CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Mattel, Inc's (Mattel) ratings as follows:
--Long-term Issuer Default Rating (IDR) at 'A-';
--Short-term IDR at 'F2';
--Commercial Paper program at 'F2';
--Unsecured bank facility at 'A-';
--Senior unsecured notes at 'A-'.
The company's $1.65 billion in senior unsecured notes at Sept. 30, 2013, the commercial paper program, and $1.6 billion revolving credit facility maturing March 2018 are affected by this action. The Rating Outlook is Stable.
KEY RATING DRIVERS
SCALE AND LEADING POSITION
Mattel is one of the largest manufacturers and marketers in the traditional toy industry globally with $6.6 billion in net revenues through the last-twelve-months (LTM) ended Sep 30, 2013 with approximately 49% of revenues generated outside the U.S.. Mattel is on pace, barring sudden macro-environmental shocks and marked appreciation in the US dollar, to deliver low to mid-single digit revenues growth in 2013 which Fitch expects to continue into 2014 Further, the firm has strong brands; such as Barbie and Fisher-Price, which have had proven longevity. These brands have been supplemented with new fast growth products such as Monster High dolls to form a broadly diversified product portfolio. These factors help mitigate fashion risk.
HIGHLY SEASONAL CASH FLOWS
Virtually all of Mattel's FCF (operating cash flow less capital expenditures and dividends) is generated in the fourth quarter coinciding with the holiday period as is typical for most toy manufacturers. Fitch expects FCF to be in the $200 to $300 million range through 2014 down from $633 million in 2012 which benefitted from working capital being a significant source of funds and is unlikely to repeat this year. Further, Fitch is making a conservative assumption that the $137.8 million litigation accrual related to MGA Entertainment, Inc. is paid within this time frame although both companies are still in the appeal process. The payment will depress FCF.
CONSERVATIVE FINANCIAL POLICIES
The company's conservative financial policies are designed to maintain a strong balance sheet in an industry with a highly seasonal profile. Mattel has had at least $600 million in cash balances at the end of each of the past ten years with cash exceeding debt in three of the past five years. Leverage (Debt/EBITDA) has been 1.4x or less in each of the past years as well. Fitch believes low leverage and the maintenance of significant liquidity help mitigate any potential negative impact from seasonality, fads, trends toward digitalization, and customer concentration, factors which are all characteristic of the global toy industry.
COMMODITIES AND CURRENCIES A WILDCARD
The rating also encompasses volatility in commodity costs, currencies, and Chinese labor costs. Mattel has executed well on cost savings initiatives and has maintained gross margins of at least 50% beginning in 2009. This is despite high resin prices and double-digit increases in Chinese labor costs. The current slow-down in China, some stabilization in commodity costs, ahead-of-plan cost savings, and positive mix and pricing have contributed to a 280 basis point improvement in gross margins since 2010 to 53.3% in the first nine months of this year. Fitch expects the company to maintain gross margins above 50% range given their ability to contain costs and execute price increases. EBITDA margins have followed a similar trajectory improving sequentially from 18.1% in 2009 to approximately 22.2% through the LTM.
Mattel has ample liquidity of $2 billion although the firm's cash balance of $407 million is at the seasonal low point after being used to fund working capital. Fitch expects that the company's $1.6 billion revolver maturing in 2018 will remain unutilized serving as CP back-up. CP balances are typically $0 or minimal at quarter end. There is ample cushion within the two financial covenants found in the revolving credit facility and debt maturities are very modest through 2017. Three notes totally $50 million mature next month and are to be repaid with cash on hand. Except for this, only a 2.5% $300 million note due in 2016 matures between 2014 through 2018. The $300 million note is likely to be refinanced and debt balances are expected to remain in the $1.7 billion range through 2014.
Future developments that may, individually or collectively, lead to an upgrade include:
Operating with leverage under 1x and a FCF margin consistently in the 5% range, all while maintaining or growing market share.
Negative Outlook or Downgrade: Future developments that may potentially lead to a negative rating action are large leveraged share repurchases or acquisitions. These management controlled directives are not expected.
Exogenous developments that could potentially lead to a negative rating action could be a material and consistent loss of market share or a secular decline in the traditional toy industry such that the company is unable to maintain its capital and investment framework and current credit protection measures.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (August 2013)
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage