UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C.  20549








FORM 10-Q





(Mark One)


x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2009.





or





 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from  to .





Commission File Number  1-34020





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





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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes  ̈   No  ̈





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
filerx


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 October 30, 2009 there were 62,328,263 shares of common stock, no par value, outstanding.





Table of Contents





MICREL, INCORPORATED
INDEX TO
REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009PagePART I.  FINANCIAL INFORMATIONItem 1.
Financial Statements (Unaudited):Condensed Consolidated Balance Sheets - at September 30, 2009 and at December 31, 2008


3Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2009 and 2008


4Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2009 and 2008


5Notes to Condensed Consolidated Financial Statements


6Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations


18Item 3.
Quantitative and Qualitative Disclosures about Market Risk


28Item 4.
Controls and Procedures


28PART II.  OTHER INFORMATIONItem 1.
Legal Proceedings


29Item 1A.
Risk Factors


29Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds


36Item 6.
Exhibits


36Signature


37











2
 Table of Contents





ITEM 1. FINANCIAL STATEMENTSMICREL, INCORPORATEDCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)(In thousands, except share amounts)September 30,


December 31,2009


2008ASSETSCURRENT ASSETS:Cash and cash equivalents

$
56,737


$
48,343Short-term investments


8,989



25,852Accounts receivable, less allowances: 2009, $4,111; 2008, $2,937


29,829



20,643Inventories


34,622



37,440Income taxes receivable


569



6,783Prepaid expenses and other


1,479



1,781Deferred income taxes


19,182



17,752Total current assets


151,407



158,594LONG-TERM INVESTMENTS


12,572



12,628PROPERTY, PLANT AND EQUIPMENT, NET


69,514



76,200DEFERRED INCOME TAXES


9,754



11,135INTANGIBLE ASSETS, NET


573



1,338OTHER ASSETS


457



448TOTAL

$
244,277


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

$
13,473


$
15,365Deferred income on shipments to distributors


22,889



21,136Current portion of long-term debt


8,571



--Other current liabilities


6,533



10,696Total current liabilities


51,466



47,197LONG-TERM DEBT, NET


5,000



--LONG-TERM INCOME TAXES PAYABLE


4,949



4,468ACCRUED RENT


203



272Total liabilities


61,618



51,937COMMITMENTS AND CONTINGENCIES (Notes 10 and 15)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 – 62,338,263 shares; 2008 – 67,308,899 shares


690



--Accumulated other comprehensive loss


(2,033
)


(2,244
)Retained earnings


184,002



210,650Total shareholders’ equity


182,659



208,406TOTAL

$
244,277


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


3
 Table of Contents





MICREL, INCORPORATEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)(In thousands, except per share amounts)Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008NET REVENUES

$
58,872


$
67,549


$
157,656


$
204,194COST OF REVENUES (1)


27,936



30,194



76,537



89,873GROSS PROFIT


30,936



37,355



81,119



114,321OPERATING EXPENSES:Research and development (1)


11,405



13,832



35,378



42,716Selling, general and administrative (1)


9,507



11,307



27,278



34,789Restructuring expense (credit)


--



--



--



(842
)Proxy contest expense


--



349



--



3,070Total operating expenses


20,912



25,488



62,656



79,733INCOME FROM OPERATIONS


10,024



11,867



18,463



34,588OTHER INCOME (EXPENSE):Interest income


164



652



677



2,382Interest expense


(116
)


(1
)


(176
)


(2
)Other income, net


5



10



85



57Total other income, net


53



661



586



2,437INCOME BEFORE INCOME TAXES


10,077



12,528



19,049



37,025PROVISION FOR INCOME TAXES


3,276



4,871



6,835



13,662NET INCOME

$
6,801


$
7,657


$
12,214


$
23,363NET INCOME PER SHARE:Basic

$
0.11


$
0.11


$
0.19


$
0.33Diluted

$
0.11


$
0.11


$
0.19


$
0.33WEIGHTED AVERAGE SHARES USED INCOMPUTING PER SHARE AMOUNTS:Basic


62,322



70,299



63,993



71,243Diluted


62,545



70,427



64,063



71,365(1) Share-based compensation expense included in:Cost of revenues

$
184


$
243


$
470


$
759Research and development


425



544



1,133



1,716Selling, general and administrative


427



544



1,116



1,785The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


4
 Table of Contents





MICREL, INCORPORATEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(In thousands)

Nine Months EndedSeptember 30,2009


2008NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:Net income

$
12,214


$
23,363Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation and amortization


12,102



14,541Share-based compensation expense


2,719



4,260Tax benefit on the exercise of employee stock options


16



230Gain on disposal of assets


(101
)


(113
)Accrued rent


(69
)


(45
)Deferred income taxes provision


(2,257
)


(394
)Changes in operating assets and liabilities:Accounts receivable


(9,186
)


(4,657
)Inventories


2,837



(782
)Income taxes receivable


6,214



2,876Prepaid expenses and other assets


292



2,215Accounts payable


(1,892
)


(2,316
)Income taxes payable


475



814Other current liabilities


(4,163
)


(3,464
)Deferred income on shipments to distributors


1,753



3,429Net cash provided by operating activities


20,954



39,957CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment, net


(4,550
)


(9,052
)Purchases of investments


(29,210
)


(8,951
)Proceeds from the sale of investments


46,472



14,323Net cash provided (used) in investing activities


12,712



(3,680
)CASH FLOWS FROM FINANCING ACTIVITIES:Long-term debt borrowings


15,000



--Repayments of long-term debt


(1,429
)


--Proceeds from the issuance of common stock


313



3,186Repurchases of common stock


(32,448
)


(35,997
)Payment of cash dividends


(6,708
)


(7,133
)Net cash used in financing activities


(25,272
)


(39,944
)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


8,394



(3,667
)CASH AND CASH EQUIVALENTS - Beginning of period


48,343



80,977CASH AND CASH EQUIVALENTS - End of period

$
56,737


$
77,310SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for:Interest

$
175


$
13Income taxes

$
2,365


$
9,940The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.





