UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001.
[ ] 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 (I.R.S. Employer
of incorporation or Organization) Identification No.)
2180 Fortune Drive, San Jose, CA 95131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 944-0800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 15, 2002, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $1,704,855,144 based
upon the closing sales price of the Common Stock as reported on the Nasdaq
Stock Marketr on such date. Shares of Common Stock held by officers,
directors and holders of more than ten percent of the outstanding Common Stock
have been excluded from this calculation because such persons may be deemed to
be affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 15, 2002, the Registrant had outstanding 93,177,492 shares of
Common Stock.
_______________________
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on May 23, 2002 are incorporated by reference in Part
III of this Report.
This report on Form 10-K includes 68 pages with the Index to Exhibits
located on page 66.
MICREL, INCORPORATED
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2001
Page
----
PART I
Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 37
PART III
Item 10. Directors and Executive Officers of the Registrant 38
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and Management 41
Item 13. Certain Relationships and Related Transactions 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 42
Signatures 65
2
PART I
ITEM 1. BUSINESS
Recent Developments
On January 28, 2002, Micrel, Incorporated (the "Company" or "Micrel")
announced that it would restate its consolidated financial statements for the
years ended December 31, 1998, 1999, and 2000, and the quarters ended March
31, 2001, June 30, 2001, and September 30, 2001. This restatement relates to
the Company's past method of setting the exercise price of certain employee
stock options which results in stock compensation expenses and related payroll
and income tax effects that had not been recorded in previously issued
financial statements. It should be noted that Micrel sought outside
professional advice prior to implementation of the option grant method that
resulted in the unintentional consequence of stock compensation charges.
Information regarding the effect of the restatement on the Company's financial
position and results of operations is provided in Note 2 of Notes to
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K/A for the year ended December 31, 2000, the Quarterly Reports on
Form 10-Q/A for the quarters ended March 31, June 30 and September 30, 2001
and the Current Report on Form 8-K/A filed on April 1, 2002.
General
The Company was incorporated in California in July 1978. References to the
"Company" and "Micrel" refer to Micrel, Incorporated and subsidiaries,
which also does business as Micrel Semiconductor. The Company's principal
executive offices are located at 2180 Fortune Drive, San Jose, California
95131. The Company's telephone number is (408) 944-0800.
Micrel designs, develops, manufactures and markets a range of high-
performance analog power integrated circuits and mixed-signal and digital
integrated circuits. The Company currently ships over 1,400 standard products
and has derived the majority of its product revenue for the year ended
December 31, 2001 from sales of standard analog integrated circuits for power
management. These analog power circuits are used in a wide variety of
electronic products, including those in the computer, telecommunications and
industrial markets. For the years ended December 31, 2001, 2000, and 1999, the
Company's standard products accounted for 84%, 79%, and 78%, respectively, of
the Company's net revenues. In addition, the Company manufactures custom
analog and mixed-signal circuits and provides wafer foundry services for a
diverse range of customers who produce electronic systems for communications,
consumer and military applications. With the Company's acquisition of Synergy
Semiconductor ("Synergy") in November 1998, the Company broadened its standard
product offerings to include high performance bipolar integrated circuits sold
to customers within the communications, industrial and computing markets. This
product portfolio is comprised of more than 200 products including
communication transceivers, clock generators, distribution/clock recovery
circuits as well as high-speed logic and memory. In April 2000, Micrel
completed its acquisition of Electronic Technology Corporation ("ETC"), a
company specializing in mixed signal and analog design with a complete
portfolio of voltage supervisor and microprocessor reset circuits. These
products are highly complementary with the Company's power products portfolio
since they accurately monitor the power supplies of critical system components
(e.g. microprocessors) and signal the microprocessor to reset if the voltage
to the device falls out of the specified operating range. In May 2001, Micrel
completed its acquisition of Kendin Communications, Inc. ("Kendin"), a
privately held fabless semiconductor company that designs, develops and
markets high performance integrated circuits for the communications and
networking markets. This acquisition enabled Micrel to enter the high growth
Ethernet market with a family of Ethernet Switch products targeting the SOHO
(Small Office, Home Office) and Enterprise networking markets. This
3
product portfolio consists of transceiver and switch devices that support
various Ethernet protocols supporting communication transmission speeds from
10 megabits per second to 100 megabits per second. Micrel's Kendin operations
are developing products to serve the gigabit Ethernet communication protocol.
The Kendin transaction has been accounted for as a pooling of interests, and
accordingly all financial statements presented have been restated to include
the Kendin results.
Continuing trends in the communications, networking and computing markets
have created demand for power analog circuits, which control, regulate,
convert and route voltage and current in electronic systems. This demand for
power analog circuits has been fueled by the growth of battery powered
cellular telephones and computing devices and the emergence of lower voltage
microprocessors and Personal Computer Memory Card International Association
("PCMCIA") standards for peripheral devices. The Company sells a wide range of
regulators, references and switches designed for cellular telephones and
laptop computers. Micrel was one of the first companies to offer analog
products for the PCMCIA Card and universal serial bus ("USB") market. In
additional to USB power switches the Company now offers a family of
transceiver products to support USB connectivity from a PC to a USB equipped
peripheral at data rates up to 12 Megabits per second. The Company recently
introduced a family of Hot Swap Power controllers for the Compact Peripheral
Control Interface ("CompactPCI") bus standard used extensively in PC servers,
networking equipment and industrial control applications. These devices
support 24 hours a day, 7 days per week operations by enabling customers to
remove and insert printed circuit boards during system operation. Future
families of hot swap controllers are being developed to address the higher
voltage requirements of the telecommunications market. The Company also
offers standard analog products that address other markets, including power
supplies and industrial, defense, avionics and automotive electronics.
In addition to power and thermal management products, Micrel also offers a
family of highly integrated RF products. These QwikRadioT products enable
customers to develop wireless control systems significantly improving the
consumer experience of their products. Applications for the QwikRadioT
products include remote keyless entry for automobiles, TV remote controls,
wireless game controllers, keyboards and mice.
The Company's standard mixed-signal and digital integrated circuits are
used primarily for enterprise switch networks, storage area networks and
metropolitan area networks. With the demand for bandwidth in these networks
continuing to increase, Micrel has developed a family of fiber optic module
components to support higher data rates. With form factor and size reductions
critical to the continued growth of this technology, Micrel has utilized its
own process technology and innovative packaging to address these challenges.
With the acquisition of Altos Semiconductor ("Altos") in November 1999,
Micrel entered the thermal management market. These mixed signal devices
accurately measure the temperature at various "hot spots" in electronic
systems and initiate system cooling by turning on fans or if necessary
initiate a controlled system shutdown. The continuing trend to provide more
processing power in smaller form factors (e.g. notebook PCs, Personal Digital
Assistants ("PDAs")) creates demand for thermal management devices.
In addition to standard analog and mixed signal products, Micrel offers
customers various combinations of design, process and foundry services.
Through interaction with customers in its custom and foundry business, we have
been able to enhance our design and process technology capabilities, which in
turn provides engineering and marketing benefits to its standard products
business.
4
The supply of semiconductors can quickly and unexpectedly match or exceed
demand because customer end demand can change very quickly and semiconductor
suppliers can rapidly increase production output. This can lead to a sudden
oversupply situation and a subsequent reduction in order rates as customers
adjust their inventories to true demand rates. Customers continuously adjust
their inventories resulting in frequent changes in demand for our products.
The semiconductor industry experienced such a change in the supply and
demand situation during 2000 and 2001. In the fourth quarter of 2000 and
during 2001, customers in the high speed communications end market, and the
contract manufacturing firms that serve this market, adjusted their demand on
component suppliers as they coped with high levels of inventory and sharply
reduced demand for their end products. In addition, the slowing of global
economic growth during 2001 led to lower order rates from customers serving
the telecommunications, industrial and computer end markets as they adjusted
to lower demand for their products. The rapid build-up of semiconductor
inventories in global sales channels caused lead times for components to fall
precipitously during 2001. Due to the combination of excess supply, reduced
demand and lower lead times, new orders rates declined and a significant
amount of previously placed orders were cancelled during the first half of
2001. The corresponding reduction in backlog has left the Company, like most
semiconductor suppliers, with extremely limited visibility into future
customer demand. Customers appear to be placing orders on an "as needed"
basis due to short supplier lead times combined with the uncertain
macroeconomic outlook. The low backlog and uncertainty of customer demand
significantly limits our ability to predict future levels of sales and
profitability.
Industry Background
Analog Circuit, Mixed-Signal and Digital Integrated Circuits Markets
Integrated circuits may be divided into three general categories - digital,
analog (also known as "linear") and mixed-signal. Digital circuits, such as
memories and microprocessors, process information in the form of on-off
electronic signals and are capable of implementing only two values, "1" or
"0." Analog circuits, such as regulators, converters and amplifiers, process
information in the form of continuously varying voltages and currents that
have an infinite number of values or states. Analog circuits condition,
process, and measure or control real world variables such as current, sound,
temperature, pressure or speed. Mixed-signal integrated circuits combine
analog and digital functions on one chip.
