and Financial Review and Prospects Information in this Operating Review and Financial Prospects Section should be read in conjunction with our consolidated financial statements and notes thereto which are included elsewhere in this Annual Report. Executive Overview Nova is a leading innovator and key provider of metrology and process control solutions used in semiconductor manufacturing. We deliver continuous innovation by providing state-of-the-art high-performance metrology solutions for effective process control throughout the semiconductor fabrication lifecycle. We industrialize laboratory and research-grade technologies to develop differentiated inline metrology solutions that are deployed by a broad range of customers, including the world’s largest integrated circuit manufacturers. Our portfolio combines high-precision hardware and cutting-edge software for deep insight into the development and production of the most advanced semiconductor devices. Our solutions enable our customers to improve device performance, enhance yields and accelerate time to market. We sell our solutions mainly to semiconductor manufacturers, and in some cases to semiconductor process equipment manufacturers. Our business is greatly affected by the level of spending on capital equipment by semiconductor manufacturers. In addition, demand for our products and services is affected by the timing of new IC capacity expansion and ramping up of new technology nodes, by the timing of releasing new products by us and our competitors, market acceptance of our new or enhanced products and changes or improvements in semiconductor design or manufacturing processes. In the past five years (2020-2025), we achieved a positive Compound Annual Growth Rate (CAGR) of products revenues of approximately 27.5%, while Gartner Inc. estimates that the Process Control sector has achieved a CAGR of approximately 16.0% (Gartner Q4-2025 forecast, published in December 2025). During these years, we successfully diversified our technology to include Material and Chemical metrology capabilities, on top of our Dimensional metrology solutions. We also added advanced machine learning algorithms on top of our physical modeling, and we advanced our traditional tool set to include advanced capabilities in both hardware and software. We also diversified our revenue mix across semiconductor sectors, customers and geographies. During these years, we were also able to increase our total available market through development of new technologies used for Materials, Dimensional and chemical metrology, addressing emerging applications in Logic/Foundry, Memory and Packaging across mature and advanced technology nodes. 54 In 2025, product sales accounted for approximately 80% of our total revenues, and services accounted for approximately 20%. As of the end of 2025, we had cash reserves, net of convertible senior notes, of approximately $914 million, and working capital of approximately $1,186 million, which consist of current assets net of current liabilities. Our service organization is operating on a profit-and-loss basis, and the objectives of our service organization are defined and measured by customer satisfaction, quality support parameters, and profit and loss criteria. The service organization provides support to all products we sell, during both the warranty period and the post warranty period. Service revenues are mostly driven by extended warranty, time and material requests, service contracts and proactive sales to the install base to improve productivity and metrology performance. Significant Events in 2025 and Outlook for 2026 During 2025, we demonstrated several significant achievements: • Record product and service sales results. • Record profitability and earnings per share • Diversified customers mix, across multiple territories. • Further expansion into advanced packaging with new and existing products. • Further market adoption of Nova’s advanced portfolio: o Materials, chemical and dimensional metrology solutions. o Hardware and software coupling. o Machine learning and AI capabilities to complement physical modeling. o Holistic offering, including Integrated and Standalone metrology. • Continued proliferation of Nova’s advanced solutions across the board 55 • Record sales of each of our product lines: optical integrated and stand alone systems, materials metrology systems and chemical metrology systems. • Record sales of materials and chemical metrology solutions. • Continued investments in research and development programs aimed to generate new organic growth engines for process control. • Deepening collaboration with research institutes and customers' development centers, utilizing a variety of our products, leading to our positioning as a long-term technology development and high-volume manufacturing partner. • ESG (Environment, Social and Governance) – In 2025 we worked to update our Sustainability Plan. We are determined as a company to play a vital role in creating a world that values equality, safety and environmental health for the benefit of future generations to come. We remain committed to proactively invest in embedding social responsibility and sustainability as part of our culture and business management to support our values. • The acquisition of Sentronics, a privately held company headquartered in Germany, closed on January 30, 2025. Sentronics is a global provider of wafer metrology tools for backend semiconductor fabrication. Sentronics develops flexible and modular metrology tools