Goodyear estimates new USW contract will save $610 million; equity offering planned

By Jennifer Lanning Drey

Portland, Ore., Jan. 9 - Goodyear Tire & Rubber Co. estimated it will save $610 million under the terms of its new master labor contract negotiated with the United Steelworkers union, Richard J. Kramer, Goodyear's chief financial officer, said Tuesday during a company conference call.

"This was a difficult and long negotiation, but one that met our goals," Kramer said.

Goodyear executives also reiterated during Tuesday's call that the company is planning to proceed with an equity offering but said its timing will depend on other strategic initiatives.

In relation to the recently negotiated union contract, Kramer said the bulk of the savings will be realized through increased productivity, a savings the company has estimated will total $300 million over the life of the contract, which lasts through 2009. Lower wage rates will allow for the primary boost in increased productivity.

Additionally, Kramer said Goodyear expects to reduce its legacy costs by $275 million over the life of the contract through lower overhead related to retiree benefits that the company expects to achieve through the establishment of a VEBA trust fund.

Under the proposed VEBA trust fund, Goodyear would fund an independently administered trust that would permanently eliminate the company's retiree benefit-related expenses and therefore decrease its projected benefit obligations related to retiree health care to $1.3 billion at the end of 2007 from $2.5 billion at the end of 2005, Kramer said.

If the VEBA gains the necessary court and regulatory approvals, Goodyear will fund it with $1 billion, $700 million of which will be cash. The remaining $300 million can be made with cash or common stock at the company's option.

Kramer said the contribution is likely to be made in cash if Goodyear has been able to raise additional capital through asset sales or an equity offering prior to the contribution date.

By funding the VEBA, Goodyear also expects it will reduce retiree medical expense by $110 million annually and improve its cash flow by $145 million per year.

If Goodyear is able to become cash flow positive in the future, as it now expects, the company will focus on investing in growth and deleveraging, Kramer said.

Equity offering still planned

In addition to using a possible cash boost to lower its debt, Kramer reminded investors that Goodyear has been focused on using equity to deleverage its balance sheet since the company began implementing its capital structure improvement plan in 2003.

However, he said the company felt the timing was not right for an equity offering in 2006.

"Now, looking ahead, we are focused on finding the right opportunity to complete an equity offering, but believe the best time may be after we have been able to complete a couple of additional initiatives that are currently underway," he said.

Those initiatives include, but are not limited to, the sale of the company's engineered products division and a review of salaried retirement benefits, Kramer said.

The company expects to announce a transaction related to the sale of the engineering products division in the first half of 2007.

"We believe better understanding of these added initiatives, along with clarifying the impact of the strike going forward, will help potential equity investors better understand Goodyear's financial position and therefore more accurately evaluate the offering," he said.

Goodyear estimated that its recent labor strike cost the company between $30 million and $35 million per week in the fourth quarter, due to lower production volumes and lost sales volume.

At the same time, Kramer said the strike positively impacted Goodyear's cash flows due to changes in working capital, and therefore, liquidity was higher at the end of the 2006 than at the end of the third quarter.

In addition, Goodyear drew $975 million under its U.S. first-lien credit facility in an effort to enhance its cash position during the strike. The company has since repaid that amount, although it was still outstanding at the end of the year, he said.

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