Analog circuits are used in virtually every electronic system, and the
largest markets for such circuits are computers, telecommunications and data
communications, industrial equipment, and military, consumer and automotive
electronics. Because of their numerous applications, analog circuits have a
wide range of operating specifications and functions. For each application,
different users may have unique requirements for circuits with specific
resolution, processing linearity, speed, power and signal amplitude
capability. Such differentiation results in a high degree of market
fragmentation, which provides smaller companies an opportunity to compete
successfully against larger suppliers in certain market segments.
Mixed-signal and digital integrated circuits may be divided into six
general categories, LSI/MSI logic, data processing, signal processing, memory,
FPGA and application specific.
Mixed-signal and digital integrated circuits are used in computer and
communication systems and in industrial products. The primary markets for such
circuits are consumer, communications, personal computer systems, and
industrial. The primary advantages of the Company's bipolar integrated
circuits are high speed and low noise.
5
As compared with the digital integrated circuit industry, the analog
integrated circuit industry has the following important characteristics:
- - Dependence on Individual Design Teams. The design of analog circuits
involves the complex and critical placement of various circuits. Analog
circuit design has traditionally been highly dependent on the skills and
experience of individual design engineers.
- - Interdependence of Design and Process. Analog designers, especially at
companies having their own wafer fabrication facility ("fab"), are able
to select from several wafer fabrication processes in order to achieve
higher performance and greater functionality from their designs.
- - Longer Product Cycles and More Stable Pricing. Analog circuits generally
have longer product cycles as compared to digital circuits. As a result,
analog circuit pricing has historically been more stable than most digital
circuit pricing.
Analog, mixed-signal and digital integrated circuits are sold to customers
as either standard products or custom products. Standard analog products are
available to customers "off-the-shelf" and are often sold in large volumes
to a wide variety of customers in different industries. Custom products are
designed to an individual customer's specifications.
Recent Trends in Analog Power Management, Mixed-Signal and Digital
Integrated Circuits
Most electronic systems utilize analog circuits to perform power management
functions ("power analog circuits") such as the control, regulation,
conversion and routing of voltages and current. The computer and
communications markets have emerged as two of the largest markets for power
analog circuits. In particular, the recent growth and proliferation of
portable, battery powered devices, such as cellular telephones and laptop
computers, continue to increase demand and create new technological challenges
for power analog circuits.
Cellular telephones, which are composed of components and subsystems that
utilize several different voltage levels, require multiple power analog
circuits to precisely regulate and control voltage. Manufacturers continue to
pack more processing power and functionality into smaller form factors placing
severe demands on the battery. To maintain or extend talk times demands high
performance power management products. With the introduction of new color
displays, "boost" voltage regulators are now required to step up the battery
voltage to the higher voltage required to backlight the display with white or
blue LEDs (Light Emitting Diodes). Several manufacturers are also adding USB
connectivity to their cellular phones to enable efficient downloads from their
PCs or PDAs and Micrel offers a family of USB transceivers to support this
emerging trend.
The trend toward the use of lower voltage digital processing devices
(microprocessors, digital signal processors ("DSPs") and field programmable
gate arrays ("FPGA"s)) at the core of the latest generation of electronic
systems has also increased market demand and created new requirements for
power analog circuits. These devices require lower voltage, higher current
power supplies and this power must be delivered with high efficiency to
prolong battery life in portable systems and reduce heat in mains powered
systems. These trends are driving the demand for higher efficiency switching
regulators and higher current LDO regulators. Another recent trend is the
emergence of PCMCIA standards that require a voltage protection capability,
thereby creating new specifications for higher performance power analog
switches.
6
The rapid adoption of the Internet for information exchange, in business
and consumer markets, has led to a significant increase in the need for
broadband communications technology. In addition, the use of more media-rich
technologies on the Internet, like graphics and movies with high bandwidth
requirements, has led to a growing need to increase the speed and capacity of
the Internet infrastructure. One major trend within the communications
industry is the worldwide adoption and deployment of high-speed fiber optic
networks. Such networks require the use of high-speed optical modules and this
is driving the demand for ultra-high speed laser drivers, signal conditioning,
clock recovery and post processing in order to attain data rates in excess of
10 Gigabits per second.
In the networking market, Ethernet has been widely adopted as the
communication standard. Ethernet ports are now being provided on equipment
ranging from PCs and PC peripherals such as printers to Games consoles. This
is driving rapid growth in the SOHO market to connect multiple PCs and
Peripherals with the home or office. With its acquisition of Kendin
Communications, Micrel has entered this market with leadership products and
technology. With the continued development of the Ethernet standard to
Gigabit and now 10 Gigabit data rates it is now starting to challenge the
SONET standard in the Metropolitan Area Network. Product development is
underway at Micrel to support these higher data rates.
Micrel's Strategy
Micrel seeks to capitalize on the growth opportunities within the high-
performance analog and mixed-signal semiconductor market. The Company's core
competencies are its analog design and process technology, its large, in-house
wafer fabrication capability and its manufacturing expertise. The Company also
seeks to capitalize on the growth opportunities within the high performance
bipolar semiconductor market. The Company has expanded upon its core
competencies through the addition of Synergy's expertise in the synchronous
optical network ("SONET") and fiber channel arenas. The Synergy design team,
process technology and wafer fabrication facility complement the historical
Micrel core strengths. The Company intends to build a leadership position in
its targeted markets by pursuing the following strategies:
- - Focus on Standard Products for High Growth Markets. Currently, Micrel ships
over 1,400 standard products, with net revenues from standard products
generating 84% of the Company's net revenues for the year ended December
31, 2001. Micrel believes that its long-term growth will depend
substantially on its ability to increase standard products sales in its
existing markets and to penetrate new standard products markets. The
Company, however, will pursue additional custom and foundry business as
opportunities arise.
- - Target Power Analog, High-Speed Mixed-signal and Digital Markets. Micrel
has leveraged its expertise in power analog circuits by addressing market
opportunities in cellular telephones, battery powered computers and desktop
personal computers. A majority of the Company's standard products net
revenues for the year ended December 31, 2001 were derived from products
relating to power management. Through the acquisitions of Synergy
Semiconductor, Altos Semiconductor, ETC and Kendin the Company has gained
expertise in high-speed, mixed-signal and system-level digital integrated
circuits, required to address the high bandwidth and local area network
communication markets as well as increase its penetration of the power and
thermal management markets.
7
- - Maintain Technological Leadership. The Company seeks to utilize its design
strengths and its process expertise to enhance what the Company believes
are its competitive advantages in LDO regulators, ECL logic products, high-
speed communications devices, PCMCIA and USB devices. In order to maintain
its technology leadership, the Company has developed plans for successive
generations of products with increased functionality. The Company now has
its sub-micron bipolar process in production and has recently released the
first product, a 10 Gigabit line receiver on its high speed silicon
germanium process.
- - Develop/Acquire New Complementary Businesses. The Company seeks to identify
complementary business opportunities building on its core strengths in the
analog and mixed signal area. During the past year the Company has
significantly expanded its product scope through the acquisition of
Kendin's high performance transceiver and switch products that address
local area network communication applications. The Company has also
expanded its product portfolio to include hot swap power controllers,
thermal management products and voltage supervisors. This enables Micrel to
provide a more complete solution to its customers and facilitates the
Company's growth.
- - Capitalize on In-house Wafer Fab Facilities. The Company believes that its
six-inch in-house wafer fab facilities provide a significant competitive
advantage because they facilitate close collaboration between design and
process engineers in the development of the Company's products.
- - Maintain a Strategic Level of Custom and Foundry Products Revenue. Micrel
believes that its custom and foundry products business complements its
standard products business by generating a broader revenue base and
lowering overall per unit manufacturing costs through greater utilization
of its manufacturing facilities. Through interaction with customers, Micrel
has been able to enhance its design and process technology capabilities.
Products and Markets
Overview
The following table sets forth the net revenues attributable to the
Company's two segments, standard products and custom and foundry products
expressed in dollars and as a percentage of total net revenues.
Net Revenues by Segment
(Dollars in thousands)
Years Ended December 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
Net Revenues:
Standard Products $ 183,103 $ 275,306 $ 155,979
Custom and Foundry Products 34,705 71,029 44,037
--------- --------- ---------
Total net revenues $ 217,808 $ 346,335 $ 200,016
========= ========= =========
As a Percentage of Total Net Revenues:
Standard Products 84% 79% 78%
Custom and Foundry Products 16 21 22
--------- --------- ---------
Total net revenues 100% 100% 100%
========= ========= =========
For a discussion of the changes in net revenues from period to period, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
8
Standard Products
In recent years, the Company has directed a majority of its development,
sales and marketing efforts towards standard products in an effort to address
the larger markets for these products and to broaden its customer base. The
Company offers power analog circuits that address certain high growth markets
including cellular telephones, battery powered computers and desktop personal
computers. The Company's remaining power management standard products address
other markets, including power supplies and industrial, defense, avionics, and
automotive electronics. The Company offers a variety of standard products that
serve the communications market including high-speed mixed-signal and digital
integrated circuits sold to customers within the networking, communications
and computing markets.
