MEMC Electronic Materials, Inc.

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MEMC Electronic Materials, Inc.

501 Pearl Drive
St. Peters, Missouri 63376
U.S.A.
Telephone: (636) 474-5000
Fax: (636) 474-5158
Web site: http://www.memc.com

Public Company
Founded: 1959 as Monsanto Electronics Materials Company
Employees: 5,500
Sales: $1.12 billion (2005)
Stock Exchanges: New York
Ticker Symbol: WFR
NAIC: 334413 Semiconductor and Related Device Manufacturing

MEMC Electronic Materials, Inc., is a St. Peters, Missouri-based producer of silicon wafers for semiconductor device manufacturers, the world's largest public company devoted solely to this market. The wafers range in size from 100 millimeters to 300 millimeters and are found in personal computers, mainframe computers, servers, and storage devices, as well as consumer electronics, automobiles, telecommunications devices, industrial automation and control systems, and aerospace and defense systems. MEMC's primary product is the standard polished wafer, featuring crystalline silicon with ultraflat and ultraclean surfaces, achieved through a chemical-mechanical polishing process pioneered by the company in the early 1960s.

MEMC also produces epitaxial wafers featuring a thin, single crystal silicon layer grown on the polished surface of a silicon wafer substrate and used in advanced semiconductor devices. In addition, MEMC offers other advanced branded wafers: Perfect Silicon, relying on a proprietary defect-free crystal growth process, and Magic Denuded Zone wafers, optimized for device fabrication and employing clusters of oxygen deep below the surface to capture harmful metals. MEMC operates three manufacturing facilities in the United States, and six overseas, in Japan, Malaysia, South Korea, Taiwan, and two plants in Italy. It also maintains 13 sales offices in the United States, Europe, and Southeast Asia. MEMC is listed on the New York Stock Exchange, with about one-third of its shares owned by the Texas Pacific Group.

POST-WORLD WAR II DEVELOPMENTS LEADING TO MEMC

Two years after World War II ended, Bell Laboratories produced the first transistor connected to the surface of semiconductor material. This development led to Texas Instruments launching commercial production of silicon transistors in 1954, and four years later the company produced the first computer chip, or integrated circuit. During this time, the labs of St. Louis-based Monsanto Chemical Company, founded in the beginning of the century to produce the artificial sweetener saccharin, began working in this arena. In 1959 the company announced the launch of a new semiconductor business called the Monsanto Electronic Materials Company, or MEMC, its purpose to produce ultra-pure silicon wafers for use in the manufacture of transistors and rectifiers. Thirty miles west of its headquarters, Monsanto began building a new plant in St. Charles County, where the atmosphere was supposed to be free of the kind of impurities found in a major city like St. Louis. Before the year was out, MEMC produced its first silicon wafer, 19 millimeters in diameter.

As an early participant in the field, MEMC became a pioneer, some of its innovations remaining industry standard into the next century. In 1962 MEMC introduced the Chemical Mechanical Polishing (CMP) process, creating a flatness standard for the smaller, faster circuits that were coming into use at the time. In that same year, MEMC developed and implemented the Czochralski (CZ) crystal growing process, which removed impurities through the application of a direct electrical current to the silicon in a molten state. MEMC researcher Dr. Horst Kramer was responsible for a major development in silicon materials science when in 1966 he discovered Zero Dislocation silicon crystals.

As the semiconductor industry flourished and the demand for ever smaller and faster computer chips grew, MEMC opened a new plant in Kuala Lumpur, Malaysia, which then put 2.25-inch wafers into commercial production. Although the United States had developed the semiconductor industry, Japanese firms began to dominate the field, and U.S. companies steadily fell by the wayside. A notable exception was MEMC, which continued to be an innovative force in the 1970s and beyond. Its researchers routinely made advances in the areas of wafer flatness, chemical mechanical polishing, and Zero Dislocation crystals. In 1979 MEMC became the first company to find a way to control oxygen content. MEMC also became the first to produce 125mm wafers, in 1975.

