Gateway Inc.'s reserves for loan losses soared last year as the computer manufacturer sought to expand sales among customers with riskier credit, the company disclosed.
The San Diego-based firm set aside $121.9 million for potential consumer-loan losses last year, compared with just $4.7 million the year before, according to documents filed with the Securities and Exchange Commission.
The provision increased because Gateway made more loans and extended the financing program to "higher risk categories," the firm said in the filing.
The loans may have helped Gateway maintain sales growth for much of last year, as slower industry sales hit rivals. But the bad-debt provision was unusually high for a consumer lending business, according to several analysts.
"I think they [Gateway] have a distressed lending business," said Reilly Tierney, an analyst at Fox-Pitt Kelton Inc. who follows credit-card firms such as MBNA Corp.
In all, consumer-financing receivables at Gateway surged 160% last year to $779 million from $299 million a year earlier, while total sales rose 7% to $9.6 billion, according to the SEC filings.
PC manufacturers traditionally have offered financing to bolster demand, according to analysts.
Although Gateway offers financing through partner MBNA, the computer company in 1999 decided also to make loans directly to customers. With annual interest rates on such loans running as high as 28%, Gateway views the direct-financing program as one way to diversify its revenue streams as PC prices fall.
Expanding the loan program to riskier borrowers helped the company "broaden the availability of technology to those who could qualify for it," according to spokesman John Spelich.
The cost, however, was the $121.9-million set-aside for potential loan losses last year. Against that total, Gateway charged off $51 million of loans during the year as uncollectable. Including 1999 loss provisions, that left about $75 million still set aside as of Dec. 31.
On Feb. 16, Gateway sold about $500 million of its finance receivables to a loan servicer. That reduced total consumer receivables to about $300 million, the company said. But the loans sold consisted of Gateway's higher-rated credits.
Gateway shares rose 75 cents to close at $17.72 on the New York Stock Exchange on Wednesday.