equipped with multiple metrology sensors for a variety of critical dimension applications, including thickness, roughness, and topography. • On September 5, 2025, we closed an offering of $750 million aggregate principal amount of 0% Convertible Senior Notes due 2030 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The funds raised will be utilized for further investment in the company’s growth and resiliency in order to enhance shareholders’ value. In 2026, we plan to focus on the following: • Investing in organizational development to enhance our human capital and the strength of our global teams based on our values and culture. • Continue to strengthen our competitive market position, through unique innovation and technological leadership and to meet future industry challenges. • Continue executing our well-defined strategy to reach $1B USD in revenues by 2027. The strategy defines the Company’s growth path in revenue, customers, technology and financial performance. 56 • Expand our total available markets by addressing new emerging metrology applications and markets sectors, through solutions delivery to the challenging buildup of advanced Logic technology nodes, memory scaled 3D-NAND nodes, DRAM scaled devices and advanced packaging schemes at leading edge customers. • Continue delivering metrology systems for mature technology nodes and traditional packaging, to support new applications ramp up and expansions. • Continue the collaborations and joint research programs with leading semiconductor manufacturers and relevant leading research institutes. • Continue innovation and diversification of our products through new product introductions to extend the Company’s market leadership and total available market. • Create synergy between our product lines towards a combined offering for advanced applications, which require dimensional, material and chemical metrology. • Grow our production facilities and offices footprint to meet semiconductor demand and our strategic plans and continue to develop modern and streamlined core business processes through new ERP and Service CRM infrastructure. • Build an extensive roadmap for Sentronics products to broaden our portfolio and cater to additional applications. • Create synergy between Nova and Sentronics’ technologies towards a combined and enhanced offering for advanced packaging applications. 57 • Successfully completing the go‑live and stabilization of our new ERP system. • Continue looking for investment opportunities to broaden our portfolio and enrich our brand. The major challenges we could face in fulfilling our plans include: • Meeting strategic, development, operational and delivery targets considering the uncertainties around the macro-economic, geopolitical and trade restriction issues across the globe. • On time delivery of the required solutions to meet the current and future needs of our existing and new customers. • Correctly understanding the market trends and competitive landscape to ensure our products retain proper differentiation to win customer confidence. • Creating aggressive, innovative and competitive roadmap deliverables at reasonable costs to properly control expenses. • Identifying the metrology evolution roadmap for future industry needs to meet process control requirements and lead the market. • Achieving long-term growth targets while supporting extensive growth in all our activities. • Building a solid global infrastructure and production capacity to accommodate further growth. • Challenges implementing our new ERP system. In order to address the risks above we implemented a global plan to secure our employees’ safety, guarantee supply chain resiliency, assure business continuity and continuous support to our customers. We collaborate with key customers, equipment manufacturers, and research institutes to stay informed about their metrology and process control requirements. This helps us align our roadmap to their needs and address any technical or roadmap risks and challenges. 58 It is our belief that we have been able to consistently improve our market position because of a combination of factors: • Optical metrology has become an enabler for the industry over the last few years. • Materials metrology has been widely adopted by leading memory and logic/foundry customers. We expect further adoption in the next few years. • The growing adoption of our metrology portfolio in the advanced packaging market. • The growing need for chemical process control and replenishment solutions, driven by ESG and environment sustainability trends for reduction in chemical materials waste. • Our unique metrology portfolio, combining optical, X-Ray and chemical metrology for both dimensions and materials. This provides the most advanced portfolio, combining the best innovative metrology capabilities with the best reliability and return on investment. • The ability to provide a unique and differentiated technology portfolio sets us apart from the competition and adds a competitive edge to our offering. • Our solutions are well accepted by leading customers that allow us to gain more market share with additional process steps and new applications. • Our ability to closely team with our customers allows us to predict the industry evolution and process control challenges and by that introduce innovative metrology roadmap to solve industry needs. • Our diversified portfolio, which is a result of continuous investment in research and development, is becoming more attractive to our customers. • Extending