TEXT-Fitch affirms Mattel's ratings
Oct 22 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 $1.5 billion of senior unsecured notes at Sept. 30, 2012, the commercial paper program, and $1.4 billion revolving credit facility maturing March 8, 2015 are affected by this action. The Rating Outlook is Stable. Rating Rationale: The ratings reflect Mattel's leading position in the traditional toy industry, significant scale with over $6 billion in revenues, strong brands with proven longevity, ample liquidity and a broadly diversified product portfolio. Geographic diversification is also well balanced with 48% of revenues generated outside the U.S. These factors help to mitigate key industry challenges of seasonality, retailer concentration and fashion risk. The company's financially conservative policies designed to maintain a strong balance sheet and healthy cash flow also supports the rating. Mattel has demonstrated fairly steady performance over a long period of time. Leverage (debt/EBITDA) for the LTM period ended Sep 30, 2012 was 1.2x, has not exceeded 1.4x in 10 years, and is expected to remain at this level or less going forward. FFO adjusted leverage has been less than 2.7x over the comparable period. FCF has averaged $294 million over the past 10 years. FCF is expected to remain robust at approximately $200 million to $300 million in 2012 and 2013. The caveat to Fitch's FCF expectations is any unfavorable settlement related to the Carter Bryant and MGA Entertainment, Inc. lawsuit where Mattel has a $310 million judgment against it. The company does not believe that the award will be sustained and therefore has not accrued for any future payout. Potential claims could be satisfied by the $282 million of cash on hand and incremental debt. Mattel has room within its ratings to add a modest amount of incremental debt. The rating also encompasses volatility in commodity and Chinese labor costs as well as the potential for Chinese currency appreciation. Mattel has executed well on cost savings initiatives and has maintained gross margins of at least 50% beginning in 2009 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 led to a 410 basis point improvement in gross margins to 52.4% in the first nine months of this year. Fitch expects the company to maintain gross margins in the 50% range given their ability to contain costs and execute price increases, despite volatility in commodity costs being a wildcard. Stable Outlook: The Stable Outlook is underpinned by Mattel's consistent track record and management's conservative financial posture. The company has a capital and investment framework since 2003 which includes maintaining approximately $800 million to $1 billion in year-end cash and a year-end debt-to-capital ratio of about 35%. The debt-to-capital ratio at Sept. 30, 2012 was approximately 36% and within management's expectation. The 35% equates to debt/EBITDA of approximately 1.2x, which is within the company's historical range, and is a factor in Mattel's strong credit protection measures that supports both the Outlook and the rating. Any material tightening or loosening of its capital and investment framework would represent a change in management's financial strategy and could have rating implications. Financial Performance: The current year is challenging for the industry from a macro-economic perspective, and NPD data shows that U.S. retail sales of toys are down 5 to 10%. Mattel has been gaining share with well received brands such as Monster High and American Girl. Supporting the gains is Mattel's North American sales growth of 1% on a year to date basis with strength in dolls such as Monster High and American Girl. Revenue for the nine months ended Sept. 30, 2012 was up 1% to $4.2 billion as volume, and mix offset negative foreign exchange translation. Operating income improved 19% to $648 million as higher gross profits offset modest integration related costs from the Hit Entertainment acquisition earlier this year. As is typical in the toy industry cash flow from operations (CFO) is usually negative through the end of the third quarter. CFO was negative ($101 million) for the nine month period, but has improved sequentially in each of the past three years. Liquidity: Mattel has ample liquidity of $1.682 billion although cash balances are at the seasonal low point after being used to fund peak working capital usage. Fitch expects that the company's $1.4 billion revolver was unutilized and comprises much of the company's liquidity. Debt maturities are modest. Except for $400 million due in 2013, the next closest long term debt maturity is in 2016. Fitch expects the 2013 debt maturities to be refinanced. Rating Triggers: Upgrade: Future developments that may, individually or collectively, lead to positive rating actions include a commitment to operating with leverage under the 1x and FCF consistently over the long term average of $300 million, 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.
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