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, 2002.
[ ] 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. Yes [X] No [ ]
As of March 14, 2003, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $459,603,118 based upon
the closing sales price of the Common Stock as reported on the Nasdaq Stock
Market(r) 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 14, 2003, the Registrant had outstanding 92,064,679 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 22, 2003 are incorporated by reference in Part
III of this Report.
This Report on Form 10-K includes 71 pages with the Index to Exhibits
located on page 68.
MICREL, INCORPORATED
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2002
Page
----
PART I
Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 36
PART III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters 37
Item 13. Certain Relationships and Related Transactions 37
Item 14. Controls and Procedures 37
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 38
Signatures 65
Certifications 66
Exhibit Index 68
2
PART I
ITEM 1. BUSINESS
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. We maintain a
corporate website located at www.micrel.com, however none of the information
contained on our website is incorporated into this annual report. Our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports are made available, free of charge, on
the website noted above as soon as reasonably practicable after filing with
the Securities and Exchange Commission.
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 1,700 standard products
and has derived the majority of its product revenue for the year ended
December 31, 2002 from sales of standard analog and high speed communications
integrated circuits. These products address a wide range of end markets
including cellular handsets, portable computing, enterprise and home
networking, wide area and metropolitan area networks and industrial equipment.
For the years ended December 31, 2002, 2001, and 2000, the Company's standard
products accounted for 88%, 84%, and 79%, respectively, of the Company's net
revenues. In addition, the Company manufactures custom analog and mixed-signal
circuits and provides wafer foundry services for customers who produce
electronic systems for communications, consumer and military applications. 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 small office, home office ("SOHO") and enterprise
networking markets. This 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 also currently developing products to serve the
gigabit Ethernet communication protocol.
Continuing trends to lower voltages and higher currents in the
communications, networking and computing markets have created demand for high
performance analog products to accurately control, regulate, convert and route
voltage and current in electronic systems. The demand for these high
performance power management circuits has been further fueled by the growth of
portable communications and computing devices (e.g. cellular telephones,
personal digital assistants ("PDA"), MP3 players and notebook computers). The
Company sells a wide range of switching and linear regulators, power switches,
voltage supervisors, and thermal management products for these portable
devices. 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 also has an extensive power management offering for the
networking and communications infrastructure markets including PC servers,
network switches and routers, storage area networks and wireless base
stations. This offering includes a new family of switching regulators for
point of load applications in distributed power schemes, and a new family of
hot swap power controllers. These hot swap controllers support 24 hours a day,
7 days per week operations by enabling customers to remove and insert printed
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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 industrial, defense, avionics
and automotive electronics.
In addition to power and thermal management products, Micrel also offers a
family of highly integrated radio frequency ("RF") products. Micrel's
QwikRadio(TM) products enable customers to develop wireless control systems
significantly improving the consumer experience of their products.
Applications for the QwikRadio(TM) products include remote keyless entry for
automobiles, TV remote controls, wireless game controllers, keyboards and
mice. The Company introduced a new family of RF products in 2002 to address
high data rate two-way wireless links. Micrel's new RadioWire(TM) transceivers
provide frequency hopping capability to extend the range and improve the
integrity of the data link for applications including remote metering,
security surveillance and factory automation.
The Company's standard mixed-signal and digital integrated circuits are
used primarily for enterprise switch networks, storage area networks and
metropolitan area networks. Micrel provides a complete chipset solution for
fiber optic module transceivers to support data rates up to 10 Gigabits per
second (OC-192). 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. In 2002, the
Company introduced the first integrated controller solution to support the new
digital diagnostic standard for optical transceivers to improve system
reliability and networking support costs. The MIC3000 controller replaces 4-5
integrated circuits ("ICs") in the current solution with a 75% reduction in
size.
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 the Company's standard
products business.
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, 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, 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.
4
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.
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.
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, high
performance power management products are required. 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 light emitting diodes ("LED"s). 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. Another emerging trend is the use of switching
regulators to improve efficiency in power hungry devices such as the base-band
processor and power amplifier. This results in longer standby and talk times
for the cellular handset and provides a significant opportunity for the
Company's high frequency switching regulators.
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 2002 there has been a significant
expansion in the number of broadband subscribers for both DSL and cable modem
5
services. The increased bandwidth demand of these users will continue to
consume the installed capacity in the metropolitan and wide area networks. The
additional demand of new wireless services utilizing the transmission of video
will further consume this installed capacity. It is anticipated these trends
will continue in 2003. Micrel has maintained significant investment in its
communications products to ensure the Company is positioned with new products
to capitalize on the return to growth in communications equipment. The Company
has significantly expanded its high-speed interface portfolio of logic, level
translation, clocking and physical media products with the introduction of 44
new products in 2002.
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, media converters, set-
top boxes, internet protocol ("IP") phones and game consoles. This is driving
rapid growth in the SOHO market to connect multiple PCs and peripherals. With
its acquisition of Kendin Communications, Micrel has entered this market with
leadership products and technology. Micrel's networking products transmit,
receive and switch data in local area networks utilizing Ethernet data
transmission protocols. Micrel offers a broad range of physical layer ("PHY"),
media access controllers ("MAC"s) and switch products for the 10/100 Megabit
Ethernet standard.
With the continued development of the standard to Gigabit and now 10
Gigabit data rates Ethernet is now starting to challenge the SONET standard in
the metropolitan area network. As applications such as voice over IP
("VOIP"), video conferencing and video multicasting continue to grow in the
corporate enterprise, video streaming of movies and online gaming continue to
increase over the Internet, and broadband DSL connections continue to grow
worldwide, there is an ever increasing demand for more bandwidth. Micrel is
positioned with the capabilities to provide the Gigabit and 10-Gigabit
Ethernet components that enable these applications. Micrel has 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.
