	0.08		$	0.15	$	0.27		$	0.46
CASH DIVIDENDS DECLARED PER SHARE	$	0.04		$	0.04	$	0.12		$	0.11
WEIGHTED AVERAGE SHARES USED IN COMPUTING PER SHARE AMOUNTS:
Basic	59,242			62,043		60,096			62,017
Diluted	59,889			62,465		60,774			62,850

(1)    Share-based compensation expense included in:

Cost of revenues	$	274	$	246	$	840	$	772
Research and development	646		615		2,203		1,666
Selling, general and administrative	719		629		2,287		1,737

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

MICREL, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
NET INCOME	$	4,694		$	9,212		$	16,141		$	28,998
Other comprehensive income (loss):
Unrealized gains (losses) on investments	57			(91		)	226			559
Income taxes	22			(35		)	87			220
Other comprehensive income (loss), net of taxes	35			(56		)	139			339
COMPREHENSIVE INCOME	4,729			9,156			16,280			29,337
Less: comprehensive income attributable to the noncontrolling interest	(9		)	—			(13		)	—
COMPREHENSIVE INCOME ATTRIBUTABLE TO MICREL, INCORPORATED SHAREHOLDERS	$	4,720		$	9,156		$	16,267		$	29,337

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

MICREL, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended
	September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	16,141		$	28,998
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	9,346			9,179
Share-based compensation expense	5,330			4,175
Excess tax benefits from stock-based awards	(162		)	(476		)
Impairment of technology	1,000			—
Loss on disposal of assets	1			—
Deferred income tax provision	(1,448		)	1,341
Changes in operating assets and liabilities:
Accounts receivable	(6,533		)	4,720
Inventories	(1,366		)	(1,033		)
Income taxes receivable	4,590			5,720
Prepaid expenses and other assets	(303		)	656
Accounts payable	1,327			(3,343		)
Income taxes payable	(442		)	290
Other current liabilities	341			(1,347		)
Deferred income on shipments to distributors	(1,202		)	(2,232		)
Net cash provided by operating activities	26,620			46,648
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of PhaseLink’s net assets, net of cash acquired	(16,439		)	—
Purchases of property, plant and equipment	(6,221		)	(6,324		)
Purchases of investments	(41,408		)	(54,355		)
Proceeds from sale and maturities of investments	41,808			32,785
Net cash used in investing activities	(22,260		)	(27,894		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt	(282		)	(2,857		)
Proceeds from the issuance of common stock	2,730			11,574
Repurchases of common stock	(28,430		)	(12,473		)
Payment of cash dividends	(7,135		)	(6,848		)
Purchase of stock for withholding taxes on vested restricted stock	(454		)	(56		)
Excess tax benefits from stock-based awards	162			476
Net cash used in financing activities	(33,409		)	(10,184		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(29,049		)	8,570
CASH AND CASH EQUIVALENTS - Beginning of period	60,610			74,738
CASH AND CASH EQUIVALENTS - End of period	$	31,561		$	83,308

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

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 and majority-owned subsidiaries (together “Micrel” or the “Company”) as of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011 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, comprehensive income 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, 2011, 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, 2011. 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, 2011 and those included in this Form 10-Q below.

Net Income Per Common and Equivalent Share- Basic net income per share is computed by dividing net income attributable to Micrel, Incorporated shareholders 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 attributable to Micrel, Incorporated shareholders is as follows (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2012	2011	2012	2011
Weighted average common shares outstanding	59,242	62,043	60,096	62,017
Dilutive effect of stock options outstanding using the treasury stock method	647	422	678	833
Shares used in computing diluted net income per share attributable to Micrel, Incorporated shareholders	59,889	62,465	60,774	62,850

For the three and nine months ended September 30, 2012, 5.7 million stock options and 5.5 million stock options, respectively, have been excluded from the weighted-average number of common shares outstanding for the diluted net income per share computations as they were anti-dilutive. For the three and nine months ended September 30, 2011, 4.9 million stock options and 3.8 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 July 2012, the Financial Accounting Standards Board issued a guidance to reduce the complexity and cost of performing an evaluation of impairment of indefinite-lived intangible assets other than goodwill. Under the new guidance, an entity is permitted to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption is not expected to have a material impact on the Company's consolidated financial condition or results of operations.

Effective January 1, 2012, the Company adopted the new accounting standard on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The adoption did not have an impact on the Company’s consolidated financial position or results of operations.

7

Effective January 1, 2012, the Company adopted the new standard that requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. In December 2011, an amendment was issued that defers the requirement to present reclassification adjustments out of accumulated other comprehensive income on the face of the consolidated statement of income. The adoption concerns presentation and disclosure only and did not have an impact on the Company’s consolidated financial position or results of operations.

3. ACQUISITION

On March 15, 2012, the Company signed a definitive agreement to acquire a controlling interest in PhaseLink^™ Company Limited (“PhaseLink”), a private company based in Taiwan and in San Jose, California. The acquisition was completed on April 2, 2012. The Company acquired approximately 95% of the outstanding shares of PhaseLink for $19.7 million in cash ($16.4 million net of cash acquired). The objective of the acquisition is to complement Micrel’s high performance clock generation, distribution products for the communication market and to expand its product offerings into the consumer and industrial markets. In addition, the Company expects the acquisition to enhance its technology portfolio and further expand its research and development capabilities. The Company has included the financial results of PhaseLink in its condensed consolidated financial statements beginning on the acquisition date. Pro forma financial disclosures are not presented herein as the financial results of this acquisition are considered immaterial.

Recognized amounts of identifiable assets acquired and liabilities assumed

The Company accounted for the transaction using the acquisition method and, accordingly, the consideration has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date. For the three and nine months ended September 30, 2012, acquisition costs of $79,000 and $161,000, respectively, were expensed as incurred.

While the Company uses best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, estimates and assumptions are subject to refinement. As a result, during the preliminary purchase price allocation period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. The Company records adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period in the operating results in the period in which the adjustments were determined. In the three and nine months ended September 30, 2012, the Company recorded an increase of $101,000 to goodwill with a corresponding decrease of $79,000 to accounts receivable and $22,000 increase to other liabilities.

The Company’s allocation of the total purchase price is summarized below (in thousands):

Cash and cash equivalents	$	3,255
Accounts receivable	1,040
Inventories	1,320
Other assets	273
Property, plant and equipment	1,734
Developed technology	4,400
Customer relationships	3,000
Trademarks	510
Non-competition agreements	410
In-process research and development	410
Goodwill	6,189
Short-term debt	(282		)
Other liabilities	(1,588		)
Noncontrolling interest	(977		)
Total purchase consideration	$	19,694

8

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Identifiable intangible assets

Fair values for the acquired developed technology, customer relationships, trademarks and non-competition agreements and in-process research and development (“IPR&D”) were determined based on various methods including excess earnings method, relief from royalty method and with-or-without method. The values of the developed technology and customer relationships will be amortized over an estimated useful life of 10 years. The non-competition agreements will be amortized over a two-year period. The values of trademarks will be amortized over two to five years.

The fair value of the acquired IPR&D was determined through estimates and valuation techniques based on the terms and details of the acquisition. As it was determined that the underlying projects had not reached technological feasibility at the date of acquisition, the amounts allocated to IPR&D will not be expensed until completion of the related projects. Upon the completion of development for each project, the acquired IPR&D will be amortized over its useful life.

The following table summarizes the identifiable intangible assets acquired as part of the acquisition (in thousands):

	Fair Value as of Acquisition Date		Accumulated Amortization as of			Net Carrying Amount as of
	April 2, 2012		September 30, 2012			September 30, 2012
Developed technology	$	4,400	$	(220	)	$	4,180
Customer relationships	3,000		(150		)	2,850
Trademarks	510		(76		)	434
Non-competition agreements	410		(103		)	307
In-process research and development	410		—			410
Total	$	8,730	$	(549	)	$	8,181

Goodwill

Goodwill represents the excess of the estimated acquisition consideration over the fair value of the underlying net tangible and intangible assets. The Company’s primary reasons for the PhaseLink acquisition were to complement Micrel’s high performance clock generation, distribution products for the communication market and to expand its product offerings into the consumer and industrial markets. The Company also expects the acquisition to reduce the time to develop new technologies and to provide more complete solutions for communications, consumer and industrial markets. The acquisition also enhanced the Company’s engineering resources through the addition of PhaseLink’s research and development team. These significant factors were the basis for the recognition of goodwill. The goodwill is not expected to be deductible for tax purposes.

4. SHARE-BASED COMPENSATION

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 7 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The following table summarizes total share-based compensation expense included in the Condensed Consolidated Statement of Operations (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Cost of revenues	$	274		$	246		$	840		$	772
Research and development	646			615			2,203			1,666
Selling, general and administrative	719			629			2,287			1,737
Pre-tax share-based compensation expense	1,639			1,490			5,330			4,175
Less income tax effect	(558		)	(512		)	(1,863		)	(1,504		)
Net share-based compensation expense	$	1,081		$	978		$	3,467		$	2,671

9

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

During the three months ended September 30, 2012 and 2011, the Company granted 512,380 and 294,100 stock options, respectively, at weighted average fair values of $3.05 and $3.22 per share, respectively. For the nine months ended September 30, 2012 and 2011, the Company granted 1,296,200 and 1,929,550 stock options, respectively, at weighted average fair values of $2.99 and $4.49 per share, respectively. The fair value of the Company’s stock options granted under the Company’s 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				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Expected term (years)	5.8		5.6		5.8		5.7
Stock volatility	36.0	%	41.3	%	36.1	%	40.5	%
Risk free interest rates	0.8	%	1.1	%	1.0	%	1.9	%
Dividends during expected terms	1.5	%	1.7	%	1.6	%	1.4	%

The Company also grants Restricted Stock Units (“RSUs”) to its employees. In the three months ended September 30, 2012 and 2011, the Company granted 123,537 and 323,928 RSUs, respectively, at weighted average fair values of $9.73 and $9.22, respectively. During the nine months ended September 30, 2012 and 2011, the Company granted 379,623 and 486,081 RSUs, respectively, at weighted average fair values of $9.75 and $10.10, respectively.