5
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





1.
SIGNIFICANT  ACCOUNTING  POLICIES





Interim Financial Information -The accompanying condensed consolidated financial statements of Micrel, Incorporated and its wholly-owned subsidiaries (“Micrel” or the “Company”)
as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 are unaudited.  In the opinion of management, the condensed consolidated financial statements include all adjustments (consisting only of normal recurring accruals) that management considers necessary for a fair statement of its financial position, operating results and cash flows for the interim periods presented.  Operating results and cash flows for interim periods are not necessarily
indicative of results for the entire year. The Condensed Consolidated Balance Sheet as of December 31, 2008, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted ("GAAP") in the United States of America. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2008.  These financial statements should also be read in conjunction with the Company's critical accounting policies included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.





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





Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008Weighted average common shares outstanding


62,322



70,299



63,993



71,243Dilutive effect of stock options outstanding using the treasury stock method


223



128



70



122Shares used in computing diluted net income per share


62,545



70,427



64,063



71,365





For the three and nine months ended September 30, 2009, 7.2 million stock options and 7.5 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 were anti-dilutive. For the three and nine months ended September 30,
2008, 10.1 million stock options and 10.4 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 were anti-dilutive.








2.
REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS





During the fourth quarter of 2008, the Company identified errors primarily related to its calculation of deferred income on shipments to distributors ("deferred income"). Upon review of its calculations, management determined that the estimated shipping margin percentage used to calculate the deferred income balance was incorrect and
this resulted in an understatement of deferred income and related cost of sales. In addition, the Company identified errors in the timing of proxy contest expense recognition during the second and third quarters of 2008. The Company assessed the materiality of these errors on prior periods’ financial statements and concluded that the errors were not material to any prior annual or interim periods but would be material to the year ended December 31, 2008 if the entire corrections were recorded in that year.
The Company revised its financial statements for 2006, 2007 and the first three quarters of 2008 to correct for the immaterial errors. In addition, an adjustment was also recorded to reduce the beginning retained earnings at January 1, 2006 for the cumulative impact of these errors on prior periods.


6
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Set out below are the line items within the consolidated financial statements as of and for the three and nine months ended September 30, 2008 that have been impacted by the revisions.  The revision had no impact on the Company’s total cash flows from operating, investing or financing activities.




As of and for the
Three Months Ended
September 30, 2008


For the
Nine Months Ended
September 30, 2008(in thousands except per share amounts)

As
Reported


As
Revised


As
Reported


As
RevisedConsolidated Statement of Operations:Cost of revenues

$
29,678


$
30,194


$
89,218


$
89,873Gross Profit


37,871



37,355



114,976



114,321Income from operations


12,716



11,867



35,310



34,588Income before income taxes


13,377



12,528



37,747



37,025Provision for income taxes


4,900



4,871



13,641



13,662Net income


8,477



7,657



24,106



23,363Net income per share:Basic

$
0.12


$
0.11


$
0.34


$
0.33Diluted

$
0.12


$
0.11


$
0.34


$
0.33Consolidated Balance Sheets:Income taxes receivable

$
824


$
66Deferred income taxes


19,561



20,829Total current assets


174,831



175,341Total assets


279,319



279,829Deferred income on shipments to distributors


23,012



26,306Total current liabilities


49,351



52,712Retained earnings


227,894



225,043Total shareholders’ equity


226,066



223,215Total liabilities and shareholders’ equity


279,319



279,829








3.
RECENTLY ISSUED ACCOUNTING STANDARDS





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.  This guidance is effective for interim or annual reporting periods ending after June 15, 2009. In preparing these financial statements, Micrel evaluated the events and transactions that occurred from October 1, 2009 through November 9, 2009, the date these financial statements
were issued.





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 ending 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


7
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





In March 2009, the FASB unanimously voted for the FASB Accounting Standards Codification (“ASC”) to be effective July 1, 2009. Other than resolving certain minor inconsistencies in current GAAP, the ASC is not supposed to change GAAP, but is intended to make it easier to find and research GAAP applicable to particular transactions
or specific accounting issues. The ASC takes accounting pronouncements and organizes them by approximately ninety accounting topics. The ASC has become the single source of authoritative GAAP. All guidance included in the ASC is to be considered authoritative, even guidance that comes from what was previously deemed to be a non-authoritative section of a standard. Upon effectiveness of the ASC, all non-grandfathered, non-SEC accounting literature not included in the ASC will become non-authoritative. The adoption
of ASC did not have a material impact on the Company’s Consolidated Financial Statements.





In September 2009, the FASB issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the
selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The accounting guidance will be applied prospectively and will become effective during the first quarter of 2011. Early adoption is allowed. The adoption of this accounting guidance will not have an impact on the Company’s consolidated financial statements.








