March 6, 2003

MORGAN
JOSEPH

Goodyear Tire & Rubber Co

Table 1: Security Details

Issue

Coupon

Snr Nts
Euro Snr Nts
CHF Snr Nts
Snr Nts
Snr Nts
Snr Nts
Snr Nts
Snr Nts

8 1/8%
6 3/8%
5 3/8%
6 5/8%
8 1/2%
6 3/8%
7 6/7%
7%

Amount mm
$300
Euro 400
CHF 200
$250
$300
$100
$650
$149

Maturity
03/15/03
06/06/05
03/16/06
12/01/06
03/15/07
03/15/08
08/15/11
03/15/28

Ratings
Price
Ba2/BB- (*) 99.5-100.5
Ba2/BB- (*)
78-79
Ba2/BB- (*)
Ba2/BB- (*)
76-77
Ba2/BB- (*)
75-77
Ba2/BB- (*)
74-75
Ba2/BB- (*)
74-76
Ba2/BB- (*)
66-68

YTW
7.8%
12.2%
15.1%
17.4%
15.0%
14.5%
11.9%
`

(*) Both Moody's and S&P have a negative outlook on the company

HIGH YIELD RESEARCH

Summary and recommendation: We rate the Senior Notes underperform due to the
companys considerable liquidity risk, rising raw material costs, market share loss, rising
healthcare & pension costs as well as a substantial asbestos litigation risk. In addition, the
company faces $500mm minimum pension contributions and $1.4bn debt maturing over
the coming two years. Further, we believe that part of the announced new $1.3bn credit
facility will be secured ahead of the Senior Notes; previously Goodyears bank borrowings
were unsecured. On a more positive note, Goodyear could potentially raise cash through
asset sales. In addition, Goodyears debt/EBITDA is a moderate 3.9x and it has a strong 3.9x
interest coverage.
Company description: Founded in 1898 and based in Ohio, Goodyear Tire & Rubber
Company is one of the world's leading manufacturers of tires and rubber products (87%
sales). Worldwide, 71% of Goodyear's tire sales are to the replacement markets with the
remainder going to vehicle manufacturers for original equipment. The majority of its tire
sales are for passenger cars (85%). Geographically 51% of its sales are in the US, 28% in
Europe and 9% in Latin America. Goodyear has two major competitors:
Bridgestone/Firestone (based in Japan) and Michelin/UniroyalGoodrich (based in France).
In the US its market share is 28.4% and in Europe 24%. In addition to selling its tires
through a large dealer network, Goodyear operates approximately 941 retail outlets for the
sale of its tires to consumers in the US and Canada and approximately 711 retail outlets in
other countries. Worldwide, Goodyear operates approximately 118 tire retreading facilities
and 227 warehouse and distribution facilities, and it employs around 92,000 people.

$mm Year end Dec

Total Sales
EBITDA
Interest expense
Capex
Total debt

Table 2 - Financial Summary of Goodyear Tire & Rubber Co.

2000
2001
2002E
1Q02
2Q02
14,417
14,147
13,584
3,311
3,479
1,173
916
935
168
289
283
292
240
61
60
615
435
395
75.8
97.1
3,586
3,568
3,693

EBITDA/Gross Interest expense

Total debt/EBITDA LTM
Market value Debt/EBITDA LTM (1)

Josephine Shea
212-218-3701
JSHEA @MORGANJOSEPH. COM

4.2x
3.1x

3.1x
3.9x

3.9x
3.9x

2.7x

4.8x

3Q02
3,530
267
62
120.4
3,631

4Q02E
3,264
212
58
101.7
3,693

4.3x
4.2x
3.7x

3.7x
3.9x

Source: Goodyear Tire & Rubber Co annual and quarterly reports, (1) Assumes bankdebt at par.

The Disclosure section may be found on the last page of this report.

Goodyear Tire & Rubber Co.

