UNITED STATES SECURITIES AND EXCHANGE COMMISSION PRIVATE
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, 1998.
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 0-25236
M I C R E L, I N C O R P O R A T E D
(Exact name of Registrant as specified in its charter)
California 94-2526744
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1849 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 [ ]
As of October 31, 1998 there were 19,952,244 shares of common stock, no par
value, outstanding.
This Report on Form 10-Q includes 16 pages with the Index to Exhibits located
on page 15.
<PAGE>
MICREL, INCORPORATED
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1998
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Income Statements - Three
and Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
MICREL, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997 (1)
------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,900 $ 2,581
Short-term investments 19,914 17,565
Accounts receivable, net 24,806 16,938
Inventories 11,999 10,664
Other current assets 6,715 5,176
-------- --------
Total current assets 72,334 52,924
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 47,996 32,423
OTHER ASSETS 197 180
-------- --------
TOTAL $120,527 $ 85,527
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,591 $ 2,858
Deferred income on shipments to distributors 3,249 1,940
Other current liabilities 9,861 6,432
-------- --------
Total current liabilities 19,701 11,230
LONG-TERM OBLIGATIONS 6,327 3,729
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - authorized:
5,000,000 shares; issued and outstanding: none -- --
Common stock, no par value - authorized:
50,000,000 shares; issued and outstanding:
1998 - 19,936,744; 1997 - 19,483,319 33,000 27,703
Net unrealized gains on short-term investments 12 -
Retained earnings 61,487 42,865
-------- --------
Total shareholders' equity 94,499 70,568
-------- --------
TOTAL $120,527 $ 85,527
======== ========
</TABLE>
(1) Derived from the December 31, 1997 audited balance sheet included in
the 1997 Annual Report on Form 10-K of Micrel, Incorporated.
See notes to condensed consolidated financial statements.
3
<PAGE>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
NET REVENUES $ 35,426 $ 27,203 $102,587 $ 73,643
COST OF REVENUES 15,714 12,660 45,790 34,817
-------- -------- -------- --------
GROSS MARGIN 19,712 14,543 56,797 38,826
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 4,741 3,532 13,564 9,916
Selling, general and administrative 5,273 4,473 16,018 12,087
-------- -------- -------- --------
Total operating expenses 10,014 8,005 29,582 22,003
-------- -------- -------- --------
INCOME FROM OPERATIONS 9,698 6,538 27,215 16,823
OTHER INCOME, NET 297 230 1,000 670
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 9,995 6,768 28,215 17,493
PROVISION FOR INCOME TAXES 3,398 2,301 9,593 5,948
-------- -------- -------- --------
NET INCOME $ 6,597 $ 4,467 $ 18,622 $ 11,545
======== ======== ======== ========
NET INCOME PER SHARE:
Basic $ 0.33 $ 0.23 $ 0.94 $ 0.61
======== ======== ======== ========
Diluted $ 0.31 $ 0.21 $ 0.88 $ 0.56
======== ======== ======== ========
SHARES USED IN COMPUTING PER
SHARE AMOUNTS:
Basic 19,882 19,198 19,734 18,955
======== ======== ======== ========
Diluted 21,133 21,054 21,141 20,775
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1998 1997
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 26,885 $ 17,804
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (23,843) (16,818)
Purchases of short-term investments (33,549) (29,094)
Proceeds from sales and maturities of short-term
investments 31,200 25,900
--------- ---------
Net cash used in investing activities (26,192) (20,012)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings 4,000 --
Repayments of long-term debt (791) (904)
Proceeds from the issuance of common stock, net 2,417 1,921
--------- ---------
Net cash provided by financing activities 5,626 1,017
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,319 (1,191)
CASH AND CASH EQUIVALENTS - Beginning of period 2,581 3,239
--------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 8,900 $ 2,048
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 112 $ 143
========= =========
Cash paid for income taxes $ 6,419 $ 4,084
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MICREL,
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information - The accompanying condensed consolidated
financial statements of Micrel, Incorporated and its wholly-owned
subsidiaries ("Micrel" or the "Company") as of September 30, 1998 and for
the quarter and nine months ended September 30, 1998 and 1997 are
unaudited. In the opinion of management, the condensed consolidated
financial statements include all adjustments (consisting only of normal
recurring accruals) that management considers necessary for a fair
presentation of its financial position, operating results and cash flows
for the interim periods presented. Operating results and cash flows for
interim periods are not necessarily indicative of results for the entire
year.
