Micrel (MCRL) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________

FORM 10-Q

________________________________

(Mark One)

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

For the quarterly period ended September 30, 2013

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  x    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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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	x
Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x

As of November 1, 2013 there were 57,023,617 shares of common stock, no par value, outstanding.

MICREL, INCORPORATED

INDEX TO

REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013

		Page
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets - as of September 30, 2013 and December 31, 2012	3
	Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2013 and 2012	4
	Condensed Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2013 and 2012	5
	Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2013 and 2012	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
Item 4.	Controls and Procedures	30
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 6.	Exhibits	39
	Signature	40

2

ITEM 1. FINANCIAL STATEMENTS

MICREL, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share amounts)

	September 30, 2013			December 31, 2012
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	28,524		$	27,281
Restricted cash	1,099			291
Short-term investments	69,708			76,349
Accounts receivable, less allowances: 2013, $755; 2012, $812	31,894			27,683
Inventories	45,102			42,256
Income taxes receivable	4,367			4,090
Prepaid expenses and other	1,602			2,355
Deferred income taxes	22,369			19,811
Total current assets	204,665			200,116
LONG-TERM INVESTMENTS	4,212			4,159
PROPERTY, PLANT AND EQUIPMENT, NET	58,764			60,692
GOODWILL	8,501			6,076
INTANGIBLE ASSETS, NET	11,795			7,906
DEFERRED INCOME TAXES	697			16
OTHER ASSETS	1,194			2,489
TOTAL	$	289,828		$	281,454
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	16,075		$	21,936
Deferred income on shipments to distributors	32,493			25,768
Other current liabilities	11,742			8,833
Total current liabilities	60,310			56,537
LONG-TERM INCOME TAXES PAYABLE	3,064			2,759
LONG-TERM DEFERRED INCOME TAXES	1,283			1,054
OTHER LONG-TERM LIABILITIES	55			—
Total liabilities	64,712			60,350
COMMITMENTS AND CONTINGENCIES (Note 13)
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: 2013 - 57,425,064 shares; 2012 - 58,153,665 shares	—			—
Accumulated other comprehensive loss	(312		)	(532		)
Retained earnings	225,428			221,636
Total shareholders’ equity	225,116			221,104
TOTAL	$	289,828		$	281,454

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,
	2013			2012			2013			2012
NET REVENUES	$	58,169		$	62,928		$	177,073		$	187,778
COST OF REVENUES (1)	28,698			29,661			85,440			86,201
GROSS PROFIT	29,471			33,267			91,633			101,577
OPERATING EXPENSES:
Research and development (1)	14,055			15,341			41,327			42,585
Selling, general and administrative (1)	11,184			11,847			34,478			35,186
Total operating expenses	25,239			27,188			75,805			77,771
INCOME FROM OPERATIONS	4,232			6,079			15,828			23,806
OTHER INCOME (EXPENSE):
Interest income	121			166			373			554
Interest expense	—			47			—			—
Other income (expense), net	(87		)	2			(230		)	(121		)
Total other income, net	34			215			143			433
INCOME BEFORE INCOME TAXES AND NONCONTROLLING INTEREST	4,266			6,294			15,971			24,239
PROVISION FOR INCOME TAXES	262			1,402			1,687			7,409
NET INCOME	4,004			4,892			14,284			16,830
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST	—			(9		)	—			(13		)
NET INCOME ATTRIBUTABLE TO MICREL, INCORPORATED SHAREHOLDERS	$	4,004		$	4,883		$	14,284		$	16,817
NET INCOME PER SHARE ATTRIBUTABLE TO MICREL, INCORPORATED SHAREHOLDERS:
Basic	$	0.07		$	0.08		$	0.25		$	0.28
Diluted	$	0.07		$	0.08		$	0.24		$	0.28
CASH DIVIDENDS DECLARED PER SHARE	$	0.0500		$	0.0400		$	0.0925		$	0.1200
WEIGHTED AVERAGE SHARES USED IN COMPUTING PER SHARE AMOUNTS:
Basic	57,752			59,242			58,107			60,096
Diluted	58,440			59,889			58,826			60,774

(1) Share-based compensation expense included in:

Cost of revenues	$	270	$	274	$	784	$	840
Research and development	704		646		2,008		2,203
Selling, general and administrative	789		719		2,284		2,287

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,
	2013		2012			2013		2012
NET INCOME	$	4,004	$	4,892		$	14,284	$	16,830
Other comprehensive income:
Unrealized gains on investments	39		57			315		226
Reclassification adjustment for a realized loss on investment included in net income*	—		—			26		—
Income taxes	14		22			121		87
Other comprehensive income, net of taxes	25		35			220		139
COMPREHENSIVE INCOME	4,029		4,927			14,504		16,969
Less: comprehensive income attributable to the noncontrolling interest	—		(9		)	—		(13		)
COMPREHENSIVE INCOME ATTRIBUTABLE TO MICREL, INCORPORATED SHAREHOLDERS	$	4,029	$	4,918		$	14,504	$	16,956

* For the nine months ended September 30, 2013, a realized loss of $26,000 relating to short term investments was reclassified from accumulated other comprehensive income to other expense, net in the condensed consolidated statement of operations.

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,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	14,284		$	16,830
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	9,788			9,346
Share-based compensation expense	5,076			5,330
Excess tax benefits from share-based awards	(418		)	(162		)
Impairment of technology	—			1,000
Loss (gain) on disposal of assets	(33		)	1
Deferred income tax provision	(3,133		)	(1,939		)
Changes in operating assets and liabilities:
Accounts receivable	(3,534		)	(6,533		)
Inventories	(1,691		)	(1,366		)
Income taxes receivable	(351		)	4,392
Prepaid expenses and other assets	(434		)	(303		)
Accounts payable	(6,368		)	1,327
Income taxes payable	172			(442		)
Other liabilities	2,089			341
Deferred income on shipments to distributors	6,725			(1,202		)
Net cash provided by operating activities	22,172			26,620
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of PhaseLink’s net assets, net of cash acquired	—			(16,439		)
Purchase of Discera's net assets	(6,110		)	—
Purchases of property, plant and equipment	(5,797		)	(6,221		)
Purchases of intangible assets	(57		)	—
Purchases of investments	(50,079		)	(41,408		)
Proceeds from sale and maturities of investments	57,010			41,808
Change in restricted cash	(808		)	—
Net cash used in investing activities	(5,841		)	(22,260		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt	—			(282		)
Proceeds from the issuance of common stock	3,743			2,730
Repurchases of common stock	(13,177		)	(28,430		)
Payment of cash dividends	(5,371		)	(7,135		)
Purchase of stock for withholding taxes on vested restricted stock	(701		)	(454		)
Excess tax benefits from share-based awards	418			162
Net cash used in financing activities	(15,088		)	(33,409		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	1,243			(29,049		)
CASH AND CASH EQUIVALENTS - Beginning of period	27,281			60,610
CASH AND CASH EQUIVALENTS - End of period	$	28,524		$	31,561

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 subsidiaries (together “Micrel” or the “Company”) as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) 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, 2012, 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, 2012. 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, 2012 and those included in this Form 10-Q below.

