As indicated in the first quarter of fiscal 2011, a U.K. division that manages energy market contracts saw its profit margins narrow significantly on several projects. This resulted in particular from inadequate cost assessment, as well as lack of rigor in project management, procurement and subcontracting.
In the second quarter, the Corporation continued implementing the division's turnaround plan, including:
1. Set up a new management team with solid project management skills;
2. Improve the subcontracting and supplier network model leveraging best practices from other Ovivo divisions;
3. Continue integration with the operations of the other U.K. divisions, including Christ Water Technology AG (CWT) entities, to maximize synergies and harmonize the client offering, particularly by drawing on the technology portfolio as a whole.
Implementation of this plan specifically resulted in a complete reassessment of completion costs for projects underway as well as the working capital items related to these projects.
As a result, the U.K. division recorded an operating loss before amortization of approximately $7.4 million for the first six months of the fiscal year ($0.3 million and $7.1 million for the quarters ended June 30, 2010 and September 30, 2010, respectively).
Moreover, a second European division is encountering difficulties completing certain contracts in the municipal segment won prior to the acquisition of CWT. This generated additional costs resulting in an operating loss of $1.9 million for the first six months of fiscal 2011 ($0.5 million and $1.4 million for the quarters ended June 30, 2010 and September 30, 2010, respectively). The approval process and the controls over order booking and, in particular, cost estimating are being tightened, as elsewhere in the Corporation.