MEMC advances continued in the 1980s as the company became the first to commercially produce 150mm wafers in 1981, and through a partnership with IBM became the first to commercially produce 200mm wafers in 1984. Other important developments in the 1980s included the use of the "Flip Tran" cassette in 1981 to ship wafers with dry nitrogen to ensure cleanliness, and a year later the revolutionary development of Epi wafers, designed for use in the microchips that powered contemporary computers. The application of an epataxial layer to the wafer's surface allowed for the execution of advanced applications. MEMC also added to its production capacity in the 1980s, opening a plant in Spartanburg, South Carolina, in 1981, and a plant in Japan in 1983, thus becoming the first non-Japanese wafer manufacturer to operate in Japan.

INDUSTRY DOWNTURN IN 1985

Although MEMC was a survivor among American wafer manufacturers, it was basically operating in a commodities business and had a difficult time competing with Japanese companies on price in a highly cyclical business. IBM, Texas Instruments, and Motorola continued to produce wafers, but these chips were of exacting specification and only intended for internal use and represented a mere percentage of these companies' wafer needs. From 1985 through 1987 MEMC lost money, despite sizable growth in sales, and only an increase in wafer prices in 1988 allowed it to net $11 million on sales of $209 million. This kind of performance was not acceptable for a Monsanto unit, however, and starting in the mid-1980s the parent company began looking to divest the business. MEMC was offered to U.S. companies but there were no takers. The most likely suitors appeared to be Japanese companies, in particular the Nippon Steel subsidiary Nittsetu, which had become involved in silicon wafers.

In April 1989 MEMC was sold to a West German company, Huls AG, a subsidiary of industrial conglomerate VEBA AG, which 18 months earlier had become involved in the wafer business through the acquisition of Dynamit Nobel AG. A U.S. subsidiary, Dynamit Nobel Silicon, founded in 1984, was located in the Research Triangle area of North Carolina. After the MEMC sale received U.S. government approval, Huls consolidated the U.S., European, Japanese, and Malaysian operations of MEMC and Dynamit Nobel's U.S. and Italian silicon wafer business under the corporate structure of Dynamit Nobel, which then changed its name to MEMC Electronic Materials, Inc., a reflection of the brand value of the MEMC name. In addition, the corporate headquarters of Dynamit Noble was moved from Palo Alto, California, to St. Peters, Missouri.

COMPANY PERSPECTIVES

MEMC Electronic Materials, Inc. is the world's largest public company solely devoted to the supply of wafers to semiconductor device manufacturers. MEMC has been a pioneer in the design and development of wafer technologies over the past four decades.

To spur the business of the new MEMC, Huls pledged to add $50 million to the company's capital spending program over the next two to three years. Some of that money was put to use in research and development, as MEMC remained in the vanguard of industry innovations. In 1991 it became the first company to add commercial production of 300mm wafers, and in that same year it developed the first process using granular polysilicon, which provided cost and productivity advantages over the traditional "chunk" polysilicon, especially in the production of 300mm wafers. In 1995 MEMC acquired a granular polysilicon production facility, renamed MEMC Pasadena, Inc. (located in Pasadena, Texas), to provide a ready source for an essential raw material. Also in the early 1990s, MEMC teamed up with other companies in joint ventures, including the Posco Huls Company, created in 1991 by MEMC with Samsung Electronics, LTD, and Pohang Iron & Steel Co. Posco Huls concentrated on manufacturing 200mm wafers for the Korean market. In 1994 MEMC joined forces with China Steel and other companies to create Taisil Electronic Materials, Inc., located in Taiwan to serve that country's semiconductor needs. Then, in 1995, MEMC and Texas Instruments formed MEMC Southwest, Inc., to produce wafers in an existing Texas Instruments plant.

PUBLIC OFFERING IN 1995

MEMC went public in 1995, completing an initial public offering (IPO) of stock in July of that year, raising more than $440 million. VEBA AG retained a majority interest, however. The company had been enjoying a nice run, as did the entire chip industry, as an increasingly digital world appeared to have an insatiable appetite for chips. The semiconductor industry as a whole grew 30 percent a year in the first half of the 1990s. However, the good times came to a sudden end for wafer manufacturers in 1996 when demand fell off just as they had built up massive inventories. According to the St. Louis Post Dispatch, "Demand was down in part because chip manufacturers are continually finding ways to reduce the size of circuits and put more chips on each wafer—say, 400 where once they put 80. The industry calls the process 'line shrinkage.'" Although line shrinkage was good news for consumers, who saw the price of electronic devices drop, it was bad news for wafer manufacturers. For a time, increasing sales of electronic devices offset the effects of line shrinkage, but a financial crisis that hit Asia resulted in a drop in demand for electronic devices. A domino effect ensued, as Japanese wafer manufacturers lowered their prices to prop up demand, and with the yen also falling against the dollar, MEMC was unable to keep pace. Sales reached $1.12 billion in 1996, producing a profit of $101.6 million for MEMC, but a year later sales dipped to $986.7 million and the company recorded a loss of $6.7 million.

