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 March 31, 2011.





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 May 2, 2011 there were 62,167,613 shares of common stock, no par value, outstanding.











MICREL, INCORPORATED

INDEX TO

REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011PagePART I.  FINANCIAL INFORMATIONItem 1.
Financial Statements (Unaudited):Condensed Consolidated Balance Sheets - at March 31, 2011 and at December 31, 2010
3Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2011 and 2010
4Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2011 and 2010
5Notes to Condensed Consolidated Financial Statements
6Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16Item 3.
Quantitative and Qualitative Disclosures about Market Risk
26Item 4.
Controls and Procedures
26PART II.  OTHER INFORMATIONItem 1.
Legal Proceedings
28Item 1A.
Risk Factors
28Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
35Item 6.
Exhibits
35Signature
36











2
 Table of Contents





ITEM 1. FINANCIAL STATEMENTSMICREL, INCORPORATEDCONDENSED CONSOLIDATED BALANCESHEETS(Unaudited)(In thousands, except share amounts)March 31,


December 31,2011


2010ASSETSCURRENT ASSETS:Cash and cash equivalents

$
98,438


$
74,738Short-term investments


23,159



34,497Accounts receivable, less allowances: 2011, $2,426; 2010, $3,925


32,987



34,131Inventories


36,255



36,709Income taxes receivable


3,504



6,547Prepaid expenses and other


2,963



2,718Deferred income taxes


24,871



25,022Total current assets


222,177



214,362LONG-TERM INVESTMENTS


12,023



12,166PROPERTY, PLANT AND EQUIPMENT, NET


63,851



64,517DEFERRED INCOME TAXES


9,232



9,740INTANGIBLE ASSETS, NET


192



255OTHER ASSETS


1,432



1,413TOTAL

$
308,907


$
302,453LIABILITIES AND SHAREHOLDERS’ EQUITYCURRENT LIABILITIES:Accounts payable

$
17,192


$
19,672Deferred income on shipments to distributors


37,979



38,646Current portion of long-term debt


714



2,857Other current liabilities


11,312



11,973Total current liabilities


67,197



73,148LONG-TERM INCOME TAXES PAYABLE


6,018



5,664Total liabilities


73,215



78,812COMMITMENTS AND CONTINGENCIES (Note 14)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:  2011 – 62,113,461 shares; 2010 – 61,604,160 shares


7,513



2,401Accumulated other comprehensive loss


(1,175
)


(1,212
)Retained earnings


229,354



222,452Total shareholders’ equity


235,692



223,641TOTAL

$
308,907


$
302,453The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


3
 Table of Contents





MICREL, INCORPORATEDCONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS(Unaudited)(In thousands, except per share amounts)Three Months EndedMarch 31,2011


2010NET REVENUES

$
67,494


$
67,192COST OF REVENUES (1)


29,645



29,973GROSS PROFIT


37,849



37,219OPERATING EXPENSES:Research and development (1)


12,521



11,373Selling, general and administrative (1)


12,091



10,898Total operating expenses


24,612



22,271INCOME FROM OPERATIONS


13,237



14,948OTHER INCOME (EXPENSE):Interest income


190



144Interest expense


(16
)


(78
)Other income, net


39



41Total other income, net


213



107INCOME BEFORE INCOME TAXES


13,450



15,055PROVISION FOR INCOME TAXES


4,385



5,344NET INCOME

$
9,065


$
9,711NET INCOME PER SHARE:Basic

$
0.15


$
0.16Diluted

$
0.14


$
0.16CASH DIVIDENDS DECLARED PER SHARE

$
0.035


$
0.035WEIGHTED AVERAGE SHARES USED INCOMPUTING PER SHARE AMOUNTS:Basic


61,845



62,346Diluted


63,078



62,548(1) Share-based compensation expense included in:Cost of revenues

$
242


$
208Research and development


526



426Selling, general and administrative


605



458The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.





4
 Table of Contents





MICREL, INCORPORATEDCONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS(Unaudited)(In thousands)Three Months EndedMarch 31,2011


2010NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:Net income

$
9,065


$
9,711Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


3,218



3,278Share-based compensation expense


1,373



1,092Tax benefit on the exercise of employee stock options


261



20Deferred income taxes provision


635



(3,116
)Changes in operating assets and liabilities:Accounts receivable


1,144



(6,562
)Inventories


505



309Income taxes receivable


3,043



4,011Prepaid expenses and other assets


(264
)


(254
)Accounts payable


(2,480
)


(1,720
)Income taxes payable


354



4,263Other current liabilities


(661
)


1,693Deferred income on shipments to distributors


(667
)


5,206Net cash provided by operating activities


15,526



17,931CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment, net


(2,489
)


(1,094
)Purchases of investments


(4,708
)


(2,001
)Proceeds from the sale of investments


16,250



300Net cash provided by (used in) investing activities


9,053



(2,795
)CASH FLOWS FROM FINANCING ACTIVITIES:Repayments of long-term debt


(2,143
)


(2,143
)Proceeds from the issuance of common stock


9,258



798Repurchases of common stock


(5,831
)


(967
)Payment of cash dividends


(2,163
)


(2,140
)Net cash used in financing activities


(879
)


(4,452
)NET INCREASE IN CASH AND CASH EQUIVALENTS


23,700



10,684CASH AND CASH EQUIVALENTS - Beginning of period


74,738



70,898CASH AND CASH EQUIVALENTS - End of period

$
98,438


$
81,582The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.





5
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 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 (together “Micrel” or the “Company”) as of March 31, 2011 and for the three months ended March 31, 2011 and 2010 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, 2010, 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, 2010. 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, 2010 and those included in this Form 10-Q below.





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 EndedMarch 31,2011


2010Weighted average common shares outstanding


61,845



62,346Dilutive effect of stock options outstanding using the treasury stock method


1,233



202Shares used in computing diluted net income per share


63,078



62,548





For the three months ended March 31, 2011 and 2010, 2.0 million and 3.8 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.
RECENTLY ISSUED ACCOUNTING STANDARDS





There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements, from those disclosed in the Company’s 2010 Annual Report on Form 10-K.


