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Rating Action:

MOODY'S ASSIGNS B3 RATING TO ICON'S PROPOSED $200 MILLION SR SUB NOTES; OUTLOOK STABLE

22 Mar 2002
MOODY'S ASSIGNS B3 RATING TO ICON'S PROPOSED $200 MILLION SR SUB NOTES; OUTLOOK STABLE

Approximately US$ 200 Million of Debt Securities Rated.

New York, March 22, 2002 -- Moody's Investors Service has assigned the following new ratings to ICON Health & Fitness, Inc. ("ICON"), a leading manufacturer and marketer of fitness equipment.

New ratings assigned:

B3 for the proposed $200 million senior subordinated notes, due 2012,

B1 senior implied rating, and

B2 senior unsecured issuer rating.

The rating outlook is stable.

The ratings reflect ICON's significant indebtedness and high financial leverage, weak balance sheet, sensitivity to retail industry trends and shifting consumer interest, the challenges of continuing to produce new products that have market-leading features, heavy reliance on a concentrated group of retail customers, and uneven financial performance in recent years. On the other hand, the ratings also recognize the company's leading market position in the fitness equipment market, broad product offerings with strong brand recognition, well-established presence in multiple distribution channels, favorable industry and demographic trends, and improvement in its financial performance and capital structure.

Factors that could cause Moody's to consider a positive rating action include increased customer diversification, stronger margins, and lower debt and financial leverage. Factors that could cause Moody's to consider a negative rating action include increased customer concentration, a sharp cutback in consumer spending, lower-than-expected demand for fitness equipment, a deterioration in the retail industry and particularly at ICON's key customers, and substantial acquisitions that increase leverage.

The B3 rating on the $200 million senior subordinated notes reflects their unsecured nature, contractual and effective subordination to senior debt, including outstandings under the senior secured credit facilities.

Concurrent with the issuance of the notes, ICON will seek to increase its existing senior secured revolving credit facility from $120 million to $210 million. The proceeds of the new notes, together with $113 million to be drawn under the up-sized revolver, will be used to refinance the $90 million outstanding under the existing revolving credit facility, to pay off $167 million of existing term loans and $44 million existing senior subordinated notes, and to pay transaction fees and expenses of about $12 million. The new financing, while keeping the company's total debt amount largely unchanged, will have the effect of extending the overall debt maturity and increasing availability under the revolving credit facility.

ICON is the world's largest manufacturer and marketer of home fitness equipment. It offers a broad line of equipment in four main categories: treadmills (61% of fiscal 2001sales, ended 5/31/01), aerobic exercise machines (23%), anaerobic strength training equipment (13%), and other related home fitness products and accessories (3%). Major brands include NordicTrack, Reebok, ProForm, HealthRider, Weslo, etc., which are among the most-widely recognized names in the fitness equipment sector. Products are marketed through department stores (47% of fiscal 2001 sales), mass retailers and warehouse clubs (28.5%), sporting goods and specialty fitness retailers (16%), and direct to consumer sales through catalogs, websites, and infomercials (8.5%). ICON has traditionally focused on the home equipment market, with only limited penetration in the institutional market (health club chains, training centers, and corporate gyms). With the recent acquisition of the FreeMotion brand, it plans to expand its presence in the $750-million-a-year institutional market.

The US home fitness equipment market, with estimated retail revenues of $3.8 billion a year, is highly competitive. The market is characterized by frequent new product introductions accompanied by major advertising and promotional campaigns. Because product life cycles can be short, product innovation and repositioning is essential to attract and retain consumer interest and to stay ahead of competitors, although certain products (treadmills, stationary bikes, etc.) are more mature and well-established. High gross margins enjoyed in the early stages of life cycle diminish as competition increases and as consumer interest subsides. Nevertheless, the long-term demographic trend in the US is generally favorable. Steady demand for fitness equipment is underpinned by the increasing population aged between 45 and 64, the age group that accounts for about 68% of treadmill sales in the US.

ICON has long-standing relationships with leading retailers in all the major distribution channels. It supplies the majority of the fitness equipment sold by Sears, the largest retailer of fitness equipment in the US. However, customer concentration is very high. The top three customers account for 62% of the company's fiscal 2001 revenue (ended 5/31/020), with Sears alone representing 43% of total sales. Loss of a key customer, or significant curtailment of purchases by any of these top customers is likely to have a material adverse impact on ICON's business and performance. At present, however, major customers are enjoying relatively good sales of fitness equipment. Sears, for instance, has been expanding its floor space for fitness equipment and adding new product lines that it carries.

In recent years, ICON has experienced uneven financial performance and volatile cash flows. In 1998 and 1999, the bankruptcy of several of its large retail customers resulted in about $140 million of lost revenues. Operating income and cash flows declined considerably as a result. The deterioration in performance, coupled with an unmanageably high debt level, forced the company to restructure its debt in late 1999. The restructuring resulted in a significant reduction in the company's debt burden through new equity injection and debt-for-equity swaps. Since the debt restructuring, the company has achieved considerable revenue growth and improvement in cash flow generation, helped by robust consumer spending, a favorable retail environment, as well as the company's focus on growing revenues of key products and with key clients.

For FY 2001, revenues grew to $821 million from $710 million in FY 1999, while adjusted EBITDA grew to $73 million from $55 million. For LTM ended 12/29/01, revenues totaled $855 million, while adjusted EBTIDA amounted to $74 million. New product innovation and constant repositioning and improving of mature products have helped keep margins largely stable. For LTM ended December-2001, gross margin and EBITDA margin were 29% and 8.6%, respectively, compared to 27.6% and 7.8% for FY 1999.

ICON's capex requirement is modest, at about $14-16 million a year, while research and development costs average about $10 million per annum. Working capital investment, however, is relatively high, given the need to finance a sizable inventory to ensure prompt delivery and the payment terms that customers receive. Subsequent to this financing, ICON will continue to be highly leveraged. Pro forma debt would total approximately $314 million, or 4.3 times LTM EBITDA (or 5.6 times on an EBITA basis). Balance sheet remains very weak, with negative tangible equity of $25 million at end-2001. Pro forma for the financing, LTM EBITDA and EBITA would cover interest expense 2.1 times and 1.9 times, respectively.

ICON Health & Fitness Inc., based in Logan, Utah, is the world's largest manufacturer and marketer of home fitness equipment.

New York
Daniel Gates
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Charles X. Tan
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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