SHAREHOLDERS' EQUITY AND SHARE-BASED COMPENSATION

Preferred Stock

The Company has authorized 5.0 million shares of preferred stock, no par value, of which none were issued or outstanding at December 31, 2014. 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.

Share Repurchase Program

Since February 2010, the Company's Board of Directors has authorized the repurchase of $145.0 million of the Company's common stock. Shares of common stock purchased pursuant to the repurchase program are cancelled from outstanding shares upon repurchase and credited to an authorized and unissued reserve account. Share repurchases are recorded as a reduction to common stock to the extent available. Any amounts repurchased which are in excess of the existing total common stock balance are recorded as a reduction of retained earnings. 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 share-based compensation plans and the Micrel, Incorporated Employee Stock Purchase Plan (“ESPP”). During the year ended December 31, 2014, the Company repurchased 1.7 million shares of its common stock for an aggregate price of $20.2 million, which included $0.2 million of share repurchases pending cash settlement at December 31, 2014. The total available for repurchase, at December 31, 2014, was $30.7 million.

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.

On May 24, 2012, the Company’s shareholders approved the Micrel, Incorporated 2012 Equity Incentive Award Plan (the “2012 Plan”) and the reservation of an aggregate of 6.0 million shares of common stock for issuance pursuant to the 2012 Plan.

The 2012 Plan has replaced in its entirety the Company’s 1994 Stock Option Plan, the Micrel, Incorporated 2000 Non-Qualified Stock Incentive Plan and the Micrel, Incorporated 2003 Incentive Award Plan (the “Prior Plans”). No new award has been made under these plans since May 24, 2012. However, the shares of common stock that remained available for issuance under the Prior Plans were added to the shares reserved for issuance under the 2012 Plan. In addition, shares of common stock subject to awards already granted under the Micrel, Incorporated 2003 Incentive Award Plan that terminate, expire or lapse will become available for issuance under the 2012 Plan, provided that the aggregate number of shares of common stock available for issuance under the 2012 Plan is reduced by two (2) shares for each share of common stock delivered in settlement of any award other than a stock option or stock appreciation right. On the effective date of the 2012 Plan which was May 24, 2012, the Prior Plans were terminated, provided, that any awards outstanding under the Prior Plans remain outstanding pursuant to their respective terms. At December 31, 2014, there were 3.4 million shares available for future grants under the Company’s 2012 Plan.

Stock Options

Options granted under the 2012 Plan typically become exercisable in cumulative annual increments of either 20% or 25% per year from the date of grant. The term of each stock option is no more than ten years from the date of grant.

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



	Number of Shares		Weighted Avg. Exercise Price Per Share
Outstanding, December 31, 2011 (3,366,610 shares 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
Granted	1,494,250		10.13
Exercised	(415,156	)	7.91
Canceled	(882,995	)	11.22
Outstanding, December 31, 2012 (4,068,071 shares exercisable at a weighted average price of $9.98 per share and a weighted average remaining contractual life of 4.2 years)	8,156,269		10.25
Granted	700,300		9.96
Exercised	(522,218	)	7.62
Canceled	(821,263	)	10.92
Outstanding, December 31, 2013 (4,286,232 shares exercisable at a weighted average price of $10.12 per share and a weighted average remaining contractual life of 4.3 years)	7,513,088		10.34
Granted	445,767		10.85
Exercised	(1,485,784	)	8.56
Canceled	(586,132	)	12.38
Outstanding, December 31, 2014 (3,512,257 shares exercisable at a weighted average price of $10.53 per share and a weighted average remaining contractual life of 4.8 years)	5,886,939		$	10.64

