Note 13. 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 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.

There were no shares repurchased and retired during fiscal year 2016.

Shares repurchased and retired for fiscal year 2015 and 2014 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 2015		Fiscal Year 2014
Number of shares of common stock repurchased		111,050		362,633
Weighted average price per share	$	15.49	$	14.74
Total cost of repurchase	$	1,721	$	5,344
Amount available for repurchase at end of period	$	4,397	$	6,118

$4.4 million remained available for the future repurchase of our 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 31, 2016, the Company had 0.1 million shares remaining for issuance under the ESPP. Shares purchased under the ESPP were 212,619 shares, 125,504 shares and 122,112 shares in 2016, 2015 and 2014 at a weighted average price of $14.29, $13.98 and $13.76, 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.

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 was 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 2016			Fiscal Year 2015			Fiscal Year 2014
Stock Options:
Expected life		—			—		4.6 years
Volatility		—			—			54.9	%
Risk free interest rate		—			—			1.54	%
Dividends		—			—			—
Employee Stock Purchase Plan:
Expected life	0.5 years			0.5 years			0.5 years
Volatility		38.7	%		36.9	%		31.2	%
Risk free interest rate		0.44	%		0.12	%		0.54	%
Dividends		—			—			—

Stock Options and Restricted Stock Units (“RSUs”)

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.

Stock Options

The weighted average fair value per share of the stock options awarded in fiscal year 2014 was $8.13. No stock options were granted in fiscal years 2015 and 2016. A summary of activity of stock options 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 27, 2014		1,382,993		$	13.92		3.41	$	4,108
Exercised		(229,510	)		9.65
Cancelled/Forfeited		(94,012	)		16.67
Outstanding at December 26, 2015		1,059,471			14.61		2.47	$	1,920
Exercised		(442,339	)		13.66
Cancelled/Forfeited		(176,587	)		15.83
Outstanding at December 31, 2016		440,545			15.06		2.12	$	4,405
Exercisable at December 31, 2016		407,920		$	14.94		2.00	$	4,129

The aggregate intrinsic value in the above table represents the total pretax intrinsic value, based on the Company’s closing stock price of $25.06 as of December 31, 2016, 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 2016, 2015 and 2014 was $2.7 million, $1.6 million and $3.0 million, respectively. The fair value of options vested during 2016, 2015 and 2014 was $0.7 million, $1.5 million and $3.2 million, respectively.

The following table summarizes ranges of outstanding and exercisable options as of December 31, 2016.

	Options Outstanding						Options Exercisable
Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$9.5-$10.46		17,400		0.32	$	10.05		17,400	$	10.05
$11.37-$11.37		114,166		0.88		11.37		114,166		11.37
$12.98-$15.33		45,691		3.01		14.36		38,954		14.34
$15.35-$15.74		44,437		2.58		15.65		40,586		15.65
$15.85-$15.85		60,000		3.19		15.85		56,250		15.85
$15.97-$17.33		57,166		2.30		16.89		48,527		16.85
$17.7-$18.27		36,935		2.34		18.12		33,267		18.15
$18.51-$18.51		13,750		4.13		18.51		8,333		18.51
$18.79-$18.79		1,000		4.23		18.79		437		18.79
$19.03-$19.03		50,000		2.13	$	19.03		50,000	$	19.03
$9.5-$19.03		440,545						407,920

As of December 31, 2016, the total unrecognized compensation costs related to unvested stock options was $0.2 million and is expected to be recognized as an expense over a weighted average remaining amortization period of 0.65 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 476,667 and 506,459 RSUs during the years ended December 31, 2016 and December 26, 2015, respectively, to key employees with vesting periods up to three years.