Portable Battery Powered Computer Market. The Company makes power analog
circuits for laptop, palmtop computers and PDAs. Products in this growing
segment are differentiated on the basis of power efficiency, weight, small
size and battery life.
Cellular Telephone Market. Micrel offers a range of power control and
regulating analog circuits to address the demand for cellular telephones with
longer battery lives. Micrel supplies a range of high performance LDO
regulators and higher efficiency switching regulators that convert, regulate,
switch and control the DC voltages used in cellular telephones. Micrel's
SuperBeta PNPT LDO and CMOS regulators enable cellular telephones to continue
to operate effectively until the battery is almost completely exhausted.
Micrel products are designed to reduce board space and decrease system cost.
The introduction of new, large display technologies to the cellular handset
has created a demand for new "boost" converters to provide higher voltages
from single cell lithium batteries. This includes products for both electro-
luminescent and color LCD displays. In addition, Micrel offers switch mode
power supply ("SMPS") regulators that convert AC to useable DC power in
battery chargers and cellular base stations.
Universal Serial Bus Market. Universal Serial Bus ("USB") is a novel method
of connecting computer peripherals to a host computer that improves upon the
bandwidth and ease-of-use of previously used computer interconnect solutions.
In addition to implementing data communications between the connected devices,
USB also provides a power source capable of powering the peripheral. Micrel
believes that it is the leader in the design and manufacture of circuits that
safely control the delivery of this power source. Micrel's latest generation
of USB devices are the first to support the new Advanced Control and Power
Interface ("ACPI") standard for lower power consumption. Micrel has also
added to its USB product portfolio recently with the introduction of a family
of USB transceivers to support connectivity from the PC host to a USB
peripheral at data rates up to 12 Megabits per second.
PCMCIA Card and Socket Markets. The Personal Computer Memory Card
International Association, of which Micrel is a member, has established
standards for personal computer cards that are the size of credit cards and
for sockets that allow insertion of such cards into personal computers.
Micrel believes that it is a leader in the design and manufacture of
integrated circuits that enable PC Card sockets to have such compatibility.
Power Supply Market. Most electronic equipment includes a power supply that
converts and regulates the electrical power source into usable current for the
equipment. During 2001 Micrel introduced a new family of high voltage
switching controllers for the telecommunications market capable of supporting
extreme transient line voltages up to 180V. Applications for this family
include ADSL line cards, high voltage DC-DC modules and Voice over IP (VOIP)
phones and related networking equipment. In addition to SMPS controllers and
single chip SMPS regulators, Micrel offers a full line of MOSFET drivers,
voltage references, LDOs and Super LDOs.
9
Automotive Electronics Market. Micrel's LDO products, including the line of
monolithic SuperBeta PNP TM LDO regulators, have been designed in for such
automotive controller applications and safety features as automotive airbags
and antilock brake systems. For each of the years ended December 31, 2001,
2000, and 1999, the automotive electronics market represented less than 2% of
net revenues.
General Purpose Analog. Micrel sells a variety of general purpose analog
products including high speed, low power op-amps, comparators, fan controllers
and intelligent protected power switches. The Company also has available for
sale a broad portfolio of voltage supervisors and microprocessor reset
circuits provided by its acquisition of ETC. All of these general purpose
devices were focused on low voltage and low current applications.
Thermal Management. Micrel's thermal management products, based on the
technology acquired from Altos Semiconductor, address the need to accurately
measure temperature in several system locations and control cooling fans. The
ability to measure temperature accurately allows customers to optimize system
performance and is critical to both the reliability and operating life of
today's electronic systems. Micrel's thermal management technology enables
high accuracy at low system cost by sensing the temperature at each location
using only one pin connection.
Hot Swap Controllers. Micrel's hot swap power controllers support the
requirement for 24/7 operation in servers and communications equipment. These
products allow customers to upgrade or replace system boards without having to
power down the system. This family offers the industry's most integrated hot
swap solution for CompactPCIT applications. These devices build on Micrel's
expertise in power control and distribution and target the PC server and
industrial computing market segments. A dual channel hot swap controller was
recently introduced to support Intel's ItaniumT 64-bit microprocessor for the
latest generation of PC servers. During the year the Company also introduced
its first products for the higher voltage telecommunications and networking
equipment markets.
Radio Frequency Data Communications. Micrel's QwikRadioTM family of radio
frequency ("RF") receivers are designed for use in any system requiring a cost
effective, low data-rate wireless link. Typical examples include garage door
openers, wireless computer peripherals, lighting and fan controls, utility
metering, automotive keyless entry and security systems. The Company also
introduced the MICRF500, its first RF transceiver product capable of
supporting data rates up to 115 Kilobits per second. This device is
particularly well suited for home and industrial automation products as well
as wireless game controllers and PC peripherals.
Networking and High-Speed Communications Circuits Market. The Company's
Synergy subsidiary has directed a majority of its development, sales and
marketing efforts towards high-speed media interface for SONET/synchronous
digital hierarchy ("SDH") markets. The Synergy subsidiary also develops and
produces communications products targeted at fiber optic modules and wave
division multiplex ("WDM"), dense wave division multiplex ("DWDM") modules as
well as clock recovery, clock distribution and level translation circuits.
Micrel entered the Ethernet networking market with its acquisition of Kendin
Communications in May 2001. Micrel's networking products transmit, receive and
switch data in local area networks utilizing Ethernet data transmission
protocols. Micrel's Kendin operations offers a broad range of physical layer
(PHY), Media Access Controllers (MACs) and switch products for the 10/100
Megabit Ethernet standard. The primary applications for the switch products
are home and small office computer networks, VOIP phones and media converters,
used to convert signals transmitted optically over fiber to standard cable
(copper) and vice versa. Single 10/100 Megabit PHYs are also used in set-top
boxes, cable modems, game consoles, printers, copiers and a host of other PC
peripherals. Micrel's Kendin operations also recently introduced a Gigabit MAC
and is currently developing a family of switch and PHY products for Gigabit
Ethernet together with several products in support of the emerging 10 Gigabit
Ethernet standard.
10
The Company's future success will depend in part upon the timely
completion, introduction, and market acceptance of new standard products. As
compared with the Company's custom and foundry products business, the standard
products business is characterized by generally 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 its product offerings will quickly
become obsolete. The success of new standard products depends on a variety of
factors, including product selection, successful and timely completion of
product development, achievement of acceptable manufacturing yields by the
Company's foundry and the Company's ability to offer products at competitive
prices.
Micrel's new products are generally incorporated into a customer's products
or systems at the design stage. The value of any design win largely depends
upon the commercial success of the customer's product and on the extent to
which the design of the customer's electronic system accommodates
incorporation of components manufactured by the Company's competitors. In
addition, products or systems may be subsequently redesigned so that they no
longer require the Company's products. No assurance can be given that the
Company will achieve design wins or that any design win will result in future
revenues. The failure of the Company to achieve design wins would materially
and adversely affect the Company's financial condition, results of operations
and cash flows.
Custom and Foundry Products
Micrel offers customers various combinations of design, process and foundry
services in order to provide them with the following alternatives:
Full Service Custom. Based on a customer's specification, Micrel designs
and then manufactures integrated circuits for the customer.
Custom and Semi-Custom. Based on a customer's high level or partial circuit
design, Micrel uses varying levels of its design and process technologies to
complete the design and then manufactures integrated circuits for the
customer.
R&D Foundry. Micrel modifies a process or develops a new process for a
customer. Using that process and mask sets provided by the customer, Micrel
manufactures fabricated wafers for the customer.
Foundry. Micrel duplicates a customer's process to manufacture fabricated
wafers designed by the customer.
Micrel's full service custom, custom and semi-custom products primarily
address high bandwidth communications, consumer, automotive and military
applications and use both analog and digital technologies. The military
applications include communications and transport aircraft.
With respect to R&D foundry and other foundry products, Micrel provides
wafers to a variety of companies. The Company believes that the custom and
foundry business reduces somewhat the Company's sensitivity to fluctuations in
its standard products markets as the Company's foundry customers are often in
different markets that are not affected by the same business cycles.
11
Sales, Distribution and Marketing
The Company sells its products through a worldwide network of independent
sales representative firms and distributor firms and through a direct sales
staff. In the year ended December 31, 2001, sales through North American
distributor firms accounted for 12% of the Company's net revenues.
The Company sells its products in Europe through a direct sales staff in
England as well as independent sales representative firms, independent
distributors and independent stocking representative firms. Asian sales are
handled through independent stocking representative firms with Micrel sales
offices in Korea, Japan and Taiwan. The stocking representative firms may buy
and stock the Company's products for resale or may act as the Company's agent
in arranging for direct sales from the Company to an OEM customer.
Sales to customers in North America, Asia and Europe accounted for 39%, 50%
and 11%, respectively, of the Company's net revenues for the year ended
December 31, 2001 compared to 58%, 32% and 10%, respectively, of the Company's
net revenues for the year ended December 31, 2000 and 52%, 37% and 11%,
respectively, of the Company's net revenues for 1999. The Company's standard
products are sold throughout the world, while its custom and foundry products
are primarily sold to North American customers. The Company's net revenues by
country, including the United States, is included in Note 12 of Notes to
Consolidated Financial Statements.
