Company Outlines Restructuring Charges and
Progress Against Revitalization Plan
Remains on Track to Meet Unit Growth and Operating Profit Goals
Cash and Marketable Securities Exceeds $1.0 Billion
SAN DIEGO, April 19 /PRNewswire/ -- Gateway Inc. (NYSE: GTW) today
reported a first quarter loss driven primarily by previously announced special
charges to earnings and additional strategic restructuring decisions to
position the company for a return to profitable growth.
In the first quarter of 2001, Gateway posted sales of $2.03 billion, a
15 percent decline over the same period last year, and had a net loss of
$503 million, or $1.56 per diluted share, including the pre-tax effects of
$533 million of special charges, as well as the $24 million cumulative effect
of implementing a new accounting principle. During the same period last year,
the company had net income of $120 million, or $0.36 per diluted share.
"We're making solid progress against our revitalization plans," said Ted
Waitt, Gateway chairman and chief executive officer. "In order to get our
business in fighting form for the second half of 2001, we're moving with speed
and aggressiveness to make the appropriate operational improvements to our
business now. I'm confident that with the steps we're taking, we'll emerge a
much stronger and more profitable company and will exit the current quarter
with some solid momentum across our business. "
Quarterly Sales
During the first quarter, Gateway sold 1.1 million units worldwide, down
12 percent year over year and down 14 percent from the fourth quarter of 2000.
Gateway's U.S. Consumer unit saw revenues decline 19 percent year over year in
the quarter, while its U.S. Business unit posted a 6 percent increase in
revenues, with a notable 13 percent increase in sales to small and medium
businesses over the prior year.
In Gateway's international operations, the company's European operations
posted a 38 percent decline in revenues for the quarter over the same period
last year, with its Asia-Pacific group posting a 32 percent decline.
Revenue was impacted in the quarter and will be impacted in future
quarters by actions being taken to eliminate certain less-profitable revenue
streams. These actions include, among other things, the closure of under-
performing retail locations, a rationalization of international markets,
elimination of most indirect sales efforts, a modification of the company's
ISP business model and the decision to discontinue the purchase of lesser-
quality consumer finance receivables, outlined below.
"We're taking advantage of the current demand environment to take the
necessary steps to get our business back in shape for the second half of the
year," Waitt said. "While our revenue performance in the quarter was
negatively impacted by our own strategic decision to focus on more profitable
revenue streams going forward, this is a strategy that should yield healthier
shareholder returns both now and in the future. Going forward, we intend to
capture more than our fair share of the market by offering unbeatable value
and the best customer service and support in the industry. In fact, our early
efforts are showing signs of gaining traction in those two areas."
In the past six weeks, the company has taken steps to price more
competitively and is in the process of repositioning its marketing efforts to
drive more traffic to its existing Gateway Country stores in the U.S., which
serves both the Consumer and Business sales organizations. In addition, the
company has taken a number of steps to increase customer satisfaction, from
retraining its sales force to eliminating tech support policies that
previously had a negative effect on the company's overall customer experience.
As a result, Gateway's internal tracking measurements show that customer
satisfaction scores increased nearly 15 percent in the month of March alone,
to their highest levels in the more than two years the company has been
tracking such results.
In an effort to provide better visibility to the sale of non-PC products
and services, which Gateway has called beyond-the-box sales, the company will
now begin to report the sale of beyond-the-box items both at the point of
sale, and after the sale. Therefore, Gateway will now begin to report an
average selling price (ASP) metric, which is the sum of the PC and non-PC
products and services purchased with the PC at the point of sale. In the
first quarter, the ASP was $1,723.
Total beyond-the-box sales amounted to 23 percent of revenue and
41 percent of gross profit in the first quarter, versus 14 and 29 percent
respectively for the same period last year. Approximately $326 million of the
beyond-the-box revenue in the first quarter occurred at the point of sale and
is accordingly included in the ASP calculation, while $141 million was from
after the point of sale.
"Beyond-the-box remains a critical element of profitable growth for
Gateway, and is a cornerstone of our commitment to lifelong relationships with
our customers," Waitt said. "By breaking out beyond-the-box sales in this new
way, we'll better illustrate the nature of this important stream of revenue
and profit both at the point of sale and beyond."
Restructuring Steps
In the first quarter, Gateway began restructuring the business to improve
its position. As a result, the company recorded $533 million of special
charges, consisting of $250 million of charges relating to restructuring steps
previously announced and estimated to be in this range in late February, and
the balance primarily related to subsequent strategic decisions concerning the
technology and other assets acquired from NECX Direct and the company's
consumer loan portfolio.
Approximately $430 million of the $533 million charges are non-cash.
Special charges for previously announced restructuring steps consisted of
$39 million to cover productivity initiatives following the previously
announced 12 percent reduction in force and the departure of senior
executives; an $83 million write-down covering domestic facilities and capital
assets; $75 million for the closing of underperforming retail locations in the
U.S. and Canada; $38 million for restructuring of international operations and
$15 million for other items. Subsequent strategic decisions included an IT
systems restructuring of the company's e-commerce operations, primarily
Gateway's online peripherals store. This resulted in the abandonment of the
intellectual property and technology acquired in the NECX acquisition and the
write-down of the remaining $140 million of goodwill and other intangibles
associated with that acquisition.
In addition, while the company will continue to offer customer financing,
it decided to discontinue providing customer financing to lesser quality
credits, and to sell the substantial balance of its existing consumer loan
portfolio consisting of these credits. Therefore, the company took a
$100 million charge in the first quarter to write-down its loan portfolio to
estimated realizable value. Earlier this year, the company sold approximately
$500 million of its portfolio, consisting of higher-tiered credits, at par.
Pre-tax Income (Loss)
Gross profit margin for the quarter was 9.7 percent. Excluding the
effects of Gateway's consumer loan portfolio and special charges, gross profit
margin would have been 18.5 percent for the first quarter of this year while
it was 21.6 percent for the same period last year.
Selling, General & Administrative (SG&A) expenses were $773 million in the
first quarter. Excluding special charges, first quarter SG&A expenses were
$384 million, or 18.9 percent of revenue, down sequentially from the fourth
quarter of 2000. SG&A expenses were 13.8 percent of revenue for the same
period last year.
Excluding the above-described special charges, the company had a pre-tax
loss of $81 million in the quarter. The operating loss associated with the
consumer loan portfolio was $75 million for the first quarter and is included
in this $81 million pre-tax loss. Excluding this loss on the portfolio and
the special charges, Gateway had a pre-tax loss of approximately $6 million in
the first quarter.
Accounting Change
Statement of Financial Accounting Standards No. 133 changed the accounting
rules for derivatives, warrants, options and other financial instruments.
Gateway adopted this new standard in the first quarter of 2001, as required.
The cumulative effect of these changes for positions held as of Dec. 31, 2000,
was a one-time, non-cash charge of $24 million net of tax. The impact of
applying these new accounting rules in the first quarter increased the pre-tax
loss by $5 million.
Balance Sheet Highlights
Gateway exited the first quarter with $1.1 billion in cash and marketable
securities, its strongest cash position since the second quarter of last year
and nearly twice the level the company had at the end of 2000, while its
inventory turns increased to 28 times, its highest level in the past 12
months.
"The restructuring steps we're taking are already having a positive effect
both on our balance sheet and the underlying health of our current and future
business from an operating perspective," said Joseph Burke, senior vice
president and chief financial officer. "We would have essentially broken even
from an operating perspective in the first quarter, as per our earlier
guidance, excluding the effects of the special charges and losses on the now
discontinued lower quality consumer financing business."
Outlook
Gateway believes it is still on track to deliver against its unit growth
guidance and bottom line goals. The company expects to approximately break
even on an income from continuing operations basis, excluding special charges,
during the remainder of the first half of the year, despite seeing unit sales
down slightly over 2000. For the second half of the year, the company expects
unit sales to be up as compared with last year, and expects to return to
profitability on an income from continuing operations basis.
During the second and third quarters, the company expects pre-tax special
charges of $25 million and $10 million respectively, related to the strategic
restructuring decisions made in the first quarter associated primarily with
retail and international activities.
Gateway also said that its cost-cutting steps will continue to have a
positive effect on the level of SG&A expenses throughout the balance of the
year.
Annual meeting
The 2001 Annual Meeting of shareholders of Gateway will be held on May 17,
2001, at the Sioux City Convention Center, 801 Fourth Street, Sioux City,
Iowa, at 9:00 a.m. CDT.
About Gateway
Gateway (NYSE: GTW) a Fortune 500(R) company founded in 1985, focuses on
building lifelong relationships with consumers, small and medium businesses
and government and education institutions by helping clients meet all their
technology needs. Gateway is ranked as the most admired American company in
the Computers and Office Equipment industry in a Fortune Magazine survey (1)
and is the top brand in customer loyalty and for first-time home computer
purchases of Wintel-based PCs (2). The company had total global revenue of
$9.6 billion in 2000. For more information, visit our Web site at
http://www.gateway.com.
Special Note
This press release contains forward-looking statements that involve risks
and uncertainties, as well as assumptions that, if they do not materialize or
prove incorrect, could cause Gateway's results to differ materially from those
expressed or implied by such forward-looking statements. All statements,
other than statements of historical fact, are statements that could be deemed
forward-looking statements, including any projections of earnings, revenues,
or other financial items; any statements of plans, strategies and objectives
of management for future operations; any statements regarding proposed new
products, services or developments; any statements regarding future economic
conditions or performance; statements of belief and any statement of
assumptions underlying any of the foregoing. The risks that contribute to the
uncertain nature of these statements include, among others, competitive
factors and pricing pressures, including the impact of aggressive pricing cuts
by larger competitors; general conditions in the personal computing industry,
including changes in overall demand and average unit prices, shifts from
desktops to mobile computing products and information appliances and the
impact of new microprocessors and operating software; component supply
shortages; short product cycles; the ability to access new technology;
infrastructure requirements; risks of international business; foreign currency
fluctuations; ability to grow in e-commerce; risks of minority equity
investments; risks relating to new or acquired businesses, joint ventures and
strategic alliances; risks related to financing customer orders; changes in
accounting rules, the impact of litigation and government regulation
generally; inventory risks due to shifts in market demand; changes in product,
customer or geographic sales mix; the impact of employee reductions and
management changes and additions; and general economic conditions, and other
risks described from time to time in Gateway's Securities and Exchange
Commission periodic reports and filings. The Company assumes no obligation to
update these forward-looking statements to reflect events that occur or
circumstances that exist after the date on which they were made.
(1) Fortune Magazine, "America's Most Admired Companies,"
February 19, 2001.
(2) From the Harris Interactive Consumer TechPoll(SM) study of 140,000
PC owners who use the Internet, released March 5, 2001.
