8-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of Earliest Event Reported): January 25, 2006

NOVELLUS SYSTEMS, INC.

(Exact Name of Registrant as Specified in its Charter)

California

(State or Other Jurisdiction of Incorporation)

0-17157	77-0024666
(Commission File Number)	(I.R.S. Employer Identification No.)

4000 North First Street, San Jose, California 95134

(Address of Principal Executive Offices) (Zip Code)

(408) 943-9700

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)

TABLE OF CONTENTS

	Item 2.02. Results of Operations and Financial Condition.
	Item 9.01. Financial Statements and Exhibits.
	SIGNATURES
EXHIBIT INDEX
EXHIBIT 99.1

Item 2.02. Results of Operations and Financial Condition.

     On January 25, 2006, Novellus Systems, Inc. (the “Company”) announced via press release the Company’s results for its fourth quarter and year ended December 31, 2005. A copy of the Company’s press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference. This Form 8-K and the attached exhibit are provided under Item 2.02 of Form 8-K and are furnished to, but shall not be deemed filed with, the Securities and Exchange Commission or incorporated by reference into the Company’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits.

The exhibit listed below is being furnished with this Form 8-K.

Exhibit
Number	Description
99.1	Financial Press Release, dated January 25, 2006, announcing results for fourth quarter and year ended December 31, 2005.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

NOVELLUS SYSTEMS, INC.
By:	/s/ William H. Kurtz
	William H. Kurtz
	Executive Vice President and Chief Financial Officer

Date: January 25, 2006

EXHIBIT INDEX

Exhibit
Number	Description
99.1	Financial Press Release, dated January 25, 2006, announcing results for fourth quarter and year ended December 31, 2005.

EX-99.1

Exhibit 99.1

Contacts:	William H. Kurtz	Robin Yim
	Executive Vice President and Chief Financial Officer	Vice President, Treasurer
	Novellus Systems, Inc.	Novellus Systems, Inc.
	Phone: (408) 943-9700	Phone: (408) 943-9700

FOR IMMEDIATE RELEASE

NOVELLUS SYSTEMS REPORTS FOURTH QUARTER AND YEAR-END RESULTS

SAN JOSE, Calif., January 25, 2006—Novellus Systems, Inc. (Nasdaq: NVLS) today reported net sales and results of operations for its fourth quarter and year ended December 31, 2005. Net sales for the fourth quarter were $332.3 million, down $6.6 million or 2.0 percent from the third quarter 2005 net sales of $338.9 million and down $8.0 million or 2.4 percent from the fourth quarter 2004 net sales of $340.3 million. Net income for the fourth quarter was $23.0 million or $0.17 per diluted share, similar to net income for the third quarter 2005 of $23.4 million or $0.17 per diluted share. Net income for the fourth quarter 2005 decreased by $14.5 million or 38.8 percent from the fourth quarter 2004 net income of $37.5 million or $0.27 per diluted share.

The fourth quarter results reflect net pre-tax restructuring and other charges of $5.9 million. These charges include a pre-tax restructuring of $8.8 million related to the relocation of certain operations activities from Chandler, Arizona to San Jose, California, which was partially offset by a $2.9 million pre-tax reversal of a previously recorded restructuring accrual resulting from a change in estimated sublease income over the remaining lease term. Without the restructuring charges, net income would have been $26.6 million, or $0.20 per diluted share. The third quarter 2005 results included net pre-tax restructuring and other charges of $3.4 million and, within cost of sales, a pre-tax inventory write-down of $5.2 million. Without these charges, the third quarter 2005 net income would have been $28.7 million, or $0.21 per diluted share.

Net sales for the fiscal year 2005 were $1.34 billion, down $16.8 million or 1.2 percent compared with net sales of $1.36 billion in fiscal year 2004. Net income for the year was $110.1 million, or $0.80 per diluted share, compared with the fiscal year 2004 net income of $156.7 million, or $1.06 per diluted share.

The fiscal year 2005 results include net pre-tax restructuring and other charges of $9.2 million and, within cost of sales, a pre-tax inventory write-down of $5.2 million. Without the restructuring charges and inventory write-down, net income for fiscal year 2005 would have been $118.9 million, or $0.86 per diluted share. In comparison, the fiscal year 2004 results include net pre-tax restructuring and other charges of $1.5 million, pre-tax acquired in-process research and development write-offs of $6.1 million, net pre-tax recovery from legal settlements of $2.6 million and the pre-tax reversal of previously accrued royalty payments of $8.1 million. Without these charges and benefits, net income for fiscal year 2004 would have been $156.3 million, or $1.06 per diluted share.