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.
Customers
For the year ended December 31, 2001 one customer, Galaxy, accounted for
11% of the Company's net revenues. For the year ended December 31, 2000 one
customer, Future Electronics (a distributor), accounted for 10% of the
Company's net revenues. For the year ended December 31, 1999 no customer
accounted for 10% or more of the Company's net revenues.
Design and Process Technology
Micrel's analog proprietary design technology depends on the skills of its
analog design team. The Company has experienced analog design engineers who
utilize an extensive macro library of analog and mixed-signal circuits and
computer simulation models.
Micrel can produce integrated circuits using a variety of manufacturing
processes, some of which are proprietary and provide enhanced product
features. Designers at companies that do not have in-house fabs or have a
limited selection of available processes often have to compromise design
methodology in order to match process parameters.
12
Micrel produces high-speed communication transceivers, clock
generation/distribution circuits, clock recovery circuits as well as high-
speed logic and memory using the Company's proprietary All Spacer Separated
Element Transistor ("ASSET") process.
The Company utilizes the following process technologies:
- - Bipolar - Bipolar technology is one of the oldest technologies. It is
utilized where precision analog elements are required.
- - High Speed Bipolar - This is a variation of bipolar technology that is
specially optimized for very fast transistors and is used where high-speed
switching or signal conditioning is required.
- - SuperBeta PNP TM - The Company's proprietary SuperBeta PNP TM process
technology allows power transistors to be driven with much lower current as
compared to conventional PNP Bipolar technology, which gives such
transistors a competitive advantage.
- - CMOS - CMOS technology is the technology most widely used in digital
applications. It has the advantages of low power consumption and high
packing density.
- - BiCMOS - Bipolar/CMOS ("BiCMOS") merges the Bipolar and CMOS technologies
and offers the benefits of both technologies. This process, however, adds
more expense to a product.
- - BCD - Bipolar/CMOS/DMOS ("BCD") merges three technologies, Bipolar, CMOS
and DMOS. DMOS is best suited for handling high current and is used in the
output section of the circuit. BCD combines the high speed, ruggedness and
power of DMOS and the benefits of BiCMOS.
- - ASSET - ASSET technology is the Company's proprietary high-speed Bipolar
process developed by the Company's Synergy subsidiary. This technology
allows high speed with low jitter and is ideally suited for high-speed
mixed-signal designs.
The Company continues to develop each of these technologies to improve both
the performance and cost of its new products. Micrel is also developing new
process technologies to support its own product development and the needs of
its foundry customers. For example, a new Silicon Germanium process is
currently in development to meet the needs of the next generation
communication products operating at 10Gbps. Silicon Germanium is ideally
suited for these products given its combination of high speed with low power
consumption.
The Company utilizes third party wafer fabrication foundries for advanced CMOS
fabrication processes that are not available in-house. Currently all of
Micrel's Kendin operations networking products are fabricated at third party
foundry suppliers.
13
Research and Development
The ability of the Company to compete will substantially depend on its
ability to define, design, develop and introduce on a timely basis new
products offering design or technology innovations. Research and development
in the analog integrated circuit industry is characterized primarily by
circuit design and product engineering that enables new functionality or
improved performance. Research and development in the high-speed
communications circuit industry is characterized primarily by innovative
process technologies, novel design techniques and high-speed test methodology.
The Company's research and development efforts are also directed at its
process technologies and focus on cost reductions to existing manufacturing
processes and the development of new process capabilities to manufacture new
products and add new features to existing products. With respect to more
established products, the Company's research and development efforts also
include product redesign, shrinkage of device size and the reduction of mask
steps in order to improve die yields per wafer and reduce per device costs.
The Company's analog design engineers principally focus on developing next
generation standard products. The Company's new product development strategy
emphasizes a broad line of standard products that are based on customer input
and requests. The Company often develops new standard analog products with the
cooperation of customers in order to better ensure market acceptance. The
Company is currently developing products to expand its line of USB and PCMCIA
switches, SMPS regulators, LDOs, MOSFET drivers and RF transmitters and
receivers. New development areas in analog standard products include high
speed, low power operational amplifiers, thermal management devices, hot swap
power controllers, display drivers and voltage supervisors.
The Company's mixed-signal design engineers principally focus in two areas.
The first is high speed, low noise media driving and clock/data recovery
devices used in communication and advanced computer systems. New product
development in this area includes high speed Current Mode Logic ("CML") for
optical networking, high speed, precision timing devices for next generation
64-bit servers, fiber optic module components for 10Gbps (OC-192) optical
networking, and communications transceivers for OC-48 and 10 Gigabit Ethernet
applications. The second area of focus is Ethernet based local area network
devices. New product development in this area includes three and five port
switches for the SOHO market, switch products for internet protocol telephony,
and switch products for business enterprises. The Company has also developed
a media access controller for the gigabit Ethernet market and has begun
development of transceiver and switch products for gigabit Ethernet
applications.
In 2001, 2000, and 1999 the Company spent $51.3 million $42.2 million, and
$29.6 million, respectively, on research and development. The Company expects
that it will continue to spend substantial funds on research and development
activities. The Company is currently developing, and may in the future
develop, certain types of standard products with which the Company has only
limited experience. Certain of these new standard products will be targeted at
emerging market segments in which the Company has not previously participated.
Additionally, there can be no assurance that the Company will be able to
identify new standard product opportunities successfully and develop and bring
to market such new products or that the Company will be able to respond
effectively to new technological changes or new product announcements by
others.
14
Patents and Intellectual Property Protection
The Company seeks patent protection for those inventions and technologies
for which such protection is suitable and is likely to provide competitive
advantage to the Company. The Company currently holds 63 United States patents
on semiconductor devices and methods, with various expiration dates through
2020. The Company has applications for 39 United States patents pending. The
Company holds 71 issued foreign patents and has applications for 18 foreign
patents pending. 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 issue or will
be issued with the scope of the claims sought by the Company.
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. See Item 3, Legal Proceedings, of this
report on Form 10-K.
Supply of Materials and Purchased Components
Micrel currently purchases certain components from a limited group of
vendors. The packaging of the Company's products which is performed by, and
certain of the raw materials included in such products are obtained from, a
limited group of suppliers. Micrel's Kendin operations wafer supply is
dependent upon a single large third party wafer foundry supplier. Although the
Company seeks to reduce its dependence on its sole and limited source
suppliers, disruption or termination of any of these sources could occur and
such disruptions could have an adverse effect on the Company's financial
condition, results of operations, or cash flows. The Company has rarely
experienced delays in obtaining raw materials, which have adversely affected
production.
Manufacturing
The Company produces the majority of its wafers at the Company's wafer
fabrication facilities located in San Jose and Santa Clara, California while a
small percentage of wafer fabrication is subcontracted to outside foundries,
including 100% of Micrel's Kendin operations wafer requirements. The San Jose
facility includes a 57,000 square foot office and manufacturing facility
containing a 24,800 square foot clean room facility, which provides production
processes. The San Jose facility is classified as a Class 10 facility, which
means that the facility achieves a clean room level of fewer than 10 foreign
particles larger than 0.5 microns in size in each cubic foot of space. The
facility uses six-inch wafer technology. The Company leases approximately
63,000 square feet of additional adjacent space in San Jose that is used as a
testing facility.
In November 1998, in connection with its acquisition of Synergy, the
Company acquired a 70,000 square foot office and manufacturing facility in
Santa Clara, California containing a 9,000 square foot clean room facility,
which provides production processes. The Santa Clara facility was upgraded
from a Class 10 facility to Class 1 in 1999. The facility uses six-inch wafer
technology. The Company is currently in the process of expanding these clean
room facilities with an additional 5,000 square foot Class 1 clean room
expected to be placed in use in 2002.
15
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 failure, wafer breakage or other
factors 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.
Generally, each die on the Company's wafers is electrically tested for
performance, and most of the wafers are subsequently sent to independent
assembly and final test contract facilities in Malaysia and certain other
Asian countries. At such facilities, the wafers are separated into individual
circuits and packaged. The Company's reliance on independent assemblers may
subject the Company to longer manufacturing cycle times. The Company from time
to time has experienced competition with respect to these contractors from
other manufacturers seeking assembly of circuits by independent contractors.
Although the Company currently believes that alternate foreign assembly
sources could be obtained without significant interruption, there can be no
assurance that such alternate sources could be obtained quickly.
The Company manufactures the majority of its products at two wafer
fabrication facilities. Given the nature of the Company's products, it would
be difficult to arrange for independent manufacturing facilities to supply
such products. Any prolonged inability to utilize the Company's manufacturing
facilities as a result of fire, utility interruptions, natural disaster or
otherwise, would have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
Competition
The semiconductor industry is highly competitive and subject to rapid
technological change. Significant competitive factors in the market for
standard products include product features, performance, price, the timing of
product introductions, the emergence of new technological standards, quality
and customer support. The Company believes that it competes favorably in all
these areas.