This financial data 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, 1997.
Net Income per Common and Equivalent Share - Basic net income per share
is computed by dividing net income by the number of weighted average
common shares outstanding. Diluted net income per share reflects
potential dilution from outstanding stock options using the treasury
stock method.
Reconciliation of weighted average shares used in computing net income
per share is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 19,882 19,198 19,734 18,955
Dilutive effect of stock options
outstanding using the treasury
stock method 1,251 1,856 1,407 1,820
------- ------- ------- -------
Shares used in computing diluted
net income per share 21,133 21,054 21,141 20,775
======= ======= ======= =======
</TABLE>
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Finished goods $ 2,166 $ 2,480
Work in process 7,693 6,351
Raw materials 2,140 1,833
--------- ---------
$ 11,999 $ 10,664
========= =========
</TABLE>
3. BORROWING ARRANGEMENTS
On September 30, 1998, the Company extended its revolving line of credit
and security agreement, which was scheduled to expire September 30, 1998,
to November 4, 1998 at which date the agreement was amended and extended
through September 30, 1999. Under the amended agreement, the Company can
borrow up to 80% of its eligible accounts receivable to a maximum of $5.0
million. Borrowings under the line of credit agreement bear interest
rates of, at the company's election, the prime rate or the Banks offshore
rate, which approximates LIBOR plus 2.25%. Borrowings are collateralized
by substantially all of the assets of the Company. There were no
borrowings under this revolving line of credit at September 30, 1998.
6
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MICREL,
(Unaudited)
Under the same amended security agreement, the Company has a non-
revolving bank line of credit of $20.0 million for funding purchases of
capital equipment under which the Company may borrow up to 100% of the
cost of such equipment. Amounts borrowed under this credit line are
converted to four-year installment notes. All equipment notes are
collateralized by the equipment purchased and bear interest rates of, at
the Company's election, a fixed rate based on the four-year U.S. Treasury
Bill rate plus 3.0% or an annual adjustable rate based on the one-year
U.S Treasury Bill rate plus 3.0%. There were no borrowings under the
amended line of credit at September 30, 1998.
In September, 1998, under the previous non-revolving bank line of credit,
the Company borrowed $2.0 million which was subsequently converted to a
four-year installment note bearing interest at the prime rate. As of
September 30, 1998, the Company had $4.6 million outstanding under term
notes that are collateralized by the equipment purchased.
The agreements contain certain restrictive covenants that include a
restriction on the declaration and payment of dividends without the
lender's consent. The Company was in compliance with all such covenants
at September 30, 1998.
4. SIGNIFICANT CUSTOMERS
No single customer accounted for 10% or more of net revenues during the
nine months ended September 30, 1998 or the comparable period in 1997. At
September 30, 1998, one customer accounted for approximately 19% of net
accounts receivable.
5. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires an enterprise to report, by major components and as
a single total, the change in net assets during the period from non-owner
sources. Comprehensive income includes all changes in equity during a
period except those resulting from investments by and distributions to
the Company's shareholders. Comprehensive income, which was comprised of
the Company's net income for the periods and unrealized gains or losses
on investments, was $6.6 million and $18.6 million for the quarter and
nine months ended September 30, 1998, respectively, and $4.5 million and
$11.5 million for the comparable periods in 1997.
6. EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. Adoption of
this statement will not impact the Company's consolidated financial
position, results of operations or cash flows. The Company will adopt
this statement in its financial statements for the year ending December
31, 1998.
7. SUBSEQUENT EVENTS
On November 9, 1998, the Company completed the acquisition of Synergy
Semiconductor Corporation ("Synergy"), a privately held U.S. provider of
mixed-signal and digital integrated circuits for the communications, high
performance computing and ATE industries. The Company acquired all
outstanding shares of capital stock of Synergy in exchange for
approximately $9.9 million in cash. The acquisition will be accounted for
as a purchase transaction. The Company expects that a portion of the
total purchase price will be allocated to in-process research and
development and will be charged to operations during the quarter ending
December 31, 1998.
