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, 2009.





 ̈           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




MICREL,   INCORPORATED


(Exact name of Registrant as specified in its charter)





California
94-2526744(State or other jurisdiction of
(I.R.S. Employer Identification No.)incorporation or organization)





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:                Common Stock, no par value


Securities registered pursuant to Section 12(g) of the Act:                None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ̈No x





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ̈No x





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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated
filer  ̈  Accelerated filer x  Non-accelerated filer  ̈  Smaller reporting company  ̈





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ̈No x





As of June 30, 2009, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $138 million based upon the closing sales price of the Common Stock as reported on the Nasdaq National Market 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 February 19, 2010, the Registrant had outstanding 62,325,072 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 25, 2010 are incorporated by reference in Part II and Part III of this Report.


This Report on Form 10-K includes 78 pages with the Index to Exhibits located on page 76.


MICREL, INCORPORATED





INDEX TO





ANNUAL REPORT ON FORM 10-K





FOR YEAR ENDED DECEMBER 31, 2009





PagePART IItem 1.
Business
3Item 1A.
Risk Factors
14Item 1B.
Unresolved Staff Comments
22Item 2.
Properties
22Item 3.
Legal Proceedings
22Item 4.
Submission of Matters to a Vote of Security Holders
22





PART IIItem 5.
Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
23Item 6.
Selected Financial Data
25Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
26Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
40Item 8.
Financial Statements and Supplementary Data
40Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
40Item 9A.
Controls and Procedures
40Item 9B.
Other Information
41





PART IIIItem 10.
Directors, Executive Officers and Corporate Governance
42Item 11.
Executive Compensation
42Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
43Item 13.
Certain Relationships and Related Transactions, and Directors Independence
43Item 14.
Principal Accounting Fees and Services
43PART IVItem 15.
Exhibits and Financial Statement Schedules
44Signatures
75Exhibit Index
76





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PART I





ITEM 1.
BUSINESS





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, as amended,  including statements regarding the Company’s expectations,
hopes, intentions or strategies regarding the future.  Forward-looking statements include, but are not limited to statements regarding: future revenues and dependence on standard products sales and international sales; the levels of international sales; the effect of global market conditions on revenue levels, profitability and results of operations: future products or product development; statements regarding fluctuations in the Company’s results of operations; future returns and price adjustments
and allowance; future uncollectible amounts and doubtful accounts allowance; future products or product development; future research and development spending and the Company’s product development strategy; the Company’s markets, product features and performance; product demand and inventory to service such demand; competitive threats and pricing pressure; the effect of dependence on third parties; the Company’s future use and protection of its intellectual property; future expansion or utilization
of manufacturing capacity; future expenditures; current or future acquisitions; the ability to meet anticipated short term and long term cash requirements; effect of changes in market interest rates on investments; the Company’s need and ability to attract and retain certain personnel; the cost and outcome of litigation and its effect on the Company; the future realization of tax benefits; and share based incentive awards and expectations regarding future stock based compensation expense. In some cases,
forward-looking statements can be identified by the use of forward-looking terminology such as "believe," "estimate," "may," "can," "will," "could," "would," "intend," "objective," "plan," "expect," "likely," "potential," "possible" or "anticipate" or the negative of these terms or other comparable terminology. All forward-looking statements included in this document are based on information available to the Company on the date of this report, and the Company assumes no obligation to update any such forward-looking
statements ,including those risks discussed under ”Risks Factors” and elsewhere in this document. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. Some of the factors that could cause actual results to differ materially are set forth in Item 1 ("Business"), Item 1A ("Risk Factors"), Item 3 ("Legal Proceedings") and Item 7 ("Management's Discussion and Analysis
of Financial Condition and Results of Operations".








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. The Company maintains a corporate website located at www.micrel.com. The Company's 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 or being furnished to the Securities and Exchange Commission.





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Micrel designs, develops, manufactures and markets a range of high-performance analog power integrated circuits ("ICs"), mixed-signal and digital ICs. The Company currently ships over 3,000 standard products and has derived the majority of its product revenue for the year ended December 31,
2009 from sales of standard analog and high speed communications ICs. These products address a wide range of end markets including cellular handsets, portable computing, enterprise and home networking, wide area and metropolitan area networks, digital televisions and industrial equipment. For the years ended December 31, 2009, 2008, and 2007, the Company's standard products accounted for 97%, 95%, and 92%, respectively, of the Company's net revenues. The Company also manufactures custom analog and mixed-signal
circuits and provides wafer foundry services for customers who produce electronic systems for communications, consumer and military applications.





Micrel’s high performance power management analog products are characterized by highest power density and smallest form factor.  The demand for high performance power management circuits has been fueled by the growth of portable communications and computing devices (e.g. cellular
handsets, portable media players and notebook computers). The Company also has an extensive power management offering for the networking and communications infrastructure markets including cloud, single-board and enterprise servers, network switches and routers, storage area networks and wireless base stations. Recently, the Company has entered the solid state lighting market, and is seeing strength in the emergence of solid state drives and analog switches including USB switches.





The Company's high bandwidth communications circuits are used primarily for enterprise networks, storage area networks, access networks, and metropolitan area networks. With form factor, size reductions, and ease of use critical for system designs, Micrel utilizes innovative packaging and
proprietary process technology to address these challenges.





The Company's family of Ethernet products targets the digital home and industrial/embedded networking markets. This product portfolio consists of physical layer transceivers (“PHY”), Media Access Controllers ("MAC"), switches, and System-On-Chip ("SoC") devices that support various
Ethernet protocols supporting communication transmission speeds from 10 Megabits per second to 100 Megabits per second.





In addition to standard analog and mixed signal products, Micrel offers customers various combinations of design, process and foundry services.








Industry Background





Analog Circuit, Mixed-Signal and Digital ICs Markets





ICs 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 ICs combine analog and digital functions on one chip.


4
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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.





Mixed-signal and digital ICs may be divided into six general categories, LSI/MSI logic, data processing, signal processing, memory, FPGA and application specific.





Mixed-signal and digital ICs are used in computer and communication systems and in industrial products. The primary markets for such circuits are consumer, communications, personal and enterprise computer systems, networking and industrial.





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, 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 and greater price stability as compared to digital circuits.





Analog, mixed-signal and digital ICs are sold to customers as either standard products or custom products.





Recent Trends in Analog Power Management, Mixed-Signal and Digital ICs





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, digital cameras, portable media players and notebook computers, continue to increase demand and create new technological challenges for power analog circuits.





Cellular telephones, as an example, 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.


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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 recent years, there has been a significant expansion in the number of broadband subscribers for both DSL,
cable modem and fiber to the home technologies. The increased bandwidth demand of these users will continue to consume the installed capacity and drive infrastructure upgrades in metropolitan and wide area networks. The additional demand of new wireless services utilizing the transmission of video will further accelerate this trend.





In the networking market, Ethernet has been widely adopted as a communication standard. Ethernet ports are now being provided on equipment ranging from PCs and PC peripherals to other consumer products such as Network Printers, Internet Protocol Set-Top Boxes ("IP-STB"), High-definition (“HD”)
TV, Blue-Ray DVD players, Personal Video Recorders (PVR), Multimedia Servers, Internet Protocol Phones ("IP-phone"), Analog Telephone Adaptors ("ATA"), Internet Protocol Camera ("IP-camera"), Femto-cell base stations, game consoles, media converters, used to convert signals transmitted optically over fiber to standard cable (copper) and vice versa, and industrial equipment. This is driving rapid growth in both the digital home market to connect multiple PCs and peripherals and the industrial market to connect
machinery to central control and monitoring equipment.








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, control theory, packaging and device technology, as well as its in-house wafer fabrication capability.
The Company intends to build a leadership position in its targeted markets by pursuing the following strategies:





·
Served Available Market Expansion:  Micrel is presently a trusted partner to key OEMs around the world.  The Company intends to use these relationships to increase revenues by providing more products to these key partners. In addition, through collaboration with these key partners, the Company has access to a rich pipeline of new product
development innovation opportunities. Through this “invention” based partnering, the Company now ships over 3,000 standard products, with net revenues from standard products generating 97% of the Company's total net revenues for the year ended December 31, 2009.





·
Maintain Technological Leadership. Micrel has executed on significant device and process optimizations which have yielded improvements of as much as six times in core specific on resistance (“Rsp”) features, improved packaging, and module capability, and improved power density and form factor.





·
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.





·
Capitalize on In-house Wafer Fabrication Facility. The Company believes that its in-house six-inch wafer fabrication facility provides a significant competitive advantage because it facilitates close collaboration between design and process engineers in the development of the Company's products.


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·
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.





·
Protect Proprietary Technology.The Company seeks to identify and protect its proprietary technology through the acquisition of patents, trademarks and copyrights.








Products and Markets





Overview





The following table sets forth the net revenues attributable to the Company's two segments, standard products and other products, consisting primarily of custom and foundry products revenues and revenues from the license of patents, expressed in dollars and as a percentage of total net
revenues.








Net Revenues by Segment(Dollars in thousands)

Years Ended December 31,2009


2008


2007Net Revenues:Standard Products

$
212,606


$
246,644


$
237,356Other Products


6,281



12,716



20,618Total net revenues

$
218,887


$
259,360


$
257,974As a Percentage of Total Net Revenues:Standard Products


97
%


95
%


92
%Other Products


3



5



8Total net revenues


100
%


100
%


100
%





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.





Revenues by End Market

Years Ended December 31,2009


2008


2007As a Percentage of Total Net Revenues:Industrial


36
%


37
%


39
%High-Speed Communications


28



26



23Wireless Handsets


16



19



17Computer


15



15



18Military & Other


5



3



3Total 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.''





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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 expand its customer base. The Company offers a broad range of high performance analog, mixed
signal, and digital ICs that address high growth markets including cellular telephones, portable electronics, set-top boxes, desktop and notebook computers, networking and communications. The majority of the Company's revenue is derived from power management standard products that, in addition to the above markets, are also used in the industrial, consumer, defense, and automotive electronics markets.





Power Conversion Market. Most electronic equipment includes a power supply that converts and regulates the electrical power source into usable voltage for the equipment. Micrel has multiple power conversion families:





·
LDOs – LDOs have long been a cornerstone of Micrel’s product offering.  LDOs are linear voltage regulators which allow lower voltage devices to be connected to higher voltage power rails. The Company offers numerous LDOs products ranging from low cost portable regulators, to
high performance (tight accuracy) high current regulators with supervisory functions.





·
DC/DC converters – The Company’s DC/DC converter products are offered in controller (no switch) and regulator (switches on board) form.  Competitive advantages include power density, high voltage capability, and small form factor. The devices are primarily used in solid state
drives, cloud servers, networking, portable equipment and base stations.





·
Analog Power Switches – Micrel offers analog switches that range from straight current switching to reverse blocking, current protected and soft start devices with supervisory options.  The devices are primarily used in LCD TV, computer USB port and cell phone devices.  In
addition, the Company offers a family of hot swap controllers including second sources of leading competitive devices which appeal primarily to the networking and telecom markets.





·
PMICs– PMICs combine supervisor, DC/DC, LDO and interfacing requirements in a single IC to save space and cost.  The Company has introduced many PMIC devices for key applications ranging from graphics processors to LTE dongles.





·
RF PA bias – Micrel offers digitally controlled output voltage DC/DC converters for power amplifier communications biasing. The devices are primarily used in portable wireless equipment and cell phones. The Company continues to collaborate with its key customers to expand this product offering.





·
Solid State Lighting – Micrel offerings include LED drivers for the portable and non-portable backlighting markets, as well as drivers for solid state architectural and general illumination.  These products have been adopted by portable equipment and cell phone manufacturers as an
alternative to more costly charge pump solutions.





·
FET Drivers – Micrel produces buffers which allow DC/DC controllers to interface to external switches and provide the power needed to drive these switches.


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Supervisory Market. Micrel offers supervisory and reference products which protect, monitor and improve the interface of circuitry, especially around microcontroller and processor circuits.  Demand for products in this
area has been driven by needs in the portable cell phone market to improve interaction between memory and processor segments as well as numerous tracking, sequencing, and monitoring requirements in various networking industrial and portable applications.





General Linear. Micrel offerings include a line of general linear parts ranging from opamps, to thermal measurement devices, timers and other general glue devices.  These types of devices tend to be deployed in many analog
circuits as glue circuitry to improve operation.





Portable Battery-Powered Computer Market. The Company makes power analog circuits for notebook computers, tablet PCs, and PDAs. Products in this growing market are differentiated on the basis of power efficiency, weight, small size
and battery life.





Radio Frequency Data Communications. Micrel's QwikRadio® family of RF receivers and transmitters are designed for use in any system requiring a cost-effective, low-data-rate wireless link. Typical examples include garage door
openers, lighting and fan controls, automotive keyless entry and remote controls. Micrel's RadioWire® transceivers provide a higher level of performance for more demanding applications such as remote metering, security systems and factory automation.





Networking and High-Speed Communications Market.The Company's High Bandwidth division develops and produces high speed Physical Media Devices (“PMD”) and interface integrated circuits for communications products targeted
at fiber optic modules, active cables, backplane management, data and clock management applications.





Micrel's Ethernet division offers a broad range of PHY, MAC, Switch and SoC products for the 10/100/1000 Megabit Ethernet standard. The primary applications for the products are Digital Home Networks, Enterprise, and other Industrial/Embedded Ethernet systems.





The Company's future success will depend in part upon the timely completion, introduction, and market acceptance of new standard products. The standard products business can be characterized as having shorter product lifecycles, greater pricing pressure, larger competitors and more rapid
technological change as compared to the Company's custom and foundry products business.








Other Products





Micrel offers various combinations of design, process and foundry services in order to provide customers with the following alternatives:





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.








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Sales, Distribution and Marketing





The Company sells its products through a worldwide network of independent sales representative, independent distributor and stocking representative firms and through a direct sales staff.





The Company sells its products in Europe through a direct sales staff in the United Kingdom, Germany 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, China and Singapore, independent distributors 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 original equipment manufacturer (“OEM”) customer.





In 2009, sales to customers in North America, Asia and Europe accounted for 26%, 61% and 13%, respectively, of the Company's net revenues. In 2008 North America, Asia and Europe accounted for 30%, 56% and 14%, respectively, of the Company's net revenues and in 2007 North America, Asia
and Europe accounted for 33%, 55% and 12%%, respectively, of the Company's net revenues.  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, are included in Note 12 of Notes to Consolidated Financial Statements.





The Company's international sales are primarily denominated in U.S. dollars. Consequently, changes in exchange rates that strengthen the U.S. dollar could increase the price in local currencies of the Company's products in foreign markets and make the Company's products relatively more
expensive than competitors' products that are denominated in local currencies, leading to a reduction in sales or profitability in those foreign markets. The Company has not taken any protective measures against exchange rate fluctuations, such as purchasing hedging instruments with respect to such fluctuations.








Customers





For the year ended December 31, 2009, three customers, two worldwide distributors and an OEM accounted for 19%, 13% and 12%, respectively, of the Company's net revenues. For the year ended December 31, 2008, one customer, a worldwide distributor, accounted for 13% of the Company's
net revenues. For the year ended December 31, 2007, two worldwide distributors accounted for 15% and 13%, respectively, of the Company's net revenues.








Design and Process Technology





Micrel's analog proprietary design technology depends on the skills of its analog design teams.  These teams rely on a state of the art Cadence framework, with an emphasis on circuit innovation, control theory and mathematical rigor.  Additionally, the Company’s
unique device, packaging and testing capabilities allow it to compete on a variety of advantages.





In order for Micrel to compete, it must provide process technologies that are uniquely suited for the products it develops. In the case of Micrel’s Analog business, we are recognized as a technology leader and therefore our process technologies must be state of the art and cost effective.


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Micrel recently introduced its world class BCD035 technology, and continues to implement many new designs on its CSI0.5 and BCD0.5 processes. These processes are characterized by a rich array on analog device including analog resistors and capacitors, post package trim, optimized ESD,
high voltage structures, optimized specific on resistance, true bipolar and in some processes true power bipolar capability at key nodes including 3.3V, 5V and 12, and BCD capability to 65V. In Addition, the Company has unique copper pillar, thick aluminum and copper conduction metals, CSP and thermal pad process capabilities. These capabilities give the Company an advantage from many competitors using a fabless model as these simultaneous capabilities are generally not available at most third party foundries.





Additionally Micrel has an array of BCD1.2u and CSI1.2u and above processes, as well as limited high speed Silicon Germanium capability.





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, 2009, approximately 8% of Micrel's wafer requirements were fabricated at third-party foundry
suppliers, including 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 and mixed-signal integrated circuit industry is characterized
primarily by circuit design and product engineering that enables new functionality or improved performance. 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, mixed-signal and digital design engineers principally focus on developing next generation standard products for the Company’s targeted markets. The Company's new product development strategy emphasizes a broad line of standard products that are based on customer
input and requests.





In 2009, 2008, and 2007, the Company spent $46.5 million $54.9 million, and $54.5 million, respectively, on research and development. The Company expects that it will continue to spend substantial funds on research and development activities.








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 a competitive advantage to the Company. The Company currently holds 304 United States patents on semiconductor devices and methods, with various expiration
dates through 2028. The Company has applications for 57 United States patents pending. The Company holds 47 issued foreign patents and has applications for 36 foreign patents pending.





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Supply of Materials and Purchased Components





Micrel currently purchases certain components from a limited group of vendors. The packaging of the Company's products 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 primarily dependent upon two large third-party wafer foundry suppliers.








Manufacturing





The Company produces the majority of its wafers at the Company’s wafer fabrication facility located in San Jose, 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 28,000 square foot clean room facility, which provides production processes. Approximately 70% of the San Jose facility's clean room space is classified as a Class 1 facility, which means that the facility achieves a clean room level of fewer than 1 foreign particle larger than 0.3 microns in size in each cubic foot of space. The remainder of the facility's clean room space is classified as Class 10, achieving fewer
than 10 foreign particles larger than 0.3 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 and administrative offices.





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.








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 of these areas.





The standard products market for analog ICs is diverse and highly fragmented and 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, Freescale Semiconductor, Intersil, Fairchild Semiconductor, Advanced Analogictech, Semtech and ON Semiconductor. Most of these companies have 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, Analog Devices, Maxim Integrated
Products, Inc., Vitesse Semiconductor Corp., Integrated Device Technology and Mindspeed. The primary competitors for Micrel's Ethernet products are Broadcom Corp., Marvell Technology Group Ltd. and a number of Taiwanese companies.


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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, 2009, the Company's backlog was approximately $77 million, substantially all of which is scheduled to be shipped during the first six months of 2010. At December 31, 2008, backlog was approximately $40 million. The increase in backlog resulted from increased
order levels due to an improvement in economic conditions during 2009 as compared to 2008. 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 who receive significant return rights and price adjustments
from the Company are not recognized as revenue by the Company until the product is sold from the distributor stock and through to the end-users. Because of possible changes in product delivery schedules and cancellation of product orders and because an increasing percentage of the Company's sales are shipped in the same quarter that the orders are received, the Company's backlog at any particular date is not necessarily indicative of actual sales for any succeeding period.








Environmental Matters





Federal, state and local regulations impose various environmental controls on the storage, handling, discharge and disposal of chemicals and gases used in the Company's manufacturing process. The Company believes that its activities conform to present environmental regulations.








Employees





As of December 31, 2009, the Company had 755 full-time employees as compared to 852 at December 31, 2008. The Company's employees are not represented by any collective bargaining agreements, and the Company has never experienced a work stoppage.








Segment Information





The Company has two reportable segments: standard products and other product revenues, which consist primarily of custom and foundry products revenues. Segment financial information is presented in Note 12 in the Consolidated Financial Statements, which is incorporated
by reference here.





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ITEM 1A.  RISK FACTORS





Factors That May Affect Operating Results





If a company's operating results are below the expectations of public market analysts or investors, then the market price of its Common Stock could decline. Many factors that can affect a company's quarterly and annual results are difficult
to control or predict.  Some of the factors which can affect a multinational semiconductor business such as the Company are described below.





Geopolitical and Macroeconomic Risks That May Affect Multinational Enterprises





The current global recession and unprecedented volatility in global capital markets could have a material adverse effect on the Company’s business, results of operations, and financial condition.  While the current global economic downturn may be improving and the
Company has recently seen some improvement in the business climate for semiconductors, there is no guarantee that these conditions will continue to improve or that these conditions will not further decline again in the future. The semiconductor industry has traditionally been highly cyclical and has often experienced significant downturns in connection with, or in anticipation of, declines in general economic conditions, and the Company cannot accurately predict how severe and prolonged this downturn might be.
The global recession and credit crisis in the financial markets has resulted in a decrease in orders for the Company’s products, which may continue or worsen for the foreseeable future, and which may materially adversely affect the Company’s revenues, results of operations and financial condition. In addition to reduction in sales, the Company’s profitability may decrease during this economic downturn because it may not be able to reduce costs at the same rate as its sales decline.





Recent macroeconomic turmoil in the world financial markets is affecting commercial and consumer markets.  Financial markets in the United States, Europe and Asia have been experiencing extreme disruption in recent months, causing customers and consumers to cut back on
spending in order to conserve cash.  Additionally, many of the Company’s customers procure its products on credit. If credit is not available to them, it may be difficult or impossible for customers to purchase the Company’s products. The Company’s operating results in one or more segments may be materially adversely affected by the current economic conditions, and if such conditions remain uncertain, persist, or deteriorate further, the Company may experience material impacts on its
business, operating results, and financial condition.





Demand for semiconductor components is increasingly dependent upon the rate of growth of the global economy.  The current global economic downturn and any worsening in the global economy could cause demand for the Company’s products to be adversely affected, which
in turn could negatively affect revenues, results of operations and financial condition.  Many factors could adversely affect regional or global economic growth.  Some of the factors that could further slow global economic growth include: continued volatility in the United States and global credit markets, increased price inflation for goods, services or materials, a slowdown in the rate of growth of the Chinese economy, a significant act of terrorism which disrupts global trade or consumer
confidence, and geopolitical tensions including war and civil unrest.  Reduced levels of economic activity, or disruptions of international transportation, could adversely affect sales on either a global basis or in specific geographic regions.


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Market conditions may lead the Company to initiate additional cost reduction plans, which may negatively affect near term operating results.  Weaker customer demand, competitive pricing pressures, excess capacity, weak economic
conditions or other factors, may cause the Company to initiate additional 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 current tightening of the credit markets may adversely affect the Company’s business in a number of ways.The unprecedented contraction and extreme disruption of the credit and financial markets in the United States, Europe,
and Asia has led to, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuation of others. These economic developments may adversely affect the Company’s business in a number of ways. The current tightening of credit in financial markets may limit the ability of the Company’s customers and suppliers to obtain financing for capital purchases and operations. This could result in a
decrease in or cancellation of orders for the Company’s products or reduced ability to finance operations to supply products to the Company. The Company cannot predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. and other countries. Further, the worldwide economic slowdown makes it is extremely difficult for the Company to forecast future sales levels based on historical information and trends. Visibility into customer demand
continues to be limited due to short order lead times. Portions of the Company’s expenses are fixed and other expenses are tied to expected levels of sales activities. To the extent the Company does not achieve its anticipated levels of sales, its gross profit and net income could be adversely affected until such expenses are reduced to an appropriate level.





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 the U.S. or foreign governments, acts of terrorism, foreign government instability, 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. 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 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. 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 elsewhere in the world. Such factors could adversely affect the Company's future revenues, financial condition, results of operations or cash flows.








Semiconductor Industry Specific Risks





The volatility of customer demand in the semiconductor industry limits a company's ability to predict future levels of sales and profitability. Semiconductor suppliers can rapidly increase production output, leading 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 products can result in excess quantities of certain 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 Company's quarterly
revenues are highly dependent upon turns fill orders (orders booked and shipped in the same quarter).  The short-term and volatile nature of customer demand makes it extremely difficult to accurately predict near term revenues and profits.


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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 and
price; timing of product introductions; emergence of new computer and communications standards; and quality and customer support. If the Company is unable to compete favorably in these areas, revenues and profits could be negatively affected.





The short lead time environment in the semiconductor industry has allowed many end consumers to rely on semiconductor suppliers, stocking representatives and distributors to carry inventory to meet short term requirements and minimize their
investment in on-hand inventory.Over the past several years, customers have worked to minimize the amount of inventory of semiconductors they hold.  As a consequence, customers are generally providing less order backlog to the Company and other semiconductor suppliers, resulting in short order lead times and reduced visibility into customer demand.  As a consequence of the short lead time environment and corresponding unpredictability of customer demand, the Company has
increased its inventories over the past five to six years to maintain reliable service levels.  If actual customer demand for the Company’s products is different from the Company’s estimated demand, product inventory may have to be scrapped, or the carrying value reduced, which could adversely affect the Company's business, financial condition, results of operations, or cash flows. In addition, the Company maintains a network of stocking representatives and distributors that carry inventory
to service the volatile short-term demand of the end customer.  Should the relationship with a distributor or stocking representative be terminated, the future level of product returns could be higher than the returns allowance established, which could negatively affect the Company’s revenues and results of operations.





During periods when economic growth and customer demand have been less certain, both the semiconductor industry and the Company have experienced significant price erosion.  If price erosion occurs, it will have the effect
of reducing revenue levels and gross margins in future periods.  Furthermore, the trend for the Company’s customers to move their electronics manufacturing to Asian countries has brought increased pricing pressure for Micrel and the semiconductor industry as a whole.  Asian based manufacturers are typically more concerned about cost and less concerned about the capability of the integrated circuits they purchase.  The increased concentration of electronics procurement and manufacturing
in the Asia Pacific region may lead to continued price pressure and additional product advertising costs for the Company’s products in the future.





Many semiconductor companies face risks associated with a dependence upon third parties that manufacture, assemble or package certain of its products.  These risks include reduced control over delivery schedules and quality;
inadequate manufacturing yields and excessive costs; the potential lack of adequate capacity during periods of excess demand; difficulties selecting and integrating new subcontractors; potential increases in prices; disruption in supply due to civil unrest, terrorism, natural disasters or other events which may occur in the countries in which the subcontractors operate; and potential misappropriation of the Company's intellectual property.  The occurrence of any of these events may lead to increased
costs or delay delivery of the Company's products, which would harm its profitability and customer relationships. The Company does not have long-term supply contracts with any of its third-party vendors. Therefore, the vendors are not obligated to perform services or supply products to the Company for any specific period, in any specific quantities, or at any specific price, except as may be provided in a particular accepted purchase order. Additionally, the Company's wafer and product requirements typically
represent a relatively small portion of the total production of the third-party foundries and outside assembly, testing and packaging contractors.  As a result, Micrel is subject to the risk that a third-party supplier will provide delivery or capacity priority to other larger customers at the expense of Micrel, resulting in an inadequate supply to meet customer demand or higher costs to obtain the necessary product supply.


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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.





Because the standard products market for ICs is diverse and highly fragmented, the Company encounters different competitors in various market areas.  Many of these competitors have substantially greater technical, financial
and marketing resources and greater name recognition than the Company.  The Company may not be able to compete successfully in either the standard products or custom and foundry products business in the future and competitive pressures may adversely affect the Company's financial condition, results of operations, or cash flows.





The success of companies in the semiconductor industry depends in part upon intellectual property, including patents, trade secrets, know-how and continuing technology innovation. The success of companies like Micrel may depend on
their ability to obtain necessary intellectual property rights and protect such rights. There can be no assurance that the steps taken by the Company to protect its intellectual property will be adequate to prevent misappropriation or that others will not develop competitive technologies or products. There can be no assurance that any patent owned by the Company will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages or that any of its pending
or future patent applications will be issued with the scope of the claims sought, if at all. Furthermore, others may develop technologies that are similar or superior to the Company's technology, duplicate technology or design around the patents owned by the Company. Additionally, the semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. Claims alleging infringement of intellectual property rights have been asserted against the Company in the past
and could be asserted against the Company in the future. These claims could result in the Company having to discontinue the use of certain processes; cease the manufacture, use and sale of infringing products; incur significant litigation costs and damages; attempt to obtain a license to the relevant intellectual property and develop non-infringing technology. The Company may not be able to obtain or renew such licenses on acceptable terms or to develop non-infringing technology. Existing claims or other assertions
or claims for indemnity resulting from infringement claims could adversely affect the Company's business, financial condition, results of operations, or cash flows.  In addition, the Company relies on third parties for certain technology that is integrated into some of its products. If the Company is unable to continue to use or license third-party technologies in its products on acceptable terms, or the technology fails to operate, the Company may not be able to secure alternative technologies in a
timely manner and its business would be harmed.





The significant investment in semiconductor manufacturing capacity and the rapid growth of circuit design centers in China may present a competitive threat to established semiconductor companies due to the current low cost of labor and capital
in China.The emergence of low cost competitors in China could reduce the revenues and profitability of established semiconductor manufacturers.


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There is intense competition for qualified personnel in the semiconductor industry. The loss of any key employees or the inability to attract or retain qualified personnel, including management, engineers and sales and marketing
personnel, could delay the development and introduction of the Company’s products, and harm its ability to sell its products. The Company believes that its future success is dependent on the contributions of its senior management, including its President and Chief Executive Officer, certain other executive officers and senior engineering personnel. The Company does not have long-term employment contracts with these or any other key personnel, and their knowledge of the Company’s business and industry
would be difficult to replace.





Companies in the semiconductor industry are subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in its manufacturing process.  Any failure
to comply with present or future regulations could result in the imposition of fines, the suspension of production, alteration of manufacturing processes or a cessation of operations.  In addition, these regulations could restrict the Company's ability to expand its facilities at their present locations or construct or operate a new wafer fabrication facility or could require the Company to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean
up prior discharges. The Company's failure to appropriately control the use of, disposal or storage of, or adequately restrict the discharge of, hazardous substances could subject it to future liabilities and could have a material adverse effect on its business.





Company-Specific Risks





In addition to the risks that affect multinational semiconductor companies listed above, there are additional risks which are more specific to the Company such as:





An important part of the Company's strategy is to continue to focus on the market for high-speed communications IC’s.  Should demand from the Company’s customers in this end market decrease, or if lower customer demand for the Company’s high bandwidth
products materializes, the Company's future revenue growth and profitability could be adversely affected.





The cellular telephone (wireless handset) market comprises a significant portion of the Company’s standard product revenues.  The Company derives a significant portion of its net revenues from customers serving the cellular telephone market. Due to the highly competitive
and fast changing environment in which the Company’s cellular telephone customers operate, demand for the product the Company sells into this end market can change rapidly and unexpectedly.  If the Company’s cellular telephone customers acceptance of Micrel’s products decreases, or if these customers lose market share, or accumulate too much inventory of completed handsets, the demand for the Company’s products could decline sharply which could adversely affect the Company’s
revenues and results of operations.





The Company’s gross margin, operating margin and net income are highly dependent on the level of revenue and capacity utilization that the Company experiences.  Semiconductor manufacturing is a capital-intensive business resulting in high fixed costs. If the Company
is unable to utilize its installed wafer fabrication or test capacity at a high level, the costs associated with these facilities and equipment would not be fully absorbed, resulting in higher average unit costs and lower profit margins.


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The Company has invested in certain auction rate securities that may not be accessible for in excess of 12 months and these auction rate securities may experience an other than temporary decline in value, which would adversely affect the Company’s income.At December 31,
2009, the Company held $15.5 million in principal of auction rate notes secured by student loans. As of December 31, 2009, all of these auction rate securities have failed to auction successfully due to sell orders exceeding buy orders. The Company has recorded a $2.8 million pre-tax temporary impairment of these securities to other comprehensive income, a component of shareholders’ equity.  If it is determined that the fair value of these securities is other than temporarily impaired, the Company
would record a loss, which could be material, in its statement of operations in the period such other than temporary decline in fair value is determined. For additional information regarding the Company's investments, see Note 1 of Notes to Consolidated Financial Statements.





The Company faces various risks associated with the trend toward increased shareholder activism.  In 2008, the Company became engaged in a proxy contest with a large shareholder. This dispute led to a significant increase in operating expenses which appreciably reduced
the Company’s operating profit and net income.  The Company prevailed in the contest and has subsequently repurchased 4,675,000 shares of the Company’s Common Stock from the activist shareholder and entered into a standstill agreement with the shareholder restricting their actions as a shareholder of the Company.  While we believe this dispute has been resolved, the Company could become engaged in another proxy contest in the future.  Another proxy contest would require
significant additional management time and increased operating expenses, which could adversely affect the Company’s profitability and cash flows.





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 operation or cash flows.





In the event of an adverse ruling in any intellectual property litigation that might arise in the future, the Company might be required to discontinue the use of certain processes, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to the infringing
technology.  There can be no assurance, however, that under such circumstances, a license would be available under reasonable terms or at all.  In the event of a successful claim against the Company and the Company's failure to develop or license substitute technology on commercially reasonable terms, the Company's financial condition, results of operations, or cash flows could be adversely affected.  The Company does not believe that any material and specific risk currently exists
related to the loss of use of patents, products or processes.





The complexity of the Company’s products may lead to errors or defects, which could subject the Company to significant costs or damages and adversely affect market acceptance of its products. Although the Company’s customers and suppliers rigorously test its products,
these products may contain undetected errors, weaknesses or defects. If any of the Company’s products contain production defects, reliability, quality or compatibility problems that are significant, the Company’s reputation may be damaged and customers may be reluctant to continue to buy its products. This could adversely affect the Company’s ability to retain and attract new customers. In addition, these defects could interrupt or delay sales of affected products, which could adversely affect
the Company’s results of operations.


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If defects are discovered after commencement of commercial production, the Company may be required to incur significant costs to resolve the problems. This could result in significant additional development costs and the diversion of technical and other resources from other development efforts. The Company could also incur significant
costs to repair or replace defective products or may agree to be liable for certain damages incurred. These costs or damages could have a material adverse effect on the Company’s financial condition and results of operations.





The Company will continue to expend substantial resources developing new products, applications or markets and may never achieve the sales volume that it anticipates for these products, which may limit the Company’s future growth and harm its results of operations.The Company’s
future success will depend in part upon the success of new products. The Company has in the past, and will likely in the future, expend substantial resources in developing new and additional products for new applications and markets. The Company may experience unforeseen difficulties and delays in developing these products and experience defects upon volume production and broad deployment. The markets the Company enters will likely be highly competitive and competitors may have substantially more experience in
these markets. The Company’s success will depend on the growth of the markets it enters, the competitiveness of its products and its ability to increase market share in these markets. If the Company enters markets that do not achieve or sustain the growth it anticipates, or if the Company’s products are not competitive, it may not achieve volume sales, which may limit the Company’s future growth and would harm its results of operations.





If the Company is unable to convert a significant portion of its design wins into revenue, the Company’s business, financial condition and results of operations could be materially and adversely impacted.The Company has secured a significant number of design wins for new
and existing products. Such design wins are necessary for revenue growth. However, many of the Company’s design wins may never generate revenues if end-customer projects are unsuccessful in the marketplace or the end-customer terminates the project, which may occur for a variety of reasons. Mergers and consolidations among customers may lead to termination of certain projects before the associated design win generates revenue. If design wins do generate revenue, the time lag between the design win and meaningful
revenue is typically between six months to greater than eighteen months. If the Company fails to convert a significant portion of its design wins into substantial revenue, the Company’s business, financial condition and results of operations could be materially and adversely impacted.





If the Company’s distributors or sales representatives stop selling or fail to successfully promote its products, the Company’s business, financial condition and results of operations could be adversely impacted.Micrel sells many of its products through sales representatives
and distributors. The Company’s non-exclusive distributors and sales representatives may carry its competitors’ products, which could adversely impact or limit sales of the Company’s products. Additionally, they could reduce or discontinue sales of the Company’s products or may not devote the resources necessary to adequately sell the Company’s products. The Company’s agreements with distributors contain limited provisions for return of products, including stock rotations whereby
distributors may return a percentage of their purchases based upon a percentage of their most recent three months of shipments. In addition, in certain circumstances upon termination of the distributor relationship, distributors may return some portion of their prior purchases. The loss of business from any of the Company’s significant distributors or the delay of significant orders from any of them, could materially and adversely harm the Company’s business, financial conditions and results of operations.





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In addition, the Company depends on the continued viability and financial resources of these distributors and sales representatives, some of which are small organizations with limited working capital. In turn, these distributors and sales representatives are subject to general economic and semiconductor industry conditions. If some or
all of the Company’s distributors and sales representatives experience financial difficulties, or otherwise become unable or unwilling to promote and sell the Company’s products, its business, financial condition and results of operations could be adversely impacted.





The Company manufactures most of its semiconductors at its San Jose, California fabrication facilities. The Company's existing wafer fabrication facility, located in Northern California, may be subject to natural disasters such as earthquakes.  A significant natural disaster,
such as an earthquake or prolonged drought, could have a material adverse impact on the Company's business, financial condition and operating results.  Furthermore, manufacturing semiconductors requires manufacturing tools that are unique to each product being produced.  If one of these unique manufacturing tools was damaged or destroyed, the Company's ability to manufacture the related product would be impaired and its business would suffer until the tool was repaired or replaced.  Additionally,
the fabrication of ICs is a highly complex and precise process.  Small impurities, contaminants in the manufacturing environment, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer, manufacturing equipment failures, and wafer breakage or other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional.  The Company maintains approximately two to three months of inventory that has completed
the wafer fabrication manufacturing process.  This inventory is generally located offshore at third party subcontractors and can act to buffer some of the adverse impact from a disruption to the Company’s San Jose wafer fabrication activity arising from a natural disaster such as an earthquake.





The Company’s results of operations could vary as a result of the methods, estimations and judgments used in applying its accounting policies.The methods, estimates and judgments used by the Company in applying its accounting policies have a significant impact on its results
of operations. Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties, assumptions and changes in rulemaking by the regulatory bodies, and factors may arise over time that lead the Company to change its methods, estimates, and judgments. Changes in those methods, estimates and judgments could significantly impact the Company’s results of operations.





Changes in tax laws could adversely affect the Company’s results of operations. The Company is subject to income taxes in the United States and in various immaterial foreign jurisdictions. Significant judgment is required in determining the Company’s worldwide tax liabilities.
The Company believes that it complies with applicable tax law. If the governing tax authorities have a different interpretation of the applicable law or if there is a change in tax law, the Company’s financial condition and results of operations may be adversely affected.





In addition, there have been proposals to reform U.S. tax laws that could significantly impact how U.S. multinational corporations are taxed on foreign earnings. Although the Company cannot predict whether or in what form this proposed legislation will pass, if enacted it could have a material impact on our results of operations. It
should be noted the Company does not currently have a material foreign tax structure and the majority of the Company’s income is subject to U.S. corporate tax laws.