Because the standard products market for analog integrated circuits is
diverse and highly fragmented, the Company encounters different competitors in
its various market areas. The Company's principal analog circuit competitors
include Linear Technology Corporation, Maxim Integrated Products, Inc., and
National Semiconductor Corporation in one or more of its product areas. Other
competitors include Texas Instruments, Motorola, On Semiconductor, and certain
Japanese manufacturers. Each of these companies has 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 competitors. The Company's principal competitors for products
targeted at the high bandwidth communications market are On Semiconductor,
Applied Micro Circuits Corp., Maximum Integrated Products, Inc., Vitesse
Semiconductor Corporation and Conexant. The primary competitors for the
Micrel's Kendin operations networking products are Broadcom Corporation,
Marvell Technology Group Ltd. and a number of smaller Taiwanese companies.
With respect to the custom and foundry products business, significant
competitive factors include product quality and reliability, established
relationships between customers and suppliers, timely delivery of products and
price. The Company believes that it competes favorably in all these areas.
16
Backlog
At December 31, 2001, the Company's backlog was approximately $20 million,
all of which was scheduled to be shipped during the first six months of 2002.
At December 31, 2000, the Company's backlog was approximately $87 million.
Orders in backlog are subject to cancellation or rescheduling by the customer,
generally with a cancellation charge in the case of custom and foundry
products. The Company's backlog consists of distributor and customer released
orders required to be shipped within the next six months. Shipments to United
States, Canadian and certain other international distributors are not
recognized as revenue by the Company until the product is sold from the
distributor stock and through to the end-users. Because of possible changes in
product delivery schedules and cancellation of product orders and because an
increasing percentage of the Company's sales are shipped in the same quarter
that the orders are received, the Company's backlog at any particular date is
not necessarily indicative of actual sales for any succeeding period.
Environmental Matters
Federal, state and local regulations impose various environmental controls
on the storage, handling, discharge and disposal of chemicals and gases used
in the Company's manufacturing process. The Company believes that its
activities conform to present environmental regulations. Increasing public
attention has, however, been focused on the environmental impact of
semiconductor operations. While the Company has not experienced any materially
adverse effects on its operations from environmental regulations, there can be
no assurance that changes in such regulations will not impose the need for
additional capital equipment or other requirements or restrict the Company's
ability to expand its operations. Any failure by the Company to restrict the
discharge of hazardous substances adequately could subject the Company to
future liabilities or could cause its manufacturing operations to be
suspended.
Employees
As of December 31, 2001, the Company had 895 full-time employees. The
Company's employees are not represented by any collective bargaining
agreements, and the Company has never experienced a work stoppage. The Company
believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company's main executive, administrative, and technical offices are
located in a 57,000 square foot facility in San Jose, California under a lease
agreement that expires in April 2011. The majority of the Company's
manufacturing operations are also located in San Jose, California in another
57,000 square foot facility and an adjacent 63,000 square foot facility under
lease agreements that expire in May 2005. The Company fabricates the majority
of its wafers at this location in a 24,800 square foot clean room facility,
which provides all production processes. In addition to wafer fabrication, the
Company also uses this location as a testing facility.
Additional administrative, technical, and wafer production facilities are
maintained at a 70,000 square foot facility in Santa Clara, California which
was acquired in connection with the Company's purchase of Synergy
Semiconductor. This facility is under a lease agreement that expires in 2006.
The Company fabricates mixed-signal and digital integrated circuit wafers at
this location in a 9,000 square foot clean room facility, which provides all
production processes.
17
Associated with the acquisition of Kendin, the Company also maintains
additional administrative and technical offices at a 10,936 square foot
facility located in Mountain View, California under a lease agreement that
expires in March 2003.
Associated with the acquisition of ETC, the company maintains a 12,175
square foot design facility in Huxley, Iowa. This facility is owned by the
Company.
The Company also leases small sales and technical facilities located in
Medford, NJ; Coppell, TX; Seattle, WA; Irvine, CA; Raleigh, NC; Seoul, Korea;
Taipei, Taiwan; Tokyo, Japan; Newbury, U.K.; Livingston, Scotland; and
Frankfurt, Germany.
The Company believes that its existing and planned facilities are adequate
for its current manufacturing needs. The Company believes that if it should
need additional space, such space would be available at commercially
reasonable terms.
ITEM 3. 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
or results of operations.
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, and treble damages as well as permanent injunctive relief
against further infringement of the National patents at issue. The Company
intends to continue defending itself against these claims. The litigation is
currently in the motion and discovery phase. An initial trial date has been
set by the Court for September 16, 2002.
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 intends to continue
to defend itself against these claims. The case is currently in the discovery
and motion phase and no trial date has been set.
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
claims that two of the Company's products infringed one of Linear's patents.
The complaint in the lawsuit seeks unspecified compensatory damages, treble
damages and attorneys' fees as well as preliminary and permanent injunctive
relief against infringement of the Linear patent at issue. On August 20, 1999,
the United States District Court in San Jose adjudicated in favor of the
Company in this patent infringement suit brought by the plaintiff. 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
18
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. The United States District Court
in San Jose dismissed the plaintiff's complaint on the merits of the case and
awarded the Company its legal costs. A notice of appeal of the Judgment was
filed by Linear with the United States Court of Appeal for the Federal Circuit
("CAFC") on September 17, 1999. After briefing and oral argument by both
companies, on December 28, 2001 the CAFC reversed the District Court's
judgment of invalidity and remanded the case to the District Court. The
Company intends to continue to vigorously defend itself against the claims set
forth in the lawsuit.
On June 16, 1999, Paul Boon ("Boon" or "plaintiff"), an ex-employee of the
Company, filed a complaint in the Superior Court of California entitled Paul
Boon v. Micrel Incorporated, dba Micrel Semiconductor, alleging breach of
employment contract, discrimination based upon age, and wrongful termination
in violation of public policy. On October 12, 2000, Boon filed an amended
complaint alleging breach of an implied covenant of good faith and fair
dealing, and breach of written agreement, in addition to the original causes
of action. On February 23, 2001, a jury decided that the Company had breached
an employment contract with plaintiff and awarded plaintiff $1.3 million. On
April 13, 2001, the Company filed a motion for judgement notwithstanding the
verdict or alternatively, a motion for new trial. On May 18, 2001, the Court
granted the Company's motion, issuing an order that vacated and set aside the
judgement in favor of Boon, and ordered a new trial on all issues. A new
trial date was set for July 16, 2001. Prior to the beginning of trial, the
parties settled the matter. On July 27, 2001, the case was dismissed by the
Court.
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.
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In the fourth quarter of 2001, no matters were submitted to a vote of
security holders.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is listed on the Nasdaq Stock Market under the
Symbol "MCRL". The range of daily closing sales prices per share for the
Company's Common Stock from January 1, 2000 to December 31, 2001 was:
Year Ended December 31, 2001: High Low
Fourth quarter $ 32.81 $ 18.15
Third quarter $ 36.10 $ 19.29
Second quarter $ 40.47 $ 23.50
First quarter $ 48.94 $ 26.94
Year Ended December 31, 2000: High Low
Fourth quarter $ 67.00 $ 28.75
Third quarter $ 76.44 $ 41.44
Second quarter $ 53.81 $ 29.78
First quarter $ 62.06 $ 27.19
The reported last sale price of the Company's Common Stock on the Nasdaq
Stock Market on December 31, 2001 was $24.30. The approximate number of
holders of record of the shares of the Company's Common Stock was 200 as of
March 15, 2002. This number does not include shareholders whose shares are
held in trust by other entities. The actual number of shareholders is greater
than this number of holders of record. The Company estimates that the number
of beneficial shareholders of the shares of the Company's Common Stock as of
March 15, 2002 was approximately 10,000.
The Company has authorized Common Stock, no par value and Preferred Stock,
no par value. The Company has not issued any Preferred Stock.
The Company has not paid any cash dividends on its capital stock. The
Company currently intends to retain its earnings to fund the development and
growth of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's existing
credit facilities prohibit the payment of cash or stock dividends on the
Company's capital stock without the lender's prior written consent. See Item 7
- - "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and Note 5 of Notes to
Consolidated Financial Statements contained in Item 8.
Unregistered Sales of Securities. In April 2000, in connection with the
acquisition of ETC, the Company issued 152,234 shares of Common Stock in
exchange for the outstanding shares of capital stock of ETC. The issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended. In May 2001, in connection with the acquisition of Kendin,
the Company issued 6,138,635 shares of Common Stock in exchange for the
outstanding shares of capital stock of Kendin. The issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
20
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated fiancial statements and related notes
thereto.