our solutions’ base to include hardware and software elements in a coupled offering. • Successful track record in completing and integrating inorganic products, as a result of M&A, which allows us to diversify our product offering to expand our addressable markets. • Well controlled and efficient operating model to support our profitable growth and operational resiliency. We anticipate ongoing growth in the adoption of our solutions as the semiconductor manufacturing process becomes increasingly complex and the industry evolves. We believe that our target market is growing as we expand our offering to more stages of the semiconductor manufacturing process and develop innovative new metrology solutions. As the semiconductor production process becomes increasingly challenging, we believe that the need for our diverse portfolio of technologies for dimensional, materials and chemical metrology will continue to grow in the coming years. 59 5.A Operating Results Overview A substantial portion of our revenues is generated from a small number of customers, and we anticipate that our revenues will continue to depend on a limited number of major customers. For the distribution of our total revenues, from products and services, by geographic areas, see Note 16 to our consolidated financial statements. The sale cycle of our systems is long and the rate and timing of customer orders may vary significantly from month to month as a function of the specific timing of fab expansions. We schedule production of our systems based upon order backlog and customer forecasts. Our revenues increased by 31% in 2025 following an increase of 30% in 2024 following a decrease of 9% in 2023. The following table shows the relationship, expressed as a percentage, of the listed items from our consolidated income statements to our total revenues for the periods indicated: Percentage of Total Revenues Year ended December 31: 2023 2024 2025 Revenues from product sales 78 % 80 % 80 % Revenues from services 22 % 20 % 20 % Total revenues 100 % 100 % 100 % Cost of products sale 32 % 31 % 32 % Cost of services 12 % 11 % 11 % Total cost of revenues 43 % 42 % 43 % Gross profit 57 % 58 % 57 % Operating expenses: Research and development expenses, net 17 % 16 % 16 % Sales and marketing expenses 10 % 10 % 9 % General and administrative expenses 4 % 4 % 3 % Total operating expenses 31 % 30 % 29 % Operating profit 26 % 28 % 29 % Financial income (expense), net 4 % 4 % 6 % Income before income taxes 30 % 32 % 34 % Income tax expenses 4 % 5 % 5 % Net income 26 % 27 % 29 % 60 Comparison of Years Ended December 31, 2025 and 2024 Revenues. Our revenues in 2025 increased by $208.2 million, or 31%, compared to 2024. Revenues attributable to product sales were $705.6 million, an increase of $167.2 million, or 31%, compared to 2024. Revenues attributable to services were $175.0 million, an increase of $40.9 million, or 31%, compared to 2024. The increase in product revenues in 2025 was attributed to higher demand for our products across all main product lines and to the acquisition of Sentronics. The increase in services revenue in 2025 was primarily driven by the growth of our installed systems base. Cost of Revenues and Gross Profit. Cost of revenues consists of labor, material and overhead costs of manufacturing our systems, royalties, amortization of intangible assets and the costs associated with our worldwide service and support infrastructure. It also consists of inventory write-offs and provisions for estimated future warranty costs for systems we have sold. Our cost of revenues attributable to product sales in 2025 was $282.1 million compared to $210.6 million in 2024 in line with the increase in product revenue. Our gross margin attributable to product revenues in 2025 was 60%, compared to 61% in 2024. The decline in product gross margins in 2025 was primarily driven by a shift in the product and customer volumes mix. Our cost of services in 2025 was $93.3 million, compared to $74.7 million in 2024. Gross margin attributable to service revenues in 2025 was 47%, compared to 44% in 2024 in line with the increase in service revenue. The increase in service gross margin in 2025 was primarily due to economies of scale resulting from higher service revenue volumes. Research and Development Expenses, net. Consist primarily of salaries and related expenses and also include consulting fees, subcontracting costs, related materials and overhead expenses, after offsetting grants received or receivable from governmental funding of research and development activities. Our net research and development expenses in 2025 were $143.4 million, an increase of $33.1 million, or 30%, compared to 2024, after offsetting grants received of $2.4 million in 2025 and $2.2 million in 2024. Research and development expenses excluding grants received or receivable in 2025 were $145.8 million, compared to $112.4 million in 2024. The increase in 2025 is mainly related to higher investment in existing and new products and technologies, higher personnel costs and the addition of Sentronics. In 2025, net research and development expenses represented 16% of our revenues similar to 2024. Sales and Marketing Expenses. Sales and marketing expenses are mainly comprised of salaries and related costs for sales and marketing personnel, travel related expenses, overhead and commissions to our representatives and sales personnel. Our sales and marketing expenses in 2025 were $82.2 million, an increase of $17.1 million, or 26%, compared to 2024. The increase is due to the increase in revenues. Sales and marketing expenses represented 9.3% of our revenues in 2025 compared to 9.7% in 2024. General and Administrative Expenses. General and administrative expenses are comprised of salaries and related expenses and other non-personnel related expenses such as legal expenses. Our general and administrative expenses in 2025 were $26.1 million, an increase of $1.9 million, or 8%, compared to 2024. The increase in general and administrative expenses in 2025 was primarily driven by higher personnel costs and related overhead, including post-merger integration costs and to the addition of Sentronics expenses. In 2025, general and administration expenses represented 3.0% of our revenues, compared to 3.6% in 2024. 