FSI International, Inc.
FSI International, Inc.
322 Lake Hazeltine Drive
Chaska, Minnesota 55318
Fax: (612) 448-2825
Sales: $190.4 (1995)
Stock Exchanges: NASDAQ
SICs: 3559 Special Industry Machinery, Not Elsewhere
FSI International, Inc., a leading producer of automated equipment used in the manufacture of integrated circuits, has served a worldwide market since its founding in 1973. The Minnesota-based company concentrates on three distinct technologies: silicon wafer cleaning systems; self-contained, robotics photolithography systems; and chemical delivery, blending, and generation systems. The company staged a dramatic comeback after faltering within a year of its first public stock offering in 1989.
The history of FSI may be traced to the 1966 formation of Fluoroware, Inc., a custom fabricator for the electronics industry founded by Victor Wallestad. When Wallestad established Fluoroware, he recruited Joel Elftmann for his start-up team. Elftmann, a technical school graduate, had worked as mold maker at Booker& Wallestad and had also worked a second shift as a die maker for another company, while making custom molds in his shop at home in his spare time. Elftmann would later figure prominently in the founding of FSI.
Fluoroware’s core product was a Teflon carrier which held silicon wafers in position during the manufacturing process. Such large manufacturers as Delco, Texas Instruments, and Fairchild Semiconductors were among its early customers. When Fluoroware was contracted by a division of Collins Radio to build a drying mechanism for silicon wafers, Elftmann, as supervisor of design and tool making, lead his production team in the invention of the first centrifugal “spin dryer” for semiconductor manufacturing. The success of the spin dryer lead to development of the first automated silicon wafer rising and drying system using a spray technology.
The spray technology provided an alternative to the immersion cleaning method used to remove impurities from silicon wafers during the manufacturing of computer chips. The rinser/ dryer equipment required technology more advanced than what was necessary for Fluoroware’s core business area. So in 1973, Vic Wallestad founded a company to develop the product. FSI International, Inc. was begun on $60,000, with Wallestad owning 75 percent and Elftmann owning 25 percent of the new business.
The Years of Private Ownership
FSI established itself as an international supplier of semiconductor manufacturing equipment from the beginning of its existence; exports brought in at least a quarter of total sales. In 1975, Elftmann used his experience gained through establishing a European sales and distribution organization for Fluoroware to co-found, with Fluoroware, Metron- Semiconductors Europa, an independent organization which sold wafer processing equipment and provided technical support to customers. A similar arrangement was made with Fluoroware in 1985 via the founding of Metron Semiconductors Asia which served Korea, Taiwan, Singapore, China, and Hong Kong.
An innovator, FSI was among the first semiconductor equipment suppliers to establish its own computer chip processing laboratory. Opened in 1978, the lab helped FSI to more accurately identify customer production needs in relationship to its equipment. The company also lead in the commercialization of chemical management and distribution technology as an alternative to bottled chemicals. A joint venture with Texas Instruments, initiated in 1985, resulted in the creation of the first vapor-phase cleaning system, which greatly reduced water and chemical consumption.
As micro chips became smaller and more complex, FSI technology became an increasingly crucial part of the semiconductor manufacturing process in which layers of conducting and insulating materials are applied and etched away from silicon wafers in order to form the electronic circuits. The chemical cleaning process must be performed repeatedly during manufacturing: impurities of even a fraction of a micron can render a chip useless. FSFs “wet-process” equipment, which measured, timed, and released a liquid chemical spray, sold for $40,000 per unit or up to $600,000 per system; in 1987 FSI held just over 20 percent the $125 million market segment. That same year, FSI introduced the first gas-cleaning system, the “Excalibur,” which sold for $250,000 to $500,000.
In 1988 FSI was a leading supplier—among about forty competitors—of cleaning machines for the computer chip industry, with total sales of about $45 million. “Excalibur” gas-cleaning system was named one of the nation’s 100 best new technology-oriented products by Research& Development magazine. International sales had risen to 45 percent, and the company employed 350 people. The company’s main concerns seemed to be the volatility of the industry—there had been four serious downturns since FSI started business in 1973—and reliance on one customer for a significant proportion of its business. IBM, including both domestic and overseas operations, accounted for 31 percent of FSF s sales. FSF’s first decade and a half of business had been marked by solid leadership and financial stability. The company posted net profit in all but two years.