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ITEM 1B.
UNRESOLVED STAFF COMMENTS





None








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 28,000 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 another 57,000 square foot facility in San Jose, California which is owned by the Company.





Associated with the acquisition of Electronic Technology Corporation in 2000, the Company owns a 12,175 square foot design facility in Huxley, Iowa. In 2009, the Company closed this design facility in conjunction with a Company wide reduction in force.





The Company also leases small sales and technical facilities located in, Richardson, TX; Irvine, CA; Bundang, Korea; Taipei, Taiwan; Shenzhen, P.R. China; Singapore; Yokohama, Japan; Newbury, U.K.; Livingston, France and Villebon, France.





The Company believes that its existing 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” in Item 15 of Part IV is incorporated herein by reference.








ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





In the fourth quarter of 2009, no matters were submitted to a vote of security holders.








2010 Annual Meeting of Shareholders





The Company’s Annual Meeting of Shareholders of Micrel, Incorporated, is to be held on May 25, 2010. Shareholder proposals or nominations submitted pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, must be received by the Company within a reasonable time before the Company begins
to print and send its proxy materials for the 2010 Annual Meeting of Shareholders and must comply with all applicable Securities and Exchange Commission rules, in order to be considered for inclusion in the Company’s proxy materials for the 2010 Annual Meeting of Shareholders.  Shareholder proposals or nominations that are not submitted pursuant to Rule 14a-8 under the Exchange Act must be delivered to or mailed and received by the Secretary of the Company at the principal executive offices of
the Company no later than the close of business on March 2, 2010. A shareholder’s notice must also satisfy the other requirements set forth in Section 2.4 of the Company’s bylaws.


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PART II





ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS





The Company did not sell any unregistered securities during the period covered by this Annual Report on Form 10-K.





The Company’s Common Stock is listed on the Nasdaq Stock Market LLC under the Symbol “MCRL.” The range of daily closing sales prices per share for the Company’s Common Stock from January 1, 2008 to December 31, 2009 was:





Year Ended December 31, 2009:

High


LowFourth quarter

$
8.44


$
7.05Third quarter

$
8.34


$
7.00Second quarter

$
7.96


$
6.75First quarter

$
7.94


$
6.29Year Ended December 31, 2008:

High


LowFourth quarter

$
8.72


$
5.82Third quarter

$
9.85


$
8.31Second quarter

$
10.36


$
8.85First quarter

$
9.39


$
5.60





The reported last sale price of the Company’s Common Stock on the NASDAQ Global Market on December 31, 2009 was $8.20. The approximate number of holders of record of the shares of the Company’s Common Stock was 434 as of February 19, 2010. 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 February 19, 2010 was approximately 7,000.





The Company has authorized Common Stock, no par value and Preferred Stock, no par value. The Company has not issued any Preferred Stock.





The information required by this item regarding securities authorized for issuance under equity compensation plans is included under the caption "Equity Compensation Plan Information" in the Company’s Proxy Statement to be filed in connection with the Company’s 2010 Annual Meeting of Shareholders and is incorporated herein
by reference.








Dividend Policy





On January 26, 2010, the Company's Board of Directors declared a $0.035 per common share cash dividend, payable February 24, 2010 to shareholders of record on February 10, 2010. During the year ended December 31, 2009 the Company paid cash dividends of $8.9 million.





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Issuer Purchases of Equity Securities





On December 30, 2008, the Company's Board of Directors approved a $50 million share repurchase program for calendar year 2009. Share repurchases are recorded as a reduction of common stock to the extent available. Any amounts in excess of common stock are recorded as a reduction of retained earnings. Repurchases of the Company's common
stock during 2009 were as follows:





Period

Total Number ofShares Purchased


Average Price
Paid Per Share


Total Number of Shares Purchased as Part of Publicly Announced
Plans or Programs


Maximum Dollar Value of Shares that May Yet be Repurchased Under the
Plans or Programs ($000)January 2009


279,277


$
6.97



279,277


$
48,053February 2009


1,666,643


$
6.30



1,666,643


$
37,552March 2009


--



--



--


$
37,552Total Q1 2009


1,945,920


$
6.40



1,945,920April 2009


--



--



--


$
37,552May 2009


3,075,000


$
6.50



3,075,000


$
17,552June 2009


--



--



--


$
17,552Total Q2 2009


3,075,000


$
6.50



3,075,000July 2009


--



--



--


$
17,552August 2009


--



--



--


$
17,552September 2009


--



--



--


$
17,552Total Q3 2009


--



--



--October 2009


--



--



--


$
17,552November 2009


--



--



--


$
17,552December 2009


--



--



--


$
17,552Total Q4 2009


--



--



--Total 2009


5,020,920


$
6.46



5,020,920





The information included in Note 7 of Notes to Consolidated Financial Statements under the caption “Stock Repurchase Plan” in Item 15 of Part IV is incorporated herein by reference.








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ITEM 6.
SELECTED FINANCIAL DATA





The selected consolidated financial data below is not necessarily indicative of future operations and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and related notes thereto which are incorporated herein by
reference.


Income Statement Data:

Years Ended December 31,(in thousands, except per share amounts)

2009


2008


2007(1)


2006(2)


2005(3)Net revenues

$
218,887


$
259,360


$
257,974


$
276,307


$
250,356Cost of revenues*


105,134



116,351



111,068



117,164



115,559Gross profit


113,753



143,009



149,906



159,143



134,797Operating expenses:Research and development*


46,522



54,947



54,523



52,074



45,231Selling, general and administrative*


37,325



44,405



45,040



49,016



46,159Proxy contest expense (credits)


(550
)


4,153



—



—



—Equipment impairment and restructuring charges (credits)


6,514



(842
)


128



269



—Other operating expense


—



—



86



966



9,282Total operating expenses


89,811



102,663



99,777



102,325



100,672Income from operations


23,942



40,346



47,129



56,818



34,125Other income, net


688



2,936



21,717



5,403



4,180Income before income taxes


24,630



43,282



68,846



62,221



38,305Provision for income taxes


8,336



15,025



24,778



24,497



12,264Net income

$
16,294


$
28,257


$
44,068


$
37,724


$
26,041Net income per share:Basic

$
0.26


$
0.40


$
0.57


$
0.46


$
0.30Diluted

$
0.26


$
0.40


$
0.57


$
0.46


$
0.30Shares used in computing per share amounts:Basic


63,576



70,549



76,918



81,550



87,055Diluted


63,644



70,653



77,813



82,842



87,971Cash dividends per common share

$
0.14


$
0.14


$
0.09


$
—


$
—*Share based compensation included in:Cost of revenues

$
670


$
974


$
1,156


$
1,540


$
159Research and development


1,619



2,086



2,130



3,341



161Selling, general and administrative


1,675



2,119



2,199



3,534



450





Balance Sheet Data(1):

December 31,(in thousands)

2009


2008


2007


2006


2005Working capital

$
102,266


$
111,397


$
128,365


$
140,790


$
163,939Total assets


245,958



260,343



295,276



300,649



320,016Long-term debt and other obligations


7,529



4,740



3,149



453



475Total shareholders' equity


185,351



208,406



237,143



236,217



256,445


_____________


(1) Other income, net for the year ended December 31, 2007, includes $15.5 million in non-operating income resulting from the settlement of litigation.


(2) Operating results for the year ended December 31, 2006, include $2.9 million in revenues related to a patent license granted by Micrel to Monolithic Power Systems and $846,000 in accrued other expense related to a legal judgment against Micrel in a patent infringement suit with Linear Technology Corporation. In addition, operating results for the year ended December 31, 2006 also include $714,000 in cost of revenues
related to the settlement of a patent dispute with International Business Machines.


(3) Operating results for the year ended December 31, 2005, include $9.3 million in accrued litigation expense related to a jury verdict against Micrel in its suit against TRW Automotive and for TRW Automotive in its countersuit against Micrel.





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 Table of Contents


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 analog power ICs, mixed-signal and digital ICs.  These products address a wide range of end markets including cellular handsets, enterprise and portable computing, enterprise and home networking, wide area and metropolitan area networks and industrial
equipment.  The Company also manufactures custom analog and mixed-signal circuits and provides wafer foundry services for customers who produce electronic systems for communications, consumer and military applications.





To enhance the readers' understanding of the Company's performance, the following chronological overview of the Company's results for the years 2007 through 2009 have been provided.





During the first quarter of 2007, bookings increased in all major geographic regions resulting in an 18% growth in orders compared with fourth quarter 2006 levels.  The total overall amount of new orders booked in the first quarter exceeded revenues.  The sequential improvement in bookings was driven by higher order
levels from customers serving the high speed communications, wireless handset and industrial end markets.  First quarter 2007 revenues were $63.1 million, 2% less than the $64.5 million recorded in the fourth quarter 2006 and 7% lower than the $68.2 million posted in the first quarter of 2006.  Seasonal declines in sales to customers serving the computing, wireless handset and consumer end markets were partially offset by higher resales through the Company’s sell-through distributors.  Gross
margin increased sequentially to 58.0% despite lower revenues and inventory reduction due to a combination of lower manufacturing costs and a higher gross margin sales mix.  First quarter operating profit was $11.2 million, or 18% of sales.  The Company’s on-hand inventory declined on a sequential basis.  Overall channel inventories remained relatively flat from the end of 2006, with increases at the Company’s sell-through distributors offset by lower inventory levels
at Micrel’s sell-in distributors.





In the second quarter of 2007, bookings exceeded the Company’s revenue level. Second quarter revenues were $65.1 million, a sequential increase of 3% over the $63.1 million recorded in the first quarter, and 7% lower than the $70.2 million posted in the year-ago period. The sequential growth in second quarter revenues was led by
increased sales to customers serving the communications and computing end markets, offsetting lower sales of the Company’s products to major Korean wireless handset customers.  Gross margin of 57.4% increased 0.7% from the prior year period and decreased by 0.6% from the first quarter.  During the second quarter, the Company operated at a lower level of factory utilization, which had the combined effect of reducing both inventory levels and gross margin.  Channel inventories
also declined on a sequential basis as the Company’s major global sell-through distributors attempted to take advantage of readily available semiconductor component supplies to increase their working capital turns.


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Demand for the Company's products in the third quarter of 2007 was generally seasonal in nature.  Bookings from industrial and wireline communication customers softened, while holiday and back-to-school related markets such as wireless handsets, computing and consumer were more robust.  Faced with concerns about the
growth of the U.S. economy, the Company’s sell-through distributors were cautious throughout the third quarter as they saw their orders slow and inventories build.  The overall amount of orders booked by the Company in the third quarter was approximately the same as the revenue level for the quarter.  Third quarter revenues were $65.2 million, up slightly compared to the second quarter, and 11% lower than the $73.5 million posted in the year-ago period.  An increase in third
quarter sales to customers in the wireless handset and consumer end market was offset by lower revenues from customers in the wireline communications end market, arising from lower shipments to major Chinese communications customers as they trimmed inventory levels.  Gross margin decreased from 57.4% in the second quarter to 56.6% in the third quarter of 2007, and decreased from 58.7% in the year ago period.  During the third quarter, the Company reduced on-hand inventory levels despite a
higher level of factory utilization.  Channel inventories increased by approximately one week over the second quarter due to seasonally slower distribution sales of the Company’s products.  Third quarter operating profit was $12.4 million, or 18.9% of revenues.





In the fourth quarter of 2007, the increasingly uncertain macroeconomic environment appeared to heighten the Company’s customer’s focus on maintaining lean inventories.  Global distributors and certain OEM customers informed the Company that they attempted to minimize inventory at year-end.  As a consequence,
customer orders and purchases declined more quickly than usual in the month of December, resulting in a quarterly book-to-bill ratio of less than one, and impacting fourth quarter revenues.  Revenues for the fourth quarter of 2007 decreased 1% from the third quarter to $64.6 million and were essentially flat to the revenues in the year-ago period.  Sales to customers serving the consumer, computing and the wire line communications end markets declined on a sequential basis, partially offset
by increased sales of the Company’s Ethernet products during the quarter.  Gross margin decreased to 55.7% in the fourth quarter from 56.6% in the third quarter primarily as a result of a less favorable sales mix. Fourth quarter operating profit was $11.6 million, or 18% of revenues.  On-hand inventories increased during the fourth quarter, while channel inventories decreased by approximately one week from the end of the third quarter.





Micrel’s financial performance in 2007 remained solid.  Total year gross margin of 56.9% was the second highest in the Company history.  Net income for fiscal 2007 increased 16.8% to $44.1 million, or $0.57 per diluted share, compared with net income of $37.7 million, or $0.46 per diluted share in 2006.  Included
in 2007 pre-tax income was a $15.5 million gain associated with a first quarter legal settlement, which after income taxes, was equivalent to $9.5 million or $0.12 per diluted share.  Cash flows from operations of $67.8 million during the year enabled the repurchase of 5.5 million shares of common stock for $55.1 million, representing approximately 7% of the shares outstanding at the beginning of the year.  In addition, the Company commenced a $0.03 per common share cash dividend payment to
shareholders in the second quarter of 2007.


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In the first quarter of 2008, bookings levels rebounded from the fourth quarter of 2007, resulting in the highest quarterly booking level since the first quarter of 2006 and a book-to-bill ratio significantly above one.  First quarter revenues of $66.1 million increased 2% sequentially compared to fourth quarter 2007 revenues
of $64.6 million.  The increase in revenues was primarily due to stronger demand from the wire line communications, digital television, industrial and voice-over-IP end markets, which offset seasonal declines in sales to the computing and wireless handset end markets.  Revenues through Micrel’s sell-through distributors increased in the first quarter of 2008 and the number of weeks of distribution channel inventory decreased slightly on a sequential basis.  Gross margin improved
to 56.3% in the first quarter of 2008 from 55.7% in the fourth quarter of 2007 while at the same time inventory levels were reduced.  First quarter 2008 operating profit was $11.6 million, or 18% of revenues. Earnings per diluted share for the first quarter of 2008 increased to $0.12 per share from $0.11 per share reported in the fourth quarter of 2007.





During the first quarter of 2008, the Company became engaged in its first proxy contest since going public in 1994, with a small activist hedge fund, Obrem Capital Management LLC (“OCM”). This issue resulted in Micrel incurring incremental operating expenses on this matter of $331,000 in the first quarter, $2.4 million in
the second quarter, $349,000 in the third quarter and $1.1 million in the fourth quarter of 2008. See “Management Discussions and Analysis of Financial Conditions and Results of Operations – Proxy Contest Expense” for additional information.





In the second quarter of 2008, total bookings remained firm, resulting in a book-to-bill ratio above one. Second quarter 2008 bookings were paced by demand from customers serving the communications, industrial, and wireless handset end markets.  Customers remained very cautious, which continued to keep order lead times in the
4 to 5 week range. In the second quarter of 2008, Micrel posted its highest sequential revenue growth rate in four years.  Second quarter 2008 revenues of $70.6 million increased by $4.5 million, or 7%, from the first quarter of 2008.  The growth in revenues was led by stronger demand from customers serving the wireline communications, wireless handset, and wi-fi voice-over-IP end markets, combined with record sales through the Company’s global sell-through distributors.  Gross
margin was 56.4%, which was similar to gross margin in the first quarter of 2008.  Second quarter 2008 operating profit was $11.1 million, or 16% of sales.  A total of $2.4 million of proxy contest expenses reduced Micrel’s operating income by approximately 18% in the second quarter of 2008, and also had the effect of reducing operating margin by approximately 3% in the second quarter of 2008.  Second quarter 2008 net income was $7.4 million, or $0.10 per diluted share. Expenses
related to the Company’s proxy contest reduced net income by $0.02 per share in the second quarter of 2008.





Financial markets in the United States, Europe and Asia experienced extreme disruption in the second half of 2008, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, ratings downgrades of certain investments and declining valuations of others. In the third quarter
of 2008, concerns related to the deterioration in the global financial and credit markets, including with respect to the availability and cost of credit, contributed to instability in worldwide capital and credit markets and diminished expectations for the U.S. and global economy.  These conditions worsened in the fourth quarter of 2008, and combined with uncertainty about the global economy in general, contributed to volatility of unprecedented levels and a further economic slowdown.  Although
governments have taken unprecedented actions in an attempt to alleviate the credit crisis, customers and consumers began to cut back on spending in order to conserve cash in the third quarter of 2008.  This resulted in the slowing of orders from Micrel’s distributors and direct OEM customers, which continued into the fourth quarter of 2008.


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During the third quarter of 2008, total bookings were less than revenues, resulting in a book-to-bill ratio of less than one. Notwithstanding the order decrease, resales of the Company’s products from global sell-through distributors remained strong throughout the quarter and were at the highest levels ever experienced by the Company.
In the third quarter of 2008, Micrel posted $67.5 million in revenue, a decrease of 4% from the second quarter of 2008. The sequential quarter decrease in sales primarily resulted from reduced demand from customers serving the wireline communications, Wi-FI voice-over IP and foundry sales to a major solar end customer. This was offset by slight increases in the computer and consumer markets. Third quarter gross margin was 55.3%, down 1.1% from 56.4% in the second quarter of 2008. Operating income was $11.9 million,
or 18% of sales. This compares to operating income of $11.1 million in the second quarter of 2008. Other income, net was unchanged quarter to quarter at $700,000. The effective tax rate was 38.9% for the third quarter. Third quarter 2008 net income was $7.7 million, or $0.11 per diluted share.





Fourth quarter 2008 revenue of $55.2 million decreased by $12.4 million, or 18%, from $67.5 million in the third quarter of 2008. The decrease in revenues was due to tight year-end inventory control in most geographies, channels and end markets as a result of the worldwide financial crisis. The worldwide macroeconomic recession in the
fourth quarter caused the Company’s customers to focus on maintaining lean inventories.  The Company’s global distributors and a number of major OEM customers took action to minimize inventories at year-end.  As a consequence, customer orders and purchases declined in November and December after strong activity in October.  For the fourth quarter 2008, Micrel’s overall book-to-bill ratio was below one. Fourth quarter 2008 gross margin was 52.0%, compared to 55.3%
in the third quarter of 2008.  The decrease in gross margin was the result of factory underutilization and additional inventory reserves due to a lower sales forecast. Fourth quarter 2008 net income was $4.9 million, or $0.07 per diluted share.





For the year ended December 31, 2008, Micrel’s financial performance continued to be strong, especially in light of the existing economic conditions. Total 2008 revenues of $259.4 million were up slightly, compared with $258.0 million in 2007.  Net income for 2008 was $28.3 million, or $0.40 per diluted share, compared
with net income of $44.1 million, or $0.57 per diluted share in 2007.  2007 net income included a $15.5 million pre-tax gain associated with a first quarter legal settlement, which after income taxes, is equivalent to $0.12 per diluted share. Gross margins for 2008 were 55.1% compared to 56.9% in 2007.  Solid cash flows from operations of $53.3 million during the year enabled the repurchase of 7.1 million shares of common stock, or approximately 9.6% of the shares outstanding at the beginning
of 2008.  In addition, during the year ended December 31, 2008, the Company paid cash dividends of $9.5 million.