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




3.
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, 2010. The following table summarizes total share-based compensation expense included in the Condensed Consolidated Statement of Operations (in thousands):





Three Months EndedMarch 31,2011


2010Cost of revenues

$
242


$
208Research and development


526



426Selling, general and administrative


605



458Pre-tax share-based compensation expense


1,373



1,092Less income tax effect


(543
)


(372
)Net share-based compensation expense

$
830


$
720





During the three months ended March 31, 2011 and 2010, the Company granted 1,052,900 and 712,727 stock options, respectively, at weighted average fair values of $5.88 and $3.73 per share, respectively. The fair value of the Company’s stock options granted under the Company’s option plans was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:





Three Months EndedMarch 31,2011

2010Expected term (years)


5.8



6.6Stock volatility


40.3
%


39.8
%Risk free interest rates


2.5
%


3.1
%Dividends during expected terms


1.0
%


1.3
%





As of March 31, 2011, there was $16.0 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 3.9 years. Total share-based compensation capitalized as part of inventory as of March 31, 2011 and December 31, 2010 was $194,000 and $142,000, respectively.





Under the Company’s Employee Stock Purchase Plan (“ESPP”), eligible employees are permitted to have salary withholdings to purchase shares of Common Stock at a price equal to 95% of the market value of the stock at the end of each three-month offer period, subject to an annual limitation. The ESPP is considered non-compensatory per current share-based compensation accounting guidelines.


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


4.
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 March 31, 2011 consist primarily of liquid municipal and corporate debt instruments and are classified as available-for-sale securities. Long-term investments as of March 31, 2011 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 March 31, 2011 and December 31, 2010 is as follows (in thousands):





As of March 31, 2011


As of December 31, 2010Cost


Gross

Gains


Gross

Losses


Fair

Value


Cost


Gross

Gains


Gross

Losses


Fair

ValueMunicipal and Corporate Debt Securities

$
21,356


$
3


$
201


$
21,158


$
32,583


$
1


$
98


$
32,486Certificates of Deposits


2,001



—



—



2,001



2,011



—



—



2,011Total

$
23,357


$
3


$
201


$
23,159


$
34,594


$
1


$
98


$
34,497





As of March 31, 2011, $19.0 million of the Comapny's short-tem investments were in an unrealized loss position.




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.


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





Financial assets measured at fair value on a recurring basis as of March 31, 2011 were as follows (in thousands):





Description

Quoted Prices in Active Markets for Identical Assets

Level 1


Significant Other Observable Inputs

Level 2


Significant Unobservable Inputs

Level 3


TotalMoney market funds

$
78,883


$
4,475


$
—


$
83,358Municipal and corporate debt securities


23,659



—



—



23,659Auction rate notes


—



—



12,023



12,023Total

$
102,542


$
4,475


$
12,023


$
119,040





Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 were as follows (in thousands):





Description

Quoted Prices in Active Markets for Identical Assets

Level 1


Significant Other Observable Inputs

Level 2


Significant Unobservable Inputs

Level 3


TotalMoney market funds

$
63,659


$
4,474


$
—


$
68,133Municipal and corporate debt securities


36,506



—



—



36,506Auction rate notes


—



—



12,166



12,166Total

$
100,165


$
4,474


$
12,166


$
116,805





As of March 31, 2011, the Company had approximately $12.0 million of auction rate notes, the fair value of which has been measured using Level 3 inputs. Auction rate notes are securities that are structured with short-term interest rate reset dates of generally less than ninety days, but with contractual maturities that can be in excess of ten years. At the end of each reset period, which occurs every seven or twenty eight days for the securities held by the Company, investors can sell or continue to hold the securities at par. As a result of sell orders exceeding buy orders, auctions for the student loan-backed notes held by the Company have failed as of March 31, 2011. To date the Company has collected all interest payable on all of its auction-rate securities when due and expects to continue to do so in the future. The principal associated with failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the issuers redeem the securities, the issuers repay principal over time from cash flows prior to final maturity or final payments come due according to contractual maturities ranging from 23 to 36 years. As a result, the Company has classified all auction rate notes as long-term investments as of March 31, 2011 and December 31, 2010. 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 March 31, 2011 and December 31, 2010, the maximum interest rate is generally one month LIBOR plus 1.5% based on the notes’ rating as of that date.





The Company has used a combination of discounted cash flow models and observable transactions for similar securities to determine the estimated fair value of its investment in auction rate notes as of March 31, 2011 and December 31, 2010. 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 March 31, 2011, the Company determined there was a cumulative decline in the fair value of its auction rate notes of approximately $1.7 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.


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


For the three months ended March 31, 2011, 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, 2010

$
12,166Transfers in and/or out of Level 3


—Total gains, before tax


157Settlements


(300
)Ending balance, March 31, 2011

$
12,023







5.
INVENTORIES





Inventories consist of the following (in thousands):


March 31,


December 31,2011


2010Finished goods

$
12,718


$
14,304Work in process


21,692



20,907Raw materials


1,845



1,498Total inventories

$
36,255


$
36,709








6.
PROPERTY, PLANT AND EQUIPMENT










March 31,


December 31,2011


2010Manufacturing equipment

$
175,602


$
173,967Land


8,101



8,101Buildings and improvements


53,517



53,385Office furniture and research equipment


14,735



14,493251,955



249,946Accumulated depreciation


(188,104
)


(185,429
)Total property, plant and equipment, net

$
63,851


$
64,517





Depreciation expense for the three months ended March 31, 2011 was $3.2 million.








7.
INTANGIBLE ASSETS





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





As of March 31, 2011


As of December 31, 2010Gross

Carrying

Amount


Accumulated

Amortization


Net

Carrying

Amount


Gross

Carrying

Amount


Accumulated

Amortization


Net

Carrying

AmountDeveloped and core technology

$
8,718


$
8,718


$
—


$
8,718


$
8,718


$
—Patents and trade name


2,886



2,694



192



2,886



2,631



255Customer relationships


1,455



1,455



—



1,455



1,455



—Total intangible assets

$
13,059


$
12,867


$
192


$
13,059


$
12,804


$
255




10
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 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 months ended March 31, 2011 was $63,000.





