NOVELLUS SYSTEMS INC - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - NOVELLUS SYSTEMS INC	Financial_Report.xls
EX-10.30 - ACCELERATED STOCK VESTING RETIREMENT PLAN SUMMARY - NOVELLUS SYSTEMS INC	dex1030.htm
EX-31.2 - CERTIFICATION OF VP AND CFO IN ACCORDANCE WITH RULES 13A-14(A) AND 15D-14(A) - NOVELLUS SYSTEMS INC	dex312.htm
EX-31.1 - CERTIFICATION OF CEO IN ACCORDANCE WITH RULES 13A-14(A) AND 15D-14(A) - NOVELLUS SYSTEMS INC	dex311.htm
EX-10.31 - NOTICE OF RESTRICTED STOCK UNIT AWARD FOR GRANTEES OUTSIDE THE EUROPEAN UNION - NOVELLUS SYSTEMS INC	dex1031.htm
EX-10.32 - NOTICE OF STOCK OPTION AWARD FOR GRANTEES OUTSIDE THE EUROPEAN UNION - NOVELLUS SYSTEMS INC	dex1032.htm
EX-32.1 - CERTIFICATION OF CEO IN ACCORDANCE WITH 18 U.S.C. 1350 - NOVELLUS SYSTEMS INC	dex321.htm
EX-32.2 - CERTIFICATION OF VP AND CFO IN ACCORDANCE WITH 18 U.S.C. 1350 - NOVELLUS SYSTEMS INC	dex322.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 25, 2010

¨	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* *incorporation of organization)*		*(I.R.S. Employer* *Identification Number)*

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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if a smaller reporting company)	Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of October 27, 2010, there were 90,187,631 shares of the Registrant’s common stock, no par value, issued and outstanding.

NOVELLUS SYSTEMS, INC.

FORM 10-Q

QUARTER ENDED SEPTEMBER 25, 2010

TABLE OF CONTENTS


			Page
Part I: Financial Information
	Item 1:	Condensed Consolidated Financial Statements		3
		Condensed Consolidated Statements of Operations for the three and nine months ended September 25, 2010 and September 26, 2009		3
		Condensed Consolidated Balance Sheets as of September 25, 2010 and December 31, 2009		4
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 25, 2010 and September 26, 2009		5
		Notes to Condensed Consolidated Financial Statements		6
	Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
	Item 3:	Quantitative and Qualitative Disclosures About Market Risk		29
	Item 4:	Controls and Procedures		29
Part II: Other Information
	Item 1:	Legal Proceedings		30
	Item 1A:	Risk Factors		30
	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds		38
	Item 6:	Exhibits		39
Signatures				40
	EXHIBIT 10.30
	EXHIBIT 10.31
	EXHIBIT 10.32
	EXHIBIT 31.1
	EXHIBIT 31.2
	EXHIBIT 32.1
	EXHIBIT 32.2
	EXHIBIT 101.INS
	EXHIBIT 101.SCH
	EXHIBIT 101.CAL
	EXHIBIT 101.LAB
	EXHIBIT 101.PRE

PART I: FINANCIAL INFORMATION

ITEM 1:

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVELLUS SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 25, 2010			September 26, 2009			September 25, 2010		September 26, 2009
	(In thousands, except per share amounts)
Net sales	$	367,203		$	176,879		$	964,801	$	395,000
Cost of sales		186,774			106,171			493,468		267,548

Gross profit		180,429			70,708			471,333		127,452

Selling, general, and administrative		46,426			36,648			134,509		125,565
Research and development		44,271			37,013			124,747		112,369
Restructuring charges		240			324			657		3,558

Total operating expenses		90,937			73,985			259,913		241,492

Operating income (loss)		89,492			(3,277	)		211,420		(114,040	)

Interest and other income (expense), net		(132	)		(124	)		3,590		4,078

Income (loss) before income taxes		89,360			(3,401	)		215,010		(109,962	)
Provision for income taxes		13,095			625			34,181		10,464

Net income (loss)	$	76,265		$	(4,026	)	$	180,829	$	(120,426	)

Net income (loss) per share:
Basic	$	0.83		$	(0.04	)	$	1.93	$	(1.25	)

Diluted	$	0.82		$	(0.04	)	$	1.90	$	(1.25	)

Shares used in basic per share calculations		91,512			96,701			93,833		96,459

Shares used in diluted per share calculations		92,859			96,701			94,986		96,459

See accompanying Notes to Condensed Consolidated Financial Statements.

NOVELLUS SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 25, 2010			December 31, 2009
	(Unaudited)
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	207,887		$	142,047
Short-term investments		386,660			359,323
Accounts receivable, net		199,018			150,624
Inventories		198,566			162,213
Deferred tax assets, net		47,363			46,900
Other current assets		32,868			36,715

Total current assets		1,072,362			897,822
Property and equipment, net of accumulated depreciation of $564,476 in 2010 and $549,926 in 2009		220,231			239,111
Non-current restricted cash and cash equivalents		119,697			133,105
Long-term investments		71,571			78,763
Goodwill		125,223			126,438
Other non-current assets		79,160			83,739

Total assets	$	1,688,244		$	1,558,978

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	76,269		$	72,656
Accrued payroll and related expenses		56,323			21,566
Accrued warranty		25,321			17,014
Other current liabilities		58,450			49,571
Income taxes payable		20,297			1,580
Deferred profit		15,151			9,094
Current debt obligations		96			13

Total current liabilities		251,907			171,494
Long-term debt obligations		106,773			114,147
Long-term income taxes payable		50,528			48,332
Other non-current liabilities		43,981			45,228

Total liabilities		453,189			379,201

Commitments and contingencies (Note 16)
Shareholders’ equity:
Common stock		1,132,762			1,179,220
Retained earnings		107,390			5,226
Accumulated other comprehensive loss		(5,097	)		(4,669	)

Total shareholders’ equity		1,235,055			1,179,777

Total liabilities and shareholders’ equity	$	1,688,244		$	1,558,978

See accompanying Notes to Condensed Consolidated Financial Statements.

NOVELLUS SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	September 25, 2010			September 26, 2009
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	180,829		$	(120,426	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Loss on disposal of property and equipment, net		801			119
Depreciation and amortization		30,775			35,636
Deferred income taxes		(2,876	)		(1,597	)
Stock-based compensation		25,706			22,878
Excess tax benefit from stock-based compensation		(392	)		(2	)
Other non-cash charges, net		4,138			7,233
Changes in operating assets and liabilities:
Accounts receivable, net		(47,956	)		31,344
Inventories		(34,481	)		65,662
Other assets		6,673			11,063
Accounts payable and accrued liabilities		3,466			906
Accrued payroll and related expenses		37,383			(8,237	)
Accrued warranty		10,077			(13,053	)
Income taxes payable		20,728			8,762
Deferred profit		6,265			(8,607	)
Other liabilities		6,875			(6,646	)

Net cash provided by operating activities		248,011			25,035

Cash flows from investing activities:
Proceeds from sales of investments		119,359			192,174
Proceeds from maturities of investments		143,384			15,351
Purchases of investments		(287,894	)		(216,135	)
Capital expenditures		(12,916	)		(9,111	)
Decrease (increase) in restricted cash and cash equivalents		8,652			(18,577	)
Purchase of intangible assets		0			(2,000	)
Proceeds from the sale of property and equipment		0			1,267

Net cash used in investing activities		(29,415	)		(37,031	)

Cash flows from financing activities:
Proceeds from employee stock compensation plans		7,641			4,394
Proceeds from debt obligations		556			110,632
Repayment of debt obligations		(41	)		(110,608	)
Proceeds from (repayments of) lines of credit, net		(5	)		419
Repurchases of common stock		(161,037	)		(6,269	)
Excess tax benefit from stock-based compensation		392			2

Net cash used in financing activities		(152,494	)		(1,430	)

Effects of exchange rate changes on cash and cash equivalents		(262	)		286

Net increase (decrease) in cash and cash equivalents		65,840			(13,140	)
Cash and cash equivalents at the beginning of the period		142,047			184,332

Cash and cash equivalents at the end of the period	$	207,887		$	171,192

See accompanying Notes to Condensed Consolidated Financial Statements.

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. The interim financial information is unaudited and does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 25, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or any future period. The interim financial statements should be read in conjunction with the Consolidated Financial Statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosures of contingent assets and liabilities. We evaluate estimates on an ongoing basis, including those related to recognition of revenue, valuation of investments, adequacy of the allowance for doubtful accounts, valuation of inventory, valuation of deferred tax assets, valuation of goodwill and other intangible assets, adequacy of warranty obligations, measurement of restructuring and impairment charges, compliance with hedge accounting for derivatives, contingencies and litigation, and measurement of stock-based compensation. We base estimates on historical experience and other market-based assumptions that we believe to be reasonable under current circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our intent is to accurately state assets and liabilities given facts known at the time of measurement. Actual results may differ from these estimates.

The accompanying Condensed Consolidated Financial Statements include our accounts and the accounts of our subsidiaries after the elimination of intercompany account balances and transactions.

Note 2. Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) amended the disclosure requirements for fair value measurements with respect to recurring and nonrecurring assets and liabilities. The FASB’s authoritative guidance provides for disclosure of all significant transfers of assets and liabilities between those that are actively traded in markets (Level 1) and those that are not actively traded but have observable inputs (Level 2), and the reasons for the transfers. The authoritative guidance also provides that disclosures for assets and liabilities with significant unobservable inputs (Level 3) should separately disclose purchases, sales, issuances, and settlements. We adopted this authoritative guidance in the first quarter of 2010. See Note 4 for the disclosures required by this guidance.

In October 2009, the FASB issued new authoritative guidance addressing revenue arrangements with multiple deliverables. This authoritative guidance requires revenue to be allocated to multiple elements based on their relative selling price. Under the relative selling price method, a best estimate of the selling price may be used if vendor-specific or other third-party evidence of fair value is not available. The authoritative guidance will eliminate our use of the residual method to allocate the arrangement consideration. This authoritative guidance is effective for our fiscal year beginning January 1, 2011. We are currently evaluating the potential impact of this authoritative guidance on our Condensed Consolidated Financial Statements.

Note 3. Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. For purposes of computing basic net income (loss) per share, the weighted average number of outstanding shares of common stock excludes unvested restricted stock awards.

For the three and nine months ended September 25, 2010, diluted net income per share was computed by dividing net income by the weighted average number of common and potential common shares outstanding during the period. Potential common shares represent the number of additional common shares that would have been outstanding if the dilutive potential shares had been issued. These potential common shares consist primarily of stock options, unvested service-based restricted stock awards and unvested performance-based restricted stock awards. For purposes of computing diluted net income per share, weighted average potential common shares do not include potential common shares that are either anti-dilutive under the treasury stock method or restricted shares subject to performance conditions that have not been met. For this reason, potential common shares of 13.3 million and 14.0 million were excluded from the computation for the three and nine months ended September 25, 2010, respectively.

For the three and nine months ended September 26, 2009, diluted net loss per share excludes all potential common shares because the effect of including such shares would be anti-dilutive. Accordingly, the denominator used in computing both basic and diluted net loss per share was the same. The number of potential common shares that could dilute basic net income per share was 19.2 million and 22.0 million for the three and nine months ended September 26, 2009, respectively.

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides a reconciliation of the numerators and denominators of the basic and diluted per share computations:


	Three Months Ended					Nine Months Ended
	September 25, 2010		September 26, 2009			September 25, 2010		September 26, 2009
	(In thousands, except per share amounts)
Numerator:
Net income (loss)	$	76,265	$	(4,026	)	$	180,829	$	(120,426	)

Denominator:
Basic weighted-average shares outstanding		91,512		96,701			93,833		96,459
Dilutive common equivalent shares		1,347		0			1,153		0

Diluted weighted-average shares outstanding		92,859		96,701			94,986		96,459

Net income (loss) per share – Basic	$	0.83	$	(0.04	)	$	1.93	$	(1.25	)
Net income (loss) per share – Diluted	$	0.82	$	(0.04	)	$	1.90	$	(1.25	)

Note 4. Fair Value of Financial Instruments

Fair Value Hierarchy

We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and we consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

Our financial instruments consist primarily of money market funds, municipal bonds, variable-rate demand notes, corporate bonds, and auction-rate securities. Three levels of inputs are used to measure the fair value of our investments:

Level 1 -

Quoted prices in active markets for identical assets or liabilities.

We classify our money market funds as Level 1 instruments as they are traded in active markets with sufficient volume and frequency of transactions.

Level 2 -

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.

We classify our municipal bonds, variable-rate demand notes, and corporate bonds as Level 2 instruments due to our use of observable market prices in less active markets or, when observable market prices were not available, our use of non-binding market prices that are corroborated by observable market data or quoted market prices for similar instruments. We classify our derivative instruments as Level 2 instruments due to our use of observable inputs other than quoted prices, including interest rates and credit risk.

Level 3 -

Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

We classify our auction-rate securities as Level 3 instruments as we use a cash-flow-based valuation model to measure the fair value of these securities. This model requires the use of significant unobservable inputs. Our valuation of these securities incorporates our assumptions about the anticipated term and yield that a market participant would require to purchase such securities in the marketplace.

During the three and nine months ended September 25, 2010 and September 26, 2009, there were no transfers of financial instruments between Level 1 and Level 2 or transfers in or out of Level 3.

Financial Instruments Measured at Fair Value on a Recurring Basis

Financial instruments measured and recorded at fair value on a recurring basis, excluding accrued interest components, consist of the following:

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	September 25, 2010
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In thousands)
Assets
Money market funds	$	207,378	$	0	$	0	$	207,378
Municipal bonds		0		297,972		0		297,972
Variable-rate demand notes		0		58,235		0		58,235
Corporate bonds		0		19,166		0		19,166
Auction-rate securities		0		0		71,571		71,571
Derivative assets⁽¹⁾		0		40		0		40

Total assets	$	207,378	$	375,413	$	71,571	$	654,362

Liabilities
Derivative liabilities ⁽¹⁾	$	0	$	1,322	$	0	$	1,322

(1)	See additional disclosures relating to our derivatives and hedging activities in Note 6.


