UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

March 31, 2017
or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 000-30205

CABOT MICROELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)


DELAWARE
36-4324765
(State of Incorporation)
(I.R.S. Employer Identification No.)

870 NORTH COMMONS DRIVE
60504
AURORA, ILLINOIS
(Zip Code)
(Address of principal executive offices)
 

Registrant's telephone number, including area code: (630) 375-6631

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES
X
NO
   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
YES
X
NO
   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of "large accelerated filer," "accelerated filer" and smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

 
Large accelerated filer
X
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 
YES
 
NO
X
 

As of April 30, 2017, the Company had 25,254,551 shares of Common Stock, par value $0.001 per share, outstanding.

CABOT MICROELECTRONICS CORPORATION

INDEX

Part I. Financial Information
Page
     
Item 1.
Unaudited Financial Statements
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
Item 2.
23
     
Item 3.
31
     
Item 4.
32
     
Part II. Other Information
 
     
Item 1.
33
     
Item 1A.
33
     
Item 2.
38
     
Item 3.
38
     
Item 4.
38
     
Item 6.
39
 
40

PART I. FINANCIAL INFORMATION
ITEM 1.

 
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands, except per share amounts)

   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
   
2017
   
2016
   
2017
   
2016
 
Revenue
 
$
119,184
   
$
99,244
   
$
242,438
   
$
199,613
 
                                 
Cost of goods sold
   
59,153
     
52,348
     
120,902
     
102,522
 
                                 
Gross profit
   
60,031
     
46,896
     
121,536
     
97,091
 
                                 
Operating expenses:
                               
Research, development and technical
   
14,090
     
14,934
     
27,486
     
29,762
 
Selling and marketing
   
7,268
     
6,668
     
14,820
     
13,417
 
General and administrative
   
14,699
     
12,990
     
27,195
     
27,253
 
Total operating expenses
   
36,057
     
34,592
     
69,501
     
70,432
 
                                 
Operating income
   
23,974
     
12,304
     
52,035
     
26,659
 
                                 
Interest expense
   
1,135
     
1,191
     
2,285
     
2,358
 
                                 
Other income, net
   
234
     
452
     
1,230
     
642
 
Income before income taxes
   
23,073
     
11,565
     
50,980
     
24,943
 
                                 
Provision for income taxes
   
4,793
     
2,434
     
10,469
     
4,503
 
                                 
Net income
 
$
18,280
   
$
9,131
   
$
40,511
   
$
20,440
 
                                 
Basic earnings per share
 
$
0.73
   
$
0.38
   
$
1.63
   
$
0.84
 
                                 
Weighted average basic shares outstanding
   
25,031
     
24,061
     
24,798
     
24,070
 
                                 
Diluted earnings per share
 
$
0.71
   
$
0.37
   
$
1.60
   
$
0.83
 
                                 
Weighted average diluted shares outstanding
   
25,526
     
24,408
     
25,304
     
24,444
 
                                 
Dividends per share
 
$
0.20
   
$
0.18
   
$
0.38
   
$
0.18
 

The accompanying notes are an integral part of these consolidated financial statements.

CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited and in thousands)

   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
   
2017
   
2016
   
2017
   
2016
 
                         
Net income
 
$
18,280
   
$
9,131
   
$
40,511
   
$
20,440
 
                                 
Other comprehensive income (loss), net of tax:
                               
Foreign currency translation adjustments
   
13,883
     
6,160
     
(3,691
)
   
6,357
 
Minimum pension liability adjustment
   
-
     
(85
)
   
-
     
287
 
Net unrealized gain (loss) on cash flow hedges
   
152
     
(651
)
   
818
     
(92
)
                                 
Other comprehensive income (loss), net of tax
   
14,035
     
5,424
     
(2,873
)
   
6,552
 
                                 
Comprehensive income
 
$
32,315
   
$
14,555
   
$
37,638
   
$
26,992
 

The accompanying notes are an integral part of these consolidated financial statements.

CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except share amounts)

   
March 31, 2017
   
September 30, 2016
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
343,683
   
$
287,479
 
Accounts receivable, less allowance for doubtful accounts of $1,708 at March 31, 2017, and $1,828 at September 30, 2016
   
59,438
     
62,830
 
Inventories
   
69,778
     
72,123
 
Prepaid expenses and other current assets
   
15,807
     
14,398
 
Total current assets
   
488,706
     
436,830
 
                 
Property, plant and equipment, net
   
109,042
     
106,496
 
Goodwill
   
101,786
     
100,639
 
Other intangible assets, net
   
46,580
     
50,476
 
Deferred income taxes
   
20,173
     
20,747
 
Other long-term assets
   
11,815
     
12,042
 
Total assets
 
$
778,102
   
$
727,230
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
 
$
12,345
   
$
16,834
 
Accrued expenses, income taxes payable and other current liabilities
   
42,924
     
41,395
 
Current portion of long-term debt
   
9,844
     
7,656
 
Total current liabilities
   
65,113
     
65,885
 
                 
Long-term debt, net of current portion, less prepaid debt issuance cost of $567 at March 31, 2017 and $696 at September 30, 2016
   
140,527
     
146,961
 
Deferred income taxes
   
62
     
75
 
Other long-term liabilities
   
14,789
     
16,661
 
Total liabilities
   
220,491
     
229,582
 
                 
Commitments and contingencies (Note 10)
               
Stockholders' equity:
               
Common Stock: Authorized: 200,000,000 shares, $0.001 par value; Issued: 35,072,863 shares at March 31, 2017, and 34,261,304 shares at September 30, 2016
   
35
     
34
 
Capital in excess of par value of common stock
   
567,250
     
530,840
 
Retained earnings
   
361,652
     
330,776
 
Accumulated other comprehensive income (loss)
   
6,683
     
9,556
 
Treasury stock at cost, 9,816,519 shares at March 31, 2017, and 9,744,642 shares at September 30, 2016
   
(378,009
)
   
(373,558
)
Total stockholders' equity
   
557,611
     
497,648
 
                 
Total liabilities and stockholders' equity
 
$
778,102
   
$
727,230
 

The accompanying notes are an integral part of these consolidated financial statements.

CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and amounts in thousands)

   
Six Months Ended March 31,
 
   
2017
   
2016
 
Cash flows from operating activities:
           
Net income
 
$
40,511
   
$
20,440
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
13,214
     
12,495
 
Provision for doubtful accounts
   
(38
)
   
(14
)
Share-based compensation expense
   
6,465
     
8,202
 
Deferred income tax expense
   
1,570
     
574
 
Non-cash foreign exchange gain
   
(174
)
   
(288
)
(Gain) loss on disposal of property, plant and equipment
   
(64
)
   
158
 
Impairment of assets
   
-
     
79
 
Other
   
207
     
(78
)
Changes in operating assets and liabilities:
               
Accounts receivable
   
1,449
     
1,517
 
Inventories
   
723
     
(2,157
)
Prepaid expenses and other assets
   
(2,310
)
   
(796
)
Accounts payable
   
(4,418
)
   
93
 
Accrued expenses, income taxes payable and other liabilities
   
774
     
(7,589
)
Net cash provided by operating activities
   
57,909
     
32,636
 
                 
Cash flows from investing activities:
               
Additions to property, plant and equipment
   
(11,677
)
   
(10,330
)
Proceeds from the sale of property, plant and equipment
   
90
     
17
 
Acquisition of business, net of cash acquired
   
-
     
(126,525
)
Net cash used in investing activities
   
(11,587
)
   
(136,838
)
                 
Cash flows from financing activities:
               
Repayment of long-term debt
   
(4,375
)
   
(4,375
)
Repurchases of common stock
   
(4,451
)
   
(27,855
)
Net proceeds from issuance of stock
   
24,802
     
4,695
 
Dividends paid
   
(8,926
)
   
-
 
Tax benefits associated with share-based compensation expense
   
5,164
     
666
 
Net cash provided by (used in) financing activities
   
12,214
     
(26,869
)
                 
Effect of exchange rate changes on cash
   
(2,332
)
   
3,269
 
Increase (decrease) in cash and cash equivalents
   
56,204
     
(127,802
)
Cash and cash equivalents at beginning of period
   
287,479
     
354,190
 
Cash and cash equivalents at end of period
 
$
343,683
   
$
226,388
 
                 
Supplemental disclosure of non-cash investing and financing activities:
               
Purchases of property, plant and equipment in accrued liabilities and accounts payable at the end of the period
 
$
2,496
   
$
868
 

The accompanying notes are an integral part of these consolidated financial statements.

CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except share and per share amounts)


1. BACKGROUND AND BASIS OF PRESENTATION

Cabot Microelectronics Corporation ("Cabot Microelectronics'', "the Company'', "us'', "we'', or "our'') supplies high-performance polishing slurries and pads used in the manufacture of advanced integrated circuit (IC) devices within the semiconductor industry, in a process called chemical mechanical planarization (CMP).  CMP polishes surfaces at an atomic level, thereby helping to enable IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects.  We develop, produce and sell CMP slurries for polishing many of the conducting and insulating materials used in IC devices, and also for polishing the disk substrates and magnetic heads used in hard disk drives.  We develop, manufacture and sell CMP polishing pads, which are used in conjunction with slurries in the CMP process.  We also develop and provide products for demanding surface modification applications in other industries through our Engineered Surface Finishes (ESF) business.  For additional information, refer to Part 1, Item 1, "Business", in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.