In November, 1998, under a non-revolving bank line of credit (see Note 3
of "Notes to Condensed Consolidated Financial Statements"), the Company
borrowed $8.0 million which was subsequently converted to a four-year
installment note bearing a fixed interest rate of 7.5% over the term of
the note.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Micrel designs, develops, manufactures and markets a range of high
performance standard analog integrated circuits. These circuits are used in
a wide variety of electronics products, including those in the
communications, computer and industrial markets. In addition to standard
products, the Company manufactures custom analog and mixed-signal circuits
and provides wafer foundry services. The Company derives a substantial
portion of its net revenues from standard products. While the Company
continues to maintain a long-term strategy that focuses on standard products
sales revenues, the Company has recently emphasized custom and foundry
product sales as an interim response to the Asian financial situation.
Standard products sales represented 69% of net revenues for the quarter
ended September 30, 1998 as compared to 77% for the similar period in the
prior year. For the nine months ended September 30, 1998 and 1997, the
Company's standard products sales accounted for 70% and 75% of the Company's
net revenues, respectively. 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.
Results of Operations
The following table sets forth certain operating data as a percentage of
total net revenues for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 4.4 46.5 44.6 47.3
----- ----- ----- -----
Gross margin 55.6 53.5 55.4 52.7
----- ----- ----- -----
Operating expenses:
Research and development 13.4 13.0 13.2 13.4
Selling, general and administrative 14.9 16.5 15.6 16.4
----- ----- ----- -----
Total operating expenses 28.3 29.5 28.8 29.8
----- ----- ----- -----
Income from operations 27.3 24.0 26.6 22.9
Other income, net 0.9 0.9 1.0 0.9
----- ----- ----- -----
Income before income taxes 28.2 24.9 27.6 23.8
Provision for income taxes 9.6 8.5 9.4 8.1
----- ----- ----- -----
Net income 18.6% 16.4% 18.2% 15.7%
===== ===== ===== =====
</TABLE>
Net Revenues. Net revenues increased for the quarter and nine months ended
September 30, 1998 as compared to the comparable periods in the prior year.
Net revenues were $35.4 million and $102.6 million for the quarter and nine
months ended September 30, 1998, respectively, increases of 30% and 39% over
$27.2 million and $73.6 million for the comparable 1997 periods. The growth
in net revenues on a quarterly and year-to-date basis is due, in part, to
higher standard products revenues which, while declining on a percentage
basis to 69% and 70% of net revenues for the quarter and nine months ended
September 30, 1998, respectively, from 77% and 75% for each of the comparable
periods in 1997, grew in absolute dollars. On a dollar basis, standard
products revenues increased 16% to $24.4 million for the quarter ended
September 30, 1998 from $21.0 million for the comparable period in 1997 and
by 30% to $72.2 million for the nine months ended September 30, 1998 from
$55.4 million for the comparable period in 1997. Sales of standard products
by the Company during the quarter and nine months were led by the increased
sales of low dropout regulators and computer peripheral devices. Such
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
products were sold to manufacturers of telecommunications, portable
computing, computing peripherals and industrial products. Custom and foundry
products revenues increased 77% to $11.0 million for the quarter ended
September 30, 1998 from $6.2 million for the comparable period in 1997 and
66% to $30.3 million for the nine months ended September 30, 1998 from $18.3
million for the comparable period in 1997. During the quarter and nine months
ended September 30, 1998 custom and foundry products increased to 31% and 30%
of net revenues, respectively, compared to 23% and 25% for the comparable
periods in 1997. This increase in custom and foundry products, which are sold
primarily within the United States, reflects the Company's recent interim
response to the Asian financial situation. Management believes that the
range of the Company's products - from standard products to custom and
foundry products - as well as the geographic diversity of its customers
should enable the Company to maintain stable revenue levels in the near
future despite current economic conditions in Asia and elsewhere.
The Company believes that pricing pressures continue to be experienced by
the general technology sector and by companies in the analog segment of the
semiconductor industry. During the third quarter of 1998, standard product
customer demand continued to be short-term focused due to shorter than
historical order lead times. These factors affect the Company's ability to
predict future sales growth, profitability and forward visibility. The
Company's ability to predict demand in future quarters also continues to be
affected by the trend of its customers to place orders close to desired
shipment dates and to reduce their long-term purchasing commitments, which
is the result of less predictable demand for such customers' products and
increased product availability in the semiconductor industry. The Company
has sought to address these reduced order lead times by implementing faster
production cycles and slightly increasing inventory levels.
