##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 1, 2006
 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
    
    77-0024666(State or other jurisdiction of
    
    (I.R.S. Employer Identificationincorporation or organization)
    
    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)
 þ o
  þ o o
 o þ




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##### 



NOVELLUS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED JULY 1, 2006
 TABLE OF CONTENTS
 PagePart I: Financial InformationItem 1: Condensed Consolidated Financial StatementsCondensed Consolidated Statements of Operations for the three and six months ended July 1, 2006 and July 2, 2005
    
    
    3Condensed Consolidated Balance Sheets as of July 1, 2006 and December 31, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended July 1, 2006 and July 2, 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4: Controls and Procedures
    
    
    30Part II: Other InformationItem 1: Legal Proceedings
    
    
    31Item 1A: Risk Factors
    
    
    32Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 4: Submission of Matters to a Vote of Security Holders
    
    
    38Item 6: Exhibits
    
    
    39SignaturesEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I: FINANCIAL INFORMATION
 
 ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOVELLUS SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJuly 1, 2006
    
    
    July 2, 2005
    
    
    July 1, 2006
    
    
    July 2, 2005Net sales
    
    $
    410,073
    
    
    $
    329,585
    
    
    $
    775,979
    
    
    $
    669,325Cost of sales
    
    
    205,309
    
    
    
    172,023
    
    
    
    403,675
    
    
    
    357,894Gross profit
    
    
    204,764
    
    
    
    157,562
    
    
    
    372,304
    
    
    
    311,431Operating expenses:Selling, general and administrative
    
    
    66,311
    
    
    
    50,325
    
    
    
    124,793
    
    
    
    102,085Research and development
    
    
    63,298
    
    
    
    63,512
    
    
    
    127,081
    
    
    
    125,560Restructuring and other charges (benefits)
    
    
    
    
    
    
    (74
    )
    
    
    12,629
    
    
    
    (74
    )Legal settlement
    
    
    
    
    
    
    
    
    
    
    3,250
    
    
    
    Total operating expenses
    
    
    129,609
    
    
    
    113,763
    
    
    
    267,753
    
    
    
    227,571Operating income
    
    
    75,155
    
    
    
    43,799
    
    
    
    104,551
    
    
    
    83,860Interest income, net
    
    
    5,168
    
    
    
    4,287
    
    
    
    10,200
    
    
    
    7,347Other income (loss), net
    
    
    2,443
    
    
    
    (613
    )
    
    
    3,490
    
    
    
    (204
    )Interest and other income, net
    
    
    7,611
    
    
    
    3,674
    
    
    
    13,690
    
    
    
    7,143Income before provision for income taxes and cumulative
effect of a change in accounting principle
    
    
    82,766
    
    
    
    47,473
    
    
    
    118,241
    
    
    
    91,003Provision for income taxes
    
    
    30,061
    
    
    
    14,242
    
    
    
    41,767
    
    
    
    27,301Income before cumulative effect of a change in
accounting principle
    
    
    52,705
    
    
    
    33,231
    
    
    
    76,474
    
    
    
    63,702Cumulative effect of a change in accounting principle,
net
of tax of $594 for the six months ended July 1, 2006
    
    
    
    
    
    
    
    
    
    
    948
    
    
    
    Net income
    
    $
    52,705
    
    
    $
    33,231
    
    
    $
    77,422
    
    
    $
    63,702Net income per share:Basic:Income before cumulative effect of a change in
accounting principle
    
    $
    0.42
    
    
    $
    0.24
    
    
    $
    0.60
    
    
    $
    0.46Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    Basic net income per share
    
    $
    0.42
    
    
    $
    0.24
    
    
    $
    0.61
    
    
    $
    0.46Diluted:Income before cumulative effect of a change in
accounting principle
    
    $
    0.42
    
    
    $
    0.24
    
    
    $
    0.59
    
    
    $
    0.45Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    Diluted net income per share
    
    $
    0.42
    
    
    $
    0.24
    
    
    $
    0.60
    
    
    $
    0.45Shares used in basic per share calculations
    
    
    125,124
    
    
    
    138,068
    
    
    
    128,113
    
    
    
    138,979Shares used in diluted per share calculations
    
    
    125,910
    
    
    
    138,944
    
    
    
    129,087
    
    
    
    140,022
  3




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##### Table of Contents



NOVELLUS SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands)
 July 1,
    
    
    December 31,2006
    
    
    2005 *(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    63,312
    
    
    $
    40,403Short-term investments
    
    
    460,180
    
    
    
    608,837Accounts receivable, net
    
    
    439,521
    
    
    
    397,534Inventories
    
    
    213,827
    
    
    
    193,787Deferred tax assets, net
    
    
    101,512
    
    
    
    88,563Prepaid and other current assets
    
    
    26,521
    
    
    
    34,388Total current assets
    
    
    1,304,873
    
    
    
    1,363,512Property and equipment, net
    
    
    399,678
    
    
    
    423,749Restricted cash and cash equivalents
    
    
    147,595
    
    
    
    140,212Goodwill
    
    
    259,553
    
    
    
    255,584Intangibles and other assets
    
    
    105,434
    
    
    
    107,192Total assets
    
    $
    2,217,133
    
    
    $
    2,290,249LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    84,917
    
    
    $
    83,710Accrued payroll and related expenses
    
    
    61,562
    
    
    