The unaudited consolidated financial statements have been prepared by Cabot Microelectronics pursuant to the rules of the Securities and Exchange Commission (SEC) and accounting principles generally accepted in the United States of America (U.S. GAAP).  In the opinion of management, these unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of Cabot Microelectronics' financial position as of March 31, 2017, cash flows for the six months ended March 31, 2017, and March 31, 2016, and results of operations for the three and six months ended March 31, 2017, and March 31, 2016.  The consolidated balance sheet as of September 30, 2016 was derived from audited financial statements, but does not contain all of the footnote disclosures from the annual financial statements.  The results of operations for the three and six months ended March 31, 2017 may not be indicative of results to be expected for future periods, including the fiscal year ending September 30, 2017.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in Cabot Microelectronics' Annual Report on Form 10-K for the fiscal year ended September 30, 2016.

The consolidated financial statements include the accounts of Cabot Microelectronics and its subsidiaries. All intercompany transactions and balances between the companies have been eliminated as of March 31, 2017 .

USE OF ESTIMATES

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes.  The accounting estimates that require management's most difficult and subjective judgments include, but are not limited to, those estimates related to   bad debt expense, inventory valuation, valuation and classification of auction rate securities, impairment of long-lived assets and investments, business combinations, goodwill, other intangible assets, interest rate swaps, share-based compensation, income taxes and contingencies.   We base our estimates on historical experience, current conditions and on various other assumptions that we believe are reasonable under the circumstances.  However, future events are subject to change and estimates and judgments routinely require adjustment.  Actual results may differ from these estimates under different assumptions or conditions.

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Trade accounts receivable are recorded at the invoiced amount and do not bear interest.  We maintain an allowance for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments.  Our allowance for doubtful accounts is based on historical collection experience, adjusted for any specific known conditions or circumstances such as customer bankruptcies and increased risk due to economic conditions.  Amounts charged to bad debt expense are recorded in general and administrative expenses.  A portion of our receivables and the related allowance for doubtful accounts is denominated in foreign currencies, so they are subject to foreign exchange fluctuations.  Uncollectible account balances are charged against the allowance when we believe that it is probable that the receivable will not be recovered.

 
    At March 31, 2017, our accounts receivable balance with Toshiba Corporation ("Toshiba") represented a U.S. dollar equivalent of $2,592, which equates to 4.4%   of our total accounts receivable balance of $59,438, net of allowance for doubtful accounts, and of which no amounts are past due.  We continue to monitor the financial condition of Toshiba and its ability to make the required payments due on our receivables.  At present, we do not believe it is probable that the receivables from Toshiba are impaired, and accordingly, we have not recorded a related allowance for doubtful accounts .

2. BUSINESS COMBINATION

On October 22, 2015, the Company completed the acquisition of 100% of the outstanding stock of NexPlanar Corporation (NexPlanar), a privately held, U.S. based company specializing in the development, manufacture and sale of advanced CMP pad solutions for the semiconductor industry.  We acquired NexPlanar to expand our polishing pad portfolio by adding a complementary pad technology and to leverage our global infrastructure to better serve customers on a global basis, including offering performance-advantaged slurry and pad consumable sets.  We paid a total of $126,976, including total purchase consideration of $142,237, less cash acquired of $15,261.  The purchase consideration includes $142,167 paid at the date of acquisition and $70 for a post-closing adjustment.   In addition, we paid $154 in compensation expense related to certain unvested NexPlanar stock options settled in cash at the acquisition date.


The following table summarizes the fair values of assets acquired and liabilities assumed as of the date of acquisition:

Total purchase consideration
 
$
142,237
 
         
Cash
 
$
15,261
 
Accounts receivable
   
3,052
 
Inventories
   
2,768
 
Prepaid expenses and other current assets
   
1,712
 
Property, plant and equipment
   
6,901
 
Intangible assets
   
55,000
 
Deferred tax assets
   
20,509
 
Other long-term assets
   
1,458
 
Accounts payable
   
(1,057
)
Accrued expenses and other current liabilities
   
(1,472
)
Deferred tax liabilities
   
(20,313
)
Total identifiable net assets
   
83,819
 
Goodwill
   
58,418
 
   
$
142,237
 

The acquisition was accounted for using the acquisition method of accounting. Tangible and identifiable intangible assets acquired and liabilities assumed are recorded at fair value as of the acquisition date.  We finalized the purchase price allocation during the fourth quarter of fiscal 2016.  We believe that the information we used provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed.

The fair values of identifiable assets and liabilities acquired were developed with the assistance of third party valuation firms.  The fair value of acquired property, plant and equipment is valued at its "value-in-use" as there are no known plans to dispose of any assets.  The fair value of acquired identifiable intangible assets was determined using the "income approach" on an individual asset basis.  The key assumptions used in the calculation of the discounted cash flows include projected revenue, gross margin, operating expenses, and discount rate.  The valuations and the underlying assumptions have been deemed reasonable by Company management.  There are inherent uncertainties and management judgment required in these determinations.


The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition:
 
   
Fair
 
Useful
   
Value
 
Life
Trade name
 
$
8,000
 
7 years
Customer relationships
   
8,000
 
11 years
Developed technology - product family A
   
32,000
 
7 years
Developed technology - product family B
   
2,000
 
9 years
In-process technology
   
5,000
   
Total intangible assets
 
$
55,000
   


The trade name represents the estimated fair value of the brand and name recognition associated with the marketing of NexPlanar's product offerings.  Customer relationships represent the estimated fair value of the underlying relationships and agreements with NexPlanar customers.  Developed technology represents the estimated fair value of NexPlanar's technology, processes and knowledge regarding its product offerings.  In-process technology represents the fair value assigned to technology projects under development as of the acquisition date.  The in-process technology assets are capitalized and accounted for as indefinite-lived intangible assets and will be subject to impairment testing until completion or abandonment of the projects.  Upon successful completion of each project, we will make a determination of the appropriate useful life and the related amortization will be recorded as an expense over the estimated useful life based on the future expected cash flow stream.  In the fourth quarter of fiscal 2016, we recorded impairment expense of $1,000 representing the entire fair value of one of the in-process technology assets as management determined that revised expected future cash flows were insufficient to support the value of the asset.  The intangible assets subject to amortization have a weighted average useful life of 7.7 years and are being amortized on a straight-line basis.

The excess of purchase consideration over the fair value of net assets acquired was recorded as goodwill, and is not deductible for income tax purposes.  The goodwill is primarily attributable to anticipated revenue growth from the combination of our and NexPlanar pad technologies, expected synergies from the combined operations, and the assembled workforce of NexPlanar.  NexPlanar's results of operations have been included in our unaudited consolidated statements of income and comprehensive income from the date of acquisition.


The following supplemental pro forma information summarizes the combined results of operations for Cabot Microelectronics and NexPlanar as if the acquisition had occurred on October 1, 2014.

   
Three Months Ended
March 31,
   
Six Months Ended
March 31,
 
   
2016
   
2016
 
Revenues
 
$
99,244
   
$
201,020
 
Net income
   
9,131
     
21,503
 
Earnings per share - basic
   
0.38
     
0.89
 
Earnings per share - diluted
 
$
0.37
   
$
0.87
 

The historical financial information has been adjusted to give effect to the pro forma adjustments, which consist of amortization expense associated with intangible assets, and the elimination of interest expense on NexPlanar debt repaid prior to the acquisition.  The proforma amounts for the six months ended March 31, 2016 exclude the impact of compensation expense related to unvested NexPlanar stock options settled in cash, and the step-up of inventory as these items are assumed to have occurred during the quarter ended December 31, 2014 had the acquisition been completed on October 1, 2014.  The pro forma consolidated results are not necessarily indicative of what the consolidated results actually would have been had the acquisition been completed on October 1, 2014.  The pro forma consolidated results do not purport to project future results of combined operations, nor do they reflect the expected realization of any revenue or cost synergies associated with the acquisition.



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 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 March 31, 2017 and September 30, 2016.  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. 

March 31, 2017
 
Level 1
   
Level 2
   
Level 3
   
Total
Fair Value
 
Assets:
                       
Cash and cash equivalents
 
$
343,683
   
$
-
   
$
-
   
$
343,683
 
Other long-term investments
   
1,134
     
-
     
-
     
1,134
 
Derivative financial instruments
   
-
     
801
     
-
     
801
 
Total assets
 
$
344,817
   
$
801
   
$
-
   
$
345,618
 
                                 
Liabilities:
                               
Derivative financial instruments
   
-
     
456
     
-
     
456
 
Total liabilities
 
$
-
   
$
456
   
$
-
   
$
456
 

September 30, 2016
 
Level 1
   
Level 2
   
Level 3
   
Total
Fair Value
 
Assets:
                       
Cash and cash equivalents
 
$
287,479
   
$
-
   
$
-
   
$
287,479
 
Other long-term investments
   
1,028
     
-
     
-
     
1,028
 
Derivative financial instruments
   
-
     
28
     
-
     
28
 
Total assets
 
$
288,507
   
$
28
   
$
-
   
$
288,535
 
                                 
Liabilities:
                               
Derivative financial instruments
   
-
     
1,469
     
-
     
1,469
 
Total liabilities
 
$
-
   
$
1,469
   
$
-
   
$
1,469
 

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 invest exclusively in AAA- rated, prime institutional money market funds, comprised of high quality, short-term 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 such time as participant makes a qualifying withdrawal.  The long-term asset was adjusted to $1,134 in the second quarter of fiscal 2017 to reflect its fair value as of March 31, 2017.

Our derivative financial instruments include forward foreign exchange contracts and interest rate swaps.  In the first quarter of fiscal 2015, we entered into floating-to-fixed interest rate swap agreements to hedge the variability in LIBOR-based interest payments on a portion of our outstanding variable rate debt.  These interest rate swaps represent our primary use of derivative financial instruments.  The fair value of our derivative instruments is estimated using standard valuation models using market-based observable inputs over the contractual term, including one-month LIBOR-based yield curves, among others.  We consider the risk of nonperformance, including counterparty credit risk, in the calculation of the fair value of derivative financial instruments.  See Note 9 of this Form 10-Q for more information on our use of derivative financial instruments.


4. INVENTORIES
Inventories consisted of the following:

   
March 31,
2017
   
September 30,
2016
 
             
Raw materials
 
$
38,025
   
$
45,109
 
Work in process
   
5,481
     
4,668
 
Finished goods
   
26,272
     
22,346
 
Total
 
$
69,778
   
$
72,123
 


5. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill was $101,786 as of March 31, 2017, and $100,639 as of September 30, 2016.  The decrease in goodwill was due to $1,147 in foreign exchange fluctuations of the New Taiwan dollar.

The components of other intangible assets are as follows:

   
March 31, 2017
   
September 30, 2016
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Gross
Carrying
Amount
   
Accumulated
Amortization
 
Other intangible assets subject to amortization:
                       
Product technology
 
$
42,287
   
$
15,207
   
$
42,194
   
$
12,718
 
Acquired patents and licenses
   
8,270
     
8,236
     
8,270
     
8,155
 
Trade secrets and know-how
   
2,550
     
2,550
     
2,550
     
2,550
 
Customer relationships, distribution rights and other
   
28,228
     
13,952
     
27,900
     
12,205
 
                                 
Total other intangible assets subject to amortization
   
81,335
     
39,945
     
80,914
     
35,628
 
                                 
In-process technology
   
4,000
             
4,000
         
Other indefinite-lived intangibles*
   
1,190
             
1,190
         
Total other intangible assets not subject to amortization
   
5,190
             
5,190
         
                                 
Total other intangible assets
 
$
86,525
   
$
39,945
   
$
86,104
   
$
35,628
 

*Other indefinite-lived intangible assets not subject to amortization consist primarily of trade names.


Amortization expense on our intangible assets was $1,926 and $3,925 for the three and six months ended March 31, 2017 respectively, and was $2,138 and $3,954 for the three and six months ended and March 31, 2016, respectively. Estimated future amortization expense for the five succeeding fiscal years is as follows:

 
Fiscal Year
 
Estimated
Amortization
Expense
 
 
Remainder of 2017
 
$
3,869
 
 
2018
   
7,118
 
 
2019
   
6,675
 
 
2020
   
6,670
 
 
2021
   
6,664
 



Goodwill and indefinite-lived intangible assets are tested for impairment annually in the fourth quarter of the fiscal year or more frequently if indicators of potential impairment exist, using a fair-value-based approach.  The recoverability of goodwill is measured at the reporting unit level, which is defined as either an operating segment or one level below an operating segment.  An entity has the option to assess the fair value of a reporting unit either using a qualitative analysis ("step zero") or a discounted cash flow analysis ("step one").  Similarly, an entity has the option to use a step zero or a step one approach to determine the recoverability of indefinite-lived intangible assets.  In fiscal 2016, we chose to use a step one analysis for both goodwill impairment and for indefinite-lived intangible asset impairment.

We completed our annual impairment test during our fourth quarter of fiscal 2016 and recorded $1,000 of impairment expense on one of the in-process technology assets acquired in the NexPlanar acquisition during the fourth quarter of 2016 based on management's revised expected future cash flows for this asset.  There were no indicators of potential impairment during the quarter ended March 31, 2017, so it was not necessary to perform an impairment review for goodwill and indefinite-lived intangible assets during the quarter.  There have been no cumulative impairment charges recorded on the goodwill for any of our reporting units.


6. OTHER LONG-TERM ASSETS

Other long-term assets consisted of the following:

   
March 31,
2017
   
September 30,
2016
 
             
Auction rate securities (ARS)
 
$
5,494
   
$
5,494
 
Other long-term assets
   
2,602
     
2,620
 
Long-term contract asset
   
2,585
     
2,900
 
Other long-term investments
   
1,134
     
1,028
 
Total
 
$
11,815
   
$
12,042
 

Our ARS investments at March 31, 2017 consisted of two tax exempt municipal debt securities with a total par value of $5,494, both of which have maturities greater than ten years.  The fair value of our ARS, determined using level 2 fair value inputs, was $5,039 as of March 31, 2017. We have classified our ARS as held-to-maturity based on our intention and ability to hold the securities until maturity. We believe the gross unrecognized loss of $455 is due to the illiquidity in the ARS market, rather than to credit loss.  Although we believe these securities will ultimately be collected in full, we believe that it is not likely that we will be able to monetize the securities in our next business cycle (which for us is generally one year).  We will continue to monitor our ARS for impairment indicators, which may require us to record an impairment charge that is deemed other-than-temporary.

In the third quarter of fiscal 2015, we amended a supply contract with an existing supplier. The amended agreement includes a fee of $4,500, which provides us the option to purchase certain raw materials beyond calendar 2016.  This fee was recorded as a long-term asset at its present value and is being amortized into cost of goods sold on a straight-line basis through December 31, 2019, the expiration date of the agreement.  See Note 10 for more information regarding this contract.

Other long-term assets are comprised of the long-term portion of prepaid unamortized debt costs, related to our Revolving Credit Facility, as well as miscellaneous deposits and prepayments on contracts extending beyond the next 12 months. As discussed in Note 8, we reclassified $435 of prepaid debt costs related to our Term Loan out of other long-term assets as of September 30, 2016, in accordance with the adoption of a new accounting pronouncement. As discussed in Note 3, we recorded a long-term asset and a corresponding long-term liability of $1,134 representing the fair value of our SERP investments as of March 31, 2017.


7. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES

Accrued expenses, income taxes payable and other current liabilities consisted of the following:

   
March 31,
2017
   
September 30,
2016
 
             
Accrued compensation
 
$
20,069
   
$
17,856
 
Income taxes payable
   
6,413
     
7,878
 
Dividends payable
   
5,212
     
4,502
 
Raw materials received, not yet invoiced
   
2,867
     
2,648
 
Deferred revenue and customer advances
   
678
     
782
 
Warranty accrual
   
215
     
243
 
Taxes, other than income taxes
   
1,258
     
775
 
Current portion of long-term contract liability
   
1,500
     
1,500
 
Other accrued expenses
   
4,712
     
5,211
 
Total
 
$
42,924
   
$
41,395
 


8. DEBT

On February 13, 2012, we entered into a credit agreement (the "Credit Agreement") among the Company, as Borrower, Bank of America, N.A., as administrative agent, swing line lender and an L/C issuer, Bank of America, Merrill Lynch and J.P. Morgan Securities LLC, as joint lead arrangers and joint book managers, JPMorgan Chase Bank, N.A., as syndication agent, and Wells Fargo Bank, N.A. as documentation agent. The Credit Agreement provided us with a $175,000 term loan (the "Term Loan"), which we drew on February 27, 2012 to fund approximately half of the special cash dividend we paid to our stockholders on March 1, 2012, and a $100,000 revolving credit facility (the "Revolving Credit Facility"), which has never been drawn, with sub-limits for multicurrency borrowings, letters of credit and swing-line loans.  The Term Loan and the Revolving Credit Facility are referred to as the "Credit Facilities."  On June 27, 2014, we entered into an amendment (the "Amendment") to the Credit Agreement, which (i) increased term loan commitments by $17,500 from $157,500 to $175,000, the same level as the original amount under the Credit Agreement at its inception in 2012; (ii) increased the uncommitted accordion feature on the Revolving Credit Facility from $75,000 to $100,000; (iii) extended the expiration date of the Credit Facilities from February 13, 2017 to June 27, 2019; (iv) relaxed the consolidated leverage ratio financial covenant; and (v) revised certain pricing terms and other terms within the Credit Agreement. On June 27, 2014, we drew the $17,500 of increased term loan commitments, bringing the total outstanding commitments under the Term Loan to $175,000.