A summary of activity for RSUs is as follows:

Summary of activity for RSUs	Number of RSUs			Weighted Average Fair Value
Outstanding RSUs as of December 27, 2014		563,337		$	17.90
Granted		506,459			15.62
Released		(237,520	)		16.59
Cancelled		(119,033	)		16.59
Outstanding RSUs as of December 26, 2015		713,243			15.99
Granted		476,667			17.45
Released		(315,872	)		16.05
Cancelled		(54,253	)		16.29
Outstanding RSUs as of December 31, 2016		819,785		$	16.79

As of December 31, 2016, the total unrecognized compensation costs related to RSU's was $8.0 million and is expected to be recognized as an expense over a weighted average remaining amortization period of 1.77 years.

Market-Based Performance Stock Units (“PSUs”)

In addition to granting RSUs that vest on the passage of time only, the Company granted PSUs to an executive. The PSUs will vest in three equal tranches over one, two, three years based on the relative performance of the Company’s stock during those periods, compared to a peer group over the same period. If target stock price performance is achieved, 66.7% of the shares of the Company’s stock subject to the PSUs will vest, and up to a maximum of 100% of the shares subject to the PSUs will vest if the maximum stock price performance is achieved for each tranche.

A summary of activity for PSUs is as follows:

Summary of activity for PSUs	Number of PSUs			Weighted Average Fair Value
Outstanding PSUs as of December 27, 2014		—			—
Granted		60,000		$	12.23
Outstanding PSUs as of December 26, 2015		60,000			12.23
Granted		67,500			8.52
Released		(13,333	)		12.03
Cancelled		(6,667	)		12.03
Outstanding PSUs as of December 31, 2016		107,500		$	9.94

Valuation of PSUs

On the date of grant, the Company estimated the fair value of PSUs using a Monte Carlo simulation model. The assumptions for the valuation of PSUs are summarized as follows:

	2016 Award		2015 Award
Grant Date Fair Value Per Share	$	8.52	$	12.23
Weighted-average assumptions/inputs:
Expected Dividend		—		—
Range of risk-free interest rates		0.92%	0.25%-1.1%
Range of expected volatilities for peer group	22%-93%		23%-65%

The number of RSUs granted during fiscal year 2016 was 476,667, which counted as 810,334 shares, and PSUs granted during fiscal year 2016 was 67,500, which counted as 114,750 against the 2005 Equity Incentive Plan. The number of RSUs cancelled during fiscal year 2016 was 54,253, which counted as 92,230 shares and PSUs cancelled during fiscal year 2016 was 6,667, which counted as 11,334, 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, RSUs and PSUs during fiscal year 2016, 2015 and 2014 and shares available for grant as of the respective period end dates, is as follows:

	Fiscal Year 2016			Fiscal Year 2015			Fiscal Year 2014
Shares available for grant at beginning of fiscal year		1,916,589			2,464,082			2,937,001
Options - granted		—			—			(74,300	)
Options - cancelled		176,587			94,012			191,061
Options - expired plan shares		(116,192	)		(1,800	)		(17,491	)
RSUs - granted		(810,334	)		(860,980	)		(805,120	)
RSUs - cancelled		92,230			202,356			167,404
RSUs - shares issued to satisfy tax withholding obligations		179,117			120,919			65,527
PSUs - granted		(114,750	)		(102,000	)
PSUs - cancelled		11,334			—			—
Shares available for grant at end of fiscal year		1,334,581			1,916,589			2,464,082

Stock-based Compensation Expense

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 31, 2016, December 26, 2015 and December 27, 2014 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 are 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 $1.0 million of excess tax benefit in fiscal year 2016, and none in both fiscal years 2015 and 2014, respectively.

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 2016		Fiscal Year 2015		Fiscal Year 2014
Cost of products	$	403	$	274	$	268
Cost of service		509		309		287
Research and development		1,408		1,036		1,245
Selling		2,046		1,881		1,642
General and administrative		3,300		2,748		3,243
Restructuring		—		—		67
Total stock-based compensation expense related to employee stock options and employee stock purchases	$	7,666	$	6,248	$	6,752