Fitch Affirms Mattel's IDR at 'A-'; Outlook Revised to Negative

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 (CP) program at 'F2'

--Unsecured bank facility at 'A-';

--Senior unsecured notes at 'A-'.

The Rating Outlook is revised to Negative from Stable.

The company's $2.1 billion in senior unsecured notes outstanding at Dec. 31, 2014, the CP program, and the $1.6 billion revolving credit facility maturing in March 2018 are affected by this action.

The Outlook revision to Negative is due to Mattel's weak fourth quarter and full year 2014 performance, the resulting significant increase in leverage, negative market share trends, and modest uncertainty caused by the resignation of its CEO earlier this week. During 2014, consolidated revenues declined 7% including a 2% negative impact from translation. Fitch estimates that organic growth was negative in the high single digit range. Leverage which has been 1.3x or less in each of the past 10 years will end 2014 materially higher at 2x.

Mattel lost market share through the past five quarters, and will lose a strategically important though not financially material license with the Disney Princess franchise in 2016. According to The NPD Group, Inc., retail sales in the U.S., Mattel's single largest market, grew 4%. This suggests that Mattel lost a moderate amount of market share in 2014, which pressured revenue growth and contributed to compressed margins.

Fitch's concerns about market share loss or revenue declines for a large, well-diversified, toy manufacturer are typically muted if there is one poor holiday season. The sectors credit protection measures and liquidity are expected to be better than more stable consumer product companies of comparable ratings to provide a cushion for volatility given the industry's inherent fashion risk, low barriers to entry and seasonality. However, the company's performance during the 2013 holiday period was also modestly weaker than anticipated thus the accelerated market share and revenue loss in 2014 has heightened our concern.

Mattel is focused on innovation and creativity with the rehiring of Richard Dickson as its Chief Brands Officer in mid-2014. He was highly successful in reviving the Barbie brand after the financial crisis. His programs, products and marketing efforts should be visible by at the end of 2015. Despite this, Fitch does not expect a significant near-term rebound in consolidated revenue growth, given the negative impact of a very strong dollar, but easier comparisons and some pricing should result in modest organic growth in 2015.

The Negative Outlook should be resolved after holiday 2015. Although Mattel has significant liquidity, improved FCF generation, and a financially conservative management team, a downgrade could occur if there is two consecutive years of meaningful market share losses and significant revenue declines.

KEY RATING DRIVERS

SCALE AND LEADING POSITION

Mattel is one of the largest manufacturers and marketers in the traditional toy industry globally with more than $6 billion in net revenues in 2014 and more than 50% of revenues generated outside the U.S. It has leading brands such as Barbie, American Girl, Thomas and Friends, and Hot Wheels with proven longevity. These have been supplemented with newer toys such as Monster High and Ever After High.

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. Mattel's 2014 FCF of $114 million is a strong turnaround from the negative $48 million in 2013 but is below Fitch's expectations of more than $200 million. Nonetheless, the company has proven its high cash generative capabilities and should be able to generate FCF at the same levels barring even further decelerations in revenues in 2015.

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 historically maintained very high cash balances, low leverage and credit protection measures that is typically higher than its rating providing the company with a cushion to have a poor holiday season every now and then as is typical with most large toy companies.

STRONG FINANCIAL FLEXIBILITY

Mattel ended the year with $972 million of cash meeting its public cash goals. The company's financial flexibility is normally very high. Cash on hand has exceeded more than $800 million at the end of 11 of the past 12 years although a significant portion resides in international markets. Mattel's manages towards having at least $800 million of cash at year end with the goal of using much of the balances to self-fund seasonal working capital peaks in the third and fourth quarter. Fitch has observed Mattel pulling back on discretionary activities to meet some of the more controllable aspects of its financial framework such as the $800 to $1 billion cash balance at year end. While the company had significantly exceeded the upper end of its cash goals from 2010 through 2012 with approximately $1.3 billion, its ability to do so with the quick deceleration in revenues in the fourth quarter of 2014 is a credit positive. Debt maturities are well-laddered with only one senior unsecured note (2.5%, $300 million) due in the next three years.

RATING SENSITIVITIES

Future developments that may potentially lead to a negative rating action include:

--As discussed above, meaningful market share loss specific to Mattel concurrent with organic revenue declines in two consecutive years is likely to lead to a negative rating action.

--A large leveraged share repurchases or acquisitions such that leverage is consistently above 2x. These management controlled directives are not expected.

--Exogenous developments that could potentially lead to a negative rating action could be a material and consistent secular decline in the traditional toy industry that is most likely due to a rise in digital technologies consuming the playtime normally devoted to traditional toys.

--Change in management's conservative financial policies that could come with a new CEO and/or more of a growth focus given stagnant sales performance over the past several years.

Future developments that may, individually or collectively, lead to a Stable Outlook include:

--Flat to modest organic growth as well as stable or improving market shares against key product categories, particularly the doll portfolio. Fitch expects Mattel's growth to at least mirror major global toy market rates. Leverage should retreat below 2x at the end of 2015 with a clear line of sight to returning to the 1.4x range by 2016. FCF needs to remain positive in the $100 million or better arena with cash balances should remain over $800 million at the end of 2015.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Fitch: Hasbro Not Just for Boys, but Princesses Pose Some Risk' (September 2014);

--'Fitch Rates Mattel's $500MM Notes 'A-'' (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=978927

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