The worldwide macroeconomic recession continued to impact demand in the first quarter of 2009 and the Company’s customers continued to maintain lean inventory levels. Despite the difficult environment, first quarter bookings increased over fourth quarter levels and resulted in a book to bill ratio above one for both the OEM and
distribution sales channels. The Company’s first quarter revenues were $47.0 million, compared to $55.2 million in the fourth quarter of 2008.  First quarter gross margin was 50.3%, compared to 52% in the prior quarter.  The decrease in gross margin was primarily the result of factory capacity under-utilization as Micrel continued to control its inventory levels. First quarter 2009 net income was $1.5 million, or $0.02 per diluted share, as compared to fourth quarter 2008 net income
of $4.9 million, or $0.07 per diluted share. The Company continued to enhance shareholder value by maintaining its quarterly three and one-half cent per share dividend and repurchasing 1.9 million shares under its stock repurchase plan.


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Despite a continuing weak economic environment, the Company experienced strong growth of both revenues and net income in the second quarter of 2009. Bookings were solid which resulted in a book-to-bill ratio above one. Second quarter revenues grew on a sequential quarter basis for the first time in four quarters.  The Company
saw strength in all major segments of its business with primary growth coming from markets in China.  In particular, the build out of China’s 3G infrastructure was an important driver for the Company’s revenue growth in the second quarter of 2009. Revenues increased to $51.8 million in the second quarter of 2009, compared to $47.0 million in the first quarter of 2009.  Second quarter 2009 operating expenses were down by 4% sequentially. Second quarter 2009 net income of $3.9 million
was more than double the net income of $1.5 million reported for the first quarter of 2009.  In addition, the Company continued to enhance shareholder value with its stock buy-back program. Average shares outstanding in the second quarter of 2009 decreased by 4% compared to the first quarter of 2009.  In addition, the Company also maintained its quarterly three and one-half cent per share dividend payment.





Revenues for the third quarter of 2009 totaled $58.9 million, compared to $51.8 million in the second quarter of 2009, and $67.6 million in the third quarter of 2008. Sequential revenue growth was driven by increasing demand across most major markets served by the Company, especially from the industrial, handset and automotive markets.
Bookings for the third quarter of 2009 were solid and the book-to-bill ratio was above one for the third quarter in a row. Third quarter 2009 gross margin improved to 52.5%, up from 51.3% in the second quarter of 2009, due to increased revenue levels to cover fixed manufacturing costs. Third quarter 2009 net income increased 76% to $6.8 million, or 11 cents per diluted share as compared to $3.9 million, or $0.06 per diluted share in the second quarter of 2009. As a result of the Company’s ongoing expense
management and the Company’s stock repurchase program, third quarter 2009 earnings per diluted share of $0.11 were the same as the third quarter 2008 earnings per diluted share, despite significantly lower revenues in the third quarter of 2009 as compared to the third quarter of 2008. The Company also maintained its quarterly three and one-half cent per share dividend.





During the fourth quarter of 2009, ordering strength from the industrial and communications end markets resulted in a book-to-bill ratio significantly above one, marking the fourth consecutive quarter where the book-to-bill exceeded one. As a result, customer backlog at the end of 2009 is nearly two times as high as customer backlog
at the end of 2008.  Revenues in the fourth quarter of 2009 increased 4% to $61.2 million, compared to $58.9 million in the third quarter of 2009.  The sequential growth was driven by increasing demand across most major markets for the Company’s products. Fourth quarter 2009 gross margin was 53.3%, up from 52.5% in the third quarter of 2009. The improvement in gross margin was due to better capacity utilization as a result of increased revenue levels to cover fixed manufacturing costs.
During the quarter, total operating expenses included a $6.5 million non-cash, pre-tax charge related to the impairment of certain semiconductor manufacturing equipment located at the Company’s San Jose fabrication facility.  As a result of this manufacturing equipment impairment, the Company expects to realize future improved capacity utilization levels and a reduction in operating expenses.  Fourth quarter 2009 operating income was $5.5 million, or 8.9% of sales.  This compares
to operating income of $10.0 million, or 17.0% of sales in the third quarter 2009. Fourth quarter 2009 net income was $4.1 million, or $0.07 per basic and diluted share, which included a $0.06 per diluted share reduction due to the equipment impairment.  This compares with third quarter 2009 net income of $6.8 million, or $0.11 per basic and diluted share. In addition, the Company continued to maintain its quarterly three and one-half cent per share dividend.


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Micrel’s financial performance for 2009 continued to be strong, especially when considering the challenging macroeconomic environment experienced during 2009. The Company maintained its track record of profitability for 30 out of 31 years.  For the year ended December 31, 2009, revenue was $218.9 million, compared to
revenue of $259.4 million in 2008.  Net income for 2009 was $16.3 million, or $0.26 per diluted share, compared with net income of $28.3 million, or $0.40 per diluted share in 2008.  During 2009, Micrel generated $37.6 million in cash flow from operations; repurchased $32.5 million of its common stock; purchased its San Jose California corporate facility for approximately $6 million; paid $8.9 million of dividends to shareholders and made other capital investments of $6.1 million. Over the
last five years the Company has repurchased $276 million of its common stock and has paid $25 million in dividends, returning approximately 30% of its market capitalization to its shareholders.





The Company derives a substantial portion of its net revenues from standard products. For 2009, 2008 and 2007 the Company's standard products sales accounted for 97%, 95%, and 92%, 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 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 and in Item 1A.  As a result of the foregoing or other factors, including the global economic crisis, 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, or results of operations or cash flows.





Critical Accounting Policies and Estimates





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 judgments. Management bases its estimates and judgments 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, share-based accounting, income taxes, and litigation to be critical to the
fair presentation of its financial statements.


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Revenue Recognition and Receivables. Micrel generates revenue by selling products to OEM's, distributors and stocking representatives.  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.  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 or determinable and collection of the resulting receivable is reasonably assured.





Micrel allows certain distributors located in North America and Europe, and in certain countries in Asia, significant return rights, price protection and pricing adjustments subsequent to the initial product shipment.  As these returns and price concessions have historically been significant, and future returns and price concessions
are difficult to reliably estimate, the Company 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. Although revenue and related cost of sales are not recognized, the Company records an accounts receivable and relieves inventory at the time of initial product shipment.  As standard terms are FOB shipping
point, payment terms are enforced from shipment date and legal title and risk of inventory loss passes to the distributor upon shipment. In addition, where revenue is deferred upon shipment and recognized on a sell-through basis, the Company may offer price adjustments to its distributors to allow the distributor to price the Company's products competitively for specific resale opportunities. The Company estimates and records an allowance for distributor price adjustments for which the specific resale transaction
has been completed, but the price adjustment claim has not yet been received and recorded by the Company.





Sales to OEM customers and stocking representatives are recognized based upon the shipment terms of the sale transaction when all other revenue recognition criteria have been met.  The Company does not grant return rights, price protection or pricing adjustments to OEM customers.  The Company offers limited contractual
stock rotation rights to stocking representatives.  In addition, the Company is not contractually obligated to offer, but may infrequently grant, price adjustments or price protection to certain stocking representatives on an exception basis. At the time of shipment to OEMs and stocking representatives, an allowance for returns is established based upon historical return rates, and an allowance for price adjustments is established based on an estimate of price adjustments to be granted. Actual future
returns and price adjustments could be different than the allowance established.





The Company also maintains an allowance for doubtful accounts for estimated uncollectible accounts receivable. This estimate is based on an analysis of specific customer creditworthiness and historical bad debts experience. 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 records 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 an inventory write-down provision is established, it is maintained until the product to which it relates is sold or otherwise disposed of.


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Share-Based Compensation. Share-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense in the statement of operations. To determine fair value, the Company uses the Black-Scholes valuation model which requires input factors
such as expected term, stock price volatility, dividend yield and risk free interest rate. In addition, the Company estimates expected forfeiture rates of stock grants and share-based compensation expense is only recognized for those shares expected to vest. Determining the input factors, such as expected term, expected volatility and estimated forfeiture rates, requires significant judgment based on subjective future expectations.





Income Taxes.Deferred tax assets and liabilities result primarily from temporary timing differences between book and tax valuation of assets and liabilities, and state research and development credit carryforwards. The Company must regularly assess the likelihood that future taxable
income levels will be sufficient to ultimately realize the tax benefits of these deferred tax assets. As of December 31, 2009, 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. Should the Company determine that future realization of these tax benefits is not more likely than not, a valuation allowance would be established, which would increase the Company's tax provision in the period
of such determination.





The Company uses a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.





Litigation.The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights.  During recent years, the Company has resolved litigation involving intellectual property claims. An estimated liability
is accrued when it is determined to be probable that a liability has been incurred and the amount of loss can be reasonably estimated. The liability accrual is charged to income in the period such determination is made. The Company regularly evaluates current information available to determine whether such accruals should be made.


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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 31,2009


2008


2007Net revenues


100.0
%


100.0
%


100.0
%Cost of revenues


48.0



44.9



43.1Gross profit


52.0



55.1



56.9Operating expenses:Research and development


21.3



21.2



21.1Selling, general and administrative


17.1



17.1



17.4Equipment impairment and restructuring charges (credits)


3.0



(0.4
)


0.1Proxy contest expense (credits)


(0.3
)


1.6



—Total operating expenses


41.1



39.5



38.6Income from operations


10.9



15.6



18.3Other income, net


0.3



1.1



8.4Income before income taxes


11.2



16.7



26.7Provision for income taxes


3.8



5.8



9.6Net income


7.4
%


10.9
%


17.1
%





Net Revenues. Net revenues decreased 16% to $218.9 million for the year ended December 31, 2009 compared to $259.4 million in 2008. Standard product revenues, which represented 97% of net revenues, decreased 14% to $212.6 million for the year ended December 31, 2009,
compared to $246.6 million and 95% of net revenues for 2008. Other products revenues which consist primarily of custom and foundry product revenues, decreased 51% to $6.3 million of net revenues for the year ended December 31, 2009, compared to $12.7 million of net revenues for 2008. These decreases were the result of decreased unit shipments across all product lines and geographies due to a reduction in demand caused by the worldwide macroeconomic recession.





For the year ended December 31, 2008, net revenues increased 1% to $259.4 million compared to $258.0 million in 2007 due to increased standard product revenues which were partially offset by decreased other products revenues.





The current global economic slowdown, unprecedented volatility in the capital markets and severely diminished liquidity and credit availability has exacerbated the ongoing weakness in the semiconductor industry. This has materially softened demand for the Company’s products, and management is not able to predict whether macroeconomic
conditions will continue to deteriorate or improve. The persistence of such conditions could have a significant adverse effect on the Company’s revenues, profitability and results of operations.


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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)





Customer demand for semiconductors can change quickly and unexpectedly.  The Company’s revenue levels have been highly dependent on the amount of new orders that are received for which product is requested to be delivered to the customer within the same quarter.  Within the semiconductor industry these orders
that are booked and shipped within the quarter are called “turns fill” orders.  When the turns fill level exceeds approximately 35% of quarterly revenue, it makes it very difficult to predict near term revenues and income.  Because of the long cycle time to build its products, the Company’s lack of visibility into demand when turns fill is high makes it difficult to predict what product to build to match future demand.





As noted in Item 1A “Risk Factors” and above in the overview section of this “Management's Discussion and Analysis of Financial Condition and Results of Operations”, a trend has developed over the last several years whereby customers in the semiconductor supply chain have worked to minimize
the amount of inventory of semiconductors they hold. As a consequence, customers are generally providing less order backlog to the Company and other semiconductor suppliers, and relying on short lead times to buffer their build schedules.  Shorter lead times reduce visibility into end demand and increase the reliance on turns fill orders.  The reluctance of customers to provide order backlog together with short lead times and the uncertain growth rate of the world economy, make it difficult
to precisely predict future levels of sales and profitability.





International sales represented 74%, 69% and 67% of net revenues for the years ended December 31, 2009, 2008 and 2007, respectively. On a dollar basis, international sales decreased 10% to $162.1 million for the year ended December 31, 2009 from $180.0 million for 2008. This decrease resulted primarily from decreased shipments
of standard products to Europe and Asia due to a reduction in demand caused by the worldwide macroeconomic recession.





Sales to customers in Asia represented 61% of net revenues for the year ended December 31, 2009 as compared to 56% of the Company’s net revenues for the year ended December 31, 2008 and 55% of the Company’s net revenues for the year ended December 31, 2007. The trend for the Company’s customers to move their electronics
manufacturing to Asian countries has resulted in increased pricing pressure for Micrel and other semiconductor manufacturers. Asian based manufacturers are typically more concerned about cost and less concerned about the capability of the integrated circuits they purchase. This can make it more difficult for United States based companies to differentiate themselves in any manner other than by lowering prices. The increased concentration of electronics procurement and manufacturing in the Asia Pacific region has
led, and may continue to lead, to continued price pressure for the Company’s products in the future.





Gross Profit.Gross profit is affected by a variety of factors including the volume of product sales, product mix, manufacturing capacity utilization, product yields and average selling prices. The Company's gross margin decreased to 52% for the year ended December 31, 2009 from
55% for 2008. This decrease in gross margin resulted primarily from decreased manufacturing capacity utilization and decreased average selling prices in 2009 as compared to 2008.





For the year ended December 31, 2008, the Company's gross margin decreased to 55% from 57% for 2007. This decrease in gross margin resulted primarily from an increase in sales mix of lower margin products in 2008 as compared to 2007.


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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)





Research and Development Expenses.  Research and development expenses as a percentage of net revenues represented 21% for each of the years ended December 31, 2009 and 2008. On a dollar basis, research and development expenses decreased $8.4 million or 15% to $46.5
million for 2009 from $54.9 million in 2008. These decreases were primarily due to decreased staffing levels and decreased prototype fabrication 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 year ended December 31, 2008, research and development expenses increased $424,000 or 1% to $54.9 million from $54.5 million in 2007. This increase was primarily due to increased prototype fabrication costs.





Selling, General and Administrative Expenses. As a percentage of net revenues, selling, general and administrative expenses represented 17% for each of the years ended December 31, 2009 and 2008. On a dollar basis, selling, general and administrative expenses decreased $7.1
million or 16% to $37.3 million for 2009 from $44.4 million for 2008. This decrease was primarily due to decreased staffing levels, decreased commission expenses, decreased advertising expenses and decreased profit sharing accruals.





For the year ended December 31, 2008, selling, general and administrative expenses decreased $635,000, or 1%, to $44.4 million from $45.0 million in 2007. This decrease was primarily due to decreased outside legal costs.





Proxy Contest Expense (Credits).During the first quarter of 2008, the Company became engaged in a proxy contest with a small activist hedge fund, Obrem Capital Management LLC (“OCM”).  This issue resulted in Micrel incurring incremental expenses on this matter
of $4.2 million during 2008. During the fourth quarter of 2009, the Company negotiated a reduction in outside service fees related to the proxy contest and recorded a $550,000 credit. These expenses consist primarily of outside consulting and legal fees.  Subsequent to a special meeting of shareholders on May 20, 2008, at which the Company’s shareholders rejected all proposals set forth by OCM, OCM agreed to withdraw its slate of nominees for the board of directors, and support Micrel’s
board nominees at the upcoming annual meeting of shareholders. Micrel’s slate of directors was subsequently elected by shareholders at the Company’s annual meeting on October 1, 2008.





Equipment impairment and restructuring charges (credits). During the fourth quarter of 2009, the Company recorded a $6.5 million charge for the impairment of certain excess semiconductor manufacturing equipment which was removed from service and was held for sale as of December
31, 2009. The $7.4 million net book value of the equipment held for sale was reduced to its estimated sales value of $910,000.





During 2003, the Company closed its Santa Clara wafer fabrication facility. In February 2006, the Company terminated the facility lease under the terms of the lease agreement due to major vandalism rendering the building unusable.  The facility Lessor disputed the termination of the lease.  In March 2008, the Company
entered into a Settlement and Mutual Release agreement with the Lessor. Under the terms of the agreement, the Company paid $875,000 to the Lessor and released a $70,000 security deposit for full settlement of all obligations under the lease. The remaining $842,000 unused restructuring expense accruals were credited to restructuring charges (credits) in the statement of operations during the first quarter of 2008.


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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)





Share-Based Compensation. Share-based compensation costs for stock option grants are based on the fair value calculated from a stock option pricing model on the date of grant. The Company's results of operations for the years ended December 31, 2009, 2008 and 2007 were impacted
by the recognition of non-cash expense related to the fair value of share-based compensation awards. During 2009, Micrel recorded $4.0 million in pre-tax share-based compensation expense, of which $670,000 is included in cost of revenues, $1.6 million is included in research and development expense and $1.7 million is included in sales, general and administrative expense. During 2008, Micrel recorded $5.2 million in pre-tax share-based compensation expense, of which $1.0 million is included in cost of revenues,
$2.1 million is included in research and development expense and $2.1 million is included in sales, general and administrative expense.





Other Income, Net. Other income, net reflects interest income from investments in short-term and long-term investment securities and money market funds and other non-operating income, offset by interest expense incurred on term notes.  Included in the 2007 other income
is $15.5 million in non-operating income resulting from the settlement of litigation.





Provision for Income Taxes. For the year ended December 31, 2009, the provision for income taxes was $8.3 million or 34% of income before taxes as compared to 35% of income before taxes for 2008 and 36% of income before taxes for 2007.  These tax rate decreases resulted
primarily from a greater impact of federal and state research and development credits due to reduced income before income taxes. The 2009 provision for income taxes differs from taxes computed at the federal statutory rate primarily due to the effects of non-deductible share-based compensation expense, state income taxes, federal and state research and development credits and federal qualified production activity deductions.








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, 2009, consisted of cash and cash equivalents of $70.9 million and a $5 million revolving line of credit from a commercial bank.





The Company generated $37.6 million in cash flows from operating activities for the year ended December 31, 2009. Cash flow from operating activities were primarily attributable to net income of $16.3 million plus non-cash activities of $23.6 million (consisting primarily of $15.7 million in depreciation and amortization, $4.0 million
in share-based compensation and a $6.5 million impairment of equipment, offset in part by $2.2 million in deferred income taxes benefits) combined with a $3.3 million decrease in inventory, a $2.8 million decrease in income taxes receivable and a $2.3 million increase in deferred income, which were partially offset by a $5.7 million increase in accounts receivable and a $4.3 million decrease in accrued compensation.





For the year ended December 31, 2008, the Company generated $53.3 million in cash flows from operating activities. Cash flow from operating activities were primarily attributable to net income of $28.3 million plus non-cash activities of $26.2 million (consisting primarily of $19.2 million in depreciation and amortization, $5.2
million in share-based compensation and a $1.8 million decrease in deferred income taxes) combined with a $9.0 million decrease in accounts receivable, which were partially offset by a $3.8 million increase in income taxes receivable and a $1.8 million increase in inventory combined with a $2.6 million decrease in accounts payable and a $2.3 million decrease in other accrued liabilities.


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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)





The Company generated $14.4 million of cash from investing activities during the year ended December 31, 2009, which was primarily comprised of $26.6 million from the net proceeds of sales of short-term investments, offset in part by $12.1 million in purchases of property, plant and equipment, which included approximately $6 million
for the purchase of the Company’s previously leased headquarters facility.





For the year ended December 31, 2008, the Company used $26.4 million of cash for investing activities, which was primarily comprised of $15.4 million for the net purchases of short-term investments and $11.2 million in purchases of property, plant and equipment.





The Company used $29.5 million of cash for financing activities during the year ended December 31, 2009, primarily for the repurchase of $32.4 million of the Company's common stock, $8.9 million for the payment of cash dividends and $3.6 million in repayments of long-term debt, which were partially offset by $15.0 million in proceeds
from long-term debt borrowing.





