3. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Financial Accounting Standards Board ("FASB") established a three-level hierarchy for disclosure based on the extent and level of judgment used to estimate fair value. Level 1 inputs consist of valuations based on quoted market prices in active markets for identical assets or liabilities. Level 2 inputs consist of valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in an inactive market, or other observable inputs. Level 3 inputs consist of valuations based on unobservable inputs that are supported by little or no market activity.

The following table presents financial instruments, other than long-term debt, that we measured at fair value on a recurring basis at June 30, 2018 and September 30, 2017. See Note 8 for a detailed discussion of our long-term debt. We have classified the following assets and liabilities in accordance with the fair value hierarchy set forth in the applicable standards. In instances where the inputs used to measure the fair value of an asset fall into more than one level of the hierarchy, we have classified them based on the lowest-level input that is significant to the determination of the fair value.

June 30, 2018	Level 1		Level 2		Level 3		Total Fair Value
Assets:
Cash and cash equivalents	$	174,089	$	12,035	$	-	$	186,124
Other long-term investments		1,089		-		-		1,089
Available-for-sale securities:
Asset Backed Securities				13,901				13,901
Certificates of Deposit				2,442				2,442
Commercial Paper				7,754				7,754
Corporate debt securities				75,260				75,260
U.S. Treasuries				25,098				25,098
Derivative financial instruments		-		8		-		8
Total assets	$	175,178	$	136,498	$	-	$	311,676

Liabilities:
Derivative financial instruments		-		44		-		44
Total liabilities	$	-	$	44	$	-	$	44

September 30, 2017	Level 1		Level 2		Level 3		Total Fair Value
Assets:
Cash and cash equivalents	$	397,890	$	-	$	-	$	397,890
Other long-term investments		929		-		-		929
Derivative financial instruments		-		263		-		263
Total assets	$	398,819	$	263	$	-	$	399,082

Liabilities:
Derivative financial instruments		-		1,881		-		1,881
Total liabilities	$	-	$	1,881	$	-	$	1,881

Our cash and cash equivalents consist of various bank accounts used to support our operations and investments in institutional money-market funds that are traded in active markets. We are invested exclusively in AAA-rated, prime institutional money market funds, comprised of high quality, fixed income securities. Our other long-term investments represent the fair value of investments under the Cabot Microelectronics Supplemental Employee Retirement Plan (SERP), which is a nonqualified supplemental savings plan. The fair value of the investments is determined through quoted market prices within actively traded markets. Although the investments are allocated to individual participants and investment decisions are made solely by those participants, the SERP is a nonqualified plan. Consequently, the Company owns the assets and the related offsetting liability for disbursement until a participant makes a qualifying withdrawal. The long-term investment was adjusted to $1,089 in the third quarter of fiscal 2018 to reflect its fair value as of June 30, 2018.

We use an investment pricing valuation methodology of a third-party service provider to determine fair values of our available-for-sale securities, consisting of fixed income securities that are under our managed investment arrangement; these are listed in Note 2 of this report on Form 10-Q. Our available-for-sale securities are valued using a market-based valuation methodology at the end of each reporting period. Market-based valuation is determined on the basis of the last reported sale price or market quotation, typically obtained from the third-party service provider. Market quotations may also include exchange trades and publicly-available bid/offer data from established market makers or quotation systems. All available-for-sale securities are classified as Level 2 based upon inputs other than quoted prices with observable market data.

The fair value of our derivative instruments is estimated using standard valuation models and market-based observable inputs over the contractual term, including one-month LIBOR-based yield curves for interest rate swaps, and forward rates and/or the Overnight Index Swap (OIS) curve for forward foreign exchange contracts, among others. We consider the risk of nonperformance, including counterparty credit risk, in the calculation of the fair value of derivative financial instruments. Our derivative financial instruments include forward foreign exchange contracts and interest rate swaps. We terminated our interest rate swap agreements during the quarter, in connection with the extinguishment of debt. In the fourth quarter of fiscal 2017, we entered into forward foreign exchange contracts in an effort to protect our net investment in a foreign operation against potential adverse changes resulting from foreign currency fluctuation. This net investment hedge was terminated during the quarter driven by a significant repatriation of funds from this foreign operation. See Note 9 of this Report on Form 10-Q for more information on our use of derivative financial instruments.