Goodyear Trims Labor Costs

New workers' contract ends strike and cuts costs by $300 million over next three years; shares rally 5%

It's looking like it could be a happy new year for shares of Goodyear Tire & Rubber (GT). The company is expected to save hundreds of millions of dollars in labor costs with a new contract workers ratified Dec. 28. Wall Steet liked what it saw in the deal, sending the tire maker's shares nearly 5% higher in the year's last trading session.

The three-year pact with the United Steelworkers (USW) also ended an 86-day strike by 15,000 employees against the Akron, Ohio company. Goodyear has been battling to cut its high costs at the same time it improves production globally.

The new deal is expected to save Goodyear $70 million in 2007, $240 million in 2008 and $300 million in 2009. The contract covers workers at 12 of the company's tire and engineered products factories in the U.S., from Buffalo, N.Y. to Sun Prairie, Wis. More than 10,000 USW-represented members voted on the new contract at the 12 locations. The striking steelworkers plan to return to work on Jan. 2.

As part of the agreement, Goodyear is moving the responsibility for all its current and future union retirees' health care to a $1 billion trust, subject to regulatory and court approval. Goodyear is paying at least $700 million cash up front to the trust, with the balance in additional cash or common stock at the company's option.

Goodyear will also invest $550 million over three years to modernize its North American plants.

"It took a strike, but we achieved a fair and equitable contract that protects quality health care for active and retired members," said USW executive vice president Ron Hoover, in a Dec. 29 press release. "And by winning major capital investment expenditures, it secures our jobs for the future."

But the company is closing its Tyler, Texas, plant after Dec. 31, 2007, thereby eliminating 9 million units of tire capacity. Goodyear had previously announced a goal to eliminate 15 to 20 million units of high-cost tire capacity by 2008. With the Tyler closure, Goodyear will have eliminated 14 million units toward this goal.

Goodyear rescinded its earlier demand for immediate closure of the Texas plant, and will instead provide for a one-year transition period so that workers can take advantage of retirement buyouts.

"Reaching agreement on a contract that competitively positions Goodyear for the future is a huge achievement for everyone involved in the negotiation process," CEO Robert J. Keegan said in a statement.

Goodyear's shares rose 4.9% to close at $20.99 Friday on the New York Stock Exchange.

"Although we expect the recently resolved strike against the company to hurt Q4 results, we do think that the agreement with the United Steel Workers union will improve GT's financial health and enhance future profitability," said Standard & Poor's Corp. analyst Efraim Levy in a research note. (S&P, like, is owned by The McGraw-Hill Companies.) Levy hiked his 2007 earnings per share estimate by $3 to $22 to reflect the company's expectations that the agreement will reduce its costs in the coming years.

Negotiations between the USW and Goodyear started in June as the contract's July 22 expiration date approached. As discussions remained in stalemate, the parties resorted to daily extensions of the agreement. Ultimately, 15,000 union members went on strike Oct. 5.

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