##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM
10-Q/A
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended July 2, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission File Number 000-17157
 NOVELLUS SYSTEMS, INC.
 (Exact name of Registrant as specified in its charter)
 California(State or other jurisdiction of
incorporation of organization)
    
    77-0024666(I.R.S. Employer Identification
Number)
 4000 North First Street, San Jose, California 95134  (Address of principal executive offices including zip code)
 (408) 943-9700  (Registrants telephone number, including area code)
  YES þ NO o
  YES þ NO o




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EXPLANATORY NOTE
   
 NOVELLUS SYSTEMS, INC.
 FORM
10-Q/A
QUARTER ENDED JULY 2, 2005
 TABLE OF CONTENTS
 PagePart I: Financial Information
    
    
    3Item 1: Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Statements of Operations for the three and six months ended July 2, 2005 and June 26, 2004
    
    
    3Condensed Consolidated Balance Sheets as of July 2, 2005 and December 31, 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended July 2, 2005 and June 26, 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4: Controls and Procedures
    
    
    27Part II: Other Information
    
    
    28Item 1: Legal Proceedings
    
    
    28Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 4: Submission of Matters to a Vote of Security Holders
    
    
    29Item 6: Exhibits
    
    
    30Signatures
    
    
    31EXHIBIT 10.33EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I: FINANCIAL INFORMATION
 
 ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 Three Months Ended
    
    Six Months EndedJuly 2, 2005
    
    June 26, 2004
    
    July 2, 2005
    
    June 26, 2004Net sales
    
    $
    329,585
    
    
    $
    338,219
    
    
    $
    669,325
    
    
    $
    601,081Cost of sales
    
    
    172,023
    
    
    
    168,539
    
    
    
    357,894
    
    
    
    306,796Gross profit
    
    
    157,562
    
    
    
    169,680
    
    
    
    311,431
    
    
    
    294,285Operating expenses:Selling, general and administrative
    
    
    50,325
    
    
    
    47,225
    
    
    
    102,085
    
    
    
    89,628Research and development
    
    
    63,512
    
    
    
    63,471
    
    
    
    125,560
    
    
    
    122,428Restructuring and other charges (benefits)
    
    
    (74
    )
    
    
    
    
    
    
    (74
    )
    
    
    Acquired in-process research and development
    
    
    
    
    
    
    6,124
    
    
    
    
    
    
    
    6,124Legal settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500Total operating expenses
    
    
    113,763
    
    
    
    116,820
    
    
    
    227,571
    
    
    
    220,680Operating income
    
    
    43,799
    
    
    
    52,860
    
    
    
    83,860
    
    
    
    73,605Interest income, net
    
    
    4,287
    
    
    
    2,668
    
    
    
    7,347
    
    
    
    5,123Other income (loss), net
    
    
    (613
    )
    
    
    228
    
    
    
    (204
    )
    
    
    522Interest and other income, net
    
    
    3,674
    
    
    
    2,896
    
    
    
    7,143
    
    
    
    5,645Income before income taxes
    
    
    47,473
    
    
    
    55,756
    
    
    
    91,003
    
    
    
    79,250Provision for income taxes
    
    
    14,242
    
    
    
    17,945
    
    
    
    27,301
    
    
    
    24,758Net income
    
    $
    33,231
    
    
    $
    37,811
    
    
    $
    63,702
    
    
    $
    54,492Net income per share:Basic net income per share
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.46
    
    
    $
    0.36Diluted net income per share
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.45
    
    
    $
    0.35Shares used in basic per share calculation
    
    
    138,068
    
    
    
    149,112
    
    
    
    138,979
    
    
    
    151,012Shares used in diluted per share calculation
    
    
    138,944
    
    
    
    151,386
    
    
    
    140,022
    
    
    
    153,743
  3




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##### Table of Contents



CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 July 2,
    
    December 31,2005
    
    2004 *(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    114,022
    
    
    $
    106,117Short-term investments
    
    
    571,111
    
    
    
    481,645Accounts receivable, net
    
    
    321,234
    
    
    
    395,522Inventories
    
    
    236,220
    
    
    
    261,046Deferred tax assets, net
    
    
    110,377
    
    
    
    110,644Prepaid and other current assets
    
    
    33,681
    
    
    
    14,350Total current assets
    
    
    1,386,645
    
    
    
    1,369,324Property and equipment, net
    
    
    457,519
    
    
    
