UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999.
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
incorporation or organization) Identification No.)
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 July 30, 1999 there were 20,493,597 shares of common stock, no par
value, outstanding.
<PAGE>
MICREL, INCORPORATED
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1999
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - June 30, 1999
and December 31, 1998 3
Condensed Consolidated Income Statements - For the
Three and Six Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<S> <C> <C>
June 30, December 31,
1999 1998 (1)
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,364 $ 13,415
Short-term investments 25,679 15,029
Accounts receivable, net 28,532 24,079
Inventories 20,657 16,069
Deferred income taxes 11,040 11,967
Prepaid expenses and other 1,003 693
---------- ----------
Total current assets 97,275 81,252
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 58,724 54,920
INTANGIBLE ASSETS, NET 7,804 8,878
OTHER ASSETS 321 320
---------- ----------
TOTAL $ 164,124 $ 145,370
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,244 $ 7,942
Income taxes payable 2,971 4,316
Deferred income on shipments to distributors 4,417 4,414
Current portion of long-term debt 5,374 5,579
Other current liabilities 8,496 8,133
---------- ----------
Total current liabilities 28,502 30,384
LONG-TERM DEBT 11,243 14,007
OTHER LONG-TERM OBLIGATIONS 5,217 5,268
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:
1999 - 20,470,882; 1998 - 20,091,196 43,631 35,660
Accumulated other comprehensive income (loss) (8) 10
Retained earnings 75,539 60,041
---------- ----------
Total shareholders' equity 119,162 95,711
---------- ----------
TOTAL $ 164,124 $ 145,370
========== ==========
(1) Derived from the December 31, 1998 audited balance sheet included in
the 1998 Annual Report on Form 10-K of Micrel, Incorporated.
See notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
NET REVENUES $ 44,178 $ 34,502 $ 84,749 $ 67,161
COST OF REVENUES 19,439 15,380 37,384 30,076
-------- -------- -------- --------
GROSS PROFIT 24,739 19,122 47,365 37,085
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 6,210 4,708 12,028 8,823
Selling, general and
administrative 6,430 5,228 12,251 10,745
-------- -------- -------- --------
Total operating expenses 12,640 9,936 24,279 19,568
-------- -------- -------- --------
INCOME FROM OPERATIONS 12,099 9,186 23,086 17,517
OTHER INCOME, NET 49 359 45 703
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 12,148 9,545 23,131 18,220
PROVISION FOR INCOME TAXES 4,009 3,246 7,633 6,195
-------- -------- -------- --------
NET INCOME $ 8,139 $ 6,299 $ 15,498 $ 12,025
======== ======== ======== ========
NET INCOME PER SHARE:
Basic $ 0.40 $ 0.32 $ 0.77 $ 0.61
======== ======== ======== ========
Diluted $ 0.37 $ 0.30 $ 0.70 $ 0.57
======== ======== ======== ========
SHARES USED IN COMPUTING PER
SHARE AMOUNTS:
Basic 20,338 19,736 20,242 19,660
======== ======== ======== ========
Diluted 22,226 21,180 22,071 21,140
======== ======== ======== ========
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<S> <C> <C>
Six Months Ended
June 30,
----------------------
1999 1998
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 18,307 $ 20,729
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (11,642) (18,447)
Purchases of short-term investments (33,758) (27,458)
Proceeds from sales and maturities of short-term
investments 23,090 22,200
--------- ---------
Net cash used in investing activities (22,310) (23,705)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings -- 2,000
Repayments of long-term debt (2,969) (540)
Proceeds from the issuance of common stock, net 3,897 1,681
--------- ---------
Net cash provided by financing activities 928 3,141
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,075) 165
CASH AND CASH EQUIVALENTS - Beginning of period 13,415 2,581
--------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 10,340 $ 2,746
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 758 $ 51
========= =========
Cash paid for income taxes $ 3,958 $ 4,699
========= =========
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information - The accompanying condensed consolidated
financial statements of Micrel, Incorporated and its wholly-owned
subsidiaries ("Micrel" or the "Company") as of June 30, 1999 and for the
three and six months ended June 30, 1999 and 1998 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, 1998.
