TEXT-Fitch affirms Mattel's ratings

Mon Oct 22, 2012 4:37pm EDT

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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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