    476,492Restricted cash and cash equivalents
    
    
    159,783
    
    
    
    176,708Goodwill
    
    
    265,084
    
    
    
    278,972Intangible and other assets
    
    
    112,634
    
    
    
    100,336Total assets
    
    $
    2,381,665
    
    
    $
    2,401,832LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    62,756
    
    
    $
    70,446Accrued payroll and related expenses
    
    
    51,110
    
    
    
    64,531Accrued warranty
    
    
    50,493
    
    
    
    45,526Other accrued liabilities
    
    
    52,472
    
    
    
    54,517Income taxes payable
    
    
    19,830
    
    
    
    14,691Deferred profit
    
    
    74,145
    
    
    
    71,216Current obligations under lines of credit
    
    
    11,996
    
    
    
    3,103Total current liabilities
    
    
    322,802
    
    
    
    324,030Long term debt
    
    
    132,995
    
    
    
    161,103Other liabilities
    
    
    50,732
    
    
    
    54,865Total liabilities
    
    
    506,529
    
    
    
    539,998Shareholders equity:Common stock
    
    
    1,460,916
    
    
    
    1,473,829Deferred stock compensation
    
    
    (15,669
    )
    
    
    (17,159
    )Retained earnings
    
    
    424,275
    
    
    
    399,919Accumulated other comprehensive income
    
    
    5,614
    
    
    
    5,245Total shareholders equity
    
    
    1,875,136
    
    
    
    1,861,834Total liabilities and shareholders equity
    
    $
    2,381,665
    
    
    $
    2,401,832
 
 *
    
    Amounts as of December 31, 2004 are derived from the December 31, 2004 audited financial
statements.  4




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Six Months EndedJuly 2,
    
    June 26,2005
    
    2004Cash flows from operating activities:Net income
    
    $
    63,702
    
    
    $
    54,492Adjustments to reconcile net income to net cash provided by operating activities:Gain on sale of an investment
    
    
    
    
    
    
    (365
    )Reversal of previously accrued restructuring charges
    
    
    (74
    )
    
    
    Loss on disposal of fixed assets
    
    
    657
    
    
    
    Depreciation and amortization
    
    
    42,318
    
    
    
    41,694Deferred income taxes
    
    
    1,843
    
    
    
    (18,652
    )Stock-based compensation
    
    
    2,262
    
    
    
    1,979Changes in operating assets and liabilities:Accounts receivable
    
    
    64,167
    
    
    
    (99,219
    )Inventories
    
    
    8,298
    
    
    
    (30,462
    )Prepaid and other current assets
    
    
    (8,025
    )
    
    
    (1,963
    )Accounts payable
    
    
    (11,507
    )
    
    
    18,974Accrued payroll and related expenses
    
    
    (12,860
    )
    
    
    19,454Accrued warranty
    
    
    5,284
    
    
    
    9,459Other accrued liabilities
    
    
    (3,007
    )
    
    
    (184
    )Income taxes payable
    
    
    7,935
    
    
    
    28,760Deferred profit
    
    
    3,198
    
    
    
    37,416Net cash provided by operating activities
    
    
    164,191
    
    
    
    61,383Cash flows from investing activities:Proceeds from sales of short-term investments
    
    
    152,525
    

    
    
    426,611Proceeds from maturities of short-term investments
    
    
    100,913
    
    
    
    165,690Purchases of short-term investments
    
    
    (343,455
    )
    
    
    (652,449
    )Capital expenditures
    
    
    (26,980
    )
    
    
    (11,195
    )Proceeds from sale of fixed assets
    
    
    2,591
    
    
    
    Increase in other assets
    
    
    (2,701
    )
    
    
    (2,553
    )Decrease (increase) in restricted cash and cash equivalents
    
    
    12,503
    
    
    
    (1,021
    )Net cash used in investing activities
    
    
    (104,604
    )
    
    
    (74,917
    )Cash flows from financing activities:Proceeds from employee stock compensation plans
    
    
    16,638
    
    
    
    17,977Proceeds from (payments on) lines of credit, net
    
    
    8,980
    
    
    
    (4,967
    )Payments on long-term debt
    
    
    (13,007
    )
    
    
    Repurchase of common stock
    
    
    (69,669
    )
    
    
    (182,370
    )Net cash used in financing activities
    
    
    (57,058
    )
    