International sales represented 42% and 44% of net revenues for the quarter
and nine months ended September 30, 1998 as compared to 50% and 49% for the
comparable periods in the prior year, respectively, as a result of the
change in product mix emphasizing custom and foundry product sales as an
interim response to the Asian situation. On a dollar basis, international
sales totaled $14.9 million and $45.4 million for the quarter and nine
months ended September 30, 1998, increases of 9% and 27% over $13.7 million
and $35.8 million for the comparable periods in 1997, respectively. The
dollar increase in international sales for the quarter ended September 30,
1998 resulted from increased standard products shipments to Asian markets
while shipments to Europe remained relatively stable. The dollar increase
in international sales for the nine months ended September 30, 1998 resulted
from increased standard products shipments to Asian markets and, to a lesser
extent to Europe.
The Company's international sales are primarily denominated in U.S.
currency. Consequently, changes in exchange rates that strengthen the U.S.
dollar could increase the price in local currencies of the Company's
products in foreign markets and make the Company's products relatively more
expensive than 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 with
respect to such fluctuations.
The Company defers recognition of revenue derived from sales to North
American distributors until such distributors resell the Company's products
to their customers. Sales to international distributors are recognized upon
shipment. The Company estimates international distributor returns and
provides an allowance as the revenue is recognized.
Gross Margin. Gross margin is affected by the volume of product sales,
product mix, manufacturing utilization, product yields and average selling
prices. The Company's gross margin increased to 56% and 55% for the quarter
and the nine months ended September 30, 1998 from 54% and 53% for the
quarter and the nine months ended September 30, 1997, respectively. The
improvement in gross margin reflected an increase in manufacturing
efficiency due to greater capacity utilization that was partially offset by
declining average selling prices. The Company believes that gross margins
are likely to remain stable throughout the balance of 1998.
Research and Development Expenses. Research and development expenses include
costs associated with the development of new processes and the definition,
design and development of standard products. The Company also expenses
prototype wafers and new production mask sets related to new products as
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
research and development costs until products based on new designs are fully
characterized by the Company and are demonstrated to support published data
sheets and satisfy reliability tests.
The Company's research and development expenses increased $1.2 million or 34%
to $4.7 million for the quarter ended September 30, 1998 from $3.5 million
for the comparable period in 1997. For the nine months ended September 30,
1998, research and development expenses increased by $3.7 million to $13.6
million from $9.9 million for the comparable prior year period. As a
percentage of net revenues, research and development expenses represented 13%
of net revenues for the quarter and the nine months ended September 30, 1998
as compared to 13% of net revenues for the quarter and the nine months ended
September 30, 1997, respectively. The dollar increase in research and
development expenses during the quarter and nine months ended September 30,
1998 was primarily due to increased costs associated with the Company's
conversion to six-inch wafer fabrication and increased engineering staffing
and material and processing costs to support the development of new products
and new wafer fabrication processes. The Company believes that the
development and introduction of new standard products is critical to its
future success and expects that research and development expenses will
increase on a dollar basis in the future.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased on a dollar basis to approximately $5.3
million or 15% of net revenues for the third quarter in 1998 from $4.5
million or 16% of net revenues for the comparable period in 1997. For the
nine months ended September 30, 1998, these expenses increased on a dollar
basis to $16.0 million or 16% of net revenues from $12.1 million or 16% for
the comparable period in 1997. The dollar increase during the quarter ended
September 30, 1998 was principally attributable to increased wages and
salaries, sales commissions, and other sales and administrative expenses
associated with the growth of the Company's revenues. The dollar increase
during the nine months ended September 30, 1998 was principally attributable
to increased wages and salaries, sales commissions, profit sharing accruals
to promote personnel retention, higher legal accruals, and other sales and
administrative expenses associated with the growth of the Company's revenues.
Other Income, Net. Other income, net reflects interest income from
investments in short-term investment grade securities offset by interest
expense incurred on line of credit borrowings and term notes. Other income,
net increased by $67,000 to $297,000 for the quarter ended September 30, 1998
from $230,000 for the comparable period in 1997. For the nine months ended
September 30, 1997, other income, net increased to $1.0 million from $0.7
million for the comparable period in 1997. Such increases in the quarter and
nine months ended September 30, 1998 reflected an increase in interest income
due to an increase in average cash and investment balances. The Company
expects to continue to utilize term financing as appropriate to finance its
capital equipment needs.