Borrowings under the amended Credit Facilities (other than in respect of swing-line loans) bear interest at a rate per annum equal to the "Applicable Rate" (as defined below) plus, at our option, either (1) a LIBOR rate determined by reference to the cost of funds for deposits in the relevant currency for the interest period relevant to such borrowing or (2) the "Base Rate", which is the highest of (x) the prime rate of Bank of America, N.A., (y) the federal funds rate plus 1/2 of 1.00% and (z) the one-month LIBOR rate plus 1.00%.  The current Applicable Rate for borrowings under the Credit Facilities is 1.50%, as amended, with respect to LIBOR borrowings and 0.25% with respect to Base Rate borrowings, with such Applicable Rate subject to adjustment based on our consolidated leverage ratio.  Swing-line loans bear interest at the Base Rate plus the Applicable Rate for Base Rate loans under the Revolving Credit Facility.  In addition to paying interest on outstanding principal under the Credit Agreement, we pay a commitment fee to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder.  As amended, the fee ranges from 0.20% to 0.30%, based on our consolidated leverage ratio. Interest expense and commitment fees are paid according to the relevant interest period and no less frequently than at the end of each calendar quarter.  We also pay letter of credit fees as necessary.  The Term Loan has periodic scheduled repayments; however, we may voluntarily prepay the Credit Facilities without premium or penalty, subject to customary "breakage" fees and reemployment costs in the case of LIBOR borrowings.  All obligations under the Credit Agreement are guaranteed by certain of our existing and future direct and indirect domestic subsidiaries.  The obligations under the Credit Agreement and guarantees of those obligations are secured, subject to certain exceptions, by first priority liens and security interests in the assets of the Company and certain of its domestic subsidiaries.


In the first quarter of fiscal 2017, we adopted the provisions of Accounting Standards Update No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03) and ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements".  The provisions of ASU 2015-03 require an entity to present the debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction to the carrying amount of that debt liability.  ASU 2015-03 requires adoption on a retrospective basis, wherein the balance sheet of each individual period should be adjusted to reflect the period-specific effects of the guidance.  ASU 2015-15 provides guidance on the treatment of debt issuance costs related to line-of-credit arrangements based on comments provided by the SEC staff.  The SEC staff stated that it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance cost ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.  In accordance with this guidance, we have separated our debt issuance costs between those attributable to our Term Loan and those attributable to our Revolving Credit Facility.  The debt issuance costs attributable to our Term Loan are presented as a reduction of the long-term debt balance on our Consolidated Balance Sheet, while the debt issuance costs attributable to our Revolving Credit Facility remain in prepaid expenses and other current assets, and other long-term assets.  As of March 31, 2017, $567 of debt issuance costs related to our Term Loan are presented as a reduction of long-term debt.  Debt issuance costs related to our Revolving Credit Facility are not material.  As of September 30, 2016, we have reclassified $261 and $435 of debt issuance costs related to our Term Loan from prepaid expenses and other current assets, and other long-term assets, respectively, and presented them as a reduction of our long-term debt on our Consolidated Balance Sheet.

The Credit Agreement contains covenants that restrict the ability of the Company and its subsidiaries to take certain actions, including, among other things and subject to certain significant exceptions: creating liens, incurring indebtedness, making investments, engaging in mergers, selling property, paying dividends or amending organizational documents.  The Credit Agreement requires us to comply with certain financial ratio maintenance covenants.  These include a maximum consolidated leverage ratio of 2.75 to 1.00 and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00 for the period January 1, 2016 through the expiration of the Credit Agreement.  As of March 31, 2017, our consolidated leverage ratio was   1.03 to 1.00 and our consolidated fixed charge coverage ratio was 3.54   to 1.00.  The Credit Agreement also contains customary affirmative covenants and events of default.  We believe we are in compliance with these covenants.


At March 31, 2017, the fair value of the Term Loan, using level 2 inputs, approximates its carrying value of $150,938 as the loan bears a floating market rate of interest.  As of March 31, 2017, $9,844 of the debt outstanding is classified as short-term.

Principal repayments of the Term Loan are generally made on the last calendar day of each quarter if that day is considered to be a business day.  As of March 31, 2017, scheduled principal repayments of the Term Loan were as follows:

 
Fiscal Year
 
Principal
Repayments
 
 
Remainder of 2017
 
$
3,281
 
 
2018
   
14,219
 
 
2019
   
133,438
 
 
Total
 
$
150,938
 


9. DERIVATIVE FINANCIAL INSTRUMENTS

We are exposed to various market risks, including risks associated with interest rates and foreign currency exchange rates.  We enter into certain derivative transactions to mitigate the volatility associated with these exposures.  We have policies in place that define acceptable instrument types we may enter into and we have established controls to limit our market risk exposure.  We do not use derivative financial instruments for trading or speculative purposes.  In addition, all derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value on a gross basis.

Cash Flow Hedges – Interest Rate Swap Agreements
In the first quarter of fiscal 2015, we entered into floating-to-fixed interest rate swap agreements to hedge the variability in LIBOR-based interest payments on $86,406 of our outstanding variable rate debt.  The notional amount of the swaps decreases each quarter by an amount in proportion to our scheduled quarterly principal repayment of debt. The notional value of the swaps was $75,469 as of March 31, 2017, and the swaps are scheduled to expire on June 27, 2019.


We have designated these swap agreements as cash flow hedges pursuant to ASC 815, "Derivatives and Hedging".  As cash flow hedges, unrealized gains are recognized as assets and unrealized losses are recognized as liabilities.  Unrealized gains and losses are designated as effective or ineffective based on a comparison of the changes in fair value of the interest rate swaps and changes in fair value of the underlying exposures being hedged.  The effective portion is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion is recorded as a component of interest expense.  Changes in the method by which we pay interest from one-month LIBOR to another rate of interest could create ineffectiveness in the swaps, and result in amounts being reclassified from other comprehensive income into net income.  Hedge effectiveness is tested quarterly to determine if hedge treatment continues to be appropriate.

Foreign Currency Contracts Not Designated as Hedges
Periodically we enter into forward foreign exchange contracts in an effort to mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet exposures.  Our foreign exchange contracts do not qualify for hedge accounting; therefore, the gains and losses resulting from the impact of currency exchange rate movements on our forward foreign exchange contracts are recognized as other income or expense in the accompanying consolidated income statements in the period in which the exchange rates change.  As of March 31, 2017 and September 30, 2016, respectively, the notional amounts of the forward contracts we held to purchase U.S. dollars in exchange for other international currencies were $7,538 and $8,858, respectively, and the notional amounts of forward contracts we held to sell U.S. dollars in exchange for other international currencies were $20,250 and $15,635, respectively.

The fair value of our derivative instruments included in the Consolidated Balance Sheet, which was determined using level 2 inputs, was as follows:

    
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
Fair Value at
March 31,
2017
  
Fair Value at
September 30, 2016
 
Fair Value at
March 31,
2017
 
Fair Value at
September 30, 2016
 
Derivatives designated as hedging instruments
                 
Interest rate swap contracts
Other noncurrent assets
$
598
 
$
-
 
$
-
 
$
-
 
 
Accrued expenses and other current liabilities
$
-
 
$
-
 
$
263
 
$
612
 
 
Other long-term liabilities
$
-
 
$
-
 
$
-
 
$
655
 
                           
Derivatives not designated as hedging instruments
                         
Foreign exchange contracts
Prepaid expenses and other current assets
$
203
 
$
28
 
$
-
 
$
-
 
 
Accrued expenses and other current liabilities
$
-
 
$
-
 
$
193
 
$
202
 
                           

The following table summarizes the effect of our derivative instruments on our Consolidated Statement of Income for the three and six months ended March 31, 2017 and 2016:

    
Gain (Loss) Recognized in Statement of Income
 
 
   
Three Months Ended
 
Six Months Ended
 
Statement of Income Location 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
 
March 31, 2016
 
Derivatives not designated as hedging instruments
                 
Foreign exchange contracts
Other income (loss), net
$
320
 
$
698
 
$
(1,474
)
$
512
 

The interest rate swap agreements were deemed to be effective since inception, so there was no impact on our Consolidated Statement of Income. We recorded a $152 unrealized gain in accumulated comprehensive income during the quarter ended March 31, 2017 for these interest rate swaps.  During the next 12 months, we expect approximately $194 may be reclassified from accumulated other comprehensive income into interest expense related to our interest rate swaps based on projected rates using the LIBOR forward curve as of March 31, 2017.



10. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

While we are not involved in any legal proceedings that we believe will have a material impact on our consolidated financial position, results of operations or cash flows, we periodically become a party to legal proceedings in the ordinary course of business.

Refer to Note 18 of "Notes to the Consolidated Financial Statements" in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, for additional information regarding commitments and contingencies.

PRODUCT WARRANTIES

We maintain a warranty reserve that reflects management's best estimate of the cost to replace product that does not meet our specifications and customers' performance requirements, and costs related to such replacement. The warranty reserve is based upon a historical product replacement rate, adjusted for any specific known conditions or circumstances. Additions and deductions to the warranty reserve are recorded in cost of goods sold. Our warranty reserve activity during the first six months of fiscal 2017 was as follows:

Balance as of September 30, 2016
 
$
243
 
Reserve for product warranty during the reporting period
   
256
 
Settlement of warranty
   
(284
)
Balance as of March 31, 2017
 
$
215
 

POSTRETIREMENT OBLIGATIONS IN FOREIGN JURISDICTIONS

We have unfunded defined benefit plans covering employees in certain foreign jurisdictions as required by local law. Benefit costs, consisting primarily of service costs, are recorded as fringe benefit expense under cost of goods sold and operating expenses in our Consolidated Statements of Income. The projected benefit obligations and accumulated benefit obligations under all such unfunded plans are updated annually during the fourth quarter of the fiscal year. Benefit payments under all such unfunded plans to be paid over the next 10 years are expected to be approximately $3,888.  For more information regarding these plans, refer to Note 18 of "Notes to the Consolidated Financial Statements" included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.