Liquidity and credit facility

At the end of Sep 02, liquidity consisted of $595mm in cash and $1.2bn in available credit facilities. The company
indicated that at the end of December 02 liquidity had declined slightly to $1.7bn with $600mm in cash and $1.1bn
in available credit facilities. In order to conserve cash, the company has eliminated its quarterly dividend representing
around $84mm in annual cash savings. Although current liquidity is sufficient there are considerable risks going
forward that could negatively impact liquidity:
Credit facility covenant risk: Due to deteriorating credit fundamentals at year-end 2002, the company was close to
breaking some of its credit facilities financial covenants. On February 6, 2003 the company announced that it had
received waivers from its bank lenders (JP Morgan Chase & Citigroup) until March 7 to comply with certain
covenants. On March 4th the waivers were extended to April 4th. Under these waivers, the company continues to
have access to the $1.1bn unused revolving credit facilities.
New secured debt ahead of the Senior Notes: Also on March 5th, it was announced that the new credit facility is
expected to be for $1.3bn and would be asset-based. Although Goodyear is limited in its ability to put secured debt
ahead of the Senior Notes due to strict indenture covenants, we believe that a carve-out of a minimum of $436mm
can be secured, based upon a covenant test calculated at 15% of shareholders equity. Other non-restricted assets
mentioned in the indenture that potentially could be used are certain assets outside the US, personal properties and
possibly some forms of sale/lease-back transactions. Nevertheless, it seems unlikely that Goodyear will be able to
fully secure the $1.3bn facility without sharing at least part of the lien-basket with the Senior Notes.
Accounts receivable program covenant risk: Its $825mm accounts receivable facility was amended in December
2002 and extended until December 2003. The facility was downsized to $700mm and its minimum rating covenant
was changed from a BB rating to Ba3/BB-. At the end of September 2002 $674mm was outstanding. Goodyear will
need to seek further amendments if its rating deteriorates below its current Ba2/BB- rating.
Debt maturities: Around $583mm in debt is coming due over the next twelve months to Sep 03 including the
$300mm 8 1/8% Snr Nts coming due in March 2003. Over the consecutive twelve months to Sep 04, another
$828mm in debt will come due of which $800mm is a Bank term loan (3/30/04).
Pension contribution: In addition, the company is expected to make a minimum of $500mm cash contribution to
the pension fund over the coming 2 years. Due to the weak performance of its pension plan in 2002 (down 17% on
the year 3Q02), this amount might prove to be too low.
Table 3 - Debt capital structure
Debt structure

2000

2001

2002E

1,077
0

255
0

305
0

Domestic short term borrowings

729

172

172

$750mm Credit facility 8/15/05

$800mm Bank Term loan 3/30/04

800

800

Bank term loans due 2002-05

8 1/8% Nts 03/15/03

151
300

96
300

96
300

6.375% $400mm Euro Nts 06/06/05

371

355

416

97

95

96

6 5/8% Nts 12/01/06

249

250

250

8 1/2% Nts 03/15/07

6 3/8% Nts 03/15/08

300
100

300
100

300
100

Notes Payable to Banks

$575mm 364-day Credit Facility 8/12/03

5.375% CHF 200mm Uns Nts 3/16/06

7 6/7% Nts 08/15/11

7% Nts 03/15/28
Capital lease obligations
Total debt

650

650

149

149

149

63
3,586

49
3,568

61
3,693

Source: Goodyear Tire & Rubber reports, Morgan Joseph estimates

Recent results
Sales in the 3rd quarter of 02 were $3.53bn, decreasing 4% yoy but up 1% sequentially. The decline was primarily
due to a 4% lower tire unit volume and the absence of the contribution from the Specialty Chemical Business which
2

