Shareholders' Equity and Share-Based Compensation

12 Months Ended

Dec. 31, 2011

Shareholders' Equity and Share-Based Compensation [Abstract]

SHAREHOLDERS' EQUITY AND SHARE-BASED COMPENSATION

7. SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

Preferred Stock

The Company has authorized 5,000,000 shares of preferred stock, no par value, of which none were issued or outstanding at December 31, 2011. The preferred stock may be issued from time to time in one or more series. The Board of Directors is authorized to determine or alter the rights, preferences, privileges and restrictions of such preferred stock.

Stock Repurchase Plan

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 million to $30 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 was expended. On May 31, 2011, the Company announced that its Board of Directors authorized the repurchase of an additional $30 million of the Company’s common stock, bringing the total available for repurchase under the program to $60 million. The authorization will stay in effect until the authorized aggregate amount is expended or the authorization is modified by the Board of Directors. As of December 31, 2011, the total amount available for repurchase was $23.7 million.

Any amounts in excess of common stock are recorded as a reduction of retained earnings. Shares of common stock purchased pursuant to the repurchase program are cancelled from outstanding shares upon repurchase and credited to an authorized and un-issued reserve account, and are intended to reduce the number of outstanding shares of Common Stock to increase shareholder value and offset dilution from the Company’s stock option plans and employee stock purchase plan. During the year ended December 31, 2011, the Company repurchased 1,853,962 shares of its common stock for an aggregate price of $20.3 million which was applied as a reduction of common stock.

Incentive Award Plans

The Company has in effect incentive stock plans under which incentive stock options have been granted to employees and restricted stock units and non-qualified stock options have been granted to employees and non-employee members of the Board of Directors. The Company’s 1994 Stock Option Plan and 2000 Non-Qualified Stock Incentive Plan have expired and new options may no longer be granted under these plans. Under the 2003 Incentive Award Plan there were 795,492 shares available for future grants as of December 31, 2011. Options granted under the 2003 Incentive Award Plan typically become exercisable in cumulative annual increments of 20% per year from the date of grant. The term of each stock option is no more than ten years from the date of grant. At December 31, 2011, there were 9,422,939 total shares reserved for future issuance under the Company’s incentive stock plans.

Option activity under the Company’s incentive stock plans is as follows:

	Number of Shares			Weighted Avg. Exercise  Price Per Share
Outstanding, December 31, 2008 (6,345,428 exercisable at a weighted average price of $14.07 per share and a weighted average remaining contractual life of 5.6 years)		10,526,011		$	12.46
Granted		2,789,245			7.42
Exercised		(22,305	)		5.30
Canceled		(5,587,954	)		14.18
Outstanding, December 31, 2009 (3,170,359 exercisable at a weighted average price of $11.18 per share and a weighted average remaining contractual life of 4.8 years)		7,704,997			9.41
Granted		1,528,990			10.36
Exercised		(785,633	)		8.13
Canceled		(564,549	)		10.84
Outstanding, December 31, 2010 (3,430,038 exercisable at a weighted average price of $10.74 per share and a weighted average remaining contractual life of 4.7 years)		7,883,805			9.65
Granted		2,165,056			12.14
Exercised		(1,246,435	)		9.39
Canceled		(842,256	)		10.64
Outstanding, December 31, 2011 (3,366,610 exercisable at a weighted average price of $10.31 per share and a weighted average remaining contractual life of 4.3 years)		7,960,170		$	10.26

As of December 31, 2011, the estimated number of options exercisable and expected to vest was 6.6 million shares with a weighted average remaining contractual life of 6 years and an estimated aggregate intrinsic value of $6.5 million.

The weighted average fair value (computed using the Black-Scholes option pricing model) of options granted under the stock option plans during the years ended December 31, 2011, 2010 and 2009 was $4.36, $4.07, and $2.98 per share, respectively. The total intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the years ended December 31, 2011, 2010 and 2009 was $4.6 million, $2.4 million and $51,000, respectively. During the years ended December 31, 2011, 2010 and 2009, the amount of cash received from the exercise of stock options was $11.7 million, $6.5 million, and $118,000, respectively. The net tax benefit realized from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options was $477,000, $211,000 and $0 for the years ended December 31, 2011, 2010 and 2009, respectively.

