By Melinda Rose, Senior Editor
BANGKOK, Thailand, Jan. 6, 2012 — Flooding that began more than six months ago continues to affect the optical components industry, as a major supplier has said that one of its manufacturing facilities may never reopen. Affected companies recently started announcing the impact of the continuing production slowdown on quarterly revenue and estimated yearly earnings. Some had better news for investors than others.
The floods, which began in July after unusually heavy monsoon rains, have killed hundreds of people and flooded from Chiang Mai in the north to parts of the capital city of Bangkok near the mouth of the Chao Phraya River (See: Thailand Flooding Hits Optics Industry). The flooding began affecting industrial manufacturing facilities near Bangkok in the fall.
The disaster, estimated to have cost $45 billion by the World Bank, now ranks as the world’s fourth costliest, surpassed by the 2011 earthquake and tsunami in Japan, the 1995 Kobe earthquake and Hurricane Katrina.
The Advanced Land Imager (ALI) on NASA’s Earth Observing-1 (EO-1) satellite acquired these natural-color images of Ayutthaya, north of Bangkok, on Oct. 23, 2011 (right), and July 11, 2011 (bottom). In both images, the Chao Phraya River curves through the southwestern part of the city (image lower left). In October, however, the river overflowed onto nearby flood plains, especially southwest of the river and west of Route 356. Thailand’s monsoon generally lasts from mid-May to September. Because these images show the region at different times of year, some of the differences in water and vegetation could result from normal seasonal variations. However, the large expanse of floodwater in October 2011 is unusual, even in a monsoon season. (NASA Earth Observatory image created by Jesse Allen and Robert Simmon, using EO-1. ALI data provided courtesy of the NASA EO-1 team and the US Geological Survey)
Fabrinet, a provider of optical communication components, modules and subsystems, industrial lasers and sensors for companies such as Oclaro, Infinera, JDSU and Opnext, has its facilities in Bangkok. Its customer base includes optical communications, industrial lasers and sensors OEMs that provide products to the semiconductor processing, biotechnology, metrology, materials processing, automotive and medical devices markets.
On Oct. 24, Fabrinet said that 3.5 feet of water had infiltrated several manufacturing buildings at its Chokchai campus in Pathum Thani, and that production there was expected to be suspended for the rest of the quarter.
In a Dec. 22 filing with the Securities and Exchange Commission, Fabrinet said that water had been pumped out of its Chokchai facilities as of Nov. 29 and that the company was continuing to recover and restore equipment and other assets, which it expected to complete during the first quarter of 2012. Equipment in working condition is being shipped seven miles north to its Pinehurst campus as it works to move customers from Chokchai to Pinehurst, which is dry and no longer has water in the area. Production at Pinehurst is back to preflood levels, Fabrinet said.
Water has been pumped out of its Chokchai facilities, Fabrinet reported on its website Nov. 29, and water levels outside the walls surrounding Chokchai continued to recede but still remained at 2.5 feet high.
Floodwaters affect multiple areas of Thailand, including this industrial park, during a humanitarian assessment survey team's aerial flood assessment north of Bangkok, on Oct. 16. (US Marine Corps photo by Cpl. Robert J. Maurer)
Fabrinet said in November that it may never again manufacture at the Chokchai campus but, instead, divert manufacturing to existing buildings 3, 4 and 5 at its Pinehurst campus, and its newest building, 6, at Pinehurst, upon completion. The company does not have manufacturing capabilities outside of Thailand.
Fabrinet reported total revenue of $186 million for the first quarter of fiscal 2012, which ended Sept. 30, 2011, an increase of more than 7 percent year-over-year. The results for the second quarter, however, are not expected to be so positive. Fabrinet issued a limited second-quarter revenue guidance estimate of about $28 million, or about what it generated before the shutdown, and said it anticipates a net loss related to the flooding. The Chokchai site accounted for 29 percent of its first-quarter revenue and Pinehurst, for 67 percent.
"Our top priority has been to restart production in Thailand following the intensive floods, and minimize any impact to our customers," said Alain Couder, chairman and CEO of San Jose, Calif.-based optical communications and laser components provider Oclaro, on Jan. 4.
Couder said the company has made "substantial progress" in restarting production for its affected product lines, and those efforts contributed to the company achieving preliminary revenue of $86 million for the second quarter of 2012, exceeding its guidance of $75 million to $85 million.
Four of its five flood-affected product lines are expected to restart commercial output at Fabrinet’s Pinehurst facility by the end of January, Oclaro said. Those lines include high-power lasers, which resumed shipments in November and has restored production to preflood levels; amplifiers, which resumed production in late December and is expected to be back to preflood levels by the end of the third quarter in March; and tunable dispersion compensators, which are expected to begin production again by the end of January and be back to normal production by the end of the third quarter.