The estimated future amortization expense of intangible assets as of March 31, 2011 was as follows (in thousands):





Year Ending December 31,2011 (nine months)

$
192Thereafter


—$
192








8.
OTHER CURRENT LIABILITIES





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




March 31,


December 31,2011


2010Accrued compensation

$
7,046


$
8,451Accrued commissions


2,338



2,067Accrued workers compensation and health insurance


959



410All other current accrued liabilities


969



1,045Total other current liabilities

$
11,312


$
11,973








9.
BORROWING ARRANGEMENTS





Under the terms of an unsecured credit agreement with Bank of the West, the Company has a $5 million line of credit available for general working capital needs, which includes a $5 million letter of credit sub-facility including a $2 million foreign exchange sub-facility. As of March 31, 2011, the Company had no borrowings under the line of credit. On April 22, 2011 the expiration date of the line of credit was extended from April 30, 2011 to April 30, 2013. Interest rates under the amended agreement are based on one of three interest rates, at the Company’s option: (1) a variable alternate base rate plus 1.0%, 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 2.0% or (3) fixed LIBOR for one, two, three or six month periods, plus 2.0%.





The agreement includes certain restrictive covenants and, as of March 31, 2011, the Company was in compliance with such covenants.





The credit agreement also included a $15 million term loan facility to finance the repurchase of shares of the Company’s common stock. In May 2009, the Company borrowed $15 million under the term loan. Interest under the term loan facility is payable at a rate equal to floating one-month LIBOR plus 2.25%. Borrowings were payable over 21 equal monthly installments, which commenced on August 31, 2009 and the final payment was made on April 30, 2011. The term loan facility expired April 30, 2011.




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


The following table summarizes the Company’s long-term debt (in thousands):





March 31,


December 31,2011


2010Notes payable bearing variable interest at 1 month LIBOR plus 2.25%

$
714


$
2,857Current portion


(714
)


(2,857
)Long-term debt

$
—


$
—





As of March 31, 2011 and December 31, 2010, the estimated fair value of the Company’s notes payable was not materially different than its respective carrying value.








10.
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 economically hedged the variability on future interest payments resulting in a fixed rate of 3.36% for $357,000 of the Company’s notes payable as of March 31, 2011. The Company will experience variability in interest payments for the remaining $357,000 unhedged portion of the Company’s notes payable. The hedge expired April 30, 2011. The Company does not hold derivative financial instruments for trading or speculative purposes. The Swap was 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 March 31, 2011, the notional amount of the outstanding interest rate swap contract was $357,000. The effect of derivative instruments on the Statement of Operations for the three months ended March 31, 2011 was not material. The fair values of the Company’s derivative assets and liabilities as of March 31, 2011 and December 31, 2010 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.








11.
SIGNIFICANT CUSTOMERS





During the three months ended March 31, 2011, two customers, both worldwide distributors, accounted for $13.0 million (19%) and $11.6 million (17%) of net revenues, respectively. During the three months ended March 31, 2010, two customers, both worldwide distributors, accounted for $14.2 million (21%) and $12.8 million (19%) of net revenues, respectively.





At March 31, 2011, two worldwide distributors and an Asian based stocking representative accounted for 26%, 19% and 11%, respectively, of total accounts receivable. At December 31, 2010, three worldwide distributors and an Asian based stocking representative accounted for 23%, 17%, 10% and 11%, respectively, of total accounts receivable.




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





12.
COMPREHENSIVE INCOME





Comprehensive income for the three month periods ended March 31, 2011 and 2010 were as follows (in thousands):





Three Months EndedMarch 31,2011


2010Net Income

$
9,065


$
9,711Unrealized gains (losses) on investments, net of tax


37



71Comprehensive income

$
9,102


$
9,782








13.
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(dollars in thousands)

March 31,2011


2010Net Revenues:Standard Products

$
65,571


$
65,083Other Products


1,923



2,109Total net revenues

$
67,494


$
67,192As a Percentage of Total Net Revenues:Standard Products


97
%


97
%Other Products


3
%


3
%Total net revenues


100
%


100
%








14.
LITIGATION AND OTHER CONTINGENCIES





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





As of March 31, 2011, the Company believes it is not reasonably likely that an unrecorded material loss has been incurred. Generally, litigation is subject to inherent uncertainties, and no assurance can be given that the Company will prevail in any particular lawsuit. Accordingly, 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.




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





15.
SHARE REPURCHASE PROGRAM





In February 2010, the Company’s Board of Directors approved a $15 million share repurchase program for calendar year 2010. In September 2010, the Company’s Board of Directors approved an increase to the amount authorized for repurchase from $15.0 million to $30.0 million. In November 2010, the Company’s Board of Directors approved a modification to the termination date of the authorized repurchase plan. The plan would have terminated on December 31, 2010, but was modified to stay in effect until the total authorized aggregate amount of $30 million is expended. Any amounts in excess of common stock are recorded as a reduction of retained earnings. Shares of common stock purchased pursuant to the repurchase program are cancelled from outstanding shares upon repurchase and credited to an authorized and un-issued reserve account. Share repurchases are intended to reduce the number of outstanding shares of common stock to increase shareholder value and offset dilution from the Company's stock option plans and employee stock purchase plan. During the three months ended March 31, 2011, the Company repurchased 433,671 shares of its common stock for an aggregate price of $5.8 million.








16.
INCOME TAXES





The income tax provision for the three months ended March 31, 2011, as a percentage of income before taxes, was 32.6%. The tax provision for this period includes $176,000 in benefits from the exercise of incentive stock options treated as disqualifying dispositions for income tax purposes. The income tax provision for the three months ended March 31, 2010, as a percentage of income before taxes, was 35.5%. The tax provision for this period excludes approximately 1.5% in benefits, as a percentage of income before taxes, from the Federal research and development credit which expired on December 31, 2009 and was not reinstated until the fourth quarter of 2010.





As of March 31, 2011, the gross liability for uncertain tax positions was $12.7 million and the net liability, reduced for the federal effects of potential state tax exposures, was $9.7 million. If these uncertain tax positions are sustained upon tax authority audit, or otherwise become certain, the net $9.7 million would favorably affect the Company’s tax provision in such future periods. Included in the $9.7 million is $1.9 million which has not yet reduced income tax payments, and therefore, has been netted against non-current deferred tax assets. The remaining $7.8 million liability consists of $6.0 million included in long-term income taxes payable and $1.8 million included in current income taxes payable. The Company does not anticipate a significant change to the $6.0 million long-term uncertain income tax positions within the next 12 months. The Company believes that the uncertainties surrounding the $1.8 million in current uncertain income tax positions may be resolved within the next 12 months.