PURCHASE OBLIGATIONS

Purchase obligations include our take-or-pay arrangements with suppliers, and purchase orders and other obligations entered into in the normal course of business regarding the purchase of goods and services.  We have a fumed silica supply agreement with Cabot Corporation, which is not a related party and has not been one since 2002, the current term of which runs through December 31, 2019.  It provides us the option to purchase fumed silica for the remaining term of the agreement beyond calendar year 2016, for which we will pay a fee of $1,500 in each of calendar years 2017, 2018 and 2019, of which the 2017 payment has already been made.  The present value of the remaining fees was $2,907 as of March 31, 2017.  The 2018 payment of $1,500 is included in accrued expenses and the remaining $1,407 is included in other long-term liabilities on our Consolidated Balance Sheet.  As of March 31, 2017, purchase obligations include $3,511 of contractual commitments related to our Cabot Corporation supply agreement for fumed silica.

CONTINGENCIES

Our subsidiary in South Korea is currently under an audit in the normal course of business by the Korean customs authority for the period from fiscal years 2011 through 2016.  The matter is not yet at a stage at which we are able to estimate a reasonably possible loss or range of loss, if any, that may result from this matter, and accordingly, we have not recorded a liability for this matter as of March 31, 2017.  We expect that any costs to ultimately resolve any matters identified in the audit would not have a material effect on our financial results.



11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (AOCI), including the reclassification adjustments for items that are reclassified from AOCI to net income, are shown below:

   
Foreign
Currency
Translation
   
Cash Flow
Hedges
   
Pension and
Other
Postretirement
Liabilities
   
Total
 
Balance at September 30, 2016
 
$
11,985
   
$
(817
)
 
$
(1,612
)
 
$
9,556
 
Foreign currency translation adjustment, net of tax of $(1,732)
   
(3,691
)
   
-
     
-
     
(3,691
)
Unrealized gain (loss) on cash flow hedges:
                               
Change in fair value, net of tax of $576
   
-
     
1,026
     
-
     
1,026
 
Reclassification adjustment into earnings, net of tax of $(117)
   
-
     
(208
)
   
-
     
(208
)
Balance at March 31, 2017
 
$
8,294
   
$
1
   
$
(1,612
)
 
$
6,683
 


   
Foreign
Currency
Translation
   
Cash Flow
Hedges
   
Pension and
Other
Postretirement
Liabilities
   
Total
 
Balance at September 30, 2015
 
$
(4,011
)
 
$
(901
)
 
$
(1,178
)
 
$
(6,090
)
Foreign currency translation adjustment, net of tax of $622
   
6,357
     
-
     
-
     
6,357
 
Unrealized loss on cash flow hedges:
                               
Change in fair value, net of tax of $(71)
   
-
     
(127
)
   
-
     
(127
)
Reclassification adjustment into earnings, net of tax of $20
   
-
     
35
     
-
     
35
 
Change in pension and other postretirement liabilities,  net of tax of $287
   
-
     
-
     
287
     
287
 
Balance at March 31, 2016
 
$
2,346
   
$
(993
)
 
$
(891
)
 
$
462
 

The before tax amounts reclassified from OCI to net income during the six months ended March 31, 2017 and 2016, related to our cash flow hedges, were recorded as interest expense on our Consolidated Statement of Income.  For the six month ended March 31, 2017, we recorded $3,691 in currency translation losses, net of tax, that are included in other comprehensive income, primarily due to exchange rate fluctuations in the Japanese yen and Korean won versus the U.S. dollar.  These losses primarily relate to changes in the U.S. dollar value of assets and liabilities denominated in local currencies when these asset and liability amounts are translated at month-end exchange rates.



12. SHARE-BASED COMPENSATION PLANS

We issue share-based awards under the following programs: our Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan, as amended effective March 7, 2017 (OIP); our Cabot Microelectronics Corporation 2007 Employee Stock Purchase Plan, as Amended and Restated January 1, 2010 (ESPP); and, pursuant to the OIP, our Directors' Deferred Compensation Plan, as amended September 23, 2008 (DDCP), and our 2001 Executive Officer Deposit Share Program (DSP).  In March 2017, our stockholders reapproved the material terms of performance-based awards under the OIP for purposes of complying with Section 162(m) of the Internal Revenue Code of 1986, as amended.  Prior to March 2012, when our stockholders first approved the OIP, we issued share-based payments under our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan, as amended and restated September 23, 2008 (EIP); our ESPP, and, pursuant to the EIP, the DDCP and DSP.  For additional information regarding these programs, refer to Note 13 of "Notes to the Consolidated Financial Statements" included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.  Other than the ESPP, all share-based payments granted beginning March 6, 2012 are made from the OIP, and since then, the EIP no longer has been available for any awards.

We record share-based compensation expense for all share-based awards, including stock option grants, restricted stock and restricted stock unit awards and employee stock purchase plan purchases.  We calculate share-based compensation expense using the straight-line approach based on awards ultimately expected to vest, which requires the use of an estimated forfeiture rate.  Our estimated forfeiture rate is primarily based on historical experience, but may be revised in future periods if actual forfeitures differ from the estimate.  We use the Black-Scholes option-pricing model to estimate the grant date fair value of our stock options and employee stock purchase plan purchases.  This model requires the input of highly subjective assumptions, including the price volatility of the underlying stock, the expected term of our stock options, expected dividend yield and the risk-free interest rate.  We estimate the expected volatility of our stock options based on a combination of our stock's historical volatility and the implied volatilities from actively-traded options on our stock.  We calculate the expected term of our stock options using historical stock option exercise data, and we add a slight premium to this expected term for employees who meet the definition of retirement-eligible pursuant to their grants during the contractual term of the grant.  The expected dividend yield represents our annualized dividend in dollars divided by the stock price on the date of grant.  The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant.

Share-based compensation expense for the three and six months ended March 31, 2017, and 2016, was as follows:

   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
   
2017
   
2016
   
2017
   
2016
 
                         
Cost of goods sold
 
$
552
   
$
535
   
$
1,093
   
$
1,069
 
Research, development and technical
   
459
     
416
     
878
     
834
 
Selling and marketing
   
347
     
411
     
686
     
815
 
General and administrative
   
2,194
     
2,373
     
3,808
     
6,089
 
Total share-based compensation expense
   
3,552
     
3,735
     
6,465
     
8,807
 
Tax benefit
   
(1,220
)
   
(1,274
)
   
(2,167
)
   
(2,988
)
Total share-based compensation expense, net of tax
 
$
2,332
   
$
2,461
   
$
4,298
   
$
5,819
 

Our non-employee directors received annual equity awards in March 2017, 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. Two of the Company's non-employee directors had completed at least two full terms of service as of the date of the March 2017 award. Consequently, the requisite service period for the award has already been satisfied and we recorded the fair value of $377 of the awards to these two directors to share-based compensation expense in the fiscal quarter ended March 31, 2017 rather than recording that expense over the one-year vesting period stated in the award agreement, as is done for the other non-employee directors who received an annual equity award in March 2017.


In conjunction with our acquisition of NexPlanar in October 2015, share-based compensation expense for the three months ended December 31, 2015, included $605 related to certain unvested NexPlanar incentive stock options (ISOs) settled in cash at the acquisition date, of which $451 was reversed in the third quarter of fiscal 2016.  We also substituted certain NexPlanar ISOs with Cabot Microelectronics Corporation ISOs, preserving the intrinsic value, including the original vesting periods, of the original awards.  We accelerated the vesting on the substitute awards made to certain individuals based on the terms of their employment agreements with NexPlanar, and recorded $492 of share-based compensation expense related to this acceleration.  The total $1,097 of acquisition-related compensation is included in the table above as general and administrative expense for the six months ended March 31, 2016.

For additional information regarding the estimation of fair value, refer to Note 13 of "Notes to the Consolidated Financial Statements" included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.



13.
OTHER INCOME, NET

Other income (expense), net, consisted of the following:

 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
 
2017
 
2016
 
2017
 
2016
 
                 
Interest income
 
$
516
   
$
178
   
$
937
   
$
387
 
Other income (expense)
   
(282
)
   
274
     
293
     
255
 
Total other income, net
 
$
234
   
$
452
   
$
1,230
   
$
642
 

Other income (expense) primarily represents gains and losses recorded on transactions denominated in foreign currencies.  The increase in other income was primarily due to the impact of foreign currency fluctuations on monetary assets and liabilities denominated in currencies other than the functional currency, net of the gains and losses incurred on forward foreign exchange contracts discussed in Note 9.


14. INCOME TAXES

Our effective income tax rate was 20.8% and 20.5%  for the three and six months ended March 31, 2017, respectively, compared to a 21.0% and 18.1% effective income tax rate for the three and six months ended March 31, 2016.  The increase in the effective tax rate during the first six months of fiscal 2017 was primarily due to changes in the jurisdictional mix of income and the absence of the retroactive reinstatement of the research and experimentation tax credit recorded in fiscal 2016.

The Company is currently operating under a tax holiday in South Korea in conjunction with our investment in research, development and manufacturing facilities there.  This arrangement allows for a tax at 50% of the local statutory rate in effect for fiscal years 2016 and 2017, following a 0% tax rate in fiscal years 2013, 2014 and 2015.  This tax holiday reduced our income tax provision by approximately $1,915 and $1,797 in the first six months of fiscal 2017 and 2016, respectively.  This tax holiday increased our diluted earnings per share by approximately $0.08 and $0.07 during the six month ended March 31, 2017 and 2016, respectively.

