By David Clucas

Sometimes you have to gut a house before attempting a remodel.

That seems to be the strategy of new Performance Sports Group (PSG) CEO Harlan Kent, who since joining the struggling company in June has moved rapidly to realize losses, restructure divisions and lay off employees at the parent of Bauer Hockey, Mission Hockey, Easton and other team sports brands.

This all led up to the public company’s (NYSE:PSG) August 15 announcement that it will delay its annual 10-K report, for its fiscal year ended May 31, 2016, to “conduct an internal investigation in connection with the finalization of the company’s financial statements and the related certification process.” And on August 17, PSG confirmed it was the subject of inquiries by U.S. and Canadian securities regulators, including an investigation by the U.S. Securities and Exchange Commission.

In other words, as officials peeled back the carpet and drywall, they likely found some structural problems.

In delaying the 10-K filing, officials admitted that “the failure to file on time is expected to result in a default under the company’s credit facilities.” That sent PSG’s already battered stock down more than half its value to less than $2 per share August 15 on the New York Stock Exchange.

Officials said they are in discussion with the company’s lenders, although noted “there can be no assurances as to the outcome of such discussions.” They continued, “The Audit Committee and its advisors are working diligently to complete the investigation with a view to having the company finalize the Form 10-K as soon as practicable, although at this time it is uncertain when this will occur.”

Financial Uncertainties
While investors aren’t yet writing PSG’s obituary, they have a keen interest on how the company is managing the triple whammy of a decline in diamond-sport sales, the lingering effects of recent retail bankruptcies and currency exchange-rate pressures.

PSG last gave a financial update with preliminary fiscal-fourth-quarter results on June 8, at the time of Kent’s hiring. It projected the quarter’s revenue down 10 percent to $133 million and fiscal-year 2016 revenue also down 10 percent to $587 million. Officials further noted that the company had made progress on its supply-chain cost saving efforts and expected to have reduced inventories by $18 million from a year ago, and reduced its asset-based revolving loan balance by approximately $38 million during the second half of the year to “well below its $100 million target.”

“The continued challenging market conditions created customer credit issues that exceeded our expectations,” PSG Brands President Amir Rosenthal, said at the time. “In response to these developments, we took actions during the quarter to reduce shipments to customers that were not settling their outstanding payments in line with our requirements.”

Kent, the former CEO at Yankee Candle, went right to work, announcing in July that PSG would consolidate its entire baseball/softball category under its existing Easton operations in Thousand Oaks, CA, closing two Combat brand facilities. Then, in early August, Kent announced PSG would reduce its workforce by 15 percent at a severance expense of $2.8 million in the first half of fiscal 2017 for an estimated annualized savings of $5.9 million.

“We continue to examine our corporate structure as well as identify savings opportunities across the organization that can be re-invested in key consumer and customer-facing activities, and utilized to pay down debt,” Kent said. “It is important that we focus our efforts on our core businesses of hockey, baseball/softball and lacrosse, while we make improvements to our business processes with the goal of making our entire company more efficient and effective.”

Photo Courtesy Easton/PSG