Acquisition, Goodwill Impairment and Long-lived Asset Impairment

While the Company uses best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed at the business combination date, estimates and assumptions are subject to refinement. As a result, during the preliminary purchase price allocation period, which may be up to one year from the business combination date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. The Company records adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period in the operating results in the period in which the adjustments were determined. In the twelve month period ended December 29, 2012, the Company recorded a $0.6 million reduction in the fair value of royalty payments to Real Time Metrology Inc. ("RTM") with a corresponding decrease of $0.4 million in goodwill and $0.2 million decrease in intangible assets. In the twelve month period ended December 29, 2012, the Company received $0.5 million in cash from the escrow and recorded a corresponding decrease of $0.5 million to goodwill.

The total purchase price allocated to the tangible assets acquired was assigned based on the fair values as of the date of the acquisition. The fair value assigned to identifiable intangible assets acquired was determined using the income approach which discounts expected future cash flows to present value using estimated assumptions determined by management. The Company believes that these identified intangible assets will have no residual value after their estimated economic useful lives.

Acquisition of Nanda Technologies GmbH in 2011

On November 21, 2011, the Company acquired 100% of the outstanding shares of Nanda Technologies GmbH (“Nanda”), a privately-held company with headquarters near Munich, Germany. The total purchase price consisted of approximately $24.6 million in net cash after an adjustment of $0.5 million that was formerly held in escrow and paid to the Company during the twelve month period December 29, 2012, and subject to certain post-closing adjustments associated with Nanda's working capital as of the acquisition date. As a result of the acquisition, the Company obtained a new technology and product line that enables the capture of full-wafer surface inspection images at high-volume production speeds. The transaction met the conditions of a business combination under ASC 805 and was accounted for under this guidance. The goodwill balance related to the acquisition of Nanda at December 29, 2012 was $11.4 million. In addition to the transactions above, the difference in the goodwill balance between at the time of acquisition and at December 29, 2012 was also due to foreign currency exchange rate fluctuations.

Recognized amounts of identifiable assets acquired and liabilities assumed:



	Amount
Cash and equivalents	$	1,239
Account receivables	724
Inventories	1,440
Property, plant and equipment – machinery and equipment	616
Other assets	227
Developed technology (included in intangibles)	9,042
Customer relationships (included in intangibles)	1,040
In-process research and development (included in intangibles)	308
Liabilities	(1,603		)
Total identifiable net assets	13,033
Goodwill	11,610
Total Purchase Consideration	$	24,643

Inventories were measured at fair value as of the date of the acquisition. In estimating the fair value of finished goods and work-in-process inventory, the Company made assumptions about the selling price and selling costs associated with inventory.

With the acquisition, the Company recorded intangible assets of $9.0 million of developed technology, $1.0 million of customer relationships, and $0.3 million of in-process research and development. The developed technology represents Nanda's full wafer, high volume inspection technology and was valued by discounting the estimated future net cash flows of this technology to their net present value utilizing the income approach. The value of the developed technology will be amortized over its estimated useful life of five years. The value of the customer relationship asset was determined based on management's estimates of the costs that would have been incurred to replicate Nanda's existing customer relationships. Based on industry experience, management estimates the useful life of the customer relationship asset to be three years, and the value of this asset will be amortized over this period. The in-process research and development asset was valued by discounting the estimated future net cash flows of the asset to their net present value utilizing the income approach. During fiscal 2012, the $0.3 million of intangible assets related to in-process research and development as of December 31, 2011 was completed and incorporated in products sold during 2012 and the asset was reclassified to developed technology as of December 29, 2012.

The purchase price for this transaction exceeded the fair value allocated to tangible and identifiable intangible assets. The excess purchase price over the fair value of identifiable assets and liabilities of approximately $11.6 million was recorded as goodwill. The Company establishes reporting units based on its reporting structure. The acquisition of Nanda did not trigger any significant changes to the existing reporting structure of the Company. Therefore, the Company continues to operate as a single reporting unit.

The Company expects to benefit from the goodwill through utilization of Nanda's technology in existing Nanometrics products, estimated future sales of existing Nanometrics products to Nanda's established customer base, incremental sales of Nanda's products through Nanometrics worldwide sales and service channels, and efficiencies expected to be achieved from the manufacturing of Nanda's products using Nanometrics operational facilities and processes.