15.
EARNINGS PER SHARE

Basic earnings per share (EPS) is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period, excluding the effects of unvested restricted stock awards that have a right to receive non-forfeitable dividends, which are considered participating securities as prescribed by the two-class method under ASC 260.  Diluted EPS is calculated in a similar manner, but the weighted-average number of common shares outstanding during the period is increased to include the weighted-average dilutive effect of "in-the-money" stock options and unvested restricted stock shares using the treasury stock method.


The standards of accounting for earnings per share require companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations.  Basic and diluted earnings per share were calculated as follows:

   
Three Months Ended
March 31,
   
Six Months Ended
March 31,
 
   
2017
   
2016
   
2017
   
2016
 
Numerator:
                       
Net Income
 
$
18,280
   
$
9,131
   
$
40,511
     
20,440
 
Less: income attributable to participating securities
   
(48
)
   
(41
)
   
(146
)
   
(160
)
Earnings available to common shares
 
$
18,232
   
$
9,090
   
$
40,365
     
20,280
 
                                 
Denominator:
                               
Weighted average common shares
   
25,030,367
     
24,061,005
     
24,798,122
     
24,069,557
 
(Denominator for basic calculation)
                               
                                 
Weighted average effect of dilutive securities:
                               
Share-based compensation
   
496,090
     
346,615
     
505,834
     
374,098
 
Diluted weighted average common shares
   
25,526,457
     
24,407,620
     
25,303,956
     
24,443,655
 
(Denominator for diluted calculation)
                               
                                 
Earnings per share:
                               
                                 
Basic
 
$
0.73
   
$
0.38
   
$
1.63
     
0.84
 
                                 
Diluted
 
$
0.71
   
$
0.37
   
$
1.60
     
0.83
 

For the three and six months ended March 31, 2017 and 2016, approximately 0.4 million and 1.2 million shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise price of the options was greater than the average market price of our common stock and, therefore, their inclusion would have been anti-dilutive.


16. FINANCIAL INFORMATION BY INDUSTRY SEGMENT AND PRODUCT LINE

We operate predominantly in one reportable segment, as defined under ASC 280 – the development, manufacture, and sale of CMP consumables.

Revenue generated by product line for the three and six months ended March 31, 2017, and 2016, was as follows:

   
Three Months Ended
March 31,
   
Six Months Ended
March 31,
 
Revenue:
 
2017
   
2016
   
2017
   
2016
 
Tungsten slurries
 
$
51,835
   
$
43,885
   
$
107,136
   
$
88,297
 
Dielectric slurries
   
27,843
     
23,679
     
57,125
     
46,697
 
Polishing pads
   
17,139
     
11,943
     
33,348
     
22,452
 
Other Metals slurries
   
14,670
     
14,180
     
30,450
     
30,538
 
Engineered Surface Finishes
   
6,036
     
3,743
     
11,060
     
7,695
 
Data storage slurries
   
1,661
     
1,814
     
3,319
     
3,934
 
Total revenue
 
$
119,184
   
$
99,244
   
$
242,438
   
$
199,613
 














17. NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), an updated standard on revenue recognition .   ASU 2014-09 provides enhancements to how revenue is reported and improves comparability in the financial statements of companies reporting using IFRS and US GAAP.  The core principle of the new standard is for companies to recognize revenue for goods or services in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services.  The new standard is intended to enhance disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively, such as service revenue and contract modifications, and improve guidance for multiple-element arrangements.  In August 2015, the FASB issued ASU No. 2015-14, "Deferral of Effective Date" (Topic 606).  This standard officially defers the effective date of ASU 2014-09 by one year.  ASU 2014-09 will be effective for us beginning October 1, 2018, and may be applied on a full retrospective or modified retrospective approach.  In March 2016, the FASB issued ASU No. 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" (Topic 606).  ASU 2016-08 provides clarification for the implementation guidance on principal versus agent considerations.  In April 2016, the FASB issued ASU No. 2016-10, ASU No. 2016-11, and ASU 2016-12, all of which provide additional clarification of the original revenue standard.  We are currently evaluating the impact of implementation of these standards on our financial statements.

In February 2015, the FASB issued ASU No. 2015-02, "Amendments to the Consolidation Analysis" (Topic 810) .   ASU 2015-02 amends the criteria for determining which entities are considered variable interest entities (VIEs), amends the criteria for determining if a service provider possesses a variable interest in a VIE and ends the deferral granted to investment companies for application of the VIE consolidation model.  We adopted ASU 2015-02 effective October 1, 2016, and this pronouncement had no material effect on our financial statements as we had no interest in any entities that may be considered a VIE.

In July 2015, the FASB issued ASU No, 2015-11, "Simplifying the Measurement of Inventory" (Topic 330).  The provisions of ASU 2015-11 require an entity to measure inventory at the lower of cost and net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  ASU 2015-11 will be effective for us beginning October 1, 2017, but early adoption is permitted.  We do not believe the adoption of this standard will have a material effect on our financial statements.

In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" (Subtopic 825-10).  The provision of ASU 2016-01 requires equity investments, other than those accounted for under the equity method of accounting or those that result in consolidation, to be measured at fair value with changes in fair value recognized in net income.  ASU 2016-01 simplifies the impairment assessment of equity securities by permitting a qualitative assessment each reporting period, and makes changes to presentation and disclosure of certain classes of financial assets and liabilities.  ASU 2016-01 will be effective for us beginning October 1, 2018, but early adoption is permitted.  We are currently evaluating the impact of implementation of this standard on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842).  The provisions of ASU 2016-02 require a dual approach for lessee accounting under which a lessee would recognize a right-of-use asset and a corresponding lease liability.  Leases will be classified as either finance or operating leases.  For finance leases, a lessee will recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee will recognize a straight-line total lease expense.  The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements, to afford better understanding of an entity's leasing activities, including any significant judgments and estimates.  ASU 2016-02 will be effective for us beginning October 1, 2019, but early adoption is permitted.  We are currently evaluating the impact of implementation of this standard on our financial statements.

In March 2016, the FASB issued ASU No. 2016-05, "Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships" (Topic 815).  The provisions of ASU 2016-05 provide clarification that a change in a counterparty of a derivative instrument that has been designated as a hedging instrument does not require dedesignation of that hedging relationship, provided that all other hedge accounting criteria is met.  ASU 2016-05 will be effective for us beginning October 1, 2017, but early adoption is permitted.  We do not believe the adoption of this standard will have a material effect on our financial statements.

In March 2016, the FASB issued ASU No. 2016-09, "Improvements to Employee Share Based Payment Accounting" (Topic 718).  The provisions of this standard involve several aspects of the accounting for share-based payments transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  ASU 2016-09 will be effective for us beginning October 1, 2017, but early adoption is permitted.  We are currently evaluating the impact of implementation of this standard on our financial statements.


In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" (Topic 326).  The provisions of this standard require financial assets measured at amortized cost to be presented at the net amount expected to be collected.  An allowance account would be established to present the net carrying value at the amount expect to be collected.  ASU 2016-13 also provides that credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses.  ASU 2016-13 will be effective for us beginning October 1, 2020, but early adoption is permitted as of October 1, 2019.  We are currently evaluating the impact of implementation of this standard on our financial statements.

In October 2016, the FASB issued ASU No. 2016-16 "Intra-Entity Transfers of Assets Other Than Inventory" (Topic 740).  The provisions of this standard provide guidance on recognition of taxes related to intra-entity transfer of assets other than inventory when the transfer occurs.  ASU 2016-16 will be effective for us beginning October 1, 2018, but early adoption is permitted.  We are currently evaluating the impact of implementation of this standard on our financial statements.

In October 2016, the FASB issued ASU No. 2016-17 "Interest Held through Related Parties That Are under Common Control" (Topic 810).  The provisions of this standard provide further guidance related to ASU 2015-02, and also provides guidance on consolidation in relation to VIEs and related parties.  ASU 2016-17 will be effective for us beginning October 1, 2017, but early adoption is permitted.  We do not believe the adoption of this standard will have a material effect on our financial statements as we currently have no interest in any entities that may be considered VIE.

In January 2017, the FASB issued ASU No. 2017-01 "Clarifying the Definition of a Business" (Topic 805).  The provisions of this standard provide guidance to determine whether the acquisition or sale of a set of assets or activities constitutes a business.  The standard requires that an integrated set of assets and activities include an input and a substantive process that together contribute to the ability to create output.  ASU 2017-01 will be effective for us beginning October 1, 2017, and early adoption is permitted under specified conditions.  We are currently evaluating the impact of implementation of this standard on our financial statements.

In January 2017, the FASB issued ASU No. 2017-04 "Simplifying the Test for Goodwill Impairment" (Topic 350).  The provisions of this standard eliminate Step 2 from the goodwill impairment test, which required an entity to determine the fair value of its assets and liabilities at the impairment testing date of its goodwill and compare it to its carrying amount to determine a possible impairment loss. Goodwill impairment testing will now be done by comparing the fair value of a reporting unit and its carrying amount. ASU 2017-04 will be effective for us beginning October 1, 2020, but early adoption is permitted as of October 1, 2017.  We are currently evaluating the impact of implementation of this standard on our financial statements.