Micrel's Strategy
Micrel seeks to capitalize on the growth opportunities within the high-
performance analog, mixed-signal and digital semiconductor markets. 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 growth opportunities within the
communications and networking markets and has successfully acquired companies
serving these market segments. 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 1,700 standard products, with net revenues from standard products
generating 88% of the Company's net revenues for the year ended December
31, 2002. Micrel believes that its long-term growth will depend
substantially on its ability to increase standard product sales in its
existing markets and to penetrate new standard product 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, 2002 were derived from products
relating to power management. Through the acquisitions of Synergy
Semiconductor, Altos Semiconductor, Electronic Technology and Kendin, the
Company has gained expertise in high-speed, mixed-signal and system-level
digital integrated circuits, required to address the wide area,
6
metropolitan area and local area network communication markets as well as
increase its penetration of the power and thermal management markets.
- - 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 linear and switching regulators, PCMCIA
and USB power switches, hot swap power controllers, high speed interface
and communications devices. In order to maintain its technology
leadership, the Company has developed plans for successive generations of
products with increased functionality. The Company's process technology is
a key aspect of the products' value proposition to the customer and enables
the Company to differentiate itself from the competition. The Company now
has its sub-micron CMOS and bipolar processes in production. The Company is
currently developing an in-house 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. 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 Facility. The Company believes that its
six-inch in-house wafer fab facility provides a significant competitive
advantage because it facilitates 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,
---------------------------------
2002 2001 2000
--------- --------- ---------
Net Revenues:
Standard Products $ 180,407 $ 183,103 $ 275,306
Custom and Foundry Products 24,297 34,705 71,029
--------- --------- ---------
Total net revenues $ 204,704 $ 217,808 $ 346,335
========= ========= =========
As a Percentage of Total Net Revenues:
Standard Products 88% 84% 79%
Custom and Foundry Products 12 16 21
--------- --------- ---------
Total net revenues 100% 100% 100%
========= ========= =========
7
The Company's products address a wide range of end markets. The following
table presents the Company's revenues by end market as a percentage of total
net revenues.
Years Ended December 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
As a Percentage of Total Net Revenues:
High-Speed Communications 27% 32% 33%
Wireless Handsets 17 15 16
Computer 34 30 27
Industrial 19 20 22
Military & Consumer 3 3 2
------- ------- -------
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."
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 a broad range of high performance analog circuits that address
high growth markets including cellular telephones, portable computers and
desktop personal computers. The majority of the Company's revenue is derived
from power management standard products which, in addition to the above
markets, are also used in the industrial, defense, and automotive electronics
markets. In addition to power management, 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 low drop out
("LDO") regulators and higher efficiency switching regulators that convert,
regulate, switch and control the DC voltages used in cellular telephones.
Micrel's SuperBeta PNP(TM) 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. 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 also pioneered switch
products utilizing the new Advanced Control and Power Interface ("ACPI")
8
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 and is actively developing products to
address the new "On the Go" USB standard for peer-to-peer communications.
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 2002 Micrel introduced several families of high voltage
switching controllers for the networking, telecommunications and computing
markets. These devices offer high efficiency to minimize power loss through
heat and high switching frequencies to minimize solution size. Applications
for these products include DC-DC converter modules, VOIP phones, network
switches and routers, wireless base-stations, wireless access points and PC
servers. In addition to SMPS controllers and single chip SMPS regulators,
Micrel offers a full line of MOSFET drivers, smart switches, voltage
supervisors, LDOs and Super LDOs.
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. All of these general purpose devices
were focused on low voltage and low current applications.
Thermal Management. Micrel's thermal management products 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. Applications for these
products include notebook computers, enterprise storage, printers, copiers and
set-top boxes.
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 CompactPCI(TM) applications. These devices build on Micrel's
expertise in power control and distribution and target the PC server and
industrial computing market segments. Micrel's dual channel hot swap
controller to support Intel's Itanium(TM) 64-bit microprocessor for the latest
generation of PC servers and the next generation product to support the latest
PCI-Express standard is in development. The Company also offers high voltage
(+/- 48V) controllers for the telecommunications and networking equipment
markets.
Radio Frequency Data Communications. Micrel's QwikRadio(TM) family of 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
its first generation RadioWire(TM) products. The MICRF500, is the Company's
first RF transceiver product that is 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.
9
Networking and High-Speed Communications Circuits Market. The Company's
High Bandwidth division has directed a majority of its development, sales and
marketing efforts towards high-speed media interface for SONET/synchronous
digital hierarchy ("SDH") markets. The group 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. During
2002, the division expanded its high speed interface portfolio with the
introduction of 44 new products. These products offer the highest signal
integrity in the industry to ensure minimal data loss at transmission speeds
in excess of 10 Gigabits per second. Micrel continues to innovate through the
addition of novel level translation techniques and the introduction of new
data transmission functions. In the fiber optics market Micrel continued to
innovate with the introduction of the world's first fiber optic module
controller to support the new SFF-8472 digital diagnostic standard it co-
authored. This offers optical transceiver customers the highest integration
and the lowest solution cost in the market.
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 offers a broad range of PHYs, 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. In 2002 Micrel
introduced the KS8695, the world's first integrated SOHO router solution using
the ARM 9 processor core. The device is capable of utilizing a broadband
connection (cable modem or DSL) to connect up to four PCs with 10/100 Ethernet
to realize a home or small business network. 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 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.