At December 31, 2014, the estimated number of options expected to vest and exercisable was 5.2 million shares with a weighted average remaining contractual life of 5.7 years and an estimated aggregate intrinsic value of $20.3 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, 2014, 2013 and 2012 was $2.93, $2.86 and $2.96 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, 2014, 2013 and 2012 was $4.2 million, $1.2 million and $1.0 million, respectively. During the years ended December 31, 2014, 2013 and 2012, the amount of cash received from the exercise of stock options was $12.7 million, $4.0 million and $3.3 million, respectively. The excess tax benefit realized from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options was $2.0 million, $0.5 million and $0.2 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Additional information regarding options outstanding at December 31, 2014 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	132,020	3.5	$	6.63	132,020	$	6.63
$ 7.01 to $ 7.46	298,340	4.1	7.25		293,380	7.25
$ 7.49 to $ 8.00	288,283	4.4	7.82		283,803	7.82
$ 8.01 to $ 9.00	151,588	3.6	8.54		141,785	8.53
$ 9.01 to $10.00	1,282,671	6.5	9.61		643,954	9.65
$10.01 to $11.00	1,982,999	6.8	10.41		868,161	10.40
$11.01 to $13.00	697,258	6.0	12.09		407,874	12.16
$13.01 to $16.00	973,780	5.5	13.70		661,280	13.67
$16.01 to $49.50	80,000	1.2	16.21		80,000	16.21
	5,886,939	5.9	$	10.64	3,512,257	$	10.53

At December 31, 2014, the aggregate pre-tax intrinsic value (which was the amount by which the $14.51 closing price of the Company’s common stock at December 31, 2014 exceeded the exercise price of the in the money options) of options outstanding and options exercisable was approximately $22.9 million and $14.1 million, respectively.

The fair value of the 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:



	Years Ended December 31,
	2014		2013		2012
Expected term (years)	6.0		5.9		5.8
Stock volatility	30.7	%	34.5	%	36.6	%
Risk free interest rates	2.0	%	1.6	%	1.0	%
Dividends during expected terms	1.6	%	1.9	%	1.6	%

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

Stock volatility is based upon historical stock price volatility.

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

Dividend yield is based on annualized dividends per share and the Company’s average stock price.

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 share-based compensation to be recognized in future periods.

Restricted Stock Units

The 2012 Plan and 2003 Plan also provide 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 (“RSUs”) to employees in accordance with the provisions of the 2003 Plan. At December 31, 2014, approximately 83% of the RSUs would vest in four equal installments annually over four years. Approximately 14% 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, 2011	667,277		$	9.73
Granted	417,531		9.67
Vested	(146,327	)	9.49
Forfeited	(61,431	)	9.65
Outstanding, December 31, 2012	877,050		9.83
Granted	591,974		9.31
Vested	(209,819	)	9.60
Forfeited	(63,943	)	9.69
Outstanding, December 31, 2013	1,195,262		9.63
Granted	780,225		10.78
Vested	(349,451	)	9.61
Forfeited	(116,935	)	9.89
Outstanding, December 31, 2014	1,509,101		$	10.21

At December 31, 2014, the estimated number of RSUs expected to vest was 1.3 million shares with a weighted average remaining contractual life of 2.7 years and an estimated aggregate intrinsic value of $19.2 million. The aggregate intrinsic value of vested RSUs amount to $4.0 million for the year ended December 31, 2014.

Share-based Compensation

The following table shows total share-based compensation expense recognized in the Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012 (in thousands):



	Years Ended December 31,
	2014			2013			2012
Cost of revenues	$	997		$	1,060		$	1,178
Research and development	3,197			2,875			3,132
Selling, general and administrative	3,430			3,162			3,282
Pre-tax share-based compensation expense	7,624			7,097			7,592
Less income tax effect	(2,613		)	(2,314		)	(2,583		)
Net share-based compensation expense	$	5,011		$	4,783		$	5,009

Total share-based compensation capitalized as part of inventory at both December 31, 2014 and 2013 was $0.2 million, respectively. At December 31, 2014, there was $4.8 million of total unrecognized share-based compensation related to non-vested stock option awards and $10.8 million related to restricted stock units which are expected to be recognized over a weighted-average period of 2.44 years and 2.89 years, respectively.

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 ESPP is considered non-compensatory per current share-based compensation accounting guidelines. The aggregate number of shares of common stock which may be issued under the plan shall be no more than 2.0 million shares. Shares of common stock issued under the ESPP during 2014, 2013 and 2012 were less than 0.1 million in each of the years at a weighted average price of $11.43, $9.32 and $9.40 respectively.