12. SHARE-BASED COMPENSATION PLANS

EQUITY INCENTIVE PLAN AND OMNIBUS INCENTIVE PLAN

In March 2004, our stockholders approved our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan (the "EIP"), as amended and restated September 23, 2008. In March 2012, our stockholders approved the Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan (the "OIP"), which is the successor plan to the EIP, and which was amended as of March 2017. All share-based awards have been made from the OIP as of its approval date, and the EIP is no longer available for any awards. The OIP is administered by the Compensation Committee of the Board of Directors and is intended to provide management with the flexibility to attract, retain and reward our employees, directors, consultants and advisors. The OIP allows for the granting of six types of equity incentive awards: stock options, restricted stock, restricted stock units, stock appreciation rights (SARs), performance-based awards and substitute awards. The OIP also provides for cash incentive awards to be made. Substitute awards under the OIP are those awards that, in connection with an acquisition, may be granted to employees, directors, consultants or advisors of the acquired company, in substitution for equity incentives held by them in the seller or the acquired company. In fiscal 2016, related to our acquisition of NexPlanar, we granted incentive stock options (ISOs), as allowed under the OIP, to certain NexPlanar employees in substitution for unvested ISOs they had held in NexPlanar at the time of the closing of the acquisition. As of September 30, 2018, no SARs have been granted to date under either plan. No awards of any type have been granted to date to consultants or advisors under either plan. The OIP authorizes up to 4,934,444 shares of stock to be granted thereunder, including up to 2,030,952 shares of stock in the aggregate of awards other than options or SARs, and up to 2,538,690 incentive stock options. The 4,934,444 shares of stock represents 2,901,360 shares of newly authorized shares and 2,033,084 shares previously available under the EIP. In addition, shares that become available from awards under the EIP and the OIP because of events such as forfeitures, cancellations or expirations, or because shares subject to an award are withheld to satisfy tax withholding obligations, will also be available for issuance under the OIP. Shares issued under our share-based compensation plans are issued from new shares rather than from treasury shares.

Non-qualified stock options issued under the OIP, as they were under the EIP, are generally time-based and provide for a ten-year term, with options generally vesting equally over a four-year period, with first vesting on the first anniversary of the award date. Non-qualified stock options granted to non-employee directors on an annual basis vest 100% on the first anniversary of the award date. Under the OIP, as under the EIP, employees may also be granted ISOs to purchase common stock at not less than the fair value on the date of the grant. Prior to fiscal 2016, no ISOs had been granted under either plan. In the first quarter of fiscal 2016, we substituted certain NexPlanar ISOs with Cabot Microelectronics Corporation ISOs, preserving the intrinsic value, including the original vesting periods, of the original awards. Compensation expense related to our stock option awards was $6,392, $5,500 and $6,767 in fiscal 2018, 2017 and 2016, respectively. For additional information on our accounting for share-based compensation, see Note 2.

Under the OIP, employees and non-employees may be awarded shares of restricted stock or restricted stock units, which generally vest over a four-year period, with first vesting on the anniversary of the grant date. In general, shares of restricted stock and restricted stock units may not be sold, assigned, transferred, pledged, disposed of or otherwise encumbered. Holders of restricted stock, and restricted stock units, if specified in the award agreements, have all the rights of stockholders, including voting and dividend rights, subject to the above restrictions, although the holders of restricted stock units awarded prior to fiscal 2016 do not have such rights. Holders of restricted stock units awarded as of fiscal 2016 have dividend equivalent rights pursuant to the terms of the OIP and respective award agreements. Restricted shares under the OIP, as under the EIP, also may be purchased and placed "on deposit" by executive officers pursuant to the 2001 Deposit Share Program. Shares purchased under this Deposit Share Program receive a 50% match in restricted shares ("Award Shares"). These Award Shares vest at the end of a three-year period, and are subject to forfeiture upon early withdrawal of the deposit shares. Compensation expense related to our restricted stock and restricted stock unit awards and restricted shares matched at 50% pursuant to the Deposit Share Program was $9,186, $6,730 and $6,369 for fiscal 2018, 2017 and 2016, respectively.