In March 2017, the FASB issued ASU No. 2017-07" Improving the Presentation of Net Period Pension Cost and net Period Postretirement Benefit Cost" (Topic 715).  The provisions of ASU 2017-07 provided specific guidance on the presentation of the components of net benefit cost.  ASU 2017-07 will be effective for us beginning October 1, 2018.  We are currently evaluating the impact of implementation of this standard on our financial statements.




ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as disclosures included elsewhere in this Form 10-Q, include "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995.  This Act provides a safe harbor for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results.  All statements other than statements of historical fact we make in this Form 10-Q are forward-looking.  In particular, the statements herein regarding future sales and operating results; growth or contraction of, and trends in, the industry and markets in which the Company participates; the Company's management; various economic or political factors and international or national events; regulatory or legislative activity; product performance; the generation, protection and acquisition of intellectual property, and litigation related to such intellectual property; new product introductions; development of new products, technologies and markets; the Company's supply chain; the financial conditions of the Company's customers; natural disasters; the acquisition of or investment in, or collaboration with other entities, including NexPlanar Corporation ("NexPlanar"); uses and investment of the Company's cash balance, including dividends and share repurchases, which may be suspended, terminated or modified at any time for any reason, based on a variety of factors; financing facilities and related debt, payment of principal and interest, and compliance with covenants and other terms; the Company's capital structure; the Company's current or future tax rate; the operation of facilities by the Company; and statements preceded by, followed by or that include the words "intends," "estimates," "plans," "believes," "expects," "anticipates," "should," "could" or similar expressions, are forward-looking statements.  Forward-looking statements reflect our current expectations and are inherently uncertain.  Our actual results may differ significantly from our expectations.  We assume no obligation to update this forward-looking information.  The section entitled "Risk Factors" describes some, but not all, of the factors that could cause these differences.

This section, "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A), should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, including the consolidated financial statements and related notes thereto.


SECOND QUARTER OF FISCAL 2017 OVERVIEW

In our second quarter of fiscal 2017, we experienced continued strong demand for our products, particularly for memory applications, as well as strong overall demand in China.  Further, reports from some industry analysts and other semiconductor industry participants generally indicate expectations for near term continuation of overall firm semiconductor industry demand.  Over the longer term, we continue to believe that semiconductor demand will grow, fueled by demand for a wide range of electronic applications, including mobile internet devices, automotive, internet of things, and cloud and high-performance computing.  We expect this growth will be accompanied by continued development and advancement of semiconductor technology, including growing adoption of 3D NAND and FinFET technologies.  However, there are many factors that make it difficult for us to predict future revenue trends for our business, including those discussed in Part II, Item 1A entitled "Risk Factors" in this Form 10-Q.

Revenue for our second quarter of fiscal 2017 was $119.2 million, which represented an increase of 20.1% from the second quarter of fiscal 2016.  The Company achieved record quarterly revenue in our polishing pads product area, which grew 43.5% from the same period last year.  Revenue from tungsten and dielectrics slurries increased 18.1% and 17.6%, respectively, from the same quarter last year. Revenue for the first six months of fiscal 2017 was $242.4 million, which represented an increase of 21.5% from the comparable period of fiscal 2016.


Gross profit for our second quarter of fiscal 2017 expressed as a percentage of revenue was 50.4%, including a 100 basis point adverse impact of NexPlanar amortization expense, compared to 47.3% for our second quarter of fiscal 2016.  Factors affecting our gross profit compared to last year included higher sales volume and a higher-valued product mix, partially offset by higher fixed manufacturing costs, including costs associated with our Short Term Incentive Program (STIP).  Gross profit for the first six months of fiscal 2017 was 50.1% of revenue, including a 100 basis point adverse impact of NexPlanar amortization expense, compared to 48.6% during the same period last year.  We currently expect our gross profit percentage for full fiscal year 2017 to be in the range of 49% to 51%, which is higher than our prior annual guidance of 48% to 50%.  However, we may continue to experience fluctuations in our gross profit due to a number of factors, including fluctuations in our product mix and the extent to which we utilize our manufacturing capacity, which may cause our quarterly gross profit to be above or below this annual guidance range.

Operating expenses were $36.1 million in our second quarter of fiscal 2017, including $0.5 million of NexPlanar amortization expense, compared to $34.6 million in the second quarter of fiscal 2016.  The increase in operating expenses from the comparable quarter of fiscal 2016 was primarily due to higher costs associated with our STIP and higher professional fees, partially offset by lower clean room material expenses.  Operating expenses were $69.5 million in the first six months of fiscal 2017, including $0.9 million of NexPlanar amortization expense, compared to $70.4 million during the same period of fiscal 2016.  The decrease was primarily due to the absence of costs associated with both the NexPlanar acquisition and the 2015 CEO transition, and lower clean room material expenses, partially offset by higher costs associated with our STIP.  We continue to expect operating expenses for full fiscal year 2017 to be between $137.0 million to $142.0 million.

Diluted earnings per share for the second quarter of fiscal 2017 were $0.71, compared to $0.37 in the same quarter last year.  The year-over-year increase was primarily due to higher revenue and a higher gross profit margin.  Diluted earnings per share were $1.60 for the first six months of fiscal 2017, compared to $0.83 during the same period last year.  The increase was primarily due to higher revenue and a higher gross profit margin, partially offset by a higher effective tax rate.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS

We discuss our critical accounting estimates and effects of recent accounting pronouncements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.  There have been no material changes in our critical accounting estimates during the first six months of fiscal 2017.  See Note 17 of the Notes to the Consolidated Financial Statements of this Form 10-Q for a discussion of new accounting pronouncements.



RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2017, VERSUS THREE MONTHS ENDED MARCH 31, 2016

REVENUE

Revenue was $119.2 million for the three months ended March 31, 2017, which represented a 20.1%, or $19.9 million, increase from the three months ended March 31, 2016.  The increase in revenue was driven by a $14.2 million increase due to higher sales volume, a $6.2 million increase due to product mix, and a $0.9 million increase due to exchange rate fluctuations, partially offset by a $1.4 million decrease due to price changes.  The increase in sales volume was consistent with continued overall strong demand conditions in the global semiconductor industry this fiscal year compared to softer demand conditions we experienced during the same quarter last year.  Revenue from tungsten slurries, polishing pads, and dielectrics slurries increased 18.1%, 43.5%, and 17.6%, respectively, from the comparable period of fiscal 2016.


COST OF GOODS SOLD

Total cost of goods sold was $59.2 million for the three months ended March 31, 2017, which represented an increase of 13.0%, or $6.8 million, from the three months ended March 31, 2016.  The increase in cost of goods sold was primarily due to a $4.0 million increase due to higher sales volume, a $3.7 million increase in fixed manufacturing costs, including costs related to our STIP, a $0.8 million increase due to foreign exchange fluctuations, and $0.5 million increase due to product mix, partially offset by a $2.0 million decrease in other variable manufacturing costs, including material costs.  Fixed manufacturing costs included $1.2 million of NexPlanar amortization expense compared to $1.1 million in the same period of fiscal 2016.


GROSS PROFIT

Our gross profit as a percentage of revenue was 50.4% for the three months ended March 31, 2017, compared to 47.3% for the three months ended March 31, 2016.  The increase in gross profit as a percentage of revenue was primarily due to higher sales volume and a higher-valued product mix, partially offset by higher fixed manufacturing costs, including costs associated with our STIP.


RESEARCH, DEVELOPMENT AND TECHNICAL

Total research, development and technical expenses were $14.1 million for the three months ended March 31, 2017, which represented a decrease of 5.7%, or $0.8 million, from the three months ended March 31, 2016.  The decrease was primarily due to $0.5 million in lower clean room material costs.

Our research, development and technical efforts are focused on the following main areas:

·
Research related to fundamental CMP technology;
·
Development of new and enhanced CMP consumable products, including collaboration on joint development projects with technology-leading customers and suppliers;
·
Process development to support rapid and effective commercialization of new products;
·
Technical support of CMP products in our customers' research, development and manufacturing facilities; and,
·
Development of polishing and metrology applications outside of the semiconductor industry.



SELLING AND MARKETING

Selling and marketing expenses were $7.3 million for the three months ended March 31, 2017, which represented an increase of 9.0%, or $0.6 million, from the three months ended March 31, 2016.  The increase was primarily due to $0.6 million in higher staffing-related costs, including STIP costs.


GENERAL AND ADMINISTRATIVE

General and administrative expenses were $14.7 million for the three months ended March 31, 2017, which represented an increase of 13.2%, or $1.7 million, from the three months ended March 31, 2016.  The increase was primarily due to $1.0 million in higher staffing-related costs, including costs associated with our STIP, and $0.7 million in higher professional fees.


INTEREST EXPENSE

Interest expense was $1.1 million for the three months ended March 31, 2017, and was comparable to $1.2 million for the three months ended March 31, 2016.  We continue to fix the interest rate on 50% of our outstanding debt through interest rate swaps, while maintaining a variable interest rate on the rest of our outstanding debt.


OTHER INCOME, NET

Other income was $0.2 million for the three months ended March 31, 2017, compared to $0.5 million during the three months ended March 31, 2016.  The decrease in other income was primarily due to the impact of foreign currency fluctuations on monetary assets and liabilities denominated in currencies other than the functional currency, net of the gains and losses on forward foreign exchange contracts discussed in Note 9 of the Notes to the Consolidated Financial Statements of this Form 10-Q, partially offset by higher interest income earned on our cash and investment balances.