Provision for Income Taxes. For each of the quarters and nine months ended
September 30, 1998 and 1997, the provision for income taxes was 34% of income
before taxes for each quarter. The income tax provision for such interim
periods reflects the Company's estimated annual income tax rate. The 1998 and
1997 income tax provisions differ from taxes computed at the federal
statutory rate due to the effect of state taxes offset by the benefit from
the foreign sales corporation, federal and state research and development
credits, and state manufacturing credits.
Acquisition of Synergy Semiconductor. On November 9, 1998, the Company
acquired all outstanding shares of capital stock of Synergy in exchange for
approximately $9.9 million in cash. The acquisition will be accounted for as
a purchase transaction. The Company expects that a portion of the total
purchase price will be allocated to in-process research and development and
will be charged to operations during the quarter ending December 31, 1998.
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, 1998 consisted of cash and short-term
investments of $28.8 million and bank borrowing arrangements. Borrowing
agreements, as amended November 4, 1998, (see Note 3 of "Notes to Condensed
Consolidated Financial Statements") consisted of (i) $5.0 million under a
revolving line of credit, of which all was unused and available, and (ii)
$20.0 million under a non-revolving line of credit of which all was unused
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
and available. The two lines of credit are covered by the same loan and
security agreement. This agreement expires on September 30, 1999, subject to
automatic renewal on a month to month basis thereafter unless terminated by
either party upon 30 days notice. Borrowings are collateralized by
substantially all of the Company's assets. The agreement contains certain
restrictive covenants that include a restriction on the declaration and
payment of dividends without the lender's consent. The Company was in
compliance with all such covenants at September 30, 1998.
The non-revolving bank line of credit that is covered by the loan agreement
described above, can be used to fund purchases of capital equipment whereby
the Company may borrow up to 100% of the cost of such equipment. Amounts
borrowed under this credit line are converted to four-year installment notes.
All equipment notes are collateralized by the equipment purchased and bear
interest rates of, at the Company's election, a fixed rate based on the four-
year U.S. Treasury Bill rate plus 3.0% or an annual adjustable rate based on
the one-year U.S Treasury Bill rate plus 3.0%.
As of September 30, 1998, the Company had $4.6 million outstanding under term
notes that are collateralized by the equipment purchased.
The Company's cash flows from operating activities increased to $26.9
million for the nine months ended September 30, 1998 from $17.8 million for
the comparable period in the prior year. The cash flows from operating
activities generated by the Company in the nine months ended September 30,
1998 were primarily attributable to net income (plus non-cash charges for
depreciation and amortization) of approximately $26.9 million combined with
increases in income taxes payable of $4.1 million, accounts payable of $3.7
million, accrued compensation and other liabilities of $1.4 million and
deferred income of $1.3 million, which were partially offset by increases in
accounts receivable of $7.9 million, inventories of $1.3 million, and
prepaid expenses and other assets of $375,000. The Company's cash flows from
operating activities generated by the Company for the nine months ended
September 30, 1997 were primarily due to net income (plus non-cash charges
for depreciation and amortization) of $16.0 million combined with a $3.2
million decrease in inventory and a $1.8 million increase in income taxes
payable and $0.8 million increase in accounts payable, which were partially
offset by a $4.7 million increase in accounts receivable.
Investing activities during the nine months ended September 30, 1998 used
cash of approximately $26.2 million as compared to $20.0 million of cash
used for investing activities during the comparable 1997 period. Cash used
for investing activities during the nine months ended September 30, 1998
resulted primarily from net purchases of $23.8 million of property, plant
and equipment principally associated with the Company's conversion to six-
inch wafer production combined with net purchases of short-term investments
of $2.3 million. Cash used for investing activities during the nine months
ended September 30, 1997 were due to net purchases of property, plant and
equipment of $16.8 million primarily associated with the Company's
conversion to six-inch wafer production combined with short-term investments
of $3.2 million.
The Company's financing activities during the nine months ended
September 30, 1998 provided cash of approximately $5.6 million as compared
to $1.0 million during the comparable period in 1997. Cash provided by
financing activities during the nine months ended September 30, 1998
resulted from $3.2 million in proceeds from long-term borrowings net of
repayments and $2.4 million in proceeds from the issuance of common stock
through the exercise of stock options. Cash provided by financing activities
during the nine months ended September 30, 1997 was the result of $1.9
million in proceeds from the issuance of common stock through the exercise
of stock options, which were partially offset by $0.9 million in repayments
of long-term debt during the same period.
