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Taxing Times at Cypress Semiconductor

Just about every time I open my newspaper there's another mention of the debate over taxes this electoral season. It seems I can't escape it. You'd think in turning my eyes toward the investing world, I'd get a bit of a break from the big T, but no. Yesterday, Cypress Semiconductor (NYSE: CY  ) , which makes chips for a variety of devices including cell phones and wireless networking gear, eked out a profit on the strength of what the company said was a $29.9 million tax benefit.

Cypress reported $219.6 million in revenue and $4.3 million, or $0.02 per diluted share, in net income for its fiscal 2004 third quarter. That doesn't compare well with last year's $216.6 million in sales and $17.3 million, or $0.12 per diluted share, in earnings.

To its credit, Cypress management expressed disappointment at the results, laying the blame on an inventory glut. That's not likely to be news to Intel (Nasdaq: INTC  ) investors, who face similar problems. But Cypress might make Intel's situation look rosy: Though sales have been sporadic, the rise in Cypress's inventory has been dramatic, up 29% since December 2003.

And then we go back to the tax break, which management says results from having reserved more than it needs to pay its estimated tax liability. Without it, Cypress would have reported a $22.3 million loss. Of course, the company prefers that we look to its pro forma results, which back out $9.7 million for amortization of intangibles and $15.6 million for in-process research and development, among other expenses. All told, the exclusions would put Cypress' net income at greater than $34 million, a 208% increase over the $11 million earned during the same quarter a year ago. But without the tax break, even pro forma net income would have declined to $6.3 million.

Management doesn't expect to see another big resizing of its expected tax bill, which means its guidance toward losses in the fourth quarter -- between $0.05 and $0.12 per share -- are likely to be realized. Taxing? Yes, indeed. For now, it might be better to simply write this stock off.

For more on the inventory problems plaguing the tech industry, check out these articles by Bill Mann:

Does investing in risky tech stocks like Cypress raise the hair on your neck? If that's because you're a thrill- seeker who likes searching for the next big thing, then David Gardner'sMotley Fool Rule Breakersmight be for you. But if that hair-raising feeling is one of dread, then maybe a dose of Mathew Emmert'sMotley Fool Income Investorwould be better for you and your portfolio. A free 30-day trial to both is yours for the asking.

Fool contributor TimBeyers has some inventory -- that is, junk -- in his garage that he needs to unload. Interested a broken satellite TV receiver? Tim owns no shares in any of the companies mentioned, and you can view his Fool profile and stock holdings here.

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