For the year ended December 31, 2008, the Company used $59.5 million of cash for financing activities, primarily for the repurchase of $53.2 million of the Company's common stock and $9.5 million for the payment of cash dividends, which were partially offset by $3.2 million in proceeds from employee stock transactions.





The Company currently intends to spend approximately $10 million to $15 million to purchase capital equipment and make facility improvements during the next twelve months primarily for manufacturing equipment and additional research and development related software and equipment. On January 28, 2010, the Company's Board of Directors
declared a $0.035 per common share cash dividend, payable February 24, 2010 to shareholders of record on February 10, 2010. On February 5, 2010, Micrel’s Board of Directors authorized the Company to repurchase up to $15.0 million of its common stock through December 31, 2010. The Company believes that its cash from operations, existing cash balances and short-term investments, and its credit facility will be sufficient to meet its cash requirements for at least the next twelve months. In the longer term,
the Company believes future cash requirements will continue to be met by its cash from operations, credit arrangements and future debt or equity financings as required.





At December 31, 2009, the Company held $15.5 million in principal of senior auction rate notes secured by student loans. Auctions for these auction rate notes have failed as of December 31, 2009.  The fair value of these notes, $12.7 million, has been classified as long-term investments as of December 31, 2009. The funds associated
with failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the issuers redeem the securities or the underlying securities have matured. For additional information regarding the Company's investments, see Note 1 of Notes to Consolidated Financial Statements.





At December 31, 2009, the Company had cash and cash equivalents of $70.9 million.  Some of these available cash and cash equivalents are held in accounts managed by third party financial institutions and consist of invested cash and cash in the Company’s operating accounts.  The invested cash is invested in
interest bearing funds managed by third party financial institutions. To date, the Company has experienced no loss or lack of access to its invested cash or cash equivalents; however, the Company can provide no assurances that access to its invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets.





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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)





Recently Issued Accounting Standards





Please refer to Note 2 of Notes to Consolidated Financial Statements for a discussion of the expected impact of recently issued accounting standards.








Contractual Obligations and Commitments





As of December 31, 2009, the Company had the following contractual obligations and commitments (in thousands):


Payments Due By PeriodTotal


Less than
1 Year


1-3
Years


4-5
Years


After 5
YearsLong-term debt

$
11,428


$
8,571


$
2,857


$
--


$
--Operating leases


2,135



972



861



302



—Open purchase orders


11,500



11,500



—



—



—Total

$
25,063


$
21,043


$
3,718


$
302


$
—


Open purchase orders are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable pricing provisions; and the approximate timing of the transactions.





Borrowing agreements consisted of a $5 million line of credit for general working capital needs, which includes a $5 million letter of credit sub-facility including a $2 million foreign exchange sub-facility and a $15 million term loan facility to finance the repurchase of shares of the Company’s common stock. As of December 31,
2009, the Company had borrowed $15 million under the term loan facility, of which $3.6 million was repaid and had no borrowings under the line of credit facility.





As of December 31, 2009, the Company had $6.7 million of non-current unrecognized tax benefits.  Included in the $6.7 million is $2.0 million that has not yet reduced income tax payments, and, therefore, has been netted against non-current deferred tax assets.  The remaining $4.7 million liability is included in long-term
income taxes payable. The Company is not able to provide a reasonably reliable estimate of the timing of future payments relating to these obligations.








Off-Balance Sheet Arrangements





The Company has no off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.











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ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





At December 31, 2009, the Company held $15.5 million in principal of senior auction rate notes secured by student loans. Auctions for these auction rate notes have failed as of December 31, 2009.  The funds associated with failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of
the auction process, the issuers redeem the securities or the underlying securities have matured. As a result the Company’s ability to liquidate its investment and fully recover the carrying value of its investment in the near term may be limited or not exist. As of December 2009, the Company has recorded a $2.8 million pre-tax temporary impairment of these securities to other comprehensive income, a component of shareholders’ equity.  If it is determined that the fair value of these securities
is other than temporarily impaired, the Company would record a loss, which could be material, in its statement of operations in the period such other than temporary decline in fair value is determined. The Company currently has the ability and intent to hold these investments until a recovery of the auction process occurs or the issuers redeem the securities. For additional information regarding the Company's investments, see Note 1 of Notes to Consolidated Financial Statements.





At December 31, 2009, the Company had no fixed-rate long-term debt subject to interest rate risk.





At December 31, 2009, the Company held an interest rate swap contract, a derivative financial instrument, to partially offset its exposure to the effects of changes in interest rates on its variable-rate financing obligations. The notional amount of the outstanding interest rate swap contract at December 31, 2009 was $5.7 million. The
Company currently intends to hold the interest rate swap contract to maturity. If market interest rates were to increase immediately and uniformly by 10 percent from levels at December 31, 2009, the fair value of the interest rate swap would decline by an immaterial amount.








ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The Company’s financial statements are set forth on pages 45 through 72 and supplementary data are set forth on pages 73 through 74, which follow Item 15.








ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





Not applicable.








ITEM 9A.
CONTROLS AND PROCEDURES





Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures





The Company maintains disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act).  In designing and evaluating the disclosure controls and procedures, management recognizes that any disclosure controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.


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Under the supervision and with the participation of the Company's management, including its principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company's
principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2009.








Management’s Report on Internal Control Over Financial Reporting





The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepting accounting principles.  Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control
over financial reporting also can be circumvented by collusion or improper management override. In addition, any projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.  Under the supervision and with the participation of the Company's management, including its principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the criteria set forth in the report
entitled "Internal Control - Integrated Framework"issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the criteria set forth in the Internal Control — Integrated Framework, management has concluded that the Company's internal control over financial reporting was effective as of December 31, 2009.





The effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Part IV, Item 15 “Exhibits and Financial Statement Schedules” of this report.





Changes in Internal Control Over Financial Reporting





There has been no change in the Company’s internal controls over financial reporting that occurred during the quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.








ITEM 9B.
OTHER INFORMATION





None.





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PART III





ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The information concerning the directors and officers of the Company is included in the Company’s Proxy Statement to be filed in connection with the Company’s 2010 Annual Meeting of Shareholders under the captions "Election of Directors" and “Certain Information with Respect to Executive Officers,” respectively,
and is incorporated herein by reference.  There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors.





The Company has an Audit Committee composed of independent directors. The information required by this item with respect to the Audit Committee and “audit committee financial experts” is incorporated by reference from the Company’s Proxy Statement to be filed in connection with the Company’s 2010 Annual Meeting
of Shareholders under the captions, "Committees and Meetings of the Board of Directors" and "Board Committees"."





The information concerning compliance with Section 16(a) of the Exchange Act is included in the Company’s Proxy Statement to be filed in connection with the Company’s 2010 Annual Meeting of Shareholders under the caption “Section 16(A) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference.





The Company has adopted a code of ethics that applies to the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Company's code of ethics was filed as Exhibit 14 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003
and is incorporated herein by reference.  The Company’s code of ethics can also be viewed at www.micrel.com.  Information regarding the Company’s code of conduct, also known as the “Worldwide Standards of Business Conduct” is set forth in the Company’s Proxy Statement to be filed in connection with the Company’s 2010 Annual Meeting of Shareholders under the caption “Certain Transactions” and is incorporated herein by reference.








ITEM 11.
EXECUTIVE COMPENSATION





The information required by this item concerning executive compensation is included under the caption “Compensation Discussion and Analysis” and “Executive Compensation” in the Company’s Proxy Statement to be filed in connection with the Company’s 2010 Annual Meeting of Shareholders and is incorporated
herein by reference.





The information required by this item concerning compensation committee interlocks and insider participation is included under the captions “Compensation Committee Interlocks and Insider Participation” in the Company’s Proxy Statement to be filed in connection with the Company’s 2010 Annual Meeting of Shareholders
and is incorporated herein by reference.





The information required by this item concerning the Compensation Committee Report is included in the Company’s Proxy Statement to be filed in connection with the Company’s 2010 Annual Meeting of Shareholders and is incorporated herein by reference.  Such information shall be deemed “furnished” and not
"filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be deemed incorporated by reference into any filing of the Company as a result of furnishing the disclosure in this manner except to the extent incorporated by reference into such filing.


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 Table of Contents





ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS





The information required by this item is included under the caption “Security Ownership of Certain Beneficial Owners and Management” and "Equity Compensation Plan Information" in the Company’s Proxy Statement to be filed in connection with the Company’s 2010 Annual Meeting of Shareholders and is incorporated herein
by reference.








ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





The information required by this item is included under the captions “Certain Transactions” "Director Independence" and "Board Committees" in the Company’s Proxy Statement to be filed in connection with the Company’s 2010 Annual Meeting of Shareholders and is incorporated herein by reference.








ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES





The information required by this item is included under the caption “Independent Registered Public Accounting Firm” in the Company’s Proxy Statement to be filed in connection with the Company’s 2010 Annual Meeting of Shareholders and is incorporated herein by reference.


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PART IV








ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





The following documents are filed as part of this Report:





(a)  1.
Financial Statements. The following financial statements of the Company and the Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, are included in this Report on the pages indicated:PageReport of Independent Registered Public Accounting Firm
45Consolidated Balance Sheets as of December 31, 2009 and 2008
46Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007
47Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Years Ended December 31, 2009, 2008 and 2007
48Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
49Notes to Consolidated Financial Statements
50





2.
Financial Statement Schedule. The following financial statement schedule of the Company for the years ended December 31, 2009, 2008 and 2007, is filed as part of this report on Form 10-K and should be read in conjunction with the financial statements.Schedule II
Valuation and Qualifying Accounts
74Schedules not listed above have been omitted because they are not applicable, not required, or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto.





3
Exhibits. Those exhibits required by Item 601 of Regulation S-K to be filed or incorporated by reference as a part of this Report are listed on the Exhibit Index immediately preceding the exhibits filed herewith.





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 Table of Contents


Report of Independent Registered Public Accounting Firm





To the Board of Directors and Shareholders' of Micrel Incorporated:





In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) (1) present fairly, in all material respects, the financial position of Micrel Incorporated and its subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the index appearing under item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control
Over Financial Reporting appearing under Item 9A.  Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control
over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.





A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.





Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.





/s/ PricewaterhouseCoopers LLP


San Jose, California


March 5, 2010


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MICREL, INCORPORATEDCONSOLIDATED BALANCE SHEETSAS OF DECEMBER 31,(In thousands, except share amounts)2009


2008ASSETSCURRENT ASSETS:Cash and cash equivalents

$
70,898


$
48,343Short-term investments


—



25,852Accounts receivable, less allowances: 2009, $3,018; 2008, $2,937


26,330



20,643Inventories


34,191



37,440Income taxes receivable


4,011



6,783Prepaid expenses and other


1,449



1,781Deferred income taxes


18,465



17,752Total current assets


155,344



158,594LONG-TERM INVESTMENTS


12,692



12,628PROPERTY, PLANT AND EQUIPMENT, NET


67,644



76,200INTANGIBLE ASSETS, NET


509



1,338DEFERRED INCOME TAXES, NET


9,381



11,135OTHER ASSETS


388



448TOTAL

$
245,958


$
260,343LIABILITIES AND SHAREHOLDERS’ EQUITYCURRENT LIABILITIES:Accounts payable

$
15,342


$
15,365Accrued compensation


2,819



7,082Accrued commissions


1,657



2,366Other accrued liabilities


1,284



1,248Deferred income on shipments to distributors


23,405



21,136Current portion of long-term debt


8,571



—Total current liabilities


53,078



47,197LONG-TERM DEBT, NET


2,857



—LONG-TERM INCOME TAXES PAYABLE


4,672



4,468ACCRUED RENT


—



272Total liabilities


60,607



51,937COMMITMENTS AND CONTINGENCIES (Notes 9 and 11)SHAREHOLDERS’ EQUITY:Preferred stock, no par value – authorized: 5,000,000 shares;
issued and outstanding: none


—



—Common stock, no par value – authorized: 250,000,000 shares;
issued and outstanding: 2009 – 62,348,268; 2008 – 67,308,899


1,210



—Accumulated other comprehensive loss


(1,759
)


(2,244
)Retained earnings


185,900



210,650Total shareholders’ equity


185,351



208,406TOTAL

$
245,958


$
260,343The accompanying notes are an integral part of these consolidated financial statements.


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 Table of Contents





MICREL, INCORPORATEDCONSOLIDATED STATEMENTS OF OPERATIONSYEARS ENDED DECEMBER 31,(In thousands, except per share amounts)2009


2008


2007NET REVENUES

$
218,887


$
259,360


$
257,974COST OF REVENUES(1)


105,134



116,351



111,068GROSS PROFIT


113,753



143,009



146,906OPERATING EXPENSES:Research and development(1)


46,522



54,947



54,523Selling, general and administrative(1)


37,325



44,405



45,040Proxy contest expense (credits)


(550
)


4,153



—Equipment impairment and restructuring charges (credits)


6,514



(842
)


128Other operating expense


—



—



86Total operating expenses


89,811



102,663



99,777INCOME FROM OPERATIONS


23,942



40,346



47,129OTHER INCOME:Interest income


828



2,936



6,267Interest expense


(272
)


(57
)


(93
)Other income


132



57



15,543Total other income, net


688



2,936



21,717INCOME BEFORE INCOME TAXES


24,630



43,282



68,846PROVISION FOR INCOME TAXES


8,336



15,025



24,778NET INCOME

$
16,294


$
28,257


$
44,068NET INCOME PER SHARE:Basic

$
0.26


$
0.40


$
0.57Diluted

$
0.26


$
0.40


$
0.57WEIGHTED-AVERAGE SHARES USED IN COMPUTING PER SHARE AMOUNTS:Basic


63,576



70,549



76,918Diluted


63,644



70,653



77,813Cash dividends per common share

$
0.14


$
0.14


$
0.09(1) Share- based compensation included in:Cost of revenues

$
670


$
974


$
1,156Research and development


1,619



2,086



2,130Selling, general and administrative


1,675



2,119



2,199The accompanying notes are an integral part of these consolidated financial statements.


47
 Table of Contents




MICREL, INCORPORATEDCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOMEYEARS ENDED DECEMBER 31, 2009, 2008 AND 2007(In thousands, except share amounts)AccumulatedOther





TotalCommon Stock


Comprehensive


Retained


Shareholders'


ComprehensiveShares


Amount


Income (Loss)


Earnings


Equity


IncomeBalances, December 31, 2006


78,078,211


$
15,585


$
(35
)

$
220,667


$
236,217Net income


—



—



—



44,068



44,068


$
44,068Other comprehensive income, change in net unrealized losses from investments, net of tax










3







3



3Comprehensive income





















$
44,071Share-based compensation


—



5,382



—



—



5,382Payment of cash dividends














(6,945
)


(6,945
)Repurchases of common stock


(5,515,854
)


(34,447
)


—



(20,615
)


(55,062
)Employee stock transactions


1,439,003



12,133



—



—



12,133Tax effect of employee stock transactions


—



1,347



—



—



1,347Balances, December 31, 2007


74,001,360



—



(32
)


237,175



237,143Net income


—



—



—



28,257



28,257


$
28,257Other comprehensive income, change in net unrealized losses from investments, net of tax










(2,212
)






(2,212
)


(2,212
)Comprehensive income





















$
26,045Share-based compensation


—



5,159



—



—



5,159Payment of cash dividends


—



—



—



(9,540
)


(9,540
)Repurchases of common stock


(7,241,187
)


(9,085
)


—



(45,242
)


(54,327
)Employee stock transactions


548,726



4,254



—



—



4,254Tax effect of employee stock transactions


—



(328
)


—



—



(328
)Balances, December 31, 2008


67,308,899



—



(2,244
)


210,650



208,406Net income


—



—



—



16,294



16,294


$
16,294Other comprehensive income, change in net unrealized losses from investments, net of tax










485







485



485Comprehensive income





















$
16,779Share-based compensation


—



4,007



—



—



4,007Payment of cash dividends


—



—



—



(8,888
)


(8,888
)Repurchases of common stock


(5,020,920
)


(292
)


—



(32,156
)


(32,448
)Employee stock transactions


60,289



394



—



—



394Tax effect of employee stock transactions


—



(2,899
)


—



—



(2,899
)Balances, December 31, 2009


62,348,268


$
1,210


$
(1,759
)

$
185,900


$
185,351The accompanying notes are an integral part of these consolidated financial statements.





48
 Table of Contents





MICREL, INCORPORATEDCONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31,(In thousands)2009


2008


2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
16,294


$
28,257


$
44,068Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization


15,684



19,227



18,001Share-based compensation


3,964



5,179



5,485Tax benefit on the exercise of employee stock options


16



230



1,347Excess tax benefits associated with stock compensation


—



—



(159
)Equipment impairment


6,514



—



—Gain on disposal of assets


(173
)


(110
)


—Accrued rent


(272
)


(63
)


(118
)Deferred income tax provision (benefit)


(2,167
)


1,777



2,779Changes in operating assets and liabilities:Accounts receivable


(5,687
)


8,971



1,478Inventories


3,292



(1,799
)


1,420Income taxes receivable


2,772



(3,841
)


(2,612
)Prepaid expenses and other assets


392



1,853



(456
)Accounts payable


(530
)


(2,645
)


581Accrued compensation


(4,263
)


(1,576
)


992Accrued commissions


(709
)


373



558Income taxes payable


204



1,508



5,448Other accrued liabilities


36



(2,277
)


(10,017
)Deferred income on shipments to distributors


2,269



(1,741
)


(1,029
)Net cash provided by operating activities


37,636



53,323



67,766CASH FLOWS FROM INVESTING ACTIVITIES:Change in restricted cash


—



—



2,629Purchases of property, plant and equipment


(12,133
)


(11,044
)


(20,233
)Purchases of investments


(29,210
)


(29,852
)


(23,713
)Proceeds from sales and maturities of investments


55,776



14,474



12,064Net cash provided (used) in investing activities


14,433



(26,422
)


(29,253
)CASH FLOWS FROM FINANCING ACTIVITIES:Long-term debt borrowings


15,000



—



—Repayments of debt


(3,572
)


—



(80
)Proceeds from the issuance of common stock


394



3,242



12,133Repurchase of common stock


(32,448
)


(53,237
)


(55,062
)Payments of cash dividends


(8,888
)


(9,540
)


(6,945
)Excess tax benefits associated with stock compensation


—



—



159Net cash used in financing activities


(29,514
)


(59,535
)


(49,795
)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


22,555



(32,634
)


(11,282
)CASH AND CASH EQUIVALENTS - Beginning of year


48,343



80,977



92,259CASH AND CASH EQUIVALENTS - End of year

$
70,898


$
48,343


$
80,977SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the year for:Interest

$
272


$
68


$
818Income taxes

$
7,481


$
15,240


$
17,744The accompanying notes are an integral part of these consolidated financial statements.


49
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Years Ended December 31, 2009, 2008 and 2007


1.
SIGNIFICANT ACCOUNTING POLICIES





Nature of Business —Micrel, Incorporated and its wholly-owned subsidiaries (the “Company”) develops, manufactures and markets analog, mixed-signal and digital semiconductor devices.
The Company also provides custom and foundry services which include silicon wafer fabrication, integrated circuit ("IC") assembly and testing. The Company’s standard ICs are sold principally in North America, Asia, and Europe for use in a variety of products, including those in the computer, communication, and industrial markets. The Company’s custom circuits and wafer foundry services are provided to a wide range of customers that produce electronic systems for communications, consumer, automotive
and military applications. The Company produces the majority of its wafers at the Company’s wafer fabrication facilities located in San Jose, California. After wafer fabrication, the completed wafers are then separated into individual circuits and packaged at independent assembly and final test contract facilities primarily located in Malaysia.