contributed $35mm in 2001. Especially the North American tire market experienced a steep drop in unit volume of
12.1% in the quarter (yoy) following last years above normal sales due to the 2001 Ford replacement program.
Excluding this Ford program, the company stated that volume was down 2.6% for the quarter. International unit
volumes actually increased by 5.2% due to a growth in higher original equipment volume and increased sales of high
performance tires. EBITDA for the quarter was $267mm
4Q02 Estimates
We expect 4Q02 sales to fall 6% (yoy), due to some loss in market share, lower retail prices, and a soft tire
replacement market. The recent rise in raw material costs should be reflected in slightly higher COGS margins, while
we expect SGA to remain relatively unchanged from the 3Q02. This would result in an expected EBITDA for the
quarter of around $212mm.
Potential asset sales
The company could raise additional cash through potential asset sales. We believe that Goodyears Engineering
division is the most likely candidate ($1.1bn in annual sales and approximately $48mm in EBIT). In addition,
Goodyear has several valuable tire brand names besides the Goodyear brand name including Dunlop, Kelly, Fulda,
Lee, Sava and Debica. On September 1, 1999, Goodyear acquired 75% of the Dunlop brand and manufacturing
facilities from Sumitomo for $1.24bn. In order to circumvent any debt take-over, the acquisition was done through a
75%-25% joint venture. Goodyear paid $931.6mm in cash and contributed $307mm worth of its own businesses
into the JV, thereby paying approximately 0.5x revenue for the acquisition.
Competition
On a global basis, Goodyear is the third manufacturer behind Bridgestone/Firestone (02 $13.9bn sales) and
Michelin/Uniroyal Goodrich (02 $14bn sales). In Europe, Goodyear is number two with a 24% market share behind
Michelin with 28%. In the US, however, Goodyear has a dominant market share with 28.4% in both the replacement
segment of passenger and light trucks as well as the OEM market. Despite this dominant position in the US,
Goodyear has received much criticism over the past year for its inability to turn the additional sales it gained following
the Firestone recall of 2001 into a permanent market share win (see table 4). Moreover, Firestone/Bridgestone
rebounded strongly during 2002 from their dismal 2001 performance. Factors contributing to Goodyears lack of
success in 2002 have been a disappointing marketing campaign, overly optimistic price increases and an order fill-rate
at the dealer network that was too slow. At the end of 2002, management addressed these issues by launching a new
marketing campaign, lowering its prices and focusing on its dealer network. Going forward, Goodyears market share
will give a good indication of the sustainability of these reforms.
Table 4- Tire competition
US Replacement market
Passenger tire brand shares
2002
2001
2000
Goodyear
15.0%
16.5%
Kelly
2.5%
3.5%
Dunlop
2.0%
2.5%
Total Goodyear Corp
19.5%
22.5%
21.0%
Firestone/Bridgestone
15.5%
15.0%
16.0%
Michelin
16.0%
16.0%
15.5%

Global sales ($bn)

2002
2001

12.1
13.9
14.0

12.5
13.4
13.0

Source: Modern Tire dealer

Risks

Further ratings downgrades: S&P put Goodyear on negative credit watch on 31 October 02 and
downgraded the credit by two notches to BB- on 24 December 02. Reasons for the downgrade were liquidity
issues resulting from $1.6bn in debt maturing within the next two years and the $550mm expected cash
contribution to the pension funds. On 23 January 03, Moodys followed suit and lowered the credit rating on

Goodyears senior unsecured debt from Ba1 to Ba2 also citing liquidity issues and pension contributions. We
believe that there is a substantial risk for further downgrades by both agencies if the necessary pension
contributions turn out to be higher than expected and/or operational fundamentals and liquidity issues are
not resolved.
The collective bargaining agreement with US Steel workers of America will end on 19 April 2003 for
approximately 11,818 employees, with the master contract negotiations set to being on March 13. Although
the recent weakness in the companys operational performance as well as the weak US economy have provided
management with a stronger bargaining position, the company cannot afford a drawn-out negotiation process
or work shutdowns.
Rising raw material prices: Goodyear uses in 52% of its tires synthetic rubber. To produce this rubber, the
company uses the raw material butadiene. Rising oil prices can have a material impact on the availability of
butadiene and create supply shortages. In addition, in view of its latest pricing debacle, it is uncertain whether
Goodyear will be able to pass on any raw material price increases.
Asbestos litigation risk: Goodyear is a defendant in numerous lawsuits involving 79,750 claimants alleging
various asbestos related personal injuries. This is an increase of more than 16,000 claimants over the last year.
In the past, Goodyear has won over 23,000 cases but there is no assurance that the company will continue to
win these lawsuits. Goodyear does have liability insurance but it has not disclosed the amount. There is no
guarantee that Goodyear will have sufficient liability coverage to include all of its potential lawsuit losses. We
believe that this risk is substantial.