    57,450Accrued warranty
    
    
    60,083
    
    
    
    54,553Other accrued liabilities
    
    
    59,840
    
    
    
    58,271Income taxes payable
    
    
    22,474
    
    
    
    5,898Deferred profit
    
    
    80,220
    
    
    
    68,718Current obligations under lines of credit
    
    
    16,456
    
    
    
    15,744Total current liabilities
    
    
    385,552
    
    
    
    344,344Long-term debt
    
    
    127,911
    
    
    
    124,858Other non-current liabilities
    
    
    43,146
    
    
    
    41,764Total liabilities
    
    
    556,609
    
    
    
    510,966Shareholders equity:Common stock
    
    
    1,330,001
    
    
    
    1,393,805Retained earnings
    
    
    331,875
    
    
    
    388,015Accumulated other comprehensive income
    
    
    (1,352
    )
    
    
    (2,537
    )Total shareholders equity
    
    
    1,660,524
    
    
    
    1,779,283Total liabilities and shareholders equity
    
    $
    2,217,133
    
    
    $
    2,290,249
 
 *
    
    Amounts as of December 31, 2005 are derived from the December 31, 2005 audited financial
statements  4




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##### Table of Contents



NOVELLUS SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six Months EndedJuly 1,
    
    
    July 2,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    77,422
    
    
    $
    63,702Adjustments to reconcile net income to net cash provided by operating activities:Loss on disposal of fixed assets
    
    
    1,665
    
    
    
    657Reversal of previously accrued restructuring charges
    
    
    
    
    
    
    (74
    )Non-cash portion of restructuring and other charges
    
    
    10,199
    
    
    
    Depreciation and amortization
    
    
    36,959
    
    
    
    42,318Deferred income taxes
    
    
    (11,334
    )
    
    
    1,843Stock-based compensation
    
    
    18,230
    
    
    
    2,262Tax benefit from equity awards
    
    
    12,251
    
    
    
    Excess tax benefit from stock-based compensation
    
    
    (7,393
    )
    
    
    Cumulative effect of a change in accounting principle
    
    
    (1,542
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (38,753
    )
    
    
    64,167Inventories
    
    
    (27,414
    )
    
    
    8,298Prepaid and other current assets
    
    
    8,202
    
    
    
    (8,025
    )Accounts payable
    
    
    791
    
    
    
    (11,507
    )Accrued payroll and related expenses
    
    
    7,404
    
    
    
    (12,860
    )Accrued warranty
    
    
    5,351
    
    
    
    5,284Other accrued liabilities
    
    
    703
    
    
    
    (3,007
    )Income taxes payable
    
    
    18,376
    
    
    
    7,935Deferred profit
    
    
    11,439
    
    
    
    3,198Net cash provided by operating activities
    
    
    122,556
    
    
    
    164,191Cash flows from investing activities:Proceeds from sales of short-term investments
    
    
    300,248
    
    
    
    152,525Proceeds from maturities of short-term investments
    
    
    98,314
    
    
    
    100,913Purchases of short-term investments
    
    
    (245,011
    )
    
    
    (343,455
    )Capital expenditures
    
    
    (20,890
    )
    
    
    (26,980
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    2,591Decrease (increase) in other assets
    
    
    3,289
    
    
    
    (2,701
    )Decrease (increase) in restricted cash and cash equivalents
    
    
    (7,483
    )
    
    
    12,503Net cash provided by (used in) investing activities
    
    
    128,467
    
    
    
    (104,604
    )Cash flows from financing activities:Proceeds from employee stock compensation plans
    
    
    9,538
    
    
    
    16,638Proceeds from lines of credit, net
    
    
    712
    
    
    
    8,980Payments on long-term debt
    
    
    (4,435
    )
    
    
    (13,007
    )Repurchases of common stock
    
    
    (239,897
    )
    
    
    (69,669
    )Excess tax benefit from stock-based compensation
    
    
    7,393
    
    
    
    Net cash used in financing activities
    
    
    (226,689
    )
    
    
    (57,058
    )Effects of exchange rate changes on cash and cash equivalents
    
    
    (1,425
    )
    
    
    5,376Net change in cash and cash equivalents
    
    
    22,909
    
    
    
    7,905Cash and cash equivalents at beginning of period
    
    
    40,403
    
    
    
    106,117Cash and cash equivalents at end of period
    
    $
    63,312
    
    
    $
    114,022
  5




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##### Table of Contents



NOVELLUS SYSTEMS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. BASIS OF PRESENTATION
 Basis of Presentation
    Allowance for Doubtful Accounts
  Derivatives
  Cash Flow Hedging 
 6




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##### Table of Contents



Balance as of April 2, 2006
    
    
    (41
    )Net change on cash flow hedges
    
    
    1,813Reclassification to cost of sales
    
    
    48Balance as of July 1, 2006
    
    
    1,820
  Net Investment Hedging 
 Non-Designated Hedges 
 Recent Accounting Pronouncements
 Inventory
Costs, an amendment of ARB No. 43, Chapter 4
 Accounting for
Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43
 Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement No. 109
 2. NET INCOME PER SHARE
  7




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net income
    
    $
    52,705
    
    
    $
    33,231
    
    
    $
    77,422
    
    
    $
    63,702Denominator:Basic weighted-average shares outstanding
    
    
    125,124
    
    
    
    138,068
    
    
    