In December 2017, we granted performance share unit ("PSU") awards to certain employees. These PSUs fully vest on the third anniversary of the grant date. Stock-based compensation for the awards is recognized over the requisite service period (three years) beginning on the date of grant through the end of the performance period based on the number of PSUs expected to vest under the awards at the end of the performance period. The expected amount of vesting is determined using certain performance measures and is re-evaluated at the end of each fiscal year through the end of the performance period. In addition, the PSUs awarded may be subject to downward or upward adjustment depending on the total shareholder return achieved by the Company during the particular performance period related to the PSUs, relative to the total shareholder return of the S&P SmallCap 600 Index. We used a third-party service provider to estimate the fair value of the PSUs at grant date by using a Monte Carlo simulation model. This model simulates the stock price movements of the Company and Index constituents using certain assumptions, including the stock price of our company and Index constituents, the risk-free interest rate and stock price volatility. We have recorded $2,056 compensation expense related to our PSU awards in fiscal 2018.

In connection with our pending acquisition of KMG, immediately prior to the closing, each KMG Equity Award granted on or following August 14, 2018 will be converted into a corresponding award relating to shares of CMC Common Stock and continue to vest post-closing in accordance with the terms of the OIP (which will include vesting on a qualifying termination of employment).

EMPLOYEE STOCK PURCHASE PLAN

In March 2008, our stockholders approved our 2007 Cabot Microelectronics Employee Stock Purchase Plan (the "ESPP"), which amended the ESPP for the primary purpose of increasing the authorized shares of common stock to be purchased under the ESPP from 475,000 designated shares to 975,000 shares. As of September 30, 2018, a total of 385,504 shares are available for purchase under the ESPP. The ESPP allows all full-time, and certain part-time, employees of our Company and its subsidiaries to purchase shares of our common stock through payroll deductions. Employees can elect to have up to 10% of their annual earnings withheld to purchase our stock, subject to a maximum number of shares that a participant may purchase and a maximum dollar expenditure in any six-month offering period, and certain other criteria. The provisions of the ESPP allow shares to be purchased at a price no less than the lower of 85% of the closing price at the beginning or end of each semi-annual stock purchase period. A total of 49,896, 69,751, and 77,437 shares were issued under the ESPP during fiscal 2018, 2017 and 2016, respectively. Compensation expense related to the ESPP was $885, $774 and $763 in fiscal 2018, 2017 and 2016, respectively.

ACCOUNTING FOR SHARE-BASED COMPENSATION

The fair value of our share-based awards, as shown below, was estimated using the Black-Scholes model with the following weighted-average assumptions:

	Year Ended September 30,
	2018				2017				2016
Stock Options
Weighted-average grant date fair value		$	26.59			$	16.50			$	14.47
Expected term (in years)			6.68				6.57				6.56
Expected volatility			26	%			27	%			26	%
Risk-free rate of return			2.4	%			2.1	%			1.9	%
Dividend yield			1.0	%			1.2	%			0.3	%

	Year Ended September 30,
	2018				2017				2016
ESPP
Weighted-average grant date fair value		$	20.94			$	12.49			$	9.57
Expected term (in years)			0.50				0.50				0.50
Expected volatility			26	%			24	%			24	%
Risk-free rate of return			1.5	%			0.6	%			0.4	%
Dividend yield			1.1	%			1.3	%			0.5	%

The Black-Scholes model is primarily used in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. Because employee stock options and ESPP purchases have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, our use of the Black-Scholes model for estimating the fair value of stock options and ESPP purchases may not provide an accurate measure. Although the value of our stock options and ESPP purchases are determined in accordance with applicable accounting standards using an option-pricing model, those values may not be indicative of the fair values observed in a willing buyer/willing seller market transaction.

The fair value of our restricted stock and restricted stock unit awards represents the closing price of our common stock on the date of award. Share-based compensation expense related to restricted stock and restricted stock unit awards is recorded net of expected forfeitures.

SHARE-BASED COMPENSATION EXPENSE

Total share-based compensation expense for the years ended September 30, 2018, 2017 and 2016, is as follows:

	Year Ended September 30,
	2018			2017			2016
Income statement classifications:
Cost of goods sold	$	2,450		$	2,229		$	2,105
Research, development and technical		1,940			1,792			1,633
Selling and marketing		1,277			1,380			1,618
General and administrative		12,851			7,603			8,585
Tax benefit		(4,306	)		(4,339	)		(4,341	)
Total share-based compensation expense, net of tax	$	14,212		$	8,665		$	9,600

The grant of December 2017 included the provisions of stock option grants and restricted stock unit awards such that except in certain circumstances including termination for cause, once an employee meets the retirement eligibility requirements, any remaining unvested share-based awards will continue to vest regardless of termination of service. Consequently, the requisite service period for the award is satisfied upon retirement eligibility. Therefore, for those employees who have met the retirement eligibility at the grant date, we now record the total share-based compensation expense upon award; for those employees who will meet the retirement eligibility during the four-year vesting period, we now record the share-based compensation expense over the period from the grant date through the date of retirement eligibility, rather than over the four-year vesting period stated in the award agreement. Restricted stock units granted to non-employee directors on an annual basis vest 100% on the first anniversary of the award date.