The Company continues to recognize interest and penalties related to income tax matters as part of the income tax provision. As of March 31, 2011 and December 31, 2010, the Company had $683,000 and $743,000, 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 2007 and forward. Significant state tax jurisdictions include California, New York and Texas, and generally, the Company is subject to routine examination for years 2005 and forward in these jurisdictions. In addition, any research and development credit carryforwards that were generated in prior years and utilized in these years may also be subject to examination by respective state taxing authorities. Generally, the Company is subject to routine examination for years 2003 and forward in various immaterial foreign tax jurisdictions in which it operates.


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





Deferred tax assets and liabilities result primarily from temporary differences between book and tax bases of assets and liabilities and state research and development credit carryforwards. The Company had net current deferred tax assets of $24.9 million and net long-term deferred tax assets of $9.2 million as of March 31, 2011. 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.








17.
DIVIDENDS





On January 27, 2011, 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 February 23, 2011 to shareholders of record as of February 9, 2011.








18.
SUBSEQUENT EVENT





On April 21, 2011, the Company’s Board of Directors declared a cash dividend of $0.035 per outstanding share of common stock payable on May 25, 2011 to shareholders of record at the close of business on May 11, 2011. This dividend will be recorded in the second quarter of 2011 and is expected to be approximately $2.2 million.


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 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. In some cases, forward-looking statements can be identified by the use of forward-looking terminology such as, but not limited to, "believe,” "estimate,” "may,” "can,” "will,” "could,” "would,” "should," "continue," "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, except as required by law, the Company assumes no obligation to update any such forward-looking statements. These statements are subject to risks and uncertainties, including those risks discussed under “Risks Factors” and elsewhere in this document, which 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, 2010.





Micrel designs, develops, manufactures and markets a range of high-performance analog power integrated circuits ("ICs"), mixed-signal ICs and digital ICs. The Company currently ships approximately 3000 standard products. 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





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




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





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


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The following table presents the Company’s revenues by product line, as a percentage of total net revenues.





Net Revenues by Product Line

Three Months EndedMarch 31,2011


2010As a Percentage of Total Net RevenuesStandard ProductsAnalog


62
%


63
%High bandwidth


18



16Ethernet


17



18Total standard products


97



97Foundry, custom and other


3



3Total net revenues


100
%


100
%





The Company’s products address a wide range of end markets. The following table presents the Company’s revenues by end market as a percentage of total net revenues.





Net Revenues by End Market

Three Months EndedMarch 31,2011


2010As a Percentage of Total Net RevenuesIndustrial


43
%


40
%High-speed communications


30



30Computer


14



14Wireless handsets


10



13Automotive, military and other


3



3Total net revenues


100
%


100
%





To enhance the readers’ understanding of the Company’s performance, the following is a chronological overview of the Company’s results for the quarterly periods from January 1, 2010 through March 31, 2011.





During the first quarter of 2010, the semiconductor industry continued to recover from the downturn of 2008-2009, resulting in strong bookings and solid revenue growth. During the first quarter of 2010, revenues increased to $67.2 million, representing a 9.7% increase from the $61.2 million reported for the fourth quarter of 2009. As compared to the first quarter of 2009, revenues increased by $20.2 million, or 43.0% due to higher overall demand from customers in all of the Company's geographies and end markets. First quarter 2010 gross margin was 55.4%, representing an increase from 53.3% in the fourth quarter of 2009. Operating margin in the first quarter of 2010 was 22.2%, as compared to 8.9% in the fourth quarter of 2009. Net income for the first quarter of 2010 was $9.7 million, or $0.16 per diluted share, reflecting an increase as compared to the fourth quarter of 2009 net income of $4.1 million, or $0.07 per diluted share. Earnings per share for the fourth quarter of 2009 included $0.06 per diluted share of equipment impairment expense. During the first quarter of 2010, the Company generated $17.9 million in cash flows from operations. The Company also maintained its quarterly $0.035 per share dividend.





During the second quarter of 2010, revenues increased to $73.9 million, representing an increase of $6.7 million, or 10.0%, from $67.2 million in the first quarter of 2010. Compared to the same period last year, revenues increased by $22.1 million, or 42.7%, due to higher overall demand from customers in all of the Company's geographies and end markets. Demand from customers serving the communications and computer end markets increased, resulting in a book-to-bill ratio that was greater than one. The gross margin in the second quarter of 2010 was 57.8%, as compared to 55.4% in the first quarter of 2010. This increase was largely due to improved factory utilization and in part due to a reduced sales mix of lower margin products shipped to the wireless handset market. The Company’s operating margin for the second quarter of 2010 increased to 25.8% as compared to 22.2% in the first quarter of 2010. Net income for the second quarter of 2010 was $12.4 million, or $0.20 per basic and diluted share, as compared to net income equal to $9.7 million, or $0.16 per basic and diluted share for the first quarter of 2010, and net income equal to $3.9 million, or $0.06 per basic and diluted share, for the second quarter of 2009. During the second quarter of 2010, cash flows from operations were $26.8 million. The Company repurchased $1.3 million of its common stock during the second quarter of 2010 and also maintained its quarterly $0.035 per share dividend.  17
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During the third quarter of 2010, revenues increased to $80.6 million, representing an increase of $6.7 million, or 9.1%, from $73.9 million in the second quarter of 2010, marking the sixth consecutive quarter of revenue growth for the Company. The increase in revenues as compared to the prior quarter was primarily due to improved demand in the industrial and communications end markets. Compared to the same period last year, revenues increased by $21.8 million, or 37.0%, due to greater overall demand from customers in all of the Company's geographies and end markets. Bookings for the third quarter of 2010 declined from second quarter 2010 levels, primarily due to reduced orders from distributors as they adjusted inventories to be in-line with reduced order lead times. The Company’s book-to-bill ratio for the third quarter of 2010 was less than one. Third quarter gross margin was 57.9%, as compared to 57.8% in the prior quarter. During the quarter, gross margin improvement resulting from increased factory capacity utilization was offset by an increase in reserves for excess inventory. The Company’s operating margin for the third quarter of 2010 increased to 27.6% as compared to 25.8% in the second quarter of 2010. Net income for the third quarter of 2010 was $14.9 million, or $0.24 per basic and diluted share, as compared to net income equal to $12.4 million, or $0.20 per basic and diluted share for the second quarter of 2010, and net income equal to $6.8 million, or $0.11 per basic and diluted share, for the third quarter of 2009. During the third quarter of 2010, cash flows from operations were $14.1 million. The Company repurchased $10.9 million of its common stock during the third quarter of 2010 and also maintained its quarterly $0.035 per share dividend.





