Flooding that began more than four months ago continues to affect the optical components industry, as a major supplier reported a revenue decline of nearly 50 percent for the second quarter of fiscal 2012 and continues to move customers out of a still-flooded facility that may never reopen. The disaster began last July after unusually heavy monsoon rains, killing hundreds and flooding from Chiang Mai in the north to parts of the capital city of Bangkok near the mouth of the Chao Phraya River. Waters began infiltrating industrial manufacturing facilities near Bangkok in the fall. The event, estimated by the World Bank to have cost $45 billion, now ranks as the world’s fourth costliest, surpassed only by the 2011 earthquake and tsunami in Japan, the 1995 Kobe earthquake and Hurricane Katrina. Fabrinet, a major provider of optical communications 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 device markets. 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 July 11, 2011 (left) and Oct. 23, 2011 (right). In both images, the Chao Phraya River curves through the southwestern part of the city (image lower left). Thailand’s monsoons generally last from mid-May to September. However, the large expanse of floodwater in October 2011 is unusual, even in 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.) On Oct. 24, 3.5 feet of water infiltrated several manufacturing buildings at Fabrinet’s Chokchai campus in Pathum Thani. The facility had accounted for between 30 and 40 percent of the company’s revenue; the company does not have manufacturing capabilities outside of Thailand. Water was pumped out of Chokchai buildings as of Nov. 29, and while levels outside the walls surrounding the plant continued to recede, they remained at 2.5 feet high. Fabrinet says it may never again manufacture at the Chokchai campus; instead, it will divert manufacturing seven miles north to existing buildings 3, 4 and 5 at its Pinehurst campus and to its newest structure there, building 6, upon completion. Pinehurst experienced minimal impact from the flooding. Completing building 6 is the primary driver of its near-term plans to boost capacity, said John Marchetti, Fabrinet chief strategy officer, in a Feb. 6 earnings call with investors. “We have met our initial objectives and now have 11 manufacturing bays representing 80,000 square feet open and ramping with customer projects migrating from Chokchai,” he said. “Our next step is to complete the entire 300,000-sq-ft building, which includes engineering and office space, by the end of March.” Upon completion, the capacity of building 6 will be more than sufficient to house all customer products from Chokchai and leave room to ramp production of additional projects from new and existing customers, Marchetti said. 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 Chokchai site accounted for 29 percent of its first-quarter revenue and Pinehurst, for 67 percent. Flood-related expenses for the quarter were $40.3 million, said Mark Schwartz, chief financial officer at Fabrinet. Inventory damage, both to Fabrinet and its customers, accounted for $26.2 million of the total; $4.6 million was for damages to the company’s machinery and equipment, and the remaining $9.5 million stemmed from damage to its Chokchai campus and other flood-related expenses. Future flood-related losses are estimated to be between $44 million and $63 million. Revenue for the second quarter, which ended Dec. 30, 2011, was down nearly 50 percent, the company said. And achieving the $96.6 million total was feasible “only through the incredible effort of our employees and the strong support from our customers,” Schwartz said. Revenue for its optical communications sector was $68.4 million, or 70 percent of the total. Lasers, sensors and other revenue totaled $28.2 million, or nearly 30 percent. “Quarter over quarter, this represents a decline of 50.3 percent in optical communications and a decline of 42.2 percent in our lasers and sensors market, in both cases driven by the impact of the October flood,” Schwartz said. “I would expect the first quarter of 2013, the September quarter, will likely be the first quarter where we wouldn’t expect our revenues to be impacted as a result of the flood,” he said. The company told investors it didn’t expect to lose customers permanently from the flooding, and CEO Tom Mitchell added that Fabrinet had gained several industrial optics customers in the last quarter, although he wasn’t at liberty to name them. Fabrinet officials pointed out that some of the revenue decline is attributable to a weakening in the overall communications industry. Regarding the industry overall, Marchetti commented, “We believe that steep order reductions witnessed in the past year have given way to stability, along with some pockets of improvement … inventories are lean, overall industry demand is stable to slightly improving, and our own supply capabilities are strongly rebounding.” Fabrinet’s customers, who are working with both their own insurance carriers and Fabrinet’s toward reimbursement, also recently started announcing the impact of the continuing production slowdown on their quarterly revenue and estimated yearly earnings. “We expect full commercial production by the end of March for three of our five affected product lines and within the June quarter for the remaining two,” said Alain Couder, chairman and CEO of Oclaro, a San Jose, Calif.-based optical communications and laser components provider, on Jan. 26. Those product lines, which have moved to Pinehurst, include high-power lasers, amplifiers, tunable dispersion compensators, lithium niobate external modulators and wavelength-selective switch products. For the second quarter of 2012, Oclaro reported revenue of $86.5 million, down from $105.8 million in the first quarter. “Although our management cannot fully quantify the possible impact of the flooding in Thailand on our business, the supply disruption materially and adversely impacted our results of operations, including our revenue, for the second fiscal quarter of 2012, and will materially and adversely affect our results of operations … for at least the next two fiscal quarters,” Oclaro said in a late January SEC filing. 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. II-VI of Saxonburg, Pa., a maker of laser optic materials, optics, components and electro-optical products, said in a Jan. 24 second-quarter fiscal 2012 earnings call that the flooding significantly impacted Aegis Lightwave, a tunable optical device maker it acquired in July 2011. Aegis is a Fabrinet customer at the Chokchai campus. “The loss in production capacity … was significant with Aegis’ revenue in the December quarter decreasing by about 40 percent compared to the September quarter,” said II-VI Chief Financial Officer Craig A. Creaturo during the call. It will be late in the fourth quarter before Aegis production returns to pre-flood levels, II-VI President and CEO Francis J. Kramer said. Fremont, Calif.-based Opnext, a supplier of optical products and systems formed out of Hitachi, reported on Feb. 7 that revenue for its third fiscal quarter was down 38.3 percent sequentially to $53 million due to the loss of production capacity at Fabrinet. “During the quarter, we started limited assembly and testing of our 10G modules at our facilities in Japan and California, and we plan to restart manufacturing in Thailand at Fabrinet’s Pinehurst campus this month, with a return to pre-flood production capacity expected by March 31, 2012,” said Opnext CEO Harry Bosco in a statement. Opnext supplies the communications, defense, security and biomedical industries. 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. Fabrinet has allocated surface-mount technology lines at Pinehurst to Opnext, and new test systems are being constructed to replace systems lost, Opnext said in December. 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, the company said. Fabrinet has historically accounted for more than 50 percent of its fiber optics-related revenue, Emcore Corp. said in October, when floodwaters submerged most of its manufacturing and test equipment as well as its inventory. Floodwaters affect multiple areas of Thailand during the humanitarian survey team’s aerial flood assessment north of Bangkok on Oct. 16, 2011. US Marine Corps photo by Cpl. Robert J. Maurer. In a first-quarter earnings call on Feb. 14, Emcore said revenue totaled $37.5 million, a decrease of $14.7 million resulting primarily from the decline in fiber optics revenue impacted by the flood. The fiber optics segment’s revenue decreased about $12.6 million from the prior quarter due to the flooding, accounting for $18.4 million, or 49 percent, of the company’s total revenue. Its photovoltaics segment was not affected. Its recorded losses for the quarter attributed to the flood were $5.7 million, with the majority due to destroyed inventory. Emcore 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. For more information, see the articles “Thailand Flooding Hits Optics Industry” at photonics.com/a48923 and “II-VI Acquires Aegis Lightwave” at photonics.com/a47580.