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 can 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.
10
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.
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, 2002, sales through North American
distributor firms accounted for 11% of the Company's net revenues.
The Company sells its products in Europe through a direct sales staff in
England and France as well as independent sales representative firms,
independent distributors and independent stocking representative firms. Asian
sales are handled through Micrel sales offices in Korea, Japan, Taiwan and
China and independent stocking representative firms. The stocking
representative firms may buy and stock the Company's products for resale or
may act as the Company's sales representative in arranging for direct sales
from the Company to an OEM customer.
Sales to customers in North America, Asia and Europe accounted for 31%, 60%
and 9%, respectively, of the Company's net revenues for the year ended
December 31, 2002 compared to 39%, 50% and 11%, respectively, of the Company's
net revenues for the year ended December 31, 2001 and 58%, 32% and 10%,
respectively, of the Company's net revenues for 2000. 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.
11
Customers
For the year ended December 31, 2002 one customer, an Asian stocking
representative, accounted for 13% of the Company's net revenues. For the year
ended December 31, 2001 the same customer, accounted for 11% of the Company's
net revenues. For the year ended December 31, 2000 one customer, a North
American distributor, accounted for 10% 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.
Micrel produces high-speed communication transceivers, clock
generation/distribution circuits, clock recovery circuits as well as high-
speed logic 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 High Bandwidth division. This technology
allows high speed with low jitter and is ideally suited for high-speed
mixed-signal designs.
12
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 and other advanced processes that are not available
in-house. For the year ended December 31, 2002 14% of Micrel's wafer
requirements were fabricated at third party foundry suppliers, which includes
all of Micrel's Ethernet networking products.
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, receivers
and transceivers. 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
servers and enterprise networking, fiber optic module components for 1.25, 2.5
and 10Gbps optical networking, and communications transceivers for OC-12, 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
IP telephony, and switch products for business enterprises. The Company has
also developed a media access controller for the gigabit Ethernet market and
has transceiver and switch products for gigabit Ethernet applications in
development.
In 2002, 2001, and 2000 the Company spent $53.3 million $51.3 million, and
$42.2 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
13
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.
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 74 United States patents
on semiconductor devices and methods, with various expiration dates through
2022. The Company has applications for 59 United States patents pending. The
Company holds 39 issued foreign patents and has applications for 15 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 Note 11 of Notes to Consolidated
Financial Statements.
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. The wafer supply for the Company's Ethernet
products is currently 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 Ethernet product 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 also owns approximately
63,000 square feet of additional adjacent space in San Jose that is used as a
testing facility.
In September 2002, the Company approved a plan to close its Santa Clara, CA
wafer fabrication facility to reduce costs and improve operating efficiencies.
Management believes that these actions are prudent given the current excess
capacity levels within its wafer fabrication facilities combined with the
uncertain demand in the high-speed communications market. As a result of this
14
action, overall operating expenses are expected to decline by approximately
$500,000 per quarter beginning in the fourth quarter of 2002, with a total
expense reduction of over $2 million per quarter after the Santa Clara facility
is exited in the fall of 2003. Associated with the facility closure, the
Company accrued $5.5 million in restructuring expenses, primarily for equipment
disposal costs of $1.0 million and contractual building lease costs, less
estimated sublease income, of $4.5 million that will provide no future benefit.
These restructuring costs are expected to be paid in cash over the remaining
facility lease term, which expires in October 2006. Of the $5.5 million in
accrued restructuring costs, $1.4 million has been classified as other current
liabilities and the remaining $4.1 million has been classified as other long-
term obligations as of December 31, 2002. Also related to the planned facility
closure, the Company concluded that the future undiscounted cash flows from
this facility would not be sufficient to recover the net book value of the
facility and accordingly recorded a $23.4 million impairment of long-lived
assets to reduce the net book value of the facility's leasehold improvements
and equipment to fair value. The fair value was estimated by management based
primarily on a third party estimate of the current net sales value of equipment
totaling $3.8 million at September 30, 2002.
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 are readily available, there can be no assurance that such alternate
sources could be obtained without significant interruptions.
The Company manufactures the majority of its products at one wafer
fabrication facility. 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 and 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 Corp. in one or more of its product areas. Other
competitors include Texas Instruments, Motorola, Fairchild Semiconductor and
On Semiconductor. Each of these companies has substantially greater technical,
financial and marketing resources and greater name recognition than the
Company. The Company's principal competitors for products targeted at the high
bandwidth communications market are On Semiconductor, Applied Micro Circuits
Corp., Maxim Integrated Products, Inc., Vitesse Semiconductor Corp. and
15
Conexant. The primary competitors for the Micrel's Ethernet products are
Broadcom Corp., Marvell Technology Group Ltd., Conexant, 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.
Backlog
At December 31, 2002, the Company's backlog was approximately $27 million,
all of which was scheduled to be shipped during the first six months of 2003.
At December 31, 2001, the Company's backlog was approximately $20 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 requesting shipment 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.
Customer demand for semiconductors can change quickly and unexpectedly. As
a result of the slowing global economy, a rapid build-up of semiconductor
inventories in global sales channels occurred during 2001, causing lead times
for components to fall precipitously. The short lead time environment has
continued from the middle of 2001 through the end of 2002. Customers perceive
that semiconductor components are readily available and continue to order only
for their short-term needs. New order rates have improved during 2002 as
compared to 2001, however there is not sufficient backlog for the Company to
predict future revenue levels with certainty. The Company's revenue levels are
highly dependent on the amount of new orders that are received for which
product can be delivered to the customer within the same period. Within the
semiconductor industry these orders that are booked and shipped within the
period are called "turns fill" orders. Currently, the uncertainty of customer
demand, the high turns fill requirement, and associated uncertainty of product
mix and pricing, make it difficult to predict future levels of sales and
profitability.