Additional information regarding options outstanding as of December 31, 2011 was as follows:

	Stock Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Avg. Remaining Contractual Life (yrs)		Weighted Avg. Exercise Price Per Share		Number Exercisable		Weighted Avg. Exercise Price Per Share
$ 4.72 to $ 7.00		471,666		6.6	$	6.61		169,696	$	6.59
$ 7.01 to $ 7.46		583,959		7.3		7.23		185,135		7.22
$ 7.47 to $ 7.47		844,707		2.8		7.47		502,839		7.47
$ 7.48 to $ 8.00		434,873		7.5		7.78		156,676		7.79
$ 8.01 to $ 9.00		411,701		6.1		8.50		249,832		8.53
$ 9.01 to $ 10.00		1,175,563		7.1		9.63		463,997		9.60
$ 10.01 to $ 11.00		1,594,226		6.6		10.46		680,547		10.59
$ 11.01 to $ 13.00		918,230		7.0		12.16		390,631		11.96
$ 13.01 to $ 16.00		1,257,745		7.8		13.81		299,757		13.88
$ 16.01 to $ 49.50		267,500		2.4		17.39		267,500		17.39
$ 4.72 to $ 49.50		7,960,170		6.5	$	10.26		3,366,610	$	10.31

As of December 31, 2011, the aggregate pre-tax intrinsic value (which was the amount by which the $10.11 closing price of the Company’s common stock at December 31, 2011 exceeded the exercise price of the in the money options) of options outstanding and options exercisable was approximately

$7.8 million and $3.5 million, respectively.

The 2003 Plan also provides for the use of incentive awards other than stock options. In October 2007, the Company’s Compensation Committee approved a plan to begin granting Restricted Stock Units (“RSU”s) to employees in accordance with the provisions of the 2003 Plan. As of December 31, 2011, approximately 36% and 28% of the RSUs would vest in three and four equal installments annually over three years and four years, respectively. Approximately 36% of the RSUs would vest one third on each of the third, fourth and fifth annual anniversaries of the grant date. Information with respect to outstanding RSU activity is as follows:

	Number of Shares			Weighted Average Grant-Date Fair Value
Outstanding, December 31, 2008		52,433		$	7.87
Granted		46,470			7.01
Vested		0
Forfeited		(7,480	)		8.54
Outstanding, December 31, 2009		91,423			7.40
Granted		54,670			10.33
Vested		0
Forfeited		(333	)		9.46
Outstanding, December 31, 2010		145,760			8.36
Granted		589,638			10.09
Vested		14,750			7.72
Forfeited		(53,371	)		10.44
Outstanding, December 31, 2011		667,277		$	9.73

Employee Stock Option Exchange Program

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

Accounting for Share-based Compensation

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

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

	Years Ended December 31,
	2011			2010			2009
Expected life (years)		5.7			5.9			6.7
Stock volatility		40.4	%		40.9	%		43.0	%
Risk free interest rates		1.9	%		2.2	%		2.9	%
Dividends during expected terms		1.4	%		1.3	%		1.8	%

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

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

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

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

The following table shows total share-based compensation expense recognized in the Consolidated Statement of Operations for 2011, 2010 and 2009 (in thousands):

	Years Ended December 31,
	2011		2010		2009
Cost of revenues	$	1,009	$	798	$	670
Research and development		2,401		1,808		1,619
Selling, general and administrative		2,444		2,119		1,675
Pre-tax share-based compensation expense		5,854		4,725		3,964
Less income tax effect		2,104		1,657		990
Net share-based compensation expense	$	3,750	$	3,068	$	2,974

Total share-based compensation cost capitalized as part of inventory as of December 31, 2011 and 2010 was $174,000 and $142,000, respectively. At December 31, 2011, there was $16.6 million of total unrecognized compensation cost related to non-vested stock option and RSU awards which is expected to be recognized over a weighted-average period of 4.0 years.

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (“ESPP”), eligible employees are permitted to have salary withholdings to purchase shares of Common Stock at a price equal to 95% of the market value of the stock at the end of each three-month offer period, subject to an annual limitation. The aggregate number of shares of common stock which may be issued under the plan shall be no more than 2,000,000 shares. Shares of Common Stock issued under the ESPP during 2011, 2010 and 2009 were 32,386, 30,688, and 37,984, respectively, at weighted average prices of $10.21, $10.35, and $7.31, respectively. The ESPP is considered non-compensatory per current share-based compensation accounting guidelines.