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, 2000.
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 November 13, 2000 there were 85,192,359 shares of common stock, no par
value, outstanding.
<PAGE>
MICREL, INCORPORATED
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED September 30, 2000
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
September 30,2000 and December 31, 1999 3
Condensed Consolidated Income Statements -
Three and Nine Months Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
September 30, December 31,
2000 1999 (1)
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 64,777 $ 15,360
Short-term investments 28,017 36,337
Accounts receivable, net 57,497 39,472
Inventories 21,032 23,851
Other current assets 1,580 1,108
Deferred income taxes 16,567 11,388
---------- ----------
Total current assets 189,470 127,516
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 90,719 67,162
INTANGIBLE ASSETS, NET 6,316 7,933
OTHER ASSETS 355 483
---------- ----------
TOTAL $ 286,860 $ 203,094
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,065 $ 11,241
Income taxes payable 1,349 12,230
Deferred income on shipments to
Distributors 13,358 6,541
Other current liabilities 12,807 8,666
Current portion of long-term debt 5,246 5,132
---------- ----------
Total current liabilities 43,825 43,810
LONG-TERM DEBT 4,994 8,854
OTHER LONG-TERM OBLIGATIONS 1,580 1,761
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:
2000 - 85,081,309; 1999 - 82,835,152 85,306 51,954
Accumulated other comprehensive income (loss) (19) 15
Retained earnings 151,174 96,700
---------- ----------
Total shareholders' equity 236,461 148,669
---------- ----------
TOTAL $ 286,860 $ 203,094
========== ==========
(1) Derived from the December 31, 1999 audited balance sheet included
in the 1999 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)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET REVENUES $ 86,549 $ 50,091 $ 229,707 $ 134,840
COST OF REVENUES 34,873 21,963 96,006 59,347
--------- --------- --------- ---------
GROSS PROFIT 51,676 28,128 133,701 75,493
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and development 9,340 6,913 25,613 18,941
Selling, general and
administrative 10,904 7,367 30,443 19,618
--------- --------- --------- ---------
Total operating expenses 20,244 14,280 56,056 38,559
--------- --------- --------- ---------
INCOME FROM OPERATIONS 31,432 13,848 77,645 36,934
OTHER INCOME, NET 1,345 134 2,722 179
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 32,777 13,982 80,367 37,113
PROVISION FOR INCOME TAXES 10,818 4,614 26,525 12,247
--------- --------- --------- ---------
NET INCOME $ 21,959 $ 9,368 $ 53,842 $ 24,866
========= ========= ========= =========
NET INCOME PER SHARE:
Basic $ 0.26 $ 0.11 $ 0.64 $ 0.31
========= ========= ========= =========
Diluted $ 0.23 $ 0.10 $ 0.57 $ 0.28
========= ========= ========= =========
SHARES USED IN COMPUTING PER
SHARE AMOUNTS:
Basic 84,564 82,128 83,908 81,354
========= ========= ========= =========
Diluted 95,779 90,704 94,775 89,090
========= ========= ========= =========
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
MICREL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 71,420 $ 29,658
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold
improvements, net (40,402) (19,410)
Purchases of short-term investments (112,431) (56,011)
Proceeds from sales and maturities of
short-term investments 120,743 34,018
--------- ---------
Net cash used in investing activities (32,090) (41,403)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings --- 2,100
Repayments of long-term debt (3,980) (6,345)
Proceeds from the issuance of common stock, net 14,067 5,839
--------- ---------
Net cash provided by financing activities 10,087 1,594
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 49,417 (10,151)
CASH AND CASH EQUIVALENTS - Beginning of period 15,360 13,415
--------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 64,777 $ 3,264
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 756 $ 1,159
========= =========
Cash paid for income taxes $ 22,670 $ 4,793
========= =========
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 September 30, 2000 and
for the three and nine months ended September 30, 2000 and 1999 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, 1999.
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. In June 2000, the Company declared a two-for-one stock
split of its common stock in the form of a 100% stock dividend payable
June 27, 2000, on all shares of common stock outstanding as of June 6, 2000.