	December 31, 2009
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In thousands)
Assets
Money market funds	$	169,914	$	0	$	0	$	169,914
Municipal bonds		0		313,156		0		313,156
Variable-rate demand notes		0		21,908		0		21,908
Corporate bonds		0		6,641		0		6,641
Auction-rate securities		0		0		78,763		78,763
Derivative assets⁽¹⁾		0		137		0		137

Total assets	$	169,914	$	341,842	$	78,763	$	590,519

Liabilities
Derivative liabilities⁽¹⁾	$	0	$	322	$	0	$	322

(1)	See additional disclosures relating to our derivatives and hedging activities in Note 6.

Financial instruments measured and recorded at fair value on a recurring basis, excluding accrued interest components, were presented on our Condensed Consolidated Balance Sheets as follows:


	September 25, 2010
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In thousands)
Assets
Cash and cash equivalents	$	156,451	$	6,900	$	0	$	163,351
Short-term investments		0		368,473		0		368,473
Other current assets ⁽¹⁾		0		40		0		40
Non-current restricted cash and cash equivalents		50,927		0		0		50,927
Long-term investments		0		0		71,571		71,571

Total assets	$	207,378	$	375,413	$	71,571	$	654,362

Liabilities
Other current liabilities ⁽¹⁾	$	0	$	1,322	$	0	$	1,322

(1)	See additional disclosures relating to our derivatives and hedging activities in Note 6.

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	December 31, 2009
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(In thousands)
Assets
Cash and cash equivalents	$	108,839	$	0	$	0	$	108,839
Short-term investments		0		341,705		0		341,705
Other current assets⁽¹⁾		0		137		0		137
Non-current restricted cash and cash equivalents		61,075		0		0		61,075
Long-term investments		0		0		78,763		78,763

Total assets	$	169,914	$	341,842	$	78,763	$	590,519

Liabilities
Other current liabilities⁽¹⁾	$	0	$	322	$	0	$	322

(1)	See additional disclosures relating to our derivatives and hedging activities in Note 6.

The table below presents a reconciliation of all financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3). We classify financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Thus, the gains and losses presented below include changes in the fair value related to both observable and unobservable inputs.


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended						Nine Months Ended
	September 25, 2010			September 26, 2009			September 25, 2010			September 26, 2009
	(In thousands)
Balance, beginning of period	$	73,956		$	85,615		$	78,763		$	91,873
Unrealized gains (losses), net
Included in other comprehensive income (loss)		(35	)		646			658			4,603
Settlements		(2,350	)		(6,785	)		(7,850	)		(17,000	)

Balance, end of period	$	71,571		$	79,476		$	71,571		$	79,476

All Level 3 financial instruments are auction-rate securities. Auction-rate securities include auction-rate notes and auction-rate preferred shares of tax-exempt closed-end municipal bond funds. Our auction-rate notes consist of student loans that are substantially backed by the federal government. Due to auction failures in the marketplace, we will not have access to these funds unless (a) future auctions are successful, (b) the securities are called by the issuer, (c) we sell the securities in a secondary market, or (d) the underlying notes mature. Currently, there are no active secondary markets. As of September 25, 2010 we have recorded a cumulative temporary impairment loss of $10.1 million within Other Comprehensive Income (OCI) based upon our assessment of the fair value of these securities. We believe that this impairment is temporary as we do not intend to sell these securities. We do not believe that we will be required to sell these securities before recovery of their amortized cost; and based on our credit quality assessment, we expect to recover the amortized cost of these securities.

Fair Value of Other Financial Instruments

The carrying and estimated fair values of our other financial instruments are as follows:

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	September 25, 2010				December 31, 2009
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(In thousands)
Assets
Cash	$	44,536	$	44,536	$	33,208	$	33,208
Accrued interest receivable		4,163		4,163		3,698		3,698
Other investments		14,024		14,024		13,920		13,920
Non-current restricted cash		68,770		68,770		72,032		72,032

Total assets	$	131,493	$	131,493	$	122,858	$	122,858


Liabilities
Current debt obligations	$	96	$	96	$	13	$	13
Long-term debt obligations		106,773		107,309		114,147		114,599

Total liabilities	$	106,869	$	107,405	$	114,160	$	114,612

The carrying value of cash, accrued interest receivable, and non-current restricted cash approximates fair value because of the short maturity of those instruments. Other investments primarily relate to corporate owned life insurance contracts used to offset our deferred compensation obligations. These investments have a determinable cash surrender value, which is the best available evidence of fair value. Accrued interest receivable and other investments are classified within short-term investments on our Condensed Consolidated Balance Sheets. Our debt obligations are not publicly traded and are primarily denominated in Euros. The estimated fair value of our debt obligations is based primarily on a market approach, comparing our interest rates to those rates we believe we would reasonably receive upon re-entry into the market. Judgment is required to estimate the fair value, using available market information and appropriate valuation methods.

See additional disclosures regarding our investments below.

Note 5. Investments

All of our investments are classified as available-for-sale. The cost and estimated fair value of our investments are as follows:


	September 25, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)
Municipal bonds	$	288,750	$	2,378	$	(56	)	$	291,072
Variable-rate demand notes		58,235		0		0			58,235
Corporate bonds		19,031		140		(5	)		19,166
Auction-rate securities		81,650		0		(10,079	)		71,571

Total	$	447,666	$	2,518	$	(10,140	)	$	440,044


	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)
Municipal bonds	$	309,277	$	3,935	$	(56	)	$	313,156
Variable-rate demand notes		21,908		0		0			21,908
Corporate bonds		6,654		8		(21	)		6,641
Auction-rate securities		89,500		0		(10,737	)		78,763

Total	$	427,339	$	3,943	$	(10,814	)	$	420,468

Interest receivable of $4.2 million and $3.7 million is included in our short-term investments balance as of September 25, 2010 and December 31, 2009 as well as other investments of $14.0 million and $13.9 million, respectively, which are excluded from the tables above.

The maturities of our investments as of September 25, 2010 are as follows:

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Amortized Cost		Fair Value
	(In thousands)
Due in less than one year	$	184,118	$	185,568
Due in 1 to 3 years		122,663		123,669
Due in 3 to 5 years		1,805		1,745
Due in 5 to 10 years		15,000		15,000
Due in greater than 10 years		124,080		114,062

Total	$	447,666	$	440,044

Securities with contractual maturities greater than five years consist of auction-rate securities and variable-rate demand notes. We classify auction-rate securities in long-term investments on our Condensed Consolidated Balance Sheets as they are not readily available to us due to failed auctions in the marketplace. We classify variable-rate demand notes in short-term investments on our Condensed Consolidated Balance Sheets as they are payable on demand.

The breakdown of investments with unrealized losses as of September 25, 2010 is as follows:


	In Loss Position for Less Than 12 Months					In Loss Position for 12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
Municipal bonds	$	25,286	$	(56	)	$	0	$	0		$	25,286	$	(56	)
Corporate bonds		2,206		(5	)		0		0			2,206		(5	)
Auction-rate securities		0		0			71,571		(10,079	)		71,571		(10,079	)

Total	$	27,492	$	(61	)	$	71,571	$	(10,079	)	$	99,063	$	(10,140	)

The gross unrealized losses related to municipal and corporate bonds are primarily due to fluctuations in interest rates and quoted market prices. The gross unrealized losses related to auction-rate securities are primarily due to our estimates about the anticipated term and yield of these investments given the lack of an active market. We review our investment portfolio for possible impairment on a quarterly basis. Impairment is based on an analysis of factors that may have adverse affects on the fair value of the investment. Factors considered in determining whether a loss is temporary include our intent to sell the security, our ability to hold the security to recovery of its amortized cost, and our assessment of the credit quality of the security, including whether we expect to recover the amortized cost of the security.

For the three months ended September 25, 2010 and September 26, 2009, we sold investments for proceeds of $61.4 million and $49.9 million, respectively.

See additional disclosures regarding the fair value of our investments in Note 4.

Note 6. Derivative Financial Instruments

We manage our foreign currency exchange risk through foreign currency forward exchange contracts and foreign denominated floating-rate debt to hedge against the short-term impact of currency fluctuations. We enter into foreign currency forward exchange contracts with maturities generally less than 12 months to mitigate the impact of currency fluctuations on (a) probable system sales denominated in Japanese yen, (b) our net investment in certain foreign subsidiaries, and (c) other monetary asset and liability balances denominated in foreign currencies. We utilize a portion of our foreign denominated floating-rate debt to mitigate the economic impact of our net investment in certain foreign subsidiaries. As of September 25, 2010, 26.0 million Euros of floating-rate debt was designated as a net investment hedge. All derivatives are recorded at fair value in either other current assets or other current liabilities. We report cash flows from derivative instruments in cash flows from operating activities. We use the income approach to value our derivative instruments using observable inputs other than quoted prices, including interest rates and credit risk.

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The notional amounts of outstanding foreign currency hedge contracts were as follows:


	September 25, 2010				December 31, 2009
	Buy Contracts		Sell Contracts		Buy Contracts		Sell Contracts
	(In thousands)
Japanese Yen	$	12,880	$	40,323	$	40,217	$	46,690
British Pound Sterling		4,478		4,478		4,556		4,558
Korean Won		4,181		4,179		1,279		1,279
Malaysian Ringgit		0		0		3,497		3,496
Chinese Renminbi		0		5,202		3,209		3,687
Indian Rupee		2,343		2,341		1,804		1,803
Taiwan Dollar		0		2,470		1,308		1,306
Swiss Franc		0		4,061		0		1,453
Israeli Shekel		0		0		2,285		1,978

Total	$	23,882	$	63,054	$	58,155	$	66,250

Cash Flow Hedges. We designate and document our foreign currency forward exchange contracts as cash flow hedges on sales transactions in which costs are denominated in U.S. dollars and the related revenues are generated in Japanese yen. We evaluate and calculate the effectiveness of each hedge at least quarterly, using the dollar offset method, comparing the change in the forward contract’s fair value on a spot-to-spot basis to the spot-to-spot change in the anticipated transaction. The effective change is recorded in OCI until the sale is recognized. Ineffectiveness, along with the excluded time value of the forward contracts, is recorded in net sales as designated at the inception of the forward contract. In the event it becomes probable that an anticipated hedged transaction will not occur within the specified time period, the gains or losses on the related cash flow hedges are immediately reclassified from accumulated OCI to net sales in the Condensed Consolidated Statement of Operations. No such events occurred for the three and nine months ended September 25, 2010. During the three and nine months ended September 26, 2009 we reclassified $0.7 million from accumulated OCI into net sales as a result of the discontinuance of anticipated hedged transactions.

Net Investment Hedges. We hedge our net investment in certain foreign subsidiaries to reduce economic currency risk. Our foreign denominated floating-rate debt and foreign currency forward exchange contracts used to hedge this exposure are designated and documented as net investment hedges. The carrying value of the foreign denominated floating-rate debt that is designated as a hedging instrument is remeasured at each reporting date to reflect the changes in the foreign currency exchange spot rate, with changes since the last remeasurement date recorded within OCI. Effectiveness is evaluated at least quarterly, excluding time value, and hedges are highly effective when currency pairs and notional amounts on the forward exchange contracts are properly aligned with the net investment in subsidiaries. Changes in the spot-to-spot value are recorded as foreign currency translation adjustments within OCI. Ineffectiveness, if any, along with the excluded time value of the forward contracts, is recorded in interest and other income, net.

Other Foreign Currency Hedges. We enter into foreign currency forward exchange contracts to hedge (a) intercompany balances that are denominated in non-functional currencies, (b) certain third-party receivables denominated in Japanese yen, and (c) anticipated sales denominated in foreign currency that we do not designate and document as cash flow hedges. The maturities of these contracts are generally less than 12 months. Gains or losses arising from the remeasurement of these contracts to fair value each period are recorded in other income, net.

The fair value and balance sheet classification of foreign exchange contract derivatives are as follows:


	September 25, 2010		December 31, 2009
	(In thousands)
Other current assets:
Derivative assets designated as hedging instruments:
Cash flow hedges	$	7	$	0
Net investment hedges		0		3
Derivative assets not designated as hedging instruments:
Other foreign currency hedges		33		134

Total derivative assets⁽¹⁾	$	40	$	137

Other current liabilities:
Derivative liabilities designated as hedging instruments:
Cash flow hedges	$	574	$	0
Net investment hedges		9		5
Derivative liabilities not designated as hedging instruments:
Other foreign currency hedges		739		317

Total derivative liabilities⁽¹⁾	$	1,322	$	322

(1)	See additional fair value measurement disclosures in Note 4.

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables summarize the pre-tax effect of foreign exchange contract derivatives by (a) cash flow hedges, (b) net investment hedges, and (c) other foreign currency hedges on OCI and the Condensed Consolidated Statements of Operations.

(a)	Cash Flow Hedges:


	Three Months Ended						Nine Months Ended
	September 25, 2010			September 26, 2009			September 25, 2010			September 26, 2009
	(In thousands)
Accumulated loss in OCI, beginning of period	$	(94	)	$	(701	)	$	(126	)	$	(1,137	)
Losses recorded in OCI (effective portion), net		(719	)		(97	)		(813	)		(118	)
Gains (losses) reclassified from OCI to net sales (effective portion), net		(86	)		673			40			1,130

Accumulated loss in OCI, end of period	$	(899	)	$	(125	)	$	(899	)	$	(125	)

Gains (losses) recorded in net sales related to the ineffective portion, net	$	(1	)	$	(1	)	$	(2	)	$	5
Gains recorded in net sales related to the excluded time value portion, net	$	43		$	5		$	24		$	14

We anticipate reclassifying the accumulated loss recorded as of September 25, 2010 from OCI to net sales within 12 months.

(b)	Net Investment Hedges:


	Three Months Ended						Nine Months Ended
	September 25, 2010			September 26, 2009			September 25, 2010			September 26, 2009
	(In thousands)
Foreign exchange contracts:
Gains (losses) recorded in OCI (effective portion), net	$	(2,778	)	$	(1,269	)	$	(3,098	)	$	181
Gains (losses) recorded in other income related to the excluded time value portion, net	$	(79	)	$	10		$	(134	)	$	90
Foreign denominated floating-rate debt:
Gains (losses) recorded in OCI (effective portion), net	$	(2,811	)	$	(2,224	)	$	2,826		$	(2,224	)

(c)	Other Foreign Currency Hedges:


	Three Months Ended				Nine Months Ended
	September 25, 2010		September 26, 2009		September 25, 2010		September 26, 2009
	(In thousands)
Gains recognized in other income, net	$	1,707	$	709	$	1,842	$	726

Note 7. Inventories


	September 25, 2010		December 31, 2009
	(In thousands)
Purchased and spare parts	$	119,699	$	104,833
Work-in-process		43,594		32,002
Finished goods		35,273		25,378

Total inventories	$	198,566	$	162,213

Finished goods include $19.8 million and $8.0 million as of September 25, 2010 and December 31, 2009, respectively, of evaluation systems at customer locations.