Net Income Per 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 and restricted stock units. Reconciliation of weighted-average shares used in computing basic and diluted net income per share attributable to Micrel, Incorporated shareholders is as follows (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Weighted average common shares outstanding	57,752	59,242	58,107	60,096
Dilutive effect of stock options and restricted stock units	688	647	719	678
Shares used in computing diluted net income per share	58,440	59,889	58,826	60,774

For the three and nine months ended September 30, 2013, 5.4 million and 5.3 million shares underlying 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 September 30, 2012, 5.7 million and 5.5 million shares underlying 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

Effective January 1, 2013, the Company adopted the new guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide addition detail about those amounts. The adoption did not have a material impact on the Company's consolidated financial condition or results of operations.

Effective January 1, 2013, the Company adopted the new 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 adoption did not have a material impact on the Company's consolidated financial condition or results of operations.

7

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In March 2013, the Financial Accounting Standards Board ("FASB") issued an accounting standards update on foreign currency matters that provides additional guidance with respect to the reclassification into income of the cumulative translation adjustment (CTA) recorded in accumulated other comprehensive income associated with a parent company's ownership interest in a foreign entity. The standard differentiates between transactions occurring within a foreign entity and transactions/events affecting an investment in a foreign entity. For transactions within a foreign entity, the full CTA associated with the foreign entity would be reclassified into income only when the sale of a subsidiary or group of net assets within the foreign entity represents the substantially complete liquidation of that foreign entity. For transactions/events affecting an investment in a foreign entity (for example, control or ownership of shares in a foreign entity), the full CTA associated with the foreign entity would be reclassified into income only if the parent no longer has a controlling interest in that foreign entity as a result of the transaction/event. In addition, acquisitions of a foreign entity completed in stages will trigger release of the CTA associated with an equity method investment in that entity at the point a controlling interest in the foreign entity is obtained. The Company is required to adopt this standard for its interim and annual periods beginning after December 15, 2013. As of September 30, 2013, the Company has not recorded a CTA related to its ownership interests in a foreign entity. This standard would impact the Company's consolidated financial condition or results of operations only in the instance the Company records a CTA and an event or transaction described above occurs.

In July 2013, the FASB issued an accounting standards update on presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward (each, a “Carryforward”) exists. The standard requires that unrecognized tax benefits should be presented as a reduction to deferred tax assets for a Carryforward, if such Carryforward is required or expected to settle the additional income taxes in the event the uncertain tax position is disallowed. The standard also requires in situations that a Carryforward cannot be used or the deferred tax asset is not intended to be used for such purpose, the unrecognized tax benefit should be recorded as a liability and should not offset deferred tax assets. The Company is required to adopt this standard for its interim and annual periods beginning after December 15, 2013. The Company is currently evaluating the impact of adopting this guidance, but does not expect it to have a material impact on the Company's consolidated financial condition or results of operations.

3. ACQUISITION

On August 30, 2013, the Company signed a definitive agreement to acquire specific net assets of Discera, Inc. (“Discera”), a private company based in San Jose, California, which qualifies as an acquisition of a business for financial accounting purposes. The acquisition closed on September 9, 2013. The total consideration was approximately $7.1 million, plus $1.1 million assumed liabilities. Of the $7.1 million, $6.1 million was paid upon closing, and approximately $1.0 million was withheld to secure the indemnification obligations from the closing date through September 9, 2014. The objective of the acquisition is to complement and expand Micrel's high performance clock and timing product portfolio, as well as expand its MEMS (micro-electrical mechanical systems) capabilities. The addition of the Discera MEMS product line will also enhance Micrel's MEMS presence, intellectual property and capability. The Company has included the financial results of Discera 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 insignificant.

8

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Recognized amounts of identifiable assets acquired and liabilities assumed

The Company accounted for the transaction using the acquisition method of accounting for business combinations 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 months ended September 30, 2013, acquisition costs of $173,000 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. The Company’s allocation of the total purchase price is summarized below as of the date of acquisition (in thousands):

Accounts receivable	$	677
Inventories	1,141
Other assets	24
Property, plant and equipment	1,165
Developed technology	940
Customer relationships	800
Trademarks	100
Non-competition agreements	40
In-process research and development	890
Goodwill	2,425
Liabilities	(1,090		)
Total purchase consideration	$	7,112

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 one-year period. The values of trademarks will be amortized over 2 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 September 9, 2013		Accumulated Amortization as of September 30, 2013			Net Carrying Amount as of September 30, 2013
Developed technology	$	940	$	(10	)	$	930
Customer relationships	800		(13		)	787
Trademarks	100		(6		)	94
Non-competition agreements	40		(3		)	37
In-process research and development	890		—			890
Total	$	2,770	$	(32	)	$	2,738

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 Discera acquisition were to complement Micrel's high performance clock and timing products, as well as expand its MEMS capabilities. The addition of the Discera MEMS product line will also enhance Micrel's MEMS presence and capability. Furthermore, the Discera technical team gives Micrel the intellectual property and technical know-how to pursue not only MEMS-based timing devices but also other types of MEMS devices. These significant factors were the basis for the recognition of goodwill.

9

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. 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,
	2013			2012			2013			2012
Cost of revenues	$	270		$	274		$	784		$	840
Research and development	704			646			2,008			2,203
Selling, general and administrative	789			719			2,284			2,287
Pre-tax share-based compensation expense	1,763			1,639			5,076			5,330
Less income tax benefit	(565		)	(558		)	(1,667		)	(1,863		)
After tax impact of share-based compensation on net income	$	1,198		$	1,081		$	3,409		$	3,467

During the three months ended September 30, 2013 and 2012, the Company granted 191,400 and 512,380 stock options, respectively, at weighted average fair values of $2.79 and $3.05 per share, respectively. For the nine months ended September 30, 2013 and 2012, the Company granted 535,900 and 1,296,200 stock options, respectively, at weighted average fair values of $2.91 and $2.99 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,
	2013		2012		2013		2012
Expected term (years)	5.8		5.8		5.9		5.8
Stock volatility	35.0	%	36.0	%	34.8	%	36.1	%
Risk free interest rates	1.7	%	0.8	%	1.4	%	1.0	%
Dividends during expected terms	2.2	%	1.5	%	1.8	%	1.6	%

The Company also grants Restricted Stock Units (“RSUs”) to its employees. In the three months ended September 30, 2013 and 2012, the Company granted 207,520 and 123,537 RSUs, respectively, at weighted average fair values of $9.14 and $9.73, respectively. During the nine months ended September 30, 2013 and 2012, the Company granted 434,920 and 379,623 RSUs, respectively, at weighted average fair values of $9.49 and $9.75, respectively.

