It appears that the contract negotiations between tire maker Goodyear (NYSE:GT) and its striking unions worked out the way these things should: Both sides gave in a little. In the end, however, I think the company got the better end of the deal.
Tire makers, and Goodyear in particular, have been beset by a bevy of problems of which they are not entirely innocent. While unions had previously almost priced themselves out of jobs and created high labor costs for the companies, it was the companies themselves that compounded the problem by taking on excessive debt loads, failing to properly fund health and pension guarantees, and making products that the buying public didn't want.
Goodyear has been trying to reverse that situation and save itself from bankruptcy. While it has begun to emerge from the wilderness, it has not yet left the edge of the precipice. The Akron, Ohio-based company has long-term debt exceeding $4.6 billion, high legacy pension and benefit liabilities, and plants and facilities in the U.S. that are not cost-effective to run. An economic downdraft could create dire conditions. Having settled the 12-week-old strike, though, should go a long way toward steering the company back toward safety.
Under the settlement, an immediate $1 billion contribution will be made toward retirees' medical benefits, consisting of $700 million in cash and $300 million in either cash or stock, administered through a private association that will provide benefits to all current and future retirees. That was more than the $660 million the company had wanted to contribute, but it was also less than the $2 billion the union had demanded.
Goodyear will also close down one plant, but it agreed to a one-year transition period. Much of the tire maker's production has already moved overseas -- it already has 90 manufacturing facilities in 28 countries -- and those plants abroad have already been handling more output in the wake of the strike. Yet the company has also agreed to invest more than half a billion dollars into existing facilities -- a move that the unions saw as helping to preserve jobs in the future.
Goodyear still has $1.5 billion in cash on its balance sheet, and the agreement can allow it to achieve some $610 million in cost savings over the term of the contract as well as $300 million a year beyond that. For 2007, it expects total savings to equal about $70 million.
Should those numbers be realized, Goodyear will be that much further from the edge, making it a far more formidable competitor in the global tire market. And the strike will set out what it had hoped to achieve -- a fair and equitable settlement that gives both sides a little of what they want, but not everything they had demanded.
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Fool contributor Rich Duprey owns shares of Goodyear but none of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