4.
SHARE-BASED COMPENSATION





Share-based compensation is measured at the grant date, based on the fair value of the award and is recognized over the employee's requisite service period. For further details regarding the Company's share-based compensation arrangements, refer to Note 7 of Notes to Consolidated Financial Statements included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2008. The following table summarizes total share-based compensation expense included in the Condensed Consolidated Statement of Operations:





Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008Cost of revenues

$
184


$
243


$
470


$
759Research and development


425



544



1,133



1,716Selling, general and administrative


427



544



1,116



1,785Pre-tax share-based compensation expense


1,036



1,331



2,719



4,260Less income tax effect


(272
)


(299
)


(723
)


(910
)Net share-based compensation expense

$
764


$
1,032


$
1,996


$
3,350





During the three months ended September 30, 2009 and 2008, the Company granted 314,586 and 120,233 stock options, respectively, at weighted average fair values, using the Black-Scholes valuation model, of $3.01 and $4.26 per share, respectively. For the nine months ended September 30, 2009 and 2008, the Company granted 1,431,367 and
1,240,398 stock options, respectively, at weighted average fair values of $2.97 and $3.49 per share, respectively.





Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008Expected term (years)


6.6



6.4



6.7



6.2Stock volatility


38.6
%


47.5
%


44.4
%


48.3
%Risk free interest rates


2.8
%


3.3
%


2.7
%


3.2
%Dividends during expected terms


1.7
%


1.5
%


1.9
%


1.5
%





As of September 30, 2009, there was $13.0 million of total unrecognized share-based compensation related to non-vested stock option awards which is expected to be recognized over a weighted-average period of 3.4 years. Total share-based compensation capitalized as part of inventory as of September 30, 2009 and December 31,
2008 was $122,000 and $102,000, respectively.


8
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





5.
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). Short-term investments as of September 30, 2009 consist primarily of liquid corporate debt instruments and certificates of deposit and are classified as available-for-sale securities. Long-term investments as of September 30, 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.





A summary of the Company’s short-term investments at September 30, 2009 and December 31, 2008 is as follows (in thousands):





As of September 30, 2009


As of December 31, 2008Unrealized








UnrealizedCost


Gross
Gains


Gross
Losses


Fair
Value


Cost


Gross
Gains


Gross
Losses


Fair
ValueCorporate Securities

$
5,996


$
—


$
21


$
5,975


$
17,888


$
2


$
63


$
17,827Certificates of Deposits


3,014



—



—



3,014



8,025



—



—



8,025Total

$
9,010


$
—


$
21


$
8,989


$
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.


9
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 were as follows (in thousands):





Fair Value Measurements as of September 30, 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

$
50,174


$
4,470


$
−


$
54,644Short-term available-for-sale securities


8,989



−



−



8,989Auction rate notes


−



−



12,572



12,572Total

$
59,163


$
4,470


$
12,572


$
76,205





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 September 30, 2009, the Company had approximately $12.6 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 well
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 third quarter 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 September 30, 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 24 to 37 years. As a result, the Company has classified all auction rate notes as long-term investments as of September 30, 2009. 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 September 30, 2009, the maximum interest rate is generally one month LIBOR plus 1.5% based on the notes’
AAA rating as of that date.





The Company has used a discounted cash flow model to determine the estimated fair value of its investment in auction rate notes as of September 30, 2009. 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 September 30, 2009, the Company determined there was a decline in the fair value of its auction rate notes of approximately $3.2 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.


10
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


For the nine months ended September 30, 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


294Settlements


(350
)Ending balance, September 30, 2009

$
12,572








6.
INVENTORIES





Inventories consist of the following (in thousands):


September 30,


December 31,2009


2008Finished goods

$
12,207


$
12,669Work in process


20,877



22,213Raw materials


1,538



2,558$
34,622


$
37,440






7.
PROPERTY, PLANT AND EQUIPMENT





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


September 30,


December 31,2009


2008Manufacturing equipment

$
180,948


$
181,514Land


6,636



6,636Buildings and improvements


47,868



47,513Leasehold Improvements


749



746Office furniture and research equipment


13,962



13,560250,163



249,969Accumulated depreciation


(180,649
)


(173,769
)$
69,514


$
76,200





Depreciation expense for the three and nine months ended September 30, 2009 was $3.6 million and $11.3 million, respectively.








8.
INTANGIBLE ASSETS





Components of intangible assets were as follows (in thousands):





As of September 30, 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 trade name


10,318



9,745



573



10,318



9,078



1,240Customer relationships


1,455



1,455



--



1,455



1,455



--$
20,491


$
19,918


$
573


$
20,491


$
19,153


$
1,338





11
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





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. Total intangible amortization expense for the three and nine month periods ended September 30, 2009 was $85,000 and $765,000, respectively.





The estimated future amortization expense of intangible assets as of September 30, 2009 was as follows (in thousands):





Year Ending December 31,2009 (three months)

$
642010


2552011


254Thereafter


-$
573








9.
OTHER CURRENT LIABILITIES





Other current liabilities consist of the following (in thousands):


September 30,


December 31,2009


2008Accrued workers compensation and health insurance

$
666


$
880Accrued compensation


3,650



7,082Accrued commissions


1,936



2,366All other current accrued liabilities


281



368Total other current liabilities

$
6,533


$
10,696








10.
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 September 30, 2009, the Company was in compliance with all credit facility covenants. At September 30, 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, commencing on August 31, 2009.  Interest under the term loan facility is payable at a rate equal to floating one-month LIBOR plus 2.25%. 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%.


