Micrel, Incorporated

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Micrel, Incorporated

2180 Fortune Drive
San Jose, California 95131
U.S.A.
Telephone: (408) 944-0800
Fax: (408) 944-0970
Web site: http://www.micrel.com

Public Company
Incorporated: 1978
Employees: 877
Sales: $257.5 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: MCRL
NAIC: 334413 Semiconductor and Related Device Manufacturing

Micrel, Incorporated is a manufacturer of analog, mixed-signal, and digital semiconductors that are used for power management in telecommunications equipment, networking equipment, and industrial electronics. Micrel ships more than 2,500 products that are characterized by high speed, low noise, and maximum efficiency in the smallest package. The majority of the company's manufacturing activity takes place in San Jose, California. Micrel also owns a design facility in Huxley, Iowa. Internationally, sales and technical facilities are located in Korea, Taiwan, China, Hong Kong, Japan, the United Kingdom, Germany, Norway, and France.

ORIGINS

Micrel's founder, Raymond D. Zinn, left an indelible mark on the company he started in 1978, directing its development and orchestrating its growth during the first 30 years of its existence. Zinn, the eldest of 11 children, grew up in a devoutly Mormon family in the farming community of El Centro, California, where his father worked as a cattle rancher. Zinn and his siblings learned the merits of hard work under the watchful eye of their father, each participating in running the ranch at an early age. By the time he was four years old, Zinn was in charge of carrying home goods from the country store. He baled hay and milked cows before and after school. When his actions did not accord with his father's wishes, his errancy was brought to his attention by an object lesson. One such reprisal occurred in 1958, when Zinn decided to drop out of college and get a job. He left midway through his junior year at Brigham Young University and drove home to California to inform his father of his decision. The news was not welcomed. "First, my father took my car keys," Zinn recounted in an August 9, 2000, interview with Investor's Business Daily.

Zinn's father told him to take off his shirt and socks. "Then," Zinn explained, "he marched me into the office restroom and told me to hand my pants through the door." Naked, Zinn waited for his father to return his clothes, spending six hours wrapped in paper towels, trying to determine what his father's message was. "He was saying, 'Well, if you're going to quit school, you're going out in the world the way you came in.' He wanted me to think about living with decisions." Zinn returned to Brigham Young, earned an undergraduate degree in business management, and continued his education, receiving a master's degree from San Jose State University.

Zinn moved to the San Francisco Bay Area at the beginning of the 1960s, the destination the choice of his girlfriend. The region's first high-technology companies were emerging at the time, capturing Zinn's attention. Interested specifically in the space program, which was reaching its greatest intensity of development during the 1960s, Zinn wanted to become an astronaut. The desire directed him toward his first job at a rocket motor manufacturer named United Technologies, where he was hired as an internal ballistician. Zinn spent two years at United Technologies, leaving after his father-in-law, who worked at Fairchild Semiconductor, sparked his interest in the chip-making business. He joined Fairchild as an engineer in 1963, beginning a lifelong fascination with designing semiconductors that led him to found Micrel.

Zinn struggled against the corporate structure and hierarchy at Fairchild, deeming himself to be too fiercely individualistic to enjoy working in the traditional employer-employee setting. Although far from espousing the anti-Establishment views prevalent in the Bay Area during the 1960s (he, like his father, was a devout Mormon), Zinn never was comfortable working for others and, consequently, never held a job for long. After leaving Fairchild, Zinn worked at several chip-making plants, including Electromark and TRE, gaining the experience that would enable him to strike out on his own as an entrepreneur. In 1978, he made his move, forming a partnership with a colleague named Warren Muller to start Micrel. The pair used $300,000 in savings and bank loans to found the company, eschewing the financial support of venture capitalists. "I wanted control of my destiny and to do it my way," Zinn remarked in his interview with Investor's Business Daily.

With scant start-up capital at his disposal, Zinn was forced to play a limited role in the semiconductor industry. Micrel initially operated as a testing facility for other chip manufacturers, offering wafer-test services as a way to fund the development of its own products. A turning point in the company's development occurred in 1981, when it acquired a fabrication facility from German giant Siemens AG, a purchase that gave Zinn the means to begin offering wafer foundry services. The company, duplicating a customer's process, manufactured chips designed by the customer. Entering the production fray failed to spark any meaningful financial growth for the company, however. Throughout the 1980s, Micrel remained, in large part, out of sight, operating on the periphery of its industry. One pundit, as reported in the May 19, 1997 issue of Electronics News, criticized the company for its lackluster growth, remarking that Micrel had "glacier-like growth and the sex-appeal of a mud hen."

Zinn, looking back at the period, offered no apologies for his company's diminutive stature, explaining to Electronics News that Micrel's slow development was "like an apple tree or an almond tree that doesn't produce for seven years because it takes a long time for it to develop its root structure and its fruit." Micrel eventually recorded growth at a pace that would rank it among the fastest growing companies in the nation, growth that was attributable to the proliferation of products that used the types of chips made by Zinn's company.

Integrated circuits were divided into three broad categories: digital, analog, and mixed-signal. Digital circuits processed information by implementing two values, either zero or one, through on-off electrical surges. Although Micrel later delved into the digital chip market, the majority of its business was based on analog and mixed-signal semiconductors, particularly analog circuits. Analog circuits, which were used in virtually every electronic system, processed information in the form of continuously varying voltages and currents that had an infinite number of values. Mixed-signal chips combined analog and digital functions on one circuit.

COMPANY PERSPECTIVES

Micrel is fiercely committed to contributing to its customers' success. Internal processes have been developed with flexibility in mind, so the Company can quickly react to changing requirements. Micrel's outstanding sales, customer service and technical support organizations, and its manufacturing operations, are structured specifically to address customer needs and requirements. Micrel is known throughout the industry for being "fast on its feet."

