Last Friday, Standard & Poor's, the largest credit rating company in the world, placed a "B+ Watch Negative" corporate credit rating on CreditWatch for the Logan, Utah-based Icon Health & Fitness.
Messages requesting comment were not returned by Icon, but according to Reuters, the CreditWatch listing comes as a result of Icon’s continued weakening of credit measures caused by increased cost of sales and selling expenses. Another reason for the rating, according to Reuters, is the deterioration of Icon’s free operating cash flow though the first nine months of its fiscal year, which ends on May 31, 2012.
“The weakening of credit measures and cash flow resulted from a 20 percent year-over-year decline in EBITDA [earnings before interest, taxes, depreciation and amortization] during the first three quarters of fiscal 2012,” Reuters reported. “Although revenue over this period was relatively stable, EBITDA margin declined about 200 basis points (bps). The EBITDA decline resulted from a nearly 70-bp increase in cost of sales, and about a 135-bp increase in selling expenses.”
Icon’s selling expenses increased due to a one-time fee the company paid a retailer for a sales agreement.
Icon, whose brands include NordicTrack, Pro-Form, Image, Altra Footwear and Weslo, among others, is believed by analysts to be taking measures to resolve these issues, such as increasing sales through direct channels. Even so, analysts say it could be several quarters before the problems are resolved.
S&P will consider a downgrade in the credit rating if Icon fails to show it can’t get its EBITDA margin back to the 2011 levels.