    
    (169,360
    )Effects of exchange rate on cash and cash equivalents
    
    
    5,376
    
    
    
    131Net increase (decrease) in cash and cash equivalents
    
    
    7,905
    
    
    
    (182,763
    )Cash and cash equivalents at the beginning of the period
    
    
    106,117
    
    
    
    497,178Cash and cash equivalents at the end of the period
    
    $
    114,022
    
    
    $
    314,415
  5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
 Basis of Presentation
     Allowance for Doubtful Accounts
  Forward Foreign Exchange Contracts
  6




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Stock-Based Compensation
      Three Months Ended
    
    Six Months EndedJuly 2,
    
    June 26,
    
    July 2,
    
    June 26,2005
    
    2004
    
    2005
    
    2004Net income as reported
    
    $
    33,231
    
    
    $
    37,811
    
    
    $
    63,702
    
    
    $
    54,492Add:Intrinsic value method expense
included in reported net
income, net of related tax effects
    
    
    734
    
    
    
    1,001
    
    
    
    1,584
    
    
    
    1,979Less:Fair value method expense, net of
related tax effects
    
    
    (8,166
    )
    
    
    (14,028
    )
    
    
    (18,740
    )
    
    
    (27,831
    )Pro-forma net income
    
    $
    25,799
    
    
    $
    24,784
    
    
    $
    46,546
    
    
    $
    28,640Pro-forma basic and diluted net income
per share
    
    $
    0.19
    
    
    $
    0.17
    
    
    $
    0.33
    
    
    $
    0.19Basic net income per share
as reported
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.46
    
    
    $
    0.36Diluted net income per share
as reported
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.45
    
    
    $
    0.35
 7




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Three Months Ended
    
    Six Months EndedJuly 2,
    
    June 26,
    
    July 2,
    
    June 26,2005
    
    2004
    
    2005
    
    2004Dividend yield
    
    None
    
    None
    
    None
    
    NoneExpected volatility
    
    
    70
    %
    
    
    76
    %
    
    
    70
    %
    
    
    76
    %Risk free interest rate
    
    
    3.3
    %
    
    
    2.5
    %
    
    
    3.3
    %
    
    
    2.5
    %Expected lives
    
    3.7 years
    
    3.5 years
    
    3.7 years
    
    3.5 years
   Three Months Ended
    
    Six Months EndedJuly 2,
    
    June 26,
    
    July 2,
    
    June 26,2005
    
    2004
    
    2005
    
    2004Dividend yield
    
    None
    
    None
    
    None
    
    NoneExpected volatility
    
    
    36
    %
    
    
    45
    %
    
    
    36
    %
    
    
    45
    %Risk free interest rate
    
    
    2.5
    %
    
    
    1.3
    %
    
    
    2.5
    %
    
    
    1.3
    %Expected lives
    
    .5 year
    
    .5 year
    
    .5 year
    
    .5 year
  Recent Accounting Pronouncements
    8




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##### Table of Contents



2. NET INCOME PER SHARE
    Three Months Ended
    
    Six Months EndedJuly 2,
    
    June 26,
    
    July 2,
    
    June 26,2005
    
    2004
    
    2005
    
    2004Numerator:Net income
    
    $
    33,231
    
    
    $
    37,811
    
    
    $
    63,702
    
    
    $
    54,492Denominator:Basic weighted-average shares outstanding
    
    
    138,068
    
    
    
    149,112
    
    
    
    138,979
    
    
    
    151,012Employee stock options and restricted stock
    
    
    876
    
    
    
    2,274
    
    
    
    1,043
    
    
    
    2,731Diluted weighted-average shares outstanding
    
    
    138,944
    
    
    
    151,386
    
    
    
    140,022
    
    
    
    153,743Basic net income per share
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.46
    
    
    $
    0.36Diluted net income per share
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.45
    
    
    $
    0.35
  3. OTHER INCOME (LOSS), NET
  Three Months Ended
    
    Six Months EndedJuly 2,
    
    June 26,
    
    July 2,
    
    June 26,2005
    
    2004
    
    2005
    
    2004Other income
    
    
    111
    
    
    $
    134
    
    
    
    229
    
    
    $
    977Other expense
    
    
    (6
    )
    
    
    (94
    )
    
    
    (131
    )
    
    
    (327
    )Foreign currency gain (loss), net
    
    
    (718
    )
    
    
    188
    
    
    
    (302
    )
    