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8. Goodwill and Intangible Assets

Goodwill

The following table summarizes the changes in goodwill for the nine months ended September 25, 2010:


	Semiconductor Group		Industrial Applications Group			Total
	(In thousands)
Net balance, beginning of period	$	108,431	$	18,007		$	126,438
Foreign currency translation		0		(1,215	)		(1,215	)

Net balance, end of period	$	108,431	$	16,792		$	125,223

Our annual impairment test performed in the fourth quarter of 2009 did not identify potential impairment for either our Semiconductor Group or our Industrial Applications Group. There were no indicators of impairment in the first nine months of 2010. However, if our future operating results do not approximate current forecasts or if we have a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or both of our reporting units, impairment charges may be required.

Intangible Assets

Our acquired intangible assets are as follows:


	September 25, 2010								December 31, 2009
	Weighted Average Amortization Period	Gross		Accumulated Amortization			Net		Weighted Average Amortization Period	Gross		Accumulated Amortization			Net
	(Years)			(In thousands)					(Years)			(In thousands)
Patents and other intangible assets	11	$	18,649	$	(6,086	)	$	12,563	11	$	18,658	$	(4,797	)	$	13,861
Developed technology	6		30,282		(29,516	)		766	6		31,066		(29,114	)		1,952
Trademark	10		7,184		(4,315	)		2,869	10		7,682		(4,050	)		3,632

Total intangible assets	8	$	56,115	$	(39,917	)	$	16,198	9	$	57,406	$	(37,961	)	$	19,445

During the three months ended March 28, 2009, we purchased certain technology patents related to our Semiconductor Group with a fair value of $2.0 million and a weighted average amortization period of 6 years. Our estimated amortization expense for identifiable intangible assets is $0.7 million for the fourth quarter of 2010, and $2.6 million, $2.6 million, $2.6 million, $2.2 million, and $1.5 million for the years ending December 31, 2011, 2012, 2013, 2014, and 2015, respectively. As of September 25, 2010, we had no recorded identifiable intangible assets with indefinite lives.

Note 9. Product Warranty

Changes in the accrued warranty liability are as follows:


	Three Months Ended						Nine Months Ended
	September 25, 2010			September 26, 2009			September 25, 2010			September 26, 2009
	(In thousands)
Balance, beginning of period	$	25,254		$	18,276		$	19,611		$	30,438
Warranties issued		14,823			6,711			36,385			19,330
Settlements		(9,897	)		(6,503	)		(24,155	)		(27,642	)
Net changes in liability for pre-existing warranties, including expirations		(567	)		(964	)		(2,228	)		(4,606	)

Balance, end of period		29,613			17,520			29,613			17,520
Less: Long-term portion		(4,292	)		(2,450	)		(4,292	)		(2,450	)

Accrued warranty, current	$	25,321		$	15,070		$	25,321		$	15,070

Note 10. Restructuring Charges

In an effort to consolidate our operations, streamline product offerings, and align our operations with current business conditions, we have implemented various restructuring plans since 2001. All restructuring activity presented below is related to the Semiconductor Group and is included in operating income as part of restructuring charges. As of September 25, 2010, our restructuring plans had been completed except for payments of future rent obligations which we estimate will be paid in cash through 2017.

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes our restructuring activity:


	Three Months Ended						Nine Months Ended
	September 25, 2010			September 26, 2009			September 25, 2010			September 26, 2009
	(In thousands)
Balance, beginning of period	$	16,163		$	19,508		$	18,046		$	18,178
Adjustment of prior restructuring costs		240			324			657			3,558
Cash payments		(1,152	)		(987	)		(3,452	)		(2,891	)

Balance, end of period	$	15,251		$	18,845		$	15,251		$	18,845

Note 11. Debt Obligations

We had an insignificant amount of current debt obligations outstanding as of September 25, 2010 and December 31, 2009. As of September 25, 2010, we had $0.5 million of capital lease obligations, of which $0.4 million was classified as long-term.

On June 17, 2009, we entered into a three-year Credit Agreement, which was amended on September 23, 2009 (the Agreement), with Bank of America, N.A. The Agreement established a secured credit line with an aggregate committed maximum amount of 80 million Euros at an interest rate of Euro Interbank Offered Rate (EURIBOR) plus 75 basis points. The outstanding balance is due and payable on or before June 22, 2012. Upon execution of the Agreement, we borrowed 79.5 million Euros against this credit line. The proceeds of the loan were used to retire our credit facility with JPMorgan Chase Bank. The JPMorgan Credit Agreement was used to fund the acquisition of Peter Wolters AG in 2004 and for general corporate purposes. As of September 25, 2010 and December 31, 2009, we had 79.5 million Euros outstanding under the Agreement at an effective interest rate of 1.3% and 1.2%, respectively, which equaled $106.4 million and $114.1 million as of such dates, respectively. The Agreement is secured by deposits in money market funds of a minimum of 105 percent of the outstanding balance. Amounts used to secure the debt are included within non-current restricted cash and cash equivalents on our Condensed Consolidated Balance Sheet. The Agreement contains customary affirmative covenants, representations, warranties, events of default, limited negative covenants, and financial covenants which are subject to various exceptions and qualifications. We were in compliance with these covenants as of September 25, 2010.

Note 12. Interest and Other Income (Expense), Net

The components of interest and other income, net are as follows:


	Three Months Ended						Nine Months Ended
	September 25, 2010			September 26, 2009			September 25, 2010			September 26, 2009
	(In thousands)
Interest income	$	1,549		$	1,820		$	5,625		$	7,379
Interest expense		(411	)		(462	)		(1,037	)		(1,655	)
Gain on other investments		23			662			104			1,379
Foreign currency gain (loss), net		(1,167	)		(2,555	)		(936	)		(3,635	)
Other gain (loss), net		(126	)		411			(166	)		610

Interest and other income (expense), net	$	(132	)	$	(124	)	$	3,590		$	4,078

Note 13. Income Taxes

The income tax provision for the three and nine months ended September 25, 2010 was computed based on our annual forecast of profit and losses by jurisdiction for fiscal year 2010. Our provision for income taxes for the three and nine months ended September 25, 2010 was $13.1 million and $34.2 million, respectively, compared to a provision for income taxes of $0.6 million and $10.5 million for the three and nine months ended September 26, 2009, respectively. For the three and nine months ended September 25, 2010, our provision for income taxes was less than the federal statutory tax rate due, primarily, to foreign income taxed at lower rates.

Our provision for income taxes for the three months ended September 26, 2009 was different than the federal statutory tax rate due, primarily, to portions of foreign losses occurring in jurisdictions where no tax benefit resulted. During the three months ended September 26, 2009, we recorded a discrete net benefit from income taxes of $1.0 million related to several items. Included in those items is a net tax benefit of $20.7 million due to the utilization of net operating loss carryforwards. As well, we reviewed our intercompany agreements which resulted in a modification. This modification had no immediate impact to operating cash flow and is expected to reduce our tax liability in future years. As a result of this item, as well as other less significant discrete items recognized during the quarter, we recorded a net increase of $17.1 million in net unrecognized tax benefits.

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In addition, our provision for income taxes for the nine months ended September 26, 2009 includes a $19.4 million charge as a result of the California Budget Act of 2008 which was signed into law in February 2009. This law revised certain provisions of the California State Tax Code, including the option to elect an alternative method to apportion taxable income to California for years beginning on or after January 1, 2011. Our income subject to tax in California beginning in 2011 was anticipated to be lower than under prior tax law. As a result, the realization of our California deferred tax assets is no longer more likely than not.

Note 14. Shareholders’ Equity

Other Comprehensive Income (Loss)

The components of other comprehensive income (loss), net of tax, are as follows:


	Three Months Ended						Nine Months Ended
	September 25, 2010			September 26, 2009			September 25, 2010			September 26, 2009
	(In thousands)
Net income (loss)	$	76,265		$	(4,026	)	$	180,829		$	(120,426	)
Other comprehensive income (loss):
Foreign currency translation adjustments		3,130			2,708			1,220			3,141
Unrealized gain (loss) on investments		(348	)		1,456			(753	)		7,180
Change in derivative instruments		(804	)		576			(771	)		1,012
Unrealized gain (loss) on pension liability		(124	)		0			(124	)		87

Comprehensive income (loss)	$	78,119		$	714		$	180,401		$	(108,292	)

The components of accumulated other comprehensive loss, net of tax, are as follows:


	September 25, 2010			December 31, 2009
	(In thousands)
Foreign currency translation adjustments	$	5,393		$	4,173
Unrealized loss on investments – temporary		(7,623	)		(6,870	)
Unrealized loss on cash flow hedges		(898	)		(127	)
Unrealized loss on pension liability		(1,969	)		(1,845	)

Accumulated other comprehensive loss	$	(5,097	)	$	(4,669	)

Common Stock Repurchases

Our Board of Directors has authorized repurchases of our outstanding common stock through a stock repurchase plan. As of September 25, 2010, we had $643.2 million available for stock repurchases under these authorizations. During the three and nine months ended September 25, 2010, 1.6 million and 6.7 million shares were repurchased under this plan for $37.9 million and $160.4 million, respectively, at a weighted average price of $24.00 and $24.11, respectively. During the three and nine months ended September 26, 2009, 0.5 million shares were repurchased under this plan for $10.0 million at a weighted average purchase price of $20.83. Certain share repurchases that occurred in the third quarter of 2009 were not settled as of September 26, 2009 resulting in $5.8 million of outstanding payables in the Condensed Consolidated Balance Sheet.

For the majority of restricted stock awards pursuant to our stock incentive plans that vest, the number of shares issued is net of shares withheld to pay the minimum statutory withholding for income taxes on behalf of the grantee. Although shares withheld are not issued, they are treated as common stock repurchases, effectively reducing the number of shares that would otherwise have been issued upon vesting. Shares withheld upon vesting for income tax withholding are not included as common stock repurchases under our authorized plan. During the three months ended September 25, 2010 and September 26, 2009, the value of shares withheld to satisfy the minimum statutory withholding requirement related to the grantees’ tax obligations was $0.2 million, and $0.1 million, respectively, and for the nine months ended September 25, 2010 and September 26, 2009 was $0.7 million and $2.0 million, respectively.

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 15. Stock-Based Compensation

The following table summarizes the stock-based compensation expense related to stock options, restricted stock, and our employee stock purchase plan (ESPP) in operating income:


	Three Months Ended				Nine Months Ended
	September 25, 2010⁽¹⁾		September 26, 2009⁽²⁾		September 25, 2010⁽¹⁾		September 26, 2009 ⁽²⁾
	(In thousands)
Cost of sales	$	929	$	941	$	2,325	$	2,448
Selling, general, and administrative		5,546		3,699		15,283		13,905
Research and development		2,977		2,058		8,098		6,525

Total stock-based compensation expense	$	9,452	$	6,698	$	25,706	$	22,878

(1)

Amounts include amortization expense related to stock options of $3.6 million and $9.9 million, and restricted stock awards of $5.9 million and $15.8 million for the three and nine months ended September 25, 2010, respectively. The related income tax benefit recognized in the Condensed Consolidated Statements of Operations was $2.4 million and $6.6 million for the three and nine months ended September 25, 2010, respectively.

(2)

Amounts include amortization expense related to stock options of $3.6 million and $10.8 million, ESPP of $0 and $0.9 million, and restricted stock awards of $3.1 million and $11.2 million for the three and nine months ended September 26, 2009, respectively. The related income tax benefit recognized in the Condensed Consolidated Statements of Operations was $1.5 million and $5.4 million for the three and nine months ended September 26, 2009, respectively.

Stock Options

The exercise price of each stock option is the market price of our common stock on the date of grant. Stock options generally vest ratably over a four-year period on the anniversary date of the grant and expire ten years after the grant date. The fair values of stock options were estimated using the Black-Scholes valuation model with the following weighted-average assumptions:


	Three Months Ended						Nine Months Ended
	September 25, 2010			September 26, 2009			September 25, 2010			September 26, 2009
Risk-free interest rate		1.0	%		1.9	%		1.5	%		1.7	%
Volatility		48.9	%		51.4	%		48.1	%		56.1	%
Expected term		3.7 years			3.9 years			3.5 years			4.0 years
Dividends		None			None			None			None

Our computation of volatility is based on a combination of historical and market-based implied volatility. Our computation of expected term is based on historical exercise patterns. We base the risk-free interest rate on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with remaining terms equivalent to the expected term of the option.

A summary of stock option activity for the nine months ended September 25, 2010 is as follows:


	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
	(In thousands)					(In years)		(In thousands)
Outstanding, beginning of period		18,033		$	30.35
Grants		50			25.63
Exercises		(390	)		19.61
Forfeitures and expirations		(1,600	)		36.80

Outstanding, end of period		16,093		$	29.95		4.33	$	27,105

Expected to vest, end of period		2,954		$	21.12		8.17	$	18,392
Vested and exercisable, end of period		12,710		$	32.34		3.29	$	5,846

The aggregate intrinsic value of options outstanding is calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the 5.1 million shares that had exercise prices lower than the market price of our common stock as of September 25, 2010. The aggregate intrinsic value of options exercised, determined as of the date of exercise, was $0.3 million and $2.7 million for each of the three and nine months ended September 25, 2010, respectively, and was insignificant for each of the three and nine months ended September 26, 2009. The total cash received from employees as a result of stock option exercises was $1.4 million and $7.6 million for the three and nine months ended September 25, 2010, respectively, and $0.1 million and $0.6 million for the three and nine months ended September 26, 2009, respectively. The weighted-average grant date fair value of options granted was $9.31 and $9.40 for the three and nine months ended September 25, 2010, respectively, and $8.14 and $7.42 for the three and nine months ended September 26, 2009, respectively. In connection with the disqualifying dispositions of incentive stock options and exercises of nonqualified stock options, we realized tax benefits of $0.1 million and $0.8 million for the three and nine months ended September 25, 2010, respectively, and tax benefits of $0.1 million for each of the three and nine months ended September 26, 2009. We settle employee stock option exercises with newly issued common shares.