Basis of Presentation —The accompanying consolidated financial data has been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC")
and is in conformity with U.S. generally accepted accounting principles ("US GAAP").





Principles of Consolidation —The accompanying consolidated financial statements include the accounts of Micrel, Incorporated and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.





Use of Estimates —In accordance with accounting principles generally accepted in the United States of America, management utilizes certain 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 judgments. Management bases its estimates and judgments 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. The primary estimates underlying the Company's financial statements include allowances for doubtful accounts receivable, allowances for product returns and price adjustments, provisions for obsolete and slow moving inventory, share-based compensation, income taxes, litigation and accrual for other liabilities. Actual results could differ from those estimates.





Cash Equivalents —The Company considers all highly liquid debt instruments purchased with remaining maturities of three months or less to be cash equivalents.





Investments —Investments purchased with remaining maturity dates of greater than three months and less than 12 months are classified as short-term. Investments purchased with remaining maturity dates of 12 months or greater are classified either as short-term
or as long-term based on maturities and the Company's intent with regard to those securities (expectations of sales and redemptions). The Company held no short-term investments as of December 31, 2009. Long-term investments as of December 31, 2009, consist of auction rate notes secured by student loans and are classified as available-for-sale securities. Available-for sale securities are stated at market value with unrealized gains and losses included in shareholders’ equity. Unrealized losses are charged
against income when a decline in the fair market value of an individual security is determined to be other than temporary. Realized gains and losses on investments are included in other income or expense.


50
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007


There were no short-term investments at December 31, 2009. A summary of the Company’s short-term investments at December 31, 2008 is as follows (in thousands):





As of December 31, 2008Cost


Gross
Gains


Gross
Losses


Fair
ValueCorporate Securities

$
17,888


$
2


$
63


$
17,827Certificates of Deposits


8,025



—



—



8,025Total

$
25,913


$
2


$
63


$
25,852





To determine the fair value of financial instruments, the Company uses a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority
to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:





•           Level 1 - Quoted prices in active markets for identical assets or liabilities.


•
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


•
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.





A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Most of the Company’s financial instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker
or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.





The types of instruments valued based on quoted market prices in active markets include money market funds and commercial paper. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on other observable inputs include U.S. agency securities. Such instruments are generally
classified within Level 2 of the fair value hierarchy. The types of instruments valued based on unobservable inputs include the auction rate securities held by the Company. Such instruments are generally classified within Level 3 of the fair value hierarchy. The Company estimated the fair value of these auction rate securities using a discounted cash flow model incorporating assumptions that market participants would use in their estimates of fair value. Some of these assumptions include estimates for interest
rates, timing and amount of cash flows and expected holding periods of the auction rate securities.


51
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007


Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 were as follows (in thousands):





Fair Value Measurements as of December 31, 2009Description

Quoted Prices in Active Markets for Identical Assets
Level 1


Significant Other Observable Inputs
Level 2


Significant Unobservable Inputs
Level 3


TotalMoney market funds

$
63,706


$
4,471


$
−


$
68,177Auction rate notes


−



−



12,692



12,692Total

$
63,706


$
4,471


$
12,692


$
80,869





Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2008 were as follows (in thousands):





Fair Value Measurements as of December 31, 2008Description

Quoted Prices in Active Markets for Identical Assets
Level 1


Significant Other Observable Inputs
Level 2


Significant Unobservable Inputs
Level 3


TotalMoney market funds

$
42,220


$
4,457


$
−


$
46,677Short-term available-for-sale securities


25,852



−



−



25,852Auction rate notes


−



−



12,628



12,628Total

$
68,072


$
4,457


$
12,628


$
85,157





As of December 31, 2009, the Company had approximately $12.7 million of auction rate notes, the fair value of which has been measured using Level 3 inputs. Auction rate notes are securities that are structured with short-term interest rate reset dates of generally less than ninety days, but with contractual maturities that can be in excess
of ten years. At the end of each reset period, which occurs every seven or twenty eight days for the securities held by the Company, investors can sell or continue to hold the securities at par. During the first quarter of 2008 and continuing through the end of 2009, the auction rate securities market experienced a significant increase in the number of failed auctions, which occurs when sell orders exceed buy orders. Auctions for the student loan-backed notes held by the Company failed as of December 31, 2009.
To date the Company has collected all interest payable on all of its auction-rate securities when due and expects to continue to do so in the future. The principal associated with failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the issuers redeem the securities, the issuers repay principal over time from cash flows prior to final maturity or final payments come due according to contractual maturities ranging from 23 to 36 years. As
a result, the Company has classified all auction rate notes as long-term investments as of December 31, 2009 and 2008. In the event of a failed auction, the notes bear interest at a predetermined maximum rate based on the credit rating of notes as determined by one or more nationally recognized statistical rating organizations.  For the auction rate notes held by the Company as of December 31, 2009, the maximum interest rate is generally one month LIBOR plus 1.5% based on the notes’ AAA rating
as of that date.


52
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007





The Company has used a combination of discounted cash flow models and observable transactions for similar securities to determine the estimated fair value of its investment in auction rate notes as of December 31, 2009 and 2008. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, estimates
for discount rates using yields of comparable traded instruments adjusted for illiquidity and other risk factors, amount of cash flows and expected holding periods of the auction rate notes.  Based on this assessment of fair value, as of December 31, 2009, the Company determined there was a cumulative decline in the fair value of its auction rate notes of approximately $2.8 million (recorded net of tax as an unrealized loss in accumulated other comprehensive loss), which was deemed temporary as the
Company believes it will recover its cost basis in these investments.





For the year ended December 31, 2009 the changes in the Company’s Level 3 securities (consisting of auction rate notes) are as follows (in thousands):


Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)Beginning balance, December 31, 2008

$
12,628Transfers in and/or out of Level 3


--Total gains, before tax


714Settlements


(650
)Ending balance, December 31, 2009

$
12,692








Certain Significant Risks and Uncertainties —Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, investments and accounts
receivable. Risks associated with cash are mitigated by banking with creditworthy institutions. Cash equivalents and investments consist primarily of commercial paper, bank certificates of deposit, money market funds and auction rate notes and are regularly monitored by management. Credit risk with respect to the trade receivables is spread over geographically diverse customers. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses. At December 31,
2009, three world-wide distributors and an original equipment manufacturer (“OEM”), accounted for 19%, 18%, 10% and 11%, respectively, of total accounts receivable. At December 31, 2008, three world-wide distributors and a stocking representative, accounted for 21%, 13%, 11% and 10%, respectively, of total accounts receivable.





Micrel currently purchases certain components from a limited group of vendors. The packaging of the Company's products 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 two large
third-party wafer foundry suppliers. Although the Company seeks to reduce its dependence on 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.


53
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007


The Company participates in a dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Company’s future financial position, results of operations, or cash flows: changes in the overall demand for products offered by the Company; competitive pressures in the
form of new products or price reductions on current products; advances and trends in new technologies and industry standards; changes in product mix; changes in third-party manufacturers; changes in key suppliers; changes in certain strategic relationships or customer relationships; litigation or claims against the Company based on intellectual property, patents, product, regulatory or other factors; risks associated with the ability to obtain necessary components; risks associated with the Company’s ability
to attract and retain employees necessary to support its growth.





Inventories — Inventories are stated at the lower of cost (first-in, first-out method) or market. The Company records 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. Once an inventory write-down provision is established, it is maintained until the product to which it relates is sold or otherwise disposed of.




Property, Plant and Equipment —Equipment, building and leasehold improvements are stated at cost and depreciated using the straight-line method. Equipment is depreciated over estimated useful
lives of three to five years. Buildings are depreciated over an estimated useful life of twenty to thirty years. Building improvements are depreciated over estimated useful lives of fifteen to thirty years. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the improvements which is generally 3 to 5 years.




Intangible Assets —Acquired technology, patents and other intangible assets continue to be amortized over their estimated useful lives of 3 to 7 years using the straight-line method.
Components of intangible assets were as follows (in thousands):





As of December 31, 2009


As of December 31, 2008Gross
Carrying
Amount


Accumulated
Amortization


Net
Carrying
Amount


Gross
Carrying
Amount


Accumulated
Amortization


Net
Carrying
AmountDeveloped and core technology

$
8,718


$
8,718


$
-


$
8,718


$
8,620


$
98Patents and tradename


10,318



9,809



509



10,318



9,078



1,240Customer relationships


1,455



1,455



-



1,455



1,455



-$
20,491


$
19,982


$
509


$
20,491


$
19,153


$
1,338





Total intangible amortization expense for the years ended December 31, 2009, 2008 and 2007 was $829,000, $1.7 million and $1.7 million, respectively. Estimated future intangible amortization expense for intangible assets as of December 31, 2009, is expected to be approximately $254,000 in 2010 and $255,000 2011.





Impairment of Long-Lived Assets —The Company periodically assesses whether long-lived assets have been impaired. An asset is initially evaluated for impairment if its estimated future undiscounted cash flows are less than the carrying value recorded on the
Company's balance sheet. If a shortfall exists, any impairment is measured based on the difference between the fair value and the carrying value of the long-lived asset. The Company's estimate of fair value is based on either fair market value information, if available, or based on the net present value of expected future cash flows attributable to the asset. Predicting future cash flows attributable to a particular asset is difficult, and requires the use of significant judgment.


54
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007





In 2009, the Company recorded a $6.5 million charge for the impairment of certain excess semiconductor manufacturing equipment which was removed from service and was held for sale as of December 31, 2009. The $7.4 million net book value of the equipment held for sale was reduced to its estimated sales value of $910,000.





Revenue Recognition and Receivables — Micrel generates revenue by selling products to OEMs, distributors and stocking representatives. 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.  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 or determinable and collection of the resulting receivable is reasonably assured.





Micrel allows certain distributors located in North America and Europe, and to a lesser extent Asia, significant return rights, price protection and pricing adjustments subsequent to the initial product shipment.  As these returns and price concessions have historically been significant, and future returns and price concessions
are difficult to reliably estimate, the Company 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. Although revenue and related cost of sales are not recognized, the Company records an accounts receivable and relieves inventory at the time of initial product shipment.  As standard terms are FOB shipping
point, payment terms are enforced from shipment date and legal title and risk of inventory loss passes to the distributor upon shipment. In addition, the Company may offer to its distributors, where revenue is deferred upon shipment and recognized on a sell-through basis, price adjustments to allow the distributor to price the Company's products competitively for specific resale opportunities. The Company estimates and records an allowance for distributor price adjustments for which the specific resale transaction
has been completed, but the price adjustment claim has not yet been received and recorded by the Company.





Sales to OEM customers and Asian based stocking representatives are recognized based upon the shipment terms of the sale transaction when all other revenue recognition criteria have been met.  The Company does not grant return rights, price protection or pricing adjustments to OEM customers. The Company offers limited contractual
stock rotation rights to stocking representatives. In addition, the Company is not contractually obligated to offer, but may infrequently grant, price adjustments or price protection to certain stocking representatives on an exception basis. At the time of shipment to OEMs and stocking representatives, an allowance for returns is established based upon historical return rates, and an allowance for price adjustments is established based on an estimate of price adjustments to be granted.





The Company's accounts receivable balances represent trade accounts receivables which have been recorded at invoiced amount and do not bear interest.  The Company maintains an allowance for doubtful accounts for estimated uncollectible accounts receivable. This estimate is based on an analysis of specific customer creditworthiness
and historical bad debts experience.





Litigation — An estimated liability is accrued when it is determined to be probable that a liability has been incurred and the amount of loss can be reasonably estimated. The liability
accrual is charged to income in the period such determination is made. The Company regularly evaluates current information available to determine whether such accruals should be made.


55
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007





Warranty Costs —The Company warrants products against defects for a period of up to 30 days. The majority of Micrel's product warranty claims are settled through the return of defective product and the reshipment of replacement product. Warranty returns
are included in Micrel's allowance for returns, which is based on historical return rates. Actual future returns could be different than the returns allowance established. In addition, Micrel accrues a liability for specific warranty costs that are expected to be settled other than through product return and replacement. As of December 31, 2009 and 2008, respectively, accrued warranty expenses were immaterial amounts. Future actual warranty costs may be different from the accrued warranty expense.





Research and Development Expenses —Research and development costs are expensed as incurred and consist primarily of payroll and other headcount related costs and cost of materials associated with the development of new wafer fabrication processes and the
definition, design and development of standard products. The Company also expenses prototype wafers and new production mask sets related to new products as research and development costs until products based on new designs are released to production by the Company and are demonstrated to support published data sheets and satisfy reliability tests.





Self Insurance —The Company utilizes third-party insurance subject to varying retention levels or self insurance. The Company is self insured for a portion of the losses and liabilities
primarily associated with earthquake damage, workers’ compensation claims and health benefit claims. Losses are accrued based upon the Company’s estimates of the aggregate liability for claims incurred using historical experience and certain actuarial assumptions followed in the insurance industry.





Advertising Expenses — The Company expenses advertising costs to selling, general and administrative expense as incurred. Advertising expenses for 2009, 2008 and 2007 were $472,000,
$1.6 million and $2.0 million respectively.





Income Taxes — Deferred tax assets and liabilities result from temporary differences between book and tax bases of assets and liabilities and state research and development credit carryforwards.  The Company had net current deferred tax assets of
$18.5 million and net long-term deferred tax assets of $9.4 million as of December 31, 2009.  The Company must assess the likelihood that future taxable income levels will be sufficient to ultimately realize the tax benefits of these deferred tax assets.  The Company currently 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.





In addition, the calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations.  The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate
actual outcomes.





Share-based Compensation — Share-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense in the statement of operations.


56
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007





Net Income per Share —Basic earnings per share ("EPS") is computed by dividing net income by the number of weighted-average common shares outstanding. Diluted EPS reflects potential dilution from outstanding stock options, using the treasury stock method.
Reconciliation of weighted-average shares used in computing earnings per share is as follows (in thousands):


Years Ended December 31,2009


2008


2007Weighted-average common shares outstanding


63,576



70,549



76,918Dilutive effect of stock options outstanding, using the treasury stock method


68



104



895Shares used in computing diluted earnings per share


63,644



70,653



77,813





For the years ended December 31, 2009, 2008 and 2007, 4.8 million, 9.2 million and 6.4 million stock options, respectively, have been excluded from the weighted-average number of common shares outstanding for the diluted net income per share computations as they are anti-dilutive.





Fair Value of Financial Instruments —Financial instruments included in the Company’s consolidated balance sheets at December 31, 2009 and 2008, consist of cash, cash equivalents, accounts receivable, accounts payable and investments. For cash,
the carrying amount is the fair value. The carrying amount for cash equivalents, accounts receivable and accounts payable approximates fair value because of the short maturity of those instruments. The fair value of investments are based on quoted market prices or valuation models for investments for which quoted market prices are unavailable.








2.
RECENT ACCOUNTING PRONOUNCEMENTS





In May 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance regarding the treatment of subsequent events.  The new guidance details the period after the balance sheet date during which the Company should evaluate events or transactions that may occur for potential recognition or disclosure
in the financial statements, the circumstances under which the Company should recognize events or transactions occurring after the balance sheet date in its financial statements and the required disclosures for such events.





In June 2009, the FASB issued new accounting guidance which amends the evaluation criteria to identify the primary beneficiary of a variable interest entity (“VIE”) and requires ongoing reassessment of whether an enterprise is the primary beneficiary of the VIE. The new guidance significantly changes the consolidation rules
for VIEs including the consolidation of common structures, such as joint ventures, equity method investments and collaboration arrangements. The guidance is applicable to all new and existing VIEs. The provisions of this new accounting guidance are effective for interim and annual reporting periods beginning after November 15, 2009 and will become effective for the Company beginning in the first quarter of 2010.  The Company does not expect that this new guidance will have a material impact on its results
of operations, financial position or cash flows


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 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007


In January 2010, the FASB issued updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for
fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements
for Level 2 and Level 3 fair value measurements. The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company does not expect adoption of the updated guidance to have a material impact
on its consolidated results of operations or financial condition.








3.
INVENTORIES





Inventories at December 31 consist of the following (in thousands):





2009


2008Finished goods

$
11,139


$
12,669Work in process


21,467



22,213Raw materials


1,585



2,558$
34,191


$
37,440








4.
PROPERTY, PLANT AND EQUIPMENT





Property, plant and equipment at December 31 consist of the following (in thousands):





2009


2008Manufacturing equipment

$
169,392


$
181,514Land


8,137



6,636Buildings and improvements


53,193



48,259Office furniture and research equipment


13,612



13,560Assets held for sale


910



-245,244



249,969Accumulated depreciation and amortization


(177,600
)


(173,769
)$
67,644


$
76,200





Depreciation expense for the years ended December 31, 2009, 2008 and 2007 was $14.9 million, $17.5 million and $16.3 million, respectively.





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 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007


5.
BORROWING ARRANGEMENTS





In May 2009, the Company entered into a new, unsecured credit facility with Bank of the West which terminated and replaced the Company’s previous credit facility originally entered into in April 2007 with Bank of the West. The new facility provides, among other things: (a) a $5 million line of credit for general working capital needs,
which includes a $5 million letter of credit sub-facility including a $2 million foreign exchange sub-facility; (b) a $15 million term loan facility to finance the repurchase of shares of the Company’s common stock and (c) a modification of covenants from the previous facility, including financial covenants.  At December 31, 2009, the Company was in compliance with all credit facility covenants. At December 31, 2009, the Company had borrowed $15 million under the term loan facility and had no
borrowings under the line of credit facility.





Borrowings under the term loan facility are payable over 21 equal monthly installments, which commenced on August 31, 2009.  Interest under the term loan facility is payable at a rate equal to floating one-month LIBOR plus 2.25% (2.5% at December 31, 2009). Interest under the line of credit facility will accrue based on one of
three interest rates, at the Company’s option: (1) a variable alternate base rate plus 1.00%, the alternate base rate being the greater of (x) Bank of the West’s prime rate, (y) the Fed Funds Rate plus 0.5% or (z) daily adjusted one-month LIBOR plus 1.00%; (2) floating one-month LIBOR plus 2.25% or (3) fixed LIBOR for one, two, three or six month periods, plus 2.25%.





As of December 31, 2009, the Company had borrowed $15 million under the credit facility agreement. The Company has repaid $3.6 million of this borrowing as of December 31, 2009. The following table summarizes the Company’s long-term debt (in thousands):





December 31,2009Notes payable bearing variable interest at 1 month LIBOR plus 2.25%

$
11,428Current portion


(8,571
)Long-term debt

$
2,857





As of December 31, 2009, the estimated fair value of the Company’s notes payable was not materially different than its respective carrying value.








6.
DERIVATIVE FINANCIAL INSTRUMENTS





In June 2009, the Company entered into an interest rate swap contract (the “Swap”), to partially offset its exposure to the effects of changes in interest rates on its variable-rate financing obligations. As a result of entering into the Swap, the Company has economically hedged the variability on future interest payments resulting
in a fixed rate of 3.36% for $5.7 million of the Company’s notes payable. The Company will experience variability in future interest payments for the remaining $5.7 million unhedged portion of the Company’s notes payable. The Company does not hold derivative financial instruments for trading or speculative purposes. The Swap is considered a cash flow hedge.


59
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 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007


For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the
derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.