12
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 MICREL, INCORPORATED
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





As of September 30, 2009, the Company had borrowed $15 million under the credit facility agreement. The Company has repaid $1.4million of this borrowing as of September 30, 2009. The following table summarizes the Company’s long-term debt (in thousands):





September 30,2009Notes payable bearing variable interest at 1 month LIBOR plus 2.25%

$
13,571Current portion


(8,571
)Long-term debt

$
5,000





As of September 30, 2009, the estimated fair value of the Company’s notes payable was not materially different than its respective carrying value.








11.
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 $6.8 million of the Company’s notes payable (see Note 10). The Company will experience variability in future interest payments for the remaining $6.8 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.





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 September 30, 2009, the notional amount of the outstanding interest rate swap contract was $6.8 million.  The
effect of derivative instruments on the Statement of Operations for the three and nine months ended September 30, 2009 was not material. The fair values of our derivative assets and liabilities as of September 30, 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.








12.
SIGNIFICANT CUSTOMERS





During the nine months ended September 30, 2009, three customers accounted for more than 10% of net revenues. An original equipment manufacturer accounted for $20.1 million (13%) and two worldwide distributors accounted for $29.9 million (19%) and $21.7 million (14%) of net revenues, respectively. During the nine months ended September
30, 2008, no original equipment manufacturer accounted for more than 10% of net revenues and two worldwide distributors accounted for $30.3 million (15%) and $29.4 million (14%) of net revenues, respectively.





As of September 30, 2009, two worldwide distributors and an original equipment manufacturer accounted for 24%, 19% and 10%, 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.


13
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





13.
COMPREHENSIVE INCOME





Comprehensive income for the three and nine month periods ended September 30, 2009 and 2008 were as follows:





Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008Net Income

$
6,801


$
7,657


$
12,214


$
23,363Unrealized gains (losses) on investments, net of tax


489



(351
)


211



(1,796
)Comprehensive income

$
7,290


$
7,306


$
12,425


$
21,567








14.
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

Three Months Ended


Nine Months Ended(dollars in thousands)

September 30,


September 30,2009


2008


2009


2008Net Revenues:Standard Products

$
57,249


$
64,575


$
152,968


$
192,886Other Products


1,623



2,974



4,688



11,308Total net revenues

$
58,872


$
67,549


$
157,656


$
204,194As a Percentage of Total Net Revenues:Standard Products


97
%


96
%


97
%


94
%Other Products


3
%


4
%


3
%


6
%Total net revenues


100
%


100
%


100
%


100
%








15.
LITIGATION AND OTHER CONTINGENCIES





On June 9, 2006, Deerfield 3250 Scott, LLC ("Deerfield"), the building owner of Micrel's Santa Clara Wafer Fab facility which was closed in 2003, filed a complaint against the Company entitled "Deerfield 3250 Scott, LLC vs. Micrel, Inc. et al" in the Superior Court of the State of California, County of Santa Clara.  In February
2006, Micrel terminated this building lease under the terms of the lease agreement due to major vandalism rendering the building unusable.  Deerfield disputes that Micrel had a right to terminate, alleging that the vandalism took place because of the negligence of Micrel and that Micrel should not be able to benefit from its own negligence.  The complaint sought damages in an unspecified amount for rent through the remaining term of the lease (from March 1 through October 31, 2006), alleged
damages to the premises, and for wrongful removal of equipment.  On March 5, 2008, the Company and Deerfield entered into a Settlement Agreement, agreeing to dismiss with prejudice all claims and counterclaims in the litigation.  Under the terms of the Agreement, the Company paid Deerfield $875,000 in the first quarter of 2008 (see Note 19). Additional 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.


14
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 MICREL, INCORPORATED
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





Generally, litigation is subject to inherent uncertainties, and no assurance can be given that the Company will prevail in any particular lawsuit.  Accordingly, any 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.








16.
SHARE REPURCHASE PROGRAM





On December 30, 2008, the Company's Board of Directors approved a $50 million share repurchase program for calendar year 2009. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors. 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.





During the nine months ended September 30, 2009, the Company repurchased 5,020,920 shares of its common stock for an aggregate price of $32.4 million. Included in the 5,020,920 shares repurchased were 4,675,000 shares purchased from Obrem Capital Offshore Master, LP and Obrem Capital (QP), LP, at an average price per share of $6.42 and
an aggregate price of $30 million.








17.
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”).  The proxy contest resulted in Micrel incurring incremental expenses of $331,000 in the first quarter, $2.4 million in the second quarter, $349,000 in the third and
$1.1 million in the fourth quarter of 2008. These expenses consist primarily of outside consulting and legal fees.  Following 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 Company’s Board of Directors, and support Micrel’s Board of Directors 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.








18.
INCOME TAXES





The income tax provision for the three and nine months ended September 30, 2009, as a percentage of income before taxes, was 32.5% and 35.9%, respectively, as compared to 38.8% and 36.9%, respectively, for the comparable periods in the prior year. These decreases resulted primarily from the inclusion of federal research and development
credit in the three and nine months ended September 30, 2009. The federal research and development credit was excluded from the three months ended September 30, 2008 as the credit had previously expired and was not renewed until the fourth quarter of 2008.