During the fourth quarter of 2010, revenues decreased 6.2% to $75.6 million from $80.6 million in the third quarter of 2010. Compared to the fourth quarter of 2009, revenues increased by $14.4 million, or 23.5%, due to greater overall demand from customers in all of the Company's geographies and end markets.  Customer demand moderated in the fourth quarter of 2010 as the semiconductor industry completed its recovery from the downturn of 2008-2009.  Fourth quarter 2010 bookings seasonally declined from the third quarter 2010 levels, resulting in a book-to-bill ratio below one for the quarter. Fourth quarter 2010 gross margin was 55.8%, as compared to 57.9% in the third quarter of 2010. This decrease in gross margin was primarily the result of reduced factory utilization combined with a greater mix of direct sales to customers serving consumer markets, which tend to carry lower gross margins. Net income for the fourth quarter of 2010 was $13.7 million, or $0.22 per basic and diluted share, as compared to net income of $14.9 million, or $0.24 per basic and diluted share for the third quarter of 2010, and net income of $4.1 million, or $0.07 per basic and diluted share, for the fourth quarter of 2009. Net income for the fourth quarter of 2009 included a $6.5 million non-cash, pre-tax charge related to the impairment of certain semiconductor manufacturing equipment. During the fourth quarter of 2010, cash flows from operations were $14.3 million. The Company repurchased $2.9 million of its common stock during the fourth quarter of 2010 and also maintained its quarterly $0.035 per share dividend.





For the year ended December 31, 2010, revenues increased 36% to $297.4 million from $218.9 million for the year ended December 31, 2009. This increase was due to greater overall demand from customers in all of the Company's geographies and end markets, which resulted from improved macro-economic conditions, an expanded sales force, solid operational execution and increased shipments of new products. The Company’s book-to-bill remained above one for the full year 2010 consistent with bookings being unusually high due to long lead times in the first half of the year followed by softer demand and shorter (more normal) lead times in the second half. Gross margin for 2010 increased to 56.8%, from 52.0% for 2009. This increase was primarily due to improved factory utilization and, to a lesser extent, a reduced sales mix of lower margin products shipped to the wireless handset market as compared to 2009. Operating margin for 2010 was 25.2% which represents the highest level in a decade.  Net income increased over 200% in 2010 to $50.7 million, or $0.81 per diluted share, as compared to net income of $16.3 million, or $0.26 per diluted share in 2009. The 2010 diluted earnings per share of $0.81 was an all-time annual record for Micrel and surpassed its previous record of $0.75, which was achieved in 2000 when total revenues were 16% higher than revenues in 2010. The increase in diluted earnings per share was due in part to a 36% decrease in the number of diluted shares in 2010, as compared to 2000, as a result of the Company’s share repurchase program.  During 2010 cash, cash equivalents and short term investments increased more than 50% to $109.2 million as compared to 2009, and the Company generated $73.1 million in cash flows from operations. In addition, in 2010 the Company repurchased $16.1 million of its common stock, and paid $8.6 million in dividends to shareholders.


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During the first quarter of 2011, revenues decreased 10.8% to $67.5 million from $75.6 million in the fourth quarter of 2010. This larger than normal seasonal decline in revenue from the fourth quarter of 2010 to the first quarter of 2011 was mainly due to a larger than expected reduction in sales to a Korean wireless handset and consumer electronic device manufacturer which moderated product deliveries during the quarter to control its inventory levels.  The Company also experienced a reduction in overall demand towards the end of the first quarter of 2011 related to disruptions in the worldwide electronics supply chain as a result of the earthquake and tsunami in Japan. In addition, the first quarter 2011 revenues were impacted by reduced shipments to certain Asian based stocking representative channel partners that reduced their inventory levels during the quarter. As compared to the same period last year, first quarter 2011 revenues increased by $0.3 million. First quarter 2011 book-to-bill ratio was below one, but showed improvement compared to the fourth quarter of 2010. First quarter 2011 gross margin was 56.1%, as compared to 55.8% in the fourth quarter of 2010. Despite the lower revenues, first quarter 2011 gross margin increased from the previous quarter primarily due to a larger proportion of higher margin products. Net income for the first quarter of 2011 was $9.1 million, or $0.15 per basic share and $0.14 per diluted share, as compared to net income of $13.7 million, or $0.22 per basic and diluted share for the fourth quarter of 2010, and net income of $9.7 million, or $0.16 per basic and diluted share, for the first quarter of 2010. During the first quarter of 2011, cash flows from operations were $15.5 million. During the first quarter of 2011, cash and short-term investments increased by $12.4 million to $121.6 million. In addition to maintaining its quarterly $0.035 per share cash dividend, during the first quarter of 2011 the Company repurchased $5.8 million of its common stock.





The Company derives a substantial portion of its net revenues from standard products. For the three months ended March 31, 2011 and 2010, the Company’s standard products sales accounted for 97% of the Company’s net revenues. The Company believes that a substantial portion of its net revenues in the future will depend upon standard products sales, although such sales as a proportion of net revenues may vary as the Company adjusts product output levels to correspond with varying economic conditions and demand levels in the markets which it serves. The standard products business is characterized by short-term orders and shipment schedules, and customer orders typically can be canceled or rescheduled without significant penalty to the customer. Since most standard products backlog is cancelable without significant penalty, the Company typically plans its production and inventory levels based on forecasts of customer demand, which are 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 and customer acceptance of new products. These and other factors are described in further detail later in this discussion and in Part II Item 1A of this Quarterly Report on Form 10-Q titled "Risk Factors". As a result of the foregoing or other factors, including global economic conditions, 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 and results of operations or cash flows.