The Company's working capital increased by $10.9 million to $52.6 million as
of September 30, 1998 from $41.7 million as of December 31, 1997. The
increase was primarily attributable to a $8.7 million increase in cash, cash
equivalents and short-term investments combined with increases in accounts
receivable of $7.9 million, other current assets of $1.5 million, and
inventories of $1.3 million, which were partially offset by a $3.7 million
increase in accounts payable, a $3.4 million increase in other current
liabilities and a $1.3 million increase in deferred income. The Company's
short-term investments were principally invested in investment grade,
interest-bearing securities.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company currently intends to spend up to approximately $30 million
during the next twelve months primarily for the purchase of additional wafer
and test manufacturing equipment and leasehold improvements. This level of
capital expenditures represents a reduction from previously projected levels
as a result of the acquisition of Synergy Semiconductor. On November 9,
1998, the Company acquired all outstanding shares of capital stock of
Synergy in exchange for approximately $9.9 million in cash. (See Note 7 of
"Notes to Condensed Consolidated Financial Statements"). The Company expects
that its cash requirements through mid-1999 will be met by its existing cash
balances and short-term investments, cash from operations and its existing
credit facilities.
Factors That May Affect Operating Results
The statements contained in this Report on Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements
include: statements regarding future products or product development;
statements regarding future research and development spending and the
Company's product development strategy; statements regarding the levels of
international sales; statements regarding future expenditures; and
statements regarding Year 2000 compliance costs. All forward-looking
statements included in this document are based on information available to
the Company on the date hereof, and the Company assumes no obligation to
update any such forward-looking statements. It is important to note that the
Company's actual results could differ materially from those in such forward-
looking statements. Some of the factors that could cause actual results to
differ materially are set forth below.
The Company has generated a substantial portion of its net revenues from
export sales. The Company believes that a substantial portion of its future
net revenues will depend on export sales to customers in international
markets including Asia. International markets are subject to a variety of
risks, including changes in policy by foreign governments, social conditions
such as civil unrest, and economic conditions including high levels of
inflation, fluctuation in the value of foreign currencies and currency
exchange rates and trade restrictions or prohibitions. 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
conditions in Asia or elsewhere. Such factors could adversely affect the
Company's future revenues, financial condition or 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, market acceptance of the Company's and its customers' products,
competitive pricing pressures, the Company's ability to meet increases in
demand, the Company's ability to introduce new products on a timely basis,
the timing of new product announcements and introductions by the Company or
its competitors, the timing and extent of research and development expenses,
fluctuations in manufacturing yields, cyclical semiconductor industry
conditions, changing economic conditions in the regions which the Company
serves, the timing of any mergers or acquisitions, the Company's access to
advanced process technologies and the timing and extent of process
development costs. 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
and results of operations.
The Company has transitioned its business to rely more heavily on the sale
of standard products. The Company believes that a substantial portion of its
net revenues in the future will continue to depend upon standard products
sales. As compared with the custom and foundry products business, the
standard products business is characterized by shorter product lifecycles,
greater pricing pressure, larger competitors and more rapid technological
change. Generally, the standard products market is a rapidly changing market
in which the Company faces the risk that, as the market changes, its product
offerings will become obsolete. The Company competes in the standard
products market with established companies, most of which have substantially
greater financial, engineering, manufacturing and marketing resources than
the Company. No assurance can be given that the Company will be able to
compete successfully in the standard products market or that it will be able
to successfully introduce new standard products in the future. The failure
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
of the Company to compete successfully in the standard products business
would materially and adversely affect the Company's financial condition and
results of operations.
The Company is also currently transitioning to the processing of six-inch
wafers, which will involve process lithography that will handle items as
small as one micron. There can be no assurance that the transition to six-
inch wafer processing will be achieved on schedule without encountering any
delays in the process implementation. Nor can there be any assurance that
the Company will achieve acceptable manufacturing yields or that the
operating income margins on such products will be comparable to those
realized in connection with the Company's four inch wafer fabrication
processes. Failure to achieve acceptable yields or margins could adversely
affect the Company's financial condition and results of operations.