As of September 30, 2009, the gross liability for uncertain tax positions was $9.5 million, as compared to $9.0 million as of December 31, 2008. The net liability as of September 30, 2009, reduced for the federal effects of potential state tax exposures, was $7.0 million as compared to $6.5 million as of December 31, 2008. If
these uncertain tax positions are sustained upon tax authority audit, or otherwise become certain, the net $7.0 million would favorably affect the Company’s tax provision in such future periods.  Included in the $7.0 million is $2.1 million which has not yet reduced income tax payments, and, therefore, has been netted against non-current deferred tax assets.  The remaining $4.9 million 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.


15
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





The Company continues to recognize interest and penalties related to income tax matters as part of the income tax provision. As of September 30, 2009 and December 31, 2008, the Company had $542,000 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 2004 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.





Deferred tax assets and liabilities result primarily from temporary differences between book and tax bases of assets and liabilities, state and federal research and development credit carryforwards and state manufacturers credit carryforwards.  The Company had net current deferred tax assets of $19.2 million and net long-term
deferred tax assets of $9.8 million as of September 30, 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.








19.
RESTRUCTURING EXPENSE (CREDIT)





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 (see Note 15).  The remaining unused restructuring expense accruals were credited to restructuring charges (credits) in the statement of operations during the first quarter of 2008. A summary of restructuring expense accruals associated with this facility
closure is as follows: ($000)





Contractual Facility Costs


Disposal
Costs


TotalBalance 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

$
—


$
—


$
—








20.
DIVIDENDS





On July 23, 2009, the Company’s Board of Directors declared a cash dividend of $0.035 per outstanding share of common stock. The payment of $2.2 million was made on August 26, 2009 to shareholders of record as of August 12, 2009.





16
 Table of Contents
 MICREL, INCORPORATED
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)








21.
SUBSEQUENT EVENTS





On October 22, 2009, the Company's Board of Directors declared a cash dividend of $0.035 per outstanding share of common stock payable on November 25, 2009 to shareholders of record at the close of business on November 11, 2009. This dividend will be recorded in the fourth quarter of 2009 and is expected to be approximately $2.2 million.





On October 14, 2009, the Company paid $6 million for the purchase of its corporate headquarters facility. The Company had previously leased the facility under a ten-year commercial lease that was set to expire in March 2011.





In preparing these financial statements, Micrel evaluated the events and transactions that occurred from October 1, 2009 through November 9, 2009, the date these financial statements were issued.





On May 21, 2009, Micrel’s shareholders approved a one-time stock option exchange program. On October 30, 2009, the Company completed this stock option exchange program. A total of 286 eligible employees participated in the option exchange. Per the terms of the option exchange, the Company accepted for exchange, options to purchase
an aggregate of 2,709,359 shares of its common stock, which represented 60.1% of the total number of options eligible for exchange. All surrendered options were cancelled effective as of the expiration of the option exchange. In exchange for the surrendered options, Micrel granted new options to purchase 1,122,501 shares of the Company’s common stock with an exercise price of $7.47 per share (representing the per share closing price of Micrel common stock on October 30, 2009). In addition, the Company made
cash payments in the aggregate amount of $20,218.35.





17
 Table of Contents
 ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Overview





The statements contained in this Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, 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 and estimates made under SFAS No. 123R. 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. 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.  Additional factors that may affect operating results are contained within the Company's Form 10-K for the year ended December 31, 2008.





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 3000 standard products and has derived the majority of its product revenue 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. 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 quarterly periods from January 1, 2008 through September 30, 2009 has been provided.





In the first quarter of 2008, bookings levels rebounded from the fourth quarter of 2007, resulting in the highest quarterly booking level since Q1 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.


18
 Table of Contents
 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)





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.  The turns fill percentage for the second
quarter of 2008 was slightly above 50%.  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 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.





During the third quarter of 2008, total bookings were less than revenues, resulting in a book-to-bill ratio of less than one. Third quarter 2008 bookings decreased abruptly in the last two weeks of the quarter. 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. The OEM turns fill percentage for the third quarter of 2008 was approximately 50%. Third quarter gross margin was 55.3%, down 1.1% from 56.4% in the second quarter of 2008. Research and development spending was $13.8 million, or 20% of revenues in the third quarter of 2008 compared to $14.8 million or 21% of revenues in the second quarter of 2008. Selling, general and administrative expenses were $11.3 million, or 17% of sales, down from $11.6 million 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. Order lead times from the Company’s customers remained relatively short at from three to six weeks
during the quarter.


19
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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


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. 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. In addition to solid first quarter 2009 financial results, 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.





Despite a continuing weak economic environment, the Company experienced strong growth of both revenues and net income. 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 second 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. Customer backlog is up from the prior quarter. 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 6 cents 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 11 cents 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. In addition to solid third quarter 2009 financial results, the Company continues to enhance shareholder value by maintaining its quarterly three and one-half cent per share
dividend.


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





The Company derives a substantial portion of its net revenues from standard products.  For each of the three and nine month periods ended September 30, 2009 the Company's standard products sales accounted for 97% of the Company's net revenues as compared to 96% and 94%, respectively, of net revenues for the comparable
periods in 2008.  The Company believes that a substantial portion of its net revenues in the future will depend upon standard products sales, although such sales as a proportion of net revenues may vary as the Company adjusts product output levels to correspond with varying economic conditions and demand levels in the markets which it serves. The standard products business is characterized by short-term orders and shipment schedules, and customer orders typically can be canceled or rescheduled without
significant penalty to the customer. Since most standard products backlog is cancelable without significant penalty, the Company typically plans its production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. In addition, the Company is limited in its ability to reduce costs quickly in response to any revenue shortfalls.