    
    (128
    )Total other income (loss), net
    
    $
    (613
    )
    
    $
    228
    
    
    $
    (204
    )
    
    $
    522
 4. INVENTORIES
  July 2,
    
    December 31,2005
    
    2004Purchased and spare parts
    
    $
    177,875
    
    
    $
    192,935Work-in-process
    
    
    46,259
    
    
    
    54,586Finished goods
    
    
    12,086
    
    
    
    13,525Total inventories
    
    $
    236,220
    
    
    $
    261,046
 9




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5. GOODWILL AND INTANGIBLE ASSETS
 Goodwill
  IndustrialSemiconductor
    
    ApplicationsGroup
    
    Group
    
    TotalBalance at December 31, 2004
    
    $
    162,230
    
    
    $
    116,742
    
    
    $
    278,972SpeedFam-IPEC adjustment
    
    
    (1,170
    )
    
    
    
    
    
    
    (1,170
    )Foreign currency translation
    
    
    
    
    
    
    (4,093
    )
    
    
    (4,093
    )Balance at April 2, 2005
    
    $
    161,060
    
    
    $
    112,649
    
    
    $
    273,709SpeedFam-IPEC adjustment
    
    
    (1,170
    )
    
    
    
    
    
    
    (1,170
    )Foreign currency translation
    
    
    
    
    
    
    (7,455
    )
    
    
    (7,455
    )Balance at July 2, 2005
    
    $
    159,890
    
    
    $
    105,194
    
    
    $
    265,084
    Intangible Assets
  AccumulatedJuly 2, 2005
    
    Gross
    
    Amortization
    
    NetPatents
    
    $
    4,197
    
    
    $
    (874
    )
    
    $
    3,323Developed technology
    
    
    28,154
    
    
    
    (9,111
    )
    
    
    19,043Trademark
    
    
    6,136
    
    
    
    (614
    )
    
    
    5,522Other intangible assets
    
    
    138
    
    
    
    (85
    )
    
    
    53Total
    
    $
    38,625
    
    
    $
    (10,684
    )
    
    $
    27,941
 AccumulatedDecember 31, 2004
    
    Gross
    
    Amortization
    
    NetPatents
    
    $
    4,197
    
    
    $
    (525
    )
    
    $
    3,672Developed technology
    
    
    28,095
    
    
    
    (6,928
    )
    
    
    21,167Trademark
    
    
    6,809
    
    
    
    (340
    )
    
    
    6,469Other intangible assets
    
    
    138
    
    
    
    (81
    )
    
    
    57Total
    
    $
    39,239
    
    
    $
    (7,874
    )
    
    $
    31,365
   10




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6. PRODUCT WARRANTY
  Three Months Ended
    
    Six Months EndedJuly 2,
    
    June 26,
    
    July 2,
    
    June 26,2005
    
    2004
    
    2005
    
    2004Balance, beginning of period
    
    $
    47,979
    
    
    $
    34,050
    
    
    $
    45,526
    
    
    $
    28,805Warranties issued
    
    
    20,920
    
    
    
    21,566
    
    
    
    42,550
    
    
    
    38,200Settlements
    
    
    (19,999
    )
    
    
    (17,352
    )
    
    
    (40,303
    )
    
    
    (29,937
    )Changes in liability for pre-existing warranties,
including expirations
    
    
    1,593
    
    
    
    
    
    
    
    2,720
    
    
    
    1,196Balance, end of period
    
    $
    50,493
    
    
    $
    38,264
    
    
    $
    50,493
    
    
    $
    38,264
 7. RESTRUCTURING AND OTHER CHARGES
    AcquisitionFacilities
    
    Asset Charges
    
    Severance
    
    Expense
    
    TotalBalance at December 31, 2004
    
    $
    41,681
    
    
    $
    163
    
    
    $
    160
    
    
    $
    198
    
    
    $
    42,202Cash payments
    
    
    (2,209
    )
    
    
    (52
    )
    
    
    (62
    )
    
    
    
    
    
    
    (2,323
    )Balance at April 2, 2005
    
    
    39,472
    
    
    
    111
    
    
    
    98
    
    
    
    198
    
    
    
    39,879Cash payments
    
    
    (1,806
    )
    
    
    (93
    )
    
    
    
    
    
    
    
    
    
    
    (1,899
    )Adjustment
    
    
    
    
    
    
    
    
    
    
    (74
    )
    