Goodyear Tire & Rubber Co.

March 6, 2003

Table 5: Financial Summary of Goodyear Tire & Rubber Co.

First full year revenue contribution of the
Dunlop brand acquired in Sep '99.

2001
FY end Dec, $mm

Total Sales
% change yoy
Cost of goods sold
Gross Profit
SGA
Income from operations
Rationalizations
Interest expense
Other income (expense)
Foreign currency exchange
Equity in Earnings of affiliates
Minorities interset in Net Inc. of subs
Income before taxes
Benefit (provision) for income tax
Dividends
Net loss/income

2002

1999

2000

2001

2002E

1Q
March

2Q
Jun

3Q
Sep

4Q
Dec

1Q
March

2Q
Jun

3Q
Sep

4QE
Dec

13,355

14,147
-2%
(11,620)
2,528
(2,249)
279
(207)
(292)
(12)
(0)
(41)
(0)
(273)
69
(163)
(204)

13,584
-4%
(11,047)
2,536
(2,200)
336
(12)
(240)
(28)
29
(10)
(53)
22
(66)
(79)
(123)

3,414

3,583

3,678

3,473

(10,832)
2,523
(2,017)
506
(172)
(179)
147
28
10
(40)
300
(57)
(188)
243

14,417
8%
(11,637)
2,780
(2,237)
543
(124)
(283)
(28)
7
(22)
(34)
59
(19)
(188)
(148)

(2,786)
629
(548)
81
(79)
(69)
7
10
(5)
(8)
(64)
17
(47)
(93)

(2,912)
670
(566)
105
0
(75)
(8)
5
(4)
(9)
14
(7)
(49)
(41)

(2,994)
684
(568)
116
0
(78)
(21)
3
(5)
(3)
11
(2)
(48)
(38)

(2,928)
545
(567)
(22)
(128)
(72)
11
(18)
(27)
19
(235)
61
(20)
(194)

3,311
-3%
(2,761)
550
(529)
21
0
(61)
(14)
(13)
(5)
(14)
(86)
(22)
(20)
(128)

3,479
-3%
(2,787)
691
(558)
134
0
(60)
(14)
6
(1)
(16)
49
(20)
(20)
9

3,530
-4%
(2,855)
675
(557)
118
(12)
(62)
(0)
26
(2)
(12)
56
(23)
(20)
14

3,264
-6%
(2,644)
620
(557)
64
0
(58)
0
10
(2)
(12)
2
(1)
(20)
(18)

1,088
6.1x
(805.0)

1,173
4.2x
(614.5)

916
3.1x
(435.4)

935
3.9x
(395.0)

3,552
241
3.3x

3,586
253
3.1x

3,568
959
3.9x

3,693
595
3.9x

241.1
3.5x
103.9
19.6
4,056
234

267.2
3.6x
117.3
19.6
3,783
287

269.7
3.5x
94.7
19.7
4,201
785

137.6
1.9x
119.5
19.7
3,568
959.4
5.3x

167.5
2.7x
75.8
0.0
3,561
646
4.2x

289.0
4.8x
97.1
0.0
3,666
680
4.2x

267.3
4.3x
120.4
0.0
3,693
595
4.3x

211.5
3.7x
101.7
0.0
3,693
645
3.9x

18.9%
15.1%
8.1%

19.3%
15.5%
8.1%

17.9%
15.9%
6.5%

18.7%
16.2%
6.9%

Key credit data

EBITDA
EBITDA/Gross interest exp
Capex
Dividends
Total debt
Cash +near cash
Total debt/EBITDA
Margin analysis
Gross Profits
SGA
EBITDA