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of September 25, 2010 there was $19.9 million of unrecognized compensation cost related to unvested stock options, with a weighted average remaining amortization period of 2.4 years. During the fourth quarter of 2010, we modified our stock plans to provide certain retirement benefits. This modification provides accelerated vesting and an extended exercise period for certain stock-based awards when eligible employees retire. As a result of this modification, we expect to incur approximately $9 million of additional stock compensation expense, including acceleration of previously unrecognized compensation cost, during the fourth quarter of 2010 related to options outstanding as of September 25, 2010.

Restricted Stock Awards

Restricted stock awards include restricted stock and restricted stock units that are settled in common stock. Restricted stock awards generally vest over three, four, or five-year periods, excluding certain awards that vest upon the achievement of specific performance targets. A summary of restricted stock award activity for the nine months ended September 25, 2010 is as follows:


	Number of Shares			Weighted- Average Grant Date Fair Value
	(In thousands)
Unvested restricted stock awards, beginning of period		3,557		$	22.19
Granted		470			24.16
Vested		(113	)		22.61
Forfeited		(594	)		28.38

Unvested restricted stock awards, end of period		3,320		$	21.29

Unvested restricted stock awards at September 25, 2010 and December 31, 2009 include 3.2 million and 2.9 million restricted stock units, respectively.

As of September 25, 2010, 0.6 million restricted stock units subject to performance conditions that will result in forfeiture if the conditions are not realized. The restricted stock units have performance conditions that could result in the vesting of up to an additional 1.3 million restricted stock units. Most of the performance conditions are based on our revenue growth and our revenue growth relative to our peers.

The total fair value of restricted stock awards that vested was $0.4 million and $2.5 million for the three and nine months ended September 25, 2010, respectively, and $0.4 million and $6.2 million for the three and nine months ended September 26, 2009, respectively. In connection with the vesting of these awards, we realized tax benefits of $0.1 million and $0.7 million for the three and nine months ended September 25, 2010, respectively, and $0.1 million and $1.9 million for the three and nine months ended September 26, 2009, respectively. As of September 25, 2010, there was $58.0 million of unrecognized compensation cost related to unvested restricted stock awards with a weighted average remaining amortization period of 2.7 years.

Employee Stock Purchase Plan

Our ESPP was suspended indefinitely effective May 1, 2009 by action of our Board of Directors. Our ESPP allowed qualified employees to purchase shares of common stock at 85 percent of the fair market value on specified dates. Shares issued under our ESPP were valued using the Black-Scholes model with the following weighted-average assumptions:


		Nine Months Ended
		September 26, 2009
Risk-free interest rate		1.1%
Volatility		49%
Expected term		6 months
Dividends		None

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The weighted-average grant date fair value of shares issued was $4.53 for the nine months ended September 26, 2009. In connection with our ESPP, we realized tax benefits attributed to disqualifying dispositions of $0.1 million and $0.2 million for the three and nine months ended September 26, 2009.

Note 16. Litigation

Linear Technology Corporation

In March 2002, Linear Technology Corporation (Linear) filed a complaint against Novellus, among other parties, in the Superior Court of the State of California for the County of Santa Clara (the Superior Court) seeking damages of up to $200 million (including punitive damages), declaratory relief and injunctions for causes of action involving alleged breach of contract, fraud, unfair competition and breach of warranty.

The Superior Court dismissed Linear’s claims for fraud and unfair competition on October 5, 2004. The Court of Appeal for the Sixth Appellate District affirmed this dismissal on June 18, 2007. Trial on the remaining claims began before a jury on January 19, 2010, in the Superior Court. Novellus prevailed on these claims at trial, which ended on February 26, 2010. In connection with the judgment against Linear, on August 2, 2010, the Superior Court awarded Novellus $5.2 million in attorney’s fees and $0.1 million in other costs. As of September 25, 2010, the award had not been paid. Linear has filed two motions seeking entry of a judgment in its favor notwithstanding the jury’s verdict, and a new trial. The Superior Court has denied both of these motions, and Linear has filed an appeal. Although we cannot at this time predict the ultimate outcome in this case or estimate a range of any such potential loss, we believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or operating results.

Other Litigation

We are a defendant or plaintiff in various actions that have arisen from time to time in the normal course of business, including intellectual property claims. We believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or results of operations. However, due to the uncertainty surrounding litigation, we are unable at this time to estimate a range of loss, if any, that may result from any of these pending proceedings.

Note 17. Operating Segments

Our operations are organized into two segments, the Semiconductor Group and the Industrial Applications Group. Our Semiconductor Group develops, manufactures, sells, and supports equipment used in the fabrication of integrated circuits, commonly called chips or semiconductors. Our Industrial Applications Group is a supplier of lapping, grinding, polishing, and deburring equipment for fine-surface optimization. The accounting policies of these segments are the same as those described in Note 2 of our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Segment information for the periods presented is as follows:


	Three Months Ended September 25, 2010								Nine Months Ended September 25, 2010
	Semiconductor Group		Industrial Applications Group			Consolidated			Semiconductor Group			Industrial Applications Group			Consolidated
	(In thousands)
Sales to unaffiliated customers	$	347,948	$	19,255		$	367,203		$	918,385		$	46,416		$	964,801
Operating income (loss)	$	95,140	$	(5,648	)	$	89,492		$	222,494		$	(11,074	)	$	211,420

	Three Months Ended September 26, 2009								Nine Months Ended September 26, 2009
	Semiconductor Group		Industrial Applications Group			Consolidated			Semiconductor Group			Industrial Applications Group			Consolidated
	(In thousands)
Sales to unaffiliated customers	$	162,029	$	14,850		$	176,879		$	342,594		$	52,406		$	395,000
Operating income (loss)	$	1,420	$	(4,697	)	$	(3,277	)	$	(94,293	)	$	(19,747	)	$	(114,040	)

	September 25, 2010								December 31, 2009
	Semiconductor Group		Industrial Applications Group			Consolidated			Semiconductor Group			Industrial Applications Group			Consolidated
	(In thousands)
Total assets	$	1,601,633	$	86,611		$	1,688,244		$	1,475,755		$	83,223		$	1,558,978

NOVELLUS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 18. Related Party Transactions

We lease an aircraft from NVLS I, LLC, a third-party entity wholly owned by Richard S. Hill, our Chairman and Chief Executive Officer. Under the lease agreement, we incurred expenses of $0.2 million and $0.8 million for the three and nine months ended September 25, 2010, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 26, 2009, respectively.

An immediate family member of one of our executive officers is a partner at a law firm that provides various services for the company. We incurred total expenses of $0.4 million and $1.6 million for services performed by the law firm for the three and nine months ended September 25, 2010, respectively.

We employ, in non-executive positions, certain immediate family members of our executive officers. The aggregate compensation amount recognized for these immediate family members was $0.2 million and $0.3 million for the three and nine months ended September 25, 2010, respectively, and $0.1 million and $0.3 million for the three and nine months ended September 26, 2009, respectively.

We have outstanding loans to non-executive vice presidents and other key personnel. As of September 25, 2010 and December 31, 2009, the total outstanding balance of such loans was $0.2 million and $0.6 million, respectively. As of September 25, 2010, nearly all of the outstanding balance was secured by collateral. Loans typically bear interest, except for those made for employee relocation purposes. Bad debt expense related to these types of loans has not historically been significant. We do not have loans to any “executive officers”, as defined by the SEC.

ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Quarterly Report, other than statements that are purely historical, are forward-looking statements. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “could,” “may,” and similar expressions also identify forward-looking statements. The forward-looking statements include, without limitation:

•

estimates for 2011 and demand drivers for such growth;

•

our expectations regarding the sufficiency of the current communication infrastructure;

•

our views regarding the growth in our business and the demand for our products;

•

our belief that the impairment related to auction-rate securities is temporary, our intent not to sell our auction-rate securities, our belief that we will not be required to sell our auction-rate securities before recovery, and our expectation to recover the amortized cost of our auction-rate securities;

•

our anticipation to reclassify the accumulated loss recorded as of September 25, 2010 for cash flow hedges from OCI to net sales within twelve months;

•

our expectation that the adoption of certain accounting pronouncements will not have a significant impact on our Condensed Consolidated Financial Statements;

•

our anticipation that most of our taxable income will be generated in tax jurisdictions with lower tax rates;

•

our estimation of amortization expense for currently recognized identifiable intangible assets for the fourth quarter of 2010 and for the years ending December 31, 2011, 2012, 2013, 2014, and 2015 respectively;

•

our expectation that future obligations in connection with vacated facilities will be paid in cash through 2017;

•

our expectation that the ultimate disposition of the Linear litigation and other litigation matters that have arisen, or may arise in the future, in the normal course of business will not have a material adverse effect on our business, financial condition or operating results;

•

our anticipation that in years 2011 and beyond our income subject to tax in California will be lower, our expectation that our deferred tax assets are less likely to be realized due to the recent California tax law change, our plan to continue to assess our tax valuation allowance on our California deferred tax assets in future periods;

•

our belief that our operations will continue to be increasingly impacted by the prime wafer industry, which is characterized by intense competition and rapidly changing technology;

•

our intention to continue to seek legal protection through patents and trade secrets for our proprietary technology;

•

our views regarding changes and trends in the semiconductor industry and the effect of such changes and trends on our business;

•

our expectation that the results of our review of our intercompany agreements will reduce our tax liability in future years;

•

our expectation that net orders will fluctuate due to the cyclicality of the semiconductor industry;

•

our belief that our financial resources will be sufficient to meet our needs through the next twelve months;

•

our belief that our customer base is becoming increasingly concentrated and that sales of our products to relatively few customers will continue to account for a high percentage of our net sales in the foreseeable future;

•

our expectation that we will continue to experience significant fluctuations in our quarterly operating results;

•

our belief that future impairment charges related to goodwill or long-lived assets may be required if our future operating results do not meet current forecasts or if we have a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or more of our reporting units; and

•

our belief that it is reasonably possible that IAG could fail in the first step in a future annual impairment test, which could result in additional impairment charges that would negatively impact our results of operations.

Our expectations, beliefs, objectives, intentions and strategies regarding the future, including, without limitation, those concerning expected operating results, revenues and earnings and current and potential litigation are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from results contemplated by our forward-looking statements. These risks and uncertainties include, but are not limited to:

•

unanticipated trends with respect to the cyclicality of the semiconductor industry;

•

our inability to reclassify the accumulated loss for our cash flow hedges from OCI to net sales within twelve months;

•

inaccuracies regarding growth potential in the Asia region over the long term;

•

a sustained decrease in or leveling off of customer demand;

•

our inability to make adequate inventory valuation adjustments in a timely manner;

•

our inability to manage inventory levels;

•

unexpected changes in the tax regulatory environment, changes in accounting and tax standards or practices, and our inability to achieve a tax benefit due to unexpected changes in domestic or international tax regulations;

•

our inability to predict the ultimate outcome of the Linear litigation and other current litigation on our business, financial conditions or operating results;

•

our inability to accurately predict the impact on our Consolidated Financial Statements of new accounting pronouncements;

•

our inability to accurately assess the period in which we will recognize unrecognized compensation related to unvested stock options and restricted stock awards;

•

inaccuracies related to the timing and satisfaction of remaining obligations related to vacated leases;

•

unexpected shipment delays which adversely impact shipment volumes;

•

our inability to meet certain performance conditions that may result in forfeiture of certain restricted stock awards;

•

unexpected increase in costs associated with manufacturing our products;

•

our inability to anticipate cyclical changes in customers’ capacity utilization and demand;

•

the negative impact of higher cost of services on gross margins;

•

our inability to realize efficiencies from outsourcing;

•

inefficiencies in the allocation of funds towards our research and development efforts to our existing and new product lines;

•

unexpected complications related to timing, success and cost of our manufacturing consolidation efforts;

•

unexpected difficulties in introducing new and enhanced products in a timely manner in order to remain competitive;

•

unexpected changing product needs of our customers, the loss of major customers, and the need to seek new customers and diversify our customer base;

•

an unanticipated need for additional liquid assets in the next twelve months;

•

our inability to enforce our patents and protect our trade secrets;

•

our inability to recover the amortized cost of our investments in auction-rate securities, market changes negatively affecting auction-rate securities and the government’s inability to guarantee the underlying securities;

•

our inability to accurately predict customers capital spending over the long term;

•

further periodic downturns in the semiconductor industry which could have a material adverse effect on the semiconductor industry’s demand for semiconductor processing equipment;

•

our inability to accurately predict mega-fabrication trends in memory manufacturing and uncertainties related to the acceptance of new technology into the memory market;

•

the introduction of new products by competitors;

•

our inability to gain and leverage market position during the economic downturn;

•

unexpected shifts in market demands for both memory and logic products; and

•

uncertainties related to growth in the electronic industry and our inability to successfully select, develop, and market new products, or enhance existing products.

The forward-looking statements in this Quarterly Report on Form 10-Q are subject to additional risks and uncertainties set forth under the heading “Risk Factors” in Item 1A of Part II, and are based on information available to us on the date hereof. We assume no obligation to update any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of the filing of this Quarterly Report on Form 10-Q. Readers should also review carefully the cautionary statements listed in our Annual Report on Form 10-K for the year ended December 31, 2009 and in our other filings with the SEC, including our Forms 10-Q and 8-K and our Annual Report to Shareholders.

Introduction

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide readers with an understanding of our business. The following are included in our MD&A:

•

Overview of our Business and Industry;

•

Critical Accounting Policies;

•

Results of Operations; and

•

Liquidity and Capital Resources.

Overview of Our Business and Industry

Novellus Systems, Inc. is a California corporation organized in 1984. At Novellus we primarily develop, manufacture, sell and support equipment used in the fabrication of integrated circuits. The customers for these products are semiconductor manufacturers who are either building chips for their own production, or who are offering integrated circuit, or IC, manufacturing services to other third party businesses. Over the past twenty years, the semiconductor industry has grown rapidly as a result of increasing demand for personal computers, the expansion of the Internet and the telecommunications industry, and the emergence of new applications in consumer electronics.