    
    
    
    
    
    (74
    )Balance at July 2, 2005
    
    $
    37,666
    
    
    $
    18
    
    
    $
    24
    
    
    $
    198
    
    
    $
    37,906
 8. LONG-TERM OBLIGATIONS
  11




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##### Table of Contents



9. COMPREHENSIVE INCOME
  Three Months Ended
    
    Six Months EndedJuly 2,
    
    June 26,
    
    July 2,
    
    June 26,2005
    
    2004
    
    2005
    
    2004Net income
    
    $
    33,231
    
    
    $
    37,811
    
    
    $
    63,702
    
    
    $
    54,492Other comprehensive income:Foreign currency translation adjustments, net of tax
    
    
    (1,294
    )
    
    
    (1,348
    )
    
    
    (4,038
    )
    
    
    (423
    )Unrealized change in derivative instruments
    
    
    4,958
    
    
    
    
    
    
    
    4,958
    
    
    
    Realized gain on available-for-sale securities, net of tax
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    (365
    )Unrealized gain (loss) on available-for-sale securities,
net of tax
    
    
    737
    
    
    
    (1,486
    )
    
    
    (551
    )
    
    
    (837
    )Comprehensive income
    
    $
    37,632
    
    
    $
    34,960
    
    
    $
    64,071
    
    
    $
    52,867
  July 2,
    
    December 31,2005
    
    2004Foreign currency translation adjustments
    
    $
    2,194
    
    
    $
    6,232Unrealized change in derivative instruments
    
    
    4,958
    
    
    
    Unrealized loss on available-for-sale securities
    
    
    (1,538
    )
    
    
    (987
    )Accumulated other comprehensive income
    
    $
    5,614
    
    
    $
    5,245
 10. PENSION PLAN
  11. RELATED PARTY TRANSACTIONS
      12




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##### Table of Contents



12. LITIGATION
 Linear Technology Corporation
  Other Litigation
  13. OPERATING SEGMENTS
   Three months ended July 2, 2005
    
    Six months ended July 2, 2005(in thousands)
    
    (in thousands)Industrial
    
    
    
    
    
    
    
    
    
    IndustrialSemiconductor
    
    Applications
    
    
    
    
    
    Semiconductor
    
    ApplicationsGroup
    
    Group
    
    Consolidated
    
    Group
    
    Group
    
    ConsolidatedSales to unaffiliated customers
    
    $
    307,345
    
    
    $
    22,240
    
    
    $
    329,585
    
    
    $
    610,523
    
    
    $
    58,802
    
    
    $
    669,325Operating income
    
    $
    39,695
    
    
    $
    4,104
    
    
    $
    43,799
    
    
    $
    73,593
    
    
    $
    10,267
    
    
    $
    83,860Long-lived assets
    
    $
    441,957
    
    
    $
    15,562
    
    
    $
    457,519
    
    
    $
    441,957
    
    
    $
    15,562
    
    
    $
    457,519All other identifiable assets
    
    
    1,748,999
    
    
    
    175,147
    
    
    
    1,924,146
    
    
    
    1,748,999
    
    
    
    175,147
    
    
    
    1,924,146Total assets
    
    $
    2,190,956
    
    
    $
    190,709
    
    
    $
    2,381,665
    
    
    $
    2,190,956
    
    
    $
    190,709
    
    
    $
    2,381,665
 13




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##### Table of Contents



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    Introduction
  
    
    Overview of our Business and Industry;
    
    Results of Operations;
    
    Critical Accounting Policies;
    
    Liquidity and Capital Resources;
 14




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##### Table of Contents




    
    Related Party Transactions; and
    
    Risk Factors.
 Overview of Our Business and Industry
     Quarterly Financial Data2005
    
    2004First
    
    Second
    
    First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterNet sales
    
    $
    339,740
    
    
    $
    329,585
    
    
    $
    262,862
    
    
    $
    338,219
    
    
    $
    415,935
    
    
    $
    340,272Gross profit
    
    
    153,869
    
    
    
    157,562
    
    
    
    124,605
    
    
    
    169,680
    
    
    
    201,111
    
    
    
    169,734Net income
    
    
    30,471
    
    
    
    33,231
    
    
    
    16,681
    
    
    
    37,811
    
    
    
    64,662
    
    
    
    37,536Diluted net income per share
    
    
    0.22
    
    
    
    0.24
    
    
    