As of September 30, 2012, there was $17.0 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 4.6 years. Total share-based compensation capitalized as part of inventory as of September 30, 2012 and December 31, 2011 was $147,000 and $174,000, respectively.

Under the Company’s Employee Stock Purchase Plan (“ESPP”), eligible employees are permitted to have salary withholdings to purchase shares of Common Stock at a price equal to 95% of the market value of the stock at the end of each three-month offer period, subject to an annual limitation. The ESPP is considered non-compensatory per current share-based compensation accounting guidelines.

5. INVESTMENTS

Investments purchased with remaining maturity dates of greater than 3 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 regard to those securities (expectations of sales and redemptions). Short-term investments as of September 30, 2012 primarily consisted of corporate debt instruments, certificate of deposits and liquid municipals and were classified as available-for-sale securities. Long-term investments as of September 30, 2012 consisted of auction rate notes secured by student loans and were classified as available-for-sale securities. Available-for-sale securities are stated at market value with unrealized gains and losses included in accumulated other comprehensive income. 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. A summary of the Company’s short-term investments at September 30, 2012 and December 31, 2011 is as follows (in thousands):

	As of September 30, 2012									As of December 31, 2011
	Cost		Gross Gains		Gross Losses			Fair Value		Cost		Gross Gains		Gross Losses			Fair Value
Municipal Securities	$	10,395	$	—	$	(113	)	$	10,282	$	11,413	$	—	$	(115	)	$	11,298
Corporate Debt Securities	30,113		—		(248		)	29,865		33,723		—		(327		)	33,396
Commercial Paper	13,959		2		—			13,961		4,991		—		(2		)	4,989
U.S. Agencies	—		—		—			—		4,528		—		(17		)	4,511
Certificates of Deposits	23,023		—		—			23,023		23,071		—		—			23,071
Total	$	77,490	$	2	$	(361	)	$	77,131	$	77,726	$	—	$	(461	)	$	77,265

10

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of September 30, 2012, $39.9 million of the Company’s short-term investments were in an unrealized loss position. The Company recorded a $0.2 million net of tax ($0.4 million pre-tax) for temporary impairment of these securities to accumulated other comprehensive income, a component of shareholders’ equity.

To determine the fair value of financial instruments, the Company uses a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:

• 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.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Most of the Company’s financial instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

The types of instruments valued based on unobservable inputs include the auction rate securities held by the Company. Such instruments are generally classified within Level 3 of the fair value hierarchy. The Company estimated the fair value of these auction rate securities using a discounted cash flow model incorporating assumptions that market participants would use in their estimates of fair value. Some of these assumptions include estimates for interest rates, timing and amount of cash flows and expected holding periods of the auction rate securities.

Financial assets measured at fair value on a recurring basis as of September 30, 2012 were as follows (in thousands):

	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	$	20,143	$	—	$	—	$	20,143
Certificates of Deposits	23,023		—		—		23,023
Corporate Debt Securities	—		29,865		—		29,865
Commercial Paper	—		13,961		—		13,961
Municipal Securities	—		10,282		—		10,282
U.S. Agencies	—		—		—		—
Auction rate notes	—		—		6,884		6,884
Total	$	43,166	$	54,108	$	6,884	$	104,158

11

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Financial assets measured at fair value on a recurring basis as of December 31, 2011 were as follows (in thousands):

	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	$	55,912	$	—	$	—	$	55,912
Certificates of Deposits	23,071		—		—		23,071
Corporate Debt Securities	—		33,396		—		33,396
Commercial Paper	—		4,989		—		4,989
Municipal Securities	—		11,298		—		11,298
U.S. Agencies	—		4,511		—		4,511
Auction rate notes	—		—		6,857		6,857
Total	$	78,983	$	54,194	$	6,857	$	140,034

As of September 30, 2012, the Company had $7.7 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 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. As a result of sell orders exceeding buy orders, auctions for the student loan-backed notes held by the Company have failed as of September 30, 2012. To date the Company has collected all interest payable on all of its auction-rate securities when due and expects 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, the issuers repay principal over time from cash flows prior to final maturity or final payments come due according to contractual maturities ranging from 20 to 35 years. As a result, the Company has classified all auction rate notes as long-term investments as of September 30, 2012 and December 31, 2011. 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 September 30, 2012 and December 31, 2011, the maximum interest rate is generally one month LIBOR plus 1.5% based on the notes’ rating as of that date.

The Company has used a combination of discounted cash flow models and observable transactions for similar securities to determine the estimated fair value of its investment in auction rate notes as of September 30, 2012 and December 31, 2011. 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 September 30, 2012, the Company determined there was a cumulative decline in the fair value of its auction rate notes and recorded a $0.5 million net of tax ($0.8 million pre-tax) temporary impairment of these securities to accumulated other comprehensive income, a component of shareholders’ equity.

For the nine months ended September 30, 2012, the changes in the Company’s Level 3 securities (consisting of auction rate notes) were as follows (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Beginning balance, December 31, 2011	$	6,857
Transfers in and/or out of Level 3	—
Total gains, before tax	127
Settlements	(100		)
Ending balance, September 30, 2012	$	6,884

12

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6. INVENTORIES

Inventories consisted of the following (in thousands):

	September 30, 2012		December 31, 2011
Finished goods	$	9,572	$	11,824
Work in process	27,602		22,863
Raw materials	1,771		1,599
Total inventories	$	38,945	$	36,286

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):

	September 30, 2012			December 31, 2011
Manufacturing equipment	$	174,582		$	170,304
Land	8,101			8,101
Buildings and improvements	53,868			53,539
Office furniture and research equipment	21,180			17,834
	257,731			249,778
Accumulated depreciation	(197,632		)	(188,894		)
Total property, plant and equipment, net	$	60,099		$	60,884

Depreciation expense for the three and nine months ended September 30, 2012 was $3.0 million and $8.7 million, respectively.

8. GOODWILL AND INTANGIBLE ASSESTS

Goodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in a business combination. On April 2, 2012, the Company acquired PhaseLink and preliminarily recorded $6.1 million of goodwill as the purchase price exceeded the fair value allocated to net tangible assets and identifiable intangible assets. As of September 30, 2012, the goodwill was adjusted to approximately $6.2 million during the preliminary purchase price allocation period, which may be up to one year from the acquisition date. The goodwill has been assigned to the timing and communications reporting unit and will be reviewed annually in October or whenever events or circumstances occur which indicate that goodwill might be impaired.

The Company’s annual goodwill impairment assessment will include first performing a qualitative assessment. As part of this assessment, the Company will consider whether it is not more likely than not that the fair value is less than the carrying value of the reporting unit. If, after assessing the qualitative factors, a company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then performing the two-step impairment test is unnecessary. However, if a company concludes otherwise, then it is required to perform the first step of the two-step goodwill impairment test. The first step requires a comparison of the fair value of the Company’s reporting unit to its net book value. If the fair value is greater, then no impairment is deemed to have occurred. If the fair value is less, then the second step must be performed to determine the amount, if any, of actual impairment.

The process of evaluating the potential impairment of long-lived intangible assets is highly subjective and requires significant judgment. In estimating the fair value of these assets, the Company makes estimates and judgments about future revenues and cash flows. The Company’s forecasts will be based on assumptions that are consistent with the plans and estimates the Company is using to manage the business. Changes in these estimates could change the Company’s conclusion regarding impairment of the long-lived assets and potentially result in future impairment charges for all or a portion of the following balances at September 30, 2012 (in thousands):

13

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Carrying Amount as of		Additions at Cost		Carrying Amount as of		Accumulated Amortization as of			Net Carrying Amount as of
	March 31, 2012		April 2, 2012		September 30, 2012		September 30, 2012			September 30, 2012
Developed technology	$	—	$	4,400	$	4,400	$	(220	)	$	4,180
Customer relationships	—		3,000		3,000		(150		)	2,850
Trademarks	—		510		510		(76		)	434
Non-competition agreements	—		410		410		(103		)	307
In-process research and development	—		410		410		—			410
	$	—	$	8,730	$	8,730	$	(549	)	$	8,181

The above intangible assets continue to be amortized over their estimated useful lives of 2 to 10 years using the straight-line method. Total intangible amortization expense for the three-month periods ended September 30, 2012 was $274,000.

The estimated future amortization expense of intangible assets as of September 30, 2012 was as follows (in thousands):

Year Ending December 31,
2012 (remaining three months)	$	275
2013	1,098
2014	881
2015	808
2016	808
Thereafter	4,311
	$	8,181

For the three months ended September 30, 2012, the Company recorded an impairment of $1.0 million for a technology which was replaced by more advanced technologies.

9. OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following (in thousands):

	September 30, 2012		December 31, 2011
Accrued compensation	$	5,536	$	4,997
Accrued commissions	2,490		1,964
Accrued workers compensation and health insurance	875		987
All other current accrued liabilities	1,132		1,381
Total other current liabilities	$	10,033	$	9,329

10. BORROWING ARRANGEMENTS

Under the terms of an unsecured credit facility with Bank of the West, the Company has a $5.0 million line of credit available for general working capital needs, which includes a $5.0 million letter of credit sub-facility including a $2.0 million foreign exchange sub-facility. In April 2011, the expiration date of the line of credit was extended from April 30, 2011 to April 30, 2013. Interest rates under the amended agreement are based on one of three interest rates, at the Company’s option: (1) a variable alternate base rate plus 1.0%, the alternate base rate being the greater of (x) Bank of the West’s prime rate, (y) the Fed Funds Rate plus 0.5% or (z) daily adjusted one-month LIBOR plus 1.0%; (2) floating one-month LIBOR plus 2.0% or (3) fixed LIBOR for one, two, three or six month periods, plus 2.0%. As of September 30, 2012, the Company had no borrowings under the line of credit. The agreement includes certain restrictive covenants and, as of September 30, 2012, the Company was in compliance with such covenants.