As of September 30, 2013, there was $14.8 million of total unrecognized share-based compensation related to non-vested awards which is expected to be recognized over a weighted-average period of 2.9 years. Total share-based compensation capitalized as part of inventory as of September 30, 2013 and December 31, 2012 was $153,000 and $139,000, 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

Short-term investments represent the investment of cash in instruments that are available to fund current operations with remaining maturities of greater than three months on the date of purchase. Short-term investments as of September 30, 2013 primarily consisted of corporate debt securities, commercial paper and liquid municipal debt securities with maturities ranging from less than one month to less than two years and were classified as available-for-sale securities. Long-term investments as of September 30, 2013 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 credit 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, 2013 and December 31, 2012 is as follows (in thousands):

10

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	As of September 30, 2013								As of December 31, 2012
	Cost		Unrealized Gross Gains		Unrealized Gross Losses		Fair Value		Cost		Unrealized Gross Gains		Unrealized Gross Losses			Fair Value
Municipal Debt Securities	$	16,530	$	—	$	—	$	16,530	$	12,520	$	—	$	(116	)	$	12,404
Corporate Debt Securities	36,726		2		—		36,728		26,575		—		(139		)	26,436
Commercial Paper	16,447		3		—		16,450		18,464		—		(2		)	18,462
Certificates of Deposits	—		—		—		—		19,047		—		—			19,047
Total	$	69,703	$	5	$	—	$	69,708	$	76,606	$	—	$	(257	)	$	76,349

The Company recorded a cumulative temporary gain of $3,000 net of tax ($5,000 pre-tax) for its short-term securities as of September 30, 2013 to accumulated other comprehensive income, a component of shareholders' equity. The change in the fair value of these securities is recorded to unrealized gains (losses) on investments in the condensed consolidated statements of comprehensive income. As of September 30, 2013, none of the Company’s short-term investments was in a continuous unrealized loss position for more than twelve months.

A summary of the Company’s long-term investments at September 30, 2013 and December 31, 2012 is as follows (in thousands):

	As of September 30, 2013									As of December 31, 2012
	Cost		Unrealized Gross Gains		Unrealized Gross Losses			Fair Value		Cost		Unrealized Gross Gains		Unrealized Gross Losses			Fair Value
Auction Rate Securities	$	4,700	$	—	$	(488	)	$	4,212	$	4,700	$	—	$	(541	)	$	4,159

As of September 30, 2013, the Company had auction rate notes with an amortized cost of $4.7 million and a fair value of $4.2 million. 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 and not resumed as of September 30, 2013. 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 19 to 34 years. As a result, the Company has classified all auction rate notes as long-term investments as of September 30, 2013 and December 31, 2012, and the auction rate notes have been in a continuous unrecognized loss position since 2008 when auctions began to fail. As a result of failed auctions, 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, 2013 and December 31, 2012, the maximum interest rate is generally one month LIBOR plus 1.5% or 2.5% based on the notes' rating as of that 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 Company has not recognized an other than temporary impairment loss on the auction rate notes because it expects to recover the full amortized cost basis of the securities, i.e., a credit loss has not occurred, and it has the ability and intent to hold the investments until such time.

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.

11

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. The Company's short-term investments 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 other significant observable inputs.

The types of instruments valued based on unobservable inputs include the auction rate securities held by the Company. Such instruments are classified within Level 3 of the fair value hierarchy and are recorded under long-term investments in the condensed consolidated balance sheets. 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, 2013 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 (1)	$	14,179	$	—	$	—	$	14,179
Corporate Debt Securities (2)	—		36,728		—		36,728
Commercial Paper (2)	—		16,450		—		16,450
Municipal Debt Securities (2)	—		16,530		—		16,530
Auction rate notes (3)	—		—		4,212		4,212
Total	$	14,179	$	69,708	$	4,212	$	88,099

Financial assets measured at fair value on a recurring basis as of December 31, 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 (1)	$	13,845	$	—	$	—	$	13,845
Certificates of Deposits (2)	19,047		—		—		19,047
Corporate Debt Securities (2)	—		26,436		—		26,436
Commercial Paper (2)	—		18,462		—		18,462
Municipal Debt Securities (2)	—		12,404		—		12,404
Auction rate notes (3)	—		—		4,159		4,159
Total	$	32,892	$	57,302	$	4,159	$	94,353

__________

(1) Included in cash and cash equivalents

(2) Included in short-term investments

(3) Included in long-term investments

There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy.

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, 2013 and December 31, 2012. 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, 2013, the Company determined there was a cumulative decline in the fair value of its auction rate notes and recorded a $317,000 net of tax ($488,000 pre-tax) temporary impairment of these securities to accumulated other comprehensive income, a component of shareholders’ equity. The change in the fair value of these securities is recorded to unrealized gains (losses) on investments in the condensed consolidated statements of comprehensive income.

12

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the nine months ended September 30, 2013, 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, 2012	$	4,159
Transfers in and/or out of Level 3	—
Total unrealized gains, before tax effect	53
Settlements	—
Ending balance, September 30, 2013	$	4,212

6. INVENTORIES

Inventories consisted of the following (in thousands):

	September 30, 2013		December 31, 2012
Finished goods	$	13,338	$	12,518
Work in process	30,195		28,133
Raw materials	1,569		1,605
Total inventories	$	45,102	$	42,256

7. PROPERTY, PLANT AND EQUIPMENT

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

	September 30, 2013			December 31, 2012
Manufacturing equipment	$	178,566		$	174,353
Land	8,101			8,101
Buildings and improvements	54,129			53,792
Office furniture and research equipment	21,557			20,241
	262,353			256,487
Accumulated depreciation	(203,589		)	(195,795		)
Total property, plant and equipment, net	$	58,764		$	60,692

Depreciation expense for the three and nine months ended September 30, 2013 was $2.7 million and $8.3 million, respectively.

8. GOODWILL AND INTANGIBLE ASSETS

Goodwill

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 recorded $6.1 million of goodwill as the purchase price exceeded the fair value allocated to net tangible assets and identifiable intangible assets. On September 9, 2013, the Company acquired Discera and recorded $2.4 million of goodwill as the purchase price exceeded the fair value allocated to net tangible assets and identifiable intangible assets. The goodwill of both acquisitions 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.

13

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 the 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.

Intangible Assets

The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. An asset is considered impaired if its carrying amount exceeds the undiscounted future net cash flow that the asset is expected to generate. 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.

The following table sets forth the components of intangible assets as follows (in thousands):

	September 30, 2013							December 31, 2012
	Gross Carrying Amount		Accumulated Amortization			Net  Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net  Carrying Amount
Developed technologies	$	7,443	$	(798	)	$	6,645	$	4,400	$	(330	)	$	4,070
Customer relationships	3,800		(463		)	3,337		3,000		(225		)	2,775
Trademarks	610		(236		)	374		510		(115		)	395
Non-competition agreements	450		(311		)	139		410		(154		)	256
In-process research and development	1,300		—			1,300		410		—			410
	$	13,603	$	(1,808	)	$	11,795	$	8,730	$	(824	)	$	7,906

The above intangible assets continue to be amortized over their estimated useful lives of 1 to 10 years using the straight-line method. Total intangible amortization expense for the three and nine months ended September 30, 2013 was $354,000 and $(984,000), respectively.

The estimated future amortization expense of intangible assets as of September 30, 2013 was as follows (in thousands):

Year Ending December 31,
2013 (remaining three months)	$	386
2014	1,357
2015	1,241
2016	1,208
2017	1,157
Thereafter	6,446
	$	11,795

14

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9. OTHER CURRENT LIABILITIES

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

	September 30, 2013		December 31, 2012
Accrued compensation	$	6,368	$	4,167
Accrued commissions	2,725		1,918
Accrued workers compensation and health insurance	944		865
All other current accrued liabilities	1,705		1,883
Total other current liabilities	$	11,742	$	8,833

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 2013, an amendment was entered to amend certain terms of the credit agreement including an extension of the expiration date to April 30, 2015 and the deletion of a minimum effective tangible net worth covenant. 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%. The agreement includes certain restrictive covenants and, as of September 30, 2013, the Company was in compliance with such covenants.