Integrated circuits are generally built on a silicon wafer base and include a large number of different components, such as transistors, capacitors and other electronic devices that are connected by multiple layers of wiring, or interconnects. To build an integrated circuit, transistors are first created on the surface of the silicon wafer. The wiring and insulating structures are then added as multiple thin-film layers through a series of manufacturing process steps. Typically, a first layer of dielectric (insulating) material is deposited on top of the formed transistors. Subsequent layers of metal (historically, aluminum) are formed on top of this base layer, etched to create the conductive lines that carry the electricity, and then filled with dielectric material to create the necessary insulators between the lines, in a manufacturing process called subtractive aluminum. When copper wires are being constructed, the manufacturing process, called copper damascene, is a mirror image of that described above: the insulator (dielectric) is etched, and the copper wiring is created in the etched insulator via a high-technology electroplating process called electrochemical deposition. Building either copper or aluminum wiring requires these manufacturing steps to be repeated many times: advanced chip designs may require as many as 500 process steps.

Several technological trends characterize semiconductor manufacturing. Perhaps the most prominent of these trends is the increasing density of the integrated circuit. Moore’s Law, first postulated in the mid-1960s and still substantially accurate some 45 years later, states that the density of circuitry on an individual semiconductor chip doubles every 18 months. Today’s advanced devices are being manufactured with line widths as small as 32 nanometers, and with up to eleven layers of interconnect circuitry. By increasing circuit density, manufacturers can pack more electronic components on a chip and thereby provide higher performance and value.

Another trend worth noting is the transition to copper wiring from aluminum wiring as the primary conductive material in semiconductor devices. Copper has a lower electrical resistance value than aluminum, which provides a number of performance advantages. Because of the superior properties of copper, a chip made with copper may need only half as many metal layers as one made with aluminum, providing considerable reduction in manufacturing cost. In addition, copper wiring produces a substantial improvement in device performance and a significant reduction in power requirements in comparison to aluminum.

A similar transition is underway from traditional silicon oxide films to dielectric insulators with a low dielectric constant, or low-k. Low-k dielectrics are better at limiting the capacitance between metal lines in a device, which improves the speed and performance of the chip. However, low-k materials are also more fragile than silicon oxide, and this poses a host of new challenges to the semiconductor industry in integrating the new materials into a manufacturing process flow.

Another important trend is the move to larger wafer sizes. For some years chipmakers have been migrating to larger, 300 mm wafers because of the manufacturing cost advantages of these larger wafers compared to 200 mm. The 300 mm wafers provide up to 2.25 times the number of chips per wafer, and hence provide significant economies of scale in the manufacturing process.

These trends shape the equipment and process demands of our customers. Our customers generally measure the cost and performance of their production equipment in terms of “cost per wafer,” a ratio determined by factoring in the costs for acquisition and installation of a system, operating costs, and net throughput rate. A system with higher net throughput allows a manufacturer to recover the purchase price over a greater number of wafers, thereby reducing the cost of ownership of the system on a per-wafer basis. Yield and film qualities are also significant factors in selecting processing equipment. The increased cost of larger and more complex semiconductor wafers have made high yields extremely important to our customers. To achieve elevated yields and better film quality, systems must be able to repeat a process consistently and reliably. This characteristic, known as repeatability, is critical in achieving commercially acceptable yields. Systems that operate at desired throughput rates without approaching critical tolerance limits can achieve repeatability more easily.

These changes in manufacturing geometries and materials have significantly increased the cost and performance requirements of the equipment used to manufacture semiconductor devices. An advanced 300 millimeter wafer fabrication line, for example, can cost more than $2 billion, representing a substantial increase over the costs associated with previous-generation facilities. At the same time, demand for advanced technology continues to grow as the industry adapts to working with ever shrinking nodes and faster technology cycles. As a result, chipmakers are focused on balancing their need for innovative technology while optimizing each unit process involved in the manufacturing cycle. This transition-and the opportunities that accompany it-are at the heart of Novellus' strategy to build on its productivity advantage while offering cutting edge technology to the world's leading semiconductor device manufacturers.

We also develop, manufacture, sell and support grinding, lapping and polishing equipment for fine-surface optimization and serve a broad spectrum of industrial applications. We refer to this segment of our business as our Industrial Applications Group, or IAG.

Our IAG business depends on capital expenditures made by manufacturers in sectors such as automotive, aircraft and electronic products, parts and components. At the broadest level, the demand for machine tools is highly sensitive to macroeconomic conditions as our customer base includes some of the most cyclically sensitive industries in the economy. Such variables as the outlook for overall economic growth, fixed investment, and durable goods shipments directly affect the growth of our business. Our industrial business also depends on niche applications. For example, our operations have been increasingly impacted by the prime wafer industry which, similar to the semiconductor segment, is characterized by intense competition and rapidly changing technology.

Our shipments, revenues, and net income have increased significantly during the first nine months of 2010 compared to the same period in 2009. During this year, our business has benefitted from increased demand for semiconductor products driven in part by i) a corporate refresh cycle for the personal computer, ii) an increased market for enterprise storage utilizing a solid-state hybrid architecture, which has stimulated demand for NAND flash and iii) a robust SmartPhone market. Growth in the semiconductor market for 2011 is likely to be driven by the same demand drivers, including the introduction of new tablet products. We also believe that the current communication infrastructure is not sufficiently robust enough to support the growing demand for mobile graphics and video, both domestically and in the emerging Asian markets. Lastly, we believe the information technology applications for use in defense and intelligence have room for significant improvements and further proliferation. As a result, we continue to believe the necessary demand drivers to promote growth for our business, long-term, remains intact.

Over the long term, we believe that demand for our products will continue to increase as our customers’ capital expenditures increase to meet growing demand for semiconductor devices. However, historically, any improvement in demand for semiconductor manufacturing equipment occurs at an uneven pace. The current unstable macroeconomics for the general economy and weakening of memory prices could potentially impact some of our customers’ profitability and forecasted levels of investment in capital equipment in the short-term. Accordingly, any forecasts about demand for wafer fabrication equipment in the near term are subject to uncertainty, and we could experience significant volatility in our quarterly results of operations over the next several quarters.

We focus on certain key quarterly financial data to manage our business. Net sales, gross profit, net income, and net income per share are the primary measures we use to monitor performance. We also use certain non-GAAP measures, such as shipments and net orders to assess business trends and performance. We discuss these non-GAAP measures because we believe these metrics assist investors to assess certain business trends in the same way that these trends are analyzed by management. Shipments consist of products shipped to customers, without regard to net sales adjustments such as deferrals associated with customer acceptance. Net orders, which in our industry are also referred to as bookings, consist of current period orders less current period cancellations and other adjustments. Shipments and net orders are used to forecast and plan future operations. We do not report orders for systems with delivery dates more than 12 months from the latest balance sheet date.

The following table sets forth certain quarterly financial information for the periods indicated (in thousands, except per share data and percentages):


	Quarterly Financial Data
	2010									2009
	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Net sales	$	367,203		$	321,369		$	276,229		$	244,194		$	176,879		$	119,208		$	98,913
Gross profit	$	180,429		$	156,938		$	133,967		$	113,638		$	70,708		$	31,006		$	25,738
Net income (loss)	$	76,265		$	63,308		$	41,256		$	35,191		$	(4,026	)	$	(50,008	)	$	(66,392	)
Net income (loss) per share – Diluted	$	0.82		$	0.66		$	0.43		$	0.36		$	(0.04	)	$	(0.52	)	$	(0.69	)
Shipments	$	363,290		$	332,083		$	282,816		$	244,485		$	165,446		$	119,982		$	92,130
Change in shipments from prior quarter		9	%		17	%		16	%		48	%		38	%		30	%		(48	%)
Net orders	$	406,888		$	384,856		$	321,363		$	257,610		$	171,548		$	111,187		$	77,795
Change in net orders from prior quarter		6	%		20	%		25	%		50	%		54	%		43	%		(6	%)

We expect net orders to fluctuate due to the cyclical nature of our business. The receipt of net orders in a particular quarter affects revenue in subsequent quarters. Net orders typically result in revenue either at shipment and transfer of title or upon customer acceptance of the equipment. Our revenue recognition policy, as discussed in our Annual Report on Form 10-K for the year ended December 31, 2009, addresses the distinction between the revenue recognized upon shipment and transfer of title and the revenue recognized upon customer acceptance. Equipment generally ships within two to six months of receiving the related order, and if applicable, customer acceptance is typically received one to six months after shipment. These time lines are general estimates and actual times may vary depending on a range of circumstances.

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. GAAP requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our assumptions and estimates, including those related to recognition of revenue, valuation of inventory, valuation of goodwill and other intangible assets, valuation of deferred tax assets, adequacy of warranty obligations, measurement of restructuring and impairment charges, compliance with hedge accounting for derivatives, measurement of stock-based compensation expense, valuation of investments, adequacy of the allowance for doubtful accounts and adequacy of loss contingencies, including those related to legal matters. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We discuss our critical accounting policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009. There have been no significant changes in our critical accounting policies or estimates since those reported in our Annual Report. See Note 2 to our Condensed Consolidated Financial Statements for a discussion of the impact of new authoritative guidance.

Results of Operations

Net Sales


	Three Months Ended						Nine Months Ended
	September 25, 2010		June 26, 2010		September 26, 2009		September 25, 2010		September 26, 2009
	(In thousands)
Semiconductor Group	$	347,948	$	306,762	$	162,029	$	918,385	$	342,594
Industrial Applications Group		19,255		14,607		14,850		46,416		52,406

Net sales	$	367,203	$	321,369	$	176,879	$	964,801	$	395,000

Semiconductor Group net sales for the third quarter of 2010 increased by 13% and 115% compared to the second quarter of 2010 and the third quarter of 2009, respectively. Semiconductor Group net sales increased 168% for the first three quarters of 2010 as compared with the same period in the prior year. The increase in net sales within the Semiconductor Group is due to improvements in both the macroeconomic environment and the semiconductor industry driven primarily by our foundry customers in addition to strength in our memory business. Strong demand continues in the end markets for personal computers, smartphones, and consumer electronics resulting in increased semiconductor capital expenditure requirements for our customers.

Industrial Applications Group net sales decreased 11% for the first three quarters of 2010 compared with the same period in the prior year. However, IAG net sales for the third quarter of 2010 increased 32% and 30% compared with the second quarter of 2010 and the third quarter of 2009, respectively. Demand for our industrial products continues to improve after significant declines during the latter half of 2009.

Geographical net sales as a percentage of total net sales were as follows (based upon the location of our customers’ facilities):


	Three Months Ended			Nine Months Ended
	September 25, 2010	June 26, 2010	September 26, 2009	September 25, 2010	September 26, 2009
North America	22%	24%	30%	24%	35%
Europe	7%	8%	8%	7%	13%
Greater China	36%	44%	36%	39%	28%
Japan	4%	3%	6%	4%	7%
Korea	31%	21%	20%	26%	17%

Gross Profit


	Three Months Ended									Nine Months Ended
	September 25, 2010			June 26, 2010			September 26, 2009			September 25, 2010			September 26, 2009
	(In thousands, except percentages)
Gross profit	$	180,429		$	156,938		$	70,708		$	471,333		$	127,452
Gross margin		49	%		49	%		40	%		49	%		32	%

The gross margin of 49% for the third quarter of 2010 is consistent with the second quarter of 2010. Third quarter 2010 gross margin increased by 9 percentage points from third quarter 2009, and gross margin increased by 17 percentage points for the first nine months of 2010 compared with the same period in the prior year. These increases are primarily due to increased absorption of fixed costs on higher shipment volumes with a favorable product mix. We also experienced a reduction in net inventory write-downs of $3.4 million and $22.9 million in the third quarter and first nine months of 2010 over the same period in the prior year.

Selling, General, and Administrative (SG&A)


	Three Months Ended									Nine Months Ended
	September 25, 2010			June 26, 2010			September 26, 2009			September 25, 2010			September 26, 2009
	(In thousands, except percentages)
SG&A expense	$	46,426		$	43,032		$	36,648		$	134,509		$	125,565
% of net sales		13	%		13	%		21	%		14	%		32	%

SG&A expense includes compensation and benefits for corporate, financial, marketing, sales, and administrative personnel as well as travel expenses and professional service fees. Also included are expenses for rents, utilities, and depreciation and amortization related to the assets utilized by these functions.

Third quarter 2010 SG&A expense increased only slightly over second quarter, remaining flat as a percentage of net sales. SG&A expense for the third quarter and first nine months of 2010 increased 27% and 7% from the same periods in the prior year. The increase is due, primarily, to profit dependent compensation expense which increased $7.2 million for the third quarter of 2010 over the third quarter of 2009 and increased $18.5 million for the first nine months of 2010 from the same period in the prior year.

Research and Development (R&D)


	Three Months Ended									Nine Months Ended
	September 25, 2010			June 26, 2010			September 26, 2009			September 25, 2010			September 26, 2009
	(In thousands, except percentages)
R&D expense	$	44,271		$	40,790		$	37,013		$	124,747		$	112,369
% of net sales		12	%		13	%		21	%		13	%		28	%

R&D expense includes compensation and benefits for research and development personnel, project materials, chemicals, and other direct expenses incurred in product and technology development. Also included are expenses for depreciation, rents, utilities, and equipment repairs and maintenance. Our significant investments in R&D over the past several years reflect our strong commitment to the continuous improvement of our current product lines and the development of new products and technologies. We continue to believe that significant investment in R&D is required to remain competitive, and we plan to continue to invest in new products and enhancements of our current product lines.

Third quarter 2010 R&D expense increased 9% and 20% from the second quarter of 2010 and the third quarter of 2009, respectively. R&D expense for the first nine months of 2010 increased 11% compared with the same period in the prior year. The largest increase in R&D spending is related to profit dependent compensation expense which increased $2.6 million and $6.7 million for the third quarter and first nine months of 2010, respectively, over the same periods in the prior year.

Income Taxes


	Three Months Ended									Nine Months Ended
	September 25, 2010			June 26, 2010			September 26, 2009			September 25, 2010			September 26, 2009
	(In thousands, except percentages)
Provision for income taxes	$	13,095		$	11,792		$	625		$	34,181		$	10,464
% of income (loss) before income taxes		15	%		16	%		(18	)%		16	%		(10	)%

As a result of our global business structure, in periods of profitability, we expect to achieve tax rates lower than current federal rates as we benefit from a geographical mix of income at lower tax rates. Likewise, in periods of operating losses, these losses may accumulate in lower tax rate jurisdictions which would reduce our tax benefit. The income tax provision for the third quarter and first nine months of 2010 were computed based on our annual forecast of profit and loss by jurisdiction for fiscal year 2010.