Gateway
Consolidated Statements of Operations
(in thousands, except per share amounts)
Three months ended March 31
2001 2000
(unaudited)
Net sales $2,033,510 $2,398,950
Cost of goods sold 1,836,205 1,880,448
Gross profit 197,305 518,502
Selling, general, and
administrative expenses 773,260 332,238
Operating income (loss) (575,955) 186,264
Other, net (38,215) 17,599
Income (loss) before income
taxes and cumulative effect
of change in accounting
principle (614,170) 203,863
Provision for income taxes (135,117) 72,372
Net income (loss) before
cumulative effect of change
in accounting principle (479,053) 131,491
Cumulative effect of change
in accounting principle, net (23,851) (11,851)
Net income (loss) $(502,904) $119,640
Net income (loss) per share
before cumulative effect of change
in accounting principle:
Basic $(1.48) $0.41
Diluted $(1.48) $0.40
Net income (loss) per share:
Basic $(1.56) $0.37
Diluted $(1.56) $0.36
Basic weighted average
shares outstanding 322,868 320,013
Diluted weighted average
shares outstanding 322,868 332,541
Gateway
Consolidated Balance Sheet
(in thousands)
March 31, 2001 December 31, 2000
ASSETS: (unaudited)
Current assets:
Cash and cash equivalents $906,101 $483,997
Marketable securities 205,258 130,073
Accounts receivable, net 433,074 544,755
Inventory 184,830 315,069
Other 525,300 793,166
Total current assets 2,254,563 2,267,060
Property, plant, and
equipment, net 785,404 897,414
Intangibles, net 46,989 165,914
Other assets 533,007 822,156
$3,619,963 $4,152,544
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $554,993 $785,345
Accrued liabilities 585,828 556,323
Accrued royalties 142,354 138,446
Other current liabilities 131,301 150,920
Total current liabilities 1,414,476 1,631,034
Other long-term liabilities 346,214 141,171
Total liabilities 1,760,690 1,772,205
Stockholders' equity 1,859,273 2,380,339
$3,619,963 $4,152,544
Gateway
Analysis of Consolidated Statement of Operations
(in thousands)
(unaudited)
Three months ended March 31, 2001
Excluding Special As Reported
Special Charges Charges
Net sales $2,033,510 $-- $2,033,510
Cost of goods sold 1,736,244 99,961 (1) 1,836,205
Gross profit 297,266 (99,961) 197,305
Selling, general, and
administrative expenses 383,691 389,569 (2) 773,260
Operating loss (86,425) (489,530) (575,955)
Other, net 5,160 (43,375)(3) (38,215)
Loss before income taxes
and cumulative effect of
change in accounting
principle (81,265) (532,905) (614,170)
Provision for income taxes (26,127) (108,990) (135,117)
Net loss before cumulative
effect of change in
accounting principle (55,138) (423,915) (479,053)
Cumulative effect of change
in accounting principle, net (23,851) -- (23,851)
Net loss $(78,989) $(423,915) $(502,904)
(1) Represents a write down of the Company's consumer loan portfolio as
it is prepared for disposition by sale.
(2) Consists of $140 million related to the impairment of the goodwill and
other assets acquired in the acquisition of NECX Direct, $83 million
related to the write-down of domestic facilities and capital assets,
$75 million for the closing of underperforming retail locations in the
United States and Canada, $39 million related to productivity
initiatives following the 12 percent reduction in force and the
departure of senior executives, $38 million related to the
restructuring of international operations and $15 million for other
items.
(3) Represents the write down of securities and long-term receivables
associated with a strategic restructuring decision.
Gateway
Three Months Ended March 31, 2001
Special Charges
(in millions)
Estimated
Range Actual
(unaudited)
Productivity Initiatives $35-60 $39
Facilities/Capital Assets 35-100 83
Operating Assets 45-65 75
International Restructuring 30-36 38
Other 5-14 15
New Strategic Decisions N/A 283 (1)
$150-275 $533
(1) Decisions made subsequent to March 3, 2001 consist primarily of the
planned abandonment of the intellectual property and technology
acquired in connection with the acquisition of NECX Direct and the
decision to not only discontinue the purchase of lesser quality
consumer finance receivables but also to sell the existing portfolio
which is related primarily to same.
SOURCE Gateway Inc.
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Related links:
http://www.gateway.com
CONTACT:
media, John W. Spelich, Public Relations,
858-799-2657, john.spelich@gateway.com; or investor relations,
Marlys D. Johnson, 605-232-2709, marlys.johnson@gateway.com, both
of Gateway Inc.
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