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June 23, 2006 02:00 AM

Bandag plans to reduce staff by 15 percent, freeze pensions

Vera Linsalata
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    MUSCATINE, Iowa-Bandag Inc. is trying to cut is work force and operational costs by offering early retirement and voluntary separations to eligible employees and changing its pension plan.

    The retread materials and systems provider wants to slice 175 salaried employees off its roster, equal to 15 percent of its staff. The company said if it doesn´t get enough volunteers, it will make cuts unilaterally.

    Bandag said it also:

    —is freezing its defined benefit pension plans, and modifying the defined contribution program;

    —has closed its pension plans for salaried and hourly workers in the U.S. and Canada; and

    —will freeze the existing pension plans for all employees in the U.S. and for salaried Canadian workers.

    The company said the defined contribution program-basically a 401(k), in which the employee makes a contribution that is matched by the company up to a certain amount-is better designed to encourage workers to save for retirement. In the defined benefit plan, Bandag is responsible for contributing and investing employees´ retirement dollars.

    Bandag said the pension freeze will allow it to control retirement benefit expenses better while at the same time preserving workers´ retirement benefits to date.

    Overall, the company estimates it will record a net curtailment pretax gain of $1.9 million in the second quarter through the pension plan change.

    Warren Heidbreder, Bandag´s chief financial officer, said its former approach to providing benefits to retirees has "outlived its usefulness" and hence, it is freezing pensions in favor of its 401(k) plan. All Bandag employees already participate in a 401(k)-contribution plan.

    "Our pension costs, as with what many companies are finding, are escalating very rapidly," Heidbreder said. "It´s also a very volatile expense. It´s a legacy cost that builds over time."

    In the past five years, Heidbreder estimated Bandag´s pension costs have risen $10 million or $11 million. Volatile markets have meant the company´s assets have experienced large swings in returns.

    At the same time, raw material prices and higher energy costs have taken their toll on Bandag. In 2005, the company´s net earnings fell 26 percent on sales of $914.6 million. Some raw materials prices jumped by as much as 200 percent, according to Heidbreder. Price increases helped Bandag´s sales, but he noted there is "a reasonable limit" to price increases when the company´s customers also are getting squeezed.

    Bandag reported a net loss for the first quarter of 2006 of $12.6 million, with earnings from continuing operations falling 36.7 percent.

    Chairman and CEO Martin Carver said the North American markets for commercial replacement tires have changed during the past several years, a situation exacerbated by record-high raw material prices and intensified competition. He said the steps the company is taking are intended to stimulate growth in Bandag´s traditional retread business.

    To that end, Bandag is offering early retirement to about 170 employees who will have reached age 55 by Dec. 31 and voluntary separation to other U.S. salaried employees. If voluntary separation and early retirement result in fewer than 175 salaried employee acceptances of its U.S. work force, Bandag said it will terminate employees to achieve that 15-percent reduction by mid-September.

    No salaried employees in Canada will be cut because Bandag in April announced it was phasing out tread rubber production at its facility in Shawinigan, Quebec, which will be completed by the end of this month. Fifty-one employees will lose their jobs from the plant closure. Heidbreder said the number of salaried Canadian employees remaining is insignificant compared with the U.S.

    Employees who accept the early retirement offer will have five years added to their age in determining their pension benefit and will be able to purchase medical coverage through the company until age 65.

    Pretax expenses associated with early retirement and voluntary and involuntary separation programs are estimated to be $12 million to $17 million, which is expected to be recorded in the third quarter. Bandag estimates pretax cost savings from reducing its work force will be $5 million to $7 million for 2006 and that it will achieve an annualized net pretax savings of $16 million to $20 million.

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