Note O. Stock-Based Compensation

The Company has established equity compensation plans that provide stock-based compensation to eligible employees. The 2009 Long-Term Incentive Plan (the “2009 Plan”), which was approved by Cabot’s stockholders on March 12, 2009 and amended on March 8, 2012, authorizes the issuance of approximately 8.9 million shares of common stock. This is the Company’s only equity incentive plan under which awards may currently be made to employees, although some awards made under the Company’s 2006 Long-Term Incentive Plan (the “2006 Plan”) remain outstanding at September 30, 2012.

The terms of awards made under Cabot’s equity compensation plans are generally determined by the Compensation Committee of Cabot’s Board of Directors. The 2009 Plan allows for grants of stock options, restricted stock, restricted stock units and other stock-based awards to employees. The awards made in fiscal 2012, 2011 and 2010 under the 2009 Plan consist of grants of stock options, time-based restricted stock units, performance-based restricted stock units, and restricted stock units that will be settled in cash. The options were issued with an exercise price equal to 100% of the market price of Cabot’s common stock on the date of grant, vest over a three year period (30% on each of the first and second anniversaries of the date of grant and 40% on the third anniversary of the date of grant) and expire ten years after grant. The restricted stock units vest three years from the date of the grant. The number of shares issuable, if any, when a performance-based restricted stock unit award vests will depend on the degree of achievement (threshold, target or maximum performance) of the corporate performance metrics for each year within the three-year performance period of the award. Accordingly, future compensation costs associated with outstanding awards of performance-based restricted stock units may increase or decrease based on the probability of the Company achieving the performance metrics.

As of September 30, 2012, there were 56,892 outstanding time-based and performance-based restricted stock units which will be settled by the payment of cash. Compensation expense related to these awards is remeasured throughout the vesting period and until ultimate settlement of the award. Cumulative compensation and the associated liability is recorded equal to the fair value of Cabot common stock multiplied by the applicable vesting percentage. The Company recorded liabilities associated with these cash settled awards of $1 million at both September 30, 2012 and 2011.

Prior to 2009, the principal awards made under the Company’s equity plans consisted of grants of restricted stock and stock options. The shares of restricted stock were generally purchased by the employee at a price equal to 30% of the market price of Cabot’s common stock on the date of grant, with vesting dates three years after the date of grant. The stock options issued prior to 2009 were issued with an exercise price equal to 100% of the market price of Cabot’s common stock on the date of grant, vest three years after the date of grant and expire five years after grant.

Stock-based employee compensation expense was $10 million, $10 million and $11 million, after tax, for fiscal 2012, 2011 and 2010, respectively. The Company recognized the full impact of its stock-based employee compensation expense in the Consolidated Statements of Operations for fiscal 2012, 2011 and 2010 and did not capitalize any such costs on the Consolidated Balance Sheets because those that qualified for capitalization were not material. The following table presents stock-based compensation expenses included in the Company’s Consolidated Statements of Operations:


	Years Ended September 30
	2012			2011			2010
	(Dollars in millions)
Cost of Sales	$	5		$	5		$	6
Selling and administrative expenses		9			9			11
Research and technical expenses		1			1			1

Stock-based compensation expense		15			15			18
Income tax benefit		(5	)		(5	)		(7	)

Net stock-based compensation expense	$	10		$	10		$	11

As of September 30, 2012, Cabot has $14 million, $2 million and less than $1 million of total unrecognized compensation cost related to non-vested restricted stock units, non-vested options and non-vested restricted stock, respectively, granted under the Company’s equity incentive plans. That cost is expected to be recognized over a weighted-average period of 1.2 years, 0.8 years and 0.9 years for non-vested restricted stock units, non-vested options and the non-vested restricted stock, respectively.

