ICON & IHF Holdings Rtgs Lowered by S&P

Business Wire, Oct 28, 1998

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire 10/28/98 --The corporate credit ratings for ICON Fitness Corp., IHF Holdings Inc., and their operating subsidiary, ICON Health & Fitness Inc., today were lowered to single-'B'-minus from single-'B'. The subordinated debt rating for ICON Fitness and ICON Health, as well as the senior secured debt rating for IHF, was lowered to triple-'C' from triple-'C'-plus.

The outlook is now negative.

The downgrades reflect the consolidated company's increased financial risk resulting from the combination of a weakened business position in the highly seasonal, price-sensitive exercise equipment industry and a heavy debt burden.

ICON Health and Fitness manufactures and markets a variety of home fitness equipment products, including treadmills, upright rowers, abdominal machines, and a variety of other recreational and sports medicine products. Revenues are highly concentrated by customer, as well as product, adding to the company's business risk. During the fiscal year ended May 31,1998, overall revenues declined by 10%, driven by declines across several product categories. Though sales to Sears, the company's largest customer, increased on a percentage basis, rising to about 33% for fiscal 1998 versus 29% for fiscal 1997, on a dollar basis, sales to Sears were roughly flat. The company continues to depend heavily upon treadmill sales. Treadmills' share of total sales rose to 63% during fiscal 1998, from 54% for fiscal 1997.

ICON's key credit measures remained weak during the 12 months ended Aug. 29, 1998, as well as the fiscal year ended May 31, 1998. Even with an 11% increase in earnings before interest, taxes, depreciation, and amortization (EBITDA) during the 12-month period ended Aug. 29, 1998, EBITDA remained below fiscal 1997's level of $55 million. EBITDA to total interest expense remained below 1.0 times (x) for both the fiscal year end and latest 12-month period, while lease-adjusted debt to EBITDA before rent decreased slightly to 11x during the 12 months ended Aug. 29, 1998, from 11.5x at fiscal year-end 1998. This level still represented a significant increase over fiscal 1997's year-end level of 8.9x.

While near-term debt maturities are nominal, IHF Holdings' 15% senior discount notes due in 2004 require cash interest payments in 2000, and the 14% senior discount notes due in 2006 have mandatory cash interest payments in 2002. The company's ability to meet these commitments while funding operations will be highly dependent on strong growth in revenues and EBITDA, given that the company's ability to make revolving borrowings under its credit agreement is set to expire in November 1999. Renegotiation of the agreement is uncertain, given the current credit environment and the company's financial condition.

OUTLOOK: NEGATIVE

The company's high financial risk and weakened business position leave little financial cushion. Ratings may be lowered again if the company experiences any further deterioration in operating results and credit measures.---CreditWire