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, 2002, the Company had 821 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
16
believes that its employee relations are good.
ITEM 2. PROPERTIES
The majority of the Company's manufacturing operations are located in San
Jose, California in a 57,000 square foot facility and an adjacent 63,000
square foot facility which are owned by the Company. 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. 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.
Additional administrative, technical, and wafer production facilities are
maintained at a 70,000 square foot facility in Santa Clara, California. 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. During the quarter ended September 30, 2002, the Company approved a
plan to close this wafer fabrication facility within the next 12 months in
order to reduce costs and improve operating efficiencies through improved
capacity utilization (see Note 13 of Notes to Consolidated Financial
Statements.)
Associated with the acquisition of Kendin, the Company also maintains
additional administrative and technical offices at a 10,936 square foot
facility located in Sunnyvale, California under a lease agreement that expires
in March 2003. The Company currently intends to discontinue its use of this
facility upon expiration of the lease agreement on March 31, 2003.
Associated with the acquisition of ETC, the company owns a 12,175 square
foot design facility in Huxley, Iowa.
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; Frankfurt,
Germany and Courtaboeuf Cedex, France.
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 information included in Note 11 of Notes to Consolidated Financial
Statements under the caption "Litigation" is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In the fourth quarter of 2002, no matters were submitted to a vote of
security holders.
17
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, 2001 to December 31, 2002 was:
Year Ended December 31, 2002: High Low
------- -------
Fourth quarter $ 12.60 $ 4.57
Third quarter $ 15.19 $ 5.38
Second quarter $ 25.65 $ 13.83
First quarter $ 29.52 $ 18.95
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
The reported last sale price of the Company's Common Stock on the Nasdaq
Stock Market on December 31, 2002 was $8.98. The approximate number of holders
of record of the shares of the Company's Common Stock was 650 as of March 14,
2003. 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 14, 2003 was approximately 7,500.
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 6 of Notes to
Consolidated Financial Statements contained in Item 8.
18
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 financial statements and
related notes thereto.
Years Ended December 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
Income Statement Data:
Net revenues $204,704 $217,808 $346,335 $200,016 $144,935
Cost of revenues* 139,554 126,242 149,083 89,572 72,953
-------- -------- -------- -------- --------
Gross profit 65,150 91,566 197,252 110,444 71,982
Operating expenses:
Research and development 53,308 51,306 42,201 29,563 21,373
Selling, general and
administrative 32,160 32,862 45,319 29,399 22,562
Amortization of deferred
stock compensation* 22,535 9,572 6,060 2,109 753
Manufacturing facility
impairment 23,357 - - - -
Restructuring expense 5,536 - - - -
Acquisition expenses* - 8,894 - - -
Purchased in-process
technology - - - 603 3,737
-------- -------- -------- -------- --------
Total operating expenses 136,896 102,634 93,580 61,674 48,425
-------- -------- -------- -------- --------
Income (loss) from operations (71,746) (11,068) 103,672 48,770 23,557
Other income, net 1,056 6,086 4,739 692 1,138
-------- -------- -------- -------- --------
Income (loss) before
income taxes (70,690) (4,982) 108,411 49,462 24,695
Provision (benefit) for
income taxes (29,690) (5,534) 35,104 16,019 9,304
-------- -------- -------- -------- --------
Net income (loss) $(41,000) $ 552 $ 73,307 $ 33,443 $ 15,391
======== ======== ======== ======== ========
Net income (loss) per share:
Basic $ (0.44) $ 0.01 $ 0.82 $ 0.39 $ 0.19
======== ======== ======== ======== ========
Diluted $ (0.44) $ 0.01 $ 0.75 $ 0.36 $ 0.18
======== ======== ======== ======== ========
Shares used in computing
per share amounts:
Basic 92,600 91,888 89,242 85,762 82,258
======== ======== ======== ======== ========
Diluted 92,600 98,092 98,186 92,906 85,878
======== ======== ======== ======== ========
*Amortization of deferred stock
compensation related to:
Cost of revenues $ 7,354 $ 3,141 $ 2,202 $ 926 $ 275
Operating expenses:
Research and development $ 11,430 $ 5,047 $ 3,347 $ 1,444 $ 467
Selling, general and
administrative 11,105 4,525 2,713 665 286
Amortization of deferred
stock compensation 22,535 9,572 6,060 2,109 753
Acquisition expenses - 2,007 - - -
-------- -------- -------- -------- --------
Total operating expenses $ 22,535 $ 11,579 $ 6,060 $ 2,109 $ 753
======== ======== ======== ======== ========
December 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(in thousands)
Working capital $182,155 $196,940 $172,768 $ 91,629 $ 55,206
Total assets 330,675 354,813 359,748 214,171 152,207
Long-term debt and
other obligations 19,237 5,200 9,211 10,648 19,297
Total shareholders' equity 273,619 313,330 281,835 157,258 100,693
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Micrel designs, develops, manufactures and markets a range of high
performance standard analog integrated circuits and high-speed mixed-signal
and digital integrated circuits. These circuits are used in a wide variety of
electronics products, including those in the computer, telecommunications,
industrial and networking markets. In addition to standard products, the
Company manufactures custom analog and mixed-signal circuits and provides
wafer foundry services.
The Company derives a substantial portion of its net revenues from standard
products. For 2002, 2001, and 2000 the Company's standard products sales
accounted for 88%, 84%, and 79%, 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.
