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Rating Action:

MOODY'S CONFIRMS B3 RATING OF SR SUB NOTES OF ICON HEALTH & FITNESS, INC.; ASSIGNS Caa2 RATING TO SR SECURED DISCOUNT NOTES OF IHF HOLDINGS, INC.; AND ASSIGNS Caa3 RATING TO SR DISCOUNT NOTES OF ICON FITNESS CORPORATION

02 Jul 1997
MOODY'S CONFIRMS B3 RATING OF SR SUB NOTES OF ICON HEALTH & FITNESS, INC.; ASSIGNS Caa2 RATING TO SR SECURED DISCOUNT NOTES OF IHF HOLDINGS, INC.; AND ASSIGNS Caa3 RATING TO SR DISCOUNT NOTES OF ICON FITNESS CORPORATION New York, 07-02-97 -- Moody's Investors Service confirmed the B3 rating of ICON Health & Fitness, Inc.'s (ICON's) $101.25 million of 13% senior subordinated notes, due 2002. Moody's also assigned a Caa2 rating to the $123.7 million of 15% senior secured discount notes, due 2004, issued by ICON's parent, IHF Holdings, Inc. (Holdings), and assigned a Caa3 rating to the $162 million of 14% senior discount notes, due 2006, of Holding's parent, ICON Fitness Corporation (Fitness Corporation). The outlook is stable.
The ratings reflect the companies' high leverage, modest debt protection, heavy reliance on two product categories and on several customers for sales, the challenges of continuing to produce new products that have market-leading features, certain one-time charges and costs of integrating several recent acquisitions that have eroded equity, and the contractual and structural subordination of the rated issues to secured bank debt. However, the ratings also reflect the good prospects for continued growth of the fitness equipment industry, ICON's dominant position in the U.S. market for home fitness equipment, improved gross margin, diverse brands, and well established presence in multiple distribution channels.
The B3 rating of ICON's senior subordinated notes reflects their contractual subordination to a significantly increased amount of secured debt outstanding on its $310 million revolving credit facility.
The Caa2 rating on Holding's $123.7 million of 15% senior secured discount notes, due 2004, reflects their structural subordination to the debt of its subsidiary, ICON. Holdings has no material assets other than the stock of ICON. As of March 1, 1997, ICON's debt was approximately $377 million, and the total debt of Holdings and ICON was $454 million, 1.2 times Holding's total capitalization given its deficit net worth of $73 million.
The Caa3 rating on Fitness Corporation's $162 million of 14% senior discount notes, due 2006, reflects their structural subordination to the debt of its subsidiaries (Holdings and ICON). Gross proceeds of the senior discount notes were $82.5 million which, net of $4.2 million of transaction expenses, were used to finance the $42.3 million purchase of capital stock of its parent, IHF Capital, Inc., and the $35.8 million purchase in November 1996 of all of the preferred stock and preferred stock options of Holdings. Cash interest payments on the notes begin to accrue on November 15, 2001, with the first semi-annual payment due in May 2002. Fitness Corporation has no material assets other than the stock of Holdings, and its ability to make cash interest payments on the notes will depend on ICON's performance. The total debt of Fitness Corporation and it subsidiaries was $541 million at March 1, 1997, 1.4 times Fitness Corporation's total capitalization. The amount paid to purchase the common stock of IHF Capital was recorded as a reduction to additional paid-in capital of Fitness Corporation, further eroding its net worth to a deficit $153 million.
ICON Health & Fitness, Inc. is a leading U.S. manufacturer and marketer of home fitness equipment. The fitness equipment market is highly competitive and is characterized by frequent introductions of new products accompanied by major advertising and promotional campaigns. Because life cycles can be short, product innovation is essential in order to remain competitive. Higher gross margins enjoyed during the early stages of the life cycle diminish as competition increases and as consumer interest declines, and it is not always certain that new product start-up costs will be recouped. ICON is highly dependent on sales of two product categories, treadmills and upright rowers, which together have historically generated about 75% of total company sales. However, sales of ICON's line of upright rowers dropped a dramatic 67% for the nine months ended March 1, 1997 due to decreased demand, graphically demonstrating the company's vulnerability to shifts in consumer preferences for aerobic and non-aerobic equipment. ICON is also highly dependent on sales to price-sensitive mass merchandisers, with Sears and two other customers, accounting for nearly half of its 1996 sales.
ICON's $11.9 million EBIT for the nine months ended March 1, 1997 adjusts to $50 million after normalizing for one-time charges, including a $10.2 million increase in cost of goods sold (on a "stepped-up" basis for acquired inventory), a $10.4 million charge for integration costs in connection with three acquisition made during 1996, and a $17.5 million charge relating to the settlement of litigation. Adjusting for the effects of the step-up in acquired inventory, ICON's gross margin improved to 30%, from 27% for the same period last year. However, the ratio of adjusted EBIT to sales dropped to 8%, from 8.7%, reflecting higher marketing expenses. Capital expenditures of $16.8 million exceeded depreciation and amortization of $11 million for the period. Adjusted EBITDA less capital expenditures covered ICON's interest expense by 1.8 times, Holding's by 1.6 times, and Fitness Corporation's by 1.7 times.
ICON's debt increased to $377 million at March 1, 1997, from $284 million at fiscal 1996. Most of the increase was due to additional borrowings under ICON's $310 million secured revolving credit facility, which had outstandings of $227 million on March 1, 1997. The facility is secured by substantially all of ICON's assets. ICON used the revolving credit to finance the purchase of three companies consisting of HealthRider ($28.3 million), Weider Sports ($8.7 million), and CanCo ($1.7 million), as well as to fund one-time selling and integration expenses of $10.4 million and to settle litigation for a payment of $17.5 million. Moody's believes that the highly cash-intensive nature of ICON's operating activities during the past nine months are the result of acquisitions and one-time charges and should reduce in the future.
With executive offices in Logan, Utah, ICON Heath & Fitness, Inc. is a U.S. manufacturer and marketer of home fitness equipment. IHF Holdings, Inc. is a holding company whose principal asset is the stock of ICON Health & Fitness, Inc. ICON Fitness Corporation is a holding company whose principal asset is the stock of IHF Holdings, Inc.

No Related Data.
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