In fiscal 2018, we recorded $2,602 of shared-based compensation expense associated with our executive officer transitions, which is included in the table above as general and administrative expense. In fiscal 2016, we recorded $154 in share-based compensation expense related to certain unvested NexPlanar ISOs settled in cash at the acquisition date. The $154 represents the portion of the fair value of the original awards related to the post-acquisition period had these awards not been settled in cash at the acquisition date. U.S. GAAP prescribes that the portion of fair value of equity awards related to pre-acquisition service periods represents purchase consideration, including equity awards vesting immediately upon a change-in-control, and the portion of fair value related to post-acquisition service periods represents compensation expense. Since the post-acquisition service requirement was eliminated through the cash settlement, the $154 in compensation expense was recorded immediately following the acquisition date. We accelerated the vesting on the substitute ISO awards made to certain individuals based on the terms of their employment agreements and recorded $492 of share-based compensation expense related to this acceleration. The total $646 of acquisition-related compensation is included in the table above as general and administrative expense.

Our non-employee directors receive annual equity awards in March, pursuant to the OIP. The award agreements provide for immediate vesting of the award at the time of termination of service for any reason other than by reason of Cause, Death, Disability or a Change in Control, as defined in the OIP, if at such time the non-employee director has completed an equivalent of at least two full terms as a director of the Company, as defined in the Company's bylaws. Three of the Company's non-employee directors had completed at least two full terms of service as of the date of the March 2018 award. Consequently, the requisite service period for the award has already been satisfied and we recorded the fair value of $586 of the awards to these directors to share-based compensation expense in the fiscal quarter ended March 31, 2018 rather than recording that expense over the one-year vesting period stated in the award agreement.

STOCK OPTION ACTIVITY

A summary of stock option activity under the EIP and OIP as of September 30, 2018, and changes during fiscal 2018 are presented below:

	Stock Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at September 30, 2017		1,517,061		$	44.17
Granted		152,282			95.19
Exercised		(488,029	)		39.45
Forfeited or canceled		(49,833	)		53.09
Outstanding at September 30, 2018		1,131,481		$	52.68		6.8	$	57,212

Exercisable at September 30, 2018		552,969		$	41.57		5.5	$	34,063

Expected to vest after September 30, 2018		575,758		$	63.16		8.0	$	23,120

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., for all in-the-money stock options, the difference between our closing stock price per share on the last trading day of fiscal 2018 and the exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised their options on the last trading day of fiscal 2018. The total intrinsic value of options exercised was $30,345, $25,213 and $12,317 for fiscal 2018, 2017 and 2016, respectively.

The total cash received from options exercised was $19,247, $27,666 and $16,623 for fiscal 2018, 2017 and 2016, respectively. The actual tax benefit realized for the tax deductions from options exercised was $7,503, $8,743 and $4,076 for fiscal 2018, 2017 and 2016, respectively. The total fair value of stock options vested during fiscal years 2018, 2017 and 2016 was $5,008, $5,300 and $7,880, respectively. As of September 30, 2018, there was $6,723 of total unrecognized share-based compensation expense related to unvested stock options granted under the EIP and OIP. That cost is expected to be recognized over a weighted-average period of 2.3 years.

RESTRICTED STOCK AND RESTRICTED STOCK UNITS

A summary of the status of the restricted stock awards and restricted stock unit awards, including PSUs outstanding that were awarded under the OIP as of September 30, 2018, and changes during fiscal 2018, are presented below:

	Restricted Stock Awards and Units			Weighted Average Grant Date Fair Value

Nonvested at September 30, 2017		346,513		$	52.43
Granted *		140,084			93.16
Vested		(134,165	)		49.73
Forfeited		(24,285	)		58.64
Nonvested at September 30, 2018		328,147		$	70.42

* Includes the initial amount of PSUs granted, which may be subject to downward or upward adjustment depending on the performance measures during the particular performance period pursuant to the PSU award agreement.

The total fair value of restricted stock awards and restricted stock units vested during fiscal years 2018, 2017 and 2016 was $6,669, $6,898 and $10,740, respectively. As of September 30, 2018, there was $20,955 of total unrecognized share-based compensation expense related to unvested restricted stock awards and restricted stock units, including PSUs under the OIP. That cost is expected to be recognized over a weighted-average period of 2.3 years.