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
and the successful development of new products. 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 of America. Preparation of these
financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, management evaluates its
estimates and 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. 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.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Revenue Recognition. Micrel generates revenue by selling products to
original equipment manufacturers ("OEM"s), distributors and stocking
representatives. The Company's policy is to recognize revenue from sales to
customers when the rights and risks of ownership have passed to the customer,
when persuasive evidence of an arrangement exists, the product has been
delivered, the price is fixed and determinable and collection of the resulting
receivable is reasonably assured.
Micrel allows certain distributors, primarily located in North America and
Europe, significant return rights and pricing adjustments subsequent to the
initial product shipment. Micrel defers recognition of revenue and related
cost of sales (in the balance sheet line item deferred income on shipments to
distributors) derived from sales to these distributors until they have resold
the Company's products to their customers. Sales to OEM customers and stocking
representatives, primarily located in Asia, which have limited return rights
and pricing adjustments, are recognized upon shipment and a related returns
allowance is established based upon historical return rates. The Company's
total allowance for returns was $2.9 million and $3.1 million as of
December 31, 2002 and 2001, respectively. Actual future returns could be
different than the returns allowance established.
The Company also maintains an allowance for doubtful accounts for estimated
uncollectible accounts receivables. This estimate is based on an analysis of
specific customer creditworthiness and historical bad debts experience. The
Company's total allowance for doubtful accounts was $421,000 and $787,000 for
the years ended December 31, 2002 and 2001, respectively. Actual future
uncollectible amounts could exceed the doubtful accounts allowance
established.
Inventory Valuation. Inventories are stated at the lower of cost (first-in,
first-out method) or market. The Company 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. Once a reserve is established, it is
maintained until the product to which it relates is sold or otherwise disposed
of. This treatment is in accordance with Accounting Research Bulletin 43 and
Staff Accounting Bulletin 100 "Restructuring and Impairment Charges."
Income Taxes. As of December 31, 2002, the Company has net deferred tax
assets of $40.4 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 and has not established a valuation allowance.
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
Note 11 of Notes to Financial Statements) and has not accrued a liability for
such litigation. The Company regularly evaluates current information available
to determine whether such accruals should be made. An estimated liability
would be accrued when it is determined to be probable that a liability has
been incurred and the amount of loss can be reasonably estimated. If the
Company were to determine that such a liability was probable and could be
reasonable estimated, the adjustment would be charged to income in the period
such determination was made.
21
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,
----------------------------
2002 2001 2000
-------- -------- --------
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 68.2 58.0 43.0
------- ------- -------
Gross profit 31.8 42.0 57.0
Operating expenses:
Research and development 26.0 23.6 12.2
Selling, general and administrative 15.7 15.1 13.1
Amortization of deferred stock compensation 11.0 4.4 1.8
Manufacturing facility impairment 11.4 - -
Restructuring expense 2.7 - -
Acquisition expenses - 4.0 -
------- ------- -------
Total operating expenses 66.8 47.1 27.1
------- ------- -------
Income (loss) from operations (35.0) (5.1) 29.9
Other income, net 0.5 2.8 1.4
------- ------- -------
Income (loss) before income taxes (34.5) (2.3) 31.3
Provision (benefit) for income taxes (14.5) (2.6) 10.1
------- ------- -------
Net income (20.0)% 0.3% 21.2%
======= ======= =======
Net Revenues. Net revenues decreased 6% to $204.7 million for the year
ended December 31, 2002 from $217.8 million in 2001 primarily due to lower
custom and foundry revenues and, to a lesser extent, lower standard product
revenues. Standard product revenues decreased 1% to $180.4 million, which
represented 88% of net revenues for the year ended December 31, 2002, compared
to $183.1 million and 84% of net revenues for 2001. This decrease resulted
primarily from decreased average selling prices across all product lines
combined with decreased unit shipments of high bandwidth communications
products, which were partially offset by increased unit shipments of analog
power management products and Ethernet communications products. Sales of
standard products were led by low dropout regulators, Ethernet communications
products, computer peripheral products, switching regulators and high
bandwidth communications products. Such products were sold to manufacturers in
the telecommunications, computing, Ethernet communications, high bandwidth
communications, and industrial markets. Custom and foundry revenues decreased
30% to $24.3 million, which represented 12% of net revenues for the year ended
December 31, 2002, compared to $34.7 million and 16% of net revenues for 2001.
Such decreases were due primarily to decreased unit shipments of foundry
products.
Customer demand for semiconductors can change quickly and unexpectedly. As
a result of the slowing global economy, a rapid build-up of semiconductor
inventories in global sales channels occurred during 2001, causing lead times
for components to fall precipitously. The short lead time environment has
continued from the middle of 2001 through the end of 2002. Customers perceive
that semiconductor components are readily available and continue to order only
for their short-term needs. New order rates have improved during 2002 as
compared to 2001, however there is not sufficient backlog for the Company to
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
predict future revenue levels with certainty. The Company's revenue levels are
highly dependent on the amount of new orders that are received for which
product can be delivered to the customer within the same period. Within the
semiconductor industry these orders that are booked and shipped within the
period are called "turns fill" orders. Currently, the uncertainty of customer
demand, the high turns fill requirement, and associated uncertainty of product
mix and pricing, make it difficult to predict future levels of sales and
profitability.
For the year ended December 31, 2001, net revenues decreased 37% to $217.8
million 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.