    128,113
    
    
    
    138,979Employee stock options and other
    
    
    786
    
    
    
    876
    
    
    
    974
    
    
    
    1,043Diluted weighted-average shares outstanding
    
    
    125,910
    
    
    
    138,944
    
    
    
    129,087
    
    
    
    140,022Basic net income per share
    
    $
    0.42
    
    
    $
    0.24
    
    
    $
    0.60
    
    
    $
    0.46Diluted net income per share
    
    $
    0.42
    
    
    $
    0.24
    
    
    $
    0.60
    
    
    $
    0.45
  3. STOCK-BASED COMPENSATION
 Adoption of SFAS 123(R )
   8




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedJuly 1, 2006
    
    
    July 1, 2006Cost of sales
    
    $
    538
    
    
    $
    846Selling, general and administrative
    
    
    5,590
    
    
    
    11,029Research and development
    
    
    2,664
    
    
    
    5,725Stock-based
compensation expense before income taxes (1)
    
    
    8,792
    
    
    
    17,600Income tax benefit
    
    
    (3,385
    )
    
    
    (6,776
    )Total stock-based compensation expense after income taxes
    
    $
    5,407
    
    
    $
    10,824
 
 (1)
    
    Amount includes $1.7 million and $3.5 million related to restricted stock awards for the three
and six months ended July 1, 2006, respectively.   9




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJuly 1, 2006
    
    
    July 1, 2006SFAS 123(R)
    
    
    As
    
    
    SFAS 123(R)
    
    
    AsAdjustments
    
    
    Reported
    
    
    Adjustments
    
    
    ReportedIncome from operations
    
    $
    (7,054
    )
    
    $
    75,155
    
    
    $
    (14,131
    )
    
    $
    104,551Income before income taxes
    
    
    (7,054
    )
    
    
    82,766
    
    
    
    (14,131
    )
    
    
    118,241Income before cumulative effect of a change in
accounting principle, net of tax
    
    
    (4,338
    )
    
    
    52,705
    
    
    
    (8,691
    )
    
    
    76,474Net Income
    
    
    (4,338
    )
    
    
    52,705
    
    
    
    (7,743
    )
    
    
    77,422Basic earnings per sharePrior to cumulative effect of a change in accounting
principle
    
    $
    (0.03
    )
    
    $
    0.42
    
    
    $
    (0.07
    )
    
    $
    0.60Cumulative effect of a change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    0.01$
    (0.03
    )
    
    $
    0.42
    
    
    $
    (0.06
    )
    
    $
    0.61Diluted earnings per sharePrior to cumulative effect of a change in accounting
principle
    
    $
    (0.03
    )
    
    $
    0.42
    
    
    $
    (0.07
    )
    
    $
    0.59Cumulative effect of a change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    0.01$
    (0.03
    )
    
    $
    0.42
    
    
    $
    (0.06
    )
    
    $
    0.60
    10




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedJuly 2, 2005
    
    
    July 2, 2005Net income as reported
    
    $
    33,231
    
    
    $
    63,702Add:Intrinsic value method expense included in reported net
income, net of related tax effects
    
    
    734
    
    
    
    1,584Less:Fair value method expense, net of related tax effects
    
    
    (8,166
    )
    
    
    (18,740
    )Pro-forma net income
    
    $
    25,799
    
    
    $
    46,546Pro-forma basic and diluted net income per share
    
    $
    0.19
    
    
    $
    0.33Basic net income per share as reported
    
    $
    0.24
    
    
    $
    0.46Diluted net income per share as reported
    
    $
    0.24
    
    
    $
    0.45
 Valuation and Other Assumptions for Stock Options
 Valuation and Amortization Method
 Expected Term.
 Expected Volatility.
 Risk-Free Interest Rate.
 Dividends.
 Forfeitures.
 11




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJuly 1,
    
    July 2,
    
    July 1,
    
    July 2,2006
    
    2005
    
    2006
    
    2005Risk-free interest rate
    
    
    5.1
    %
    
    
    3.3
    %
    
    
    4.9
    %
    
    
    3.3
    %Expected volatility
    
    
    49.4
    %
    
    
    70.0
    %
    
    
    49.2
    %
    
    
    70.0
    %Expected term
    
    4.3 years
    
    
    3.7 years
    
    
    4.3 years
    
    
    3.7 yearsExpected dividends
    
    None
    
    
    None
    
    
    None
    
    
    None
  Stock Options
  Weighted-AverageNumber
    
    
    
    
    
    
    Remainingof
    
    
    Weighted-Average
    
    
    Contractual
    
    
    AggregateShares
    
    
    Exercise Price
    
    
    Term (in Years)
    
    
    Intrinsic ValueOutstanding at January 1, 2006
    
    
    24,137
    
    
    $
    31.79Grants
    
    
    274
    
    
    
    24.57Exercises
    
    
    (320
    )
    
    
    17.62Forfeitures or expirations
    
    
    (1,485
    )
    
    
    33.58Outstanding at July 1, 2006
    
    
    22,606
    
    
    $
    31.79
    
    
    
    6.2
    
    
    $
    12,205Vested and expected to vest at July 1, 2006
    
    
    21,907
    
    
    $
    31.98
    
    
    
    6.1
    
    
    $
    12,036Exercisable at July 1, 2006
    
    
    17,248
    
    
    $
    33.49
    
    
    
