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Gateway to lay off up to 25 percent

The PC maker will lay off up to 4,600 workers worldwide, pull out of several Asian markets, and post a third-quarter loss.

    Gateway will lay off up to 4,600 workers worldwide, pull out of several Asian markets and post a third-quarter loss, the company said Tuesday.

    The company will immediately close its company-owned operations in Malaysia, Singapore, Japan, Australia and New Zealand.

    The PC maker will also close a Salt Lake City manufacturing plant and call centers in Hampton, Va.; Vermillion, S.D.; Lake Forest, Calif.; and Salt Lake City. It will keep open two other call centers in South Dakota and those in Kansas City, Mo.; Rio Rancho, N.M.; and Colorado Springs, Colo.

    The San Diego-based company will also take steps to make manufacturing plants in Virginia and South Dakota more efficient.

    Gateway said the moves will result in a roughly 15 percent reduction of the company's U.S. work force and approximately a 25 percent reduction in Gateway's worldwide work force, assuming it also exits European markets--a move that it has already put in motion.

    The 4,600 worldwide job cuts include 2,100 in the United States, 1,400 in Asia and 1,100 if Gateway shuts down in European operations.

    Its layoffs come on top of job cuts made earlier this year. Before the company began making reductions in January, it employed 24,000 people. Before the cuts announced Tuesday, the company had 19,300 workers.

    The third-quarter loss will be before taxes and exclude $475 million in special charges.

    A consensus of analysts expects Gateway to post a third-quarter loss of a penny per share, excluding charges, according to First Call.

    The company previously said only that it expected to roughly break even in the second half of the year. The company said Tuesday that it expects to return to profitability in the fourth quarter and be "marginally" profitable, excluding charges, in the second half.

    Despite the changes, Gateway predicts that its U.S. computer sales, as measured in units, will increase sequentially in the third and fourth quarters.

    The various restructuring efforts are expected to eventually save $300 million on an annual basis, the company said.

    Gateway CEO Ted Waitt told CNET that the company made the decision to pull back internationally after deciding it didn't have the brand recognition, distribution channels or partnerships in global markets that it had in the United States.

    "We don't need to be a global business because our customers aren't global, since we're not going after the enterprise," Waitt said in a telephone interview.

    As a result, the company also had more manufacturing capacity than it needed, Waitt said.

    Waitt added that the current move is a continuation of, rather than a break from, the beyond-the-box strategy he inherited from Jeffrey Weitzen, who was ousted as CEO earlier this year. That approach focuses on bringing in revenue from items other than the PC such as training, software and services.

    "Really, it's just an evolution of beyond the box," Waitt said. "We never walked away from beyond the box."

    Gateway said it will separate the various components of its non-PC sales into separate business units--communications, applications, learning, financing and services--with each product area reporting its own financial results.

    Waitt told analysts on a conference call that although the hardware business has gross profit margins in the midteen percent range, the other five areas all have margins of more than 50 percent. Each of the five segments accounts for at least $100 million in sales on an annual basis, he said.

    Of the $475 million in charges for the third quarter, $150 million will be in cash.

    The charges break down as $200 million for the possible exit from Europe, $150 million for closing the Asian operations, and $125 million for the U.S. restructuring. The costs include severance costs, the writedown of assets and other restructuring costs.

    Chief Financial Officer Joe Burke stressed that the company has the resources it needs to make the transition.

    "We have a strong liquidity position today," Burke said in an interview.

    Even with the charges, Gateway said it expects to exit the year around its current level of $1 billion in cash and marketable securities. The company said it "believes that its current sources of working capital and liquidity will provide adequate flexibility for its financial needs for the foreseeable future."

    In the conference call, Burke also took issue with a recent downgrade from Standard & Poor's that dropped the company's credit rating to junk status.

    "We don't understand the rationale for the downgrade," Burke said.

    He added that while the decision is not favorable, it should not have an adverse material effect on the company, though it could increase the costs of raising cash in the future.

    Burke said the company's bond rating from Moody's is still at an investment-grade level.

    Ahead of the announcement, Gateway shares closed up 10 cents, or roughly 1 percent, at $8.60. The stock rose in after-hours trading to $9.28, according to Island ECN.