Years Ended December 31,
------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
Income Statement Data:
Net revenues $217,808 $346,335 $200,016 $144,935 $105,170
Cost of revenues* 126,242 149,083 89,572 72,953 50,284
-------- -------- -------- -------- --------
Gross profit 91,566 197,252 110,444 71,982 54,886
Operating expenses:
Research and development 51,306 42,201 29,563 21,373 16,032
Selling, general and
administrative 32,862 45,319 29,399 22,562 17,763
Amortization of deferred
stock compensation*. 9,572 6,060 2,109 753 197
Non-recurring acquisition
expenses* 8,994 - - - -
Purchased in-process
technology - - 603 3,737 -
-------- -------- -------- -------- --------
Total operating expenses 102,634 93,580 61,674 48,425 33,992
-------- -------- -------- -------- --------
Income (loss) from operations (11,068) 103,672 48,770 23,557 20,894
Other income, net 6,086 4,739 692 1,138 974
-------- -------- -------- -------- --------
Income (loss) before
income taxes (4,982) 108,411 49,462 24,695 21,868
Provision (benefit) for
income taxes (5,534) 35,104 16,019 9,304 7,068
-------- -------- -------- -------- --------
Net income $ 552 $ 73,307 $ 33,443 $ 15,391 $ 14,800
======== ======== ======== ======== ========
Net income per share:
Basic $ 0.01 $ 0.82 $ 0.39 $ 0.19 $ 0.19
======== ======== ======== ======== ========
Diluted $ 0.01 $ 0.75 $ 0.36 $ 0.18 $ 0.18
======== ======== ======== ======== ========
Shares used in computing
per share amounts:
Basic 91,888 89,242 85,762 82,258 77,640
======== ======== ======== ======== ========
Diluted 98,092 98,186 92,906 85,878 84,527
======== ======== ======== ======== ========
*Amortization of deferred
stock compensation
related to:
Cost of revenues $ 3,141 $ 2,202 $ 926 $ 275 $ 64
======== ======== ======== ======== ========
Operating expenses:
Research and development $ 5,047 $ 3,347 $ 1,444 $ 467 $ 68
Selling, general and
administrative 4,525 2,713 665 286 129
Amortization of deferred
stock compensation 9,572 6,060 2,109 753 197
-------- -------- -------- -------- --------
Non-recurring acquisition
expenses 2,007 - - - -
-------- -------- -------- -------- --------
Total operating expenses $ 11,579 $ 6,060 $ 2,109 $ 753 $ 197
======== ======== ======== ======== ========
December 31,
------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Working capital $196,940 $172,768 $ 91,629 $ 55,206 $ 40,939
Total assets 354,813 359,748 214,171 152,207 89,432
Long-term debt 1,299 5,327 8,854 14,007 552
Total shareholders' equity 313,330 281,835 157,258 100,693 70,526
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Recent Developments
On January 28, 2002, Micrel announced that it would restate its consolidated
financial statements for the years ended December 31, 1998, 1999, and 2000,
and the quarters ended March 31, 2001, June 30, 2001, and September 30, 2001.
This restatement relates to the Company's past method of setting the exercise
price of certain employee stock options which results in stock compensation
expenses and related payroll and income tax effects that had not been recorded
in previously issued financial statements. It should be noted that Micrel
sought outside professional advice prior to implementation of the option grant
method that resulted in the unintentional consequence of stock compensation
charges. Information regarding the effect of the restatement on the Company's
financial position and results of operations is provided in Note 2 of Notes to
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K/A for the year ended December 31, 2000, the Quarterly Reports on
Form 10-Q/A for the quarters ended March 31, June 30 and September 30, 2001
and the Current Report on Form 8-K/A filed on April 1, 2002.
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 high bandwidth communications, computer,
telecommunications and industrial markets. In addition to standard products,
the Company manufactures custom analog and mixed-signal circuits and provides
wafer foundry services.
On May 30, 2001, the Company completed the acquisition of Kendin, a
privately held fabless semiconductor company that designs, develops and
markets high performance integrated circuits for the communications and
networking markets. Under the terms of the merger agreement, the Company
issued 6,138,635 shares of Common Stock and options to purchase 645,097
shares of Common Stock in exchange for all outstanding Kendin securities and
options to purchase Kendin securities. The transaction has been accounted for
as a pooling of interests, and accordingly all financial statements presented
have been restated to include the Kendin results. Associated with the
acquisition the Company recorded $8.9 million in non-recurring acquisition
expenses in the quarter ended June 30, 2001. The non-recurring expenses
consisted of $6.9 million in transaction costs and $2.0 million in stock
compensation charges.
The Company derives a substantial portion of its net revenues from
standard products. For 2001, 2000, and 1999 the Company's standard products
sales accounted for 84%, 79%, and 78%, respectively, of the Company's net
revenues. The Company believes that a substantial portion of its net revenues
in the future will depend upon standard products sales, although such sales
as a proportion of net revenues may vary as the Company adjusts product
output levels to correspond with varying economic conditions and demand
levels in the markets which it serves. The standard products business is
characterized by short-term orders and shipment schedules, and customer
orders typically can be canceled or rescheduled without significant penalty
to the customer. Since most standard products backlog is cancelable without
significant penalty, the Company typically plans its production and inventory
levels based on 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.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company may experience significant fluctuations in its results of
operations. Factors that affect the Company's results of operations include
the volume and timing of orders received, changes in the mix of products sold,
the utilization level of manufacturing capacity, competitive pricing
pressures, the successful development of new products, and the Company's
ability to ramp up manufacturing capacity to meet demand. These and other
factors are described in further detail later in this discussion. 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.
Critical Accounting Policies
The financial statements included in this Form 10-K and discussed within
this Management's Discussion and Analysis of Financial Condition and Results
of Operations have been prepared in accordance with accounting principles
generally accepted in the United States. Preparation of these financial
statements requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates and
judgements. Management bases its estimates and judgements on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. For a detailed discussion
of the Company's significant accounting policies, see Note 1 of Notes to
Consolidated Financial Statements in Item 14 of this Form 10-K. The Company
considers certain accounting policies related to revenue recognition, inventory
valuation, income taxes, and litigation to be critical to the fair
presentation of its financial statements.
Revenue Recognition. 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. Actual future returns
could exceed the returns allowance established.
Inventory Valuation. The Company has taken adjustments to write-down
the cost of obsolete and excess inventory to the estimated market value based
on historical and forecasted demand for its products. If actual future demand
for the Company's products is less than currently forecasted, additional
inventory adjustments may be required.
Income Taxes. As of December 31, 2001, the Company has net deferred tax
assets of $24.5 million, resulting from temporary timing differences between
book and tax valuation of assets and liabilities. The Company believes that
future taxable income levels will be sufficient to realize the tax benefits
of these deferred tax assets.
Litigation. The semiconductor industry is characterized by frequent
litigation regarding patent and other intellectual property rights. The
Company is currently involved in such intellectual property litigation. See
Item 3, Legal Proceedings, of this report on Form 10-K.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Results of Operations
The following table sets forth certain operating data as a percentage of
total net revenues for the periods indicated.
Years Ended
December 31,
--------------------
2001 2000
-------- --------
Net revenues 100.0% 100.0%
Cost of revenues 58.0 43.0
-------- --------
Gross profit 42.0 57.0
Operating expenses:
Research and development 23.6 12.2
Selling, general and administrative 15.1 13.1
Amortization of deferred stock compensation 4.4 1.8
Non-recurring acquisition expenses 4.0 -
-------- --------
Total operating expenses 47.1 27.1
Income (loss) from operations (5.1) 29.9
Other income, net 2.8 1.4
-------- --------
Income (loss) before income taxes (2.3) 31.3
Provision (benefit) for income taxes (2.6) 10.1
-------- --------
Net income 0.3% 21.2%
======== ========
Net Revenues. Net revenues decreased 37% to $217.8 million for the year
ended December 31, 2001 from $346.3 million in 2000 due primarily to lower
standard product revenues and lower custom and foundry revenues. Standard
product revenues decreased to $183.1 million, which represented 84% of net
revenues for the year ended December 31, 2001, compared to $275.3 million and
79% of net revenues for 2000. This decrease resulted from decreased unit
shipments across all significant product lines and end markets except
Ethernet communications, combined with decreases in average selling prices.
Sales of standard products were led by low dropout regulators, Ethernet
communications products, high bandwidth communications products and computer
peripheral products. Such products were sold to manufacturers in the
computing, Ethernet communications, high bandwidth communications,
telecommunications, and industrial markets. Custom and foundry revenues
decreased to $34.7 million, which represented 16% of net revenues for the
year ended December 31, 2001, compared to $71.0 million and 21% of net
revenues for 2000. Such decreases were due primarily to decreased sales of
custom high bandwidth communications products and to a lesser extent
decreased foundry sales.
The supply of semiconductors can quickly and unexpectedly match or exceed
demand because customer end demand can change very quickly and semiconductor
suppliers can rapidly increase production output. This can lead to a sudden
oversupply situation and a subsequent reduction in order rates and revenues as
customers adjust their inventories to true demand rates. Customers
continuously adjust their inventories resulting in frequent changes in demand
for our products.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The semiconductor industry experienced such a change in the supply and
demand situation during 2000 and 2001. In the fourth quarter of 2000 and
during 2001, customers in the high speed communications end market, and the
contract manufacturing firms that serve this market, adjusted their demand on
component suppliers as they coped with high levels of inventory and sharply
reduced demand for their end products. In addition, the slowing of global
economic growth during 2001 led to lower order rates from customers serving
the telecommunications, industrial and computer end markets as they adjusted
to lower demand for their products. The decline in new order rates resulted in
a sequential decline in the Company's revenues for the first three quarters of
2001. The rapid build-up of semiconductor inventories in global sales channels
caused lead times for components to fall precipitously during 2001. The
perceived overabundance of semiconductors combined with uncertain demand for
their end products led the Company's customers to move to a just-in-time order
pattern as they worked to reduce inventories. Due to the combination of excess
supply, reduced demand and lower lead times, new orders rates declined and a
significant amount of previously placed orders were cancelled during the first
half of 2001. The corresponding reduction in backlog has left the Company,
like most semiconductor suppliers, with extremely limited visibility into
future customer demand. Customers appear to be placing orders on an "as
needed" basis due to short supplier lead times combined with the uncertain
macroeconomic outlook. The low backlog and uncertainty of customer demand
significantly limits our ability to predict future levels of sales and
profitability.