Our effective tax rate for the third quarter of 2010 was 15%, down slightly from our second quarter 2010 effective rate of 16%, as the majority of our 2010 taxable income has been generated in tax jurisdictions with lower tax rates than the federal statutory rate. This compares to an effective tax rate of (10)% for the nine months ended September 26, 2009 due to discrete charges. Our tax rate for the year ending December 31, 2010 is anticipated to be approximately 15%, given our current expected net sales volume and profit mix by jurisdiction.

A $19.4 million discrete charge was taken in the first nine months of 2009 as a result of the California Budget Act of 2008 signed into law on February 20, 2009. This law revised certain provisions of the California State Tax Code, including the option to elect an alternative method to apportion taxable income to California for tax years beginning on or after January 1, 2011. In years 2011 and beyond, we anticipate our income subject to tax in California to be lower than under prior tax law. As a result, the realization of our California deferred tax assets is no longer more likely than not.

In addition, during the three months ended September 26, 2009, we recorded a discrete net benefit from income taxes of $1.0 million related to several items. Included in those items is a net tax benefit of $20.7 million due to the utilization of net operating loss carryforwards. As well, we reviewed our intercompany agreements which resulted in a modification. This modification had no immediate impact to operating cash flow and is expected to reduce our tax liability in future years. As a result of this item, as well as other less significant discrete items recognized during the quarter, we recorded a net increase of $17.1 million in net unrecognized tax benefits.

Liquidity and Capital Resources

Cash, Cash Equivalents and Short-Term Investments


	September 25, 2010		December 31, 2009
	(In thousands)
Cash and cash equivalents	$	207,887	$	142,047
Short-term investments		386,660		359,323

Total cash, cash equivalents and short-term investments	$	594,547	$	501,370

We have historically financed our operating and capital resource requirements through cash flows from operations, sales of equity securities, and borrowings. Our primary source of liquidity as of September 25, 2010 consisted of $594.5 million of cash, cash equivalents, and short-term investments, an increase of $93.2 million from December 31, 2009.

Restricted Cash, Cash Equivalents and Long-Term Investments


	September 25, 2010		December 31, 2009
	(In thousands)
Restricted cash and cash equivalents	$	119,697	$	133,105
Long-term investments		71,571		78,763

Total restricted cash, cash equivalents and long-term investments	$	191,268	$	211,868

We held $191.3 million in restricted cash, cash equivalents, and long-term investments as of September 25, 2010, a decrease of $20.6 million from $211.9 million as of December 31, 2009. The restricted cash and cash equivalents are primarily money market funds and Euro-denominated time-based deposits held to secure our debt obligations.

Long-term investments consist of tax-exempt auction-rate securities, whose underlying assets are either student loans, substantially backed by the federal government, or closed-end municipal bond funds. In February 2008, these auction-rate securities became illiquid because their scheduled auctions failed to settle. An auction failure occurs when the parties wishing to sell securities at auction cannot. These investments are classified as long-term in our Condensed Consolidated Balance Sheet as we may have limited or no opportunities to liquidate these investments and fully recover their par value in the near term. During the nine months ended September 25, 2010, we redeemed $7.9 million of auction rate securities at par value. We have recorded a cumulative temporary unrealized loss of $10.1 million within OCI related to these investments in our Condensed Consolidated Financial Statements as of September 25, 2010. See Note 4 to our Condensed Consolidated Financial Statements.

Cash Flow Summary


	Nine Months Ended
	September 25, 2010			September 26, 2009
	(In thousands)
Net cash provided by (used in):
Operating activities	$	248,011		$	25,035
Investing activities		(29,415	)		(37,031	)
Financing activities		(152,494	)		(1,430	)
Effects of exchange rate changes on cash and cash equivalents		(262	)		286

Net increase (decrease) in cash and cash equivalents	$	65,840		$	(13,140	)

Operating

Net cash provided by operating activities during the nine months ended September 25, 2010 was $248.0 million. The primary source of cash from operating activities was net income of $180.8 million, adjusted to exclude the effect of non-cash charges of $58.2 million and a favorable change in working capital levels of $9.0 million.

Net cash provided by operating activities during the nine months ended September 26, 2009 was $25.0 million. Our net loss of $120.4 million for the nine months ended September 26, 2009 was offset by $64.2 million in non-cash expense items and $81.2 million in favorable working capital changes. The primary drivers impacting working capital were a decrease in accounts receivable, net of $31.3 million due to strong collection efforts and a reduction in inventories of $65.7 million as a result of continued focus on optimizing inventory levels.

Investing

Net cash used in investing activities during the nine months ended September 25, 2010 was $29.4 million. This amount consisted of net purchases of investments of $25.2 million and capital expenditures of $12.9 million offset by a decrease in restricted cash and cash equivalents of $8.7 million.

Net cash used in investing activities during the nine months ended September 26, 2009 was $37.0 million. This amount consisted of an increase in restricted cash and cash equivalents of $18.6 million, capital expenditures of $9.1 million, net purchases of investments of $8.6 million, and an intangible asset purchase of $2.0 million. These increases were offset by proceeds from the sale of property and equipment of $1.3 million.

Financing

Net cash used in financing activities during the nine months ended September 25, 2010 was $152.5 million primarily as a result of stock repurchases of $161.0 million offset by net proceeds from debt obligations and short-term lines of credit of $0.5 million and proceeds from employee stock compensation plans of $7.6 million.

Net cash used in financing activities during the nine months ended September 26, 2009 was $1.4 million primarily as a result of stock repurchases of $6.3 million and offset by proceeds from employee stock compensation plans of $4.4 million. We also refinanced our previous debt obligation of $110.6 million during the second quarter of 2009. See further discussion below.

Credit Arrangements

We have short-term credit facilities with various financial institutions totaling $45.0 million. These credit facilities bear interest at various rates and expire on various dates through August, 2011. As of September 25, 2010, $3.0 million was pledged against outstanding letters of credit and the remaining $42.0 million was unutilized. We had an insignificant amount of current debt obligations outstanding as of September 25, 2010 and December 31, 2009. As of September 25, 2010, we had $0.5 million of capital lease obligations, of which $0.4 million was classified as long-term.

On June 17, 2009, we entered into a three-year Credit Agreement, which was amended on September 23, 2009 (the Agreement), with Bank of America, N.A. The Agreement established a secured credit line with an aggregate committed maximum amount of 80 million Euros at an interest rate of Euro Interbank Offered Rate (EURIBOR) plus 75 basis points. The outstanding balance is due and payable on or before June 22, 2012. Upon execution of the Agreement, we borrowed 79.5 million Euros against this credit line. The proceeds of the loan were used to retire our credit facility with JPMorgan Chase Bank. The JPMorgan Credit Agreement was used to fund the acquisition of Peter Wolters AG in 2004 and for general corporate purposes. As of September 25, 2010 and December 31, 2009, we had 79.5 million Euros outstanding under the Agreement at an effective interest rate of 1.3% and 1.2% respectively, which equaled $106.4 million and $114.1 million as of such dates, respectively. The Agreement is secured by deposits in money market funds of a minimum of 105 percent of the outstanding balance. Amounts used to secure the debt are included within non-current restricted cash and cash equivalents on our Condensed Consolidated Balance Sheet. The Agreement contains customary affirmative covenants, representations, warranties, events of default, limited negative covenants, and financial covenants which are subject to various exceptions and qualifications. We were in compliance with these covenants as of September 25, 2010.

We believe that our financial resources will be sufficient to meet our needs through the next 12 months.

ITEM 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk affecting Novellus, see Item 7A: “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Our exposure related to market risk has not changed materially since December 31, 2009.

ITEM 4:

CONTROLS AND PROCEDURES

Quarterly Evaluation of Our Disclosure Controls and Internal Controls

As of the end of the period covered by this Quarterly Report on Form 10-Q, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures and our internal controls and procedures for financial reporting. This control evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Rules adopted by the SEC require that, in this section of the Quarterly Report on Form 10-Q, we present the conclusions of the Chief Executive Officer and the Chief Financial Officer about the effectiveness of our disclosure controls and internal controls for financial reporting based on and as of the date of the controls evaluation.

CEO and CFO Certifications

The certifications of the Chief Executive Officer and the Chief Financial Officer required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits to this Quarterly Report on Form 10-Q. This section of the Quarterly Report on Form 10-Q is the information concerning the controls evaluation referred to in the Section 302 certifications and this information should be read in conjunction with the Section 302 certifications for a more complete understanding of the topics presented.

Disclosure Controls and Internal Controls for Financial Reporting

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls for financial reporting are procedures which are designed with the objective of providing reasonable assurance that our transactions are properly authorized, our assets are safeguarded against unauthorized or improper use and our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with U.S. GAAP.

Limitations on the Effectiveness of Controls

Our management, including the Chief Executive Officer and the Chief Financial Officer, does not expect that our disclosure controls or our internal controls for financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation

The evaluation of our disclosure controls and our internal controls for financial reporting by our Chief Executive Officer and our Chief Financial Officer included a review of the objective and design of the controls, our implementation of the controls and the effect of the controls on the information generated for use in this Quarterly Report on Form 10-Q. In accordance with SEC requirements, the Chief Executive Officer and the Chief Financial Officer note that, during our most recent fiscal quarter, there have been no changes in our internal controls for financial reporting that have materially affected or are reasonably likely to materially affect our internal controls for financial reporting.

Conclusions

Based upon the controls evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls are effective to ensure that information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that material information relating to the Company is made known to management, including the Chief Executive Officer and the Chief Financial Officer, particularly during the period when our periodic reports are being prepared, and that our internal controls for financial reporting are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with U.S. GAAP.

PART II: OTHER INFORMATION

ITEM 1:

LEGAL PROCEEDINGS

Linear Technology Corporation

As previously discussed in our Annual Report on Form 10-K for the year ended December 31, 2009, in March 2002, Linear Technology Corporation (Linear) filed a complaint against Novellus, among other parties, in the Superior Court of the State of California for the County of Santa Clara (the Superior Court) seeking damages of up to $200 million (including punitive damages), declaratory relief and injunctions for causes of action involving alleged breach of contract, fraud, unfair competition and breach of warranty.

The Superior Court dismissed Linear’s claims for fraud and unfair competition on October 5, 2004. The Court of Appeal for the Sixth Appellate District affirmed this dismissal on June 18, 2007. Trial on the remaining claims began before a jury on January 19, 2010, in the Superior Court. Novellus prevailed on these claims at trial, which ended on February 26, 2010. In connection with the judgment against Linear, on August 2, 2010, the Superior Court awarded Novellus $5.2 million in attorney’s fees and $0.1 million in other costs. As of September 25, 2010 the award had not been paid. Linear has filed two motions seeking entry of a judgment in its favor notwithstanding the jury’s verdict, and a new trial. The Superior Court has denied both of these motions, and Linear has filed an appeal. Although we cannot at this time predict the ultimate outcome in this case or estimate a range of any such potential loss, we believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or operating results.

Other Litigation

We are a defendant or plaintiff in various actions that have arisen from time to time in the normal course of business including intellectual property claims. We believe that the ultimate disposition of these matters will not have a material adverse effect on our business, financial condition or results of operations. However, due to the uncertainty surrounding litigation, we are unable at this time to estimate a range of loss, if any, that may result from any of these pending proceedings.

ITEM 1A:

RISK FACTORS

Set forth below and elsewhere in this Quarterly Report on Form 10-Q, and in other documents we file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the forward-looking statements contained in this Quarterly Report. We have revised the risk factors that relate to our business, as set forth below. These risks include any material changes to and supersede the risks previously disclosed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2009, and those disclosed in prior Quarterly Reports on Form 10-Q.

The semiconductor industry is highly cyclical and difficult to predict.

Our Semiconductor Group depends predominantly on the capital expenditures of semiconductor manufacturers, which in turn depend on current and anticipated market demand for integrated circuits and the products that use them. Our business has historically been cyclical due to sudden changes in our customers’ manufacturing capacity requirements and capital spending, which in turn are affected by factors such as capacity utilization, consumer demand for products, inventory levels and our customers’ access to capital. As a result, our business has experienced periodic downturns that reduced the demand for semiconductor processing equipment, including equipment that we manufacture and market. The timing, length and severity of these business cycles are difficult to predict. The semiconductor industry and our operations are characterized by fixed costs that are difficult to reduce in the short term. During periods of reduced and declining demand, we must be able to quickly and effectively align our variable costs with prevailing market conditions, and at the same time motivate and retain key employees, including our management team. Downturns in the industry have, at times, resulted in higher than optimal inventory levels and lower than optimal gross margins due to lower production volumes during these periods. Because of this volatility, we cannot provide any assurance that we will not be required to make inventory valuation adjustments in future periods. Industry downturns have historically been followed by periods of rapid growth. During periods of rapid growth, we must be able to acquire or develop sufficient manufacturing capacity and hire and assimilate a sufficient number of qualified people to meet customer demand. Net orders, net sales and results of operations may be adversely affected if we fail to respond to changing industry and economic conditions in a timely and effective manner.

We have experienced an increase in net orders during the last six sequential quarters following declines in net orders during each of the five preceding quarters. Despite these recent increases, we could again experience decreases in net orders in the future, and if so, our net sales and operating results could be adversely affected. Over the past two years, we have implemented reductions in workforce, consolidation of our manufacturing operations, and other cost reduction actions to align our business with then current industry and economic conditions. Future restructurings or other cost reduction actions may be required, which may have an adverse impact on our results of operations and our ability to capitalize on opportunities in a market recovery.

Weakness in the global economy or tightening of the credit markets may adversely affect our results of operations and our liquidity.

