Intel 1998 Annual Report Download - page 62

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capacity installed might be under-utilized and capital spending may be slowed. Revenues and gross margin may also be affected if the
Company does not add capacity fast enough to meet market demand. This spending plan is dependent upon expectations regarding production
efficiencies and delivery times of various machinery and equipment. Depreciation and amortization for 1999 is expected to be approximately
$3.4 billion, an increase of approximately $600 million from 1998. Most of this increase would be included in cost of sales and research and
development spending.
The industry in which Intel operates is characterized by very short product life cycles, and the Company's continued success is dependent on
technological advances, including the development and implementation of new processes and new strategic products for specific market
segments. Since Intel considers it imperative to maintain a strong research and development program, spending for research and development
in 1999 is expected to increase to approximately $3 billion. The Company intends to continue spending to promote its products and to increase
the value of its product brands. Based on current forecasts, spending for marketing, general and administrative expenses is also expected to
increase in 1999.
The Company currently expects its tax rate to be 33.5% for 1999. This estimate is based on current tax law and the current estimate of earnings,
and is subject to change.
Intel has established a team to address the issues raised by the introduction of the Single European Currency ("Euro") on January 1, 1999 and
during the transition period through January 1, 2002. Intel's internal systems that are affected by the initial introduction of the Euro have been
made Euro capable without material system modification costs. Further internal systems changes will be made during the three-year transition
phase in preparation for the ultimate withdrawal of the legacy currencies in July 2002, and the costs of these changes are not expected to be
material. The Company does not presently expect that introduction and use of the Euro will materially affect the Company's foreign exchange
and hedging activities, or the Company's use of derivative instruments, or will result in any material increase in costs to the Company. While
Intel will continue to evaluate the impact of the Euro introduction over time, based on currently available information, management does not
believe that the introduction of the Euro will have a material adverse impact on the Company's financial condition or overall trends in results of
operations.
Like many other companies, Intel is subject to risks from the year 2000 computer issue. If internal systems do not correctly recognize and
process date information beyond the year 1999, there could be an adverse impact on the Company's operations. Two other related issues could
also lead to incorrect calculations or failures: i) some systems' programming assigns special meaning to certain dates, such as 9/9/99 and ii) the
fact that the year 2000 is a leap year.
The Company has established a comprehensive program with dedicated program management and executive-level sponsorship to deal with
year 2000 issues. The Company is addressing its most critical internal systems first and has categorized as "critical" or "priority" those systems
whose failure would cause an extended shutdown of all or part of a factory, could cause personal injury or would have a sustained and
significant detrimental financial impact. The Company is also testing customer and supplier interfaces with its internal systems as appropriate.
These activities are intended to encompass all major categories of systems in use by the Company, including network and communications
infrastructure, manufacturing, facilities management, sales, finance and human resources. The Company's approach prioritizes functions and
systems worldwide, and all divisions and facilities are working toward the same global milestones.
The Company's semiconductor manufacturing and assembly and test ("manufacturing") equipment and systems are highly automated,
incorporating PCs, embedded processors and related software to control scheduling, inventory tracking, statistical analysis and automated
manufacturing. A significant portion of the Company's year 2000 efforts on internal systems is intended to prevent disruption to manufacturing
operations.
As of December 1998, approximately 99% of the Company's critical and priority manufacturing systems, and 85% of critical and priority non-
manufacturing systems, were determined to be already year 2000 capable, or remediation needed (replacements, changes, upgrades or
workarounds) has been determined and unit testing completed. Deployment of replacements, changes and upgrades has been completed for
93% of manufacturing systems and 84% of non-manufacturing systems. The Company has planned a comprehensive program of integration
testing of internal systems. The integration testing began in the third quarter of 1998 and will continue into 1999 as necessary.
The following table indicates the phases of the year 2000 project related to the Company's critical and priority internal systems and the
expected time frames.
Intel is also actively working with suppliers of products and services to determine the extent to which the suppliers' operations and the products
and services they provide are year 2000 capable, and to monitor their progress toward year 2000 capability. Highest priority is being placed on
Phases of the project Start date End date
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High-level assessment of systems 1996 Q3 1998 (actual)
Detailed assessment, remediation
and unit testing 1996 Q1 1999 (expected)
Deployment 1997 Mid-1999 (expected)
Integration testing Q3 1998 Mid-1999 (expected)