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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 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 to Condensed Consolidated Financial Statements in this document and 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, 2010.





Revenue Recognition and Receivables. Micrel generates revenue by selling products to OEMs, distributors and stocking representatives. Stocking representative firms may buy and stock the Company’s products for resale or may act as the Company’s sales representative in arranging for direct sales from the Company to an OEM customer. The Company’s policy is to recognize revenue from sales to customers when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable and collection of the resulting receivable is reasonably assured.





The Company 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.


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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 March 31, 2011, the Company believes that future taxable income levels will be sufficient to realize the tax benefits of these deferred tax assets and has not established a valuation allowance. Should the Company determine that future realization of these tax benefits is not more likely than not, a valuation allowance would be established, which would increase the Company’s tax provision in the period of such determination.





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





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




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Results of Operations





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





Three Months EndedMarch 31,2011


2010Net revenues


100.0
%


100.0
%Cost of revenues


43.9



44.6Gross profit


56.1



55.4Operating expenses:Research and development


18.6



16.9Selling, general and administrative


17.9



16.2Total operating expenses


36.5



33.1Income from operations


19.6



22.3Other income (expense):Interest income


0.3



0.2Interest expense


—



(0.1
)Other income, net


—



—Total other income, net


0.3



0.1Income before income taxes


19.9



22.4Provision for income taxes


6.5



7.9Net income


13.4
%


14.5
%




Net Revenues. For the three months ended March 31, 2011, net revenues were $67.5 million as compared to $67.2 million for the same period in the prior year. Standard products revenues for the three months ended March 31, 2011 were $65.6 million as compared to $65.1 million for the same period in the prior year. For the three months ended March 31, 2011, other products revenues, which consist primarily of custom and foundry products revenues, were $1.9 million compared to $2.1 million for the same period in the prior year. While the first quarter revenues for 2011 were relatively flat compared to the same period in the prior year, net revenues decreased 10.8% sequentially from the fourth quarter of 2010. This larger than normal seasonal decline in revenue from the fourth quarter of 2010 to the first quarter of 2011 was mainly due to a larger than expected reduction in sales to a Korean wireless handset and consumer electronic device manufacturer, which moderated product deliveries during the quarter to control its inventory levels.  The Company also experienced a reduction in overall demand towards the end of the first quarter of 2011 related to disruptions in the worldwide electronics supply chain as a result of the earthquake and tsunami in Japan. In addition, the first quarter 2011 revenues were impacted by reduced shipments to certain Asian based stocking representative channel partners that reduced their inventory levels during the quarter.





Customer demand for semiconductors can change quickly and unexpectedly. Historically, the Company’s revenue levels have been highly dependent on the amount of new orders for products to be delivered to the customer within the same quarter. Within the semiconductor industry, orders that are booked and shipped within the same quarter are called "turns fill" orders. When the turns fill level exceeds approximately 35% of quarterly revenues, it can be very difficult to predict near term revenues and income. The resulting lack of visibility into demand also makes it difficult to match product build with future demand as the Company's lead times to build its products may be substantially longer than order lead times.


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





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





International sales represented 71% of net revenues for each of the three month periods ended March 31, 2011 and 2010, respectively. Sales to customers in Asia represented 56% and 57% of net revenues for the three months ended March 31, 2011 and 2010, respectively. The trend for the Company’s customers to move their electronics manufacturing to Asian countries has resulted in increased pricing pressure for the Company and other semiconductor manufacturers as Asian based manufacturers are typically more concerned about cost and less concerned about the capability of the integrated circuits they purchase. This can make it more difficult for United States based companies to differentiate themselves in any manner other than by lowering prices. The increased concentration of electronics procurement and manufacturing in the Asia Pacific region has led, and may continue to lead, to continued price pressure for the Company’s products in the future.





Gross Profit.Gross profit is affected by a variety of factors including the volume of product sales, product mix, manufacturing capacity utilization, product yields and average selling prices. The Company’s gross margin increased to 56.1% for the three months ended March 31, 2011 from 55.4% for the comparable period in 2010. This increase was primarily due to a reduced proportion of lower margin products shipped to the wireless handset market as compared to the same period in 2010.





Research and Development Expenses.Research and development expenses as a percentage of net revenues represented 18.6% for the three months ended March 31, 2011 as compared to 16.9% for the same period in the prior year. On a dollar basis, research and development expenses increased 10% to $12.5 million for the three months ended March 31, 2011 as compared to $11.4 million for the same period in the prior year. This increase was primarily due to increased research and development headcount. 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 17.9% for the three months ended March 31, 2011 as compared to 16.2% for the same period in the prior year. On a dollar basis, selling, general and administrative expenses increased $1.2 million, or 10.9%, to $12.1 million for the three months ended March 31, 2011 from $10.9 million for the comparable period in 2010. This increase was primarily due to increased sales and marketing headcount and increased advertising costs, which were partially offset by decreased bonus accruals.





Share-Based Compensation. The Company’s results of operations for the three months ended March 31, 2011 and 2010 included $1.4 million and $1.1 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 3 of Notes to Condensed Consolidated Financial Statements).





Other Income (Expense). Other income, net reflects interest income from investments in short-term and long-term investment securities and money market funds and other non-operating income, offset by interest expense incurred on term notes.


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Provision for Income Taxes.The income tax provision for the three month period ended March 31, 2011, as a percentage of income before taxes, was 32.6%. The tax provision for this period included $176,000 in benefits from disqualifying dispositions of employee incentive stock options which represented 1.3% of income before taxes. The income tax provision for the three months ended March 31, 2010, as a percentage of income before taxes, was 35.5%. The tax provision for this period excluded approximately 1.5% in benefits, as a percentage of income before taxes, from the Federal research and development credit which expired on December 31, 2009 and was not renewed until December 2010. The income tax provision for such interim periods differs from taxes computed at the federal statutory rate primarily due to the tax effects of share-based compensation, 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 March 31, 2011 consisted of cash, cash equivalents and short-term investments of $121.6 million and a $5.0 million revolving line of credit from a commercial bank.





