Note 11. 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, our Board of Directors authorized the repurchase of up to $20.0 million of our common stock of which $4.4 million remained as of December 31, 2016.

On November 15, 2017, the Company's Board of Directors approved a program to repurchase up to $50.0 million of its common stock which superseded the 2012 repurchase program. This new plan is referred to as the Stock Repurchase Plan with an effective date of November 20, 2017. Stock repurchases under this plan 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.

Shares repurchased and retired for fiscal year 2017, 2016 and 2015, 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 2017		Fiscal Year 2016		Fiscal Year 2015
Number of shares of common stock repurchased		1,065,848	—			111,050
Weighted average price per share	$	25.33		—	$	15.49
Total cost of repurchase	$	26,999	—		$	1,721
Amount available for repurchase at end of period	$	23,001		—	$	4,397

The Stock Repurchase Plan was completed in February 2018, with purchases since December 30, 2017 of 896,187 shares of our common stock at the weighted average price of $25.65 for a cost of $23.0 million.

Stock Option Plans

The Nanometrics option plans are as follows:

Plan Name	Participants	Shares Authorized
2005 Equity Incentive Plan	Employees, consultants and directors		8,292,594
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 30, 2017, the Company had 0.5 million shares remaining for issuance under the ESPP. Shares purchased under the ESPP were 122,298 shares, 212,619 shares and 125,504 shares in 2017, 2016 and 2015 at a weighted average price of $21.19, $14.29 and $13.98, 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 was 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. 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. The weighted-average fair value calculations are based on the following average assumptions:

	Fiscal Year 2017	Fiscal Year 2016	Fiscal Year 2015
Employee Stock Purchase Plan:
Expected life	0.5 years	0.5 years	0.5 years
Volatility	37.2%	38.7%	36.9%
Risk free interest rate	0.91%	0.44%	0.12%
Dividends	—	—	—

Stock Options and Restricted Stock Units (“RSUs”)

On May 23, 2017, the Company approved further amendments to the 2005 Equity Incentive Plan including: increasing the number of shares of common stock authorized by 1.0 million shares and extending the term of the 2005 Equity Incentive Plan through 2027. All other terms remained the same.

Stock Options

No stock options were granted in fiscal years 2017, 2016 and 2015. 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 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
Exercised		(223,364	)		13.35
Cancelled/Forfeited		(855	)		16.63
Outstanding at December 30, 2017		216,326		$	16.82		1.76	$	1,752
Exercisable at December 30, 2017		215,620		$	16.81		1.76	$	1,748

The aggregate intrinsic value in the above table represents the total pretax intrinsic value, based on the Company’s closing stock price of $24.92 as of December 30, 2017, 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 2017, 2016 and 2015 was $3.1 million, $2.7 million and $1.6 million, respectively. The fair value of options vested during 2017, 2016 and 2015 was $0.3 million, $0.7 million and $1.5 million, respectively.

The following table summarizes ranges of outstanding and exercisable options as of December 30, 2017.

	Options Outstanding						Options Exercisable
Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$12.98-$15.00		23,383		1.83	$	14.64		23,383	$	14.64
$15.08-$15.65		27,697		1.37		15.62		27,697		15.62
$15.74-$15.74		3,333		0.40		15.74		3,333		15.74
$15.85-$15.85		60,000		2.20		15.85		60,000		15.85
$16.00-$17.33		31,700		1.82		17.00		31,700		17.00
$17.70-$18.08		6,613		1.55		17.92		6,588		17.92
$18.22-$18.22		3,600		3.16		18.22		3,449		18.22
$18.51-$18.51		9,000		3.14		18.51		8,583		18.51
$18.79-$18.79		1,000		3.23		18.79		887		18.79
$19.03-$19.03		50,000		1.13	$	19.03		50,000	$	19.03
$12.98-$19.03		216,326						215,620

As of December 30, 2017, the total unrecognized compensation costs related to unvested stock options was less than $0.1 million and is expected to be recognized as an expense over a weighted average remaining amortization period of 0.10 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 454,600 and 476,667 RSUs during the years ended December 30, 2017, and December 31, 2016, 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 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
Granted		454,600			27.12
Released		(387,592	)		16.81
Cancelled		(96,494	)		19.01
Outstanding RSUs as of December 30, 2017		790,299		$	22.46

As of December 30, 2017, the total unrecognized compensation costs related to RSU's was $12.5 million and is expected to be recognized as an expense over a weighted average remaining amortization period of 1.75 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 certain executives. The PSUs will vest in tranches over one, two, and 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. For certain shares granted in fiscal 2017, 62,500 shares are the cumulative maximum number of shares that may vest for all measurement periods.

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 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
Granted		122,050			20.51
Released		(38,500	)		10.41
Cancelled		(61,100	)		19.41
Outstanding PSUs as of December 30, 2017		129,950		$	15.60

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:

	2017 Award	2016 Award		2015 Award
Grant Date Fair Values Per Share	$14.57-$26.75	$	8.52	$	12.23
Weighted-average assumptions/inputs:
Expected Dividend	—	—		—
Range of risk-free interest rates	1.74%-1.84%	0.92%		0.25%-1.1%
Range of expected volatilities for peer group	22%-66%	22%-93%		23%-65%

The number of RSUs granted during fiscal year 2017 was 454,600, which counted as 772,820 shares, and PSUs granted during fiscal year 2017 was 122,050, which counted as 207,485 against the 2005 Equity Incentive Plan. The number of RSUs cancelled during fiscal year 2017 was 96,494, which counted as 164,040 shares, and PSUs cancelled during fiscal year 2017 was 61,100, which counted as 103,870, 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 2017, 2016 and 2015 and shares available for grant as of the respective period end dates, is as follows:

	Fiscal Year 2017			Fiscal Year 2016			Fiscal Year 2015
Shares available for grant at beginning of fiscal year		1,334,581			1,916,589			2,464,082
Additional Shares Authorized		1,000,000			—			—
Options – cancelled		855			176,587			94,012
Options - expired plan shares					(116,192	)		(1,800	)
RSUs – granted		(772,820	)		(810,334	)		(860,980	)
RSUs – cancelled		164,040			92,230			202,356
RSUs - shares issued to satisfy tax withholding obligations		251,724			179,117			120,919
PSUs – granted		(207,485	)		(114,750	)		(102,000	)
PSUs – cancelled		103,870			11,334			—
Shares available for grant at end of fiscal year		1,874,765			1,334,581			1,916,589

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. Effective January 1, 2017, as a result of the adoption of ASU No. 2016-09 “Improvements to Employee Share-Based Payment Accounting”, the Company has elected to account for forfeitures as they occur. Refer to Note 2. Recent Accounting Pronouncements for further discussion on the adoption. As such, for fiscal year ended December 30, 2017, stock-based compensation expense is recognized in the consolidated statement of operations, net of actual forfeitures during the period. Prior to the adoption of ASU No. 2016-09, the Company estimated forfeitures at the time of grant, based on historical forfeiture experience, and revised if necessary, in subsequent periods, if actual forfeitures differ from estimates. Stock-based compensation expense recognized in the consolidated statement of operations for the years ended December 31, 2016, and December 26, 2015, has been reduced for estimated forfeitures.

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 2017 and 2015, 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 2017		Fiscal Year 2016		Fiscal Year 2015
Cost of products	$	842	$	403	$	274
Cost of service		616		509		309
Research and development		1,720		1,408		1,036
Selling		2,323		2,046		1,881
General and administrative		3,318		3,300		2,748
Total stock-based compensation expense related to employee stock options and employee stock purchases	$	8,819	$	7,666	$	6,248