All share and per share information in the accompanying condensed
consolidated financial statements has been adjusted to retroactively
give effect to the stock split for all periods presented.
Reconciliation of weighted average shares used in computing net income
per share is as follows (in thousands):
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average common
shares outstanding 84,564 82,128 83,908 81,354
Dilutive effect of stock
options outstanding using
the treasury stock method 11,215 8,576 10,867 7,736
--------- --------- --------- ---------
Shares used in computing
diluted net income per share 95,779 90,704 94,775 89,090
========= ========= ========= =========
</TABLE>
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Finished goods $ 5,206 $ 5,958
Work in process 13,974 16,125
Raw materials 1,852 1,768
---------- ----------
$ 21,032 $ 23,851
========== ==========
</TABLE>
6
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. SIGNIFICANT CUSTOMERS
During the nine months ended September 30, 2000, two customers accounted
for $24.1 million (10.5%) and $23.4 million (10.2%) of net revenues,
respectively. During the nine months ended September 30, 1999, no single
customer accounted for 10% or more of net revenues.
4. COMPREHENSIVE INCOME
Comprehensive income, which was comprised of the Company's net income
for the periods and changes in unrealized gains or losses on
investments, was $22.0 million and $53.8 million for the three and nine
months ended September 30, 2000, respectively, and $9.4 million and
$24.9 million for the three and nine months ended September 30, 1999,
respectively.
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 under two reportable segments,
standard products and custom and foundry products.
<TABLE>
Net Revenues by Segment
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Revenues:
Standard Products $ 69,026 $ 40,111 $ 171,972 $ 105,389
Custom and Foundry Products 17,523 9,980 57,735 29,451
--------- --------- --------- ---------
Total net revenues $ 86,549 $ 50,091 $ 229,707 $ 134,840
========= ========= ========= =========
As a Percentage of Total
Net Revenues:
Standard Products 80% 80% 75% 78%
Custom and Foundry Products 20% 20% 25% 22%
--------- --------- --------- ---------
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. The Company is currently determining the impact of this
statement, which adoption is not expected to materially impact the
Company's consolidated financial position, results of operations or cash
flows. The Company is required to adopt this statement in the first
7
<PAGE>
MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
quarter of fiscal year 2001, with early adoption permitted.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," as amended by SAB 101A and SAB 101B which
provides the SEC staff's views on selected revenue recognition issues.
The guidance in SAB 101 must be adopted during the Company's fourth
quarter of 2000 and the effects, if any, are required to be recorded
through a retroactive, cumulative-effect adjustment as of the beginning
of the year, with a restatement of all prior interim quarters in the
year. Management has completed its preliminary review of SAB 101, but
has not completed its final evaluation of the effects, if any, that SAB
101 may have on the Company's income statement presentation, operating
results or financial position. The Company intends to complete its final
evaluation of SAB 101 during the fourth quarter of 2000.
8
<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, high-speed mixed-signal and digital
integrated circuits. These circuits are used in a wide variety of
electronics products, including those in the telecommunications,
computer, industrial, and high bandwidth communications 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. Standard products sales represented 80% of net
revenues for the three months ended September 30, 2000 and 1999. For the
nine months ended September 30, 2000 and 1999, the Company's standard
products sales accounted for 75% and 78% of 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, the successful development
of new products, and the Company's ability to ramp up manufacturing
capacity 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>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 40.3 43.8 41.8 44.0
------- ------- ------- -------
Gross profit 59.7 56.2 58.2 56.0
------- ------- ------- -------
Operating expenses:
Research and development 10.8 13.8 11.1 14.0
Selling, general and
Administrative 12.6 14.7 13.3 14.6
------- ------- ------- -------
Total operating expenses 23.4 28.5 24.4 28.6
------- ------- ------- -------
Income from operations 36.3 27.7 33.8 27.4
Other income, net 1.6 0.2 1.2 0.1
------- ------- ------- -------
Income before income taxes 37.9 27.9 35.0 27.5
Provision for income taxes 12.5 9.2 11.6 9.1
------- ------- ------- -------
Net income 25.4% 18.7% 23.4% 18.4%
======= ======= ======= =======
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Net Revenues. Net revenues increased 73% to $86.5 million for the three
months ended September 30, 2000 from $50.1 million for the same period
in 1999. For the nine months ended September 30, 2000, net revenues
increased 70% to $229.7 million from $134.8 million for the same period
in 1999. The Company derives a substantial portion of its net revenues
from standard products. Standard products sales represented 80% of net
revenues for the three months ended September 30, 2000 and 1999. For the
nine months ended September 30, 2000 and 1999, the Company's standard
products sales accounted for 75% and 78% of net revenues, respectively.
