Stock-Based Compensation

9 Months Ended

Oct. 01, 2011

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock Based Compensation

Stock-Based Compensation

Stock-based compensation expense for all share-based payment awards made to the Company’s employees and directors pursuant to the employee stock option and employee stock purchase plans by function were as follows (in thousands):

	Three Months Ended				Nine Months Ended
	October 1, 2011		October 2, 2010		October 1, 2011		October 2, 2010
Cost of products	$	45	$	30	$	111	$	90
Cost of service	51		44		146		149
Research and development	221		135		589		387
Selling	264		170		790		417
General and administrative	389		231		1,110		1,698
Total stock-based compensation expense	$	970	$	610	$	2,746	$	2,741

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table. The expected term of options granted was calculated using the simplified method. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of Nanometrics’ stock price. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future. The assumptions in the following table do not include the assumptions used in the Option Exchange Program as disclosed in Note 5 the Company's 2010 Annual Report on Form 10-K for the fiscal year ended January 1, 2011 filed with the SEC on March 14, 2011.

	Three Months Ended				Nine Months Ended
	October 1, 2011		October 2, 2010		October 1, 2011		October 2, 2010
Stock Options
Expected life	4.6 years		4.6 years		4.5 years		4.5 years
Volatility	77.47	%	74.88	%	77.02	%	73.48	%
Risk free interest rate	1.01	%	1.56	%	1.89	%	2.28	%
Dividends	—		—		—		—
Employee Stock Purchase Plan
Expected life	0.5 years		0.5 years		0.5 years		0.5 years
Volatility	65.91	%	67.43	%	73.41	%	80.34	%
Risk free interest rate	0.17	%	0.22	%	0.19	%	0.20	%
Dividends	—		—		—		—

The weighted average fair value per share of the stock options awarded in the three and nine month periods ended October 1, 2011 was $9.71 and $9.95, respectively, based on the fair market value of the Company’s common stock on the grant dates. The weighted average fair value per share of the stock options awarded in the three and nine month periods ended October 2, 2010 was $7.30 and $6.19, respectively, for both periods, based on the fair market value of the Company’s common stock on the grant dates.

A summary of activity under the Company’s stock option plans during the quarter ended October 1, 2011 is as follows:

	Number of Shares Outstanding (Options)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in Thousands)
Options
Outstanding at January 1, 2011	2,763,686		$	7.43	5.20	$	15,308
Exercised	(733,439	)	6.25
Granted	634,847		16.47
Cancelled	(151,055	)	8.87
Outstanding at October 1, 2011	2,514,039		$	9.97	5.09	$	12,747
Exercisable at October 1, 2011	1,251,496		$	7.44	4.29	$	9,074

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $14.50 as of October 1, 2011, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised during the three and nine month periods ended October 1, 2011 was immaterial for both periods. The total intrinsic value of options exercised during the three and nine month periods ended October 2, 2010 was $3.3 million and $4.7 million, respectively.

During the nine month period ended October 1, 2011, the Company granted 24,292 Restricted Stock Units (“RSUs”), which vest between one and four years after the vesting commencement date identified in the applicable grant document. As of October 1, 2011, there were 47,621 RSUs outstanding.