The Company's borrowing arrangements include a provision for the issuance of commercial or standby letters of credit by the bank on behalf of the Company. As of September 30, 2013, there was $325,000 in letters of credit outstanding. The letters of credit are issued to guarantee payments for the Company's workers compensation program. As of September 30, 2013, the Company had no borrowings under the line of credit.

11. DERIVATIVE FINANCIAL INSTRUMENTS

During the three and nine months ended September 30, 2013 and 2012, the Company was not party to any derivative instrument arrangements. At September 30, 2013, there were no derivative instrument contracts outstanding.

12. SIGNIFICANT CUSTOMERS

During the nine months ended September 30, 2013, two worldwide distributors accounted for $54.3 million (31%) and $34.9 million (20%) of net revenues, respectively. During the nine months ended September 30, 2012, two worldwide distributors and one direct customer accounted for $47.5 million (25%), $30.7 million (16%) and $20.1 million (11%) of net revenues, respectively. These distributors operate globally and regionally to sell Micrel's products to many customers across various end markets.

At September 30, 2013, two worldwide distributors and one direct customer accounted for 34%, 14%, and 10% respectively, of total accounts receivable. At December 31, 2012, one worldwide distributor and an Asia-based distributor accounted for 28% and 14%, respectively, of total accounts receivable.

15

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 or review discrete financial information for these segments. Consequently, it is not relevant to show assets by reportable segments.

	Three Months Ended						Nine Months Ended
Net Revenues by Segment	September 30,						September 30,
(in thousands)	2013			2012			2013			2012
Net Revenues:
Standard Products	$	56,185		$	60,753		$	171,469		$	180,756
Other Products	1,984			2,175			5,604			7,022
Total net revenues	$	58,169		$	62,928		$	177,073		$	187,778
As a Percentage of Total Net Revenues:
Standard Products	97		%	97		%	97		%	96		%
Other Products	3			3			3			4
Total net revenues	100		%	100		%	100		%	100		%

14. COMMITMENTS AND CONTINGENCIES

From time to time, 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, litigation 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.

As of September 30, 2013, the Company has not recorded any accrual for contingent liabilities associated with the legal proceedings described above based on the belief that liabilities, while possible, are not probable. Further, ranges of possible losses in these matters cannot be reasonably estimated at this time.

15. SHARE REPURCHASE PROGRAM

On July 26, 2012, the Company announced that its Board of Directors authorized the repurchase of $30.0 million of the Company’s common stock. As of September 30, 2013, the total remaining authorized amount available for repurchase was $6.0 million. On October 24, 2013, the Company announced that its Board of Directors authorized the repurchase of another $30.0 million of the Company’s common stock.

Shares of common stock purchased pursuant to the repurchase program are cancelled from outstanding shares upon repurchase. 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 incentive plans and ESPP. During the nine months ended September 30, 2013, the Company repurchased 1,323,367 shares of its common stock for an aggregate price of $13.2 million.

16. INCOME TAXES

The income tax provision for the three and nine months ended September 30, 2013, as a percentage of income before taxes was 6.1% and 10.6%, respectively. For the three months ended September 30, 2013, the Company recognized $775,000 of previously unrecognized tax benefits due to a lapse of the statute of limitations. For the nine months ended September 30, 2013, the income tax provision also included income tax benefits totaling $424,000 pertaining to the filing of 2012 foreign tax returns during the second quarter of 2013 and a $1.4 million benefit for 2012 research tax credits as a tax law was enacted on January 2, 2013 to retroactively reinstate the federal research and development tax credit to January 1, 2012.

16

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The income tax provision for the three and nine months ended September 30, 2012, as a percentage of income before taxes, was 22.3% and 30.6%, respectively. For the three and nine months ended September 30, 2012, the Company recognized $661,000 of previously unrecognized tax benefits due to the lapse of statute of limitations. For the nine months ended September 30, 2012, the Company also recognized $176,000 of previously unrecognized tax benefits due to settlements with the tax authorities. In addition, the tax provision for this period excluded any benefits from the federal research and development credit which expired on December 31, 2011 and had not been reinstated as of September 30, 2012.

As of September 30, 2013, the gross amount of unrecognized tax benefits for uncertain tax positions was $11.8 million (including interest and penalties) and the net amount, reduced for the federal effects of potential state tax exposures, was $8.4 million. Included in the $8.4 million is $5.4 million which has not yet reduced income tax payments, and therefore, has been netted against non-current deferred tax assets. The remaining $3.0 million liability consisted of $2.9 million included in long-term income taxes payable and $103,000 netted against short-term income taxes receivable. If these uncertain tax positions are sustained upon tax authority audit, or otherwise become certain, the $3.0 million would favorably affect the Company’s tax provision in such future periods. The Company does not anticipate a significant change to the amounts of unrecognized tax benefits presented as long-term liability or reduction to long-term deferred tax assets in 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, 2013 and December 31, 2012, the Company had $310,000 and $354,000, 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 2010 and forward. Significant state tax jurisdictions include California, Massachusetts and Texas, and generally, the Company is subject to routine examination for years 2006 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 2005 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 $22.4 million and net long-term deferred tax liabilities of $586,000 as of September 30, 2013. 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 a valuation allowance of $8.5 million maintained against state deferred tax assets as of September 30, 2013. The recorded valuation allowance is primarily due to required income apportionment methods in California causing a shortfall of projected future taxable income to realize all available deferred tax assets in that jurisdiction. Should the Company determine that future realization of other recognized tax benefits is not more likely than not, additional valuation allowance would be established which would increase the Company's tax provision in the period of such determination.

17

MICREL, INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

17. DIVIDENDS

The Company's Board of Directors declared the following dividends during the periods presented (In thousands, except dividend per share):

	Dividend Per Share		Total Amount		Record Date	Payment Date
September 30, 2013
July 25, 2013	$	0.0500	$	2,890	August 14, 2013	August 28, 2013
April 25, 2013	0.0425		2,482		May 8, 2013	May 22, 2013
December 7, 2012*	0.0425		2,497		December 18, 2012	December 27, 2012
September 30, 2012
July 26, 2012	$	0.0400	$	2,230	August 9, 2012	August 23, 2012
April 26, 2012	0.0400		2,453		May 9, 2012	May 23, 2012
January 26, 2012	0.0400		2,451		February 8, 2012	February 22, 2012

*The cash dividend declared on December 7, 2012 was an accelerated cash dividend in lieu of the quarterly dividend that the Company would have otherwise announced in January 2013 with its quarterly financial results for the fourth quarter of 2012, and that would have been paid in February of 2013.

18. SUBSEQUENT EVENTS

On October 24, 2013, the Company’s Board of Directors declared a cash dividend of $0.05 per outstanding share of common stock payable on November 22, 2013 to shareholders of record at the close of business on November 8, 2013. This dividend will be recorded in the fourth quarter of 2013 and is expected to be approximately $2.9 million.