The Company may experience significant fluctuations in its results of operations.  Factors that affect the Company's results of operations include the volume and timing of orders received, changes in the mix of products sold, the utilization level of manufacturing capacity, competitive pricing pressures and the successful development of new products.  These
and other factors are described in further detail later in this discussion and in Item 1A.  As a result of the foregoing or other factors, there can be no assurance that the Company will not experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect the Company's business, financial condition, results of operations or cash flows.








Revision of Prior Period Financial Statements





During the fourth quarter of 2008, the Company identified an error related to its calculation of deferred income on shipments to distributors ("deferred income"). Upon review of its calculations, management determined that the estimated shipping margin percentage used to calculate the deferred
income balance was incorrect and this resulted in an understatement of deferred income and related cost of sales. The Company assessed the materiality of this error on prior periods financial statements, and concluded that the error was not material to any prior annual or interim periods but would be material to the three and twelve months periods ended December 31, 2008 if the entire correction was recorded in those periods. The 2006, and 2007 and first three quarters of 2008 financial statements have been revised
to correct for the immaterial error. In addition, in the financial statements included in the Company’s Annual Report on Form 10-K an adjustment was also recorded to reduce the beginning retained earnings at January 1, 2006 for the cumulative impact of this error on prior periods. The revision had no net impact on the Company’s Consolidated Statement of Cash Flows. See Note 2 of Notes to Condensed Consolidated Financial Statements for discussion of the impact of the revisions
on the 2008 interim results included in this Form 10-Q.








Critical Accounting Policies and Estimates





The financial statements included in this Quarterly Report on Form 10-Q 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. The Company considers certain accounting policies related to revenue recognition and valuation of receivables, inventory valuation, share-based compensation, income taxes, and litigation to be critical to the fair presentation of its financial statements. For a detailed discussion of the Company's significant accounting policies, see Note 1 of
Notes to Consolidated Financial Statements in Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2008.


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


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.





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 September 30, 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.


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





The Company uses a two-step approach to recognizing and measuring 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 the past three 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.








Results of Operations





The following table sets forth certain operating data as a percentage of total net revenues for the periods indicated:




Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008Net revenues


100.0
%


100.0
%


100.0
%


100.0
%Cost of revenues


47.5



44.7



48.5



44.0Gross profit


52.5



55.3



51.5



56.0Operating expenses:Research and development


19.4



20.5



22.5



20.9Selling, general and administrative


16.1



16.7



17.3



17.1Restructuring expense (income)


--



--



--



(0.4
)Proxy contest expense


--



0.5



--



1.5Total operating expenses


35.5



37.7



39.8



39.1Income from operations


17.0



17.6



11.7



16.9Other income (expense):Interest income


0.3



1.0



0.4



1.2Interest expense


(0.2
)


--



(0.1
)


--Other income, net


--



--



0.1



--Total other income, net


0.1



1.0



0.4



1.2Income before income taxes


17.1



18.6



12.1



18.1Provision for income taxes


5.5



7.3



4.3



6.7Net income


11.6
%


11.3
%


7.8
%


11.4
%





Net Revenues. For the three months ended September 30, 2009, net revenues decreased 13% to $58.9 million from $67.5 million for the same period in the prior year. For the nine months ended September 30,
2009, net revenues decreased 23% to $157.7 million from $204.2 million for the same period in the prior year. 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. Standard products revenues for the three months ended September 30, 2009 decreased 11% to $57.2 million from $64.6 million for the same period in the prior year. For the nine months ended September 30, 2009, standard
products decreased 21% to $153.0 million from $192.9 million for the same period in the prior year. For the three months ended September 30, 2009, other products, which consist primarily of custom and foundry products revenues, decreased 45% to $1.6 million compared to $3.0 million for the same period in the prior year. For the nine months ended September 30, 2009, other products decreased 59% to $4.7 million compared to $11.3 million for the same period in the prior year.


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





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.





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”, 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.  To deal with these market forces while maintaining reliable service levels, the Company and other semiconductor suppliers are carrying higher relative levels of inventory compared with historical averages prior to 2001.  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.





Sales to customers in Asia represented 65% and 62%, respectively, of net revenues for the three and nine months ended September 30, 2009 as compared to 56% and 55%, respectively, of the Company’s net revenues for each of the three and nine months ended September 30, 2008. 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.





Share-Based Compensation. The Company's results of operations for the three month periods ended September 30, 2009 and 2008 included $1.0 million and $1.3 million, respectively, of non-cash expense related to the fair value of share-based compensation awards. For the nine month periods ended September 30,
2009 and 2008, the Company's results of operations included $2.7 million and $4.3 million, respectively, of non-cash expense related to the fair value of share-based compensation awards. Share-based compensation expense is included in the statement of operations in cost of revenues, research and development expense and selling, general and administrative expense (see Note 4 of Notes to Condensed Consolidated Financial Statements).





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 52.5% for the three months ended September 30, 2009 from 55.3%
for the comparable period in 2008. For the nine months ended September 30, 2009, the Company's gross margin decreased to 51.5% from 56.0% for the comparable period in 2008. These decreases in gross margin resulted primarily from decreased manufacturing capacity utilization and decreased average selling prices as compared to the same periods in 2008.