    0.11
    
    
    
    0.25
    
    
    
    0.45
    
    
    
    0.27Net orders
    
    
    301,594
    
    
    
    309,214
    
    
    
    346,793
    
    
    
    397,598
    
    
    
    422,692
    
    
    
    331,347
   15




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##### Table of Contents



Results of Operations
  Net Sales
 Three Months Ended
    
    Six Months EndedJuly 2, 2005
    
    June 26, 2004
    
    April 2, 2005
    
    July 2, 2005
    
    June 26, 2004Net sales
    
    $
    329,585
    
    
    $
    338,219
    
    
    $
    339,740
    
    
    $
    669,325
    
    
    $
    601,081International net sales %
    
    
    76
    %
    
    
    79
    %
    
    
    72
    %
    
    
    74
    %
    
    
    79
    %
   Three Months Ended
    
    Six Months EndedJuly 2, 2005
    
    June 26, 2004
    
    April 2, 2005
    
    July 2, 2005
    
    June 26, 2004North America
    
    
    24
    %
    
    
    21
    %
    
    
    28
    %
    
    
    26
    %
    
    
    21
    %Europe
    
    
    8
    %
    
    
    6
    %
    
    
    9
    %
    
    
    9
    %
    
    
    7
    %Asia
    
    
    68
    %
    
    
    73
    %
    
    
    63
    %
    
    
    65
    %
    
    
    72
    %
  Gross Profit
 Three Months Ended
    
    Six Months EndedJuly 2, 2005
    
    June 26, 2004
    
    April 2, 2005
    
    July 2, 2005
    
    June 26, 2004Gross profit
    
    $
    157,562
    
    
    $
    169,680
    
    
    $
    153,869
    
    
    $
    311,431
    
    
    $
    294,285% of net sales
    
    
    48
    %
    
    
    50
    %
    
    
    45
    %
    
    
    47
    %
    
    
    49
    %
    16




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##### Table of Contents



Selling, General and Administrative (SG&A)
 Three Months Ended
    
    Six Months EndedJuly 2, 2005
    
    June 26, 2004
    
    April 2, 2005
    
    July 2, 2005
    
    June 26, 2004SG&A expense
    
    $
    50,325
    
    
    $
    47,225
    
    
    $
    51,760
    
    
    $
    102,085
    
    
    $
    89,628% of net sales
    
    
    15
    %
    
    
    14
    %
    
    
    15
    %
    
    
    15
    %
    
    
    15
    %
   Research and Development (R&D)
 Three Months Ended
    
    Six Months EndedJuly 2, 2005
    
    June 26, 2004
    
    April 2, 2005
    
    July 2, 2005
    
    June 26, 2004R&D expense
    
    $
    63,512
    
    
    $
    63,471
    
    
    $
    62,048
    
    
    $
    125,560
    
    
    $
    122,428% of net sales
    
    
    19
    %
    
    
    19
    %
    
    
    18
    %
    
    
    19
    %
    
    
    20
    %
  Restructuring and Other Charges
 Three Months Ended
    
    Six Months EndedJuly 2, 2005
    
    June 26, 2004
    
    April 2, 2005
    
    July 2, 2005
    
    June 26, 2004Restructuring and other charges
    
    $
    (74
    )
    
    $
    
    
    
    $
    
    
    
    $
    (74
    )
    
    $
    % of net sales
    
    Less than 1%
    
    
    
    %
    
    
    
    %
    
    Less than 1%
    
    
    
    %
  Legal Settlement
 Three Months Ended
    
    Six Months EndedJuly 2, 2005
    
    June 26, 2004
    
    April 2, 2005
    
    July 2, 2005
    
    June 26, 2004Legal settlement
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,500% of net sales
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    1
    %
  17




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Acquired in-process research and development
 Three Months Ended
    
    Six Months EndedJuly 2, 2005
    
    June 26, 2004
    
    April 2, 2005
    
    July 2, 2005
    
    June 26, 2004Acquired in-process research
and development
    
    $
    
    
    
    $
    6,124
    
    
    $
    
    
    
    $
    
    
    
    $
    6,124% of net sales
    
    
    
    %
    
    
    2
    %
    
    
    
    %
    
    
    