On October 24, 2013, the Company also announced that its Board of Directors authorized the repurchase of another $30.0 million of the Company’s common stock.

18

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

The statements contained in this quarterly report on Form 10-Q that are not purely historical may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding the Company’s expectations, hopes, intentions or strategies regarding the future. Forward-looking statements include, but are not limited to statements regarding: future revenues and dependence on standard products sales and international sales; the levels of international sales; the effect of global market conditions on revenue levels, profitability and results of operations; future products or product development; statements regarding fluctuations in the Company’s results of operations; future returns and price adjustments and allowance; future uncollectible amounts and doubtful accounts allowance; future products or product development; future research and development spending and the Company’s product development strategy; the Company’s markets, product features and performance; product demand and inventory to service such demand; competitive threats and pricing pressure; the effect of dependence on third parties; the Company’s future use and protection of its intellectual property; future expansion or utilization of manufacturing capacity; future expenditures; the Company's integration and incorporation of 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 Annual Report on Form 10-K for the year ended December 31, 2012.

Overview

Micrel designs, develops, manufactures and markets a range of high-performance analog integrated circuits (“ICs”), mixed-signal ICs and digital ICs. The Company currently ships approximately 3,100 standard products. These products address a wide range of end markets including cellular handsets, portable computing, enterprise and home networking, wide area and metropolitan area networks, digital televisions and industrial equipment. The Company also manufactures custom analog and mixed-signal circuits and provides wafer foundry services for customers that produce electronic systems for communications, consumer and military applications.

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

The Company’s timing and communications circuits are used primarily for enterprise networks, storage area networks, access networks and metropolitan area networks. This product portfolio consists of timing, clock management and high speed Physical Media Devices (“PMD”) products. With form factor, size reductions and ease of use critical for system designs, Micrel utilizes innovative packaging and proprietary process technology to address these challenges. In 2012, the Company acquired PhaseLink Company Limited (“PhaseLink”), a private company based in Taiwan and in San Jose, California. The objective of the acquisition was 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. In September 2013, the Company acquired the net assets of Discera Inc. (“Discera”), a private company based in San Jose, California. The objective of the acquisition is to complement Micrel's high performance clock and timing products, as well as expand its MEMS (micro-electrical mechanical systems) capabilities. Discera is a leading timing and clock oscillator company utilizing a proprietary MEMS (micro-electrical mechanical system) resonator enabling lower cost, enhanced ruggedness, smaller size and wider temperature range than historical quartz based solutions.

19

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

Although the current MEMS-based timing market is relatively small with only a few competitors currently shipping MEMS-based products, Micrel believes it has the potential to expand rapidly. However, Micrel does not expect dramatic revenue growth from the Discera business for the next few quarters.

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

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

Net Revenues by Product Group	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
As a Percentage of Total Net Revenues
Linear and Power	56	%	57	%	56	%	58	%
Timing and Communications	22		20		21		20
LAN Solutions	19		20		20		18
Total standard products	97		97		97		96
Foundry, custom and other products	3		3		3		4
	100	%	100	%	100	%	100	%

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

Net Revenues by End Market	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
As a Percentage of Total Net Revenues
Industrial	50	%	38	%	53	%	41	%
Communications	17		33		16		32
Wireless handsets	14		16		13		15
Computing	15		11		14		10
Consumer and other	4		2		4		2
Total net revenues	100	%	100	%	100	%	100	%

To enhance the readers’ understanding of the Company’s performance, the following is a chronological overview of the Company’s results for the quarterly periods from January 1, 2012 through September 30, 2013.

During the first quarter of 2012, revenues increased 4.0% to $61.2 million from $58.8 million in the fourth quarter of 2011. This increase in revenue from the fourth quarter of 2011 was principally driven by overall demand from customers in most geographies and end markets. As compared to the same period last year, first quarter 2012 revenues decreased by $6.3 million. First quarter 2012 book-to-bill ratio was one, and showed improvement compared to the fourth quarter of 2011. First quarter 2012 gross margin was 54.3%, as compared to 50.5% in the fourth quarter of 2011. With the higher revenues compared to the fourth quarter of 2011, first quarter 2012 gross margin increased from the previous quarter primarily due to a higher percentage of distribution sales which carry higher margins, an increase in factory utilization, and lower inventory reserve charges. Net income for the first quarter of 2012 was $5.9 million, or $0.10 per basic and diluted share, as compared to net income of $4.9 million, or $0.08 per basic and diluted share, for the fourth quarter of 2011, and net income of $9.1 million, or $0.15 per basic share and $0.14 per diluted share, for the first quarter of 2011. During the first quarter of 2012, cash flows from operations were $8.7 million. During the first quarter of 2012, cash and short-term investments decreased by $0.6 million to $137.3 million. In addition to maintaining its quarterly $0.04 per share cash dividend, during the first quarter of 2012 the Company repurchased $6.0 million of its common stock.

20

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

Revenues of $63.7 million in the second quarter of 2012 increased 4.2% from $61.2 million in the first quarter of 2012. The increase primarily resulted from stronger sales of the Company's timing and communications products, including contributions from the acquisition of PhaseLink. This growth was in part offset by weaker than expected demand from the Company's sell-through distributors primarily in Europe. The book-to-bill ratio in the second quarter of 2012 was above one. Second quarter 2012 gross margin increased to 55.2% as compared to 54.3% in the first quarter of 2012. The increase was principally due to a richer mix of higher-margin products and improved factory utilization. Net income attributable to Micrel, Incorporated shareholders for the second quarter of 2012 was $6.0 million, or $0.10 per basic and diluted share, as compared to net income of $5.9 million, or $0.10 per basic and diluted share, for the first quarter of 2012, and net income of $10.7 million, or $0.17 per basic and diluted share, for the second quarter of 2011. During the second quarter of 2012, cash flows from operations were $11.5 million. Cash and short term investments were $119.4 million at June 30, 2012 as compared to $137.3 million at March 31, 2012 which reflects a cash payment of $16.4 million (net of acquired cash) made on April 2, 2012 related to the PhaseLink acquisition. During the second quarter of 2012, the Company repurchased $8.7 million of its common stock. In addition, the Company maintained and paid its quarterly $0.04 per share cash dividend totaling approximately $2.5 million in the second quarter of 2012.

Third quarter 2012 revenues decreased 1.2% to $62.9 million from $63.7 million in the second quarter of 2012. The decrease was principally due to lower sales of the Company's timing and communications products partially offset by gathering momentum in LAN solutions product sales. The third quarter 2012 book-to-bill ratio was above one. Third quarter 2012 gross margin decreased to 52.9% as compared to 55.2 % in the second quarter of 2012 primarily due to a mix shift to lower margin consumer-related products and lower factory capacity utilization. The lower factory utilization was due to reducing production in an attempt to minimize building inventory. Net income attributable to the Company' shareholders for the third quarter of 2012 was $4.9 million, or $0.8 per basic and diluted share, as compared to net income of $6.0 million, or $0.10 per basic and diluted share, for the second quarter of 2012, and net income of $9.2 million, or $0.15 per basic and diluted share, for the third quarter of 2011. During the third quarter of 2012, cash flows from operations were $6.4 million. Cash and short term investments were $108.7 million at September 30, 2012 as compared to $119.4 million at June 30, 2012. During the third quarter of 2012, the Company spent $13.7 million repurchasing its common stock. Additionally, the Company maintained its quarterly $0.04 per share cash dividend for a total of approximately $2.2 million.