The Company generated $15.5 million in cash from operating activities during the three months ended March 31, 2011. Significant cash flows included cash provided by net income of $9.1 million plus additions for non-cash activities of $5.5 million (consisting primarily of $3.2 million in depreciation and amortization, $1.6 million in share-based compensation expense and related tax effects and $635,000 decrease in deferred income taxes) combined with a $3.0 million decrease in income taxes receivable and a $1.1 million decrease in accounts receivable which were offset in part by a $2.5 million increase in accounts payable.





During the three months ended March 31, 2010, the Company generated $17.9 million in cash from operating activities. Significant cash flows included cash provided by net income of $9.7 million plus additions for non-cash activities of $1.3 million (consisting primarily of $3.3 million in depreciation and amortization and $1.1 million in share-based compensation expense and related tax effects partially offset by a $3.1 million increase in deferred income taxes) combined with a $4.0 million decrease in income taxes receivable, a $5.2 million increase in deferred income, a $4.3 million increase in income taxes payable and a $1.7 million increase in accrued compensation, which were offset in part by a $6.6 million increase in accounts receivable combined with a $1.7 million decrease in accounts payable.





The Company generated $9.1 million of cash in investing activities during the three months ended March 31, 2011, comprised primarily of $16.3 million in proceeds from the sales of investments, which was partially offset by $4.7 million in purchases of investments and $2.5 million of purchases of property, plant and equipment.





During the three months ended March 31, 2010, the Company used $2.8 million of cash in investing activities comprised primarily of $1.7 million in net purchases of investments and $1.1 million of purchases of property, plant and equipment.





The Company used $879,000 of cash in financing activities during the three months ended March 31, 2011 primarily for the repurchase of $5.8 million of the Company’s common stock, $2.2 million for the payment of cash dividends and $2.1 million in repayments of long-term debt, which was partially offset by $9.3 million in proceeds from employee stock transactions.





During the three months ended March 31, 2010, the Company used $4.5 million of cash in financing activities primarily for the payment of $2.1 million of cash dividends, $2.1 million in repayments of long-term debt and the repurchase of $967,000 of the Company's common stock, which was partially offset by $798,000 in proceeds from employee stock transactions.


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The Company currently intends to spend approximately $10 million to $15 million to purchase capital equipment and make facility improvements during the next twelve months primarily for manufacturing equipment and additional research and development related software and equipment.





On April 21, 2011, the Company’s Board of Directors declared a cash dividend of $0.035 per outstanding share of common stock payable on May 25, 2011 to shareholders of record at the close of business on May 11, 2011. This dividend will be recorded in the second quarter of 2011 and is expected to be approximately $2.2 million.





Under the Company’s stock repurchase program, as of March 31, 2011, the Company was authorized to repurchase an additional $8.1 million of its common stock.





The Company believes that its cash from operations, existing cash balances and short-term investments, and its credit facility will be sufficient to meet its cash requirements for at least the next twelve months. In the longer term, the Company believes future cash requirements will continue to be met by its cash from operations, credit arrangements and future debt or equity financings as required.




Recently Issued Accounting Standards





Please refer to Note 2 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 March 31, 2011, 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

YearsCurrent portion of long-term debt (see Note 9 of Notes to Condensed Consolidated Financial Statements)

$
714


$
714


$
—


$
—


$
—Operating leases


2,193



948



1,091



154



—Open purchase orders


19,556



19,556



—



—



—Total

$
22,463


$
21,218


$
1,091


$
154


$
—





Borrowing agreements consisted of an unsecured credit facility with Bank of the West. The credit facility includes a $5.0 million line of credit available for general working capital needs, a $5.0 million letter of credit sub-facility and a $2.0 million foreign exchange sub-facility. As of March 31, 2011, the Company had no borrowings under the line of credit. The credit facility also included a $15 million term loan facility to finance the repurchase of shares of the Company’s common stock. The Company had borrowed $15 million under the term loan facility, of which $14.3 million had been repaid as of March 31, 2011. The remaining balance of $714,000 was repaid on April 30, 2011. The term loan facility expired April 30, 2011.





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 March 31, 2011, the Company had $9.7 million of unrecognized tax benefits. Included in the $9.7 million is $1.9 million which has not yet reduced income tax payments, and therefore, has been netted against non-current deferred tax assets. The remaining $7.8 million liability consisted of $6.0 million included in long-term income taxes payable and $1.8 million included in current income taxes payable. The Company does not anticipate a significant change to the $6.0 million long-term uncertain income tax positions within the next 12 months. The Company believes that the uncertainties surrounding the $1.8 million in current uncertain income tax positions may be resolved within the next 12 months.


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Off-Balance Sheet Arrangements





As of March 31, 2011, the Company had no off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.








ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





At March 31, 2011, the Company held $13.7 million in principal of senior auction rate notes secured by student loans. Auctions for these auction rate notes have failed as of March 31, 2011. 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 may have limited or no ability to liquidate its investment and fully recover the carrying value of its investment in the near term. As of March 31, 2011, the Company has recorded a $1.7 million pre-tax temporary impairment of these securities to other comprehensive income, a component of shareholders’ equity. If it is determined that the fair value of these securities is other than temporarily impaired, the Company would record a loss, which could be material, in its statement of operations in the period such other than temporary decline in fair value is determined. The Company currently has the ability and intent to hold these investments until a recovery of the auction process occurs or the issuers redeem the securities.





At March 31, 2011, the Company had no fixed-rate long-term debt subject to interest rate risk.





At March 31, 2011, 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 March 31, 2011 was $357,000. 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 March 31, 2011, 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 March 31, 2011.





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.


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Our management, including our principal executive officer and principal financial officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.




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PART II.  OTHER INFORMATION





ITEM 1.  LEGAL PROCEEDINGS





The information included in Note 14 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





Weak global economic conditions could have a material adverse effect on the Company’s business, results of operations, and financial condition.While the global economy has partially recovered from the economic downturn that began in 2007 and the Company has seen improvement in the business climate for semiconductors, there is no guarantee that these conditions will continue to improve or that these conditions will not further decline again in the future. The semiconductor industry has traditionally been highly cyclical and has often experienced significant downturns in connection with, or in anticipation of, declines in general economic conditions. The Company cannot accurately predict the timing, severity or duration of such downturns. A global recession may result in a decrease in orders for the Company’s products, 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 economic downturns because the Company may not be able to reduce costs at the same rate as its sales decline.