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>
<S> <C> <C>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Weighted average common shares
outstanding 20,338 19,736 20,242 19,660
Dilutive effect of stock options
outstanding, using the treasury
stock method 1,888 1,444 1,829 1,480
-------- -------- -------- --------
Shares used in computing diluted
net income per share 22,226 21,180 22,071 21,140
======== ======== ======== ========
</TABLE>
2. INVENTORIES
<TABLE>
Inventories consist of the following (in thousands):
<S> <C> <C>
June 30, December 31,
1999 1998
------------ ------------
Finished goods $ 4,605 $ 4,540
Work in process 14,234 9,745
Raw materials 1,818 1,784
--------- ---------
$ 20,657 $ 16,069
========= =========
</TABLE>
3. SIGNIFICANT CUSTOMERS
No single customer accounted for 10% or more of net revenues during the
three and six months ended June 30, 1999 and 1998, respectively.
6
4. 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 losses on investments,
was $8.1 million and $15.5 million for the three and six months ended June
30, 1999, respectively, and $6.3 million and $12.0 million for the
comparable periods in 1998.
5. SEGMENT REPORTING
In 1998, the Company adopted 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. The Company operates in two reportable segments, standard
products and custom and foundry products.
<TABLE>
Net Revenues by Segment
(Dollars in thousands)
<S> <C> <C> <C> <C>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net Revenues:
Standard Products $ 33,817 $ 23,123 $ 65,278 $ 47,849
Custom and Foundry Products 10,361 11,379 19,471 19,312
-------- -------- -------- --------
Total net revenues $ 44,178 $ 34,502 $ 84,749 $ 67,161
======== ======== ======== ========
As a Percentage of Total Net Revenues:
Standard Products 77% 67% 77% 71%
Custom and Foundry Products 23 33 23 29
-------- -------- -------- --------
Total net revenues 100% 100% 100% 100%
======== ======== ======== ========
</TABLE>
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Adoption of this
statement is not expected to impact the Company's consolidated financial
position, results of operations or cash flows materially. The Company is
required to adopt this statement in the first quarter of fiscal year 2001,
with early adoption permitted.
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. With the Company's acquisition of
Synergy Semiconductor in November 1998, the Company broadened its standard
product offerings to include high-speed mixed-signal and digital integrated
circuits.
The Company derives a substantial portion of its net revenues from standard
products. Standard products sales represented 77% of net revenues for the
three months ended June 30, 1999 as compared to 67% for the similar period
in the prior year. For the six months ended June 30, 1999 and 1998, the
Company's standard products sales accounted for 77% and 71% 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. The standard products business is characterized by
short-term orders and shipment schedules, and customer orders typically can
be canceled or rescheduled without significant penalty to the customer.
Since most standard products backlog is cancelable without significant
penalty, the Company typically plans its production and inventory levels
based on internal forecasts of customer demand, which is highly
unpredictable and can fluctuate substantially. In addition, the Company is
limited in its ability to reduce costs quickly in response to any revenue
shortfalls.
The Company may experience significant fluctuations in its results of
operations. Factors that affect the Company's results of operations include
the volume and timing of orders received, changes in the mix of products
sold, competitive pricing pressures and the Company's ability to meet
increasing demand. As a result of the foregoing or other factors, there can
be no assurance that the Company will not experience material fluctuations
in future operating results on a quarterly or annual basis, which could
materially and adversely affect the Company's business, financial
condition, results of operations or cash flows.
Results of Operations
The following table sets forth certain operating data as a percentage of
total net revenues for the periods indicated.
<TABLE>
<S> <C> <C> <C> <C>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
------ ------ ------ ------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 44.0 44.6 44.1 44.8
------ ------ ------ ------
Gross margin 56.0 55.4 55.9 55.2
Operating expenses:
Research and development 14.1 13.6 14.2 13.1
Selling, general and administrative 14.5 15.2 14.5 16.0
------ ------ ------ ------
Total operating expenses 28.6 28.8 28.7 29.1
------ ------ ------ ------
Income from operations 27.4 26.6 27.2 26.1
Other income, net 0.1 1.1 0.1 1.0
------ ------ ------ ------
Income before income taxes 27.5 27.7 27.3 27.1
Provision for income taxes 9.1 9.4 9.0 9.2
------ ------ ------ ------
Net income 18.4% 18.3% 18.3% 17.9%
====== ====== ====== ======
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Net Revenues. Net revenues increased 28% to $44.2 million for the three
months ended June 30, 1999 from $34.5 million for the same period in 1998.