ACCELERATED GROWTH IN THE 1990S

Micrel recorded its first meaningful growth after it began designing its own chips in the early 1990s. The company's analog and mixed-signal circuits sold well, as well as a product called a low-voltage dropout regulator, which was a chip designed to control voltages in a circuit that desktop computers used. Sales reached $20 million in 1993 and doubled the following year, when Zinn, for the first time, solicited financial help from outside investors. Micrel filed for an initial public offering (IPO) of stock in October 1994 after recording four years of steady growth, seeking to pay down its debt and to finance its expansion with Wall Street's help.

In the wake of its IPO, Micrel flourished, its growth propelled by the proliferation of products in the portable electronics industry. As sales of cellular telephones, laptop computers, and industrial handheld instruments increased, so too did the need for longer battery life and lower power consumption, a trend that played to Micrel's expertise. The company's power management chips, particularly those of the mixed-signal variety, provided it with a rate of financial growth that silenced its critics. Zinn, no longer relegated to the fringe of the industry, began to attract attention from the press, earning accolades for his astute management.

Although Micrel began to record substantial growth during the latter half of the 1990s, the company continued to rank as a small- to medium-sized semiconductor manufacturer, dwarfed by the biggest chip makers. In 1996, the company's sales reached $66 million, a fraction of the total generated by multibillion-in-sales rivals, but Micrel's relatively small size, coupled with Zinn's business savvy, served as an advantage. The company was in a position to react nimbly to changing market conditions, particularly in one important instance that bolstered Zinn's reputation within the semiconductor industry.

In 1997, when Micrel celebrated its 19th consecutive year of profitability, Zinn was credited with being one of the first in his industry to foresee the onset of the Asian financial crisis. Micrel depended on Asia for 40 percent of its sales at the time, a dependence that Zinn realized would cause great damage to the company and end its profit-making streak. He ordered his managers to focus their sales efforts elsewhere, such as original equipment making, and he called a meeting of senior executives, informing them of the severity of the impending crisis. He gave the gathered executives one week to formulate a plan to deal with the collapse of Asian markets. "That meeting lasted a half-hour," the company's executive vice-president said in an August 9, 2000, interview with Investor's Business Daily. "We came back a week later and had another half-hour meeting to tell Ray what we could do. Two half-hour meetings recast what we did for 1998."

The Asian economic crisis precipitated one of the most severe downturns in the history of the semiconductor industry, yet Micrel recorded robust financial growth. Between 1997 and 1999, the company's annual sales jumped from $104.5 million to $195.1 million, while its net income more than doubled, leaping from $24.4 million to $54.4 million.

By the end of the 1990s, Zinn was pursuing an ambitious financial goal, one that dictated a much more aggressive approach to growth. Zinn announced his desire to make Micrel a $1 billion-in-sales company by 2003, an objective that would require enormous expansion for the company to meet. The pursuit of the $1 billion mark led Zinn to diversify his business and broaden the company's capabilities, something he would accomplish in large part through acquisitions. In November 1998, the company entered the high-bandwidth telecommunications and data communications market by acquiring Synergy Semiconductor Corp. Synergy, based in Santa Clara, California, posted $37.4 million in sales in 1997 by supplying mixed-signal and digital chips for the communications, high-performance computing, and automated test-equipment industries. One year later, in November 1999, Micrel entered another new market via an acquisition, purchasing Altos Semiconductor, which competed in the thermal management market. Altos provided mixed-signal circuits that accurately measured the temperature at various so-called "hot spots" in electronic systems and initiated system cooling by turning on fans.

KEY DATES

1978:: Micrel is founded.
1981:: Micrel acquires a fabrication facility.
1994:: Micrel completes its initial public offering of stock.
2002:: A $41 million loss halts 22 years of consecutive profits.
2004:: Micrel's product line surpasses 2,500 products.

FALTERING IN THE 21ST CENTURY

As Zinn pressed toward his financial target, Micrel, for once, showed that it was not immune to negative market forces. In 2000, revenues increased at a record high pace, reaching $346 million, but the following year the company felt the effects of what was regarded as the most severe downturn in the history of the semiconductor industry. A combination of recessive economic conditions, the collapse of the dot-com industry, and excess inventory held by wireless communication customers, delivered a decisive blow, leading to a 37 percent decline in revenues in 2001 to $218 million. Revenues fell the following year, slipping to $205 million, but the most notable financial blemish was a $41 million loss for the year, the first time Micrel had posted an annual loss since its inception.

In the wake of the difficulties experienced during the first years of the decade, Micrel pinned its hopes on the recovery of the semiconductor market. Instead of celebrating its 25th anniversary as a $1 billion company, Micrel pursued less lofty ambitions, striving to restore the stature it attained in 2000, the high watermark of its existence. In 2003, there were signs that the worst was over. Sales increased marginally to $211 million and the company recorded a small profit of $5.1 million, ensuring that the loss in 2002 did not turn into an unwanted streak of losses. More encouraging results were achieved in 2004, when sales increased 22 percent to $257 million and net income swelled to $31.3 million. In the years ahead, with a diverse range of products and Zinn's capable leadership underpinning its progress, the company was expected to factor as a prominent player in its industry and one day reach the $1 billion mark.

PRINCIPAL COMPETITORS

Maxim Integrated Products, Inc.; Texas Instruments Incorporated; National Semiconductor Corporation; Vitesse Semiconductor Corporation; Linear Technology Corporation; Broadcom Corporation; Marvell Technology Group Ltd.