Equity Incentive Plan Activity

The following table summarizes the total stock option, restricted stock, and restricted stock unit activity in the equity incentive plans for fiscal 2012:


	September 30, 2012
	Stock Options							Restricted Stock					Restricted Stock Units
	Total Options			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Restricted Stock			Weighted Average Grant Date Fair Value		Restricted Stock Units⁽¹⁾			Weighted Average Grant Date Fair Value
	(Shares in thousands)
Outstanding at September 30, 2011		1,772		$	21.96		$6.06		3		$	9.56		866		$	28.89
Granted		284			32.95		11.64		—			—		405			33.15
Performance-based adjustment⁽²⁾		—			—		—		—			—		10			25.93
Exercised / Vested		(434	)		19.95		4.72		(1	)		9.56		(15	)		25.64
Cancelled / Forfeited		(43	)		33.64		8.26		—			—		(35	)		29.70

Outstanding at September 30, 2012		1,579			24.17		7.37		2			9.56		1,231			30.28

Exercisable at September 30, 2012		983			20.03

Expected to vest⁽³⁾		561			30.95

⁽¹⁾	The number “Granted” represents the number of shares issuable upon vesting of time-based restricted stock units and performance-based restricted stock units, assuming the Company performs at the target performance level in each year of the three-year performance period.

⁽²⁾	Represents the net incremental number of shares issuable upon vesting of outstanding performance-based restricted stock units, based on the Company’s actual performance against the performance targets for the 2012 performance period of the outstanding units.

⁽³⁾	Stock options expected to vest in the future, net of estimated forfeitures, have a weighted average remaining contractual life of 8.3 years.

Stock Options

The following table summarizes information related to the total outstanding options and the vested options on September 30, 2012:


	Total Options Outstanding		Exercisable Options
Aggregate Intrinsic Value (in millions)	$	20	$	16
Weighted Average Remaining Contractual Term (in years)		7.3		6.7

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on the Company’s closing common stock price of $36.57 on September 28, 2012, which would have been received by the option holders had all option holders exercised their options and immediately sold their shares on that date.

The intrinsic value of options exercised during fiscal 2012, 2011 and 2010 was $9 million, $3 million and $1 million, respectively, and the Company received cash of $9 million, $4 million and $3 million, respectively, from these exercises.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of the options at the grant date. The estimated weighted average grant date fair values of options granted during fiscal 2012, 2011 and 2010 was $11.64, $12.09, and $7.41 per option, respectively. The fair values on the grant date were calculated using the following weighted-average assumptions:


	Years Ended September 30
	2012			2011			2010
Expected stock price volatility		45	%		43	%		42	%
Risk free interest rate		1.3	%		1.8	%		2.8	%
Expected life of options (years)		6			6			6
Expected annual dividends per year	$	0.72		$	0.72		$	0.72

The expected stock price volatility assumption was determined using the historical volatility of the Company’s common stock over the expected life of the option. The expected term reflects the anticipated time period between the measurement date and the exercise date or post-vesting cancellation date.

Restricted Stock Units

The value of restricted stock unit awards is the closing stock price at the date of the grant. The estimated weighted average grant date fair values of restricted stock unit awards granted during fiscal 2012, 2011 and 2010 was $33.15, $34.76 and $24.49, respectively. The intrinsic value of restricted stock units (meaning the fair value of the units on the date of vest) that vested during fiscal 2012 and 2011 were $1 million and less than $1 million, respectively. No restricted stock units vested during fiscal 2010.

Restricted Stock

The fair value of restricted stock awards is derived by calculating the difference between the share price and the purchase price at the date of the grant. There were no restricted stock awards granted during fiscal 2012, 2011 or 2010. The intrinsic value of restricted stock that vested during fiscal 2012, 2011 and 2010 was less than $1 million, $27 million and $11 million, respectively.

Supplemental Retirement Savings Plan

Cabot’s Supplemental Retirement Savings Plan (“SRSP”) provides benefits to highly compensated employees in circumstances in which the maximum limits established under ERISA and the Internal Revenue Code prevent them from receiving all of the Company matching and ESOP contributions that would otherwise be provided under the qualified Retirement Savings Plan. The SRSP is non-qualified and unfunded. Contributions under the SRSP are treated as if invested in Cabot common stock. The majority of the distributions made under the SRSP are required to be paid with shares of Cabot common stock. The remaining distributions, which relate to certain grandfathered accounts, will be paid in cash based on the market price of Cabot common stock at the time of distribution. The aggregate value of the accounts that will be paid out in stock, which is equivalent to approximately 110,000 and 125,000 shares of Cabot common stock as of September 30, 2012 and 2011, respectively, is reflected at historic cost in stockholders’ equity, and the aggregate value of the accounts that will be paid in cash, which is $1 million as of both September 30, 2012 and 2011, is reflected in other long-term liabilities and marked-to-market quarterly.