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26 Jan 2005
MOODY'S DOWNGRADES CREDIT RATINGS OF ICON HEALTH & FITNESS (SENIOR IMPLIED AT B3; SENIOR SUBORDINATED NOTES AT Caa2); OUTLOOK STABLE
Approximately $155 Million of Rated Debt Securities Affected.
New York, January 26, 2005 -- Moody's Investors Service downgraded all the credit ratings of ICON Health
& Fitness, Inc. ("ICON"), concluding a review of
the company's ratings for possible downgrade initiated on October
22, 2004. The outlook has been changed to stable.
The ratings downgrade reflects continued weak sales, a sharp deterioration
in gross and operating margins, continued pressure from commodity
price increases and increasing competition. The stable outlook
reflects the company's recent actions to discontinue under performing
businesses, reduce its cost structure and improve manufacturing
Moody's downgraded the following ratings:
$155 million 11.25% Senior Subordinated Notes due
2012, downgraded to Caa2 from B3;
Senior Implied Rating, downgraded to B3 from B1;
Senior Unsecured Issuer Rating, downgraded to Caa1 from B2.
ICON's financial performance has been weak for the last year with
a particularly sharp deterioration in the company's two most recently
reported fiscal quarters. Sales and gross profit for the six months
ended November 27, 2004 were down 14% and 36%,
respectively, from the comparable period in the prior year.
Sales of both cardiovascular and strength training equipment were down,
with particularly weak sales in the direct to consumer business.
Due to the weak operating performance and seasonal increases in inventory
and accounts receivable levels, cash flow used in operations was
($131) million and revolver borrowings increased sharply to about
The ratings downgrade reflects the difficult business climate and challenges
facing the company including sharply increased commodity prices and transportation
costs; weak consumer demand; need for constant, rapid,
new product introductions that present an ongoing design and manufacturing
challenge; limited pricing power; increased competition and
industry manufacturing capacity; sales concentration with a few large
retailers; and significant capital expenditure requirements.
Moody's expects that conditions in the fitness products industry
will continue to be challenging and ICON will have difficulty increasing
its operating margins back to historical levels. However,
the stable ratings outlook reflects Moody's belief that the company's
performance has bottomed out and positive actions taken by the company
will stabilize its performance over the next year and lead to a gradual
improvement in sales, operating margins and cash flow.
The company recently announced that it is discontinuing the manufacture
and sale of all outdoor recreational equipment, which have historically
generated an operating loss and required a large investment in working
capital. Moody's understands the reason for this action is
to improve financial performance. The company has also re-designed
portions of its product line to minimize the utilization of certain commodities;
moved up product development cycles to increase manufacturing efficiency;
and increased its focus on working capital management.
The company's joint venture in China is expected to be operational
during the early part of 2005 and should help improve operating margins
as well. ICON indicated that sales for the month of December 2004
increased over the comparable month of 2003 and that demand for products
from certain major retailers is increasing.
Moody's expects revolver borrowings to decrease significantly in
the company's third and fourth fiscal quarters of 2005 reflecting
the seasonality of the company's business and cash flow benefits
from the discontinuation of the sale of outdoor recreational products.
Moody's expects ICON to have negative free cash flow in its fiscal
year ended May 2005 and a modest level of free cash flow in its 2006 fiscal
year. EBITDA less capital expenditures to interest expense is expected
to be less than 1 time in fiscal year 2005 and improve to over 1.5
times in fiscal year 2006.
The Caa2 rating assigned to the senior subordinated notes reflects the
contractual subordination to senior debt and the magnitude of secured
debt in the capital structure. On October 11, 2004,
ICON amended its credit agreement to increase the amount of availability
under its revolver to $275 million from $210 million.
Availability under the revolver was about $27 million as of November
27, 2004. The revolver, which is not rated by Moody's,
matures in 2007 and contains a material adverse change clause that provides
that lenders having more than 66.67% of the commitment or
borrowing have the right to block the company's requests for future
ICON Health & Fitness Inc., based in Logan, Utah,
is one of the largest manufacturers and marketers of home fitness equipment
in the United States. Revenue for the fiscal year ended May 31,
2004 was approximately $1 billion.
Corporate Finance Group
Moody's Investors Service
Lenny J. Ajzenman
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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