All derivatives are recorded at fair value in either prepaid and other current assets or other accrued liabilities. The Company reports cash flows from derivative instruments in cash flows from operating activities. As of December 31, 2009, the notional amount of the outstanding interest rate swap contract was $5.7 million.  The
effect of derivative instruments on the Statement of Operations for the year ended December 31, 2009 was not material. The fair values of the Company’s derivative assets and liabilities as of December 31, 2009 were not material. The Company will continue to revaluate the fair value of the derivative instrument at each period end and record corresponding impact on the balance sheet and Statement of Operations.








7.
SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION





Preferred Stock





The Company has authorized 5,000,000 shares of preferred stock, no par value, of which none were issued or outstanding at December 31, 2009. The preferred stock may be issued from time to time in one or more series. The Board of Directors is authorized to determine or alter the rights, preferences, privileges and restrictions of such
preferred stock.





Stock Repurchase Plan





On December 30, 2008, the Company's Board of Directors approved a $50 million share repurchase program for calendar year 2009. Share repurchases are recorded as a reduction of common stock to the extent available. Any amounts in excess of common stock are recorded as a reduction of retained earnings. Shares of common stock purchased pursuant
to the repurchase program are cancelled from outstanding shares upon repurchase and credited to an authorized and un-issued reserve account, and are intended to reduce the number of outstanding shares of Common Stock to increase shareholder value and offset dilution from the Company's stock option plans and employee stock purchase plan. During the year ended December 31, 2009, the Company repurchased 5,020,920 shares of its common stock for an aggregate price of $32.4 million.





Incentive Award Plans





Under the Company's 2003 Incentive Award Plan (the “2003 Plan”), 1994 Stock Option Plan and its 2000 Non-Qualified Stock Incentive Plan, 40,749,313 shares of Common Stock are authorized for issuance to employees. The 1994 Stock Option Plan and 2000 Non-Qualified Stock Incentive Plan provide that, for stock options, the option
price will be determined by the Board of Directors at a price not less than the fair value as represented by the closing price of the Company's Common Stock on the last trading day before the date of grant.  The 2003 Incentive Award Plan provides that, for stock options, the option price will be determined by the Board of Directors at a price not less than the fair value as represented by the closing price of the Company's Common Stock on the date of grant.  Certain shareholder/employees of
the Company are granted options at 110% of the current fair market value. Options granted under the 2000 Non-Qualified Stock Incentive Plan are exercisable in 20% increments with the initial 20% vesting occurring six months after the date of grant and then in annual increments of 20% per year from the date of grant. The Company is not currently awarding option grants under the 2000 Non-Qualified Stock Incentive Plan. Options granted under the 2003 Incentive Award Plan and 1994 Stock Option Plan typically become
exercisable in not less than cumulative annual increments of 20% per year from the date of grant. The term of each stock option is no more than ten years from the date of grant. At December 31, 2009, 11,713,412 total shares were reserved for future issuance, of which 3,916,992 shares were available for future grants under the Option Plans.




60
 Table of Contents











Option activity under the Option Plans is as follows:


Number
of Shares


Weighted Avg.
Exercise Price
Per ShareOutstanding, December 31, 2006 (8,470,755 exercisable at a weighted average price of $13.23 per share)


12,775,777


$
12.76Granted


1,985,110



11.08Exercised


(1,411,021
)


8.40Canceled


(1,336,822
)


12.88Outstanding, December 31, 2007 (7,638,949 exercisable at a weighted average price of $13.83 per share and a weighted average remaining contractual life of 3.7 years)


12,013,044



12.97Granted


1,556,815



7.39Exercised


(516,719
)


7.72Canceled


(2,527,129
)


12.72Outstanding, December 31, 2008 (6,345,428 exercisable at a weighted average price of $14.07 per share and a weighted average remaining contractual life of 5.6 years)


10,526,011


$
12.46Granted


2,789,245



7.42Exercised


(22,305
)


5.30Canceled


(5,587,954
)


14.18Outstanding, December 31, 2009 (3,170,359 exercisable at a weighted average price of $11.18 per share and a weighted average remaining contractual life of 4.8 years)


7,704,997


$
9.41





The weighted average fair value (computed using the Black-Scholes option pricing model) of options granted under the stock option plans during the years ended December 31, 2009, 2008 and 2007 was $2.98, $3.40 and $5.64 per share, respectively.  The total intrinsic value of options (which is the amount by which the stock price
exceeded the exercise price of the options on the date of exercise) exercised during the years ended December 31, 2009, 2008 and 2007 was $51,000, $1.0 million and $4.8 million, respectively. During the years ended December 31, 2009, 2008 and 2007, the amount of cash received from the exercise of stock options was $118,000, $3.0 million and $11.9 million, respectively. The net tax benefit realized from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options was $16,000,
$230,000 and $1.3 million for the years ended December 31, 2009, 2008 and 2007, respectively.


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 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007


Additional information regarding options outstanding as of December 31, 2009 is as follows:





Stock Options Outstanding


Options ExercisableWeighted Avg.Remaining


Weighted Avg.





Weighted Avg.Range of


Number


Contractual


Exercise Price


Number


Exercise PriceExercise Prices


Outstanding


Life (yrs)


Per Share


Exercisable


Per Share$
4.72 to $ 7.00



877,343



7.4


$
6.36



210,269


$
5.71$
7.01 to $ 7.46



893,438



8.6



7.22



65,704



7.23$
7.47 to $ 7.47



1,115,335



4.8



7.47



-



-$
7.48 to $ 8.00



610,581



9.3



7.73



21,594



7.55$
8.01 to $ 9.00



792,939



7.5



8.47



320,927



8.55$
9.01 to $ 10.00



804,644



5.6



9.54



553,338



9.54$
10.01 to $ 11.00



1,039,692



4.7



10.60



882,354



10.63$
11.01 to $ 13.00



790,475



6.1



12.07



494,339



12.04$
13.01 to $ 16.00



444,000



4.9



13.92



317,284



14.01$
16.01 to $ 49.50



336,550



3.8



18.76



304,550



19.02$
4.72 to $ 49.50



7,704,997



6.3


$
9.41



3,170,359


$
11.18





As of December 31, 2009, the aggregate pre-tax intrinsic value (which is the amount by which the closing price of the Company's common stock at December 31, 2009 exceeded the exercise price of the in the money options) of options outstanding and options exercisable was approximately $3.6 million and $605,000, respectively. As of December
31, 2009, the estimated number of options exercisable and expected to vest was 6.4 million shares with a weighted average remaining contractual life of 6 years and estimated aggregate intrinsic value of $2.7 million.





The 2003 Plan also provides for the use of incentive awards other than stock options.  In October 2007, the Company’s Compensation Committee approved a plan to begin granting Restricted Stock Units ("RSU"s) to employees in accordance with the provisions of the 2003 Plan. The Company’s RSUs vest over 5 years. Information
with respect to outstanding restricted stock unit activity is as follows:





Number
of Shares


Weighted
Average
Grant-Date
Fair ValueOutstanding, December 31, 2007


—


$
—Granted


54,999



7.89Vested


—Forfeited


(2,566
)


8.36Outstanding, December 31, 2008


52,433



7.87Granted


46,470



7.01Vested


—Forfeited


(7,480
)


8.54Outstanding, December 31, 2009


91,423


$
7.40





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 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007





Employee Stock Option Exchange Program





On October 30, 2009, Micrel accepted for exchange, options to purchase an aggregate of 2,709,359 shares of the Company’s common stock. All surrendered options were cancelled in exchange for 1,122,501 new options with an exercise price of $7.47 per share (representing the per share closing price of the Company’s common stock
on October 30, 2009, as reported on the Nasdaq Global Select Market).  The exchange ratios used in the option exchange resulted in the aggregate fair value of the replacement options to be approximately equal to the aggregate fair value of the options that were surrendered. Stock options eligible for the exchanged had a per share exercise price of at least $9.80 or higher, which represents the highest per share closing price of the Company’s common stock for the 52-week period preceding the option
exchange.  For stock options which had a per share exercise price equal to or greater than $16.00, instead of replacement stock options, a cash payment of $0.05 per share was made in exchange for surrendered options.  The aggregate amount of these cash payments was $20,000. In addition, the Company’s named executive officers and members of its Board of Directors were not eligible to participate in the option exchange.





Accounting for Share-based Compensation





Share-based compensation costs for stock option grants are based on the fair value calculated from a stock option pricing model on the date of grant. The Company has utilized the Black-Scholes option pricing model to determine the fair value for stock option grants.  The fair value of stock option grants issued from January 1,
2006 onwards are recognized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense recognized is shown in the operating activities section of the consolidated statements of cash flows. Cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized (excess tax benefits) is shown in the financing activities section of the consolidated statements of cash flows.





The fair value of the Company’s stock options granted under the Option Plans was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:


Years Ended December 31,2009


2008


2007Expected life (years)


6.7



6.2



6.0Stock volatility


43.0%



49.3%



51.4%Risk free interest rates


2.9%



2.8%



4.4%Dividends during expected terms


1.8%



1.6%



0.9%





Expected term is based on an analysis of historical exercises and the remaining contractual life of options.





Stock volatility is based upon a combination of both historical stock price volatility and implied volatility derived from traded options on the Company’s stock in the marketplace.





The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.


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 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007





The Company estimates potential forfeitures of stock grants and accordingly adjusts compensation cost recorded. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized
through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.





The following table shows total share-based compensation expense recognized in the Consolidated Statement of Operations for 2009, 2008 and 2007 (in thousands):





Years Ended December 31,2009


2008


2007Cost of revenues

$
670


$
974


$
1,156Research and development


1,619



2,086



2,130Selling, general and administrative


1,675



2,119



2,199Pre-tax share-based compensation expense


3,964



5,179



5,485Less income tax effect


990



1,105



920Net share-based compensation expense

$
2,974


$
4,074


$
4,565





Total share-based compensation cost capitalized as part of inventory as of December 31, 2009 and 2008 was $145,000 and $102,000, respectively. At December 31, 2009, there was $12.4 million of total unrecognized compensation cost related to non-vested stock option and RSU awards which is expected to be recognized over a weighted-average
period of 3.3 years.





Employee Stock Purchase Plan





Under the Company’s Employee Stock Purchase Plan (“ESPP”), eligible employees are permitted to have salary withholdings to purchase shares of Common Stock at a price equal to 95% of the market value of the stock at the end of each three-month offer period, subject to an annual limitation. The aggregate number of shares
of common stock which may be issued under the plan shall be no more than 2,000,000 shares. Shares of Common Stock issued under the ESPP during 2009, 2008 and 2007 were 37,984, 32,007 and 27,482, respectively, at weighted average prices of $7.31, $8.36 and $10.02, respectively. The ESPP is considered non-compensatory per current share-based compensation accounting guidelines.








8.
INCOME TAXES





The income tax provisions for the years ended December 31, 2009, 2008 and 2007, as a percentage of income before taxes, were 34%, 35% and 36%, respectively.  The income tax provision for such periods differs from taxes computed at the federal statutory rate primarily due to the effect of non-deductible share-based compensation
expense, state income taxes, federal and state research and development credits and federal qualified production activity deductions.


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 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007





A reconciliation of the statutory federal income tax rate to the effective tax rate for the years ended December 31 is as follows:


2009


2008


2007Statutory federal income tax rate


35%



35%



35%Research and development credit


(3)



(2)



(2)Qualified production activities credit


(1)



(1)



(1)State income taxes (net of federal income tax benefit)


(1)



1



2Non-deductible stock compensation


2



2



2Other


2



-



-Effective tax rate


34%
%


35%



36%





The provision for income taxes for the years ended December 31 consists of the following (in thousands):


2009


2008


2007Current:Federal

$
7,241


$
12,892


$
21,318State


54



1,332



668Total current


7,295



14,224



21,986Deferred:Federal


1,544



1,902



2,107State


(503
)


(1,101
)


685Total deferred


1,041



801



2,792Total provision

$
8,336


$
15,025


$
24,778





Pre-tax income from non-U.S. jurisdictions was not material in all periods presented.





Deferred tax assets and liabilities result primarily from temporary differences between book and tax bases of assets and liabilities and state research and development credit carryforwards.  The Company had net current deferred tax assets of $18.5 million and net long-term deferred tax assets of $9.4 million as of December 31,
2009.  The Company must regularly assess the likelihood that future taxable income levels will be sufficient to ultimately realize the tax benefits of these deferred tax assets.  The Company currently 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.  Should the Company determine that future realization of these tax benefits is not likely, a valuation allowance would
be established, which would increase the Company's tax provision in the period of such determination.


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 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007


Deferred tax assets and liabilities at December 31 are as follows (in thousands):





2009


2008Deferred tax assets:Accruals and reserves not currently deductible

$
9,075


$
9,348Deferred income


9,074



8,130Tax net operating loss and credit carryforwards


10,530



10,748Non-qualified stock compensation


2,305



4,169Capitalized research and development


315



654Unrealized impairment of auction rate securities


1,043



1,380Total deferred tax assets


32,342



34,429Deferred tax liabilities:Depreciation


(4,408
)


(5,454
)State income taxes


(88
)


(88
)Total deferred tax liability


(4,496
)


(5,542
)Net deferred tax assets (current and non-current)

$
27,846


$
28,887





Included in net deferred tax assets are net operating loss and credit carryforwards. Due to the Company's acquisition of Synergy in 1998, the Company has available pre-ownership change federal net operating loss carryforwards of approximately $3.0 million which will expire in the years 2010 through 2014 if not utilized. Under Section 382
of the Internal Revenue Code, these pre-ownership changes in net operating loss carryforwards are subject to an annual limitation. The Company believes that it is more likely than not that these net operating loss carryforwards will be utilized before expiration. In addition, the Company has available state research and development credit carryforwards of approximately $17.7 million, of which approximately $2.3 million represents pre-ownership change carryforwards subject to the Section 383 annual limitation.
The state research credit carryforwards are not subject to expiration and may be carried forward indefinitely until utilized.





As of December 31, 2009, the gross liability for uncertain tax positions was $9.4 million and the net liability, reduced for the federal effects of potential state tax exposures, was $6.7 million. If these uncertain tax positions are sustained upon tax authority audit, or otherwise become certain, the net $6.7 million would favorably affect
the Company’s tax provision in such future periods.  Included in the $6.7 million is $2.0 million which has not yet reduced income tax payments, and, therefore, has been netted against non-current deferred tax assets.  The remaining $4.7 liability is included in long-term income taxes payable. The Company does not anticipate a significant change to the net liability for uncertain income tax positions within the next 12 months.





A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


Balance at January 1, 2009

$
6,523Additions based on tax positions related to the current year


777Subtractions for tax positions related to prior years


(777
)Additions for accrued interest for tax positions of prior years


200Balance at December 31, 2009

$
6,723





66
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 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007





During 2009, the Company recognized $777,000 of previously unrecognized tax benefits due to expiration of statutes of limitations.





The Company continues to recognize interest and penalties related to income tax matters as part of the income tax provision. As of December 31, 2009 and 2008, the Company had $478,000 and $450,000, respectively, accrued for interest and $0 accrued for penalties for both periods. These accruals are included as a component of long-term income
taxes payable.





The Company is required to file U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Company may be subject to examination by the Internal Revenue Service (“IRS”) for calendar years 2006 and forward. Significant state tax jurisdictions include California, New York and
Texas, and generally, the Company is subject to routine examination for years 2005 and forward in these jurisdictions. In addition, any research and development credit carryforwards that were generated in prior years and utilized in these years may also be subject to examination by respective state taxing authorities. Generally, the Company is subject to routine examination for years 2002 and forward in various immaterial foreign tax jurisdictions in which it operates.








9.
COMMITMENTS AND CONTINGENCIES





Lease Agreements





The Company leases some of its facilities and equipment under operating lease agreements that expire in the years 2010 through 2014. Rent expense is recognized on a straight-line basis over the term of the lease. Future minimum payments under these agreements are as follows (in thousands):





Year Ending December 31,2010

$
9722011


5452012


3162013


2112014


91Total

$
2,135





Rent expense under operating leases for the years ended December 31, 2009, 2008, and 2007 was $1.7 million, $2.2 million and $1.8 million, respectively.





Open Purchase Orders





As of December 31, 2009, the Company had approximately $11.5 million in open purchase orders. Open purchase orders are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable pricing
provisions; and the approximate timing of the transactions. These obligations primarily relate to future purchases of wafer fabrication raw materials, foundry wafers, assembly and testing services and manufacturing equipment. The amounts are based on the Company's contractual commitments.


67
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 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007





Letters of Credit





Micrel's borrowing arrangements include a provision for the issuance of commercial or standby letters of credit by the bank on behalf of the Company. At December 31, 2009 there was $325,000 in letters of credit outstanding. The letters of credit are issued to guarantee payments for the Company's workers compensation program.





Indemnification Obligations





Micrel is a party to a variety of contractual relationships pursuant under which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by Micrel, or regular sales and purchasing activities, under which Micrel may agree to hold the other
party harmless against losses arising from claims related to such matters as title to assets sold, certain intellectual property rights, specified environmental matters, certain income taxes, etc.  In these circumstances, indemnification by Micrel is customarily conditioned on the other party making a claim pursuant to the procedures specified in the particular contract or in Micrel’s standard terms and conditions, which procedures may allow Micrel to challenge the other party's claims, or afford
Micrel the right to settle such claims in its sole discretion.  Further, Micrel's obligations under these agreements may be limited in terms of time and/or amount, and in some instances, Micrel may have recourse against third parties for certain payments made by it under these agreements.





It is not possible to predict the maximum potential amount of future payments or indemnification costs under these or similar agreements due to the conditional nature of Micrel's obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by Micrel under these agreements have not
had a material effect on its business, financial condition, cash flows, or results of operations. Micrel believes that if it were to incur a loss in any of these matters, such loss would not have a material effect on its business, financial condition, cash flows or results of operations.








10.
PROFIT-SHARING 401(k) PLAN





The Company has a profit-sharing and deferred compensation plan (the “Plan”). All employees completing one month of service are eligible to participate in the Plan. Participants may contribute 1% to 15% of their annual compensation on a before tax basis, subject to Internal Revenue Service limitations. Profit-sharing contributions
by the Company are determined at the discretion of the Board of Directors. The Company accrued $218,000 in contributions for the year ended December 31, 2009 and made $587,000 and $750,000 in contributions to the Plan for the years ended December 31, 2008 and 2007, respectively. Participants vest in Company contributions ratably over six years of service.





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 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007





11.
LITIGATION





On April 21, 2003, the Company filed a complaint against its former independent public accountants Deloitte & Touche LLP (“Deloitte”) entitled Micrel, Incorporated v. Deloitte & Touche LLP in the Superior Court of the State of California, County of Santa Clara, alleging various causes of action relating to certain professional
advice received by Micrel from Deloitte.  The complaint sought compensatory damages, costs associated with the suit and such other relief that the court may deem just and proper.  Deloitte denied all allegations in the complaint.  On February 23, 2007, the parties entered into a Settlement Agreement and Mutual Releases. Under the terms of the agreement, the parties agreed to dismiss with prejudice the pending litigation and Deloitte paid to Micrel a settlement amount of $15.5 million.
The Company recorded the $15.5 million settlement amount, in the quarter ended March 31, 2007, as other non-operating income as the settlement payment did not represent, either directly or indirectly, income earned from the Company’s operations, nor did it represent reimbursement of operating expenses incurred.





From time to time, claims have been filed by or have arisen against the Company in its normal course of business.  The Company believes that the ultimate resolution of these claims and lawsuits will not have a material adverse effect on the Company's financial condition, results of operations or cash flows.