14

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The credit facility also included a $15.0 million term loan facility to finance the repurchase of shares of the Company’s common stock. In May 2009, the Company borrowed $15.0 million under the term loan. Interest under the term loan facility was payable at a rate equal to floating one-month LIBOR plus 2.25%. Borrowings were payable over 21 equal monthly installments, which commenced on August 31, 2009. The final payment was made on April 30, 2011.

Through the PhaseLink acquisition, the Company acquired two term loans totaling $282,000 with a local bank in Taiwan. The Company paid off the acquired bank loans in full in June 2012.

11. DERIVATIVE FINANCIAL INSTRUMENTS

The Company entered into an interest rate swap contract (the “Swap”) in 2009 to partially offset its exposure to the effects of changes in interest rates on its variable-rate financing obligations. The Swap was considered a cash flow hedge. The Company does not hold derivative financial instruments for trading or speculative purposes. The Swap matured in April 2011 and was not renewed.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. The Company reports cash flows from derivative instruments in cash flows from operating activities. All derivatives are recorded at fair value in either prepaid and other current assets or other accrued liabilities.

During the nine months ended September 30, 2012, the Company did not have any outstanding derivatives. The effect of derivative instruments on the Statement of Operations for the nine months ended September 30, 2011 was not material.

12. SIGNIFICANT CUSTOMERS

During the nine months ended September 30, 2012, two worldwide distributors and one OEM customer accounted for $47.5 million (25%), $30.7 million (16%) and $20.1 million (11%) of net revenues, respectively. During the nine months ended September 30, 2011, two worldwide distributors accounted for $39.5 million (20%) and $36.4 million (18%) of net revenues, respectively.

At September 30, 2012, two worldwide distributors and one stocking representative accounted for 30%, 15% and 12%, respectively, of total accounts receivable. At December 31, 2011, two worldwide distributors and an Asian-based distributor accounted for 23%, 10% and 11%, respectively, of total accounts receivable.

13. SEGMENT REPORTING

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.

15

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Three Months Ended						Nine Months Ended
Net Revenues by Segment	September 30,						September 30,
(dollars in thousands)	2012			2011			2012			2011
Net Revenues:
Standard Products	$	60,753		$	61,907		$	180,756		$	193,286
Other Products	2,175			2,337			7,022			6,962
Total net revenues	$	62,928		$	64,244		$	187,778		$	200,248
As a Percentage of Total Net Revenues:
Standard Products	97		%	96		%	96		%	97		%
Other Products	3			4			4			3
Total net revenues	100		%	100		%	100		%	100		%

14. LITIGATION AND COMMITMENTS AND CONTINGENCIES

On November 1, 2008, Nadatel Co., Ltd. (“Nadatel”), a video surveillance equipment supplier based in Seoul Korea, filed a complaint against the Company for product liability and tort-based damages with the Seoul Central District Court in Seoul, Korea. In 2006 and 2007, Nadatel purchased approximately 17,000 of the Company’s low-dropout voltage regulators for use in its closed circuit television digital video recorder application for security systems. Nadatel claimed that the parts failed in the field, resulting in malfunction of its application, recall of the application and replacement of circuit boards incorporating the Company’s part. The Company settled this claim in June 2012 pursuant to a court-mediated agreement without admitting to liability or product defects. Despite the Company’s assessment that the claims asserted by Nadatel are untrue, it settled this protracted litigation in order to avoid further legal expense and distraction. The settlement amount of approximately $200,000 was recorded in June 2012 as a component of selling, general and administrative expenses for the nine months ended September 30, 2012.

Additional claims have been filed by or have arisen against the Company in its normal course of business. Generally, litigation is subject to inherent uncertainties, and no assurance can be given that the Company will prevail in any particular lawsuit. Accordingly, 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. However, the Company believes that the ultimate resolution of outstanding claims and lawsuits will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

15. SHARE REPURCHASE PROGRAM

In February 2010, the Company’s Board of Directors approved a $15.0 million share repurchase program for calendar year 2010. In September 2010, the Company’s Board of Directors approved an increase to the amount authorized for repurchase from $15.0 million to $30.0 million. In November 2010, the Company’s Board of Directors approved an extension of the termination of the authorized repurchase plan from December 31, 2010 to the date on which the total authorized aggregate amount was expended. In May 2011, the Company’s Board of Directors authorized the repurchase of an additional $30.0 million of the Company’s common stock. On July 26, 2012, the Company announced that its Board of Directors authorized the repurchase of an additional $30.0 million of the Company’s common stock which increased the total approval for repurchase since February 2010 to $90.0 million. The total available for repurchase, as of September 30, 2012, was $25.3 million.

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. Share repurchases are recorded as a reduction to common stock to the extent available. Any amounts repurchased which are in excess of the existing total common stock balance are recorded as a reduction of retained earnings. Share repurchases 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 and ESPP. During the nine months ended September 30, 2012, the Company repurchased 2,820,141 shares of its common stock for an aggregate price of $28.4 million.

16

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

16. INCOME TAXES

The income tax provision for the three and nine months ended September 30, 2012, as a percentage of income before taxes, was 25.4% and 33.4%, respectively. The tax provision for the nine months ended September 30, 2012 included an out-of-period charge of $491,000 in March 2012 related to the write-offs of deferred tax assets associated with the net operating losses of two previously acquired companies. This charge was immaterial for the nine months ended September 30, 2012 and immaterial to any applicable prior periods that could have been affected. For the nine months ended September 30, 2012, the Company recognized $176,000 of previously unrecognized tax benefits due to settlements with the tax authorities.  In addition, for the three and nine months ended September 30, 2012, the Company also recognized $661,000 of previously unrecognized tax benefits due to the lapse of statute of limitations. The tax provision for this period excluded any benefits from the federal research and development credit which expired on December 31, 2011 and has not been reinstated as of September 30, 2012. The income tax provision for the three and nine months ended September 30, 2011, as a percentage of income before taxes, was 25.1% and 30.9%, respectively.

As of September 30, 2012, the gross liability for uncertain tax positions was $11.5 million (including interest and penalties) and the net liability, reduced for the federal effects of potential state tax exposures, was $8.1 million. If these uncertain tax positions are sustained upon tax authority audit, or otherwise become certain, the net $8.1 million would favorably affect the Company’s tax provision in such future periods. Included in the $8.1 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 $6.0 million liability was included in long-term income taxes payable. The Company does not anticipate a significant change to the $6.0 million long-term uncertain income tax positions within the next 12 months.

The Company continues to recognize interest and penalties related to income tax matters as part of the income tax provision. As of September 30, 2012 and December 31, 2011, the Company had $601,000 and $655,000, respectively, accrued for interest and none accrued for penalties in 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 2009 and forward. Significant state tax jurisdictions include California, Massachusetts and Texas, and generally, the Company is subject to routine examination for years 2005 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 2004 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 and state research and development credit carryforwards. The Company had net current deferred tax assets of $22.9 million and net long-term deferred tax assets of $9.1 million as of September 30, 2012. 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 except for net operating losses generated in China. Should the Company determine that future realization of these tax benefits is not likely, additional valuation allowance would be established which would increase the Company’s tax provision in the period of such determination. On November 6, 2012, California enacted a law that requires taxpayers to use a single sales factor when determining taxable income. The law is effective on January 1, 2013.  The Company is currently evaluating the impact, if any, on the realizability of its deferred tax assets as a result of the new tax law.

17. DIVIDENDS

On July 26, 2012, the Company’s Board of Directors declared a cash dividend of $0.04 per outstanding share of common stock. The aggregate payment of $2.2 million was made on August 23, 2012 to shareholders of record as of August 9, 2012.

On July 26, 2011, the Company’s Board of Directors declared a cash dividend of $0.04 per outstanding share of common stock. The aggregate payment of $2.5 million was made on August 24, 2011 to shareholders of record as of August 10, 2011.

18. SUBSEQUENT EVENTS

On October 25, 2012, the Company’s Board of Directors declared a cash dividend of $0.0425 per outstanding share of common stock payable on November 23, 2012 to shareholders of record at the close of business on November 9, 2012. This dividend will be recorded in the fourth quarter of 2012 and is expected to be approximately $2.5 million.

17

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

The statements contained in this quarterly report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding the Company’s expectations, hopes, intentions or strategies regarding the future. Forward-looking statements include, but are not limited to statements regarding: future revenues and dependence on standard products sales and international sales; the levels of international sales; the effect of global market conditions on revenue levels, profitability and results of operations; future products or product development; statements regarding fluctuations in the Company’s results of operations; future returns and price adjustments and allowance; future uncollectible amounts and doubtful accounts allowance; future products or product development; future research and development spending and the Company’s product development strategy; the Company’s markets, product features and performance; product demand and inventory to service such demand; competitive threats and pricing pressure; the effect of dependence on third parties; the Company’s future use and protection of its intellectual property; future expansion or utilization of manufacturing capacity; future expenditures; current or future acquisitions; the ability to meet anticipated short-term and long-term cash requirements and the sources of funds to meet such requirements; effect of changes in market interest rates on investments; the Company’s ability to recover the cost basis on its investments; the Company’s need and ability to attract and retain certain personnel; the cost and outcome of litigation and its effect on the Company; the impact of changes in laws and regulations; the future realization of tax benefits; the amount of future taxable income levels and the resolution of uncertain tax positions; and share-based incentive awards and expectations regarding future stock based compensation expense. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as, but not limited to, “believe,” “estimate,” “may,” “can,” “will,” “could,” “would,” “should,” “continue,” “intend,” “objective,” “plan,” “expect,” “likely,” “potential,” “possible” or “anticipate” or the negative of these terms or other comparable terminology. All forward-looking statements included in this report are based on information available to the Company on the date of this report, and, except as required by law, the Company assumes no obligation to update any such forward-looking statements. These statements are subject to risks and uncertainties, including those risks discussed under “Risks Factors” and elsewhere in this report, which could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. Additional factors that may affect operating results are contained within the Company’s Form 10-K for the year ended December 31, 2011.