    5.5
    
    
    $
    11,077
    12




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##### Table of Contents



Restricted Stock Awards
  Number
    
    
    Weighted-Averageof
    
    
    Grant DateShares
    
    
    Fair ValueUnvested restricted stock at January 1, 2006
    
    
    1,197
    
    
    $
    27.58Granted
    
    
    48
    
    
    
    23.88Vested
    
    
    (60
    )
    
    
    31.54Forfeited
    
    
    (66
    )
    
    
    27.84Unvested restricted stock at July 1, 2006
    
    
    1,119
    
    
    $
    27.20
  ESPP
  Three Months Ended
    
    Six Months EndedJuly 1,
    
    July 2,
    
    July 1,
    
    July 2,2006
    
    2005
    
    2006
    
    2005Risk-free interest rate
    
    
    5.0
    %
    
    
    2.5
    %
    
    
    5.0
    %
    
    
    2.5
    %Expected volatility
    
    
    32.0
    %
    
    
    36.0
    %
    
    
    32.0
    %
    
    
    36.0
    %Expected term
    
    6 months
    
    
    6 months
    
    
    6 months
    
    
    6 monthsExpected dividends
    
    None
    
    
    None
    
    
    None
    
    
    None
   4. OTHER INCOME (LOSS), NET
  Three Months Ended
    
    
    Six Months EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2005
    
    
    2006
    
    
    2006
    
    
    2005Other income
    
    $
    640
    
    
    $
    111
    
    
    $
    1,157
    
    
    $
    229Other expense
    
    
    (12
    )
    
    
    (6
    )
    
    
    (271
    )
    
    
    (131
    )Foreign currency gain (loss), net
    
    
    1,815
    
    
    
    (718
    )
    
    
    2,604
    
    
    
    (302
    )Total other income (loss), net
    
    $
    2,443
    
    
    $
    (613
    )
    
    $
    3,490
    
    
    $
    (204
    )
 13




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##### Table of Contents



5. INVENTORIES
  July 1,
    
    
    December 31,2006
    
    
    2005Purchased and spare parts
    
    $
    162,360
    
    
    $
    152,763Work-in-process
    
    
    37,061
    
    
    
    27,110Finished goods
    
    
    14,406
    
    
    
    13,914Total inventories
    
    $
    213,827
    
    
    $
    193,787
 6. GOODWILL AND INTANGIBLE ASSETS
 Goodwill
  2006IndustrialSemiconductor
    
    
    ApplicationsGroup
    
    
    Group
    
    
    TotalBalance at December 31, 2005
    
    $
    150,664
    
    
    $
    104,920
    
    
    $
    255,584SpeedFam-IPEC adjustment
    
    
    (2,340
    )
    
    
    
    
    
    
    (2,340
    )Foreign currency translation
    
    
    
    
    
    
    6,309
    
    
    
    6,309Balance at July 1, 2006
    
    $
    148,324
    
    
    $
    111,229
    
    
    $
    259,553
 2005IndustrialSemiconductor
    
    
    ApplicationsGroup
    
    
    Group
    
    
    TotalBalance at December 31, 2004
    
    $
    162,230
    
    
    $
    116,742
    
    
    $
    278,972SpeedFam-IPEC adjustment
    
    
    (2,340
    )
    
    
    
    
    
    
    (2,340
    )Foreign currency translation
    
    
    
    
    
    
    (11,548
    )
    
    
    (11,548
    )Balance at July 2, 2005
    
    $
    159,890
    
    
    $
    105,194
    
    
    $
    265,084
   14




---



##### Table of Contents



Intangible Assets
  AccumulatedJuly 1, 2006
    
    Gross
    
    
    Amortization
    
    
    NetPatents
    
    $
    4,201
    
    
    $
    (1,579
    )
    
    $
    2,622Developed technology
    
    
    28,616
    
    
    
    (13,964
    )
    
    
    14,652Trademark
    
    
    6,430
    
    
    
    (1,276
    )
    
    
    5,154Other intangible assets
    
    
    162
    
    
    
    (109
    )
    
    
    53Total
    
    $
    39,409
    
    
    $
    (16,928
    )
    
    $
    22,481
 AccumulatedDecember 31, 2005
    
    Gross
    
    
    Amortization
    
    
    NetPatents
    
    $
    4,201
    
    
    $
    (1,225
    )
    
    $
    2,976Developed technology
    
    
    28,042
    
    
    
    (11,422
    )
    
    
    16,620Trademark
    
    
    6,065
    
    
    
    (903
    )
    
    
    5,162Other intangible assets
    
    
    161
    
    
    
    (99
    )
    
    
    62Total
    
    $
    38,469
    
    
    $
    (13,649
    )
    
    $
    24,820
  7. ACQUISITION
    Cash consideration
    
    $
    6,369Estimated transaction costs
    
    
    435Total purchase price
    
    $
    6,804Assets acquired
    
    $
    19,393Liabilities assumed
    
    
    (12,589
    )Total net assets acquired
    
    $
    6,804
 15




---



##### Table of Contents



8. PRODUCT WARRANTY
  Three Months Ended
    
    
    Six Months EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005Balance, beginning of period
    
    $
    55,822
    
    
    $
    47,979
    
    
    $
    54,553
    
    
    $
    45,526Warranties issued
    
    
    24,386
    
    
    