International sales represented 69%, 61%, and 42% of net revenues for the
years ended December 31, 2002, 2001 and 2000, respectively. On a dollar basis,
international sales increased 7% to $142.0 million for the year ended
December 31, 2002 from $132.6 million for the comparable period in 2001. The
dollar increase in international sales resulted primarily from increased
shipments of telecommunications, personal computer and Ethernet communications
products, primarily in Asia. The increased unit shipments to Asian based
customers is primarily a result of increased demand from manufacturers of
wireless handsets and computers, as well as from customers transferring their
manufacturing operations to Asia seeking lower cost structures.
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.
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 32%
for the year ended December 31, 2002 from 42% for the year ended December 31,
2001. The decrease in gross margin primarily reflected decreased average
selling prices, a greater sales mix of lower margin products and decreased
capacity utilization as compared to the same periods in 2001. The high level
of semiconductor inventories relative to depressed demand resulted in
extremely short lead times from semiconductor suppliers and vigorous price
competition as customer unit demand increased in the first half of 2002. As a
result of slack demand and customer inventory liquidation, the Company's
utilization of manufacturing capacity ranged from 45% to 55% during 2002.
Despite significant manufacturing cost reductions in 2002, the under
utilization of capacity led to a reduction in gross profit due to lower
absorption of fixed costs. Consequently, depreciation as a percent of sales
rose to 17% in 2002 from 16% in 2001 and 7% in 2000.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
For the year ended December 31, 2001, The Company's gross margin decreased
to 42% 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.
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 26% and 24% for the years ended December 31, 2002 and 2001,
respectively. On a dollar basis, research and development expenses increased
$2.0 million or 4% to $53.3 million for the year ended December 31, 2002 from
$51.3 million in 2001. The dollar increase was primarily due to increased
prototype fabrication 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, 2001 and 2000, research and development
expenses represented 24% and 12% of net revenues, respectively. 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 increase was primarily due to increased engineering staffing costs
and increased prototype fabrication costs and new process development costs.
Selling, General and Administrative Expenses. As a percentage of net
revenues, selling, general and administrative expenses represented 16% and 15%
for the years ended December 31, 2002 and 2001, respectively. On a dollar
basis, selling, general and administrative expenses decreased $700,000 or 2%
to $32.2 million for the year ended December 31, 2002 from $32.9 million for
the comparable period in 2001. The dollar decrease was principally
attributable to decreased sales commissions and decreased staffing expenses,
which were partially offset by increased legal costs.
For the years ended December 31, 2001 and 2000, selling, general and
administrative expenses represented 15% and 13% of net revenues, 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 decrease was
principally attributable to decreased sales commissions and decreased 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, 2002 total amortization
of deferred stock compensation was $29.9 million of which $17.1 million
resulted from accelerated amortization of deferred stock compensation
associated with options cancelled pursuant to an employee option exchange
program (see Note 7 of Notes to Consolidated Financial Statements). In
addition, the $29.9 million in amortization of deferred stock compensation for
the year ended December 31, 2002 consisted of $7.4 million included in cost of
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
revenues and $22.5 million included in amortization of deferred stock
compensation. As of December 31, 2002 total unamortized stock compensation was
$9.9 million with a future amortization schedule of $4.7 million in 2003, $1.4
million in 2004 and $344,000 in 2005.
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.
Manufacturing Facility Impairment and Restructuring Expense. In September
2002, the Company approved a plan to close its Santa Clara, CA wafer
fabrication facility to reduce costs and improve operating efficiencies.
Management believes that these actions are prudent given the current excess
capacity levels within its wafer fabrication facilities combined with the
uncertain demand in the high-speed communications market. As a result of this
action, overall operating expenses are expected to decline by approximately
$500,000 per quarter beginning in the fourth quarter of 2002, with a total
expense reduction of over $2 million per quarter after the Santa Clara facility
is exited in the fall of 2003. Associated with the facility closure, the
Company accrued $5.5 million in restructuring expenses, primarily for equipment
disposal costs of $1.0 million and contractual building lease costs, less
estimated sublease income, of $4.5 million that will provide no future benefit.
These restructuring costs are expected to be paid in cash over the remaining
facility lease term, which expires in October 2006. Of the $5.5 million in
accrued restructuring costs, $1.4 million has been classified as other current
liabilities and the remaining $4.1 million has been classified as other long-
term obligations as of December 31, 2002. Also related to the planned facility
closure, the Company concluded that the future undiscounted cash flows from
this facility would not be sufficient to recover the net book value of the
facility and accordingly recorded a $23.4 million impairment of long-lived
assets to reduce the net book value of the facility's leasehold improvements
and equipment to fair value. The fair value was estimated by management based
primarily on a third party estimate of the current net sales value of equipment
totaling $3.8 million at September 30, 2002.
Acquisition expenses. Acquisition expenses for the year ended December 31,
2001 reflect $6.9 million in direct transaction costs and $2.0 million in
stock compensation costs related to the acquisition of Kendin.
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
decreased by $5.0 million to $1.1 million in 2002 from $6.1 million in 2001.
The decrease was primarily due to decreased rates of return on cash, cash
equivalents and short-term investments combined with a non-recurring expense
in 2002 of $947,000 for the settlement of a patent dispute, partially offset
by $490,000 in non-recurring other income.
For the year ended December 31, 2001, other income, net increased by $1.3
million to $6.1 million in 2001 from $4.7 million in 2000. This increase was
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.
Provision (benefit) for Income Taxes. For the year ended December 31, 2002
the benefit for income taxes was $29.7 million or 42% of loss before taxes.