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

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

21

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

During the first quarter of 2013, revenues decreased 4.2% to $59.7 million from $62.3 million in the fourth quarter of 2012. With continued global macro-economic challenges, this decrease resulted primarily from lower demand in the computing and communications end markets, partially offset by an increase in revenues from the consumer end market. As compared to the same period last year, first quarter 2013 revenues decreased by $1.4 million, or 2.3%. First quarter 2013 book-to-bill ratio was 1:1 driven by strength in the industrial end market. First quarter 2013 gross margin was 52.0%, as compared to 50.3% in the fourth quarter of 2012. This increase in gross margin from the previous quarter was primarily due to a higher percentage of distribution sales which carry higher margins. Net income for the first quarter of 2013 was $5.2 million, or $0.09 per basic and diluted share, as compared to net loss of $4.5 million, or a loss of $0.08 per basic and diluted share, for the fourth quarter of 2012, and net income of $5.9 million, or $0.10 per basic and diluted share, for the first quarter of 2012. During the first quarter of 2013, cash flows from operations were $7.7 million. During the first quarter of 2013, cash and short-term investments increased by $8.1 million to $111.7 million. The increase was partly due to the cash dividend of $0.0425 per share of common stock totaling $2.5 million, which would have been paid in the first quarter of 2013, was accelerated and paid on December 27, 2012 to shareholders of record as of December 18, 2012. In addition, the Company did not repurchase any shares of its common stock.

During the second quarter of 2013, revenues decreased 0.9% to $59.2 million from $59.7 million in the first quarter of 2013. The decrease was primarily due to lower sales to the Company's wireless handset end market which were down by 18.2%, partially offset by higher sales in the communications, computing, consumer and industrial end markets. As compared to the same quarter last year, second quarter of 2013 revenues decreased by $4.5 million, or 7.1%, principally resulting from lower demand from customers in the communications and wireless handset end markets. The book-to-bill ratio in the second quarter of 2013 was above one. The gross margin in the second quarter of 2013 was 52.5%, as compared to 52.0% in the first quarter of 2013. This increase was largely due to a product mix favoring a greater percentage of higher margin communications, computing and industrial products. The Company’s operating margin for the second quarter of 2013 increased to 10.4%, as compared to 9.1% in the first quarter of 2013. Net income for the second quarter of 2013 was $5.0 million, or $0.09 per basic and diluted share, as compared to net income of $5.2 million, or $0.09 per basic and diluted share, for the first quarter of 2013, and net income of $6.0 million, or $0.10 per basic and diluted share, for the second quarter of 2012. During the second quarter of 2013, cash flows from operations were $2.0 million. Cash and short term investments were $104.9 million at June 30, 2013 as compared to $111.7 million at March 31, 2013. During the second quarter of 2013, the Company repurchased $4.7 million of its common stock and maintained its quarterly $0.0425 per share dividend totaling $2.5 million.

Revenues for the third quarter of 2013 totaled $58.2 million, representing a decrease of $1.0 million, or 1.7%, from $59.2 million in the second quarter of 2013. The decrease was primarily due to lower sales to the Company's industrial end market which were down by 8.4%, partially offset by higher sales in the wireless, communications, and computing end markets. As compared to the same quarter last year, third quarter of 2013 revenues decreased by $4.8 million, or 7.6%, principally resulting from lower demand from customers in the computing and wireless handset end markets. The book-to-bill ratio in the third quarter of 2013 was slightly below one. The gross margin in the third quarter of 2013 was 50.7%, as compared to 52.5% in the second quarter of 2013. This decrease was principally due to a shift in product mix from higher gross margin industrial products to lower gross margin mobile handset products. The Company’s operating margin for the third quarter of 2013 decreased to 7.3%, as compared to 10.4% in the second quarter of 2013. Net income for the third quarter of 2013 was $4.0 million, or $0.07 per basic and diluted share, as compared to net income of $5.0 million, or $0.09 per basic and diluted share, for the second quarter of 2013, and net income of $4.9 million, or $0.08 per basic and diluted share, for the third quarter of 2012. During the third quarter of 2013, cash flows from operations were $12.4 million. Cash and short term investments were $98.2 million, as compared to $104.9 million at June 30, 2013, which reflects a cash payment of $6.1 million made on September 9, 2013 related to the Discera acquisition. During the third quarter of 2013, the Company repurchased $8.5 million of its common stock and paid quarterly $0.05 per share dividend totaling $2.9 million.

The Company derives a substantial portion of its net revenues from standard products. For the three months ended September 30, 2013 and 2012, the Company’s standard products sales accounted for 97% of the Company’s net revenues. For the nine months ended September 30, 2013 and 2012, the Company’s standard products sales accounted for 97% and 96%, respectively, of the Company’s net revenues. The Company believes that a substantial portion of its net revenues in the future will depend upon standard products sales, although such sales as a proportion of net revenues may vary as the Company adjusts product output levels to correspond with varying economic conditions and demand levels in the markets which it serves. The standard products business is characterized by short-term orders and shipment schedules, and customer orders typically can be canceled or rescheduled without significant penalty to the customer. Since most standard products backlog is cancelable without significant penalty, the Company typically plans its production and inventory levels based on forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. In addition, the Company is limited in its ability to reduce costs quickly in response to any revenue shortfalls.

22

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

The Company may experience significant fluctuations in its results of operations. Factors that affect the Company’s results of operations include the volume and timing of orders received, changes in the mix of products sold, levels of inventory and resales by distributors, the utilization level of manufacturing capacity, competitive pricing pressures, the successful development and customer acceptance of new products, and the successful integration of acquisitions. 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, and income taxes to be critical to the fair presentation of its financial statements. For a detailed discussion of the Company’s significant accounting policies, see Note 1 to Condensed Consolidated Financial Statements in this report and Note 1 of Notes to Consolidated Financial Statements in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Revenue Recognition and Receivables. The Company generates revenue by selling products to original equipment manufacturer ("OEM") customers, sell-through distributors and sell-in distributors. Sell-in distributors may buy and stock the Company’s products for resale or may act as the Company’s sales representative in arranging for direct sales from the Company to an OEM customer. The Company’s policy is to recognize revenue from sales to customers when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable and collection of the resulting receivable is reasonably assured.

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

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

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

23

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

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 a 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, 2013, 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 a valuation allowance that was established against deferred assets due to California tax law changes in 2012 which require a mandatory single sales factor apportionment in California for most multi-state taxpayers for tax years beginning on or after January 1, 2013. Should the Company determine that future realization of other recognized deferred tax assets is not more likely than not, additional 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.