The tightening of the credit markets, turmoil in the financial markets and weakening in the global economy contributed to the downturn we experienced in 2008 and 2009. Because our business is ultimately driven by the global demand for electronic devices, the economic slowdown caused our customers to delay or discontinue spending on our products. The tightening of the credit markets and concerns regarding the availability of credit that accompanied that downturn also made it more difficult for our customers to raise capital, whether debt or equity, to finance their purchases of capital equipment, including the products we sell. Furthermore, our customers faced liquidity issues, which resulted in cancellations of equipment orders and increased payment delays or defaults. Reduced demand for our products and the general unavailability of financing adversely impacted our operating results. While our operating results have improved along with the improvement in the economy, there can be no assurance that the economy and our operating results will continue to improve, that the economy will not experience another significant downturn, or that our operating results will not decrease. In such an event, our operating results, financial condition and business could be adversely affected.

Fluctuations and uncertainties with the economy also make it challenging for us to accurately forecast and plan future business activities and to identify the risks that may affect our business, financial condition and operating results. While we have seen recent signs of recovery, we cannot predict the timing, strength or duration of any economic slowdown, subsequent recovery or the impact on the worldwide semiconductor industry. If the economy or the markets in which we operate do not continue to recover, we may record additional charges related to restructuring costs, which may have an adverse impact on our business, financial condition and results of operations. The length of our sales cycle makes our results of operations particularly sensitive to changes in macroeconomic conditions. While past downturns in our business have been followed by periods of rapid growth, that correlation may not occur in the future.

A decline in the condition of the global financial markets could adversely impact the market values or liquidity of our investments. Our investment portfolio includes corporate and government securities, auction rate securities, money market funds and other types of debt securities. A decline in the capital and financial markets could adversely impact their market values and liquidity. As of September 25, 2010, we held $71.6 million of auction-rate securities, net of $10.1 million in temporary impairment. Our auction rate securities are tax-exempt with underlying assets that are either student loans, substantially backed by the federal government, or closed-end municipal bond funds. Due to auction failures, we will not have access to these funds until (a) future auctions are successful, (b) the securities are called by the issuer, (c) we sell the securities in a secondary market, or (d) the underlying notes mature and are repaid. Currently, there are no active secondary markets for these securities. If current market conditions do not improve, additional temporary and other-than-temporary impairment charges could occur in future periods which would reduce the value of our investments and could negatively impact our results of operations.

Our financial results have fallen short and may continue to fall short of anticipated levels; forecasting net sales and profitability is complex and our financial results are difficult to forecast.

Our management typically provides quarterly financial forecasts. These forecasts, when made, are based on estimates believed to be reasonable at the time. However, actual results may vary and have varied in the past from forecasted results for a variety of reasons, including, but not limited to, unanticipated manufacturing costs, changes in the economy or mix of products sold, unanticipated write-downs of inventory, and a higher than anticipated effective tax rate. Our lengthy sales cycle makes the timing of customer orders and product acceptances difficult to predict. In addition, our backlog at the beginning of a quarter typically does not include all orders required to achieve our sales objectives for that quarter and is not a reliable indicator of our future sales. As a result, our revenues and operating results for a quarter depend on us shipping orders as scheduled during that quarter, receiving customer acceptance during the quarter of previously shipped products, and obtaining new orders for products to be shipped in that same quarter. Any delay in, or cancellation of, scheduled shipments and customer acceptances or in shipments from new orders could materially and adversely affect our financial results. These factors have caused and may continue to cause our financial results to differ materially from prior periods and from financial forecasts we have previously provided.

Although we believe that these forecasts provide investors and analysts with a better understanding of management’s expectations for the future and are useful to our shareholders and potential shareholders, such forecasts are comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. If our operating or financial results for a particular period differ from our forecasts or the expectations of investment analysts, or if we change our forecasts for future periods, the market price of our common stock could decline.

Our quarterly operating results and stock price are unpredictable.

We have experienced and expect to continue to experience significant fluctuations in our quarterly operating results, which may adversely affect our stock price. Our future quarterly operating results and stock price may not align with past trends. The factors that have caused and could continue to cause fluctuations in our operating results include, but are not limited to:

•

economic conditions in the electronics and semiconductor industry generally, and the semiconductor equipment industry specifically;

•

the financial condition of our customers and their ability to purchase our products;

•

timing and cancellation of customer orders and shipments, including deferrals of orders of our existing products due to new product announcements by us or our competitors;

•

failure to receive anticipated orders in time to permit shipment during the quarter;

•

our practice of building systems according to forecast, instead of limited backlog information, which hinders our ability to plan production and inventory levels;

•

competitive pricing pressures;

•

intellectual property disputes;

•

the effect of revenue recognized upon acceptance with little or no associated costs;

•

unpredictability of demand for and variability of the mix of our products in our forecast, which can cause unexpected positive or negative inventory adjustments in a particular period;

•

variability in manufacturing yields;

•

fluctuations in warranty costs;

•

foreign currency exchange rate fluctuations;

•

emergence of new industry standards; and

•

ability to fund capital requirements.

In addition, the market price at which our common stock trades may be influenced by many factors, including:

•

our operating and financial performance and prospects;

•

the depth and liquidity of the market for our common stock which can impact, among other things, the volatility of our stock price;

•

investor perception of us and the industry in which we operate;

•

the level of research coverage of our common stock;

•

changes in earnings estimates or buy/sell recommendations by analysts;

•

general financial and other market conditions; and

•

domestic and international economic conditions.

Public stock markets have experienced, and may in the future experience, extreme price and trading volume volatility, particularly in the technology sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons partly or wholly unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock.

We face risks related to a highly concentrated customer base.

Our customer base, especially in the semiconductor industry, has historically been highly concentrated. Sales have historically come from a limited number of customers, and we expect that sales to a small number of customers will continue to account for a high percentage of our net sales in the foreseeable future. Although the composition of the group comprising our largest customers varies from year to year, the loss of a significant customer or any reduction in orders from a significant customer could materially and adversely affect our business, financial condition or results of operations, as we may not be able to replace the business from that customer. Because products are configured to customer specifications, changing, rescheduling or canceling orders may result in significant non-recoverable costs.

Changes in tax rates, tax assets or liabilities have negatively impacted our results and may continue to negatively impact our future results.

We are subject to taxation in the United States and other countries. Our effective tax rate has fluctuated in the past and may fluctuate in the future. Future effective tax rates could be affected by changes in composition of earnings in countries with differing tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws. We compute the effective tax rate using forecasts of jurisdictional profits and losses. Changes in the jurisdictional mix of profits and losses may cause fluctuations in the effective tax rate.

We are also subject to regular examination of our tax returns by the Internal Revenue Service (IRS) and other tax authorities, including state revenue agencies and foreign governments. The IRS and other tax authorities have increasingly focused attention on intercompany transfer pricing with respect to sales of products and services and the use of intangible assets. We could face significant future challenges on these transfer pricing issues in one or more jurisdictions.

We regularly assess the likelihood of favorable or unfavorable outcomes resulting from examinations by the IRS and other tax authorities to determine the adequacy of our provision for income taxes. Although we believe that our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different from the treatment reflected in our historical income tax provisions and accruals. Due to certain years remaining open for examination, it is reasonably possible that the total unrecognized tax benefits could increase or decrease over the next twelve months as we may be subject to either examination by tax authorities or a lapse in statute of limitations. Factors that could materially affect our future effective tax rates include, but are not limited to:

•

changes in the regulatory environment;

•

changes in accounting and tax standards or practices;

•

overall business conditions in the equipment industry;

•

changes in the composition of operating income by tax jurisdiction; and

•

our operating results before taxes.

We face risks related to intellectual property.

We intend to continue to seek legal protection, primarily through patents and trade secrets, for our proprietary technology. Seeking patent protection is a lengthy and costly process, and there can be no assurance that patents will be issued from any pending applications, or that any claims allowed from existing or pending patents will be sufficiently broad to protect our proprietary technology. There is also no guarantee that any patents we hold will not be challenged, invalidated or circumvented, or that the patent rights granted will provide competitive advantages to us. Our competitors have developed and may continue to develop and obtain patents for technologies that are similar or superior to our technologies. In addition, the laws of foreign jurisdictions in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as do the laws of the United States.

Adverse outcomes in current or future legal disputes regarding patent and intellectual property rights could result in the loss of our intellectual property rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties on terms that may not be reasonable or favorable to us, prevent us from manufacturing or selling our products, or compel us to redesign our products to avoid incorporating third parties’ intellectual property. As a result, our product offerings may be delayed, and we may be unable to meet customers’ requirements in a timely manner. Regardless of the merit of any legal disputes, we incur and may be required to incur in the future substantial costs to prosecute or defend our intellectual property rights. Even in the absence of infringement by our products of third parties’ intellectual property rights, we have elected in the past and may in the future elect to seek licenses or enter into settlements to avoid the costs of protracted litigation and the diversion of resources and management attention. However, if the terms of settlements entered into with certain of our competitors are not observed or enforced, we may suffer further costs. Any of these circumstances could have a material adverse effect on our business, financial condition or results of operations.

Our ability to develop intellectual property depends on hiring, retaining and motivating highly qualified design and engineering staff with the knowledge and technical competence to advance our technology and productivity goals. To protect our trade secrets and proprietary information, generally we have entered into confidentiality or invention assignment agreements with our employees, as well as with consultants and other parties. If these agreements prove inadequate or are breached, our remedies may not be sufficient to cover our losses.

We are subject to litigation proceedings that could adversely affect our business.

Intellectual Property Litigation

We have received certain claims of infringement of intellectual property rights and may receive other such claims in the future. For example, we were served with a complaint on March 23, 2010 for an intellectual property claim seeking injunctive relief and unspecified damages. In the past claims of infringement of intellectual property rights have sometimes evolved into legal proceedings or litigation against us, and they may continue to do so in the future. It is inherently difficult to assess the outcome of litigation. Although we believe we have meritorious defenses to these claims and that the outcome of the litigation will not have a material adverse impact on our business, financial condition, or results of operations, there can be no assurances that Novellus will prevail. Any such litigation could result in substantial cost to us, including diversion of the efforts of our technical and management personnel, and this could have an adverse effect on our business, financial condition and operating results. If we are unable to successfully defend against such claims, we could be required to expend significant resources to develop or license alternative non-infringing technology or to obtain a license to the subject technology. There is no assurance that we will be successful with such development, or that a license will be available on terms acceptable to us, if at all. Without such a license, we could be prohibited from future sales of the infringing product or products, which could materially and adversely affect our business, financial condition and operating results.

Other Litigation

In addition to the litigation risks and proceedings mentioned above, we are currently involved or may become subject to legal claims or proceedings related to securities, employment, customer or third party contracts, environmental regulations, product liability or other matters. If we are required to defend against a legal claim or deem it necessary or advisable to initiate a legal proceeding to protect our rights, the expense and distraction of such a claim or proceeding, whether or not resolved in our favor, could materially and adversely effect our business, financial condition and operating results. Further, if a claim or proceeding were resolved against us or if we were to settle any such dispute, we could be required to pay damages or refrain from certain activities, which could have a material adverse impact on our business, financial condition and operating results.

We have incurred and may in the future incur impairments to goodwill or long-lived assets.

We review our long-lived assets, including goodwill and other intangible assets, for impairment annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We recorded an impairment charge in 2008 to reduce the carrying value of goodwill within our Industrial Applications Group, or IAG reporting unit. There were no impairment charges taken in 2009. While the estimated fair value for this reporting unit exceeded its book value in our annual impairment test for 2009, our impairment analysis for IAG is sensitive to small changes to estimates and assumptions in our valuation model. Given the relatively low fair value of this reporting unit, we believe it is reasonably possible that IAG could fail the first step in a future annual impairment test, which could result in additional impairment charges and negatively impact our results of operations.

Continued negative industry or economic trends, including the lack of recovery in the market price of our common stock, reduced estimates of future cash flows, disruptions to our business, slower growth rates or lack of growth in the Semiconductor Group or IAG could lead to additional impairment charges of our long-lived assets, including goodwill and other intangible assets. If in any period our stock price decreases to the point where our fair value, as determined by our market capitalization, is less than the book value of our assets, this could also indicate a potential impairment and we may be required to record an impairment charge in that period, which would adversely affect our results of operations.

Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis indicates potential impairment to goodwill for the Semiconductor Group or IAG, we may be required to record additional charges to earnings in our financial statements, which could negatively impact our results of operations.

Rapid technological change in the semiconductor industry requires substantial research and development expenditures and responsiveness to customer needs.

We operate in intensely competitive industries that experience rapid technological developments, changes in industry standards, changes in customer requirements and frequent new product introductions and improvements. If we are unable to respond quickly and successfully to these developments, we may lose our competitive position and our products or technologies may become uncompetitive or obsolete. We devote a significant portion of our personnel and financial resources to R&D programs and we seek to maintain close relationships with our customers in order to remain responsive to their product and manufacturing process needs. Our success depends in part on our ability to accurately predict evolving industry standards, develop innovative solutions and improve existing technologies, win market acceptance of our new and advanced technologies and, manufacture our products in a timely and cost-effective manner. Our products and processes must address changing customer needs in a range of materials, including copper and aluminum, at ever-smaller line widths and feature sizes, while maintaining our focus on manufacturing efficiency and product reliability. If we do not continue to gain market acceptance for our new technologies and products, develop and introduce improvements in a timely manner in response to changing market conditions and customer requirements, or remain focused on R&D efforts that will translate into greater revenues, our business could be adversely impacted.

In the capital equipment market, technological innovations tend to have long development cycles. We have experienced delays, technical difficulties and manufacturing setbacks from time to time in the introduction of certain of our products and product enhancements. We may experience similar delays, technical difficulties and manufacturing setbacks in future new product introductions or volume production of our new systems or enhancements. The increased costs and reduced efficiencies that may be associated with the development, manufacture, sale and support of future products or product enhancements relative to our existing products may adversely affect our operating results.

Our success in developing, introducing and selling new and enhanced systems depends upon a variety of factors, including product selection; hiring, retaining and motivating highly qualified design and engineering personnel; timely and efficient completion of product design and development; implementation of manufacturing and assembly processes; achieving specified product performance in the field; and effective sales and marketing. There can be no assurance that we will be successful in selecting, developing, manufacturing and marketing new products, or in enhancing our existing products. There can be no assurance that revenue from future products or product enhancements will be sufficient to recover our investments in R&D. To ensure the functionality and reliability of our future product introductions or product improvements, we incur substantial R&D costs early in development cycles before we can confirm the technical feasibility or commercial viability of a product or product improvement. Reliability or quality problems, reduced orders, or higher manufacturing costs in new products may result in delays in collecting accounts receivable, and additional service costs and warranty expenses may rise, affecting our gross margins. Any of these events could materially and adversely affect our business, financial condition or results of operations.