Both lithium niobate external modulators and WSS (wavelength selective switch) products are expected to be back to preflood production levels in the fourth quarter, Oclaro said. Until then, limited commercial output of both products is done at some of its existing sites in the West.
Oclaro said it expects to spend about $6 million in each of the second and third fiscal quarters. These amounts include the necessary capital currently expected to recover product lines lost during the flood. Oclaro believes that it has adequate property and business interruption insurance to cover its flood-related losses. It also has certain insurance recovery rights under its supply agreement with Fabrinet. Although the total amount of insurance claims, and related recoveries, if any, cannot be estimated at this time, Oclaro currently believes that an advance payment from its insurance carrier in excess of $10 million is likely to be received in the March fiscal quarter.
II-VI of Saxonburg, Pa., a maker of laser optic materials, optics, components and electro-optical products, said Dec. 19 that it has completed an initial assessment of the damage and the impact on its second fiscal quarter and on fiscal 2012. II-VI’s recently acquired subsidiary, Aegis Lightwave, is a Fabrinet customer at the Chokchai campus (See: II-VI Acquires Aegis Lightwave).
The company said Dec. 19 that it expects to record an after-tax impairment charge of between $500,000 and $1 million, or 1 to 2 cents per share, for the second quarter ending Dec. 31, 2011, for Aegis’ damaged machinery, equipment and inventory. II-VI’s revised outlook for the fiscal year, which ends June 30, 2012, also incorporates the expected loss on Aegis products and the additional costs required for alternative manufacturing and assessing flood damages, as well as the write-off of damaged machinery, equipment and inventory. II-VI’s revised outlook expects revenue for the year to range from $550 million to $560 million and earnings per share to be between $1.05 and $1.10 per share.
Opnext, a supplier of optical products and systems formed out of Hitachi, said Dec. 28 that, as a result of the closing of the Chokchai factory, it has relocated limited production capacity to its manufacturing facilities in Totsuka, Japan, and Fremont, Calif. It also is diverting some of its 10-Gb/s module production capacity from Chokchai to Pinehurst. Opnext supplies the communications, defense, security and biomedical industries.
Fabrinet has allocated surface mount technology lines at Pinehurst to Opnext, and new test systems are being constructed to replace systems lost in the flooding, Opnext said.
An SH-60F Sea Hawk helicopter assigned to Helicopter Anti-Submarine Squadron 14 flies around the Bangkok area with members of the humanitarian assessment survey team and the Royal Thai Armed Forces to assess the damage caused by flooding on Oct. 22, 2011. (Photo: Defense Video & Imagery Distribution System/Navy Visual News Service)
Fabrinet will start production in February 2012 and ramp it up as new test systems come online, Opnext said. By engaging an additional contract manufacturer to dual source the manufacturing of some high-volume products, Opnext said it expects to have restored about 20 percent of the lost 10-Gb/s module production capacity by the end of December and to continue to increase production during the quarter ending March 21, 2012, with a return to full production capacity sometime early in the quarter ending June 30, 2012.
Opnext said the lost production at Fabrinet will have a "significant impact" on its operations for the remainder of the current fiscal year, which ends March 31, 2012.
Besides the loss of revenue, Opnext has experienced some loss of equipment and inventory in connection with the flooding at Fabrinet’s facility, the full extent of which is still not known, the company said. At the time of the flooding, the company's production equipment at the Chokchai facility included the 10-Gb/s module test sets, which originally cost more than $31 million.
Opnext also had about $16 million of inventory with Fabrinet, including $7.6 million in raw materials and $8.1 million in finished products. Half of the finished products are in good shape, and the remainder is being assessed. Although both Fabrinet and Opnext both have insurance, it is not clear whether insurance will fully cover the cost of Opnext's losses, the company said.
Fabrinet has historically accounted for more than 50 percent of its fiber optics-related revenue, Emcore Corp. said in October, and floodwaters had submerged most of its manufacturing and test equipment, as well as its inventory, in October.
Since then, Emcore said it has implemented alternative manufacturing plans at its facilities in China and the US. It also has been focusing on rebuilding its high-volume manufacturing infrastructure at other Thailand locations, with support from Fabrinet and its own manufacturing facility in China.
Emcore said it is working with Fabrinet's insurance to get reimbursed for inventory and assets that were damaged or destroyed. In the meantime, it has collected $2 million from its own insurance carrier and expects to receive another $3 million by this month.
"Our fiber optics revenue could be $12 [million] to $15 million less in our first quarter of fiscal 2012 as a result of this natural disaster," Emcore said in November, adding that its photovoltaics segment was not affected.
For more information, visit: www.opnext.com, www.emcore.com, www.oclaro.com, www.fabrinet.com or www.ii-vi.com