24

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,
	2013		2012		2013		2012
Net revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenues	49.3		47.1		48.3		45.9
Gross profit	50.7		52.9		51.7		54.1
Operating expenses:
Research and development	24.2		24.4		23.3		22.7
Selling, general and administrative	19.2		18.8		19.5		18.7
Total operating expenses	43.4		43.2		42.8		41.4
Income from operations	7.3		9.7		8.9		12.7
Other income (expense):
Interest income	0.2		0.3		0.2		0.3
Interest expense	—		—		—		—
Other expense, net	(0.1	)	—		(0.1	)	(0.1	)
Total other income, net	0.1		0.3		0.1		0.2
Income before income taxes and noncontrolling interest	7.4		10.0		9.0		12.9
Provision for income taxes	0.5		2.2		1.0		3.9
Net income	6.9		7.8		8.0		9.0
Less: net income attributable to noncontrolling interest	—		—		—		—
Net income	6.9	%	7.8	%	8.0	%	9.0	%

Net Revenues. For the three months ended September 30, 2013, net revenues decreased 7.6% to $58.2 million from $62.9 million for the same period in the prior year. The decease primarily resulted from reduced demand of the Company's products serving the computing and wireless handset end markets. For the nine months ended September 30, 2013, net revenues decreased 5.7% to $177.1 million from $187.8 million for the same period in the prior year. The decrease was principally due to lower demand from the wireless handset, communications and computing end markets, partially offset by revenues from the acquisition of PhaseLink and higher demand from the industrial end market. The decreases in revenues for the three and nine months ended September 30, 2013 reflect lower revenues from both the Company's standard and other products as compared to the same periods in the prior years.

As noted in Part II, Item 1A “Risk Factors,” 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.

International sales represented 74% and 71% of net revenues for the three and nine months ended September 30, 2013, respectively, as compared to 75% and 73% of net revenues for the three and nine months ended September 30, 2012, respectively. Sales to customers in Asia represented 60% and 58% of net revenues for both the three and nine months ended September 30, 2013, respectively, as compared to 63% and 60% of net revenues for the three and nine months ended September 30, 2012. 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 Asia-based manufacturers are typically highly cost sensitive. 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.

25

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

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 50.7% for the three months ended September 30, 2013 from 52.9% for the comparable period in 2012. For the nine months ended September 30, 2013, the Company’s gross margin decreased to 51.7% from 54.1% for the comparable period in 2012. These decreases were primarily due to lower factory capacity utilization, higher inventory reserves, and a shift in product mix to lower gross margin mobile handset products as compared to the same periods in 2012.

Research and Development Expenses. Research and development expenses as a percentage of net revenues represented 24.2% for the three months ended September 30, 2013 as compared to 24.4% for the three months ended September 30, 2012. On a dollar basis, research and development expenses decreased $1.3 million, or 8.4%, to $14.1 million for the three months ended September 30, 2013 from $15.3 million for the comparable period in 2012. This decrease was primarily due to reduced spending on test boards and mask sets and decreased outside consulting services.

For the nine months ended September 30, 2013 and 2012, research and development expenses as a percentage of net revenues represented 23.3% and 22.7%, respectively. On a dollar basis, research and development expenses decreased $1.3 million to $41.3 million for the nine months ended September 30, 2013 from $42.6 million for the comparable period in 2012. The decrease was primarily due to reduced spending on test boards and mask sets, decreased outside consulting services and lower share-based compensation expense as mentioned above, partially offset by increased headcount expenses 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 19.2% for the three months ended September 30, 2013 and 18.8% for the three months ended September 30, 2012. On a dollar basis, selling, general and administrative expenses decreased $663,000, or 5.6%, to $11.2 million for the three months ended September 30, 2013 from $11.8 million for the comparable period in 2012. This decrease was primarily due to spending reductions on product and corporate marketing activities, personnel and commissions.

For the nine months ended September 30, 2013 and 2012, selling, general and administrative expenses as a percentage of net revenues represented 19.5% and 18.7%, respectively. On a dollar basis, selling, general and administrative expenses decreased $708,000 to $34.5 million for the nine months ended September 30, 2013 from $35.2 million for the comparable period in 2012. The decrease was primarily due to lower spending on product and corporate marketing activities, commissions and travel, mostly offset by increased corporate bonus expense, headcount expenses from the acquisition of PhaseLink and Discera as well as related amortization expenses of acquired intangible assets.

Share-Based Compensation. The Company’s results of operations for the three month periods ended September 30, 2013 and 2012 included $1.8 million and $1.6 million, respectively, of non-cash expense related to the fair value of share-based compensation awards. For the nine month periods ended June 30, 2013 and 2012, the Company’s results of operations included $5.1 million and $5.3 million, respectively, of share-based compensation awards. 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 gain or loss, offset by interest expense incurred.

Provision for Income Taxes. The income tax provision for the three and nine months ended September 30, 2013, as a percentage of income before taxes, was 6.1% and 10.6%, respectively. The income tax provision for the three and nine months ended September 30, 2012, as a percentage of income before taxes, was 22.3% and 30.6%, respectively. The income tax provision for the three months ended September 30, 2013 included $775,000 of previously unrecognized tax benefits due to a lapse of the statute of limitations. For the nine months ended September 30, 2013, the income tax provision also included income tax benefits totaling $424,000 pertaining to the filing of 2012 foreign tax returns during the second quarter of 2013 and a $1.4 million benefit for 2012 research tax credits as a tax law was enacted on January 2, 2013 to retroactively reinstate the federal research and development tax credit to January 1, 2012. The tax provision for the three and nine months ended September 30, 2012, included the recognition of $176,000 of previously unrecognized tax benefits due to settlements with the tax authorities. Additionally, the Company also recognized $661,000 of previously unrecognized tax benefits due to the lapse of statute of limitations. The tax provision for the three and nine months ended September 30, 2012 excluded any benefits from the federal research and development credit which expired on December 31, 2011 and had not been reinstated as of September 30, 2012.

26

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

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.

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, 2013 consisted of cash, cash equivalents and short-term investments of $98.2 million and a $5.0 million revolving line of credit from a commercial bank.

The Company generated $22.2 million in cash from operating activities during the nine months ended September 30, 2013. Significant cash flows included cash provided by net income of $14.3 million plus additions for non-cash activities of $11.3 million (consisting primarily of $9.8 million in depreciation and amortization, $5.1 million in share-based compensation expense and related tax effects, partially offset by a $3.1 million increase in deferred income taxes) combined with a $6.7 million increase in deferred income on shipments to distributors, and a $2.1 million increase in other current liabilities which were offset in part by a $3.5 million increase in accounts receivable, a $1.7 million increase in inventories, and a $6.4 million decrease in accounts payable.

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 $16.8 million plus additions for non-cash activities of $12.6 million (consisting primarily of $9.3 million in depreciation and amortization, $5.3 million in share-based compensation expense and related tax effects, and $1.0 million in impairment of technology, partially offset by a $1.9 million increase in deferred income taxes) combined with a $4.4 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.

The Company used $5.8 million of cash from investing activities during the nine months ended September 30, 2013, primarily comprised of $50.1 million in purchases of investments, $6.1 million of acquisition of Discera and $5.8 million of purchases of property, plant and equipment, partially offset by $57.0 million in proceeds from the sales and maturities of investments.

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.

The Company used $15.1 million of cash in financing activities during the nine months ended September 30, 2013 primarily for the repurchases of $13.2 million of the Company's common stock and $5.4 million for the payment of cash dividends, which were partially offset by $3.7 million in proceeds from employee stock transactions.

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.

The Company currently intends to spend approximately $4.0 million to $8.0 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.