    %
    
    
    1
    %
  Interest and Other Income, Net
 Three Months Ended
    
    Six Months EndedJuly 2, 2005
    
    June 26, 2004
    
    April 2, 2005
    
    July 2, 2005
    
    June 26, 2004Interest and other income, net
    
    $
    3,674
    
    
    $
    2,896
    
    
    $
    3,469
    
    
    $
    7,143
    
    
    $
    5,645% of net sales
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
  Income Taxes
  Critical Accounting Policies
  Revenue Recognition
    18




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Inventory Valuation
  Goodwill and Other Intangible Assets
  Deferred Tax Assets
  Warranty Obligations
  Restructuring and Impairment Charges
  19




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##### Table of Contents



Foreign Currency Accounting
  Foreign Exchange Contracts
  Liquidity and Capital Resources
      20




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##### Table of Contents



Related Party Transactions
      Risk Factors
  21




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Cyclical Downturns in the Semiconductor Industry
  The Semiconductor Industry is Extremely Competitive and Capital-Intensive
  Rapidly Changing Technology
    22




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##### Table of Contents



Global Operations
  
    
    Tariffs and other trade barriers;
    
    Challenges in staffing and managing foreign operations and providing prompt and effective field support to our
customers outside of the United States;
    
    Difficulties in managing foreign distributors;
    
    Potentially adverse tax consequences, including withholding tax rules that may limit the repatriation of our
earnings, and variations in effective income tax rates among countries where we conduct business ;
    
    Governmental controls, either by the United States or other countries, that restrict or make costly the operation

of our business overseas and the import or export of semiconductor products;
    
    Longer payment cycles; difficulties in collecting accounts receivables outside of the United States;
    
    Inadequate protection or enforcement of our intellectual property and other legal rights in foreign jurisdictions;
    
    Global or regional economic downturns;
    
    Geo-political instability, natural disasters, acts of war or terrorism; and
    
    Fluctuations in interest and foreign currency exchange rates, creating the need to enter into forward foreign
exchange contracts to hedge against the short-term impact of foreign currency fluctuations, specifically
yen-denominated transactions. Exchange rate volatility may also increase the cost of our exported products for
international customers and inhibit demand.
  Variability of Quarterly Operating Results
  
    
    Building our systems according to forecast, instead of limited backlog information,
which hinders our ability to plan production and inventory levels;
    
    Variability in manufacturing yields;
    
    Failure to receive anticipated orders in time to permit shipment during the quarter;
    
    Timing and cancellation of customer orders and shipments, including
deferring orders of our existing products due to new product
announcements by us and/or our competitors;
 23




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
    
    Changing demand for and sales of lower-margin products relative to higher-margin products;
    
    Competitive pricing pressures; and
    
    Overall business conditions in the semiconductor equipment industry.
 Changes in Tax Rates or Liabilities Could Affect Future Results
  Acquisitions
  
    
    Difficulties in integrating the operations, technologies, products and personnel of acquired companies;
    
    Lack of synergies or the inability to realize expected synergies and cost-savings;
    
    Revenue and expense levels of acquired entities differing from those anticipated at the time of the acquisitions;
    
    Difficulties in managing geographically dispersed operations;
    
    The potential loss of key employees, customers and strategic partners of acquired companies;
    
    Claims by terminated employees, shareholders of acquired companies or other third parties related to the transaction;
    
    The issuance of dilutive securities, assumption or incurrence of additional debt obligations or expenses, or use of
substantial portions of our cash;
    
    Diversion of managements attention from normal daily operations of the business; and
    
    The impairment of acquired intangible assets as a result of technological advancements, or worse-than-expected
performance of acquired companies.
  Diversification Strategy
  24




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##### Table of Contents



Concentration of Net Sales
  Intellectual Property
    Supply Shortages
  Outsourcing Activities
  Outside Audit Firm Independence
  25




---



##### Table of Contents



Costs of Corporate Governance and Financial Reporting Compliance
  Third-Party Indemnification
  Changes in Accounting Standards for Stock Option Plans
  Investment Activities
  26




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##### Table of Contents



ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4: CONTROLS AND PROCEDURES
 Quarterly Evaluation of Our Disclosure Controls and Internal Controls
  CEO and CFO Certifications
  Disclosure Controls and Internal Controls for Financial Reporting
  Limitations on the Effectiveness of Controls
  27




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##### Table of Contents



Scope of the Controls Evaluation
   Conclusions
  
 PART II: OTHER INFORMATION
 
 ITEM 1: LEGAL PROCEEDINGS
  Linear Technology Corporation
  28




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Other Litigation
  
 ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 TotalNumber of
    
    ApproximateShares
    
    Dollar ValuePurchased
    
    of Sharesas Part of
    
    that May YetTotal
    
    
    