Demand for semiconductor components is increasingly dependent upon the rate of growth of the global economy.Many factors could adversely affect regional or global economic growth. Some of the factors that could slow global economic growth include: volatility in global credit markets, price inflation or deflation 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. Furthermore, although during 2010 the partial economic recovery contributed to higher than average growth in the semiconductor industry, as the semiconductor industry returns to its normal trend line the growth rate may decline.  A slowdown in semiconductor growth rates may exacerbate a near-term slowdown in semiconductor bookings as lead times return to historic levels.





Market conditions may lead the Company to initiate 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 actions to reduce the Company’s cost structure to 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.


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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 that began in 2007 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 adversely affected the Company’s business in a number of ways. A similar 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 disruptions in financial markets and adverse economic conditions in the U.S. and other countries. Further, fluctuations in worldwide economic conditions make it extremely difficult for the Company to forecast future sales levels based on historical information and trends. Visibility into customer demand is 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, natural disasters, foreign government instability, social conditions such as civil unrest, economic conditions including high levels of inflation or deflation, 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 in response to slight increases in demand, leading to a sudden oversupply situation and a subsequent reduction in order rates and revenues as customers adjust their inventories to account for shorter lead times. 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.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, delivery schedules may be impacted, 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. However, like many of its competitors, the Company recognizes revenue on sales of product to stocking representatives on a sell-in basis rather than, a sell-through basis, so fluctuations in inventory accumulation by stocking representatives can exacerbate fluctuations in revenue from sales to such stocking representatives. Also, should the relationship with a distributor or stocking representative be terminated, the 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, including the Company, face risks associated with a dependence upon third parties that manufacture, assemble, package or supply raw materials for 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 or suppliers 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. Furthermore, a major disruption to any part of the Company's customers' supply chains could decrease their output and subsequently result in lower demand for the Company's products.





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 or guarantee. Additionally, the Company’s wafer and product requirements typically represent a relatively small portion of the total production of the suppliers, third-party foundries and outside assembly, testing and packaging contractors. As a result, the Company is subject to the risk that a third-party supplier will provide delivery or capacity priority to other larger customers at the expense of the Company, resulting in an inadequate supply to meet customer demand or higher costs to obtain the necessary product supply.





The Company outsources some of its wafer fabrication, most of its test and all of its assembly requirements to third-party vendors. When demand for semiconductors improves, availability of these outsourced services typically becomes tight, resulting in longer than normal lead times and delinquent shipments to customers. The degree to which Micrel may have difficulty obtaining these services could have a negative impact on the Company’s revenues, bookings and backlog. If these lead times are extended, the resulting loss of near-term visibility for our customers could result in their placing higher order levels than their actual requirements which may result in higher levels of order cancellations in the future. There can be no assurance that the Company will be able to accurately forecast demand and moderate its build schedules to accommodate the possibility of an increase in order cancellations.


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The markets that the Company serves frequently undergo transitions in which products rapidly incorporate new features and performance standards on an industry-wide basis.If the Company’s products are unable to support the new features or performance levels required by OEMs in these markets, it would likely lose business from existing or potential customers and would not have the opportunity to compete for new design wins until the next product transition. If the Company fails to develop products with required features or performance standards or experiences even a short delay in bringing a new product to market, or if its customers fail to achieve market acceptance of their products, its revenues could be significantly reduced for a substantial period of time.





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





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





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





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


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





Company-Specific Risks





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





An important part of the Company’s strategy is to continue to focus on the market for high-speed communications ICs.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 wireless handset (cellular telephone) 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 wireless handset market. Due to the highly competitive and fast changing environment in which the Company’s wireless handset customers operate, demand for the product the Company sells into this end market can change rapidly and unexpectedly. If the Company’s wireless handset 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, average selling prices and capacity utilization that the Company experiences.A decline in average selling prices (“ASPs”) could adversely affect the Company’s revenues, gross margins and results of operations unless the Company is able to sell more units, reduce its costs, and introduce new products with higher ASPs or some combination thereof.





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 March 31, 2011, the Company held $13.7 million in principal of auction rate notes secured by student loans. As of March 31, 2011, all of these auction rate securities have failed to auction successfully due to sell orders exceeding buy orders. The Company has recorded a $1.7 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 4 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. While 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.


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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 or designs, 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 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 from 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 or all 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, or deliver the Company’s products in a timely manner, 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, but may not be sufficient to, act to buffer some of the adverse impact from a disruption to the Company’s San Jose wafer fabrication activity arising from a natural disaster such as an earthquake.





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





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




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




In February 2010, the Company’s Board of Directors approved a $15 million share repurchase program for calendar year 2010. In September 2010, the Company’s Board of Directors approved an increase to the amount authorized for repurchase from $15.0 million to $30.0 million. In November 2010, the Company’s Board of Directors approved a modification to the termination date of the authorized repurchase plan. The plan would have terminated on December 31, 2010, but was modified to stay in effect until the total authorized aggregate amount of $30 million is expended. 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 three months of 2011 were as follows:





ISSUER PURCHASES OF EQUITY SECURITIESPeriod

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 Purchased Under the

Plans or Programs

($000)January 2011


99,760


$
13.31



99,760


$
12,618February 2011


333,911



13.40



333,911


$
8,144March 2011


—



—



—


$
8,144Total Q1 2011


433,671


$
13.38



433,671








ITEM 6.  EXHIBITS





Exhibit No.
Description10.1
Change of Control and Severance Agreement by and between Mansour Izadinia and the Company dated as of March 1, 2011. *10.2
First Amendment to Credit Agreement by and between Bank of the West and the Company dated April 22, 2011 (incorporated by reference to exhibit 10.1 filed with the Company's report on Form 8-K dated April 28, 2011).31
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





*           Management contract or compensatory plan or agreement.


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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: May 6, 2011
By           /s/ Clyde R. WallinClyde R. WallinVice President, Finance andChief Financial Officer(Authorized Officer andPrincipal Financial Officer)





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