Net revenues increased 26% to $84.7 million for the six months ended
June 30, 1999 from $67.2 million for the same period in 1998. The growth
in net revenues on a quarterly and year-to-date basis is due primarily to
higher standard product revenues which grew to 77% of net revenues for the
three and six months ended June 30, 1999, respectively, from 67% and 71% of
each of the comparable periods in 1998. Standard products revenues
increased 46% to $33.8 million for the three months ended June 30, 1999
from $23.1 million for the same period in 1998. Standard products revenues
increased 36% to $65.3 million for the six months ended June 30, 1999 from
$47.8 million for the comparable period in the prior year. Sales of
standard products by the Company during the three and six months were led
by low dropout regulators and Synergy communications products. Such
products were sold to manufacturers of telecommunications, portable
computing, computing peripherals and industrial products. Custom and
foundry products revenues decreased to 23% of net revenues for the three
and six months ended June 30, 1999 from 33% and 29% for the comparable
periods in 1998, respectively. These declines as a percent of total
revenues reflect a reduced emphasis on custom and foundry products as
compared to the same periods in 1998, in which the Company increased its
emphasis on custom and foundry products as an interim response to the Asian
financial crisis. On a dollar basis, custom and foundry products revenues
decreased 9% to $10.4 million for the three months ended June 30, 1999 from
$11.4 for the comparable period in 1998. Custom and foundry products
revenues increased 1% to $19.5 million for the six months ended June 30,
1999 from $19.3 for the comparable period in 1998. 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 increase revenue levels in the near future.
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 second quarter and first six months of
1999, 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. The Company has sought to address these reduced order lead
times by implementing faster production cycles and increasing inventory
levels as a percentage of revenues.
International sales represented 43% and 45% of net revenues for the three
and six months ended June 30, 1999 and for the comparable periods in the
prior year, respectively. On a dollar basis, international sales increased
27% to $18.8 million for the three months ended June 30, 1999 from $14.9
million for the comparable period in 1998. International sales increased
24% to $37.8 million for the six months ended June 30, 1999, from $30.5
million for the comparable period in 1998. The dollar increase in
international sales resulted from shipments to manufacturers of personal
computers and communications products and demand for the Company's products
primarily in Asia.
The Company's international sales are 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 domestic,
Canadian, and certain other international distributors until such
distributors resell the Company's products to their customers. Generally,
sales to international distributors are recognized upon shipment and the
Company estimates returns and provides an allowance as this revenue is
recognized.
Gross Profit. Gross profit 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% for the three and the
six months ended June 30, 1998 from 55% for the three and the six months
ended June 30, 1998, respectively. The improvement in gross margin
reflected an increase in manufacturing efficiency due to greater capacity
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
utilization and reductions in contract assembly and test unit costs, which
were partially offset by declining average selling prices.
Manufacturing yields, which affect gross margin, may from time to time
decline because the fabrication of integrated circuits is a highly complex
and precise process. Factors such as minute impurities and difficulties in
the fabrication process can cause a substantial percentage of wafers to be
rejected or numerous die on each wafer to be nonfunctional. There can be no
assurance that the Company in general will be able to maintain acceptable
manufacturing yields in the future.
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 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.
As a percentage of net revenues, research and development expenses
represented 14% of net revenues for the three months ended June 30, 1999
and 1998, respectively. On a dollar basis, research and development
expenses increased $1.5 million or 32% to $6.2 million for the three months
ended June 30, 1999 from $4.7 million for the comparable period in 1998.
For the six months ended June 30, 1999, research and development increased
to 14% of net revenues as compared to 13% for the comparable period in
1998. The increase during the three and six months ended June 30, 1998 was
primarily due to increased engineering staffing costs associated with the
acquisition of Synergy. 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. As a percentage of net
revenues, general and administrative expenses represented 15% of net
revenues for the three months ended June 30, 1999 and 1998, respectively.
On a dollar basis, selling, general and administrative expenses increased
$1.2 million or 23% to $6.4 million for the three months ended June 30,
1999 from $5.2 million for the comparable period in 1998. For the six
months ended June 30, 1999, selling, general and administrative expenses
decreased to 15% of net revenues from 16% for the comparable period in
1998. The dollar increase during the three and six months ended June 30,
1999 was principally attributable to higher commissions, advertising and
other administrative expenses associated with the growth of the Company's
revenues. The Company expects that selling, general and administrative
expenses will increase on a dollar basis in the future.
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 decreased $310,000 to $49,000 for the three months ended June 30, 1999
from $359,000 for the comparable period in 1998. For the six months ended
June 30, 1999, other income, net decreased $658,000 to $45,000 from
$703,000 for the comparable period in 1998. Such decreases in the three and
six months ended June 30, 1999 was due to an increase in average long-term
debt associated with the Synergy acquisition. The Company expects to
continue to utilize term financing as appropriate to finance its capital
equipment needs.