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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 19.4% for the three months ended September 30, 2009 and 20.5% for the three months ended September 30, 2008.  On
a dollar basis, research and development expenses decreased $2.4 million, or 18% to $11.4 million for the three months ended September 30, 2009 from $13.8 million for the comparable period in 2008. For the nine months ended September 30, 2009 and 2008, research and development expenses as a percentage of net revenues represented 22.5% and 20.9%, respectively. On a dollar basis, research and development expenses decreased $7.3 million, or 17% to $35.4 million for the nine months ended September 30,
2009 from $42.7 million for the comparable period in 2008. These decreases were primarily due to decreased staffing costs combined with 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.





Selling, General and Administrative Expenses.As a percentage of net revenues, selling, general and administrative expenses represented 16.1% for the three months ended September 30, 2009 and 16.7% for the three months ended September 30, 2008.  On a dollar basis, selling, general and administrative
expenses decreased $1.8 million, or 16% to $9.5 million for the three months ended September 30, 2009 from $11.3 million for the comparable period in 2008. For the nine months ended September 30, 2009 and 2008, selling, general and administrative expenses as a percentage of net revenues represented 17.3% and 17.0%, respectively.  On a dollar basis, selling, general and administrative expenses decreased $7.5 million, or 22%, to $27.3 million for the nine months ended September 30, 2009
from $34.8 million for the comparable period in 2008. These decreases were primarily due to decreased staffing levels, decreased commissions and decreased profit sharing accruals.





Restructuring expense (credits). 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 (see Note 15 of Notes to Condensed Consolidated Financial Statements).  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 (see Note 19 of Notes to Condensed Consolidated Financial Statements).





Proxy Contest Expense. During the first quarter of 2008, the Company became engaged in its first proxy contest since going public in 1994, with OCM. The proxy contest resulted in Micrel incurring incremental expenses of $331,000 in 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. These expenses consisted primarily of outside consulting and legal fees.  Following 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 of Director 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.





Other Income (Expense). Other income (expense) reflects interest income from investments in short-term and long-term investments and money market funds and other non-operating income, offset in part by interest expense incurred on term notes.  For the three months ended September 30, 2009, other
income decreased to $53,000 from $661,000 for the comparable period in the prior year. For the nine months ended September 30, 2009, other income decreased to $585,000 from $2.4 million for the comparable period in the prior year. These decreases resulted primarily from decreased interest income due to decreased average cash and investment balances combined with reduced average interest rates earned and an increase in interest expense on term notes that were entered into in 2009.


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





Provision for Income Taxes.The income tax provision for the three and nine months ended September 30, 2009, as a percentage of income before taxes, was 32.5% and 35.9%, respectively, as compared to 38.8% and 36.9%, respectively, for the comparable periods in the prior year. These decreases resulted
primarily from the inclusion of federal research and development credit in the three and nine months ended September 30, 2009. The federal research and development credit was excluded from the three months ended September 30, 2008 as the credit had previously expired and was not renewed until the fourth quarter of 2008. The income tax provision for such interim 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.








Liquidity and Capital Resources





Since inception, the Company's principal sources of funding have been its cash from operations, bank borrowings and sales of common stock. Principal sources of liquidity at September 30, 2009, consisted of cash and short-term investments of $65.7 million and a $5 million revolving line of credit from a commercial bank (See Note 10 of Notes to Condensed
Consolidated Financial Statements).





The Company generated $21.0 million in cash from operating activities for the nine months ended September 30, 2009. Significant cash flows included cash provided by net income of $12.2 million plus additions for non-cash activities of $12.4 million (consisting primarily of $12.1 million in depreciation and amortization and $2.7 million in share-based compensation
expense partially offset by a $2.3 million increase in deferred income taxes) combined with a $6.2 million decrease in income taxes receivable, a $2.8 million decrease in inventories and a $1.8 million increase in deferred income, which were offset in part by a $9.2 million increase in accounts receivable combined with a $4.2 million decrease in other current liabilities and a $1.9 million decrease in accounts payable.





For the nine months ended September 30, 2008, the Company generated $40.0 million in cash flows from operating activities, primarily attributable to net income of $23.4 million plus additions for non-cash activities of $18.5 million (consisting primarily of $14.5 million in depreciation and amortization, $4.3 million in share-based compensation expense) combined
with a $2.9 million decrease in income taxes receivable, a $2.2 million decrease in prepaid expense and other assets and a $3.4 million increase in deferred income on shipments to distributors, which were partially offset by a $4.7 million increase in accounts receivable a $3.5 million decrease in other current liabilities and a $2.3 million decrease in accounts payable.





The Company provided $12.7 million of cash from investing activities during the nine months ended September 30, 2009, comprised primarily of $17.3 million in net proceeds from the sale of investments, which was partially offset by $4.6 million of purchases of property, plant and equipment.





For the nine months ended September 30, 2008, the Company used $3.7 million of cash from investing activities comprised of $9.1 million in purchases of property, plant and equipment combined with net purchases of short-term investments of $5.4 million.





The Company used $25.3 million of cash in financing activities during the nine months ended September 30, 2009 primarily for the repurchase of $32.5 million of the Company's common stock, $6.7 million for the payment of cash dividends and $1.4 million in repayments of long-term debt, which was partially offset by $15.0 million in proceeds of long-term debt borrowing.