For the year ended December 31, 2000, net revenues increased 73% to $346.3
million from $200.0 million in 1999 due primarily to higher standard product
revenues and, to a lesser extent, higher custom and foundry revenues.
Standard product revenues increased to $275.3 million, which represented 79%
of net revenues for the year ended December 31, 2000, compared to $156.0
million and 78% of net revenues for 1999. Such increases resulted from
increased unit shipments combined with an increase in average selling prices.
Sales of standard products were led by the increased sales of low dropout
regulators, high bandwidth communications products and computer peripheral
products. Such products were sold to manufacturers in the high bandwidth
communications, telecommunications, and industrial markets. Custom and
foundry revenues increased to $71.0 million, which represented 21% of net
revenues for the year ended December 31, 2000, compared to $44.0 million and
22% of net revenues for 1999. Such increases were due primarily to increased
sales of custom high bandwidth communications products and to a lesser extent
increased foundry sales.
International sales represented 61%, 42%, and 48% of net revenues for the
years ended December 31, 2001, 2000 and 1999, respectively. On a dollar
basis, international sales decreased 9% to $132.6 million for the year ended
December 31, 2001 from $145.9 million for the comparable period in 2000. The
dollar decrease in international sales resulted from decreased unit shipments
to manufacturers of personal computers and communications products primarily
in Europe and to a lessor extent 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.
25
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 decreased to
42% for the year ended December 31, 2001 from 57% for the year ended
December 31, 2000. The decrease in gross margin primarily reflected
decreased capacity utilization, a reduced mix of higher margin standard
products and custom products and a decrease in average selling prices
compared to the same periods in 2000.
For the year ended December 31, 2000, the Company's gross margin increased
to 57% from 55% for the year ended December 31, 1999. 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 24% and 12% for the years ended December 31, 2001 and 2000. On a
dollar basis, research and development expenses increased $9.1 million or 22%
to $51.3 million for the year ended December 31, 2001 from $42.2 million in
2000. The dollar increases were primarily due to increased engineering
staffing costs and increased prototype fabrication costs and new process
development costs. The Company believes that the development and introduction
of new products is critical to its future success and expects to continue its
investment in research and development activities in the future.
For the years ended December 31, 2000 and 1999, research and development
expenses represented 12% and 15% of net revenues, respectively. On a dollar
basis, research and development expenses increased $12.6 million or 43% to
$42.2 million for the year ended December 31, 2000 from $29.6 million in
1999. The dollar increases were primarily due to increased engineering
staffing costs and increased prototype material costs.
Selling, General and Administrative Expenses. As a percentage of net
revenues, selling, general and administrative expenses represented 15% and 13%
for the years ended December 31, 2001 and 2000, respectively. On a dollar
basis, selling, general and administrative expenses decreased $12.5 million or
27% to $32.9 million for the year ended December 31, 2001 from $45.3 million
for the comparable period in 2000. The dollar decreases were principally
attributable to decreased sales commissions and decreased profit sharing
accruals.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
For the years ended December 31, 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
$15.9 million or 54% to $45.3 million for the year ended December 31, 2000
from $29.4 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
Amortization of deferred stock compensation. The Company accounts for
stock-based awards to employees using the intrinsic value method in accordance
with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees". The Company's practices in effect through December 2001
related to employee stock option pricing resulted in stock compensation
expense under APB 25. For the year ended December 31, 2001 total amortization
of deferred stock compensation was $14.7 million of which $3.1 million was
included in cost of revenues, $9.6 million was included in amortization of
deferred stock compensation and $2.0 million was included in non-recurring
acquisition costs. For the year ended December 31, 2000 total amortization of
deferred stock compensation was $8.3 million of which $2.2 million was
included in cost of revenues and $6.1 million was included in amortization of
deferred stock compensation. For the year ended December 31, 1999 total
amortization of deferred stock compensation was $3.0 million of which $1.0
million was included in cost of revenues and $2.1 million was included in
amortization of deferred stock compensation.
Non-recurring acquisition expenses. Non-recurring acquisition expenses
reflect $6.9 million in direct transaction costs and $2.0 million in stock
compensation costs related to the acquisition of Kendin.
Purchased In-Process Technology. On December 15, 1999, the Company acquired
all the outstanding capital stock of Altos for a cash purchase price of
$1.8 million. The transaction was accounted for as a purchase. Approximately
$1.7 million of the total purchase cost was allocated to intangible assets. Of
that amount, $603,000 was allocated to purchased in-process technology, which
has not reached technological feasibility and has no alternative future use,
for which the Company recorded charges in the year ended December 31, 1999.
Other Income, Net. Other income, net reflects interest income from
investments in short-term investment grade securities and other non operating
income, offset by interest expense incurred on term notes. Other income, net
increased by $1.3 million to $6.1 million in 2001 from $4.7 million in 2000.
This increase were primarily due to the receipt of insurance proceeds of $1.1
million in 2001, combined with decreased interest expense due to a reduction
in the average balances of term notes.
For the year ended December 31, 2000, other income, net increased by $4.0
million to $4.7 million from $692,000 in 1999. This increase was primarily
due to an increase in average cash and investment balances combined with
increased rate of returns on such balances.
Provision (benefit) for Income Taxes. For the year ended December 31, 2001
the benefit for income taxes was $5.5 million or 111% of loss before taxes.
The 2001 benefit for income taxes differs from taxes computed at the federal
statutory rate primarily due to the effect of federal and state research and
development credits, and state manufacturing credits. For each of the years
ended December 31, 2000 and 1999 the provision for taxes on income was 32% of
income before taxes. The 2000 and 1999 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.
27
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 December 31, 2001 consisted of cash and short-term
investments of $133 million and bank borrowing arrangements. Borrowing
agreements consisted of (i) $5 million under a revolving line of credit and
(ii) $10 million under a non-revolving line of credit. There were no
borrowings under these agreements at December 31, 2001. The two lines of
credit are covered by the same loan and security agreement. The revolving line
of credit portion of the agreement expires on June 30, 2002 subject to
automatic renewal on a month-to-month basis thereafter unless terminated by
either party upon 30 days notice. The non-revolving line of credit portion of
the agreement expires on June 30, 2002. Borrowings under the revolving line
of credit bear interest rates of, at the Company's election, the prime rate
(4.75% at December 31, 2001), or the bank's revolving offshore rate, which
approximates LIBOR (1.88% at December 31, 2001) plus 2.0%. Borrowings under
the non-revolving line of credit bear interest rates of, at the Company's
election, the prime rate, the bank's non-revolving offshore rate, which
approximates LIBOR plus 2.13%, a fixed rate based on the four-year U.S.
Treasury Bill rate (4.21% at December 31, 2001) plus 2.75% or an annual
adjustable rate based on the one-year U.S. Treasury Bill rate (2.09% at
December 31, 2001) plus 2.75%. 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 December 31, 2001.
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 acquisition cost. Amounts borrowed
under this credit line are automatically converted to four-year installment
notes. All equipment notes are collateralized by the value of manufacturing
equipment underlying the specified amounts advanced under the non-revolving
bank line of credit.
As of December 31, 2001, the Company had $4.9 million outstanding under
term notes (see Note 5 of Notes to Consolidated Financial Statements contained
in Item 14).
The Company's working capital increased by $24.1 million to $196.9 million
as of December 31, 2001 from $172.8 million as of December 31, 2000. The
increase was primarily attributable to increases in cash, cash equivalents
and short-term investments of $10.4 million, prepaid expenses and other of
$7.2 million and inventories of $6.4 million combined with decreases in
income taxes payable of 11.8 million, accounts payable of $8.6 million,
deferred income of $4.4 million and accrued compensation of $3.0 million,
which were partially offset by a decrease in accounts receivable of
$34.6 million.
The Company generated $43.6 million in cash flows from operating
activities for the year ended December 31, 2001 compared to $115.4 million
for the year ended December 31, 2000. This decrease in cash flows provided
by operating activities was primarily due to decreased net income adjusted
for non-cash activities. For the year ended December 31, 2001 the Company's
cash flows provided by operating activities were primarily attributable to
net income of $45.3 million after adding back non-cash activities and a
decrease in accounts receivable of $34.6 which were partially offset by
increases in prepaid expenses and other of $7.2 million and inventories of
$6.4 million combined with decreases in accounts payable of $8.6 million,
deferred income of $4.4 million and accrued compensation of $3.0 million.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company's investing activities during the year ended December 31, 2001
used cash of $1.9 million as compared to $67.8 million of cash used in
investing activities during the year ended December 31, 2000. This decrease
in cash used for investing activities was primarily due to a reduction in
purchases of equipment and leasehold improvements combined with an increase
in proceeds from the net sale of short-term investments. Cash used for
investing activities during the year ended December 31, 2001 resulted
primarily from net purchases of $35.7 million of equipment and leasehold
improvements that were primarily for wafer fab and testing equipment, which
was partially offset by net sales of short-term investments of $33.9 million.
