Gateway Ratings Cut To Junk Status

Standard & Poor's cites brutal PC industry competition -- and a declining revenue base

Standard & Poor's lowered its credit ratings on Gateway Inc. (GTW ) on Aug. 22 and removed them from CreditWatch, where they were placed on March 1, 2001. Ratings on Gateway's corporate credit and bank loans were ech lowered from BBB- to BB, below investment grade. Its shelf regisration rating was lowered from BBB-/BB+ to BB/B+ as well.

The outlook is negative.

Standard & Poor's said the downgrade reflects extremely competitive industry conditions, a declining revenue base, and the company's expectation that it will not return to material profitability until fiscal 2002.

San Diego, Calif.-based Gateway is one of the leading direct marketers of PCs and related products and services. Gateway has a strong position in the consumer market, but it has less geographic and product line diversity than other major computer hardware manufacturers. The current rating incorporates the expectation that near-term operating profitability will be sub-par for the rating level. The current rating is also based on Standard & Poor's expectation that the company will restore net profitability in fiscal 2002. Gateway's fiscal 2000 EBITDA margin was 8%.

Gateway is in the process of restructuring its operations, reducing its cost base, and accelerating its strategic shift to providing personalized technology solutions. The company is expected to announce specific steps in the near future. Gateway reported revenues of $1.5 billion in the quarter ended June 30, 2001 (down 32% from the year earlier period), and a net loss of $21 million. Minimal debt levels (including capitalized operating leases), and cash and marketable securities of more than $1 billion as of June 30, 2001 contribute to Gateway's strong financial profile for the rating. Additional financial flexibility is provided by a $300 million credit facility.

Given the current market and competitive environment, Gateway may be challenged to restore profitability to expected levels in fiscal 2002, according to the rating agency.

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