Note M. 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”) authorized the issuance of up to 8,854,000 shares of common stock. The 2017 Long-Term Incentive Plan (the “2017 Plan”) was approved by Cabot’s stockholders on March 9, 2017 and authorizes the issuance of up to 5,375,000 shares of common stock. The Company ceased granting awards under the 2009 Plan when the 2017 Plan was approved and, accordingly, the 2017 Plan is the only equity incentive plan under which the Company may grant equity awards to employees.

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 awards made in fiscal 2017, 2016 and 2015 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, generally 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 have a ten-year term. The restricted stock units generally 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 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, 2017, there were 12,047 outstanding time-based and performance-based restricted stock units which will be settled by the payment of cash in November 2017. Compensation expense related to these awards is remeasured throughout the vesting period and through settlement of the award. Cumulative compensation expense and the associated liability is recorded in an amount 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 less than $1 million at both September 30, 2017 and 2016.

Stock-based employee compensation expense was $10 million, $10 million and $8 million, after tax, for fiscal 2017, 2016 and 2015, respectively. The expense recognized in fiscal 2016 includes a $5 million charge recorded in connection with the modification of the outstanding equity awards held by the Company’s former CEO under the terms of his transition and separation agreement with the Company.

The Company recognized the full impact of its stock-based employee compensation expense in the Consolidated Statements of Operations for fiscal 2017, 2016 and 2015 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
	2017			2016			2015
	(In millions)
Cost of sales	$	1		$	1		$	4
Selling and administrative expenses		14			15			7
Research and technical expenses		1			1			1
Stock-based compensation expense		16			17			12
Income tax benefit		(6	)		(7	)		(4	)
Net stock-based compensation expense	$	10		$	10		$	8

As of September 30, 2017, Cabot has $18 million and $2 million of total unrecognized compensation cost related to restricted stock units and options, respectively, granted under the Company’s equity incentive plans. These costs are expected to be recognized over a weighted-average period of 1.3 years and 1.0 year for restricted stock units and options, respectively.

Equity Incentive Plan Activity

The following table summarizes the total stock option and restricted stock unit activity in the equity incentive plans for fiscal 2017:

	Stock Options							Restricted Stock Units
	Total Options			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Restricted Stock Units⁽¹⁾			Weighted Average Grant Date Fair Value
	(Shares in thousands)
Outstanding at September 30, 2016		1,522		$	37.72	$	12.53		732		$	43.54
Granted		275		$	50.57	$	12.76		303		$	51.03
Performance-based adjustment⁽²⁾		—		$	—	$	—		10		$	46.02
Exercised / Vested		(639	)	$	32.18	$	11.05		(147	)	$	47.60
Cancelled / Forfeited		(14	)	$	48.96	$	13.41		(22	)	$	45.52
Outstanding at September 30, 2017		1,144		$	43.76	$	13.40		876		$	45.43
Exercisable at September 30, 2017		654		$	41.58
Vested and expected to vest⁽³⁾		1,134		$	43.74

⁽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 performance-based restricted stock units based upon the achievement of the annual financial performance metrics for fiscal 2017.

⁽³⁾	Stock options vested and expected to vest in the future, net of estimated forfeitures, have a weighted average remaining contractual life of 6.05 years.

Stock Options

The following table summarizes information related to the outstanding and vested options on September 30, 2017:

Total

Options

Outstanding

Exercisable

Options

Vested and

Expected

to Vest

Aggregate Intrinsic Value (in millions of dollars)

Weighted Average Remaining Contractual Term (in years)

6.07

4.20

6.05

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 $55.80 on September 30, 2017, 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 2017, 2016 and 2015 was $16 million, $8 million and $2 million, respectively, and the Company received cash of $21 million, $8 million and $4 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 weighted average grant date fair values of options granted during fiscal 2017, 2016 and 2015 was $12.76, $11.12, and $15.68 per option, respectively. The fair values on the grant date were calculated using the following weighted-average assumptions:

	Years Ended September 30
	2017			2016			2015
Expected stock price volatility		32	%		33	%		41	%
Risk free interest rate		1.8	%		2.0	%		2.0	%
Expected life of options (years)		6			6			6
Expected annual dividends per year	$	1.20		$	1.20		$	0.88

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 weighted average grant date fair values of restricted stock unit awards granted during fiscal 2017, 2016 and 2015 was $51.03, $40.51, and $45.85, respectively. The intrinsic value of restricted stock units (meaning the fair value of the units on the date of vesting) that vested during fiscal 2017, 2016 and 2015 was $7 million, $15 million and $14 million, respectively.

Supplemental 401(k) Plan

Cabot’s Deferred Compensation and Supplemental Retirement Plan (“SERP 401(k)”) provides benefits to highly compensated employees when the retirement plan limits established under the Internal Revenue Code prevent them from receiving all of the Company matching and retirement contributions that would otherwise be provided under the qualified 401(k) plan. The SERP 401(k) is non-qualified and unfunded. Contributions under the SERP 401(k) are treated as if invested in Cabot common stock. The majority of the distributions made under the SERP 401(k) 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 109,000 and 143,000 shares of Cabot common stock as of September 30, 2017 and 2016, respectively, is reflected at historic cost in stockholders’ equity, and the aggregate value of the accounts that will be paid in cash, which is $2 million and $1 million as of September 30, 2017 and 2016, respectively, is reflected in other long-term liabilities and marked-to-market quarterly.