On a dollar basis, standard products revenues increased 72% to $69.0
million for the three months ended September 30, 2000 from $40.1 million
for same period in 1999. For the nine months ended September 30, 2000,
standard products revenues increased 63% to $172.0 million from $105.4
million for same period in 1999. Such increases resulted from increased
unit shipments combined with an increase in average selling prices.
Sales of standard products by the Company during the three and nine
months ended September 30, 2000 were led by low dropout regulators, high
bandwidth communications products and computer peripheral products.
Such products were sold to manufacturers in the telecommunications, high
bandwidth communications, computer, and industrial markets. Custom and
foundry products revenues increased 76% to $17.5 million representing
20% of net revenues for the three months ended September 30, 2000 from
$10.0 million or 20% of net revenues for the comparable period in 1999.
For the nine months ended September 30, 2000, custom and foundry
products revenues increased 96% to $57.7 million representing 25% of net
revenues from $29.5 million or 22% of net revenues for the comparable
period in 1999. Such increases were due primarily to increased sales of
custom high bandwidth communications products and to a lesser extent
increased foundry sales.
Increasing end customer demand during the second half of 1999 and the
first half of 2000 resulted in capacity constraints and increasing order
lead times for semiconductor suppliers in general. During the first
three quarters of 2000, standard product customer lead times and
customer order rates increased compared to the same periods in 1999,
resulting in increased order backlog. However, supply can quickly and
unexpectedly match or exceed demand because end customer demand can
quickly change and because semiconductor suppliers can also rapidly
increase production outputs. The semiconductor industry has experienced
such a change in the supply and demand situation, during the second and
third quarters of 2000, in the mobile handset and personal computer
markets. Other end markets may also experience similar fluctuations.
Customers continuously adjust their inventories resulting in frequent
changes in demand for the Company's products. The volatility of customer
demand limits the Company's ability to predict future levels of sales
and profitability.
International sales represented 35% and 49% of net revenues for the
three months ended September 30, 2000 and 1999, respectively. On a
dollar basis, international sales increased 23% to $30.5 million for the
three months ended September 30, 2000 from $24.7 million for the
comparable period in 1999. For the nine months ended September 30, 2000
and 1999, international sales represented 39% and 46% of net revenues,
respectively. On a dollar basis, international sales increased 42% to
$88.7 million for the nine months ended September 30, 2000 from $62.6
million for the comparable period in 1999. The dollar basis increases
in international sales for the three and nine months ended September 30, 2000
resulted from increased unit shipments to manufacturers of personal
computers and communications products primarily in Asia and Europe.
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.
Sales to stocking representatives and O.E.M. customers are recognized
upon shipment. The Company estimates returns and warranty costs and
provides an allowance as revenue is recognized.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Gross Profit. Gross profit is affected by a variety of factors including
the volume of product sales, product mix, manufacturing utilization,
product yields and average selling prices. The Company's gross margin
increased to 60% for the three months ended September 30, 2000 from 56%
for the comparable period in the prior year. For the nine months ended
September 30, 2000, gross margin increased to 58% from 56% for the
comparable period in the prior year. The improvement in gross margin
reflected higher average selling prices, an increased mix of higher
gross margin products and increases in manufacturing efficiency due to
greater capacity utilization.
