Stockholders' Equity and Stock-Based Compensation

Stockholders' Equity

Preferred and Common Stock

The authorized capital stock of Nanometrics consists of 47,000,000 shares of common stock, par value $0.001 per share, and 3,000,000 shares of preferred stock, par value $0.001 per share.

Stock Repurchase

On November 29, 2010, the Company's Board of Directors approved a program to repurchase up to $10.0 million of the Company's common stock, referred to as the 2010 program. Stock repurchases under this program occurred as follows: fiscal year 2010, $0.8 million; fiscal year 2011, $4.3 million; and fiscal year 2012, $4.9 million. As of June 30, 2012, the Company repurchased and retired an aggregate of 667,406 shares of its common stock at a weighted average price of $14.97 per share under the 2010 program utilizing the entire $10.0 million approved by the Board on November 29, 2010, for the repurchase of shares of its common stock.

On May 29, 2012, the Company's Board of Directors approved a program to repurchase up to $20.0 million of its common stock, referred to as the 2012 program. Stock repurchases under this program may be made through open market and privately negotiated transactions, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased is dependent on a variety of factors including price, corporate and regulatory requirements and other market conditions. During fiscal year 2012, the Company repurchased and retired 250,400 shares of its common stock under this approved program at the weighted average price of $14.15 per share. Shares repurchased and retired for the indicated periods of the applicable repurchase programs with the associated cost of repurchase and amount available for repurchase at the end of the respective periods are as follows (in thousands, except number of shares and weighted average price per share):



	Fiscal Year 2014		Fiscal Year 2013		Fiscal Year 2012
Number of shares of common stock repurchased	362,633		332,771		587,766
Weighted average price per share	$	14.74	$	15.03	$	14.47
Total cost of repurchase	$	5,344	$	5,000	$	8,504
Amount available for repurchase at end of period	$	6,118	$	11,462	$	16,462

Subsequent to December 27, 2014, the Company repurchased 111,050 shares at an average purchase price of $15.49 per share for a total of $1.7 million. After these purchases, $4.4 million remained available for the future repurchase of the Company's common stock under the 2012 program.

Stock Option Plans

The Nanometrics option plans are as follows:



Plan Name	Participants	Shares Authorized
2005 Equity Incentive Plan	Employees, consultants and directors	7,292,594
2002 Non-statutory Stock Option Plan	Employees and consultants	1,200,000
2000 Employee Stock Option Plan	Employees and consultants	2,450,000
2000 Director Stock Option Plan	Non-employee directors	250,000
Accent Optical Technologies, Inc. Stock Incentive Plan	Employees and consultants	205,003

Employee Stock Purchase Plan

Under the 2003 Employee Stock Purchase Plan (“ESPP”), eligible employees are allowed to have salary withholdings of up to 10% of their base compensation to purchase shares of common stock at a price equal to 85% of the lower of the market value of the stock at the beginning or end of each six-month offering period, subject to an annual statutory limitation. At the end of the fiscal year ended December 27, 2014, the Company had 0.4 million shares remaining for issuance under the ESPP. Shares purchased under the ESPP were 122,112 shares, 126,068 shares and 113,512 shares in 2014, 2013 and 2012 at a weighted average price of $13.76, $12.36 and $14.16, respectively.

Stock-based Compensation

The Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock units and employee stock purchases related to the Employee Stock Purchase Plan (collectively “Employee Stock Purchases”) based on estimated fair values. The fair value of share-based payment awards is estimated on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's consolidated statement of operations.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. As stock-based compensation expense recognized in the consolidated statement of operations for the years ended December 27, 2014, December 28, 2013 and December 29, 2012 is based on awards expected to vest, it has been reduced for estimated forfeitures. ASC 740 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company's estimated forfeiture rates in 2014, 2013 and 2012 of 10.7%, 11.9%, and 7.6%, respectively, were based on historical forfeiture experience, which the Company believes is the best available information to estimate the future forfeiture rate. Tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are required to be separately classified in the consolidated statements of cash flows. The Company recognized zero, $0.1 million and $0.9 million of excess tax benefit in fiscal years 2014, 2013 and 2012, respectively.

