Shares of Matrix Service Company Get Hammered by Profit Warning

What happened

Shares of Matrix Service Company (NASDAQ: MTRX) are down 25% as of 1:00 p.m. EDT today. The reason for the sharp drop-off comes after the engineering,construction, and maintenance companyissued a press release that stated it will post a loss in the coming quarter.

So what

Perhaps the only good thing that can be said about today's press release is that at least management had the courtesy to give investors and analysts a heads-up that this quarter would be an ugly one. While Wall Street was expecting that fiscal third-quarter 2017 earnings would be around $0.13 per share, management just announced that it anticipates a net loss between $0.49 and $0.56 per share. It also said that its consolidated backlog will decline from $814 million to $790 million.

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The big change in expected earnings is the result of the company taking a large impairment related to a major project in its electrical infrastructure business segment. Management believes that the financial outcome of the project has deteriorated considerably. It noted factors such as delays, poor labor productivity, and system turnover.

Now what

The silver lining to this announcement is that it isn't a company killer in the short term. Matrix's balance sheet is quite solid; it has enough cash to cover any near-term obligations, and $790 million in backlog is enough work to see it through the year without any other significant impairments or deterioration of the business. Also, with oil and gas drilling activity picking back up again, there will be opportunities for some shorter energy infrastructure and storage work that could pad the bottom line.

The question that this press release raises is how much this deteriorating project will impact Matrix's relationship with its customers. The engineering and construction business is predicated on customers trusting that a company can deliver a project on time and within budget.

Going forward, investors should focus on new project awards. If new ones continue to come in with little sign of trouble, then perhaps this is just a temporary bump in the road. If they start to dry up, though, then things could get worse from here.

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Tyler Crowe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.