The analog semiconductor industry is highly competitive and subject to rapid
technological change. Significant competitive factors in the analog market
include product features, performance, price, timing of product
introductions, emergence of new computer standards, quality and customer
support. Because the standard products market for analog integrated circuits
is diverse and highly fragmented, the Company encounters different
competitors in its various market areas. Most of these competitors have
substantially greater technical, financial and marketing resources and
greater name recognition than the Company. Due to the increasing demands for
analog circuits, the Company expects intensified competition from existing
analog circuit suppliers and the entry of new competition, including
international companies. Increased competition could adversely affect the
Company's financial condition or results of operations. There can be no
assurance that the Company will be able to compete successfully in either
the standard products or custom and foundry products business in the future
or that competitive pressures will not adversely affect the Company's
financial condition and results of operations.
The fabrication of integrated circuits is a highly complex and precise
process. Minute 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, wafer breakage or
other factors can cause a substantial percentage of wafers to be rejected or
numerous die on each wafer to be nonfunctional. Moreover, there can be no
assurance that the Company will be able to maintain acceptable manufacturing
yields in the future.
The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. There can be no assurance
that these existing claims or any other assertions (or claims for indemnity
resulting from infringement claims) will not materially adversely affect the
Company's business, financial condition and results of operations.
The Company is aware of the "Year 2000 Issue" which is a result of computer
programs being written using two digits rather than four to define the
applicable year. If the computer programs with date-sensitive functions are
not Year 2000 compliant, they may recognize a date using "00" as the year
1900 rather than the year 2000. Systems that do not properly recognize such
information could generate erroneous data or cause systems to fail. System
failures could cause, among other things, a temporary disruption in the
manufacturing and administrative operations of the Company which could have
a material adverse affect on the Company. In response to the Year 2000
issue, the Company has developed, and is actively engaged in the
implementation of, a Year 2000 compliance plan. This plan requires the
evaluation of all Company systems for Year 2000 compliance and the
replacement or upgrade of non-compliant systems. The Company has completed
its evaluation of all primary systems and has determined that the majority
of these systems are compliant. The Company believes the cost to bring the
remaining systems into compliance will be immaterial. The plan also requires
verification of Year 2000 compliance from all major suppliers. The Company
has not completed the vendor compliance evaluation, however, the Company
believes that the cost to replace non-compliant suppliers will be
immaterial. The Company estimates that all reprogramming or replacement
efforts will be completed by June 30, 1999 and has not developed a
contingency plan for the event of non-compliance before the year 2000. Based
on assessment efforts to date, the Company does not believe that the Year
2000 issue will have a material adverse affect on the Company's financial
condition and results of operations. The estimated costs of Year 2000
compliance and the date on which the Company believes it will complete the
Year 2000 compliance requirements are based on management's best estimates,
which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. There can be no assurance that these
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
estimates will be achieved and actual results could differ materially from
those anticipated. In addition, there can be no assurance that the systems
of other third parties on which the Company relies will be Year 2000
compliant in a timely manner or that such non-compliance would not have a
material adverse affect on the Company's financial condition and results of
operations.
The Company's future success depends in part upon its intellectual property,
including patents, trade secrets, know-how and continuing technology
innovation. 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 to the Company or that any of
the Company's pending or future patent applications will be issued with the
scope of the claims sought by the Company, if at all. Furthermore, there can
be no assurance that others will not develop technologies that are similar
or superior to the Company's technology, duplicate the Company's technology
or design around the patents owned by the Company.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain claims and lawsuits have arisen against the Company in its normal
course of business. The Company believes that these claims and lawsuits will
not have a material adverse effect on the Company's financial position, cash
flow or results of operation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
Exhibit
Number Description
------ ----------------------------------------------------------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. The Company did not file any Reports on Form 8-K
during the quarter ended September 30, 1998.
15
<PAGE>
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 13, 1998 By /s/ ROBERT J. BARKER
---------------------
Robert J. Barker
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,900
<SECURITIES> 19,914
<RECEIVABLES> 24,806
<ALLOWANCES> 0
<INVENTORY> 11,999
<CURRENT-ASSETS> 72,334
<PP&E> 47,996
<DEPRECIATION> 0
<TOTAL-ASSETS> 120,527
<CURRENT-LIABILITIES> 19,701
<BONDS> 0
0
0
<COMMON> 33,000
<OTHER-SE> 61,499
<TOTAL-LIABILITY-AND-EQUITY> 120,527
<SALES> 102,587
<TOTAL-REVENUES> 102,587
<CGS> 45,790
<TOTAL-COSTS> 45,790
<OTHER-EXPENSES> 29,582
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 28,215
<INCOME-TAX> 9,593
<INCOME-CONTINUING> 18,622
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,622
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.88
</TABLE>