The Company's financing activities during the year ended December 31, 2001
provided cash of $2.5 million as compared to cash provided of $18.5 million
during the year ended December 31, 2000. Cash provided by financing
activities during the year ended December 31, 2001 was the result of
$15.6 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 was partially offset by repurchases of Common Stock of
$7.3 million and $5.8 million in repayments of long-term debt.
The Company currently intends to purchase approximately $10 million to $20
million in capital equipment during the next twelve months primarily for the
purchase of additional wafer and test manufacturing equipment and leasehold
improvements. The Company's Board of Directors has approved the repurchase of
up to $20 million of Common Stock during 2002. The Company expects that its
cash requirements through 2002 will be met by its cash from operations,
existing cash balances and short-term investments, and its credit facilities.
Factors That May Affect Operating Results
The statements contained in this Report on Form 10-K 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 our
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 in Item 1 ("Business"), Item 3 ("Legal Proceedings"),
Item 7. ("Management's Discussion and Analysis of Financial Condition and
Results of Operations") and in the additional factors set forth below.
The Company is exposed to risks because of the recent slowdown in the global
economy.
Recently, the global economy has been experiencing a slowdown due to many
factors, including decreased consumer confidence and concerns about inflation,
and reduced corporate profits and capital spending. The technology related
end markets that the Company serves such as the high-speed communications,
computing and telecommunications markets have been greatly effected by this
economic slowdown. As a result of these unfavorable economic conditions, the
Company has experienced lower levels of new customer order rates and lower
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
revenue levels. If these weak economic conditions in the global economy
continue or worsen, or if a wider global economic recession materializes, the
Company's business, financial condition and results of operations may be
materially and adversely affected.
The Company's operating results may fluctuate because of a number of factors,
many of which are beyond the its control.
If the Company's operating results are below the expectations of public
market analysts or investors, then the market price of its Common Stock could
decline. Some of the factors that affect the Company's quarterly and annual
results, but which are difficult for the Company to control or predict are:
- - the volume and timing of orders received
- - changes in the mix of products sold
- - market acceptance of the Company's products and its customers' products
- - competitive pricing pressures
- - cyclical semiconductor industry conditions
- - dependence on third party suppliers
- - the 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
- - the ability to hire and retain key technical and management personnel
- - access to advanced process technologies
- - the timing and extent of process development costs
- - the current California energy crisis
Customer demand for the Company's products is volatile and difficult to
predict
The Company's customers continuously adjust their inventories in response
to changes in end market demand for their products and the availability of
semiconductor components. This results 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. The supply of
semiconductors can quickly and unexpectedly match or exceed demand because
customer end demand can change very quickly. Also, semiconductor suppliers can
rapidly increase production output. This can lead to a sudden oversupply
situation and a subsequent reduction in order rates and revenues as customers
adjust their inventories to true demand rates.
The current weakness in the global economy has caused the end markets that
the Company's customers serve to grow less rapidly, or in some cases,
contract. The resulting uncertainty of demand has caused most of the
Company's customers to err on the side of caution until they see signs of
order strength for their end products. In addition, many customers are
continuing to deplete excess inventories, particularly contract manufacturers
and high bandwidth communication OEM's. Semiconductors are perceived to be
readily available and supplier lead times are at or near historic lows. In
this environment customers are not making large purchase commitments, only
ordering small quantities to fill known short-term requirements, greatly
reducing our visibility into customer demand. As a result, the Company's
revenues are highly dependent upon turns fill orders (orders booked and
shipped in the same quarter). The reduced level of order backlog coupled with
the short term nature of customer demand makes it extremely difficult to
predict near term revenues and profits.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The cyclical nature of the semiconductor industry can result in downturns that
can harm the Company's operating results.
The semiconductor industry has historically been cyclical and periodically
subject to significant economic downturns. These downturns have been
characterized by diminished product demand, accelerated erosion of selling
prices and over capacity levels as well as rapidly changing technology and
evolving industry standards. Management believes that the semiconductor
industry is currently in such a downturn and that the decrease in our net
revenues from $346.3 million for the year ended December 31, 2000, to $217.8
million for the year ended December 31, 2001 is primarily due to this
downturn. The Company's net revenues may continue to be adversely affected if
this downturn continues. In general, the Company may experience future
substantial period-to-period fluctuations in its business and operating
results due to general semiconductor industry conditions, overall economic
conditions or other factors.
The Company's gross margin is dependent upon a number of factors, including
the level of capacity utilization.
Semiconductor manufacturing is a capital-intensive business resulting in
high fixed costs. If the Company is unable to utilize its installed wafer
fabrication or test capacity at a high level, the costs associated with these
facilities and equipment is not fully absorbed, resulting in higher average
unit costs and lower sales margins. The decline in new customer order rates
in 2001 has resulted in reduced capacity utilization of the Company's
factories as it has attempted to match production with anticipated customer
demand. The Company's gross margins have declined as a result of this reduced
utilization of production capacity. Gross margins may deteriorate further
should production activity be curtailed in response to lower customer demand
in the future.
The semiconductor industry is highly competitive.
The semiconductor industry is highly competitive and subject to rapid
technological change, price-erosion and increased international competition.
Significant competitive factors include:
- - product features
- - performance
- - price
- - timing of product introductions
- - emergence of new computer and communications standards
- - quality and customer support
In times of weak economic conditions, such as the semiconductor industry is
now experiencing and due to uncertain customer demand and under-utilization of
semiconductor fabrication capacity, price competition becomes more prevalent.
This can have the effect of reducing revenue levels and gross margins.
Because the standard products market for integrated circuits is diverse and
highly fragmented, the Company encounters different competitors in various
market areas. Most of these competitors have substantially greater technical,
financial and marketing resources and greater name recognition than the
Company has. 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, results of operations, or cash flows.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Dependence on third-party manufacturing and supply relationships increases the
risk that the Company will not have an adequate supply of products to meet
demand or that its cost of materials will be higher than expected.
The Company faces many risks associated with its dependence upon third
parties that manufacture, assemble or package certain of our products. These
risks include:
- - reduced control over delivery schedules and quality
- - risks of inadequate manufacturing yields and excessive costs
- - the potential lack of adequate capacity during periods of excess demand
- - difficulties selecting and integrating new subcontractors
- - limited warranties on wafers or products supplied to us
- - potential increases in prices
- - potential misappropriation of the Company's intellectual property
Any of these risks may lead to increased costs or delay delivery of the
Company's products, which would harm its profitability and customer
relationships.
Additionally, the Company's wafer and product requirements typically
represent a relatively small portion of the total production of the third-
party foundries and outside assembly, testing and packaging contractors. As a
result, Micrel is subject to the risk that a foundry will provide delivery or
capacity priority to other larger customers at the expense of Micrel,
resulting in an inadequate supply to meet customer demand or higher costs to
obtain the necessary product supply. Also, there is a risk that third party
manufacturer will cease production on an older or lower volume process that it
uses to produce the Company's products. The Company cannot be certain that its
outside manufacturers will continue to devote resources to the production of
its products or continue to advance the process design technologies on which
the manufacturing of its products are based. Each of these events could
increase the Company's costs and harm its ability to deliver our products on
time.
The Company's product offering is concentrated and are highly dependent on
certain select end markets.
The Company currently sells a significant portion of its products in the
high speed communications, computer, networking and wireless handset markets.
These markets are characterized by short product life cycles, rapidly
changing customer demand, evolving and competing industry standards and
seasonal demand trends. Additionally, there can be no assurance that these
markets will continue to grow. If the markets for high speed communications,
computers, networking or wireless handsets that the Company serves fail to
grow, or grows more slowly than it currently anticipates, or if there is
increased competition in these markets, the Company's business, results of
operations and financial condition could be adversely affected.
The Company currently derives the majority of its product revenues from
sales of standard analog and mixed-signal integrated circuits and expects
these products to continue to account for the majority of its revenues for the
foreseeable future. As a result, factors adversely affecting the pricing of or
demand for standard analog integrated and mixed-signal circuits, such as
competition, product performance or technological change, could have a
material adverse effect on the Company's business and consolidated results of
operations and financial condition.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
A significant portion of the Company's revenues in recent periods has been
derived from sales of products based on SONET, SDH and ATM transmission
standards. If the communications market evolves to new standards, the Company
may not be able to successfully design and manufacture new products that
address the needs of its customers or gain substantial market acceptance.
Although the Company has developed products for the Gigabit Ethernet and Fibre
Channel communications standards, volume sales of these products are modest,
and it may not be successful in addressing other market opportunities for
products based on these standards.
An important part of the Company's strategy is to continue to focus on the
market for high-speed commu