28 October 2011

Thailand flooding to impact Fabrinet’s contract manufacturing to end of 2011

Thailand-based Fabrinet Co Ltd (which provides optical, electro-mechanical and electronic contract manufacturing services) has this week reported the impact of the severe flooding in Thailand on its manufacturing plants in the country, which has affected customers including Opnext, Oclaro, JDSU and Infinera.

On 22 October, flood waters infiltrated the offices and manufacturing floorspace at Fabrinet’s Chokchai campus in Pathum Thani. Before the infiltration, the firm took precautionary measures, where possible, to move or protect production and test equipment, inventory and tooling. However, manufacturing buildings 1 and 2 were flooded with several feet of water, inflicting extensive damage and rendering the facility largely inaccessible. Fabrinet believes that production is unlikely to resume at Chokchai before the end of this quarter.

The flooding has not breached the firm’s Pinehurst campus (about 7 miles north of Chokchai). However, production at buildings 3, 4 and 5 there continues to be suspended due to the impact on local transportation and utilities (including the availability of power), which continues to affect both arterial and access roads to Fabrinet’s factories and some employee residences.

Fabrinet is the primary contract manufacturer for optical module and component maker Opnext Inc of Fremont, CA, USA, which says that it expects the flooding at Chokchai to have a significant impact on its operations and its ability to meet customer demand for its products in the near future.

While Opnext is still assessing the likely impact on its financial results for the current and future quarters, it expects that the loss of revenue in its fiscal third-quarter (ending 31 December) will be material. Multiple factors will affect revenue loss, including Opnext’s ability to move production to other locations, existing inventory from which to meet customers’ needs, the level of customer demand, and Opnext’s ability to increase production at other facilities.

Fabrinet is also the primary contract manufacturer for Oclaro Inc of San Jose, CA, USA, which makes optical communications and laser components, modules and subsystems. Fabrinet manufactures about 30% of the firm’s total finished goods in Chokchai and Pinehurst.

Oclaro said that its assessment of the damage to equipment and inventory on site is affected by the limited site accessibility. Oclaro and Fabrinet management are investigating alternative production locations and have enacted business continuity plans. Shipments continue from Oclaro’s manufacturing facility in Shenzhen, China and other locations. However, the firm is evaluating the broader supply chain implications of the flooding in Thailand across its entire manufacturing operations.

Due to the ongoing assessment of flood damage and recovery plans, Oclaro is postponing the announcement of its quarterly results. “However, we are pleased to report that our preliminary results are within our previous guidance range and that our profitability was near the upper end of the range,” says Oclaro’s chairman & CEO Alain Couder. Specifically, for fiscal first-quarter 2012 (ending 1 October 2011) Oclaro now expects revenue of about $106m (down on last quarter’s $109.2m, but within the guidance of $103–113m), non-GAAP gross margin of about 23% (towards the upper end of guidance of 18–24%, and up on last quarter’s 22.9%), and adjusted EBITDA of minus $4.5m (compared with guidance of minus $8.5–2.5m, and a slight improvement on minus $4.7m last quarter). Oclaro expects to announce the date of its next quarterly earnings release by 2 November.

Fabrinet is one of three primary contract manufacturing partners for the Communication and Commercial Optical Products (CCOP) business segment of JDSU of Milpitas, CA, USA, supporting a portion of the CCOP product portfolio from Pinehurst (but not Chokchai). JDSU personnel are on site working with Fabrinet. “We are closely monitoring the situation and communicating with our customers, taking action to secure equipment and inventory at the site, and developing and preparing to execute contingency plans,” said JDSU. “We are evaluating the impact of these events on our CCOP segment and will provide an update when we report first-quarter earnings results on 1 November.” JDSU’s Communications Test & Measurement and Advanced Optical Technology (AOT) business segments anticipate little to no impact.

Fabrinet is also a contract manufacturer for Infinera Corp of Sunnyvale, CA, USA, a vertically integrated manufacturer of digital optical network systems incorporating its own indium phosphide-based photonic integrated circuits (PICs). Infinera says that it is executing business continuity contingency plans using existing inventory and moving to alternate contract manufacturers and second sources. However, it will likely not be possible to transition all components and subsystems quickly enough to avoid some supply chain disruption. The firm says that its priority is to invest the necessary resources to minimize the number of customers affected and limit any impact on their operations.

Infinera is still assessing the full extent of the impact on its financial results for the current and future quarters, but it currently estimates the potential negative impact to its December-quarter guidance to be 5–15% of revenue (depending on the level of competition for alternative sources for relevant components).

Fabrinet said on 24 October that conditions with the continued flooding were still evolving quickly, and that the final impact could not yet be determined at that time.

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