Bookings were $351.0 million in the fourth quarter, up 22.3 percent over third quarter bookings of $286.9 million. Shipments of $316.6 million in the fourth quarter were essentially flat with third quarter 2005 shipments of $316.4 million. Deferred revenue at the end of the quarter was $143.0 million, a decrease of $15.7 million or 9.9 percent from $158.7 million at the end of the third quarter 2005.

The financial measures set forth above, which present net income excluding unusual charges and benefits, revenue on a shipments basis and bookings, are not in accordance with U.S. generally accepted accounting principles (GAAP). The Company believes that these non-GAAP financial measures provide further insight into the results of ongoing operations and enhance the comparability of those results to results in prior periods because they assist shareholder understanding of the effects of unusual charges and benefits on the quarter’s and the year’s results.

Cash, cash equivalents, restricted cash and short-term investments as of December 31, 2005 were $789.4 million, a decrease of $90.2 million or 10.3 percent from the third quarter 2005 ending balance of $879.5 million.

“2005 finished with strong bookings momentum in the fourth quarter. We are pleased with this improved momentum on orders which was driven primarily by increased demand from both memory and logic customers,” said Richard S. Hill, chairman and chief executive officer of Novellus Systems, Inc. “We also believe we have reached a low water mark on gross margins in the fourth quarter, and we expect to improve margins and earnings going forward.”

“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995:

The statement regarding the Company’s expectation that margins and earnings will improve, as well as other matters discussed in this news release that are not purely historical data, are forward-looking statements. The forward-looking statements involve risks and uncertainties, including, but not limited to, the Company’s inability to keep cost of services down and ineffective pricing techniques, and other risks indicated in our filings with the Securities and Exchange Commission (SEC). Actual results could differ materially. We assume no obligation to update this information. For more details, please refer to our SEC filings, including our Annual Report on Form 10-K and 10K/A for the year ended December 31, 2004, our Quarterly Reports on Form 10-Q and 10Q/A for the quarters ended October 1, 2005, July 2, 2005 and April 2, 2005, and our Current Reports on Form 8-K.

About Novellus:

Novellus Systems, Inc., an S&P 500 company, manufactures, markets and services advanced deposition, ultraviolet thermal processing (UVTP), surface preparation and chemical mechanical planarization equipment for today’s advanced integrated circuits. Our products are designed for high-volume production of advanced, leading-edge semiconductor devices at the lowest possible cost. Headquartered in San Jose, Calif., with subsidiaries throughout the United States, as well as in the United Kingdom, France, Germany, the Netherlands, Ireland, Italy, Israel, India, China, Japan, Korea, Malaysia, Singapore and Taiwan, we are a publicly traded company on the Nasdaq stock exchange (Nasdaq: NVLS). Additional information about Novellus is available on our home page at www.novellus.com.

NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)	Three Months Ended									Year Ended
(Unaudited)	December 31			October 1			December 31			December 31			December 31
	2005			2005			2004			2005			2004
Net sales	$	332,268		$	338,878		$	340,272		$	1,340,471		$	1,357,288
Cost of sales		191,767			191,684			170,538			741,345			692,158
Gross profit		140,501			147,194			169,734			599,126			665,130
%		42.3	%		43.4	%		49.9	%		44.7	%		49.0	%
Operating expenses:
Selling, general and administrative		51,489			53,365			55,439			206,939			194,652
Research and development		60,492			61,263			61,453			247,315			252,083
Restructuring and other charges		5,888			3,361			2,407			9,175			1,484
Acquired in-process research and development		—			—			—			—			6,124
Legal settlement		—			—			—			—			5,400
Total operating expenses		117,869			117,989			119,299			463,429			459,743
%		35.5	%		34.8	%		35.1	%		34.6	%		33.9	%
Income from operations		22,632			29,205			50,435			135,697			205,387
%		6.8	%		8.6	%		14.8	%		10.1	%		15.1	%
Other income, net		13,368			2,405			2,433			22,916			17,804
Income before income taxes		36,000			31,610			52,868			158,613			223,191
Provision for income taxes		13,010			8,195			15,332			48,506			66,501
Net income	$	22,990		$	23,415		$	37,536		$	110,107		$	156,690
Net income per share:
Basic net income per share	$	0.17		$	0.17		$	0.27		$	0.80		$	1.07
Diluted net income per share	$	0.17		$	0.17		$	0.27		$	0.80		$	1.06
Shares used in basic per share calculation		133,980			137,848			139,466			137,447			145,956
Shares used in diluted per share calculation		134,752			138,895			140,687			138,423			147,937

NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(EXCLUDING CERTAIN UNUSUAL (CHARGES) BENEFITS)(1)

(In thousands, except per share amounts)	Three Months Ended									Year Ended
(Unaudited)	December 31			October 1			December 31			December 31			December 31
	2005			2005			2004			2005			2004
Net sales	$	332,268		$	338,878		$	340,272		$	1,340,471		$	1,357,288
Cost of sales		191,767			186,434			170,538			736,095			692,158
Gross profit		140,501			152,444			169,734			604,376			665,130
%		42.3	%		45.0	%		49.9	%		45.1	%		49.0	%
Operating expenses:
Selling, general and administrative		51,489			53,365			55,439			206,939			202,728
Research and development		60,492			61,263			61,453			247,315			252,083
Total operating expenses		111,981			114,628			116,892			454,254			454,811
%		33.7	%		33.8	%		34.4	%		33.9	%		33.5	%
Income from operations		28,520			37,816			52,842			150,122			210,319
%		8.6	%		11.2	%		15.5	%		11.2	%		15.5	%
Other income, net		13,368			2,405			2,433			22,916			9,804
Income before income taxes		41,888			40,221			55,275			173,038			220,123
Provision for income taxes		15,277			11,535			16,030			54,091			63,835
Net income	$	26,611		$	28,686		$	39,245		$	118,947		$	156,288
Net income per share:
Basic net income per share	$	0.20		$	0.21		$	0.28		$	0.87		$	1.07
Diluted net income per share	$	0.20		$	0.21		$	0.28		$	0.86		$	1.06
Shares used in basic per share calculation		133,980			137,848			139,466			137,447			145,956
Shares used in diluted per share calculation		134,752			138,895			140,687			138,423			147,937
A reconciliation of our net income excluding certain unusual charges and benefits to our net income under accounting principles generally accepted in the United States of America is presented below:
Net income excluding unusual
(charges) and benefits	$	26,611		$	28,686		$	39,245		$	118,947		$	156,288
Unusual (charges) and benefits:
Inventory write-down		—			(5,250	)		—			(5,250	)		—
Reversal of liability in connection with Applied Materials settlement (included in SG&A)		—			—			—			—			8,076
Restructuring and other charges		(5,888	)		(3,361	)		(2,407	)		(9,175	)		(1,484	)
Acquired in-process research and development		—			—			—			—			(6,124	)
Legal settlement		—			—			—			—			(5,400	)
Cash receipt from Applied Materials settlement (included in Other income, net)		—			—			—			—			8,000
Total (charges) and benefits		(5,888	)		(8,611	)		(2,407	)		(14,425	)		3,068
Adjustments on provision for income taxes		2,267			3,340			698			5,585			(2,666	)
Net income	$	22,990		$	23,415		$	37,536		$	110,107		$	156,690

(1) The condensed consolidated statements of operations (excluding certain unusual charges and benefits) are intended to present our operating results, excluding certain unusual charges, benefits and related adjustments on provisions for income taxes. These condensed consolidated statements of operations are not in accordance with or an alternative for accounting principles generally accepted in the United States of America and may be different from similar measures used by other companies.

NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)	December 31		December 31
	2005		2004
	(Unaudited)		*
ASSETS
Current assets:
Cash and short-term investments	$	649,240	$	587,762
Accounts receivable, net		397,534		395,522
Inventories		193,787		261,046
Deferred taxes and other current assets		125,478		124,994
Total current assets		1,366,039		1,369,324
Property and equipment, net		423,749		476,492
Restricted cash		140,112		176,708
Goodwill		255,584		278,972
Intangible and other assets		107,292		100,336
Total assets	$	2,292,776	$	2,401,832
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	253,977	$	235,020
Deferred profit		68,718		71,216
Income taxes payable		8,425		14,691
Current obligations under lines of credit		15,751		3,103
Total current liabilities		346,871		324,030
Long-term debt		124,858		161,103
Other liabilities		41,764		54,865
Total liabilities		513,493		539,998
Shareholders’ equity:
Common stock		1,393,805		1,456,670
Retained earnings and accumulated other comprehensive income		385,478		405,164
Total shareholders’ equity		1,779,283		1,861,834
Total liabilities and shareholders’ equity	$	2,292,776	$	2,401,832

* The December 31, 2004 condensed consolidated balance sheet was derived from our audited consolidated financial statements.