Revenues fell off another 23 percent in 1998 to $759 million and the company lost $316.3 million. With its stock price plummeting, the company had no choice but to tighten its belt and initiate cost-cutting measures that included large-scale layoffs and plant closings. Sales continued to dip in 1999, reaching $693.6 million, and MEMC lost another $151.5 million. Conditions improved significantly in 2000 as demand picked up, accompanied by more favorable pricing. Thus sales rebounded to $871.6 million. Still, the company lost $43.4 million, and by the end of the year signs of weakness in demand could be detected. The following year saw the semiconductor industry reach historic lows, dropping off 30 percent, or twice as much as the previous trough in 1985.

KEY DATES

1959:: Monsanto Electronic Materials Company is formed.
1962:: MEMC introduces chemical-mechanical polishing technology.
1970:: New plant opens in Kuala Lumpur, Malaysia.
1983:: MEMC becomes the first non-Japanese company to open wafer factory in Japan.
1989:: The company is sold to Huls AG, merged with Dynamit Nobel.
1995:: An initial public offering of stock is made.
2001:: Texas Pacific Group acquires control.
2003:: The company returns to profitability.

Well before this juncture, MEMC's corporate parent indicated that it wanted to sell its nearly 72 percent stake in the business. Then in June 2000 VEBA AG merged with VIAG AG to become E.On AG, which decided to focus on its core business of power generation and to divest other non-utility companies in addition to MEMC. E.On hired Merrill Lynch to help in selling its interest in MEMC but the investment banker found no takers, prompting E.On in 2001 to consider bankruptcy for MEMC, which in July announced it might run out of cash by the end of September. But E.On hung on, and in October of that year sold MEMC for a mere dollar to the investment company Texas Pacific Group to simply get out from under a debt load of more than $1 billion or avoid spending the money needed to close down the business. "But the deal is not so stark as it seems at first blush," reported the St. Louis Post-Dispatch at the time. "Texas Pacific Group agreed to revise the purchase price to as much as $150 million—if MEMC substantially improves its financial performance next year…. Texas Pacific also agreed to extend $150 million in debt financing to MEMC."

One of the first changes Texas Pacific made was to restructure MEMC's debt, a move that had a significant impact in 2002 when MEMC began to stage an impressive comeback. Sales increased to $687.2 million from $618 million the year before, and the company shaved its net loss from $523 million to $22.1 million. In addition to benefiting from cost reductions, MEMC was also quick to take advantage of improved market conditions in 2002 to leverage its reputation for innovation to sell new products. The company's change in fortune was reflected in the rising price of its stock, which the Wall Street Journal recognized as one of the ten best-performing technology stocks for the year.

MEMC built upon the momentum established in 2002 to produce even stronger results in 2003. Revenues improved to $781.1 million, 30 percent of which came from the sale of products introduced in the previous three years, and the company returned to profitability, netting $116.6 million. The surge continued in 2004 and 2005, when sales topped $1 billion and then increased to more than $1.1 billion, while net income reached $226.1 million in 2004 and $338.2 million in 2005. Business remained strong in the first quarter of 2006 when MEMC set a number of financial records. It appeared that MEMC had completed a dramatic turnaround in a short period of time, but given the cyclical nature of the semiconductor industry, it remained to be seen how the company would react the next time the market experienced a downturn.

PRINCIPAL SUBSIDIARIES

MEMC Electronic Materials France S.A.R.L.; MEMC Electronic Materials, GmbH; MEMC Electronic Materials Sdn. Bhd.; MEMC Electronic Materials, S.p.A.; MEMC Electronic Materials (UK) Ltd.; MEMC Holding B.V.; MEMC International, Inc.; MEMC Japan Ltd.; MEMC Korea Company; MEMC Pasadena, Inc.; MEMC Southwest Inc.; Taisil Electronic Materials Corporation.