Provision for Income Taxes. For the three and six months ended June 30,
1999, the provision for income taxes was 33% of income before taxes. For
the three and six months ended June 30, 1998, the provision for income
taxes was 34% of income before taxes. The income tax provision for such
interim periods reflects the Company's estimated annual income tax rate.
The estimated tax rate reduction from the prior comparable period
represents estimated increased utilization of federal and state research
and development credits and state manufacturing credits.
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 June 30, 1999 consisted of cash and short-term
investments of $36.0 million and bank borrowing arrangements. Borrowing
agreements consisted of (i) $5.0 million under a revolving line of credit,
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
of which all was unused and available at June 30, 1999, and (ii) $20.0
million under a non-revolving line of credit of which there was $6.8
million outstanding at June 30, 1999. 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
June 30, 1999.
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, the prime rate
(7.75% at June 30, 1999) a fixed rate based on the four-year U.S. Treasury
Bill rate (5.92% at June 30, 1999) plus 3.0% or an annual adjustable rate
based on the one-year U.S. Treasury Bill rate (5.19% at June 30, 1999) plus
3.0%.
As of June 30, 1999, the Company had $16.6 million outstanding under term
notes that are collateralized by the equipment purchased.
The Company's working capital increased by $17.9 million to $68.8 million
as of June 30, 1999 from $50.9 million as of December 31, 1998. The
increase was primarily attributable to a $7.6 million increase in cash,
cash equivalents and short-term investments combined with increases in
inventories of $4.6 million and accounts receivable of $4.5 million, and a
$1.3 million decrease in income taxes payable. The Company's short-term
investments were principally invested in investment grade, interest-bearing
securities.
The Company's cash flows from operating activities decreased to $18.3
million for the six months ended June 30, 1999 from $20.7 million for the
comparable period in the prior year primarily as a result of increased
inventory levels. The cash flows from operating activities generated by the
Company in the six months ended June 30, 1999 were primarily attributable
to net income of $25.3 million after deducting non-cash activities which
were partially offset by increases in inventories of $4.6 million and
accounts receivable of $4.5 million.
The Company's investing activities during the six months ended June 30,
1999 used cash of approximately $22.3 million as compared to $23.7 million
of cash used for investing activities during the comparable period in the
prior year. Cash used for investing activities during the six months ended
June 30, 1999 resulted primarily from net purchases of $11.6 million of
property, plant and equipment principally associated with the Company's
conversion to six-inch wafer production and additional testing equipment,
combined with net purchases of $10.7 million of short-term investments.
The Company's financing activities during the six months ended June 30,
1999 provided cash of approximately $0.9 million as compared to cash
provided of $3.1 million during the comparable period in the prior year.
Cash provided by financing activities during the six months ended June 30,
1999 was the result of $3.9 million in proceeds from the issuance of common
stock, through the exercise of employee stock options and employee stock
purchase plan activity which was partially offset by $3.0 million
repayments of long-term debt.
The Company currently intends to spend up to approximately $40.0 million
during 1999 primarily for the purchase of additional wafer and test
manufacturing equipment and leasehold improvements to increase manufacturing
capacity for anticipated future demand increases. The Company expects that
its cash requirements through 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
11
<PAGE>
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;
statements regarding Year 2000 compliance costs; and statements regarding
current or future acquisitions. 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,
results of operations, or cash flows.
In November 1998, the Company acquired Synergy Semiconductor, which is its
first major acquisition. Despite the positive near-term results, it is not
certain that the Company will be able to successfully integrate into its
operations Synergy's business, products, technology or personnel. The
Company's failure to do so could have a material adverse effect on its
financial condition, results of operations, or cash flows.
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 increasing
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, 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, results of operations, or cash
flows.
The Company has generated a substantial portion of its net revenues from
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 pressures, 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 of the Company to compete successfully
in the standard product business could materially and adversely affect the
Company's financial condition, results of operations, or cash flows.
The 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 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 integrated
circuits, the Company expects intensified competition from existing
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
integrated circuit suppliers and the entry of new competition. Increased
competition could adversely affect the Company's financial condition,
results of operations, or cash flows. 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, results of operations, or cash flows.
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, results of operations,
or cash flows.
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.
