Intel Takes $475-Million Earnings Hit : Computers: The charge for replacing flawed Pentium chips mars an otherwise stellar year.

Facing the financial music from the Pentium computer chip debacle, Intel Corp. announced Tuesday that it is taking a larger-than-expected $475-million charge to cover the cost of replacing flawed Pentium microprocessors.

The charge against fourth-quarter earnings puts a big crimp in what otherwise would have been a stellar year for Intel, with net income for the quarter dropping to $372 million from $594 million a year ago. But Intel stressed that Pentium sales remained strong.

For the full year, Intel’s net income fell slightly to $2.29 billion, or $5.24 a share, from $2.3 billion, or $5.20 a share, in 1993. Revenue rose 31%, to $11.5 billion from $8.78 billion. The results were released after the stock markets closed.

Intel, the world’s largest computer chip company, unexpectedly found itself facing a crisis late last year when word got out that its flagship Pentium microprocessor made mathematical errors in certain rare situations.

Many computer users were furious that Intel had known about the flaw but not disclosed it, and their indignation grew when Intel said it would replace chips only for certain sophisticated users. Intel maintained--then and now--that the flaw is a minor problem affecting few customers.

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But the outcry--followed by IBM’s decision in December to stop shipping Pentium PCs--eventually forced Intel to offer replacements for all comers.

The charge, greater than analysts had expected, is an estimate of what the Pentium mishap will cost Intel. By estimating high, Intel hopes it will avoid having to take another charge and, more important, having to relive the Pentium embarrassment.

The $475 million will cover both write-downs on inventories of bad chips and the cost of replacing flawed Pentium PCs already in the hands of consumers. In the end, the exact cost will depend on how many customers choose to trade in their chips.

In a conference call Tuesday, Intel executives tried to emphasize the positive. Even the bad publicity surrounding the Pentium had affected sales only slightly, said Paul Otellini, Intel vice president of worldwide sales. Otellini declined to specify how many Pentium PCs had been returned.

“In retail we saw nothing but positive signs for the Pentium,” he said. “The choice is no longer between a 486 and a Pentium, it’s between different speeds of the Pentium.”

Indeed, excluding the charge, which was larger than analysts had expected, the company’s results were strong. Fourth-quarter revenue was $3.23 billion, up 35% over that of the corresponding period last year. For the year, Intel outperformed the PC industry by three percentage points, according to market research firm International Data Corp. of Framingham, Mass.

Sales of Pentium chips represented 23% of Intel’s revenue for the quarter. Otellini projects that Pentium shipments will exceed those of the 486 this year. A precipitous drop in sales in the first quarter of this year--common after the holiday selling season--is not expected, he said.