GlassHouse Accuses Aerojet Rocketdyne Of Deceptive Accounting

Aerojet Rocketdyne Holdings Inc AJRD stock traded lower Thursday after short seller GlassHouse Research accused the company of accounting shenanigans and misleading earnings reports.

GlassHouse alleges that Aerojet Rocketdyne has abused its percentage of completion accounting practices and prematurely added revenue from long-term contracts. Aerojet Rocketdyne adopted the ASU 606 revenue recognition policy at the beginning of 2018, and GlassHouse said the company’s backlog took a $587-million hit as a result; GlassHouse said Wall Street doesn’t seem to appreciate the impact this extraction will have on future sales.

The company has shown a troubling pattern of missed milestones, unbilled receivables and plummeting advanced payments in recent quarters, suggesting a poor-quality backlog and future earnings risk down the road, according to GlassHouse. 

Benzinga has contacted Aerojet Rocketdyne for comment on GlassHouse's allegations by phone and email. 

GlassHouse also alleges that two key reserve accounts, “reserve for overhead rate disallowance” and “contract loss provisions,” have been significantly underfunded by more than $30 million over the past two years, inflating the company’s earnings numbers by millions. 

“In order to mask true economic earnings which have faltered in recent periods, we believe management has underfunded some of its key reserves and capitalized recurring expenses,” GlassHouse said in its report.

When these accounting maneuvers are taken into consideration, GlassHouse’s sustainable earnings estimates suggest Aerojet Rocketdyne stock is overvalued, the short seller said. 

“Premium valuation erroneously based on faux earnings is unwarranted given the material long-term structural issues and near-term accounting risk." 

GlassHouse has a $14.50 price target for Aerojet Rocketdyne, which implies more than 51-percent downside from the stock’s current price.

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