On October 24, 2013, the Company’s Board of Directors declared a cash dividend of $0.05 per outstanding share of common stock payable on November 22, 2013 to shareholders of record at the close of business on November 8, 2013. This dividend will be recorded in the fourth quarter of 2013 and is expected to be approximately $2.9 million.

Under the Company’s stock repurchase program, as of September 30, 2013, the Company was authorized to repurchase an additional $6.0 million of its common stock. On October 24, 2013, the Company also announced that its Board of Directors authorized the repurchase of an additional $30.0 million of the Company’s 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.

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

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, 2013 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	$	2,128	$	1,065	$	923	$	140	$	—
Open purchase orders	13,074		13,074		—		—		—
Total	$	15,202	$	14,139	$	923	$	140	$	—

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 consist 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. The Company's borrowing arrangements include a provision for the issuance of commercial or standby letters of credit by the bank on behalf of the Company. As of September 30, 2013, there was $325,000 in letters of credit outstanding. The letters of credit are issued to guarantee payments for the Company's workers compensation program. As of September 30, 2013, the Company had no borrowings under the line of credit.

As of September 30, 2013, the Company had $8.4 million of net unrecognized tax benefits. Included in the $8.4 million is $5.4 million which has not yet reduced income tax payments, and therefore, has been presented as a reduction to non-current deferred tax assets. The remaining $3.0 million presented as a liability consisted of $2.9 million included in long-term income taxes payable and $103,000 reduction in short-term income taxes receivable. The Company does not anticipate a significant change to the amount of long-term unrecognized tax benefits related to certain income tax positions within the next 12 months.

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

Off-Balance Sheet Arrangements

As of September 30, 2013, the Company had no off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company usually invests cash in investments with short maturities or with frequent interest reset terms. Accordingly, interest income fluctuates with short-term market conditions. As of September 30, 2013, the Company's investment portfolio consisted primarily of corporate debt securities, commercial paper and liquid municipal debt securities with maturities ranging from less than one month to less than two years and were classified as available-for-sale securities. With the exception of the auction rate notes (discussed below), these investments were relatively liquid. Due to the relatively short, weighted-average maturity of the Company's investment portfolio and the current low interest rate environment, the Company's exposure to interest rate risk is minimal.

At September 30, 2013, the Company held $4.7 million in principal of senior auction rate notes secured by student loans with a fair value of $4.2 million. Auctions for these auction rate notes have failed as of September 30, 2013. 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, 2013, the Company has recorded a $317,000 net of tax ($488,000 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.

The Company had no fixed-rate long-term debt subject to interest rate risk and no interest rate swap or foreign currency hedging contracts. At September 30, 2013, the Company had no derivative instrument contracts outstanding.

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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, 2013.

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 13 of Notes to Condensed Consolidated Financial Statements under the caption "Commitments and Contingencies" in Item 1 of Part I is incorporated herein by reference.

ITEM 1A. RISK FACTORS

Set forth below and elsewhere in this report and in other documents we file with the SEC are descriptions of the risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. The description below includes any material changes to and supersedes the description of the risk factors affecting our business previously discussed in "Part I, Item 1A Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

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, continued 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 United States 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 continue to 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, sell-in distributors and sell-through 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 uses sell-in distributors and sell-through distributors that carry inventory to service the volatile short-term demands of end customers. However, like many of its competitors, the Company generally recognizes revenue on sales of product to sell-in distributors upon shipment, so fluctuations in inventory accumulation by sell-in distributors can exacerbate fluctuations in revenue from sales to such sell-in distributors. Also, should the relationship with a sell-through distributor or sell-in distributor 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 highly cost sensitive. 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. Furthermore, the Company's third-party vendors may be unwilling to supply certain products and processes or may be unable to do so due to business failure or bankruptcy. If replacement suppliers or manufacturing processes are not available, we may experience delays in shipment or lost revenue which could, in turn, result in temporary or permanent loss of customers.

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.

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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.

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, such as Micrel.

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.

Rules that impose diligence and disclosure requirements relating to ��conflict minerals” may force the Company to incur significant expenses, may result in damage to its business reputation and may adversely impact its business, financial condition or operating results.  The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes disclosure requirements on companies that use certain minerals referred to as "conflict minerals" regardless of their actual country of origin, in their products. These metals are commonly used in electronic components and devices, including the Company's products. These requirements require companies to investigate and disclose whether or not such metals originated from the Democratic Republic of Congo or adjoining countries. The Company's supply chain is very complex and the Company relies on certifications from its suppliers that the minerals which they supply to the Company are sourced from smelters which do not source these minerals from the Democratic Republic of Congo or adjoining countries.  If the Company’s suppliers do not sufficiently verify the origin of the relevant metals and their certifications are found to be inaccurate, the Company may face costs for heightened due diligence analysis of its supply chain, including a formal audit, as well as reputational challenges with its customers.  Under these circumstances, the Company’s customers may purchase products from the Company’s competitors and seek damages from the Company for costs to conduct detailed due diligence of their supply chains.  These outcomes could adversely impact the Company's business, financial condition or operating results.

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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 timing and 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 timing and communications 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 net revenues. The Company derives a significant portion of its net revenues from a few 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, 2013, the Company held $4.7 million in principal of auction rate notes secured by student loans with a fair value of $4.2 million. As of September 30, 2013, all of these auction rate securities have failed to auction successfully due to sell orders exceeding buy orders. The Company has recorded a $317,000 net of tax ($488,000 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 1 of Notes to Condensed Consolidated Financial Statements.

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.

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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.

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 its sell-through 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, do not accurately forecast end market demand, do not properly manage inventory levels, 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.

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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.

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 previous and potential future acquisitions that the Company may pursue involves a number of risks. If the Company is unable to address and resolve these risks successfully, such integrations or acquisitions could disrupt its business. For example, in April 2012 the Company acquired PhaseLink which has been integrated with the Company’s business, and in September 2013, the Company acquired Discera and is in the process of integrating its 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

On July 26, 2012, the Company announced that its Board of Directors had authorized the repurchase of $30.0 million of the Company’s common stock. The total available for repurchase, as of September 30, 2013, was $6.0 million. On October 24, 2013, the Company announced that its Board of Directors had authorized the repurchase of an additional $30.0 million of the Company’s common stock.

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 2013 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 2013	—	$	—	—	$	19,142
February 2013	—	—		—	19,142
March 2013	—	—		—	19,142
Total Q1 2013	—	—		—
April 2013	—	—		—	19,142
May 2013	180,611	10.26		180,611	17,290
June 2013	288,000	9.85		288,000	14,452
Total Q2 2013	468,611	10.01		468,611
July 2013	268,000	10.34		268,000	11,681
August 2013	271,300	10.16		271,300	8,925
September 2013	315,456	9.38		315,456	5,966
Total Q3 2013	854,756	9.93		854,756
Total	1,323,367	9.96		1,323,367

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ITEM 6. EXHIBITS

Exhibit No.	Description
31	Certifications of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32*	Certifications of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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, 2013	By	/s/ Robert E. DeBarr
			Robert E. DeBarr
			Chief Financial Officer and
			Vice President of Finance and Human Resources
			(Authorized Officer andPrincipal Financial Officer)

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EXHIBIT INDEX

Exhibit No.	Description
31	Certifications of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32*	Certifications of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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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