    20,920
    
    
    
    44,786
    
    
    
    42,550Settlements
    
    
    (19,882
    )
    
    
    (19,999
    )
    
    
    (40,995
    )
    
    
    (40,303
    )Changes in liability for pre-existing warranties, including expirations
    
    
    (243
    )
    
    
    1,593
    
    
    
    1,739
    
    
    
    2,720Balance, end of period
    
    $
    60,083
    
    
    $
    50,493
    
    
    $
    60,083
    
    
    $
    50,493
 9. RESTRUCTURING AND OTHER CHARGES
      Facility
    
    
    AssetExit Costs
    
    
    Impairments
    
    
    Severance
    
    
    TotalBalance at December 31, 2005
    
    $
    27,239
    
    
    $
    
    
    
    $
    863
    
    
    $
    28,102Restructuring charges
    
    
    6,235
    
    
    
    10,199
    
    
    
    51
    
    
    
    16,485Cash payments
    
    
    (2,408
    )
    
    
    
    
    
    
    (484
    )
    
    
    (2,892
    )Non-cash adjustment
    
    
    1,161
    
    
    
    (10,199
    )
    
    
    
    
    
    
    (9,038
    )Adjustment of prior restructuring costs
    
    
    (3,856
    )
    
    
    
    
    
    
    
    
    
    
    (3,856
    )Balance at April 1, 2006
    
    
    28,371
    
    
    
    
    
    
    
    430
    
    
    
    28,801Cash payments
    
    
    (2,491
    )
    
    
    
    
    
    
    (13
    )
    
    
    (2,504
    )Balance at July 1, 2006
    
    $
    25,880
    
    
    $
    
    
    
    $
    417
    
    
    $
    26,297
  16




---



##### Table of Contents



10. LONG-TERM OBLIGATIONS
   11. COMPREHENSIVE INCOME
   Three Months Ended
    
    
    Six Months EndedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    52,705
    
    
    $
    33,231
    
    
    $
    77,422
    
    
    $
    63,702Other comprehensive income (loss):Foreign currency translation adjustments, net of tax
    
    
    (760
    )
    
    
    (1,294
    )
    
    
    968
    
    
    
    (4,038
    )Unrealized gain (loss) on available-for-sale securities, net of tax
    
    
    869
    
    
    
    737
    
    
    
    2,032
    
    
    
    (551
    )Unrealized change in derivative instruments, net of tax
    
    
    (1,856
    )
    
    
    4,958
    
    
    
    (1,815
    )
    
    
    4,958Comprehensive income
    
    $
    50,958
    
    
    $
    37,632
    
    
    $
    78,607
    
    
    $
    64,071
  July 1,
    
    
    December 31,2006
    
    
    2005Foreign currency translation adjustments, net of tax
    
    $
    321
    
    
    $
    (647
    )Unrealized gain (loss) on marketable securities, net of tax
    
    
    142
    
    
    
    (1,890
    )Unrealized change in derivative instruments, net of tax
    
    
    (1,815
    )
    
    
    Accumulated other comprehensive loss
    
    $
    (1,352
    )
    
    $
    (2,537
    )
 12. PENSION PLAN
  17




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##### Table of Contents



13. RELATED PARTY TRANSACTIONS
      14. LITIGATION
 Derivative Litigation
 Teitelbaum v. Hill et al . Joshua Teitelbaum, in
the right of and for the benefit of Novellus Systems, Inc., v. Richard S. Hill, Jeffrey C. Benzing,
D. James Guzy, Tom Long, Robert H. Smith, Neil R. Bonke, Youssef A. El-Mansy, J. David Litster,
Yoshio Nishi, Glen G. Possley, Ann D. Rhoads, William R. Spivey and Delbert A. Whitaker, as
defendants, and the Company as a Nominal Defendant
 Alaska Electrical Pension Fund v. Hill et al . Alaska Electrical Pension Fund, on behalf of Novellus Systems, Inc., v. Richard S. Hill, Jeffrey
C. Benzing, William H. Kurtz, Neil R. Bonke, Youssef A. El-Mansy, J. David Litster, Yoshio Nishi,
Glen G. Possley, Ann D. Rhoads, William R. Spivey and Delbert Whitaker, as defendants, and the
Company as a Nominal Defendant
 Linear Technology Corporation
  18




---



##### Table of Contents



Other Litigation
   15. OPERATING SEGMENTS
   19




---



##### Table of Contents



Three Months Ended July 1, 2006
    
    
    Six Months Ended July 1, 2006Industrial
    
    
    
    
    
    
    
    
    
    
    IndustrialSemiconductor
    
    
    Applications
    
    
    
    
    
    
    Semiconductor
    
    
    ApplicationsGroup
    
    
    Group
    
    
    Total
    
    
    Group
    
    
    Group
    
    
    TotalSales to unaffiliated customers
    
    $
    380,333
    
    
    $
    29,740
    
    
    $
    410,073
    
    
    $
    724,425
    
    
    $
    51,554
    
    
    $
    775,979Operating income
    
    $
    71,932
    
    
    $
    3,223
    
    
    $
    75,155
    
    
    $
    100,813
    
    
    $
    3,738
    
    
    $
    104,551Long-lived assets
    
    $
    382,423
    
    
    $
    17,255
    
    
    $
    399,678
    
    
    $
    382,423
    
    
    $
    17,255
    
    
    $
    399,678All other identifiable assets
    
    
    1,629,648
    
    
    