Readiness Disclosure for Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The
Year 2000 problem is pervasive and complex, as virtually every computer
operation will be affected by the rollover of the two digit year value to
00. The issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause
a system to fail. The Company has initiated a Year 2000 project designed to
identify and assess the risks associated with its information systems,
products, operations and infrastructure, suppliers and customers that are
not Year 2000 compliant, and to develop, implement and test remediation and
contingency plans to mitigate these risks. The Company is replacing or
upgrading systems, equipment and facilities that are known to be Year 2000
non-compliant. For the Year 2000 non-compliance issues identified to date,
management believes the cost of upgrade or remediation will not exceed
$100,000, which is not expected to be material to the Company's operating
results. If implementation of replacement systems is delayed, or if
significant new non-compliance issues are identified, the Company's
financial condition, results of operations, or cash flows could be
materially adversely affected. As of June 30, 1999 there have been no
significant changes to the Company's Year 2000 compliance plan or the
implementation status of such plan from the detailed disclosure included in
the Company's Annual Report on Form 10-K for the year ended December 31,
1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in the 1998 Form 10-K have
not changed significantly through the six months ended June 30, 1999.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 2, 1999, National Semiconductor Corporation ("National"), a
competitor of the Company, filed a complaint against the Company, entitled
National Semiconductor Corporation v. Micrel Semiconductor, Inc. in the
United States District Court, Northern District of California, in San Jose,
California, alleging that the Company infringes two National Semiconductor
patents. The complaint in the lawsuit seeks unspecified compensatory
damages for infringement, treble damages as well as permanent injunctive
relief against further infringement of the National patents at issue.
On February 26, 1999, the Lemelson Medical, Education & Research Foundation
(the "Lemelson Partnership") filed a complaint which was served on the Company
on June 15, 1999, entitled Lemelson Medical, Education & Research Foundation,
Limited Partnership v. Lucent Technologies Inc., et al. in the United States
District Court in Phoenix, Arizona, against eighty-eight defendants, including
the Company, alleging infringement of Lemelson Foundation patents. The
complaint in the lawsuit seeks unspecified compensatory damages, treble damages
and attorneys' fees, as well as injunctive relief against further infringement
of the Lemelson patents at issue.
The Company believes that the ultimate outcome of the two actions discussed
above, the National lawsuit and the Lemelson Foundation lawsuit, will not
result in a material adverse effect on the Company's financial condition,
results of operation or cash flows. However, litigation is subject to
inherent uncertainties, and no assurance can be given that the Company will
prevail in these lawsuits. Accordingly, the pending lawsuits with National
and the Lemelson Foundation, as well as potential future litigation with
other companies, could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
Certain additional 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
condition, results of operation or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders (the "Annual Meeting") was
held on May 27, 1999 at 12:00 p.m. local time, at its principal corporate
offices located at 1931 Fortune Drive, San Jose, California. The Annual
Meeting was held for the purpose of (a) electing five members of the Board
of Directors, (b) ratifying and approving an amendment to the Company's
1994 Stock Option Plan (c) ratifying and approving the appointment of
Deloitte & Touche LLP as the Company's independent auditors for the fiscal
year ending December 31, 1999 and (d) transacting such other business as
may properly come before the Annual Meeting. The three matters below were
voted upon and approved:
Proposal No. 1 - Election of five members of the Board of Directors:
The following persons were duly elected to the Board by the shareholders
for a one year term and until their successors are elected and qualified:
NOMINATION FOR ABSTAINED
----------------- ---------- -----------
Raymond D. Zinn 18,904,823 92,463
Warren H. Muller 18,913,323 83,963
Larry L. Hansen 18,912,433 84,853
George Kelly 18,913,253 84,033
Dale L. Peterson 18,913,323 83,963
14
<PAGE>
Proposal No.2 - Ratification and Approval of an amendment to the Company's
1994 Stock Option Plan.
BROKER
FOR AGAINST ABSTAINED NON VOTES
----------- ----------- ----------- -----------
12,614,495 4,915,116 11,752 1,455,923
Proposal No. 3 - Ratification of the Appointment of Deloitte & Touche LLP
as the Company's Independent Auditors for the Fiscal Year Ending December
31, 1999:
BROKER
NOMINATION FOR AGAINST ABSTAINED NON VOTES
---------------------- ---------- --------- --------- ---------
Deloitte & Touche LLP 18,993,442 1,568 2,276 --
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 June 30, 1999.
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: August 13, 1999 By: /s/ ROBERT J. BARKER
--------------------
Robert J. Barker
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MICREL,INC. FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
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<SECURITIES> 25,679
<RECEIVABLES> 28,532
<ALLOWANCES> 0
<INVENTORY> 20,657
<CURRENT-ASSETS> 97,275
<PP&E> 58,724
<DEPRECIATION> 0
<TOTAL-ASSETS> 164,124
<CURRENT-LIABILITIES> 28,502
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0
0
<COMMON> 43,631
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