Overview

Micrel designs, develops, manufactures and markets a range of high-performance analog integrated circuits (“ICs”), mixed-signal ICs and digital ICs. The Company currently ships approximately 3,000 standard products. These products address a wide range of end markets including cellular handsets, portable computing, enterprise and home networking, wide area and metropolitan area networks, digital televisions and industrial equipment. The Company also manufactures custom analog and mixed-signal circuits and provides wafer foundry services for customers that produce electronic systems for communications, consumer and military applications.

As part of keeping pace with the dynamics of an ever changing market landscape, the Company recently renamed its product groups to more accurately reflect current technology trends and customer needs. Analog is now called Micrel's high performance linear and power product group, high bandwidth product line is now the timing and communications product group and Micrel's Ethernet is now referred to as LAN solutions product group.

The Company’s high performance linear and power products are characterized by high power density and small form factor. The demand for high performance linear and power circuits has been fueled by the growth of portable communications and computing devices, including for example, cellular handsets, tablet devices and notebook computers. The Company also has an extensive linear and power management offering for the networking and communications infrastructure markets including cloud and enterprise servers, network switches and routers, storage area networks and wireless base stations. In addition, the Company offers products that serve the solid state drive market and is seeing strength in the emergence of solid state drives and analog switches, including USB switches.

18

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

The Company’s timing and communications circuits are used primarily for enterprise networks, storage area networks, access networks and metropolitan area networks. This product portfolio consists of timing, clock management and high speed Physical Media Devices (“PMD”) products. With form factor, size reductions, and ease of use critical for system designs, Micrel utilizes innovative packaging and proprietary process technology to address these challenges. On April 2, 2012, the Company acquired a controlling interest of approximately 95% in PhaseLink, a private company based in Taiwan and in San Jose, California. The objective of the acquisition is to complement Micrel’s high performance clock generation and distribution products for the communication market and to expand its product offerings into the consumer and industrial markets. PhaseLink provides high performance integrated timing solutions to system and oscillator manufacturers. The Company’s condensed consolidated financial statements include the operating results of PhaseLink from the date of acquisition. Pro forma financial disclosures are not presented herein as the financial results of this acquisition are considered immaterial.

The Company’s family of LAN solutions products targets the digital home, enterprise, industrial and automotive markets. This product portfolio consists of physical layer transceivers (“PHY”), Media Access Controllers (“MAC”), switches, and System-On-Chip (“SoC”) devices that support various LAN protocols supporting communication transmission speeds from 10 Megabits per second to a Gigabit per second.

The following table presents the Company’s revenues by product group, as a percentage of total net revenues, for the periods presented.

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

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

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

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

19

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

During the first quarter of 2011, revenues decreased 10.8% to $67.5 million from $75.6 million in the fourth quarter of 2010. This larger than normal seasonal decline in revenue from the fourth quarter of 2010 was mainly due to a larger than expected reduction in sales to a Korean wireless handset and consumer electronic device manufacturer which moderated product deliveries during the quarter to control its inventory levels. The Company also experienced a reduction in overall demand towards the end of the first quarter of 2011 related to disruptions in the worldwide electronics supply chain as a result of the earthquake and tsunami in Japan. In addition, the first quarter 2011 revenues were impacted by reduced shipments to certain Asian based stocking representative channel partners that reduced their inventory levels during the quarter. As compared to the same period last year, first quarter 2011 revenues increased by $0.3 million. First quarter 2011 book-to-bill ratio was below one, but showed improvement compared to the fourth quarter of 2010. First quarter 2011 gross margin was 56.1%, as compared to 55.8% in the fourth quarter of 2010. Despite the lower revenues, first quarter 2011 gross margin increased from the previous quarter primarily due to a larger proportion of higher margin products. Net income for the first quarter of 2011 was $9.1 million, or $0.15 per basic share and $0.14 per diluted share, as compared to net income of $13.7 million, or $0.22 per basic and diluted share, for the fourth quarter of 2010, and net income of $9.7 million, or $0.16 per basic and diluted share, for the first quarter of 2010. During the first quarter of 2011, cash flows from operations were $15.5 million. During the first quarter of 2011, cash and short-term investments increased by $12.4 million to $121.6 million. In addition to maintaining its quarterly $0.035 per share cash dividend, during the first quarter of 2011 the Company repurchased $5.8 million of its common stock.

During the second quarter of 2011, revenues increased 1.5% to $68.5 million from $67.5 million in the first quarter of 2011. This increase resulted primarily from increased demand in the high-speed communications end market as well as a resumption of more normal shipment levels to a Korean wireless handset and consumer electronic device manufacturer which had moderated product deliveries during the previous quarter. The sequential increase in revenues was less than expected primarily due to lower than expected demand in the industrial end market. The second quarter 2011 book-to-bill ratio was above one for the first time since the second quarter of 2010. Second quarter 2011 gross margin increased to 58.3% as compared to 56.1% in the first quarter of 2011 primarily due to a larger proportion of higher margin products combined with decreased excess inventory charges. Net income for the second quarter of 2011 was $10.7 million, or $0.17 per basic and diluted share, as compared to net income of $9.1 million, or $0.15 per basic share and $0.14 per diluted share, for the first quarter of 2011, and net income of $12.4 million, or $0.20 per basic and diluted share, for the second quarter of 2010. During the second quarter of 2011, cash flows from operations were $12.4 million. During the second quarter of 2011, cash and short-term investments increased by $10.7 million to $132.3 million. In addition to maintaining its quarterly $0.035 per share cash dividend, during the second quarter of 2011 the Company repurchased $1.4 million of its common stock.

During the third quarter of 2011, revenues decreased 6.2% to $64.2 million from $68.5 million in the second quarter of 2011. This decrease resulted primarily from lower customer demand in most of the Company’s geographies and end markets due to overall weakness in the global economy. The third quarter 2011 book-to-bill ratio was below one. Third quarter 2011 gross margin decreased to 55.5% as compared to 58.3 % in the second quarter of 2011 primarily due to a larger proportion of lower margin consumer products combined with lower factory capacity utilization. Net income for the third quarter of 2011 was $9.2 million, or $0.15 per basic and diluted share, as compared to net income of $10.7 million, or $0.17 per basic and diluted share, for the second quarter of 2011, and net income of $14.9 million, or $0.24 per basic and diluted share, for the third quarter of 2010. During the third quarter of 2011, cash flows from operations were $19.1 million. During the third quarter of 2011, cash and short-term investments increased by $10.7 million to $143.0 million. In addition to increasing its quarterly cash dividend to $0.04 per share, during the third quarter of 2011 the Company repurchased $5.3 million of its common stock.

During the fourth quarter of 2011, revenues decreased 8.5% to $58.8 million from $64.2 million in the third quarter of 2011. This sequential decrease resulted primarily from lower customer demand across the Company’s geographies and end markets due to overall weakness in the global economy. The fourth quarter 2011 book-to-bill ratio was below one. Fourth quarter 2011 gross margin decreased to 50.5% as compared to 55.5 % in the third quarter of 2011 primarily due to a larger proportion of lower margin consumer products combined with lower factory capacity utilization. Net income for the fourth quarter of 2011 was $5.0 million, or $0.08 per basic and diluted share, as compared to net income of $9.2 million, or $0.15 per basic and diluted share, for the third quarter of 2011, and net income of $13.7 million, or $0.22 per basic and diluted share, for the fourth quarter of 2010. During the fourth quarter of 2011, cash flows from operations were $3.4 million. During the fourth quarter of 2011, cash and short-term investments decreased by $5.1 million to $138.0 million primarily due to repurchases of common stock. In addition to maintaining its quarterly $0.04 per share cash dividend, during the fourth quarter of 2011 the Company repurchased $7.8 million of its common stock.

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

For the year ended December 31, 2011, revenues decreased 12.9% to $259.0 from $297.4 million for the year ended December 31, 2010. This decrease was due to lower customer demand across most of the Company’s geographies and end markets, which resulted from global macro-economic conditions. Gross margin for 2011 decreased to 55.3% from 56.8% for 2010. This decrease was primarily due to a shift in mix to lower margin consumer-oriented products and lower factory utilization. Operating margin for 2011 was 18.1% which decreased from the record level of 25.2% in 2010. Net income was $34.0 million, or $0.55 per diluted share, compared with $50.7 million, or $0.81 per diluted share, in 2010. At December 31, 2011, cash, cash equivalents and short term investments were $137.9 million, an increase of $28.6 million from $109.2 million in 2010. The Company generated $50.1 million in cash flows from operations in 2011. In addition, in 2011 the Company repurchased $20.3 million of its common stock, and paid $9.4 million in dividends to shareholders.

During the first quarter of 2012, revenues increased 4.0% to $61.2 million from $58.8 million in the fourth quarter of 2011. This increase in revenue from the fourth quarter of 2011 was principally driven by overall demand from customers in most geographies and end markets. As compared to the same period last year, first quarter 2012 revenues decreased by $6.3 million. First quarter 2012 book-to-bill ratio was one, and showed improvement compared to the fourth quarter of 2011. First quarter 2012 gross margin was 54.3%, as compared to 50.5% in the fourth quarter of 2011. With the higher revenues compared to the fourth quarter of 2011, first quarter 2012 gross margin increased from the previous quarter primarily due to a higher percentage of distribution sales which carry higher margins, an increase in factory utilization, and lower inventory reserve charges. Net income for the first quarter of 2012 was $5.4 million, or $0.09 per basic and diluted share, as compared to net income of $5.0 million, or $0.08 per basic and diluted share, for the fourth quarter of 2011, and net income of $9.1 million, or $0.15 per basic share and $0.14 per diluted share, for the first quarter of 2011. During the first quarter of 2012, cash flows from operations were $8.7 million. During the first quarter of 2012, cash and short-term investments decreased by $0.6 million to $137.3 million. In addition to maintaining its quarterly $0.04 per share cash dividend, during the first quarter of 2012 the Company repurchased $6.0 million of its common stock.