    187,807
    
    
    
    1,817,455
    
    
    
    1,629,648
    
    
    
    187,807
    
    
    
    1,817,455Total assets
    
    $
    2,012,071
    
    
    $
    205,062
    
    
    $
    2,217,133
    
    
    $
    2,012,071
    
    
    $
    205,062
    
    
    $
    2,217,133
 Three Months Ended July 2, 2005
    
    
    Six Months Ended July 2, 2005Industrial
    
    
    
    
    
    
    
    
    
    
    IndustrialSemiconductor
    
    
    Applications
    
    
    
    
    
    
    Semiconductor
    
    
    ApplicationsGroup
    
    
    Group
    
    
    Total
    
    
    Group
    
    
    Group
    
    
    TotalSales 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
 
 ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Cautionary Note Regarding Forward-Looking Statements
  20




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##### Table of Contents



Introduction
  
    
    Overview of our Business and Industry;
    
    Results of Operations;
    
    Critical Accounting Policies;
    
    Liquidity and Capital Resources; and
    
    Risk Factors.
 Overview of Our Business and Industry
  21




---



##### Table of Contents



Quarterly Financial Data2006
    
    2005Second
    
    First
    
    Fourth
    
    Third
    
    Second
    
    FirstQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterNet sales
    
    $
    410,073
    
    
    $
    365,906
    
    
    $
    332,268
    
    
    $
    338,878
    
    
    $
    329,585
    
    
    $
    339,740Gross profit
    
    $
    204,764
    
    
    $
    167,540
    
    
    $
    140,501
    
    
    $
    147,194
    
    
    $
    157,562
    
    
    $
    153,869Net income
    
    $
    52,705
    
    
    $
    24,717
    
    
    $
    22,990
    
    
    $
    23,415
    
    
    $
    33,231
    
    
    $
    30,471Diluted net income per share
    
    $
    0.42
    
    
    $
    0.19
    
    
    $
    0.17
    
    
    $
    0.17
    
    
    $
    0.24
    
    
    $
    0.22Net orders
    
    $
    457,545
    
    
    $
    416,710
    
    
    $
    351,018
    
    
    $
    286,929
    
    
    $
    309,214
    
    
    $
    301,594
   Results of Operations
 Adoption of SFAS 123(R)
  22




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJuly 1, 2006
    
    
    April 1, 2006
    
    
    July 2, 2005
    
    
    July 1, 2006
    
    
    July 2, 2005(1)
    
    
    (3)
    
    
    (2)
    
    
    (1)
    
    
    (2)Cost of sales
    
    $
    538
    
    
    $
    308
    
    
    $
    184
    
    
    $
    846
    
    
    $
    396Selling, general and administrative
    
    
    5,590
    
    
    
    5,439
    
    
    
    540
    
    
    
    11,029
    
    
    
    1,165Research and development
    
    
    2,664
    
    
    
    3,061
    
    
    
    325
    
    
    
    5,725
    
    
    
    701Stock-based compensation expense before income taxes
    
    $
    8,792
    
    
    $
    8,808
    
    
    $
    1,049
    
    
    $
    17,600
    
    
    $
    2,262
 
 (1)
    
    Amounts include amortization expense related to stock options of $6.5 million and $12.9
million, ESPP of $0.6 million and $1.2 million, and restricted stock awards of $1.7 million
and $3.5 million for the three and six months ended July 1, 2006, respectively.(2)
    
    Amounts include amortization expense related to restricted stock awards of $1.0 million
and $2.3 million for the three and six months ended July 2, 2005, respectively.(3)
    
    Amounts include amortization expense related to stock options of $6.5 million, ESPP of
$0.6 million, and restricted stock awards of $1.7 million. Net Sales
 Three Months Ended
    
