Opnext shifts manufacturing following floods in Thailand

Opnext, Inc. (NASDAQ: OPXT) is the second optical components manufacturer to suggest that the flooding in Thailand will affect revenues for multiple quarters.

Opnext, Inc. (NASDAQ: OPXT) is the second optical components manufacturer to suggest that the flooding in Thailand will affect revenues for multiple quarters (see "Oclaro expects Thai flood to affect two quarters").

The floods halted operations at Fabrinet, Opnext's primary contract manufacturer, on October 22, 2011 (see "Thai rains knock out Fabrinet"). Production at Fabrinet's Chokchai factory – Opnext’s main site for making 10-Gbps optical modules – remains suspended and is unlikely to resume, the company says.

To mitigate the problem, Opnext has relocated limited production capacity to its manufacturing facilities in Totsuka, Japan, and Fremont, CA. It has also diverting a portion of the 10-Gbps module production capacity to Fabrinet's Pinehurst facility, located approximately seven miles north of Chokchai. 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. The company anticipates that Fabrinet will restart production in February 2012 and ramp up as new test systems come online.

In addition, Opnext says it is in the process of engaging an additional contract manufacturer with the goal of dual sourcing the manufacturing of certain high-volume products.

Opnext said late in December that it expected to have restored approximately 20% of the lost 10-Gbps module production capacity by the end of that month, with a return to full production capacity expected sometime early in the quarter ending June 30, 2012.

The loss of production capacity is expected to have significant impact on Opnext’s ability to meet customer demand for its products for the remainder of its fiscal year ending March 31, 2012, it says. The company expects that "loss of revenue in each of the third fiscal quarter ending December 31, 2011 and the fourth fiscal quarter ending March 31, 2012 will be material."

Multiple factors will affect the extent of revenue loss, Opnext says, including, but not limited to, its ability to move production to other locations, its ability to increase production at its other facilities, its ability to source parts from suppliers that have been affected by the flooding or from alternative suppliers, the level of demand from customers, and the extent to which customer needs can be met from existing inventory.

In addition to the revenue loss, Opnext says it suffered a loss of equipment and inventory in the flooding, the full extent of which is still not known. Production equipment at the Chokchai facility consisted primarily of 10-Gbps module test sets, with an original cost of about $31.3 million. The vendor also had approximately $15.7 million of inventory with Fabrinet in Thailand, consisting of $7.6 million of raw materials and $8.1 million of finished goods. Although roughly half of the finished goods have already been determined to be in good condition, Opnext is still in the process of examining the remainder of the finished goods as well as the raw materials. The company notes that insurance may not cover the full extent of the losses.

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