Revenues of $63.7 million in the second quarter of 2012 increased 4.2% from $61.2 million in the first quarter of 2012. The increase primarily resulted from stronger sales of the Company’s timing and communications products, including contributions from the acquisition of PhaseLink. This growth was in part offset by weaker than expected demand from the Company’s sell-through distributors primarily in Europe. The book-to-bill ratio in the second quarter of 2012 was above one. Second quarter 2012 gross margin increased to 55.2% as compared to 54.3% in the first quarter of 2012. The increase was principally due to a richer mix of higher-margin products and improved factory utilization. Net income attributable to Micrel, Incorporated shareholders for the second quarter of 2012 was $6.0 million, or $0.10 per basic and diluted share, as compared to net income of $5.4 million, or $0.09 per basic and diluted share, for the first quarter of 2012, and net income of $10.7 million, or $0.17 per basic and diluted share, for the second quarter of 2011. During the second quarter of 2012, cash flows from operations were $11.5 million. Cash and short term investments were $119.4 million at June 30, 2012 as compared to $137.3 million at March 31, 2012 which reflects a cash payment of $16.4 million (net of acquired cash) made on April 2, 2012 related to the PhaseLink acquisition. During the second quarter of 2012, the Company repurchased $8.7 million of its common stock. In addition, the Company maintained and paid its quarterly $0.04 per share cash dividend totaling approximately $2.5 million in the second quarter of 2012.

Third quarter 2012 revenues decreased 1.2% to $62.9 million from $63.7 million in the second quarter of 2012. The decrease was principally due to lower sales of the Company's timing and communications products partially offset by gathering momentum in LAN solutions product sales. The third quarter 2012 book-to-bill ratio was above one. Third quarter 2012 gross margin decreased to 52.9% as compared to 55.2 % in the second quarter of 2012 primarily due to a mix shift to lower margin consumer-related products and lower factory capacity utilization. The lower factory utilization was due to reducing production in an attempt to minimize building inventory. Net income attributable to the Company' shareholders for the third quarter of 2012 was $4.7 million, or $0.8 per basic and diluted share, as compared to net income of $6.0 million, or $0.10 per basic and diluted share, for the second quarter of 2012, and net income of $9.2 million, or $0.15 per basic and diluted share, for the third quarter of 2011. During the third quarter of 2012, cash flows from operations were $6.4 million. Cash and short term investments were $108.7 million at September 30, 2012 as compared to $119.4 million at June 30, 2012. During the third quarter of 2012, the Company spent $13.7 million repurchasing its common stock. Additionally, the Company maintained its quarterly $0.04 per share cash dividend for a total of approximately $2.2 million.

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

The Company derives a substantial portion of its net revenues from standard products. For both the three and nine months ended September 30, 2012, the Company’s standard products sales accounted for 97% and 96%, respectively, of the Company’s net revenues. The Company believes that a substantial portion of its net revenues in the future will depend upon standard products sales, although such sales as a proportion of net revenues may vary as the Company adjusts product output levels to correspond with varying economic conditions and demand levels in the markets which it serves. The standard products business is characterized by short-term orders and shipment schedules, and customer orders typically can be canceled or rescheduled without significant penalty to the customer. Since most standard products backlog is cancelable without significant penalty, the Company typically plans its production and inventory levels based on forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. In addition, the Company is limited in its ability to reduce costs quickly in response to any revenue shortfalls.

The Company may experience significant fluctuations in its results of operations. Factors that affect the Company’s results of operations include the volume and timing of orders received, changes in the mix of products sold, the utilization level of manufacturing capacity, competitive pricing pressures and the successful development and customer acceptance of new products. These and other factors are described in further detail later in this discussion and in Part II Item 1A of this Quarterly Report on Form 10-Q titled “Risk Factors.” As a result of the foregoing or other factors, there can be no assurance that the Company will not experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect the Company’s business, financial condition, results of operations and cash flows.

Critical Accounting Policies and Estimates

The financial statements included in this Quarterly Report on Form 10-Q and discussed within this Management’s Discussion and Analysis of Financial Condition and Results of Operations have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company considers certain accounting policies related to revenue recognition and receivables, inventory valuation, share-based compensation, income taxes, and litigation to be critical to the fair presentation of its financial statements. For a detailed discussion of the Company’s significant accounting policies, see Note 1 to Condensed Consolidated Financial Statements in this report and Note 1 of Notes to Consolidated Financial Statements in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Revenue Recognition and Receivables. Micrel generates revenue by selling products to OEMs, distributors and stocking representatives. Stocking representative firms may buy and stock the Company’s products for resale or may act as the Company’s sales representative in arranging for direct sales from the Company to an OEM customer. The Company’s policy is to recognize revenue from sales to customers when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable and collection of the resulting receivable is reasonably assured.

The Company allows certain distributors located in North America and Europe, and in certain countries in Asia, significant return rights, price protection and pricing adjustments subsequent to the initial product shipment. As these returns and price concessions have historically been significant, and future returns and price concessions are difficult to reliably estimate, the Company defers recognition of revenue and related cost of sales (in the balance sheet line item “deferred income on shipments to distributors”) derived from sales to these distributors until they have resold the Company’s products to their customers. Although revenue and related cost of sales are not recognized, the Company records an accounts receivable and relieves inventory at the time of initial product shipment. As standard terms are FOB shipping point, payment terms are enforced from shipment date and legal title and risk of inventory loss passes to the distributor upon shipment.

In addition, where revenue is deferred upon shipment and recognized on a sell-through basis, the Company may offer price adjustments to its distributors to allow the distributor to price the Company’s products competitively for specific resale opportunities. The Company estimates and records an allowance for distributor price adjustments for which the specific resale transaction has been completed, but the price adjustment claim has not yet been received and recorded by the Company.

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

Sales to OEM customers and stocking representatives are recognized based upon the shipment terms of the sale transaction when all other revenue recognition criteria have been met. The Company does not grant return rights, price protection or pricing adjustments to OEM customers. The Company offers limited contractual stock rotation rights to stocking representatives. In addition, the Company is not contractually obligated to offer, but may infrequently grant, price adjustments or price protection to certain stocking representatives on an exception basis. At the time of shipment to OEMs and stocking representatives, an allowance for returns is established based upon historical return rates, and an allowance for price adjustments is established based on an estimate of price adjustments to be granted. Actual future returns and price adjustments could be different than the allowance established.

The Company also maintains an allowance for doubtful accounts for estimated uncollectible accounts receivable. This estimate is based on an analysis of specific customer creditworthiness and historical bad debts experience. Actual future uncollectible amounts could exceed the doubtful accounts allowance established.

Inventory Valuation. Inventories are stated at the lower of cost (first-in, first-out method) or market. The Company records adjustments to write down the cost of obsolete and excess inventory to the estimated market value based on historical and forecasted demand for its products. If actual future demand for the Company’s products is less than currently forecasted, additional inventory adjustments may be required. Once an inventory write-down provision is established, it is maintained until the product to which it relates is sold or otherwise disposed of.

Share-Based Compensation. 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, the Company estimates expected forfeiture rates of stock grants and share-based compensation expense is 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 September 30, 2012, 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 except for net operating losses generated in China. 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.

The Company uses a two-step approach to recognize and measure uncertain tax positions. 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. During recent years, the Company has resolved litigation involving intellectual property claims. 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 in which such determination is made. The Company regularly evaluates current information available to determine whether such accruals should be made.

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

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 September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Net revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenues	47.1		44.5		45.9		43.3
Gross profit	52.9		55.5		54.1		56.7
Operating expenses:
Research and development	24.4		19.7		22.7		18.7
Selling, general and administrative	18.8		17.1		18.7		17.4
Total operating expenses	43.2		36.8		41.4		36.1
Income from operations	9.7		18.7		12.7		20.6
Other income (expense):
Interest income	0.3		0.4		0.3		0.4
Interest expense	—		—		—		—
Other income (expense), net	—		—		(0.1	)	—
Total other income, net	0.3		0.4		0.2		0.4
Income before income taxes and noncontrolling interest	10.0		19.1		12.9		21.0
Provision for income taxes	2.5		4.8		4.3		6.5
Net income	7.5		14.3		8.6		14.5
Less: net income attributable to noncontrolling interest	—		—		—		—
Net income attributable to Micrel, Incorporated shareholders	7.5	%	14.3	%	8.6	%	14.5	%

Net Revenues. For the three months ended September 30, 2012, net revenues decreased 2% to $62.9 million from $64.2 million for the same period in the prior year. For the nine months ended September 30, 2012, net revenues decreased 6% to $187.8 million from $200.2 million for the same period in the prior year. The decreases were principally due to decreased revenues from the Company’s standard products. For the three months ended September 30, 2012, standard products revenues decreased 2% to $60.8 million from $61.9 million for the same period in the prior year primarily as a result of lower demand for the Company’s products serving the industrial and communications markets which was partially offset by higher demand in computer and wireless handsets markets as well as added revenues from the acquisition of PhaseLink in the second quarter of 2012. For the nine months ended September 30, 2012, standard products revenues decreased 6% to $180.8 million from $193.3 million for the same period in the prior year. The decrease was principally due to reduced product demand across the Company’s geographies and end markets resulting from continued overall weakness in the global economy, which was partially offset by increased shipment of products in wireless handsets market during the first quarter of 2012 and added revenues from the PhaseLink acquisition.

