What: Shares of Orbital ATK (NYSE:OA) crashed on Wednesday and were down 20% at 11:15 a.m. EDT.
So what: Driving today's sell-off was the company's preliminary second-quarter report, which was released before the market opened. In that report, the company announced that it will delay the filing of its quarterly report due to an "ongoing review of accounting matters related to a Defense Systems Group contract." As a result of that review, the company anticipates restating its financial results for the fiscal year that ended on March 31, 2015, the nine-month transition period that ended on December 31, 2015, and the first quarter of this year. The company has identified misstatements relating to its $2.3 billion 10-year contract to manufacture small-caliber ammunition for the U.S. Army. The company now believes the contract will result in a net loss over its 10-year term, which requires it to record the entire loss in the period when it became evident, which, in this case, is fiscal 2015.
In addition to that accounting restatement, the company's preliminary second-quarter results underwhelmed expectations. While earnings were solid and outpaced analysts' expectations, revenue fell short. As a result, the company is trimming its full-year revenue guidance. Orbital now anticipates revenue between $4.45 billion to $4.5 billion as opposed to its prior range of $4.575 billion to $4.65 billion. Further, it's trimming its free cash flow guidance range from $325 million to $275 million down to a range of $275 million to $225 million. It is, however, boosting the low end of its earnings range by $0.05 per share, up to a new range of $5.30 to $5.50 per share thanks to stronger margins.
Now what: The market is known for taking a "sell first, ask questions later approach" any time there's a hint of accounting issues. In this case, the full extent of the accounting misstatements is not yet known, which is giving investors more reason to be cautious. Needless to say, investors need to keep a close eye on this development going forward.