20.7%
18.4%
7.1%

18.7%
18.7%
7.5%

18.6%
15.4%
7.3%

15.7%
16.3%
4.0%

1,088
1,173
916
935
241
267
270
(805)
(615)
(435)
(395)
(104)
(117)
(95)
(179)
(283)
(292)
(240)
(69)
(75)
(78)
(11)
(157)
948
(211)
(452)
394
158
(198)
(157)
(252)
(96)
0
(7)
(2)
(105)
(39)
884
(7)
(384)
463
253
Source: Goodyear Rubber & Tire Co. annual and quarterly statements of Goodyear; Morgan Joseph estimates

138
(120)
(72)
848
0
795

16.6%
16.6%
5.1%

21.6%
19.9%
8.3%

19.1%
15.8%
7.6%

19.0%
17.0%
6.5%

289
(97)
(60)
(49)
(20)
63

267
(120)
(62)
78
(23)
140

212
(102)
(58)
8
(1)
59

Free cashflow

EBITDA
-/- Capex
-/- interest expense
Plus: Changes in NWI
Minus: tax
FCF

168
(76)
(61)
(248)
(22)
(240)

High Yield Department

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NAME

TITLE

E-MAIL

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MANAGING DIRECTOR ,
DIRECTOR OF SALES

MSTEDMAN @MORGANJOSEPH .COM

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VICE PRESIDENT, SALES

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SENIOR VICE PRESIDENT, SALES

LBERGER @ MORGANJOSEPH .COM

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SENIOR VICE PRESIDENT, SALES

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SENIOR VICE PRESIDENT, SALES

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SENIOR VICE PRESIDENT, SALES

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NAME

TITLE

E-MAIL

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MANAGING DIRECTOR ,
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VICE PRESIDENT, TRADING

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NAME

TITLE

E-MAIL

HOWARD GOLDBERG

MANAGING DIRECTOR ,
DIRECTOR OF RESEARCH

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JOSEPH GALZERANO

SENIOR VICE PRESIDENT, RESEARCH

JGALZERANO@MORGANJOSEPH .COM

DAN TRAVERS
JOSEPHINE SHEA

SENIOR VICE PRESIDENT, RESEARCH

VICE PRESIDENT, RESEARCH,

DTRAVERS@ MORGANJOSEPH .COM

Trading

Research

JSHEA@MORGANJOSEPH .COM

Administration
NAME

E-MAIL

VANESSA DOOLEY

VDOOLEY @MORGANJOSEPH .COM

I, Josephine Shea, the author of this research report, certify that the views expressed in this report accurately reflect my
personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or
indirectly tied to the specific recommendations or views contained in this research report.
The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not
considered to be all-inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities
mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may
have a position in the securities mentioned herein, and, before or after your receipt of this report, may make or recommend
purchases and/or sales for their own accounts or for the accounts of other customers of the Firm from time to time in the
open market or otherwise. Opinions expressed are our present opinions only and are subject to change without notice.
Morgan Joseph & Co. Inc. i s under no obligation to provide updates to the opinions or information provided herein. Additional
information is available upon request.
Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co.
Inc.
Morgan Joseph & Co. Inc. may receive or intends to seek compensation for investment banking services from the subject
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All prices are indications only, and are subject to change without notice. Prices are informational in nature only, and are not
to be construed as an offer or solicitation with respect to the purchase or sale of any security or debt referred to herein.
Investors in securities referenced herein should understand that statements regarding future prospects might not be re alized.
Investors should note that income from such securities, if any, may fluctuate and that each securitys price or value may rise
or fall. Accordingly, investors may receive fewer funds than originally invested. Past performance is not necessarily a guide
to future performance.

Copyright 2003 by Morgan Joseph