Customer demand for semiconductors can change quickly and unexpectedly. Historically, the Company’s revenue levels have been highly dependent on the amount of new orders for products to be delivered to the customer within the same quarter. Within the semiconductor industry, orders that are booked and shipped within the same quarter are called “turns fill” orders. When the turns fill level exceeds approximately 35% of quarterly revenues, it can be very difficult to predict near term revenues and income. The resulting lack of visibility into demand also makes it difficult to match product build with future demand as the Company’s lead times to build its products may be substantially longer than order lead times.

As noted in Part II, Item 1A “Risk Factors” and above in the overview section of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” 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. 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.

24

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

International sales represented 75% and 73% of net revenues for the three and nine months ended September 30, 2012, respectively, as compared to 69% and 71% of net revenues for the three and nine months ended September 30, 2011, respectively. Sales to customers in Asia represented 63% and 60% of net revenues for both the three and nine months ended September 30, 2012, respectively, as compared to 55% and 57% of net revenues for the three and nine months ended September 30, 2011, respectively. The trend for the Company’s customers to move their electronics manufacturing to Asian countries has resulted in increased pricing pressure for the Company and other semiconductor manufacturers as 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 U.S.-based companies to differentiate themselves in any meaningful manner other than by lowering prices. The increased concentration of electronics procurement and manufacturing in the Asia Pacific region has led, and may continue to lead, to continued price pressure for the Company’s products in the future.

Gross Profit. Gross profit is affected by a variety of factors including the volume of product sales, product mix, manufacturing capacity utilization, product yields and average selling prices. The Company’s gross margin decreased to 52.9% for the three months ended September 30, 2012 from 55.5% for the comparable period in 2011. For the nine months ended September 30, 2012, the Company’s gross margin decreased to 54.1% from 56.7% for the comparable period in 2011. These decreases were primarily due to decreased average selling prices in general, lower factory capacity utilization and increased proportion of lower margin products shipped to the wireless handsets market as compared to the same period in 2011.

Research and Development Expenses. Research and development expenses as a percentage of net revenues represented 24.4% for the three months ended September 30, 2012 as compared to 19.7% for the three months ended September 30, 2011. On a dollar basis, research and development expenses increased $2.7 million, or 21.4%, to $15.3 million for the three months ended September 30, 2012 from $12.6 million for the comparable period in 2011. For the nine months ended September 30, 2012 and 2011, research and development expenses as a percentage of net revenues represented 22.7% and 18.7%, respectively. On a dollar basis, research and development expenses increased $5.2 million, or 13.9%, to $42.6 million for the nine months ended September 30, 2012 from $37.4 million for the comparable period in 2011.

These increases were primarily due to an impairment of $1.0 million recorded in the third quarter of 2012 for a technology which was replaced by more advanced technologies, increased headcount, consulting services and mask expenses for research and development activities as well as added headcount from the acquisition of PhaseLink. The Company believes that the development and introduction of new products is critical to its future success and expects to continue its investment in research and development activities in the future.

Selling, General and Administrative Expenses. As a percentage of net revenues, selling, general and administrative expenses represented 18.8% for the three months ended September 30, 2012 and 17.1% for the three months ended September, 2011. On a dollar basis, selling, general and administrative expenses increased $862,000, or 7.8%, to $11.8 million for the three months ended September 30, 2012 from $11.0 million for the comparable period in 2011. The increase primarily resulted from added headcount expenses from the acquisition of PhaseLink and related amortization expenses of acquired intangible assets, and increased spending on product marketing activities, which were partially offset by decreased profit sharing accruals.

For the nine months ended September 30, 2012 and 2011, selling, general and administrative expenses as a percentage of net revenues represented 18.7% and 17.4%, respectively. On a dollar basis, selling, general and administrative expenses increased $438,000, or 1.3%, to $35.2 million for the nine months ended September 30, 2012 from $34.7million for the comparable period in 2011. The slight increase was primarily due to increased expenses for product marketing activities, a legal settlement accrual, and added expenses from the PhaseLink acquisition, including the headcount expenses, related acquisition costs and amortization expenses of acquired intangible assets, which were offset in part by decreased profit sharing accruals and a reduction of selling expenses.

Share-Based Compensation. The Company’s results of operations for the three month periods ended September 30, 2012 and 2011 included $1.6 million and $1.5 million, respectively, of non-cash expense related to the fair value of share-based compensation awards. For the nine month periods ended September 30, 2012 and 2011, the Company’s results of operations included $5.3 million and $4.2 million, respectively, of share-based compensation expense. Share-based compensation expense is included in the statement of operations in cost of revenues, research and development expenses and selling, general and administrative expenses (see Note 4 of Notes to Condensed Consolidated Financial Statements).

Other Income (Expense). Other income, net reflects interest income from investments in short-term and long-term investment securities and money market funds and other non-operating income or expense related primarily to foreign currency translation gain or loss, offset by interest expense incurred.

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

Provision for Income Taxes. The income tax provision for the three and nine months ended September 30, 2012, as a percentage of income before taxes, was 25.4% and 33.4%, respectively. The income tax provision for the three and nine months ended September 30, 2011, as a percentage of income before taxes, was 25.1% and 30.9%, respectively. The tax provision for the nine months ended September 30, 2012 included an out-of-period charge of $491,000 in March 2012 related to the write-offs of deferred tax assets associated with the net operating losses of two previously acquired companies. This charge was immaterial for the nine months ended September 30, 2012 and immaterial to any applicable prior periods that could have been affected. For the nine months ended September 30, 2012, the Company recognized $176,000 of previously unrecognized tax benefits due to settlements with the tax authorities. In addition, for the three and nine months ended September 30, 2012, the Company also recognized $661,000 of previously unrecognized tax benefits due to the lapse of statute of limitations. The tax provision for this period excluded the benefits from the federal research and development credit which expired on December 31, 2011. The income tax provision for these interim periods differs from taxes computed at the federal statutory rate primarily due to the tax effects of share-based compensation, state income taxes, federal and state research and development credits and federal qualified production activity deductions. On November 6, 2012, California enacted a law that requires taxpayers to use a single sales factor when determining taxable income.  The law is effective on January 1, 2013.  The Company is currently evaluating the impact, if any, on the realizability of its deferred tax assets as a result of the new tax law.

Liquidity and Capital Resources

Since inception, the Company’s principal sources of funding have been its cash from operations, bank borrowings and sales of common stock. Principal sources of liquidity at September 30, 2012 consisted of cash, cash equivalents and short-term investments of $108.7 million and a $5.0 million revolving line of credit from a commercial bank.

The Company generated $26.6 million in cash from operating activities during the nine months ended September 30, 2012. Significant cash flows included cash provided by net income of $16.1 million plus additions for non-cash activities of $14.1 million (consisting primarily of $9.3 million in depreciation and amortization, $5.2 million in share-based compensation expense and related tax effects, and $1.0 million in impairment of technology, partially offset by a $1.4 million increase in deferred income taxes) combined with a $4.6 million decrease in income taxes receivable and a $1.3 million increase in accounts payable which were offset in part by a $6.5 million increase in accounts receivable, a $1.4 million increase in inventory and a $1.2 million decrease in deferred income on shipments to distributors.

During the nine months ended September 30, 2011, the Company generated $46.6 million in cash from operating activities. Significant cash flows included cash provided by net income of $29.0 million plus additions for non-cash activities of $14.2 million (consisting primarily of $9.2 million in depreciation and amortization, $3.7 million in share-based compensation expense and related tax effects and $1.3 million increase in deferred tax assets) combined with a $5.7 million decrease in income taxes receivable and a $4.7 million decrease in accounts receivable, which were offset in part by a $3.3 million decrease in accounts payable, a $2.2 million decrease in deferred income and a $1.3 million decrease in other current liabilities combined with a $1.0 million increase in inventory.

The Company used $22.3 million of cash in investing activities during the nine months ended September 30, 2012, comprised of $41.4 million in purchases of investments, $16.4 million in the acquisition of PhaseLink and $6.2 million in purchases of property, plant and equipment, which were offset by $41.8 million in proceeds from the sales and maturities of investments.

During the nine months ended September 30, 2011, the Company used $27.9 million of cash in investing activities that comprised primarily of $54.4 million in purchases of investments and $6.3 million of purchases of property, plant and equipment, which was partially offset by $32.8 million in proceeds from the sales of investments.

The Company used $33.4 million of cash in financing activities during the nine months ended September 30, 2012 primarily for the repurchases of $28.4 million of its common stock and $7.1 million for the payment of cash dividends, which were partially offset by $2.7 million in proceeds from employee stock transactions.

During the nine months ended September 30, 2011, the Company used $10.2 million of cash in financing activities primarily for the repurchase of $12.5 million of its common stock, $6.8 million for the payment of cash dividends and $2.9 million in repayments of long-term debt, which were partially offset by $11.6 million in proceeds from employee stock transactions.

The Company currently intends to spend approximately $4 million to $8 million to purchase capital equipment and make facility improvements during the next twelve months primarily for manufacturing equipment and additional research and development related software and equipment.

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

On October 25, 2012, the Company’s Board of Directors declared a cash dividend of $0.0425 per outstanding share of common stock payable on November 23, 2012 to shareholders of record at the close of business on November 9, 2012. This dividend will be recorded in the fourth quarter of 2012 and is expected to be approximately $2.5 million.

Under the Company’s stock repurchase program, as of September 30, 2012, the Company was authorized to repurchase an additional $25.3 million of its common stock.