The competitive and capital-intensive nature of the semiconductor industry increases the difficulty of maintaining gross margin and maintaining and capturing market share.

We face substantial competition in the industry, from both potential new market entrants and established competitors. Competitors may have greater financial, marketing, technical or other resources, and greater ability to respond to pricing pressures. They may also have broader product lines, the ability to reduce price through product bundling, greater experience with high-volume manufacturing, greater customer service capabilities, or larger and more established sales organizations and customer bases. To maintain or capture a position in the market, we must develop new and enhanced systems and introduce them at competitive prices on a timely basis, while managing our R&D, product, and warranty costs. Semiconductor manufacturers incur substantial costs to install and integrate capital equipment into their production lines. This increases the likelihood of continuing relationships with chosen equipment vendors, including our competitors, and the difficulty of penetrating new customer accounts. In addition, sales of our systems depend in significant part upon a prospective customer’s decision to increase or expand manufacturing capacity which typically involves a significant capital commitment. From time to time, we have experienced delays in finalizing system sales following initial system qualification. Due to these and other factors, our systems typically have a lengthy sales cycle, during which we may expend substantial funds and management effort. Heightened competition may also force price reductions that could adversely affect our results of operations.

We are exposed to risks associated with outsourcing activities, which could result in supply shortages that could affect our ability to meet customer demands.

We outsource the manufacture of most subassemblies, which enables us to focus on performing system design, assembly and testing in-house, thereby minimizing our fixed costs and capital expenditures. Although we make reasonable efforts to ensure that third party providers will perform to our standards, our reliance on suppliers and subcontractors limits our control over quality assurance and delivery schedules. Defects in workmanship, unacceptable yields, manufacturing disruptions and difficulties in obtaining export and import approvals may impair our ability to manage inventory and cause delays in shipments and cancellation of orders that may adversely affect our relationships with current and prospective customers and enable competitors to penetrate our customer accounts. In addition, third party providers may prioritize capacity for larger competitors or increase prices to us, which may adversely affect our profitability and our ability to respond to pricing pressures from competitors and customers.

Our success and ability to meet customer demands depend in part on our ability to obtain timely deliveries of parts, components, and subassemblies from our suppliers to manufacture and support our products. Although we make reasonable efforts to ensure that such parts, components and subassemblies, are available from multiple suppliers, in certain cases they may be obtained only from a single source or from limited sources. These suppliers are in some cases thinly capitalized, independent companies who derive a significant amount of their business from us or from a small group of companies in the semiconductor industry. As a result, our supply channels may be vulnerable to disruption. Any such disruption to or termination of our supplier relationships may result in a prolonged inability to secure adequate supplies at reasonable prices or of acceptable quality, and may adversely affect our ability to bring new products to market and deliver them to customers in a timely manner. As a result, any disruption or termination of our supplier relationships may damage our customer relationships and our results of operations may be adversely affected.

We are exposed to the risks of global operations.

We serve an increasingly global market. Substantial operations outside of the United States and export sales expose us to certain risks that may adversely affect our operating results and net sales, including, but not limited to:

•

global or regional economic downturns;

•

adverse conditions in credit markets;

•

potential 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;

•

inefficient and limited infrastructure and disruptions, such as large-scale outages or interruptions of service from utilities, transportation, or telecommunications providers and supply chain interruptions;

•

longer payment cycles and difficulties in collecting accounts receivable outside of the United States;

•

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;

•

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;

•

inadequate protection or enforcement of our intellectual property and other legal rights in foreign jurisdictions; and

•

political instability, natural disasters, acts of war or terrorism.

We enter into foreign currency forward exchange contracts to hedge against the short-term impact of currency fluctuations, including forecasted sales transactions denominated in Japanese yen. Our hedging programs reduce, but do not entirely eliminate, the impact of currency exchange rate movements, and therefore fluctuations in exchange rates could negatively affect our results of operations and financial condition. Exchange rate volatility may also increase the cost of our exported products for international customers and inhibit demand.

There can be no assurance that any of these factors will not have a material adverse effect on our business, financial condition or results of operations. In addition, each region in the global equipment market exhibits unique market characteristics that can cause capital equipment investment patterns to vary significantly from period to period. We derive a substantial portion of our revenues from customers in Asia. Any negative economic developments, legal or regulatory changes, terrorism in Asia or geo-political instability in Asia, including the possible outbreak of hostilities or health-related epidemics involving Singapore, China, Taiwan, Korea or Japan, could result in the cancellation or delay by certain significant customers of orders for our products, which could adversely affect our business, financial condition or results of operations. Our continuing expansion in Asia renders us increasingly vulnerable to these risks.

We maintain a self-insurance program with respect to our property, casualty and other risks and are exposed to excessive costs that may not be covered by our insurance plans.

We generally maintain various types of insurance policies which provide coverage only upon the occurrence of certain catastrophic losses. Losses not covered by insurance may be substantial and may increase our expenses, which could negatively impact our results of operations. We place our insurance coverage with various carriers in numerous jurisdictions. The types and amounts of insurance that we obtain vary over time and by location, depending on availability, cost, and our decisions with respect to strategic risk management. The policies are subject to deductibles and exclusions that result in what we believe is an acceptable level of risk on a self-insurance basis. Additionally, the financial condition of our insurers’ may be negatively impacted by the recent weakening in the global economy, which could adversely impact such insurers’ financial stability and, consequently, the insurance coverage they provide.

We must attract, retain and motivate key employees and the failure to do so could harm our business and operations.

In order to compete, we must attract, retain and motivate our executives and other key employees. Hiring and retaining qualified executives, engineers, and sales representatives are critical to our business and the competition for experienced employees in the semiconductor industry can be fierce. To help attract, retain and motivate qualified employees, we use stock-based compensation awards such as employee stock options and restricted stock awards. These forms of compensation become less valuable if our stock price experiences a period of decline. If we are unable to attract, retain and motivate highly qualified employees to meet our needs in the future, our business and operations could be harmed.

We are subject to increasingly strict environmental regulations.

Our industry is subject to increasingly strict environmental regulations that control and restrict the use, transportation, emission, discharge, storage and disposal of certain chemicals, gases and other substances used or produced in the semiconductor manufacturing process. Public attention to environmental controls has continued to increase. Changes in environmental regulations could require us to invest in potentially costly pollution control equipment or alter the way our products are made. In addition, we use hazardous and other regulated materials that subject us to risks of strict liability for damages caused by accidental releases, regardless of fault. Any failure to control such materials adequately or to comply with regulatory restrictions or contractual obligations could increase our expenses and adversely affect our results of operations. New climate change regulations could require us to change our manufacturing processes or obtain substitute materials that may cost more or be less available for our manufacturing operations. In addition, new restrictions on carbon dioxide or other greenhouse gas emissions could result in significant costs for us. Greenhouse gas legislation has been introduced in the United States legislature and we expect increased worldwide regulatory activity in the future. The cost of complying, or of failing to comply, with these and other climate change and emissions regulations could have an adverse effect on our business plans and operating results.

Additionally, we may be subject to environmental and other regulations in certain states and countries where we produce or sell our products. We also face increasing complexity in our product design and procurement operations as we adjust to new and prospective requirements relating to the materials composition of our products, including the restrictions on lead and certain other substances in electronics that apply to specified electronics products put on the market in the European Union, or EU. The EU also makes producers of electrical goods financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. Other countries, such as the United States, China and Japan, have enacted or may enact similar laws or regulations similar to the EU. These and other future environmental regulations could require us to reengineer certain of our existing products.

We are exposed to risks related to our indemnification of third parties.

From time to time, in the normal course of business, we indemnify third parties with whom we enter into contractual relationships, including customers and lessors, with respect to certain matters. We have agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third party claims that our products when used for their intended purposes infringe the intellectual property rights of such other third parties, or other claims made against certain parties. We have been, and in the future may be, compelled to enter into or accrue for probable settlements of alleged indemnification obligations or become subject to potential liability arising from our customer’s involvements in legal disputes. It is difficult to determine the maximum potential amount of liability under any indemnification obligations, whether or not asserted, due to our limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Our business, financial condition and results of operations in a reported fiscal period could be materially adversely affected if we expend significant amounts in defending or settling any purported claims, regardless of their merit or outcomes.

We are exposed to risks associated with our diversification strategy.

Our core business and expertise have historically been in the development, manufacture, sale and support of deposition technologies and wafer surface preparation. We lack experience in the high-precision machine manufacturing equipment market serviced by IAG, compared with our knowledge of the semiconductor equipment industry, and cannot give any assurance that we can maintain or improve the quality of products, level of sales and gross margins, or relations with key employees and significant customers or suppliers that are necessary to compete in this market.

We face risks associated with acquisitions, divestitures, and other transactions.

We have made, and may in the future make, acquisitions of or significant investments in businesses with complementary products, services and technologies. Acquisitions involve numerous risks, including, but not limited to:

•

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;

•

difficulties entering new markets for which we have not previously manufactured and sold products;

•

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 securities dilutive to current shareholders, 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;

•

the impairment of acquired intangible assets as a result of technological advancements, or worse-than-expected performance of acquired companies; and

•

the incurrence of unforeseen obligations or liabilities.

When we make a decision to sell assets or a business, we may encounter difficulty completing the transaction as a result of a range of possible factors such as new or changed demands from the buyer. These circumstances may cause us to incur additional time or expense or to accept less favorable terms, which may adversely affect the overall benefits of the transaction.

Acquisitions, divestitures, and other transactions are inherently risky, and we cannot provide any assurance that our previous or future transactions will be successful. The inability to effectively manage the risks associated with these transactions could materially and adversely affect our business, financial condition or results of operations.

From time to time we may enhance, modify or upgrade our enterprise resource planning and other key software applications, which could cause unexpected problems to occur and could cause disruption to the management of our business.

From time to time, we may enhance, modify or upgrade our enterprise resource planning (ERP) system as well as other key software applications used for our worldwide operations. Our ERP system is integral to our ability to accurately and efficiently maintain our books and records, record transactions, provide critical information to our management, and prepare our financial statements.

Enhancements may eventually become more costly, difficult and time-consuming to purchase and implement than we currently anticipate. We may encounter unexpected difficulties or costs or other challenges, any of which may disrupt our business or cause delays in the reporting of our financial results. Our existing systems, procedures or controls may not be adequate to support our operations and require us to change our internal business practices. Corrections and improvements may be required as we enhance, modify or upgrade our systems, procedures and controls, and could cause us to incur additional costs and require additional management attention, placing burdens on our internal resources. If we fail to manage these changes effectively, it could adversely affect our ability to manage our business and our operating results.

ITEM 2:

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Repurchase of Company Securities

In February 2004, our Board of Directors approved a stock repurchase plan that authorized the repurchase of up to $500.0 million of our outstanding common stock through February 2007. In September 2004, our Board of Directors authorized an additional $1.0 billion for repurchase of our outstanding common stock through September 2009. In October 2007, our Board of Directors authorized an additional $1.0 billion for repurchase of our outstanding common stock through October 2011.

Following is a summary of our stock repurchases pursuant to our publicly announced plans for the quarter ended September 25, 2010.


Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May yet be Purchased Under the Plans or Programs
June 27, 2010 through July 31, 2010		0	$	0		0	$	643.2million
August 1, 2010 through August 28, 2010		0	$	0		0	$	643.2million
August 29, 2010 through September 25, 2010		1,579,282	$	24.00		1,579,282	$	643.2million

Total		1,579,282	$	24.00		1,579,282	$	643.2million

In addition to shares repurchased above, we withheld 7,087 shares through net share settlements for the three months ended September 25, 2010 upon the vesting of restricted stock awards under our equity incentive plans. For the majority of restricted stock awards granted, the number of shares issued on the date the restricted stock awards vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. These withheld shares are not included as common stock repurchases under our authorized stock repurchase program.

We are not obligated to make any purchases under our stock repurchase program. Subject to applicable state and federal corporate and securities laws, repurchases under our stock repurchase program may be made at such times and in such amounts as we deem appropriate. Purchases made under our stock repurchase program can be discontinued at any time we feel additional purchases are not warranted. We are subject to certain limitations under our debt agreement regarding the repurchase of common stock.

ITEM 6:

EXHIBITS

(a) Exhibits


10.30*		Accelerated Stock Vesting Retirement Plan Summary

10.31*		Notice of Restricted Stock Unit Award for Grantees Outside the European Union

10.32*		Notice of Stock Option Award for Grantees Outside the European Union

31.1		Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated November 2, 2010 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 John D. Hertz, Vice President and Chief Financial Officer of Novellus Systems, Inc. dated November 2, 2010 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 November 2, 2010 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 D. Hertz, Vice President and Chief Financial Officer of Novellus Systems, Inc. dated November 2, 2010 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		Instance Document

101.SCH		Schema Document

101.CAL		Calculation Linkbase Document

101.LAB		Labels Linkbase Document

101.PRE		Presentation Linkbase Document

*	Management contracts or compensatory plans or arrangements.

SIGNATURES

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


NOVELLUS SYSTEMS, INC.

By:		/s/ John D. Hertz
John D. Hertz
Vice President and Chief Financial Officer (Principal Financial Officer) November 2, 2010

EXHIBIT INDEX



10.30*		Accelerated Stock Vesting Retirement Plan Summary

10.31*		Notice of Restricted Stock Unit Award for Grantees Outside the European Union

10.32*		Notice of Stock Option Award for Grantees Outside the European Union

31.1		Certification of Richard S. Hill, Chairman of the Board of Directors and Chief Executive Officer of Novellus Systems, Inc. dated November 2, 2010 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 John D. Hertz, Vice President and Chief Financial Officer of Novellus Systems, Inc. dated November 2, 2010 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 November 2, 2010 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 D. Hertz, Vice President and Chief Financial Officer of Novellus Systems, Inc. dated November 2, 2010 in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		Instance Document

101.SCH		Schema Document

101.CAL		Calculation Linkbase Document

101.LAB		Labels Linkbase Document

101.PRE		Presentation Linkbase Document

*	Management contracts or compensatory plans or arrangements.

NOVELLUS SYSTEMS INC - FORM 10-Q - November 2, 2010

Attached files

NOVELLUS SYSTEMS INC Reports