For the nine months ended September 30, 2008, the Company used $39.9 million of cash in financing activities primarily for the repurchase of $36.0 million of the Company's common stock and $7.1 million for the payment of cash dividends, which were partially offset by $3.2 million in proceeds from the exercise of employee stock
awards.





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





The Company currently intends to spend approximately $10 million to $15 million to purchase capital equipment, facilities and facility improvements during the next 12 months.  On October 22, 2009, the Company's Board of Directors declared a $0.035 per common share cash dividend, payable November 25, 2009 to shareholders of record on November 11, 2009.
The cash dividend payout by the Company on November 25, 2009 is expected to be approximately $2.2 million. On October 14, 2009, the Company paid $6 million for the purchase of its corporate headquarters facility which it had previously leased.  Since inception, the Company's principal sources of funding have been its cash from operations, bank borrowings and sales of common stock. The Company believes that its cash flows 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 12 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.








Recently Issued Accounting Standards





Please refer to Note 3 of Notes to Condensed Consolidated Financial Statements for a discussion of the expected impact of recently issued accounting standards.








Contractual Obligations and Commitments





As of September 30, 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 (see Note 10 of Notes to Condensed Consolidated Financial Statements)

$
13,571


$
8,571


$
5,000


$
--


$
--Operating leases


3,793



2,130



1,447



216



--Open purchase orders


11,618



11,618



--



--



--Total

$
28,982


$
22,319


$
6,447


$
216


$
--





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.





As of September 30, 2009, the Company had $7.0 million of non-current unrecognized tax benefits.  Included in the $7.0 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 $5.0 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 other off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.








27
 Table of Contents


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





At September 30, 2009, the Company held $9.0 million in short-term investments. Short-term investments consist primarily of liquid debt instruments and are classified as available-for-sale securities. The short-term investments held at September 30, 2009 are primarily fixed rate securities. These available-for-sale securities are subject to interest rate risk and will
fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10 percent from levels at September 30, 2009, the fair value of the short-term investments would decline by an immaterial amount.





At September 30, 2009, the Company held $15.8 million in principal of auction rate notes secured by student loans. Auctions for these auction rate securities failed as of September 30, 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. The Company has recorded a $3.2 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 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 5 of Notes to Condensed Consolidated Financial Statements.





At September 30, 2009, the Company had no fixed-rate long-term debt subject to interest rate risk. At September 30, 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 September 30, 2009 was $6.8 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 September 30, 2009, the fair value of the interest rate swap would decline by an immaterial amount.








ITEM 4:  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.





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 September 30, 2009.





There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


28
 Table of Contents








PART II.  OTHER INFORMATION





ITEM 1.  LEGAL PROCEEDINGS





The information included in Note 15 of Notes to Condensed Consolidated Financial Statements under the caption "Litigation and Other Contingencies" in Item 1 of Part I is incorporated herein by reference.








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 appears to have bottomed
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 may further decline. 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 theglobaleconomy.  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.





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.


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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.





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.


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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 used in its products on acceptable terms, or the technology fails to operate, the Company may not be able to secure alternatives 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.





There is intense competition for qualified personnel in the semiconductor industry, in particular design engineers.  The Company may not be able to continue to attract and train engineers or other qualified personnel necessary for the development of its business or to replace engineers or other qualified
personnel who may leave its employ in the future. Loss of the services of, or failure to recruit, key design engineers or other technical and management personnel could be significantly detrimental to the Company's product and process development programs.





In addition, equity awards generally comprise a significant portion of the Company’s compensation packages for key employees. As a result of the recent decline in the Company’s stock price, many of its key employees hold options with exercise prices in excess of the current stock price, and therefore retention of these key employees may be difficult in a
highly competitive market. The Company is required to expense the fair value of equity awards to its employees Any modifications of existing equity awards or grants of new equity awards that are intended to retain key employees may increase the Company’s operating expenses.





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.





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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.





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 September 30, 2009, the Company held $15.8 million
in principal of auction rate notes secured by student loans. As of September 30, 2009, all of these auction rate securities have failed to auction successfully due to sell orders exceeding buy orders. The Company has recorded a $3.2 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 5 of Notes to Condensed 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.





Ownership of the Company’s stock is highly concentrated.  As of September 30, 2009, affiliates of the Company, which include directors, officers, and an individual holder of more than 10% of the Company’s Common Stock, held approximately 30% of the Company’s Common Stock in the aggregate.
As a result, a limited number of shareholders may have the ability to significantly influence the outcome of corporate actions requiring stockholder approval.  Additionally, significant sales or purchases of the Company’s Common Stock by these shareholders may cause the price of the Company’s Common Stock to fluctuate.


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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.





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.


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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.


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.





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ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS








On December 30, 2008, the Company's Board of Directors approved a $50 million share repurchase program for calendar year 2009. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors. 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 the first nine months of 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


--



--



--Total 2009


5,020,920


$
6.46



5,020,920








ITEM 6.  EXHIBITS





Exhibit No.

Description31

Certifications of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232

Certifications of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002








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SIGNATURE





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.











MICREL, INCORPORATED(Registrant)Date: November 9, 2009
By           /s/ Clyde R. WallinClyde R. WallinVice President, Finance andChief Financial Officer(Authorized Officer andPrincipal Financial Officer)















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