Troubled Times Mark Transition to Public Company
FSI went public in January 1989 with an initial public offering of 1.45 million shares of common stock priced at $7.50. A reporter for the St. Paul Pioneer Press Dispatch wrote in April 1989, “FSI had been flirting with the idea of going public for years, getting as far as an initial draft of a prospectus in 1985.” But a computer chip industry downturn forced FSI to scrap the public offering and make cut backs. When the switch from a private to public company finally was accomplished, the day-to-day leadership changed too. In August 1989 the board moved Richard Jackson, a professional manager with FSI since 1982, into the CEO position. Elftmann retained his position as chairman of the board but turned his attention to foreign distribution and industry concerns.
Annual revenues for the fiscal year ending in August 1989 were $61.6 million, and net income was $3.2 million, but FSI would not record another profitable year until 1993. Problems in the three years from 1990 to 1992 added up to $8 million in loses for the newly public company. Trouble was already on the horizon at the end of 1989, the beginning of FSIs 1990 fiscal year. First quarter operating income had fallen sharply compared to the previous year: from $908,000 to $391,000. One piece of bad news followed another, and it was colored by the aftereffects of the national economic recession of the late-1980s, as well as a changing international business environment.
The dismantling of the former Soviet Union and resulting economic chaos caused FSF’s Eastern European sales to drop from $7 million to $1 million by 1990. FSI lost another $6 million in sales when a German company failed to renew its licensing agreement for photolithography technology, a process of circuit pattern imprinting. Although FSI promptly signed on with Texas Instruments (TI) for similar technology, TF’s own difficulties resulted in suspension of development support in June 1991. Two FSI expansions, one in California and the other in Japan, failed and cost another $1 million. To make matters worse, the company had to pull newly upgraded cleaning equipment from some customers’ plants and re-engineer others. In a rush to get the equipment up and running FSI skipped on-site testing; this proved to be another costly error.
Faced with the loss of market share, customer good will, and bleak prospects for the future, Elftmann resumed day-to-day management of FSI in May 1991. Projected sales were down nearly $20 million from 1989. The August order backlog fell to about $5 million. In November 1991, employees were asked to take Thanksgiving week off without pay, while the senior management team met. Elftmann later recalled in a 1994 Minneapolis Star Tribune article, “We started with a blank sheet of paper, examined our strengths and weaknesses and proceeded to tear the organizational chart apart.”
The process resulted in a plan that included: the elimination of some long-term managers in order to strengthen FSI technical and managerial expertise; the phase out of a number of products—including the spin dryer that launched the company—while refocusing on three core businesses; and a financial commitment to engineering, research and development in order to elevate the level technology.
It was no easy task to implement the plan. FSI had been dropped as a customer by both its banks, and Elftmann had to personally guarantee $1.5 million in credit in order to finance the turnaround. Elftmann held 18 percent of the company’s stock and used that and his personal assets as security. The company pushed forward and opened a new development facility in Dallas; former TI employees with industry know-how came on board. Elftmann reached out to its customers, such as Motorola and TI, for guidance on improving on product quality. Steve Wilson, a senior Motorola engineer was quoted in Corporate Report Minnesota in 1995 as noting, “One of the things that really distinguished FSI is that they asked for our help.”
FSI International, Inc. is a successful supplier, preferred by the semiconductor industry in strategic technology segments, proactively providing high value solutions with consistent performance; high reliability; on-time delivery; competitive cost; total support.
The Early 1990s Turnaround
FSF’s hard work began to pay off. Sales for fiscal year 1993 reached $77 million, and net profit was $3.2 million. Sales jumped to $94 million in 1994, and net profit more than doubled. FSFs comeback was bolstered by a strong semiconductor industry: chip sales rose to $102 billion in 1994, a hike of $25 billion from the previous year. FSI had moved itself into position to capitalize on the gains.