61 Financial income, net. Financial income, net is comprised of interest income, financial expenses related to the 2030 Convertible Senior Notes offering which we completed in September 2025, exchange rate impact and bank charges. In 2025, we recorded $49.8 million of net financial income compared to $28.7 million in 2024. The increase in financial income in 2025 was mainly attributed to higher interest income and exchange rate impact in 2025. Income Tax Expenses. Income tax expenses are comprised of current tax expenses and deferred tax expenses/income. In 2025, we recorded $44.1 million income tax expenses compared to $32.5 million in 2024. The increase is due the increase in profitability. 2025 tax expenses reflecting effective tax rate of 15% same as 2024 Comparison of Years Ended December 31, 2024 and 2023 is incorporated by reference to the Company’s Annual Report on Form 20-F filed with the Securities and Exchange Commission on February 20, 2025. 5.B Liquidity and Capital Resources As of December 31, 2025, we had working capital of approximately $1,186 million, compared to working capital of approximately $514 million as of December 31, 2024. The increase in our working capital in 2025 was mainly attributed to the increase in cash and cash equivalents, short-term deposits and marketable securities and due to the decrease in the 2025 convertible senior notes fully converted by end of 2025. Cash and cash equivalents, short-term and long-term deposits and marketable securities as of December 31, 2025 were $1,646 million compared to $820 million as of December 31, 2024, and increased mainly due to the 2030 Convertible Senior Notes offering and our fluent operating cash flow, partially offset by Sentronics acquisition, share repurchase and the purchase of the capped calls. Trade accounts receivable increased from $139 million as of December 31, 2024 to $152 million as of December 31, 2025. Inventories increased from $157 million as of December 31, 2024 to $184 million as of December 31, 2025. The increase in inventory was driven by higher business activity. Operating activities in 2025 generated positive cash flow from operating activities of $245 million compared to a positive cash flow from operating activities of $235 million in 2024. 62 The following table describes our investments in capital expenditures during the last three years (US dollars, in thousands): 2023 2024 2025 Domestic Abroad Domestic Abroad Domestic Abroad Electronic equipment 2,086 2,867 1,313 3,077 3,228 8,404 Office furniture and equipment 360 499 29 202 95 2,323 Leasehold improvements 2,994 2,457 91 843 670 6,092 Land and buildings - 5,925 - 11,660 - 6,886 Total 5,440 11,748 1,433 15,782 3,993 23,705 In 2025, the gross investment in capital expenditures, including inventory items moved to capital and investment in the new ERP, was approximately $33 million, and was financed from our operating cash flow. In 2026, we expect our gross capital spending to remain at a similar level, primarily driven by ongoing investments in facilities and infrastructure. Our principal liquidity requirement is expected to be for working capital and capital expenditures as well as additional acquisitions and investment in the new ERP. We believe that our current cash reserves will be adequate to fund our planned activities for at least the next twelve months. Our long-term capital requirements will be affected by many factors, including the success of our current products, our ability to enhance our current products and our ability to develop and introduce new products that will be accepted by the semiconductor industry. We plan to finance our long-term capital needs with our cash reserves together with positive cash flow from operations, if any. If these funds are insufficient to finance our future business activities, which may include acquisitions, we would have to raise additional funds through the issuance of additional equity or debt securities, through borrowing or through other means. We cannot assure that additional financing will be available on acceptable terms. Presently, our long-term debt is comprised from Convertible Senior Notes. We do not have a readily available source of other short-term or long-term debt financing such as a line of credit. With regard to usage of hedging financial instruments and the impact of inflation and currency fluctuations, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk” in this Annual Report. 