Aerojet Rocketdyne [AJRD] is facing a potential class action lawsuit over its restatement of financial statements for company fiscal years 2014 and 2013.
The lawsuit was filed Feb. 11 in U.S. District Court, Central District of California, by Juliann Travis, purporting to represent a class of purchasers of Aerojet Rocketdyne securities during the period of Oct. 15, 2013 through Feb. 1, 2016. Aerojet Rocketdyne, in its 10-K annual report released Tuesday, said the lawsuit alleges the company’s securities traded at artificially inflated prices as a result of financial misstatements. The lawsuit also alleges a violation of Section 10(b) of the Exchange Act and Rule 10b-5, promulgated thereunder by all defendants, and a violation of Section 20(a) of the Exchange Act by individual defendants.
Aerojet Rocketdyne said it corrected errors in prior periods primarily related to purchase accounting associated with contracts acquired as part of the acquisition of Rocketdyne from Pratt & Whitney. It also was related to contract accounting related to subsequent modifications to one significant acquired contract and contract accounting related to the improper recognition of sales associated with incentives.
Aerojet Rocketdyne said its errors associated with purchase accounting primarily related to the fair value assessment of Rocketdyne acquired customer contracts at the acquisition date following the close of the transaction. Aerojet Rocketdyne failed to “fair value” three acquired contracts in purchase accounting and the estimates of the Rocketdyne contracts’ percentage of completion used to recognize net sales should have been based on its estimate of remaining effort on such contracts at the acquisition date, instead of the inception date of the contract.
As a result of the revisited statements, Aerojet Rocketdyne posted an increase of $300,000 to net loss for the first nine months of company FY ’15, a decrease of $3 million to net loss for company FY ’14 and a decrease of $5 million to net income for company FY ’13. Aerojet Rocketdyne said other plaintiffs may bring additional actions with other claims based on the restatement and that it could be subject to additional stockholder, governmental or other actions in connection.
In its 8-K filed Feb. 1, Aerojet Rocketdyne anticipated the restatement would result in an increase to its loss from continuing operations before income taxes for company FY ’13 of approximately $9.5 million to $11.5 million and a decrease to its loss from continuing operations before income taxes for company FY ’14 and the nine months ended Aug. 31 of approximately $5 million to $7.25 million and $250,000 to $1 million, respectively.
Aerojet Rocketdyne, in its Tuesday 10-K report, said it believes this action is without merit and intends to contest it “vigorously.” The lawsuit also names CEO and President Eileen Drake, Vice President and CFO Kathleen Redd and former president and CEO Scott Seymour as defendants. The lawsuit alleges each individual defendant had a duty to disseminate accurate and truthful information promptly with respect to the company’s business prospect and operations, and to correct any previously-issued statements that had become materially misleading or untrue to allow the market price of Aerojet Rocketdyne’s publicly-traded stock to reflect truthful and accurate information.
Aerojet Rocketdyne, in its 10-K filing, said management concluded that, as a result of the identified material weaknesses, its internal controls over financial reporting were ineffective as of Nov. 30. Aerojet Rocketdyne in its February 1 8-K, announced after markets closed that the company fiscal years 2013 and 2014 should no longer be relied upon.
Aerojet Rocketdyne spokesman Glenn Mahone said Wednesday the company does not comment on pending litigation. Aerojet Rockedyne wouldn’t say if it hired a law firm to defend itself. Travis, the plaintiff, is being represented by the Rosen Law Firm of Los Angeles.
The lawsuit alleges that Aerojet Rocketdyne filed nine SEC filings that were materially false and/or misleading because they misinterpreted and failed to disclose that the purchase accounting for contracts acquired as part of the acquisition of Rocketdyne from Pratt & Whitney in the quarter ended Aug. 31, 2013; was erroneous. The plaintiff also argues that the company made false and/or misleading statements and/or failed to disclose that the accounting for changes or modifications to one of the acquired Rocketdyne business contracts beginning in the quarter ended Feb. 28, 2014; was erroneous and, as a result, Aerojet Rocketdyne’s statements about its business, operations and prospects were materially false and misleading and/or lacked a reasonable basis at all relevant times.
Rick Graf, a Washington-based lawyer, said Wednesday the success rate for these types of lawsuits almost exclusively ride on the nature of the restatements. Graf said if they were “malicious,” like improperly-booked revenues or if expenses were hidden, they can be much more likely of success than if they were inadvertent or a rogue employee. Graf added these types of cases and outcomes are very much fact-dependent.
Graf said, as a matter of course, any time a public company does a restatement of financials, they’re almost assured of being sued by one or more plaintiffs. He said if one searches the name of a company around the date it restated financials, one would see “20 or 30 firms” with online advertisements seeking stock holders to be lead plaintiffs in suits.
Section 10(b) of the Securities Exchange Act of 1934 forbids, among other things, the making of any untrue statement of material fact or the omission of any material fact necessary to make the statements made not misleading. Section 20(a) says every person who, directly or indirectly, controls any person liable shall also be liable jointly and severally, unless the controlling person acted in good faith. Rule 10b-5 bars any person from using any means of interstate commerce, or the mail or any facility of any national securities exchange, to defraud someone in connection with the purchase or sale of any security.
In other news, Aerojet Rocketdyne reported a loss of $16.2 million for the company in FY ’15, its second consecutive year of a loss, but $33.8 million better than the restated $50 million loss posted for FY ’14. It also posted $33 million in operating income for 2015, nearly 70 percent better than the $19.6 million restated for 2014.
Pratt & Whitney is a division of United Technologies Corp. [UTX]