As of December 31, 2009, the Company believes it is not reasonably likely that an unrecorded material loss has been incurred.  Generally, litigation is subject to inherent uncertainties, and no assurance can be given that the Company will prevail in any particular lawsuit.  Accordingly, the pending lawsuits, as well
as potential future litigation with other companies, could result in substantial costs and diversion of resources and could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.








12.
SEGMENT REPORTING





Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker. The Company has two reportable segments: standard products and other products, which consist primarily of custom and foundry products and revenues from the
license of patents. The chief operating decision maker evaluates segment performance based on revenue. Accordingly, all expenses are considered corporate level activities and are not allocated to segments. Therefore, it is not practical to show profit or loss by reportable segments. Also, the chief operating decision maker does not assign assets to these segments. Consequently, it is not relevant to show assets by reportable segments.





Net Revenues by Segment (in thousands):

Years Ended December 31,2009


2008


2007Standard Products

$
212,606


$
246,644


$
237,356Other Products


6,281



12,716



20,618Total net revenues

$
218,887


$
259,360


$
257,974





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 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007





For the year ended December 31, 2009, two world-wide distributors and an OEM, accounted for $41.9 million (19%), $28.9 million (13%) and $26.9 million (12%), respectively, of the Company's net revenues. For the year ended December 31, 2008, one customer, a world-wide distributor, accounted for $34.1 million (13%) of the Company's
net revenues. For the year ended December 31, 2007 two world-wide distributors accounted for $38.7 million (15%) and $33.1 million (13%), respectively, of the Company's net revenues.





For the year ended December 31, 2009, the Company recorded revenue from customers throughout the United States; Canada and Mexico (collectively referred to as "Other North American Countries"); the U.K., Italy, Germany, France, Israel, Sweden, Hungary, Austria, Finland, Switzerland, and other European countries (collectively referred
to as "Europe"); Korea; Taiwan; Singapore; China; Japan; Hong Kong, Malaysia and other Asian countries (collectively referred to as "Other Asian Countries").





Geographic Information (in thousands):Years Ended December 31,2009


2008


2007Total Net
Revenues(1)


Long-Lived
Assets(2)


Total Net
Revenues(1)


Long-Lived
Assets(2)


Total Net
Revenues(1)United States of America

$
51,843


$
62,625


$
59,339


$
72,244


$
67,751Other North American Countries


4,894



-



19,990



1



16,663Korea


36,400



43



40,658



84



37,442Taiwan


17,626



696



24,438



506



28,514Singapore


26,083



13



24,980



17



29,356China


15,665



1,409



18,923



318



17,965Hong Kong


21,862



-



18,033



-



16,110Japan


15,177



16



15,654



-



11,554Other Asian Countries


1,448



2,707



2,038



2,807



1,696Europe


27,889



135



35,307



223



30,923Total

$
218,887


$
67,644


$
259,360


$
76,200


$
257,974(1)Total revenues are attributed to countries based on "ship to" location of customer.
(2)Long-lived assets consist of property, plant and equipment.








13.           EQUIPMENT IMPAIRMENT AND RESTRUCTURING





In 2009, the Company recorded a $6.5 million charge for the impairment of certain excess semiconductor manufacturing equipment which was removed from service and was held for sale as of December 31, 2009. The $7.4 million net book value of the equipment held for sale was reduced to its estimated sales value of $910,000.





In 2003 the Company closed its Santa Clara wafer fabrication facility. In February 2006, the Company terminated the facility lease under the terms of the lease agreement due to major vandalism rendering the building unusable.  The facility Lessor disputed the termination of the lease.  In March 2008, the Company entered
into a Settlement and Mutual Release agreement with the Lessor. Under the terms of the agreement, the Company paid $875,000 to the Lessor and released a $70,000 security deposit for full settlement of all obligations under the lease.  The remaining unused restructuring expense accruals were credited to restructuring charges (credits) in the statement of operations during the first quarter of 2008.





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A summary of restructuring expense accruals associated with this facility closure is as follows: ($000)





Contractual Facility Costs


Disposal
Costs


TotalBalance December 31, 2005

$
1,399


$
360


$
1,7592006 Charges


117



152



269Uses


(259
)


(195
)


(454
)Balance December 31, 2006


1,257



317



1,5742007 Charges


128



--



128Other


85



--



85Balance December 31, 2007


1,470



317



1,7872008 Uses


(945
)


—



(945
)Other reductions


(525
)


(317
)


(842
)Balance December 31, 2008

$
—


$
—


$
—








14.           SHAREHOLDER RIGHTS PLAN





In March 2008, the Company has adopted a limited duration Shareholder Rights Plan (the “Rights Plan”). The Rights Plan is designed to ensure that all of the Company’s shareholders receive fair and equal treatment in the event of any unsolicited takeover of the Company and to protect shareholders from partial tender offers,
open market accumulations and other abusive or coercive tactics to gain control of the Company without offering an adequate price to all shareholders. The Rights Plan is not intended to prevent a takeover, but rather to encourage anyone seeking to acquire the Company to negotiate with the Board of Directors prior to attempting a takeover. The Rights Plan is intended to enable all of the Company’s shareholders to realize the long-term value of their investment in the Company.





As a result of the Board’s adoption of the Rights Plan, one preferred stock purchase right was distributed as a dividend on each common share held of record as of the close of business on April 15, 2008 (a “Right”). Each Right, if and when it becomes exercisable, entitles the holder to buy one one-thousandth of a
share of a new series of participating preferred stock for $36.00.





Initially the rights will be represented by the Company’s Common Stock certificates and will not be exercisable. If any person or group becomes the beneficial owner of 15% or more of Micrel’s Common Stock (which includes for this purpose stock referenced in derivative transactions and securities) at any time after the March
24, 2008 date of adoption of the Rights Plan (with certain limited exceptions including the result of an acquisition of Common Shares by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such person or group to 15% or more of the Common Shares of the Company then outstanding) or if any additional such securities are acquired in the case or a person or group that owned 15% or more of such securities as of the date of adoption of
the Rights Plan (an “Acquiring Person”), then each Right not owned by such Acquiring Person will entitle its holder to purchase, at the Right’s then-current exercise price, shares of Common Stock having a market value of twice the Right’s then-current exercise price. In addition, if, after any person has become an Acquiring Person, the Company is involved in a merger or other business combination transaction with another person, each Right will entitle its holder (other than such Acquiring
Person) to purchase, at the Right’s then-current exercise price, common shares of the acquiring company having a value of twice the Right’s then-current exercise price.


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 MICREL, INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years Ended December 31, 2009, 2008 and 2007





The Company may redeem the Rights at a price of $.01 per Right at any time prior to the date on which any person has become an Acquiring Person. The Rights Plan expiration date has been amended to expire on March 24, 2010, unless earlier redeemed or terminated by Micrel, as provided in the Rights Plan.








15.           PROXY CONTEST EXPENSE





During the first quarter of 2008, the Company became engaged in a proxy contest with a small activist hedge fund, Obrem Capital Management LLC (“OCM”).  This issue resulted in Micrel incurring incremental expenses on this matter of $4.2 million in 2008. During the fourth quarter of 2009, the Company negotiated a reduction
in outside service fees related to the proxy contest and recorded a $550,000 credit. These expenses consist primarily of outside consulting and legal fees.  Subsequent to a special meeting of shareholders on May 20, 2008, at which the Company’s shareholders rejected all proposals set forth by OCM, OCM agreed to withdraw its slate of nominees for the board of directors, and support Micrel’s board nominees at the upcoming annual meeting of shareholders. Micrel’s slate of directors was
subsequently elected by shareholders at the Company’s annual meeting on October 1, 2008.








16.           DIVIDENDS





During the years ended December 31, 2009, 2008 and 2007 the Company paid cash dividends of $8.9 million, $9.5 million and $6.9 million, respectively, representing $0.14, $0.14 and $0.09 per outstanding share, respectively.








17.           SUBSEQUENT EVENTS





On January 28, 2010, the Company's Board of Directors declared a $0.035 per common share cash dividend, payable February 24, 2010 to shareholders of record on February 10, 2010.





On February 5, 2010, Micrel’s Board of Directors authorized the Company to repurchase up to $15.0 million of its common stock through December 31, 2010.





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SUPPLEMENTAL QUARTERLY FINANCIAL SUMMARY — UNAUDITED





(in thousands, except per share amounts)

Three Months Ended 2009Mar. 31,


June 30,


Sept. 30,


Dec. 31,Net revenues

$
46,986


$
51,798


$
58,872


$
61,231Gross profit

$
23,617


$
26,566


$
30,936


$
32,634Net income(1)

$
1,546


$
3,867


$
6,801


$
4,080Net income per share:Basic

$
0.02


$
0.06


$
0.11


$
0.07Diluted

$
0.02


$
0.06


$
0.11


$
0.07Weighted-average shares used in computing
per share amounts:Basic


66,175



63,525



62,322



62,338Diluted


66,223



63,573



62,545



62,409Cash dividends per common share

$
0.035


$
0.035


$
0.035


$
0.035





(in thousands, except per share amounts)

Three Months Ended 2008Mar. 31,


June 30,


Sept. 30,


Dec. 31,Net revenues

$
66,052


$
70,593


$
67,549


$
55,166Gross profit

$
37,182


$
39,784


$
37,355


$
28,688Net income (2)

$
8,318


$
7,388


$
7,657


$
4,894Net income per share:Basic

$
0.12


$
0.10


$
0.11


$
0.07Diluted

$
0.12


$
0.10


$
0.11


$
0.07Weighted-average shares used in computing
per share amounts:Basic


72,266



71,118



70,299



68,325Diluted


72,310



71,413



70,427



68,374Cash dividends per common share

$
0.03


$
0.035


$
0.035


$
0.035


__________


(1) During the fourth quarter of 2009, the Company recorded a $6.5 million charge for the impairment of certain excess semiconductor manufacturing equipment which was removed from service and was held for sale as of December 31, 2009. The $7.4 million net book value of the equipment held for sale was reduced to its estimated sales value
of $910,000.





(2) During the first quarter of 2008, the Company became engaged in a proxy contest with a small activist hedge fund, Obrem Capital Management LLC (“OCM”).  This issue resulted in Micrel incurring incremental expenses on this matter of $331,000 during the first quarter of 2008, $2.4 million in the second quarter of
2008, $349,000 in the third quarter of 2008 and $1.1 million in the fourth quarter of 2008. During the fourth quarter of 2009, the Company negotiated a reduction in outside service fees related to the proxy contest and recorded a $550,000 credit.





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SCHEDULE II





MICREL, INCORPORATED


VALUATION AND QUALIFYING ACCOUNTS


For the Years Ended December 31, 2009, 2008, and 2007


(In thousands)








Description

Balance at Beginning
of Year


Allowance Additions or
(Reductions)


Returns and Price
Adjustments


Bad Debt
Write-offs


Balance at
End of YearYear Ended December 31, 2009Allowances for OEM and Stocking
Representative returns and price adjustments

$
1,284


$
2,718


$
(2,730
)

$
--


$
1,272Allowances for unclaimed distributor
price adjustments(1)


1,498



52,282



(52,079
)


-->



1,701Allowances for doubtful accounts


155



(110
)


--



--



45Total allowances

$
2,937


$
54,890


$
(54,809
)

$
--


$
3,018Year Ended December 31, 2008Allowances for OEM and Stocking
Representative returns and price adjustments

$
1,589


$
2,464


$
(2,769
)

$
--


$
1,284Allowances for unclaimed distributor
price adjustments(1)


2,468



50,564



(51,534
)


-->



1,498Allowances for doubtful accounts


155



--



--



--



155Total allowances

$
4,212


$
53,028


$
(54,303
)

$
--


$
2,937Year Ended December 31, 2007Allowances for OEM and Stocking
Representative returns and price adjustments

$
2,490


$
2,215


$
(3,116
)

$
--


$
1,589Allowances for unclaimed distributor
price adjustments(1)


1,950



40,609



(40,091
)


-->



2,468Allowances for doubtful accounts


156



(1
)


--



--



155Total allowances

$
4,596


$
42,823


$
(43,207
)

$
--


$
4,212


___________


(1) The Company estimates and records an allowance for distributor price adjustments for which the specific resale transaction has been completed, but the price adjustment claim has not yet been received from the distributor and recorded by the Company. This allowance typically represents approximately one to three weeks of unclaimed
price adjustments.











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SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in San Jose, California on the 5th day of March, 2010.





MICREL, INCORPORATED





By   /S/ Raymond D. Zinn


Raymond D. Zinn


President and Chief Executive Officer





POWER OF ATTORNEY





KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Raymond D. Zinn and Clyde R. Wallin, and each of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.





Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.





Signature

Title

Date/S/Raymond D. Zinn
Raymond D. Zinn

President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)

February 26, 2010/S/ Clyde R. Wallin
Clyde R. Wallin

Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

February 26, 2010/S/ Daniel A. Artusi
Daniel A. Artusi

Director

February 26, 2010/S/ Michael J. Callahan
Michael J. Callahan

Director

February 26, 2010/S/ Daniel Heneghan
Daniel Heneghan

Director

February 26, 2010/S/ Neil J. Miotto
Neil J. Miotto

Director

February 26, 2010/S/ Frank W. Schneider
Frank W. Schneider

Director

February 26, 2010





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 Table of Contents





Micrel, Incorporated


Exhibits Pursuant to Item 601 of Regulation S-K





Exhibit
Number
Description3.1
Amended and Restated Articles of Incorporation of the Registrant. (1)3.2
Certificate of Amendment of Articles of Incorporation of the Registrant. (2)3.3
Amended and Restated Bylaws of the Registrant. (9)3.4
Certificate of Amendment of Articles of Incorporation of the Registrant. (7)3.5
Certificate of Determination of Series A Participating Preferred Stock of Micrel, Incorporated, classifying and designating the Series A Participating Preferred Stock, as filed March 28, 2008 with the Secretary of State of the State of California. (13)3.6
Certificate of Amendment to the Bylaws of the Company, dated April 22, 2008.  (22)3.7
Certificate of Amendment to the Bylaws of the Company, dated October 1, 2008.4.1
Certificate for Shares of Registrant’s Common Stock. (3)4.2
Rights Agreement, dated as of March 24, 2008, between Micrel, Incorporated and Mellon Investor Services LLC, as Rights Agent, which includes the form of Certificate of Determination of the Series A Participating Preferred Stock of Micrel, Incorporated as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights
to Purchase Preferred Shares as Exhibit C. (14)4.3
First Amendment to Rights Agreement, dated as of March 23, 2009, between Micrel, Incorporated and Mellon Investor Services LLC, as Rights Agent, which includes the amended form of Right Certificate as Exhibit B (amending the Original Agreement, which was filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the
SEC on March 28, 2008). (21)10.1
Indemnification Agreement between the Registrant and each of its officers and directors. (3)10.3
1994 Stock Option Plan and form of Stock Option Agreement. (1)*10.4
1994 Stock Purchase Plan. (3)10.5
2003 Incentive Award Plan. (8)*10.8
Form of Domestic Distribution Agreement. (2)10.9
Form of International Distributor Agreement. (2)10.10
Amended and Restated 1994 Employee Stock Purchase Plan, as amended January 1, 1996. (4)10.11
Commercial Lease between Harris Corporation and Synergy Semiconductor Corporation dated February 29, 1996. (5)10.12
Standard Industrial/Commercial Single-Tenant Lease Agreement Dated March 3, 2000 between the Registrant and Rose Ventures II (6)10.13
Micrel/IBM Patent License Agreement, dated September 26, 2006 (10)10.14
Credit Line Agreement dated as of April 24, 2007 among Bank of the West and Micrel, Incorporated. (11)10.15
Offer Letter, by and between Micrel Incorporated and Clyde R. Wallin, dated December 13, 2008. (16)10.16
Stock Purchase Agreement, dated as of February 11, 2009, by and among the sellers listed on Schedule I attached thereto, and Micrel, Incorporated and each of the purchasers listed on Schedule II attached thereto. (17)10.17
Credit Agreement, dated as of May 7, 2009, by and between Bank of the West and Micrel, Incorporated. (18)


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 Table of Contents





10.18
Stock Purchase Agreement, dated as of May 7, 2009, by and among the sellers listed on Schedule I attached thereto, and Micrel, Incorporated and each of the purchasers listed on Schedule II attached thereto. (19)10.19
Standstill Agreement, dated as of March 19, 2009, between Micrel, Incorporated, Obrem Capital Offshore Master, LP and Obrem Capital (QP), LP. (20)14.1
Micrel, Incorporated Code of Ethics for Senior Officers. (12)21.1
Subsidiaries of the Registrant.23.1
Consent of Independent Registered Public Accounting Firm.24.1
Power of Attorney. (See Signature Page).31
Certification of the Company's Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
Certification of the Company's Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





*
Management contract or compensatory plan or agreement.





(1)
Incorporated herein by reference to the Company’s Registration Statement on Form S-1 (“Registration Statement”), File No. 33-85694, in which this exhibit bears the same number, unless otherwise indicated.





(2)
Incorporated by reference to Amendment No. 1 to the Registration Statement, in which this exhibit bears the same number, unless otherwise indicated.





(3)
Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995, in which this exhibit bears the same number, unless otherwise indicated.





(4)
Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996, in which this exhibit bears the number 10.14.





(5)
Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998, in which this exhibit bears the number 10.14.





(6)
Incorporated by reference to exhibit 10.1 filed with the Company’s quarterly report on Form 10-Q for the period ended March 31, 2000.





(7)
Incorporated by reference to exhibit 3.1 filed with the Company’s quarterly report on Form 10-Q for the period ended September 30, 2000.





(8)
Incorporated by reference to exhibit 1 filed with the Company’s Proxy Statement on Schedule 14A dated May 9, 2003.





(9)
Incorporated by reference to exhibit 3.3 filed with the Company’s quarterly report on Form 10-Q for the period ended September 30, 2006.





(10)
Incorporated by reference to exhibit 10.17 filed with the Company’s quarterly report on Form 10-Q for the period ended September 30, 2006.





(11)
Incorporated by reference to exhibit 10.1 filed with the Company’s report on Form 8-K dated April 24, 2007.


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 Table of Contents








(12)
Incorporated by reference to exhibit 14.1 filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.





(13)
Incorporated by reference to exhibit 3.5 filed with the Company’s report on Form 8-K dated March 24, 2008.





(14)
Incorporated by reference to exhibit 4.2 filed with the Company’s report on Form 8-K dated March 24, 2008.





(15)
Incorporated by reference to exhibit 3.1 filed with the Company’s report on Form 8-K dated April 22, 2008.





(16)
Incorporated by reference to exhibit 10.1 filed with the Company’s report on Form 8-K dated December 18, 2008.





(17)
Incorporated by reference to exhibit 10.1 filed with the Company’s report on Form 8-K dated February 11, 2009.


(18)
Incorporated by reference to exhibit 10.1 to the Current Report on Form 8-K dated May 7, 2009.





(19)
Incorporated by reference to exhibit 10.2 to the Current Report on Form 8-K dated May 7, 2009.





(20)
Incorporated by reference to exhibit 10.1 to the Current Report on Form 8-K dated March 24, 2009.





(21)
Incorporated by reference to exhibit 4.1 to the Current Report on Form 8-K dated March 24, 2009.





(22)
Incorporated by reference to exhibit 3.1 to the Current Report on Form 8-K dated April 7, 2008.







78