Valuation and Expense Information

The fair value of stock-based awards to employees is calculated using the Black-Scholes option pricing model, which requires subjective assumptions, including future stock price volatility and expected time to exercise. The expected life of options granted were calculated using the simplified method allowed by the SAB 107. The risk-free rates were based on the U.S Treasury rates in effect during the corresponding period of grant. The expected volatility were based on the historical volatility of the Company's stock price. These factors could change in the future, which would affect the stock-based compensation expense in future periods.

The weighted-average fair value of stock-based compensation to employees is based on the single option valuation approach. Forfeitures are estimated and it is assumed no dividends will be declared. The estimated fair value of stock-based compensation awards to employees is amortized over the vesting period of the options. The weighted-average fair value calculations are based on the following average assumptions:



	Fiscal Year 2014	Fiscal Year 2013	Fiscal Year 2012
Stock Options:
Expected life	4.6 years	4.5 years	4.5 years
Volatility	54.9%	69.9%	77.3%
Risk free interest rate	1.54%	1.05%	0.80%
Dividends	—	—	—
Employee Stock Purchase Plan:
Expected life	0.5 years	0.5 years	0.5 years
Volatility	31.2%	26.8%	45.5%
Risk free interest rate	0.54%	0.11%	0.12%
Dividends	—	—	—

Stock Options and Restricted Stock Units ("RSUs")

Prior to December 2008, the majority of options granted by the Compensation Committee vested at a rate of 33¹/3 percent over the first three years of the seven-year option term on each of the first, second and third anniversary of such grants. Starting in December 2008, the majority of the options granted to employees employed for less than one year vest one-third ( ¹/3^rd ) of the shares subject to the option on the first anniversary of the grant date, and vest one thirty sixth (¹/36^th ) each month for the following two years, for a total three year vesting period with a seven-year option term. Starting in November 2008, the majority of the options granted for employees employed for more than one year vest one thirty-sixth (¹/36^th ) of the shares subject to the options in equal monthly installments starting on the monthly anniversary of the date of grant with a seven-year option term. On February 22, 2010, the Compensation Committee reviewed best practice with regard to stock option vesting and made the following changes: existing employees generally receive vesting terms of monthly ratable vesting for a total period of four years. New employees, in general, receive vesting terms that are equivalent to 25% vesting on the one year anniversary of the grant with monthly vesting thereafter for a total of four years. All other terms remained the same. Grant of each Restricted Stock Unit (“RSU”) counts against the Company's available for grant pool at a ratio of 2:1 against the 2005 Equity Incentive Plan as depicted below under “RSUs granted.” On May 24, 2013, the Company approved further amendments to the 2005 Equity Incentive Plan including: increasing the number of shares of common stock authorized by 2.6 million shares, changing the multiplier ratio from 2:1 to 1.7:1 against the plan for each award, other than a stock option or stock appreciation right, and providing the maximum term of stock options to be seven years. All other terms remained the same.

The number of RSUs granted during fiscal year 2014 was 473,600, which counted as 805,120 shares against the 2005 Equity Incentive Plan. The number of RSUs cancelled during fiscal year 2014 was 98,473, which counted as 167,404 shares against the 2005 Equity Incentive Plan. Each RSU represents an amount equal to the fair value of one share of the Company's common stock.