    Six Months EndedJuly 1, 2006
    
    April 1, 2006
    
    July 2, 2005
    
    July 1, 2006
    
    July 2, 2005(in thousands, except percentages)Net sales
    
    $
    410,073
    
    
    $
    365,906
    
    
    $
    329,585
    
    
    $
    775,979
    
    
    $
    669,325International net sales %
    
    
    71
    %
    
    
    66
    %
    
    
    76
    %
    
    
    69
    %
    
    
    74
    %
   Three Months Ended
    
    Six Months EndedJuly 1, 2006
    
    April 1, 2006
    
    July 2, 2005
    
    July 1, 2006
    
    July 2, 2005North America
    
    
    29
    %
    
    
    34
    %
    
    
    24
    %
    
    
    31
    %
    
    
    26
    %Europe
    
    
    9
    %
    
    
    7
    %
    
    
    8
    %
    
    
    8
    %
    
    
    9
    %Asia
    
    
    62
    %
    
    
    59
    %
    
    
    68
    %
    
    
    61
    %
    
    
    65
    %
  23




---



##### Table of Contents



Gross Profit
 Three Months Ended
    
    Six Months EndedJuly 1, 2006
    
    April 1, 2006
    
    July 2, 2005
    
    July 1, 2006
    
    July 2, 2005(in thousands, except percentages)Gross profit
    
    $
    204,764
    
    
    $
    167,540
    
    
    $
    157,562
    
    
    $
    372,304
    
    
    $
    311,431% of net sales
    
    
    50
    %
    
    
    46
    %
    
    
    48
    %
    
    
    48
    %
    
    
    47
    %
    Selling, General and Administrative (SG&A)
 Three Months Ended
    
    Six Months EndedJuly 1, 2006
    
    April 1, 2006
    
    July 2, 2005
    
    July 1, 2006
    
    July 2, 2005(in thousands, except percentages)SG&A expense
    
    $
    66,311
    
    
    $
    58,482
    
    
    $
    50,325
    
    
    $
    124,793
    
    
    $
    102,085% of net sales
    
    
    16
    %
    
    
    16
    %
    
    
    15
    %
    
    
    16
    %
    
    
    15
    %
  Research and Development (R&D)
 Three Months Ended
    
    
    Six Months EndedJuly 1, 2006
    
    April 1, 2006
    
    July 2, 2005
    
    July 1, 2006
    
    July 2, 2005(in thousands, except percentages)R&D expense
    
    $
    63,298
    
    
    $
    63,783
    
    
    $
    63,512
    
    
    $
    127,081
    
    
    $
    125,560% of net sales
    
    
    15
    %
    
    
    17
    %
    
    
    19
    %
    
    
    16
    %
    
    
    19
    %
  24




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##### Table of Contents



Restructuring and Other Charges
 Three Months Ended
    
    Six Months EndedJuly 1, 2006
    
    April 1, 2006
    
    July 2, 2005
    
    July 1, 2006
    
    July 2, 2005(in thousands, except percentages)Restructuring and other charges
    
    $
    
    
    
    $
    12,629
    
    
    $
    (74
    )
    
    $
    12,629
    
    
    $
    (74
    )% of net sales
    
    
    
    %
    
    
    3
    %
    
    Less than 1
    %
    
    
    2
    %
    
    Less than 1
    %
     Legal Settlement
 Three Months Ended
    
    Six Months EndedJuly 1, 2006
    
    April 1, 2006
    
    July 2, 2005
    
    July 1, 2006
    
    July 2, 2005(in thousands, except percentages)Legal settlement
    
    $
    
    
    
    $
    3,250
    
    
    $
    
    
    
    $
    3,250
    
    
    $
    % of net sales
    
    
    
    %
    
    
    1
    %
    
    
    
    %
    
    Less than 1
    %
    
    
    
    %
   Interest and Other Income, Net
 Three Months Ended
    
    Six Months EndedJuly 1, 2006
    
    April 1, 2006
    
    July 2, 2005
    
    July 1, 2006
    
    July 2, 2005(in thousands, except percentages)Interest and other income, net
    
    $
    7,611
    
    
    $
    6,079
    
    
    $
    3,674
    
    
    $
    13,690
    
    
    $
    7,143% of net sales
    
    
    2
    %
    
    
    2
    %
    
    
    1
    %
    
    
    2
    %
    
    
    1
    %
  25




---



##### Table of Contents



Income Taxes
  Critical Accounting Policies
  Revenue Recognition
     Inventory Valuation
  26




---



##### Table of Contents



Goodwill and Other Intangible Assets
  Deferred Tax Assets
  Warranty Obligations
  Accounting for Stock-Based Compensation
   27




---



##### Table of Contents



Restructuring and Impairment Charges
    Foreign Exchange Contracts
  Cash Flow Hedging 
 28




---



##### Table of Contents



Net Investment Hedging 
 Non-Designated Hedges 
 Liquidity and Capital Resources
          29




---



##### 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
  30




---



##### Table of Contents



Scope of the Controls Evaluation
  Conclusions
  
 PART II: OTHER INFORMATION
 
 ITEM 1: LEGAL PROCEEDINGS
  Derivative Litigation
 Teitelbaum v. Hill et al . Joshua Teitelbaum, in
the right of and for the benefit of Novellus Systems, Inc., v. Richard S. Hill, Jeffrey C. Benzing,
D. James Guzy, Tom Long, Robert H. Smith, Neil R. Bonke, Youssef A. El-Mansy, J. David Litster,
Yoshio Nishi, Glen G. Possley, Ann D. Rhoads, William R. Spivey and Delbert A. Whitaker, as
defendants, and the Company as a Nominal Defendant
 Alaska Electrical Pension Fund v. Hill et al . Alaska Electrical Pension Fund, on behalf of Novellus Systems, Inc., v. Richard S. Hill, Jeffrey
C. Benzing, William H. Kurtz, Neil R. Bonke, Youssef A. El-Mansy, J. David Litster, Yoshio Nishi,
Glen G. Possley, Ann D. Rhoads, William R. Spivey and Delbert Whitaker, as defendants, and the
Company as a Nominal Defendant
 Customer Indemnity Claim Settlement
  31




---



##### Table of Contents



Other Litigation
  
 ITEM 1A: RISK FACTORS
   Cyclical downturns in the semiconductor industry negatively impact demand for our equipment.
  The competitive and capital-intensive nature of the semiconductor industry increases the
difficulty of maintaining and capturing market share.
  Our quarterly operating results and stock price are unpredictable.
  32




---



##### Table of Contents




    
    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;
    
    Changing demand for and sales of lower-margin products relative to higher-margin products;
    
    Competitive pricing pressures;
    
    The effect of revenue recognized upon acceptance with little or no associated costs; and
    
