NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Hasbro Inc.'s (Hasbro) ratings as follows:
--Long-term Issuer Default Rating (IDR) at 'BBB+';
--Short-term IDR at 'F2';
--Commercial paper (CP) program at 'F2';
--Unsecured revolving credit facility at 'BBB+';
--Senior unsecured notes at 'BBB+'.
Approximately $1.6 billion in senior unsecured notes, a $700 million unutilized revolving credit facility, and the $700 million CP program are affected by this action. There was $65 million in CP outstanding at Sept. 30, 2014. The Rating Outlook is Stable.
KEY RATING DRIVERS
SCALE AND LEADING POSITION
Hasbro's ratings reflect the company's scale with over $4 billion in revenues, leading position in the traditional toy industry, a broad portfolio of highly diverse brands, low fixed-cost structure and strong credit protection measures. These characteristics help mitigate industry risk factors of high seasonality, retailer concentration and fashion risk on Hasbro's operating earnings and cash flow.
GOOD SUPPORT FOR REVENUE GROWTH
Despite the overall slow growth of traditional toys in developed markets, emerging markets growth and entertainment related toy sales should bolster Hasbro's revenues through the medium term. The theatrical slate is particularly strong through 2020 and includes movies such as Transformers and Star Wars. These have historically led to related toy sales increasing more than 50%.
Additionally, Hasbro recently won the license to produce Disney 'Princess' dolls in 2016 from Mattel who held the license for almost 20 years. Mattel disclosed in its last earnings call, that the 'princess' line has averaged nearly $300 million annually since 2010. Doll margins also tend to be on the high though not as high as The Lego Group's (Lego) 33% operating margins. With these, Fitch expects Hasbro's revenues to break out of the flat $4 billion range seen since 2008 and grow to more than $4.5 billion by the end of 2016 assuming there are no material changes in current release dates and continued success of the princess line. Margins should also benefit modestly from mix effects and sales leverage.
Fitch notes that entertainment related sales have been a strong contributor to Hasbro's revenues since 2007. As a result, the company's growth rates can exhibit modest levels of volatility. Nonetheless, Fitch notes that underlying trends for core product sales have been generally positive with entertainment-related toy sales incremental rather than cannibalistic.
POTENTIAL SECULAR PRESSURE FOR TRADITIONAL TOYS
Competition for children's leisure time has and will continue to increase with the proliferation of smartphones, digital offerings and other entertainment, particularly in slow growth developed markets. However, the issue does not appear to be near term as international market growth from developing markets has provided some offset. Higher birth rates and per capita income increases in the emerging markets as well as overall market share gains have generally helped to support positive organic growth rates thus far for the three largest traditional toy companies Hasbro, Inc., Lego, and Mattel, Inc. Nonetheless, developed markets remain a key source of profitability and cash flows and sustained and material revenue declines that would signal secular pressure would be of concern.
HIGHLY SEASONAL CASH FLOWS
Most of Hasbro'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 companies. Hasbro's FCF has been in the $125 million to $200 million range and is expected to remain in this range in the near term.
CONSERVATIVE FINANCIAL POLICIES
The company's conservative financial policies are designed to maintain a strong balance sheet which is appropriate in an industry with a highly seasonal profile. Hasbro has had at least $600 million in cash balances at the end of each of the past four years. Cash balances are expected to remain within this range at year end. Leverage (Debt/EBITDA) has been 2.1x or less in the past four years and was approximately 2x at the last 12 months ended Sept. 30, 2014. FFO Interest coverage has been in the 5x to 8x range in the same time frame. Manageable debt and leverage along with significant liquidity helps to mitigate potential negative impacts from seasonality, fads, trends toward digitalization, and customer concentration. Fitch expects leverage and debt balances to remain around current levels.
LIQUIDITY
Hasbro has ample liquidity of approximately $1.5 billion including $452 million of cash at Sept. 30, 2014. The majority of cash is held in international subsidiaries which Fitch views as not readily available to meet domestic cash needs. Fitch expects that the company's $700 million revolver maturing in October 2017 will remain unutilized serving as CP back-up. Maturities are modest in the next five years with only a 6.3% $350 million note maturing in 2017. That is likely to be refinanced.
RATING SENSITIVITY
Future developments that may, individually or collectively, lead to an upgrade include:
--A commitment to operating with leverage under the 1.4x range, consistently generating approximately $200 million in FCF, all while maintaining and growing market share.
Future developments that may potentially lead to a negative rating action include:
--A large leveraged share repurchases or acquisitions such that leverage is consistently above the low 2x range. These management controlled directives are not expected.
Sustained negative organic growth rates or other factors that signal a material secular decline in major developed markets could also be of concern.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Fitch to Rate Hasbro's $600MM Notes 'BBB+'' (May 2014);
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=961356
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.