The 2002 benefit for income taxes differs from taxes computed at the federal
statutory rate primarily due to the effect of state income taxes, state
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
research and development credits, and state manufacturing credits. For the
years ended December 31, 2001 and 2000 the provision for taxes on income was
111% of loss before taxes and 32% of income before taxes, respectively. The
2001 and 2000 income tax provisions differ from taxes computed at the federal
statutory rate due to the effect of state taxes offset by the benefits federal
and state research and development credits, and state manufacturing credits.
As of December 31, 2002, the Company has net deferred tax assets of $40.4
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 and has not established a valuation allowance.
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, 2002 consisted of cash and short-term
investments of $117 million and a $5 million revolving line of credit from a
commercial bank. There were no borrowings under the revolving line of credit
agreement at December 31, 2002. The revolving line of credit agreement
expires on June 30, 2003. Borrowings under the revolving line of credit bear
interest rates of, at the Company's election, the prime rate (4.25% at
December 31, 2002), or the bank's revolving offshore rate, which approximates
LIBOR (1.38% at December 31, 2002) plus 2.0%. 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, 2002.
In September 2002, the Company borrowed $10.7 million through a commercial
mortgage financing agreement which was associated with the purchase of its
previously leased manufacturing facilities in San Jose, CA. Borrowings under
this agreement bear interest, at the Company's election, at the daily floating
prime rate (4.25% at December 31, 2002), or adjustable monthly LIBOR (1.38% at
December 31, 2002) plus 1.5%. The principal balance of the loan shall be paid
in 59 consecutive monthly installments of $16,890 and one final installment in
the amount necessary to pay in full the remaining outstanding principal
balance. The mortgage agreement contains certain restrictive covenants. The
Company was in compliance with all such covenants at December 31, 2002.
The Company's working capital decreased by $14.8 million to $182.2 million
as of December 31, 2002 from $196.9 million as of December 31, 2001. The
decrease primarily resulted from cash used to repurchase $29.1 million of the
Company's common stock in 2002 as compared to $7.3 million in 2001.
The Company generated $28.7 million in cash flows from operating activities
for the year ended December 31, 2002 compared to $43.6 million for the year
ended December 31, 2001. 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, 2002 the Company's cash flows
provided by operating activities were primarily attributable to net income
after adding back non-cash activities of $29.8 million. Net income after
adding back non-cash activities consisted of a $41.0 million net loss offset
by non-cash activities of $70.8 million. Non-cash activities for 2002
included additions of $33.9 million for depreciation and amortization, $29.9
million for stock compensation and $23.4 million for manufacturing facility
impairment which were partially offset by a $15.9 increase in net deferred
income tax assets.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company's investing activities during the year ended December 31, 2002
used cash of $28.5 million as compared to $1.9 million of cash used in
investing activities during the year ended December 31, 2001. This increase in
cash used for investing activities was primarily due to a reduction in net
sales of short-term investments. Cash used for investing activities during the
year ended December 31, 2002 resulted primarily from $29.5 in net purchases of
property, plant and equipment, which includes $18.0 million for the purchase
of the Company's previously leased manufacturing facilities located in San
Jose, CA, combined with the purchase of $2.1 million in intangible assets,
which was partially offset by $3.1 million in net sales of short-term
investments.
The Company's financing activities during the year ended December 31, 2002
used cash of $13.2 million as compared to cash provided of $2.5 million during
the year ended December 31, 2001. This decrease in cash flow primarily
resulted from an increase of $21.9 million in cash used to repurchase shares
of the Company's common stock combined with a decrease of $6.7 million in
proceeds from the issuance of common stock which were partially offset by a
$10.7 million increase in long-term borrowings. Cash used by financing
activities during the year ended December 31, 2002 was the result of $29.1
million to repurchase 2,274,300 shares of common stock and $3.8 million in
repayments of long-term debt, which was partially offset by proceeds from
long-term debt borrowings of $10.7 million related to the purchase of the
company's previously leased manufacturing facilities and proceeds from the
issuance of common stock through employee stock transactions of $8.9 million.
The Company currently intends to purchase approximately $15 million to $25
million in capital equipment and improvements during the next twelve months.
The majority of the anticipated 2003 capital spending is related to equipment
and building improvements associated with the consolidation of wafer
fabrication operations in its San Jose facility. The Company also expects to
purchase additional research and development related software and equipment,
and manufacturing equipment for product testing of new products. The Company
is currently authorized by its Board of Directors to repurchase an additional
$10.9 million of its common stock in 2003. The Company expects that its cash
requirements through 2003 will be met by its cash from operations, existing
cash balances and short-term investments, and its credit facility.
Contractual Obligations and Commitments
As of December 31, 2002, the Company had the following contractual
obligations and commitments: (in thousands)
Payments Due By Period
------------------------------------------------
Less than 1-3 4-5 After 5
Total 1 Year Years Years Years
-------- -------- -------- -------- --------
Long-term debt (see Note 6
of Notes to Consolidated
Financial Statements) $ 11,894 $ 911 $ 1,109 $ 9,874 $ -
Operating leases (see Note 9
of Notes to Consolidated
Financial Statements) 15,078 2,635 7,672 1,048 3,723
Other long-term liabilities
(see Note 14 of Notes to
Consolidated Financial
Statements) 6,000 2,000 4,000 - -
-------- -------- -------- -------- --------
Total $ 32,972 $ 5,546 $ 12,781 $ 10,922 $ 3,723
======== ======== ======== ======== ========
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Factors That May Affect Operating Results
The statements contained in this Report on Form 10-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 uncertain rate of growth in the
global economy.
Although the global economy appears to have grown during 2002 after
shrinking for a period in 2001, recent events have cast doubt on the
sustainability of future economic growth. Consumer confidence is waning due
in part to the recent sharp decline in global equity markets. Reduced
corporate profits and weak capital spending, especially for technology related
end markets that the Company serves such as the high-speed communications,
enterprise computing and telecommunications markets, continue to dampen demand
for the Company's products. If economic conditions in the global economy
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:
- - disruption of customer demand, transportation or supplier operations due to
war or terrorism
- - 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
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 end
customer 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. A rapid and sudden decline in
customer demand for the Company's products can result in excess quantities of
certain of the Company's products relative to demand. Should this occur the
Company's operating results may be adversely affected as a result of charges
to reduce the carrying value of the Company's inventory to the estimated
demand level or market price.
The weakness in the global economy in 2001 and 2002 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 inventories in response to short supplier lead times.
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.
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 when economic growth and customer demand is less certain, such as
the semiconductor industry is now experiencing, price competition becomes more
prevalent. Both the semiconductor industry and the Company have experienced
significant price erosion since the beginning of 2001. If this price erosion
continues it will have the effect of reducing revenue levels and gross margins
in future periods.
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
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
products or custom and foundry products business in the future or that
competitive pressures will not adversely affect the Company's financial
condition, results of operations, or cash flows.
The cost reduction actions the Company has initiated may not materialize as
expected, or be sustained as business improves.
The Company has implemented or initiated a variety of cost reduction
actions. The expected future cost savings from these programs may not
materialize as anticipated resulting in a smaller benefit to the Company's
financial results of operations. Furthermore, when customer demand improves
and revenues increase, it is unclear whether Micrel will continue to benefit
from all of the cost reduction actions that have been implemented.
The consolidation of wafer fabrication operations into the Company's San Jose
facility may negatively impact the results of operations or fail to result in
expected cost savings.
In September 2002, the Company approved a plan to close its Santa Clara,
CA wafer fabrication facility and transfer the production and research and
development processes and certain equipment into its San Jose, CA facility.
If the transfer of the equipment and manufacturing processes is not successful
or is delayed, this could result in the Company's inability to manufacture
certain products and delay certain new product development. In addition,
expected cost savings related to this consolidation may be delayed or
unachieved. Either of these factors could have an adverse effect on the
Company's results of operations and financial condition.
Market conditions may lead the Company to initiate additional cost reduction
plans, which may negatively affect near term operating results.
As a result of weak customer demand, competitive pricing pressures, excess
capacity, weak economic conditions or other factors, the Company may decide to
initiate actions to reduce the Company's cost structure and improve the
Company's future operating results. The cost reduction actions may require
incremental costs to implement, which could negatively affect the Company's
operating results in periods when the incremental costs or liabilities are
incurred.
The Company's product offering, while diversified, is 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 grow 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.
An important part of the Company's strategy is to continue to focus on the
market for high-speed communications integrated circuits. If the severe
downturn in the telecommunications infrastructure industry continues resulting
in lack of demand for the Company's high bandwidth products, the Company's
future revenue growth and profitability could be adversely affected.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company's Ethernet products have become an important portion of the
Company's revenues. If the Company fails to develop new products to serve
this market in a timely manner, or if the market acceptance of the Company's
new Ethernet products is poor, if a competitor's products unfavorably affect
pricing or demand for the Company's products, the Company's revenues and
results of operations 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.
The markets that the Company serves frequently undergo transitions in which
products rapidly incorporate new features and performance standards on an
industry-wide basis. If the Company's products are unable to support the new
features or performance levels required by OEMs in these markets, it would
likely lose business from existing or potential customers and would not have
the opportunity to compete for new design wins until the next product
transition. If the Company fails to develop products with required features
or performance standards, or experiences even a short delay in bringing a new
product to market, or if its customers fail to achieve market acceptance of
their products, its revenues could be significantly reduced for a substantial
period of time.
The Company encounters risks associated with its international operations,
including geopolitical risks.
It is unclear what effect prolonged military conflict would have on world
trade or on economic conditions in specific regions of the world. Reduced
levels of economic activity, or disruptions of international transportation,
could adversely affect the Company's sales on either a global basis or in
specific geographic regions. Two of the Company's top ten direct customers are
located in South Korea. In the event that current political tensions
surrounding North Korea evolve into military or social conflict, the Company's
revenues, results of operations, cash flow and financial condition could be
adversely affected.
The Company has generated a substantial portion of its net revenues from
export sales. The Company believes that a substantial portion of its future
net revenues will depend on export sales to customers in international
markets, including Asia. International markets are subject to a variety of
risks, including changes in policy by foreign governments, social conditions
such as civil unrest, economic conditions including high levels of inflation,
fluctuation in the value of foreign currencies and currency exchange rates and
trade restrictions or prohibitions. In addition, the Company sells to
domestic customers that do business worldwide and cannot predict how the
businesses of these customers may be affected by economic or political
conditions in Asia or elsewhere in the world. Such factors could adversely
affect the Company's future revenues, financial condition, results of
operations or cash flows.
The Company is reliant on certain key suppliers for wafer fabrication,
circuit assembly and testing services. Most of these suppliers are based
outside of the U.S. The Company's supply could be interrupted as a result of
any of the previously mentioned risk factors relating to international
markets.
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 of the Company's products in the local
currencies of the foreign markets it serves. This would result in making the
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Company's products relatively more expensive than its competitors' products
that are denominated in local currencies, leading to a reduction in sales or
profitability in those foreign markets. The Company has not taken any
protective measures against exchange rate fluctuations, such as purchasing
hedging instruments.
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 resultin