5.C Research and Development, Patents and Licenses, etc. For information regarding our research and development activities, see “Item 4B – Research and Development” in this Annual Report. Grants from the Israeli Innovation Authority & European Programs IIA sponsoring for generic research and development projects of large Israeli companies We participate in a generic research and development programs sponsored by the IIA, available for Israeli companies that meet specific criteria’s set forth by the IIA. Companies eligible to participate in these programs receive IIA funding intended to focus on long-term creation of know-how and technological infrastructure, used for the development or production of future innovative products. These programs do not require payments of royalties to the IIA, but all other restrictions under the Innovation Law, such as local manufacturing obligations and know-how transfer limitations, as further detailed hereunder, are applicable to the know how developed by us with the funding received in such programs. 63 Joint programs of the European Research Area and the IIA (for Nova Ltd.) or BMBF (for Nova Measuring Instruments GmbH) We participate in European consortia, which are joint programs governed by the Electronic Component Systems (ECSEL), Key Digital Technologies (KDT), which starting from 2023 is re-named to European CHIPACTS, for European Leadership Joint Undertaking (the “JU”) as part of the Horizon 2020 & Horizon Europe, respectively, which form cooperations between the participating companies. Some of the obligations and undertakings specified hereunder in connection with IIA or BMBF activities (such as the restrictions under the Innovation Law and obligation to grant certain access rights to our technology and intellectual property rights) apply with respect to some of these joint projects. In addition, the participation in an EU Consortia includes specific obligations, such as the following: The budgeted grant will be paid to the company pursuant to certain rules regarding ‘eligible costs’; Obligations to properly implement the activities assigned under the specific EU Consortia project grant agreement; Restrictions in contributions of third parties (by service or otherwise); Obligations to keep information up to date and to inform about events and circumstances likely to affect the consortium activity; Obligations related to records keeping, investigations and audits by the JU in order to verify the proper implementation of the specific EU Consortium project and compliance with the obligations under the terms of the program, including assessing deliverables and reports during a period of up to two years following the receipt by the company of the full grant payment; Obligations related to Intellectual property allocation generated by an EU Consortium, background intellectual property designation prior to the commencement of the EU Consortium’s project and the provision of access rights to results obtained as part of the EU Consortium. Breach of such obligations may result in the reduction of the aggregate expected grant amount or claiming back previously received grants. In addition, the company may be subject to administrative and financial penalties such as temporary exclusion from all JU European Consortia and fines of up to 10% of the maximum expected grant, as well as to contractual liabilities. European Research Area program We also participate in European consortia which are not part of the JU (Joint Undertaking) program, thus, these programs are funded only by the European commission with no national funding from the Israel Innovation Authority. The restrictions under the Israeli Innovation Law do not apply to the project under these programs. Past royalty bearing programs and royalties arrangements Some of our previous research and development efforts were financed in part through royalty-bearing grants. We were obligated to pay royalties from sales of products funded with these grants. This obligation included different annual interest rates ranging up to 5%. In August 2016, we entered into a royalty buyout arrangement (the “Arrangement”) with the IIA. As part of the Arrangement, we paid approximately $12.9 million to the IIA in September 2016. The contingent net royalty liability to the IIA at the time we executed the Arrangement was approximately $24 million. As a result of the foregoing payment, we are released from any future royalty payments on these previous funds received from the IIA. However, to the extent that we will be able to commercialize products that were developed as part of IIA programs and were declared as “failed” at the time of the Arrangement, we will be required to pay royalties to the IIA from income generated from such commercialization. Currently, we do not anticipate that such failed projects will generate revenues in the future. We note that the Arrangement does not release the Company from other obligations towards the IIA as further detailed herein. In addition, in the future, we may, alone or together with third parties, participate in research and development programs, which may bear royalty obligations (depending on the specific terms of the applicable program). 