A summary of activity under the Company’s stock option plans including options and RSUs during fiscal year 2014, 2013 and 2012 and shares available for grant as of the respective period end dates, is as follows:



	Fiscal Year 2014		Fiscal Year 2013		Fiscal Year 2012
Shares available for grant at beginning of fiscal year	2,937,001		1,093,565		1,391,930
Increase in authorized shares	—		2,600,000		—
Options - granted	(74,300	)	(430,800	)	(281,085	)
Options - cancelled	191,061		150,459		139,376
Options - expired plan shares	(17,491	)	(53,607	)	(53,102	)
RSUs - granted	(805,120	)	(664,902	)	(103,554	)
RSUs - cancelled	167,404		133,418		—
RSUs - shares issued to satisfy tax withholding obligations	65,527		108,868		—
Shares available for grant at end of fiscal year	2,464,082		2,937,001		1,093,565

Options

The weighted average fair value per share of the stock options awarded in fiscal years 2014, 2013, and 2012 was $8.13, $8.58 and $10.00, respectively. A summary of activity of stock options in 2014 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 December 28, 2013	1,909,039		$	13.22	4.02	$	10,341
Exercised	(409,285	)	10.45		—	—
Granted	74,300		17.56		—	—
Cancelled	(191,061	)	15.74		—	—
Outstanding at December 27, 2014	1,382,993		$	13.92	3.41	$	4,108
Exercisable at December 27, 2014	1,052,110		$	13.15	2.84	$	3,867

The aggregate intrinsic value in the above table represents the total pretax intrinsic value, based on the Company’s closing stock price of $16.59 as of December 27, 2014, 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 2014, 2013 and 2012 was $3.0 million, $2.9 million and $4.9 million, respectively. The fair value of options vested during 2014, 2013 and 2012 was $3.2 million, $3.7 million and $3.6 million, respectively.

The following table summarizes ranges of outstanding and exercisable options as of December 27, 2014.



Exercise Prices	Options Outstanding				Options Exercisable
Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$0.93-$7.50	156,237	1.25	$	3.67	156,237	$	3.67
$8.81-$11.37	237,214	2.57	$	10.79	237,214	$	10.79
$11.63-$14.80	146,135	3.89	$	13.68	99,128	$	13.54
$14.88-$15.74	143,682	4.80	$	15.45	75,875	$	15.47
$15.85-$15.98	170,943	2.95	$	15.92	124,931	$	15.94
$16.00-$16.59	45,567	5.77	$	16.40	9,214	$	16.32
$16.70-$16.70	223,432	3.22	$	16.70	206,048	$	16.70
$16.89-$18.27	155,483	4.46	$	17.54	83,466	$	17.51
$18.51-$19.77	99,800	4.56	$	18.94	55,686	$	19.06
$19.84-$19.84	4,500	3.14	$	19.84	4,311	$	19.84
$0.93-$19.84	1,382,993	3.41	$	13.92	1,052,110	$	13.15

As of December 27, 2014, the total unrecognized compensation costs related to unvested stock options was $2.5 million and is expected to be recognized as an expense over a weighted average remaining amortization period of 2.21 years.

Restricted Stock Units ("RSUs")

Each RSU counts against the Company's “2005 Equity Incentive Plan” at a ratio of one and seven tenths shares for each unit granted but represents an amount equal to the fair value of one share of the Company's common stock. The Company granted 473,600 and 348,328 RSUs during the years ended December 27, 2014 and December 28, 2013, respectively, to key employees with vesting periods spanning from one to three years.

A summary of activity for RSUs is as follows:



RSU	Number of RSUs		Weighted Average Fair Value
Outstanding RSUs as of December 28, 2013	334,444		$	18.61
Granted	473,600		17.14
Released	(146,234	)	17.60
Cancelled	(98,473	)	17.12
Outstanding RSUs as of December 27, 2014	563,337		$	17.90

As of December 27, 2014, the total unrecognized compensation costs related to RSU's was $5.7 million and is expected to be recognized as an expense over a weighted average remaining amortization period of 1.88 years.

Stock-based Compensation Expense

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):



	Fiscal Year 2014		Fiscal Year 2013		Fiscal Year 2012
Cost of products	$	268	$	207	$	164
Cost of service	287		278		230
Research and development	1,245		1,478		1,220
Selling	1,642		1,894		1,791
General and administrative	3,243		2,919		2,485
Restructuring	67		898		—
Total stock-based compensation expense related to employee stock options and employee stock purchases	$	6,752	$	7,674	$	5,890