    
    
    Publicly
    
    Be PurchasedNumber of
    
    Average Price
    
    Announced
    
    Under theShares
    
    Paid per
    
    Plans or
    
    Plans orPeriod
    
    Purchased
    
    Share
    
    Programs
    
    ProgramsApril 3, 2005 to May 7, 2005
    
    
    2,895,700
    
    
    $
    24.06
    
    
    
    2,895,700
    
    
    $1020.1 millionMay 8, 2005 to June 4, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $1020.1 millionJune 5, 2005 to July 2, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $1020.1 millionTotal
    
    
    2,895,700
    
    
    $
    24.06
    
    
    
    2,895,700
    
    
    $1020.1 million
  
 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Name of Nominee
    
    In Favor
    
    WithheldRichard S. Hill
    
    
    123,529,319
    
    
    
    3,717,745Neil R. Bonke
    
    
    125,547,913
    
    
    
    1,699,151Youssef A. El-Mansy
    
    
    112,332,614
    
    
    
    14,914,450J. David Litster
    
    
    112,344,120
    
    
    
    14,902,944Yoshio Nishi
    
    
    112,229,256
    
    
    
    15,017,808Glen G. Possley
    
    
    124,547,310
    
    
    
    2,699,754Ann D. Rhoads
    
    
    125,536,784
    
    
    
    1,710,280William R. Spivey
    
    
    112,065,566
    
    
    
    15,181,498Delbert A. Whitaker
    
    
    112,245,173
    
    
    
    15,001,891
 29




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##### Table of Contents



In Favor
    
    Opposed
    
    Abstained70,790,838
    
    32,464,186
    
    770,725
  In Favor
    
    Opposed
    
    Abstained99,309,810
    
    3,940,271
    
    776,918
  In Favor
    
    Opposed
    
    Abstained123,760,215
    
    2,582,323
    
    731,319
 
 ITEM 6: EXHIBITS
  10.33
    
    Form of Non-Employee Director Restricted Stock Bonus Agreement
 31.1
    
    Certification of Richard S. Hill, Chairman of the Board of Directors
and Chief Executive Officer of Novellus Systems, Inc. dated
August 12,
2005 in accordance with 18 U.S.C. 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
 31.2
    
    Certification of John Chenault, Vice President and Chief Financial
Officer of Novellus Systems, Inc. dated August 12, 2005 in accordance
with 18 U.S.C. 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
 32.1
    
    Certification of Richard S. Hill, Chairman of the Board of Directors
and Chief Executive Officer of Novellus Systems, Inc. dated
August 12,
2005 in accordance with 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 32.2
    
    Certification of John Chenault, Vice President and Chief Financial
Officer of Novellus Systems, Inc. dated August 12, 2005 in accordance
with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 30




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##### Table of Contents



SIGNATURES
  NOVELLUS SYSTEMS, INC.By: /s/ John Chenault
John ChenaultVice President and Chief Financial Officer(Principal Financial Officer and Chief Accounting Officer)August 12, 2005
 31




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##### Table of Contents



EXHIBIT INDEX
 10.33
    
    Form of Non-Employee Director Restricted Stock Bonus Agreement
 31.1
    
    Certification of Richard S.
Hill, Chairman of the Board of
Directors and Chief Executive
Officer of Novellus Systems,
Inc. dated August 12, 2005 in
accordance with 18 U.S.C. 1350,
as adopted pursuant to Section
302 of the Sarbanes-Oxley Act
of 2002.
 31.2
    
    Certification of John Chenault,
Vice President and Chief
Financial Officer of Novellus
Systems, Inc. dated August 12,
2005 in accordance with 18
U.S.C. 1350, as adopted
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
 32.1
    
    Certification of Richard S.
Hill, Chairman of the Board of
Directors and Chief Executive
Officer of Novellus Systems,
Inc. dated August 12, 2005 in
accordance with 18 U.S.C. 1350,
as adopted pursuant to Section
906 of the Sarbanes-Oxley Act
of 2002.
 32.2
    
    Certification of John Chenault,
Vice President and Chief
Financial Officer of Novellus
Systems, Inc. dated August 12,
2005 in accordance with 18
U.S.C. 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.