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 new 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 11% and 14% for the three months ended September 30, 2000
and 1999, respectively. On a dollar basis, research and development
expenses increased $2.4 million or 35% to $9.3 million for the three
months ended September 30, 2000 from $6.9 million for the comparable
period in 1999. For the nine months ended September 30, 2000 and 1999,
research and development expenses represented 11% and 14% of net
revenues, respectively. On a dollar basis, research and development
expenses increased $6.7 million or 35% to $25.6 million for the nine
months ended September 30, 2000 from $18.9 million for the comparable
period in 1999. The dollar increases were primarily due to increased
engineering staffing costs and increased prototype material costs. The
Company believes that the development and introduction of new 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, selling, general and administrative expenses represented 13%
and 15% for the three months ended September 30, 2000 and 1999,
respectively. On a dollar basis, selling, general and administrative
expenses increased $3.5 million or 48% to $10.9 million for the three
months ended September 30, 2000 from $7.4 million for the comparable
period in 1999. For the nine months ended September 30, 2000 and 1999,
selling, general and administrative expenses represented 13% and 15% of
net revenues, respectively. On a dollar basis, selling, general and
administrative expenses increased $10.8 million or 55% to $30.4 million
for the nine months ended September 30, 2000 from $19.6 million for the
comparable period in 1999. The dollar increases were principally
attributable to increased commissions and staffing costs associated with
the growth of the Company's revenues, increased legal costs, and
increased profit sharing accruals to promote personnel retention. 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 term notes. Other income, net increased $1.2 million
to $1.3 million for the three months ended September 30, 2000 from
$134,000 for the comparable period in 1999. For the nine months ended
September 30, 2000, other income, net increased $2.5 million to $2.7
million from $179,000 for the comparable period in 1999. These
increases were primarily due to an increase in average cash and
investment balances combined with increased rate of returns on such
balances.
Provision for Income Taxes. For the three and nine months ended
September 30, 2000 and 1999, the provision for income taxes was 33% of
income before taxes. The income tax provision for such interim periods
reflects the Company's estimated annual income tax rate.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
Since inception, the Company's principal sources of funding have been
its cash from operations, bank borrowings and sales of common stock.
Principal sources of liquidity at September 30, 2000 consisted of cash
and short-term investments of $93 million and bank borrowing
arrangements. Borrowing agreements consisted of (i) $5 million under a
revolving line of credit, of which all was unused and available at
September 30, 2000, and (ii) $40 million under a non-revolving line of
credit, of which all was unused and available at September 30, 2000.
The two lines of credit are covered by the same loan and security
agreement. This agreement expires on April 30, 2001 subject to automatic
renewal on a month-to-month basis thereafter unless terminated by either
party upon 30 days notice. 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, 2000.
As of September 30, 2000, the Company had $10 million outstanding under
term notes that are collateralized by the equipment purchased.
The Company's working capital increased by $62 million to $146 million
as of September 30, 2000 from $84 million as of December 31, 1999. The
increase was primarily attributable to a $41 million increase in cash,
cash equivalents and short-term investments, a $18 million increase in
accounts receivable and a $11 million decrease in income taxes payable,
which were partially offset by a $7 million increase in deferred income
on shipments to distributors and a $3 million decrease in inventory.
The Company's cash flows from operating activities increased to $71
million for the nine months ended September 30, 2000 from $30 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, 2000 were primarily attributable to net income of $67
million after adding back non-cash activities combined with an increase
in income taxes payable of $8 million (excluding $19 million non-cash
tax benefits from employee stock transactions), an increase in deferred
income on shipments to distributors of $7 million, and a decrease in
inventories of $3 million, which were partially offset by an increase in
accounts receivable of $18 million.
The Company's investing activities during the nine months ended
September 30, 2000 used cash of $32 million as compared to $41 million
of cash used for investing activities during the comparable period in
the prior year. Cash used for investing activities during the nine
months ended September 30, 2000 resulted from net purchases of equipment
and leasehold improvements of $40 million that were primarily for wafer
fab and testing equipment to increase production capacity, which was
partially offset by net sales of short-term investments of $8 million.
