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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,
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
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.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Charles X. Tan
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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