Further evidence of the company’s turnaround came from customer and industry endorsement. TI named FSI vendor of the year in 1994. In 1993 and 1994, surveys conducted by a California-based consulting group, VSLI Research, showed that semiconductor equipment customers ranked FSI among the best process equipment suppliers. FSI received its International Standards Organization (ISO) certification in recognition of its quality assurance processes in 1994. And Semiconductor International magazine selected three FSI products for its 1994 Editor’s Choice Best Product Award.
FSI’s success continued in 1995. Each of its three divisions was gaining world-wide market share: surface conditional area held 7 percent of a $1.2 billion market; microlithographic technology held 9.5 percent of a $1.1 billion market; and chemical management held 35 percent of a $150 million market. The Chemical Management division was enhanced by the acquisition of Applied Chemical Solutions. The Surface Conditioning division made headway in Japan through its joint venture m*FSI Ltd, which had been established in 1991. The company’s backlog of business reached a record $115 million at the end of the fiscal year.
FSI was in a growth period. Two stock offerings made in 1995 raised more than $100 million, which was targeted for capital expenditures and acquisitions. FSI’s stock rose to a high of $51.75 in June of 1995; the stock was split two-for-one that same month. Sensitive to the fortunes of the large semiconductor manufacturers, FSI stock prices dropped to around $12 per share in the beginning of 1996.
But FSI appeared to be taking a stance of optimism in 1996. New products, new markets, and new technologies were driving the chip manufacturers to expand their facilities. And counted among its customers were Intel, Motorola, TI, AMD, DEC, Fuijitsu, AT& T, and IBM. To meet demand and keep up with state-of-the-art production facilities, FSI continued its move to upgrade its operations and technologies. Expansions of facilities in Texas and Minnesota were announced. The engineering, research and development budget was set at $39 million. FSI licensed IBM’s Cryogenic Aerosol Cleaning Technology, and acquired Semiconductor Systems, Inc., which it consolidated as part of the microlithography division.
On to the 21st Century
Based on the rapid growth of products utilizing semiconductors—such as cellular phones and pagers—industry analysts were predicting that the annual world-wide semiconductor market could reach $300 billion by the year 2000. FSI is positioning itself to capture significant additional market share in each of its business areas by the turn of the century. The company expected a continued commitment to successful strategies, such as the licensing of new technology, support of internal research and development, and the pursuit of joint ventures with or acquisitions of companies with complementary technologies.
Applied Chemical Solutions Inc.; Semiconductor Systems, Inc.
Abelson, Alan, “Up& Down on Wall Street,” Barron’s, December 1989.
Beal, Dave, “Chip Cleaner Stays Ahead of the Game,” St. Paul Pioneer Press Dispatch, April 3, 1989, pp. 1, 8.
Carideo, Anthony, “When Chips Are Down, This Firm Cleans Them,” Star Tribune (Minneapolis), December 25, 1989, pp. ID, 5D.
“FSI International Has Record Sales, Profits,” St. Paul Pioneer Press Dispatch, March 28, 1989.
“FSI International, Inc.,” Corporate Report Fact Book 1996, p. 251.
“FSI Moving Assembly of Polaris 200 Clusters to Texas Lab Early Next Year,” Star Tribune (Minneapolis), May 24, 1996, p. 3D.
Gross, Steve, “FSI Cleaning Up in Removal of Computer Chip Impurities,” Star Tribune (Minneapolis), September 29, 1988, pp. ID, 4D.
Schafer, Lee, “Re-Engineering FSI,” Corporate Report Minnesota, June 1995, pp. 36-38.
“Victor Wallestad, Founder of Fluoroware,” Star Tribune (Minneapolis), November 17, 1993, p. 7B.
Youngblood, Dick, “FSI Co-Founder Owns Up to Woes, Looks to Future,” Star Tribune (Minneapolis), February 21, 1994, p. 2D.
—, “FSI Stock’s Soaring, but Elftmann Still Finds Things to Worry About,” Star Tribune (Minneapolis), May 31, 1995, p. 2D.