The Company's financing activities during the nine months ended
September 30, 2000 provided cash of $10 million as compared to $2
million during the comparable period in the prior year. Cash provided by
financing activities during the nine months ended September 30, 2000 was
the result of $14 million in proceeds from the issuance of common stock
through the exercise of employee stock options and purchases through the
employee stock purchase plan, which were partially offset by $4 million
in repayments of long-term debt.
The Company currently intends to spend up to approximately $55 million
to $65 million during 2000 primarily for the purchase of additional
wafer and test manufacturing equipment and leasehold improvements. The
Company expects that its cash requirements through 2000 will be met by
cash from operations, its existing cash balances and short-term
investments and its existing credit facilities.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 expansion or utilization of manufacturing capacity;
statements regarding future expenditures; 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. Additional factors
that may affect operating results are contained within the Company's
Form 10-K for the Year ended December 31, 1999 and within the Company's
registration statement on Form S-3 as filed with the Securities and
Exchange Commission on May 25, 2000.
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, the volume of orders
canceled or rescheduled, 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 timely acquire, install and
utilize capital equipment to expand manufacturing capacity to meet
increasing demand, availability of production capacity at assembly
subcontractors, 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 ability to hire and
retain key technical and management personnel, 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 would materially and adversely affect the Company's business,
financial condition, results of operations or cash flows.
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, more volatile customer demand, 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 products
business would 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 include product
features, performance, price, timing of product introductions, emergence
of new computer and communications 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 demand
for integrated circuits, the Company expects intensified competition
from existing integrated circuit suppliers and the entry of new
competition. 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
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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. The Company is
currently involved in several lawsuits regarding claims of patent
infringement. See "Legal Proceedings" in Item 1 of Part II of this Form
10-Q. There can be no assurance that these existing lawsuits or any
other potential future litigation (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.
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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in its Form 10-K for the
year ended December 31, 1999 have not changed significantly during the
three and nine months ended September 30, 2000.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 operations or cash flows.
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
five 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 88 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.
On May 9, 1994, Linear Technology Corporation ("Linear" or "LTC"), a
competitor of the Company, filed a complaint against the Company,
entitled Linear Technology Corporation v. Micrel, Incorporated, in the
United States District Court in San Jose, California, alleging patent
and copyright infringement and unfair competition. All claims, except
the patent infringement claim, have been settled or dismissed. In this
lawsuit, Linear claimed that two of the Company's products infringed one
of Linear's patents. The complaint in the lawsuit sought unspecified
compensatory damages, treble damages and attorneys' fees as well as
preliminary and permanent injunctive relief against infringement of the
Linear patent at issue. The plaintiff alleged in the suit that the
Company had infringed upon U.S. Patent No. 4,755,741 which covers design
techniques used to increase the efficiency of switching regulators. The
United States District Court in San Jose found the patent to be invalid
under the "on sale bar" defense as the plaintiff had placed integrated
circuits containing the alleged invention on sale more than a year
before filing its patent application. On August 20, 1999 the United
States District Court in San Jose, adjudicated in favor of the Company,
dismissed the plaintiff's complaint on the merits of the case and
awarded the Company its legal costs. An appeal of the judgment was filed
by Linear on September 17, 1999.
The Company believes that the ultimate outcome of the legal actions
discussed above 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 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.
In the event of an adverse ruling in any intellectual property
litigation that now exists or might arise in the future, the Company
might be required to discontinue the use of certain processes, cease the
manufacture, use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to the
infringing technology. There can be no assurance, however, that under
such circumstances, a license would be available under reasonable terms
or at all. In the event of a successful claim against the Company and
the Company's failure to develop or license substitute technology on
commercially reasonable terms, the Company's financial condition,
results of operations, or cash flows could be adversely affected.
15
<PAGE>
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
------- -----------
3.1 Certificate of Amendment to Articles of Incorporation of the
Company.
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, 2000.
16
<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 14, 2000 By /S/ Richard D. Crowley, Jr.
----------------------------
Richard D. Crowley, Jr.
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