The Company believes that its cash from operations, existing cash balances, short-term investments and its credit facility will be sufficient to meet its cash requirements for at least the next twelve 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 September 30, 2012, 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	$	1,628	$	838	$	752	$	38	$	—
Open purchase orders	26,592		26,592		—		—		—
Total	$	28,220	$	27,430	$	752	$	38	$	—

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 an unsecured credit facility with Bank of the West. The credit facility includes a $5.0 million line of credit available for general working capital needs, a $5.0 million letter of credit sub-facility and a $2.0 million foreign exchange sub-facility. As of September 30, 2012, the Company had no borrowings under the line of credit.

As of September 30, 2012, the Company had $8.1 million of unrecognized tax benefits. Included in the $8.1 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 $6.0 million liability was included in long-term income taxes payable. The Company does not anticipate a significant change to the $6.0 million long-term uncertain income tax positions within the next 12 months.

Off-Balance Sheet Arrangements

As of September 30, 2012, the Company had no off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At September 30, 2012, the Company held $7.7 million in principal of senior auction rate notes secured by student loans. Auctions for these auction rate notes have failed as of September 30, 2012. 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 may have limited or no ability to liquidate its investment and fully recover the carrying value of its investment in the near term. As of September 30, 2012, the Company has recorded a $0.5 million net of tax ($0.8 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. 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, or until maturity if neither of those occurs.

At September 30, 2012, the Company had no fixed-rate long-term debt subject to interest rate risk. There was no interest rate swap contract outstanding at September 30, 2012.

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 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 September 30, 2012.

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.

Our management, including our principal executive officer and principal financial officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information included in Note 14 of Notes to Condensed Consolidated Financial Statements under the caption “Litigation and Commitments and Contingencies” in Item 1 of Part I is incorporated herein by reference.

ITEM 1A. RISK FACTORS

Factors That May Affect Operating Results

If the 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 the 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

Weak global economic conditions could have a material adverse effect on the Company’s business, results of operations, and financial condition. While the global economy has partially recovered from the economic downturn that began in 2007, continued weakness in the macroeconomic climate has constrained demand for the Company’s semiconductors and there is no guarantee that these conditions will improve in a timely manner or at all or that these conditions will not further decline again in the future. The semiconductor industry has traditionally been highly cyclical and has often experienced significant downturns in connection with, or in anticipation of, declines in general economic conditions. The Company cannot accurately predict the timing, severity or duration of such downturns. A global recession may result in a decrease in orders for the Company’s products, which may materially adversely affect the Company’s revenues, results of operations and financial condition. In addition to reduction in sales, the Company’s profitability may decrease during economic downturns because the Company may not be able to reduce costs at the same rate as its sales decline.

Demand for semiconductor components is increasingly dependent upon the rate of growth of the global economy. Many factors could adversely affect regional or global economic growth. Some of the factors that could slow global economic growth include: volatility in global credit markets, price inflation or deflation for goods, services or materials, a slowdown in the rate of growth of regional economies such as Europe, China or the United States, a significant act of terrorism that 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 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 actions to reduce the Company’s cost structure to 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.

Disruption in financial markets may adversely affect the Company’s business in a number of ways. The unprecedented contraction and extreme disruption of the credit and financial markets in the United States, Europe, and Asia that began in 2007 led to, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuation of others. A similar tightening of credit in financial markets in the future may limit the ability of the Company’s customers and suppliers to obtain financing for capital purchases and operations. This could result in a decrease in or cancellation of orders for the Company’s products or reduced ability to finance operations to supply products to the Company. The Company cannot predict the likely duration and severity of disruptions in financial markets and adverse economic conditions in the U.S. and other countries. Further, fluctuations in worldwide economic conditions make it extremely difficult for the Company to forecast future sales levels based on historical information and trends. Visibility into customer demand is limited due to short order lead times. Portions of the Company’s expenses are fixed and other expenses are tied to expected levels of sales activities. To the extent the Company does not achieve its anticipated levels of sales, its gross profit and net income could be adversely affected.

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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, natural disasters, foreign government instability, social conditions such as civil unrest, economic conditions including high levels of inflation or deflation, 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.

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 in response to slight increases in demand, leading to a sudden oversupply situation and a subsequent reduction in order rates and revenues as customers adjust their inventories to account for shorter lead times. 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; and 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. Customers 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, 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 over the past several years to maintain reliable service levels. If actual customer demand for the Company’s products is different from the Company’s estimated demand, delivery schedules may be impacted, 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 demands of end customers. However, like many of its competitors, the Company recognizes revenue on sales of product to stocking representatives on a sell-in basis, rather than a sell-through basis, so fluctuations in inventory accumulation by stocking representatives can exacerbate fluctuations in revenue from sales to such stocking representatives. Also, should the relationship with a distributor or stocking representative be terminated, the level of product returns could be higher than the returns allowance established, which could negatively affect the Company’s revenues and results of operations.

Uncertain economic growth and customer demand in the semiconductor industry and increased concentration of electronics procurement and manufacturing may lead to further price erosion and increased advertising costs. If price erosion continues to occur, 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 as a whole. 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.

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Many semiconductor companies, including the Company, face risks associated with a dependence upon third parties that manufacture, assemble, package or supply raw materials for 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, natural disasters or other events which may occur in the countries in which the subcontractors or suppliers 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. Furthermore, a major disruption to any part of the Company’s customers’ supply chains could decrease their output and subsequently result in lower demand for the Company’s products.

The Company generally does not have long-term supply contracts with its third-party vendors. Therefore, most of its vendors are not obligated to perform services or supply products to the Company for any specific period, in any specific quantities, or at any specific price, except as may be provided in a particular accepted purchase order or guarantee. Additionally, the Company’s wafer and product requirements typically represent a relatively small portion of the total production of the suppliers, third-party foundries and outside assembly, testing and packaging contractors. As a result, the Company is subject to the risk that a third-party supplier will provide delivery or capacity priority to other larger customers to the Company’s detriment, resulting in an inadequate supply to meet customer demand or higher costs to obtain the necessary product supply.

The Company outsources some of its wafer fabrication, most of its test and all of its assembly requirements to third-party vendors. When demand for semiconductors improves, availability of these outsourced services typically becomes tight, resulting in longer than normal lead times and delinquent shipments to customers. The degree to which Micrel may have difficulty obtaining these services could have a negative impact on the Company’s revenues, bookings and backlog. If these lead times are extended, the resulting loss of near-term visibility for our customers could result in their placing higher order levels than their actual requirements which may result in higher levels of order cancellations in the future. There can be no assurance that the Company will be able to accurately forecast demand and moderate its build schedules to accommodate the possibility of an increase in order cancellations.

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, the Company 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 businesses 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 or designs; cease the manufacturing, 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 could adversely affect the Company’s business, financial condition, results of operations or cash flows. In addition, the Company relies on third parties for certain technology that is integrated into some of its products. If the Company is unable to continue to use or license third-party technologies in its products on acceptable terms, or the technology fails to operate, the Company may not be able to secure alternative technologies in a timely manner and its business would be harmed.

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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. The loss of any key employees or the inability to attract or retain qualified personnel, including management, engineers and sales and marketing personnel, could delay the development and introduction of the Company’s products and harm its ability to sell its products. The Company believes that its future success is dependent on the contributions of its senior management, including its President and Chief Executive Officer, certain other executive officers and senior engineering personnel. The Company does not have long-term employment contracts with these or any other key personnel, and their knowledge of the Company’s business and industry would be difficult to replace.

Companies in the semiconductor industry are subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in its manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines, the suspension of production, alteration of manufacturing processes or a cessation of operations. In addition, these regulations could restrict the Company’s ability to expand its facilities at their present locations or construct or operate a new wafer fabrication facility or could require the Company to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges. The Company’s failure to appropriately control the use of, disposal or storage of, or adequately restrict the discharge of, hazardous substances could subject it to future liabilities and could have a material adverse effect on its business.

Company-Specific Risks

In addition to the risks that affect multinational semiconductor companies listed above, there are additional risks which are more specific to the Company such as:

An important part of the Company’s strategy is to continue to focus on the market for high-speed communications ICs. 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 wireless handset (cellular telephone) 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 wireless handset market. Due to the highly competitive and fast changing environment in which the Company’s wireless handset customers operate, demand for the product the Company sells into this end market can change rapidly and unexpectedly. If the Company’s wireless handset customers’ 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 could decline sharply, which could adversely affect the Company’s revenues and results of operations.

The Company’s gross margin, operating margin and net income are highly dependent on the level of revenue, average selling prices and capacity utilization that the Company experiences. A decline in average selling prices (“ASPs”) could adversely affect the Company’s revenues, gross margins and results of operations unless the Company is able to sell more units, reduce its costs, introduce new products with higher ASPs or some combination thereof.

Semiconductor manufacturing is a capital-intensive business resulting in high fixed costs. If the Company is unable to utilize its installed wafer fabrication or test capacity at a high level, the costs associated with these facilities and equipment would not be fully absorbed, resulting in higher average unit costs and lower profit margins.

The Company has invested in certain auction rate securities that may not be accessible for more than 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 September 30, 2012, the Company held $7.7 million in principal of auction rate notes secured by student loans. As of September 30, 2012, all of these auction rate securities have failed to auction successfully due to sell orders exceeding buy orders. The Company has recorded a $0.5 million net of tax ($0.8 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 5 of Notes to Condensed Consolidated Financial Statements.

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The Company faces various risks associated with the trend toward increased shareholder activism. In 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. Although this dispute was resolved, the Company could become engaged in another proxy contest in the future. Another proxy contest would require significant additional management time and increased operating expenses, which could adversely affect the Company’s profitability and cash flows.

The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. To the extent that the Company becomes involved in such intellectual property litigation, 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 or designs, 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 complexity of the Company’s products may lead to errors or defects, which could subject the Company to significant costs or damages and adversely affect market acceptance of its products. Although the Company’s customers and suppliers rigorously test its products, these products may contain undetected errors, weaknesses or defects. If any of the Company’s products contain production defects, reliability, quality or compatibility problems that are significant, the Company’s reputation may be damaged and customers may be reluctant to continue to buy its products. This could adversely affect the Company’s ability to retain and attract new customers. In addition, these defects could interrupt or delay sales of affected products, which could adversely affect the Company’s results of operations.