    Fluctuation in warranty costs.
 We face risks related to concentration of net sales.
  Rapid technological change in the semiconductor industry requires substantial research and
development expenditures and responsiveness to customer needs.
    33




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##### Table of Contents



We are exposed to the risks of 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 higher effective income tax rates in foreign countries where we conduct business;
    
    Governmental controls, either by the United States or other countries, that restrict our business overseas or the
import or export of semiconductor products, or increase the cost of our operations;
    
    Longer payment cycles and 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 currency fluctuations, specifically transactions denominated in
Japanese yen. Exchange rate volatility may also increase the cost of our exported products for international customers
and inhibit demand.
  We face risks associated with 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.
  Changes in tax rates or liabilities could negatively impact our future results.
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
    
    Changes in the regulatory environment;
    
    Changes in accounting and tax standards or practices; and
    
    Overall business conditions in the semiconductor equipment industry.
 Supply shortages could affect our ability to meet customer demands.
  We are subject to litigation proceedings that could adversely affect our business.
 Intellectual Property Litigation
  Derivative Litigation
  Other Litigation
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We are exposed to risks associated with our diversification strategy.
  The loss of key employees could harm our business and operations.
  We are exposed to risks associated with our investment activities.
  We face risks related to intellectual property.
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We are exposed to risks related to our indemnification of third parties.
  We face risks related to changes in accounting standards for stock option plans.
  If our outside audit firm does not maintain its independence, we may be unable to meet our
regulatory reporting obligations.
   We are exposed to risks associated with outsourcing activities.
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Corporate governance and financial reporting compliance requirements may lead to increased
costs and difficulty in attracting qualified executive officers and directors.
  
 ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Repurchase of Company Securities
 TotalNumber of
    
    ApproximateShares
    
    Dollar ValuePurchased
    
    of Sharesas Part of
    
    that May yetTotal
    
    Average
    
    Publicly
    
    be PurchasedNumber
    
    Price
    
    Announced
    
    Under theof Shares
    
    Paid
    
    Plans or
    
    Plans orPeriod
    

Purchased (1)
    
    Per Share
    
    Programs
    
    ProgramsApril 2, 2006 to May 6, 2006
    
    
    3,499,087
    
    
    $
    24.57
    
    
    
    3,499,087
    
    
    $709.1 millionMay 7, 2006 to June 3, 2006
    
    
    3,673,000
    
    
    $
    23.37
    
    
    
    3,673,000
    
    
    $623.3 millionJune 4, 2006 to July 1, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $623.3 millionTotal
    
    
    7,172,087
    
    
    $
    23.96
    
    
    
    7,172,087
    
    
    $623.3 million
 
 (1)
    
    All shares were purchased pursuant to a publicly announced plan.  
 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Name of Nominee
    
    In Favor
    
    WithheldRichard S. Hill
    
    
    109,161,248
    
    
    
    4,127,076Neil R. Bonke
    
    
    111,207,664
    
    
    
    2,080,660Youssef A. El-Mansy
    
    
    102,718,939
    
    
    
    10,569,385J. David Litster
    
    
    102,130,087
    
    
    
    11,158,237Yoshio Nishi
    
    
    102,724,088
    
    
    
    10,564,236Glen G. Possley
    
    
    109,393,351
    
    
    
    3,894,973Ann D. Rhoads
    
    
    111,221,733
    
    
    
    2,066,591William R. Spivey
    
    
    101,647,316
    
    
    
    11,641,008Delbert A. Whitaker
    
    
    111,213,041
    
    
    
    2,075,283
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In Favor
    
    Opposed
    
    Abstained109,706,052
    
    2,937,675
    
    644,597
  In Favor
    
    Opposed
    
    Abstained44,650,857
    
    40,144,341
    
    937,010
 
 ITEM 6: EXHIBITS
  31.1
    
    Certification of Richard S. Hill, Chairman of the Board of Directors
and Chief Executive Officer of Novellus Systems, Inc. dated August 9,
2006 in accordance with Rules 13a-14(a) and 15d-14(a) of the
Securities Exchange Act, as amended, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of William H. Kurtz, Executive Vice President and Chief
Financial Officer of Novellus Systems, Inc. dated August 9, 2006 in
accordance with Rules 13a-14(a) and 15d-14(a) of the Securities
Exchange Act, as amended, 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 9,
2006 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 William H. Kurtz, Executive Vice President and Chief
Financial Officer of Novellus Systems, Inc. dated August 9, 2006 in
accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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SIGNATURES
  NOVELLUS SYSTEMS, INC.By:
    /s/ William H. KurtzWilliam H. KurtzExecutive Vice President and Chief Financial Officer

(Principal Financial Officer)August 9, 2006 40




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EXHIBIT INDEX
 31.1
    
    Certification of Richard S. Hill, Chairman of the Board of Directors
and Chief Executive Officer of Novellus Systems, Inc. dated August
9, 2006 in accordance with Rules 13a-14(a) and 15d-14(a) of the
Securities Exchange Act, as amended, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of William H. Kurtz, Executive Vice President and
Chief Financial Officer of Novellus Systems, Inc. dated August 9,
2006 in accordance with Rules 13a-14(a) and 15d-14(a) of the
Securities Exchange Act, as amended, 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
9, 2006 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 William H. Kurtz, Executive Vice President and
Chief Financial Officer of Novellus Systems, Inc. dated August 9,
2006 in accordance with 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.