A disappointing 12 months for engineering and software group Invensys just got a lot worse as the company issued a warning on profits after uncovering a number of problems with the delivery of contracted work.
The shares, already down more than a third over the last year, are expected to take a bashing when trading starts after the company said that a number of operational issues relating to certain projects within Invensys Operations Management and Invensys Rail will put a dent in operating profits.
"We now expect that our reported operating profit for the full year will be significantly below last year," the company said.
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In a trading statement covering the third quarter of Invensys's fiscal year, the group assured that the performance of the rest of the group continues to be in line with management expectations.
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Invensys uncovered problems at its Operations Management division after a review of the engineering requirements and associated costs for the three contracts to install and commission control and safety systems into eight nuclear reactors under construction in China.
This review has concluded that there will be a delay in delivery and the need for additional engineering to be carried out on the first contract and, while some of this engineering will be reused on the later contracts, this will reduce the division's performance this year by around £40m.
That unwelcome surprise blotted the copy-book of a division which otherwise maintained momentum in the third quarter, with growth in revenue supported by continued market strength and its large order book.
Management has also been making use of its fine-toothed comb in the Rail division and found a number of problems there with some small contracts. The company has identified the need to delay revenue recognition and provide for additional costs, which will result in the division's performance for the year being around £20m less than expected.
At Invensys Controls, the appliance markets in North America and Europe remained weak which was partially offset by continued strength in the commercial and wholesale markets, the company said.
Net cash at the end of the year stood at £159m, down from £192m at the end of September, reflecting working capital fluctuations and the payment of the interim dividend.
On the positive side, Friday morning's announcement by Network Rail relating to its major signalling framework had some good news for Invensys Rail. The division has been appointed primary contractor in the Scotland, Central West and Wales & West areas.
In addition, Invensys Rail has been named as the secondary contractor in the Central East, Wessex, Surrey & Sussex, Great Western Main Line Inner and Great Western Mainline Outer areas; the secondary contractor gets to do any work in these areas that are too big for the primary contractor to handle.
The framework contracts run from 2012 to the end of "Control Period 4" in March 2014, when there will be an option for Network Rail to continue with each agreement on an annual basis for a further five years - that is, to the end of Control Period 5. This will then bring future frameworks in line with the regulatory Control Periods on which the government's funding for Network Rail are based.
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