Intel 1999 Annual Report Download - page 61

development of next-generation 0.13-micron process technology for both 300 millimeter and 200 millimeter manufacturing, in addition to
increased spending on new fabrication facility construction and equipment purchases to add 0.18- micron capacity. If the market demand does
not continue to grow and move rapidly toward higher performance products in the various market segments, revenues and gross margin may be
affected, the 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, and construction schedules for new facilities. Depreciation for
2000 is expected to be approximately $3.4 billion, an increase of approximately $200 million from 1999. Most of this increase would be
included in cost of sales and research and development spending. Amortization of goodwill and other acquisition-related intangibles is
expected to be approximately $1.2 billion for 2000.
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. Because Intel considers it imperative to maintain a strong research and development program, spending for research and
development in 2000, excluding in-
process research and development, is expected to increase to approximately $3.8 billion from $3.1 billion in
1999. The higher spending is driven primarily by the full-year impact of acquisitions and investments in new businesses as well as increased
investment in Intel architecture-related businesses. 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
2000.
The company currently expects its tax rate to be 31.7% for 2000, excluding the impact of costs related to prior and any future acquisitions. This
estimate is based on current tax law, the current estimate of earnings and the expected distribution of income among various tax jurisdictions,
and is subject to change.
During 1998, Intel established a team to address the issues raised by the introduction of the Single European Currency, the Euro, on January 1,
1999. The team is continuing to work on the conversion issues during the transition period through January 1, 2002. Intel's internal systems that
were affected by the initial introduction of the Euro were made Euro capable without material system modification costs. Further internal
systems changes are being made during the three-year transition phase in preparation for the ending of bilateral rates in January 2002 and the
ultimate withdrawal of the legacy currencies in July 2002. The costs of these changes are not expected to be material. The introduction of the
Euro has not materially affected the company's foreign exchange and hedging activities, or the company's use of derivative instruments, and is
not expected to result in any material increase in costs to the company. While Intel will continue to evaluate the impact of the ongoing Euro
conversion over time, based on currently available information, management does not believe that the Euro conversion will have a material
adverse impact on the company's financial condition or overall trends in results of operations.
Intel established a comprehensive program to deal with issues related to the year 2000 computer programming problem. By the end of 1999, all
of the company's internal systems categorized as critical, priority or important were determined to be year 2000 capable. To date, there have
been no material problems caused by year 2000 issues related to the company's internal systems or non-performance of suppliers.
Intel also established a program to assess the year 2000 capability of its products. The definition of "Year 2000 Capable" is available on Intel's
Web site. To assist customers in evaluating their year 2000 issues, the company developed a Web-enabled database indicating the capability of
Intel's current branded products and certain branded products no longer being produced. The capabilities of certain non-Intel branded products
of certain subsidiaries are posted on the Web sites of those entities.
All Intel processors and microcontrollers (embedded processors) are Year 2000 Capable, with the exception of two custom microcontroller
products sold to a limited number of customers. However, the ability of a complete system to operate correctly depends on firmware (BIOS)
capability and software design and integration, which for many end users includes firmware and software provided by companies other than
Intel.
Except as specifically provided in the limited warranties offered on certain of its current and some discontinued products, the company does not
believe it is legally responsible for costs incurred by customers to ensure their year 2000 capability. Nevertheless, the company has incurred
various costs to provide customer support and customer satisfaction services regarding year 2000 issues.
The company currently expects that the total cost of these programs will be approximately $100 million. Approximately $96 million has been
spent on the programs to date, of which approximately $54 million was incurred in 1999. Costs include estimated payroll costs for redeployed
personnel and the costs of consultants, software and hardware upgrades, and dedicated program offices.
No significant internal systems projects were deferred due to year 2000 program efforts. The installation schedule of certain new software and
hardware was accelerated to solve year 2000 capability issues, for which related costs were estimated to be an additional amount of
approximately $15 million. These estimated costs do not include any potential costs related to customer or other claims.
Based on currently available information, management does not believe that the year 2000 matters discussed above will have a material adverse
impact on the company's financial condition or overall trends in results of operations.
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