The following table summarizes the identifiable intangible assets acquired as part of the acquisition, and adjustments to carrying value include foreign currency translation adjustments and adjustments to preliminary purchase price allocation during the year:



	Net carrying value as of December 31, 2011		Adjustments to carrying value during 2012			Amortization expense during 2012			Net carrying amount as of December 29, 2012
Developed technology	$	8,603	$	279		$	(1,752	)	$	7,130
Customer relationships	957		12			(330		)	639
In-process research and development	316		(316		)	—			—
Total identifiable intangible assets acquired	$	9,876	$	(25	)	$	(2,082	)	$	7,769



	Fair Value as of acquisition date, November 21, 2011		Adjustments to carrying value during 2011			Amortization expense during 2011			Net carrying amount as of December 31, 2011
Developed technology	$	9,200	$	(393	)	$	(204	)	$	8,603
Customer relationships	1,040		(45		)	(38		)	957
In-process research and development	330		(14		)	—			316
Total identifiable intangible assets acquired	$	10,570	$	(452	)	$	(242	)	$	9,876

Prior to the acquisition, the Company had a pre-existing relationship with Nanda. In December 2010, the Company acquired certain patents from RTM under an asset purchase agreement. As part of the asset purchase, the Company assumed an existing license agreement between Nanda and RTM. Under the license agreement, Nanda is obligated to pay Nanometrics an annual royalty based on the number of tools sold with a minimum royalty payment. Under the asset purchase agreement with RTM, Nanometrics is required to remit to RTM 100% of the royalty payments received from Nanda for the first three years subsequent to the acquisition of the patents, and 50% of the royalty payments received subsequently until March 2018. In 2012, the amount of minimum royalty payments received by Nanometrics and remitted to RTM was immaterial.

As a result of the acquisition of Nanda in November 2011, a contingent liability of $0.6 million has been recognized for the estimated royalty payments due to the existing license agreement between Nanda and RTM that Nanometrics assumed. The fair value of the contingent liability was estimated based on the projected system sales and the related estimated royalty obligations. The contingent liability was reduced to zero in the first quarter of 2012 and was zero as of December 29, 2012.

The unaudited pro forma financial information in the table below summarizes the combined results of operations for Nanometrics and Nanda as though the acquisition of Nanda occurred as of the beginning of fiscal 2010. The pro forma financial information for all periods presented also includes the business combination accounting effects resulting from the acquisition including additional amortization charges of $2.4 million and $2.6 million in fiscal 2011 and 2010 respectively relating to acquired intangible assets. Additional adjustments were made to account for additional stock-based compensation charges for restricted stock units awarded of $0.8 million and $1.9 million in fiscal 2011 and 2010 respectively, and there were no related tax effects in fiscal 2011 and fiscal 2010 of the pro forma adjustments. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved had Nanda been combined with the Company as of the beginning of fiscal 2010.

The unaudited pro forma financial information combines the historical results of Nanometrics for fiscal year 2011 and 2010, the historical results of Nanda for the twelve months ended December 31, 2011 and December 31, 2010, respectively, and the effects of the pro forma adjustments described above.



	Fiscal Years Ended
(In thousands, except per share amounts)	December 31, 2011		January 1, 2011
Total revenues	$	232,418	$	188,685
Net income	24,939		45,544
Net income per share:
Basic	1.10		2.08
Diluted	1.06		1.98

There were no business acquisitions made by the Company during fiscal year 2012 and 2010.

Goodwill Impairment and Long-lived Asset Impairment

The Company’s impairment review process is completed during the fourth quarter of each year or whenever events or circumstances occur that indicate that an impairment may have occurred. The accounting standard update described above provides the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, after assessing the qualitative factors, a company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then performing the two-step impairment test is necessary. Otherwise, no further testing is necessary.

The Company completed its annual goodwill impairment assessment during the fourth quarter of 2012 by first performing a qualitative assessment. As part of this assessment, the Company considered the trading value of the Company's stock, the industry trends, and the Company's sales forecast and products plans. The Company concluded that it was more likely than not that the fair value was more than the carrying values of the Company's reporting unit and therefore did not proceed to the Step 1 of the goodwill impairment test.

The process of evaluating the potential impairment of long-lived assets is highly subjective and requires significant judgment. In estimating the fair value of these assets, the Company made estimates and judgments about future revenues and cash flows. The Company’s forecasts were based on assumptions that are consistent with the plans and estimates the Company is using to manage its business. Changes in these estimates could change the Company’s conclusion regarding impairment of the long-lived assets and potentially result in future impairment charges for all or a portion of their balance at December 29, 2012. The Company did not record any impairment charges in the fiscal year 2012.

There was zero goodwill as of January 1, 2011. During the fiscal year 2010, the Company recorded $0.5 million of impairment related to certain software implementation projects that were abandoned.