Equity and Stock Based Compensation Plans

Options

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.



	Three Months Ended				Six Months Ended
	June 29, 2013		June 30, 2012		June 29, 2013		June 30, 2012
Stock Options
Expected life	4.6 years		4.2 years		4.5 years		4.5 years
Volatility	68.90	%	78.65	%	72.32	%	78.23	%
Risk free interest rate	1.02	%	0.74	%	0.90	%	0.85	%
Dividends	—		—		—		—
Employee Stock Purchase Plan
Expected life	0.5 years		0.5 years		0.5 years		0.5 years
Volatility	25.94	%	55.93	%	27.61	%	62.74	%
Risk free interest rate	0.10	%	0.06	%	0.11	%	0.06	%
Dividends	—		—		—		—

The weighted average fair value per share of the stock options awarded in the three month periods ended June 29, 2013, and June 30, 2012, was $7.94 and $8.80, respectively, and in the six month periods ended June 29, 2013, and June 30, 2012, was $8.70 and $10.66, respectively, 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 six month period ended June 29, 2013, 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 29, 2012	2,020,319		$	12.01	4.44	$	6,770
Exercised	(181,617	)	7.15
Granted	314,100		15.31
Cancelled	(67,037	)	14.63
Outstanding at June 29, 2013	2,085,765		$	12.85	4.35	$	5,757
Exercisable at June 29, 2013	1,234,828		$	11.25	3.56	$	5,127

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $14.67 as of June 29, 2013, 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 month periods ended June 29, 2013, and June 30, 2012, was $0.6 million and $0.7 million, respectively. The total intrinsic value of options exercised during the six month periods ended June 29, 2013, and June 30, 2012, was $1.4 million and $3.4 million, respectively.

Restricted Stock Units ("RSUs")

A summary of activity for RSUs during the six month period ended June 29, 2013, is as follows:



	Number of RSUs		Weighted Average Fair Value
Outstanding RSU as of December 29, 2012	235,162		$	16.32
Granted	286,060		15.43
Released	(29,739	)	14.62
Cancelled	(8,518	)	14.27
Outstanding RSU as of June 29, 2013	482,965		$	14.67

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):



	Three Months Ended				Six Months Ended
	June 29, 2013		June 30, 2012		June 29, 2013		June 30, 2012
Cost of products	$	53	$	20	$	98	$	77
Cost of service	71		75		130		133
Research and development	362		347		679		666
Selling	501		481		941		922
General and administrative	764		670		1,360		1,256
Total stock-based compensation expense	$	1,751	$	1,593	$	3,208	$	3,054

Other Comprehensive Income

The following table shows a summary of changes in accumulated other comprehensive income by component for the six months ended June 29, 2013 (in thousands):



	Defined Benefit Pension Plans			Foreign Currency Translations			Unrealized Gain (Loss) on Investment			Total
Balance as of December 29, 2012	$	(179	)	$	1,453		$	(2	)	$	1,272
Other comprehensive income	—			(1,979		)	(3		)	(1,982		)
Balance as of June 29, 2013	$	(179	)	$	(526	)	$	(5	)	$	(710	)