64 Pertinent obligations under the Israeli Encouragement of Research, Development and Technological Innovation in the Industry Law 1984 Under the Encouragement of Research, Development and Technological Innovation in the Industry Law 1984 and the provisions of the applicable regulations, rules, procedures and benefit tracks, together the Innovation Law, a qualifying research and development program is typically eligible for grants of up to 55% of the program’s pre-approved research and development expenses. The program must be approved by a committee of the IIA. The recipient of the grants is required to return the grants by the payment of royalties on the revenues generated from the sale of products (and related services) developed (in whole or in part) under IIA program up to the total amount of the grants received from IIA, linked to the U.S. dollar and bearing annual interest (as determined in the Innovation Law). Following the full payment of such royalties and interest, there is generally no further liability for royalty payment for our currently developed and sold products. Nonetheless, the restrictions under the Innovation Law (as generally specified below) will continue to apply even after our company has repaid the grants, including accrued interest, in full. The main pertinent obligations under the Innovation Law are as follows: • Local Manufacturing Obligation. The terms of the grants under the Innovation Law require that we manufacture the products developed with these grants in Israel. Under the regulations promulgated under the Innovation Law, the products may be manufactured outside Israel by us or by another entity only if prior approval is received from the IIA (such approval is not required for the transfer of less than 10% of the manufacturing capacity in the aggregate, as declared to be manufactured out of Israel in the applications for funding, in which case a notice should be provided to the IIA). This approval may be given only if we abide by all the provisions of the Innovation Law and related regulations. Ordinarily, as a condition to obtaining approval to manufacture outside Israel, we would be required to pay royalties at an increased rate (usually 1% in addition to the standard rate and increased royalties cap between 120% and 300% of the grants, depending on the manufacturing volume that is performed outside Israel). • Know-How transfer limitation. The Innovation Law restricts the ability to transfer know-how funded by the IIA outside of Israel, including by way of a license to a non-Israeli entity. Transfer of IIA funded know-how outside of Israel requires prior approval of the IIA. The IIA approval to transfer know-how created, in whole or in part, in connection with an IIA-funded project to third party outside Israel is subject to payment of a redemption fee to the IIA calculated according to a formula provided under the Innovation Law that is based, in general, on the ratio between the aggregate IIA grants to the company’s aggregate investments in the project that was funded by these IIA grants, multiplied by the transaction consideration, taking into account depreciation mechanism, and less royalties already paid to the IIA. The regulations promulgated under the Innovation Law establish a maximum payment of the redemption fee paid to the IIA under the above mentioned formulas and differentiates between two situations: (i) in the event that the company sells its IIA funded know-how, in whole or in part, or is sold as part of an M&A transaction, and subsequently ceases to conduct business in Israel, the maximum redemption fee under the above mentioned formulas will be no more than six times the total grants received (plus accrued interest) for development of the know-how being transferred, or the entire amount received from the IIA, as applicable; (ii) in the event that following the transactions described above (i.e., asset sale of IIA funded know-how or transfer as part of an M&A transaction) the company undertakes to continue its R&D activity in Israel (for at least three years following such transfer and maintain at least 75% of its R&D staff employees it had for the six months before the know-how was transferred, while keeping the same scope of employment for such R&D staff), then the company is eligible for a reduced cap of the redemption fee of no more than three times the amounts received (plus accrued interest) for the applicable know-how being transferred, or the entire amount received from the IIA, as applicable. No assurance can be given that approval of any such transfer, if requested, will be granted and what will be the amount of the redemption fee payable. Approval of the transfer of IIA funded technology to another Israeli company requires a pre-approval by IIA and may be granted only if the recipient undertakes to fulfil all the liabilities to IIA and undertakes abides by all the provisions of the Innovation law and related regulations, including the restrictions on the transfer of know-how and manufacturing rights outside of Israel and the obligation to pay royalties. In light of the Arrangement (as further discussed below), in certain circumstances, under such sale transactions (i.e., the transfer of IIA funded technology or portion thereof to another Israeli company), we might be obligated to pay royalties to the IIA from any income derived from such a sale transaction. • Licensing arrangements. Under the terms of the Innovation Law, licensing know how developed under the IIA programs outside of Israel, requires prior consent of IIA and payment of license fees to IIA, calculated in accordance with the licensing rules promulgated under the Innovation Law. The payment of the license fees does not discharge the company from the obligation to pay royalties or other payments due to IIA in accordance with Innovation Law. 65 These restrictions may impair our ability to enter into agreements for those products or technologies which were developed with assistance of the IIA grants without the approval of the IIA. We cannot be certain that any approval of the IIA will be obtained on terms that are acceptable to us, or at all. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity of know-how developed with IIA funding pursuant to a merger or similar transaction, the consideration available to our shareholders may be reduced by the amounts we are required to pay to the IIA. Any approval, if given, will generally be subject to additional financial obligations. Failure to comply with the requirements under the Innovation Law may subject us to mandatory repayment of grants received by us (together with interest and penalties), as well as may expose us to criminal proceedings. In addition, IIA may from time-to-time audit sales of products which it claims incorporate technology funded via IIA programs and this may lead to additional royalties being payable on additional products. 5.D Trend Information For information regarding the most significant recent trends in our market, see “Item 4B– Our Market – The Semiconductor Market – Update” in this Annual Report. 5.E Critical Accounting Estimates We have provided a summary of our significant accounting policies, estimates and judgments in Note 2 to our consolidated financial statements, which are included elsewhere in this Annual Report. The following critical accounting discussion pertains to accounting estimates management believes are most critical to the portrayal of our historical financial condition and results of operations and that require significant, difficult, subjective or complex judgments. Other companies in similar businesses may use different estimation policies and methodologies, which may impact the comparability of our financial condition, results of operations and cash flows to those of other companies. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our management evaluates its estimates on an ongoing basis, including those related to, but not limited to revenue recognition, allowance for credit losses related to marketable securities, inventory write-offs, business combination, fair value and useful lives of intangible assets, and income taxes and tax uncertainties. These estimates are based on management's knowledge about current events and expectations about actions the Company may undertake in the future. Actual results could differ from those estimates. 66 Revenue Recognition Under ASC 606, the company derives revenue from the sales of advanced process control systems, spare parts, labor hours (mainly systems installation) and service contracts. Contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative Standalone Selling Price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation. The Company uses a range of amounts to estimate SSP when it sells each of the products and services separately and needs to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. The Company enters into revenue arrangements that include products and services which are generally distinct and accounted for as separate performance obligations. The Company determines whether arrangements are distinct based on whether the customer can benefit from the product or service on its own or together with other resources that are readily available and whether the Company's commitment to transfer the product or service to the customer is separately identifiable from other obligations in the contract. Inventories Inventories are stated at the lower of cost or net realizable value. Inventory write-downs are provided to cover risks arising from slow-moving items, technological obsolescence, excess inventories, discontinued products, and for market prices lower than cost, if any. We periodically evaluate the quantities on hand relative to historical and projected sales volume (which is determined based on an assumption of future demand and market conditions), the age of the inventory and the expected consumption of service spare parts. At the point of the loss recognition, a new lower cost basis for that inventory is established. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. Business Combination The results of an acquired business in a business combination are included in the Company’s consolidated financial statements from the date of acquisition according to the guidance of ASC Topic 805, “Business Combinations.” The Company allocates the purchase price, which is the sum of the consideration provided and may consist of cash, equity or a combination of the two, to the identifiable assets and liabilities of the acquired business at their fair values as of the acquisition date. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill. We allocate the purchase price to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. These valuations require management to make significant estimations and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include future expected cash flows from technology acquired, backlog and customer relationships. Management’s estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Intangible assets are comprised of acquired technology and customer relations. 67 Accounting for income tax We are subject to income taxes in Israel, the United States and numerous foreign jurisdictions. Judgment is required in evaluating our uncertain tax positions and determining our taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. Judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. For a discussion of other significant accounting policies used in the preparation of our financial statements and recent accounting pronouncements, see Note 2 to our consolidated financial statements contained elsewhere in this Annual Report.