If defects are discovered after commencement of commercial production, the Company may be required to incur significant costs to resolve the problems. This could result in significant additional development costs and the diversion of technical and other resources from other development efforts. The Company could also incur significant costs to repair or replace defective products or may agree to be liable for certain damages incurred. These costs or damages could have a material adverse effect on the Company’s financial condition and results of operations.

The Company will continue to expend substantial resources developing new products, applications or markets and may never achieve the sales volume that it anticipates for these products, which may limit the Company’s future growth and harm its results of operations. The Company’s future success will depend in part upon the success of new products. The Company has in the past, and will likely in the future, expend substantial resources in developing new and additional products for new applications and markets. The Company may experience unforeseen difficulties and delays in developing these products and experience defects upon volume production and broad deployment. The markets the Company enters will likely be highly competitive and competitors may have substantially more experience in these markets. The Company’s success will depend on the growth of the markets it enters, the competitiveness of its products and its ability to increase market share in these markets. If the Company enters markets that do not achieve or sustain the growth it anticipates, or if the Company’s products are not competitive, it may not achieve volume sales, which may limit the Company’s future growth and would harm its results of operations.

If the Company is unable to convert a significant portion of its design wins into revenue, the Company’s business, financial condition and results of operations could be materially and adversely impacted. The Company has secured a number of design wins for new and existing products. Such design wins are necessary for revenue growth. However, many of the Company’s design wins may never generate revenues if end-customer projects are unsuccessful in the marketplace or the end-customer terminates the project, which may occur for a variety of reasons. Mergers and consolidations among customers may lead to termination of certain projects before the associated design win generates revenue. If design wins do generate revenue, the time lag between the design win and meaningful revenue is typically from six months to greater than eighteen months. If the Company fails to convert a significant portion of its design wins into substantial revenue, the Company’s business, financial condition and results of operations could be materially and adversely impacted.

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If the Company’s distributors or sales representatives stop selling or fail to successfully promote its products, the Company’s business, financial condition and results of operations could be adversely impacted. Micrel sells many of its products through sales representatives and distributors. The Company’s non-exclusive distributors and sales representatives may carry its competitors’ products, which could adversely impact or limit sales of the Company’s products. Additionally, they could reduce or discontinue sales of the Company’s products or may not devote the resources necessary to adequately sell the Company’s products. The Company’s agreements with distributors contain limited provisions for return of products, including stock rotations whereby distributors may return a percentage of their purchases based upon a percentage of their most recent three months of shipments. In addition, in certain circumstances upon termination of the distributor relationship, distributors may return some or all of their prior purchases. The loss of business from any of the Company’s significant distributors or the delay of significant orders from any of them could materially and adversely harm the Company’s business, financial conditions and results of operations.

In addition, the Company depends on the continued viability and financial resources of these distributors and sales representatives, some of which are small organizations with limited working capital. In turn, these distributors and sales representatives are subject to general economic and semiconductor industry conditions. If some or all of the Company’s distributors and sales representatives experience financial difficulties or otherwise become unable or unwilling to promote and sell the Company’s products or deliver the Company’s products in a timely manner, its business, financial condition and results of operations could be adversely impacted.

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 but may not be sufficient to fully mitigate the adverse impact from a disruption to the Company’s San Jose wafer fabrication activity arising from a natural disaster such as an earthquake.

The Company may be subject to disruptions or failures in information technology systems and network infrastructures that could have a material adverse effect on its business and financial condition. The Company relies on the efficient and uninterrupted operation of complex information technology systems and network infrastructures to operate its business. A disruption, infiltration or failure of the Company’s information technology systems as a result of software or hardware malfunctions, system implementations or upgrades, computer viruses, third-party security breaches, employee error, theft or misuse, malfeasance, power disruptions, natural disasters or accidents could cause breaches of data security, loss of intellectual property and critical data and the release and misappropriation of sensitive competitive information and partner, customer and employee personal data. Any of these events could harm the Company’s competitive position, result in a loss of customer confidence, cause the Company to incur significant costs to remedy any damages and ultimately materially adversely affect its business and financial condition.

While the Company has implemented a number of protective measures, including firewalls, antivirus, patches, data encryption, log monitors, routine back-ups with offsite retention of storage media, system audits, data partitioning, routine password modifications and disaster recovery procedures, such measures may not be adequate or implemented properly to prevent or fully address the adverse effect of such events. In addition, the Company’s third-party subcontractors, including its test and assembly houses and distributors, have access to certain portions of the Company’s and its customers’ and partners’ sensitive data. In the event that these subcontractors do not properly safeguard such data, security breaches and loss of data could result. Any such loss of data by its third-party subcontractors could have a material adverse effect on the Company’s business and financial condition.

The Company’s results of operations could vary as a result of the methods, estimations and judgments used in applying its accounting policies. The methods, estimates and judgments used by the Company in applying its accounting policies have a significant impact on its results of operations. Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties, assumptions and changes in rulemaking by the regulatory bodies, and factors may arise over time that lead the Company to change its methods, estimates, and judgments. Changes in those methods, estimates and judgments could significantly impact the Company’s results of operations.

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Changes in tax laws could adversely affect the Company’s results of operations. The Company is subject to income taxes in the United States and in various foreign jurisdictions. Significant judgment is required in determining the Company’s worldwide tax liabilities. The Company believes that it complies with applicable tax law. However, if the governing tax authorities have a different interpretation of the applicable law or if there is a change in tax law, the Company’s financial condition and results of operations may be adversely affected.

The integration of PhaseLink into the Company’s business and potential future acquisitions that the Company may pursue involve a number of risks. If the Company is unable to address and resolve these risks successfully, such integrations or acquisitions could disrupt its business.On April 2, 2012, the Company acquired PhaseLink and is in the process of integrating its business with the Company’s business. In addition, the Company may in the future acquire other businesses, products or technologies to expand its product offerings and capabilities, customer base and business. Any of these transactions could be material to the Company’s financial condition and results of operations. The anticipated benefits of these acquisitions may never materialize. In addition, the process of integrating acquired businesses, products or technologies may create unforeseen operating difficulties and expenditures. Some of the areas where the Company may face acquisition-related risks include:

• diversion of management time and potential business disruptions;

• expenses, distractions and potential claims resulting from acquisitions, whether or not they are completed;

• retaining and integrating employees from any businesses that the Company may acquire;

• issuance of dilutive equity securities or incurrence of debt;

• integrating various accounting, management, information, human resource and other systems to permit effective management;

• incurring possible write-offs, impairment charges, contingent liabilities, amortization expense or write-offs of goodwill;

• difficulties integrating and supporting acquired products or technologies;

• unexpected capital expenditure requirements;

• insufficient revenues to offset increased expenses associated with the acquisition;

• opportunity costs associated with committing capital to such acquisitions; and

• acquisition-related litigation.

Foreign acquisitions involve risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. The Company may not be able to address these risks successfully, or at all, without incurring significant costs, delays or other operating problems. The Company’s inability to address successfully such risks could disrupt its business, which could have a material adverse effect on the Company’s financial condition and results of operations.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In February 2010, the Company’s Board of Directors approved a $15.0 million share repurchase program for calendar year 2010. In September 2010, the Company’s Board of Directors approved an increase to the amount authorized for repurchase from $15.0 million to $30.0 million. In November 2010, the Company’s Board of Directors approved an extension of termination date of the authorized repurchase plan from December 31, 2010 to the date on which the total authorized aggregate amount was expended. In May 2011, the Company announced that its Board of Directors authorized the repurchase of an additional $30.0 million of the Company’s common stock which increased the total approval for repurchase to $60.0 million. On July 26, 2012, the Company's Board of Directors authorized the repurchase of an additional $30.0 million of the Company’s common stock, which increased the total approval for repurchase since February 2010 to $90.0 million. The total available for repurchase, as of September 30, 2012, was $25.3 million.

The authorization will stay in effect until the authorized aggregate amount is expended or the authorization is modified by the Board of Directors. The timing and amount of any repurchase of shares is determined by the Company’s management, based on its evaluation of market conditions and other factors. 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. Repurchases of the Company’s common stock during the first nine months of 2012 were as follows:

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of a  Publicly Announced Program	Maximum Dollar Value of Shares that May Yet be Purchased Under the Program (in thousands)
January 2012	215,776	$	10.62	215,776	$	21,402
February 2012	88,719	11.21		88,719	$	20,407
March 2012	260,650	10.41		260,650	$	17,694
Total Q1 2012	565,145	10.62		565,145
April 2012	284,800	9.87		284,800	$	14,882
May 2012	271,400	10.41		271,400	$	12,057
June 2012	316,100	9.67		316,100	$	9,000
Total Q2 2012	872,300	9.97		872,300
July 2012	324,316	9.42		324,316	$	5,943
August 2012	597,445	9.79		597,445	$	30,094
September 2012	460,935	10.48		460,935	$	25,263
Total Q3 2012	1,382,696	9.93		1,382,696
��            Total	2,820,141	$	10.08	2,820,141

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ITEM 6. EXHIBITS

Exhibit No.	Description
10.1	Change in Control and Severance Agreement, dated as of August 7, 2012, by and between Micrel, Incorporated and James G. Gandenberger (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012)
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
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document

*	This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Exchange Act.
**	Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act and are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise are not subject to liability under these sections.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			MICREL, INCORPORATED
			(Registrant)
Date:	November 8, 2012	By	/s/ Clyde R. Wallin
			Clyde R. Wallin
			Vice President, Finance and Chief Financial Officer
			(Authorized Officer andPrincipal Financial Officer)

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