PROVISION FOR INCOME TAXES

Our effective income tax rate was 20.8% for the three months ended March 31, 2017 compared to a 21.0% effective income tax rate for the three months ended March 31, 2016.  The decrease in the effective tax rate during the second quarter of fiscal 2017 was primarily due to changes in the jurisdictional mix of income. We continue to expect our effective tax rate for full year fiscal 2017 to be within the range of 19% to 22%.


NET INCOME

Net income was $18.3 million for the three months ended March 31, 2017, which represented an increase of 100.2%, or $9.1 million, from the three months ended March 31, 2016.  The increase was primarily due to higher revenue and a higher gross profit margin.


SIX MONTHS ENDED MARCH 31, 2017, VERSUS SIX MONTHS ENDED MARCH 31, 2016

REVENUE

Revenue was $242.4 million for the six months ended March 31, 2017, which represented a 21.5%, or $42.8 million, increase from the six months ended March 31, 2016.  The increase in revenue was driven by a $29.0 million increase due to higher sales volume, a $14.3 million increase due to product mix, and a $2.3 million increase due to exchange rate fluctuations, partially offset by a $2.7 million decrease due to price changes.  Revenue from tungsten slurries, polishing pads, and dielectrics slurries increased 21.3%, 48.5%, and 22.3%, respectively, from the comparable period of fiscal 2016.



COST OF GOODS SOLD

Total cost of goods sold was $120.9 million for the six months ended March 31, 2017, which represented an increase of 17.9%, or $18.4 million, from the six months ended March 31, 2016.  The increase in cost of goods sold was primarily due to a $8.0 million increase due to higher sales volume, a $6.8 million increase in fixed manufacturing costs, including costs related to our STIP, a $2.5 million increase due to foreign exchange fluctuations, and a $1.5 million increase due to product mix.  Fixed manufacturing costs included $2.4 million of NexPlanar amortization expense compared to $2.0 million in same period of fiscal 2016.


GROSS PROFIT

Our gross profit as a percentage of revenue was 50.1% for the six months ended March 31, 2017, as compared to 48.6% for the six months ended March 31, 2016.  The increase in gross profit as a percentage of revenue was primarily due to higher sales volume and a higher-valued product mix, partially offset by higher fixed manufacturing costs, including costs associated with our STIP.


RESEARCH, DEVELOPMENT AND TECHNICAL

Total research, development and technical expenses were $27.5 million for the six months ended March 31, 2017, which represented a decrease of 7.6%, or $2.3 million, from the six months ended March 31, 2016.  The decrease was primarily due to $1.7 million in lower clean room material costs, and $0.3 million in lower costs for materials and supplies used in research and development.


SELLING AND MARKETING

Selling and marketing expenses were $14.8 million for the six months ended March 31, 2017, which represented an increase of 10.5%, or $1.4 million, from the six months ended March 31, 2016.  The increase was primarily due to $1.6 million in higher staffing-related costs, including STIP costs, partially offset by $0.3 million in lower sample costs.


GENERAL AND ADMINISTRATIVE

General and administrative expenses were $27.2 million for the six months ended March 31, 2017, which represented a decrease of 0.2%, or $0.1 million, from the six months ended March 31, 2016.  The decrease was primarily due to the absence of certain NexPlanar acquisition-related costs and costs associated with our 2015 CEO transition, partially offset by higher costs associated with our STIP.


INTEREST EXPENSE

Interest expense was $2.3 million for the six months ended March 31, 2017, and was consistent with the $2.4 million for the six months ended March 31, 2016.


OTHER INCOME (EXPENSE), NET

Other income was $1.2 million for the six months ended March 31, 2017, and increased $0.6 million from the six months ended March 31, 2016.  The increase was primarily due to higher interest income earned on our cash and investment balances.



PROVISION FOR INCOME TAXES

Our effective income tax rate was 20.5% for the six months ended March 31, 2017 compared to 18.1% for the six months ended March 31, 2016.  The increase in the effective tax rate during the first six months of fiscal 2017 was primarily due to changes in the jurisdictional mix of income and the absence of the retroactive reinstatement of the research and experimentation tax credit recorded in fiscal 2016.


NET INCOME

Net income was $40.5 million for the six months ended March 31, 2017, which represented an increase of 98.2%, or $20.1 million, from the six months ended March 31, 2016.  The increase was primarily due to higher revenue and a higher gross profit margin, partially offset by a higher effective tax rate.


LIQUIDITY AND CAPITAL RESOURCES

We generated $57.9 million in cash flows from operating activities in the first six months of fiscal 2017, compared to $32.6 million in cash from operating activities in the first six months of fiscal 2016.  Our cash provided by operating activities in the first six months of fiscal 2017 represented $61.7 million in net income plus non-cash items and a $3.8 million decrease in cash flow due to a net increase in working capital.  The increase in cash flows from operating activities compared to the first six months of fiscal 2016 was primarily due to a significant increase in revenue and net income and changes in the timing and amount of accrued expense payments, including payments related to our annual cash incentive bonus program, partially offset by lower accounts payable balances at March 31, 2017 compared to the same period in fiscal 2016.  The cash incentive payment related to our performance against goals in fiscal 2016, which was made in the first quarter of fiscal 2017, was $8.4 million lower than the cash incentive payment related to our performance against goals in fiscal 2015, which was made in the first quarter of fiscal 2016.

In the first six months of fiscal 2017, cash flows used in investing activities were $11.6 million, representing $11.7 million in purchases of property, plant and equipment, net of $0.1 million in proceeds from sales of property, plant and equipment.  In the first six months of fiscal 2016, cash flows used in investing activities were $136.8 million, representing $126.5 million for the NexPlanar acquisition, net of $15.2 million in cash acquired, and $10.3 million for purchases of property, plant and equipment.  We continue to expect our total capital expenditures in fiscal 2017 will be within the range of $20.0 million to $25.0 million.

In the first six months of fiscal 2017, cash flows provided by financing activities were $12.2 million.  We received $24.8 million from the issuance of common stock related to the exercise of stock options granted under our Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan (EIP) and our 2012 Omnibus Incentive Plan, as amended effective March 7, 2017 (OIP), and for the sale of shares to employees under our 2007 Employee Stock Purchase Plan, as amended and restated September 23, 2013 (ESPP), and we received $5.2 million in tax benefits related to exercises of stock options and vesting of restricted stock and restricted stock units granted under the EIP and OIP.  We used $2.3 million to repurchase common stock under our share repurchase program and $2.1 million to repurchase common stock pursuant to the terms of our OIP for shares withheld from award recipients to cover payroll taxes on the vesting of restricted stock and restricted stock units granted under these plans.  We also paid $8.9 million in dividends and dividend equivalents on our common stock, and $4.4 million to repay long-term debt.  In the first six months of fiscal 2016, cash flows used in financing activities were $26.9 million.  We used $25.0 million to repurchase common stock under our share repurchase program and $2.9 million to repurchase common stock pursuant to the terms of our EIP and our OIP for shares withheld from award recipients to cover payroll taxes on the vesting of restricted stock and restricted stock units granted under these plans.  We also used $4.4 million to repay long-term debt.  We received $4.7 million from the issuance of common stock related to the exercise of stock options granted under our EIP and OIP and for the sale of shares to employees under our ESPP, and we received $0.7 million in tax benefits related to exercises of stock options and vesting of restricted stock and restricted stock units granted under the EIP and OIP.

In January 2016, our Board of Directors authorized an increase in the amount available under our share repurchase program from the previously remaining $75.0 million to $150.0 million.  Under this program, we repurchased 36,978 shares for $2.3 million during the first six months of fiscal 2017 and we repurchased 617,839 shares for $25.0 million during the first six months of fiscal 2016.  As of March 31, 2017, approximately $131.7 million remained outstanding under our share repurchase program.  Share repurchases are made from time to time, depending on market conditions.  The timing, manner, price and amounts of repurchases are determined at the Company's discretion, and the share repurchase program may be suspended, terminated or modified at any time for any reason.  The repurchase program does not obligate the Company to acquire any specific number of shares.  To date, we have funded share purchases under our share repurchase program from our available cash balance, and anticipate we will continue to do so.  During fiscal 2016 and in fiscal 2017, we entered into "10b5-1" stock purchase plan agreements with independent brokers to repurchase shares of our common stock in accordance with guidelines pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.  A plan under Rule 10b5-1 allows a company to repurchase its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.  Repurchases are subject to SEC regulations as well as certain conditions specified in the plan.

On January 7, 2016, we announced that our Board of Directors authorized the initiation of a regular dividend program under which the Company intends to pay quarterly cash dividends on our common stock.  Pursuant to this announcement, our Board of Directors declared quarterly cash dividends of $0.18 per share, during the second, third, and fourth quarters of fiscal 2016, and during the first quarter of fiscal 2017.  In March 2017, our Board of Directors declared a quarterly cash dividend of $0.20 per share, which we paid on or about April 28, 2017 to shareholders of record as of March 23, 2017.  The declaration and payment of future dividends is subject to the discretion and determination of the Company's Board of Directors and management, based on a variety of factors, and the program may be suspended, terminated or modified at any time for any reason.

We entered into a Credit Agreement in February 2012 and amended this Credit Agreement in June 2014.  The amended Credit Agreement provided us with a $175.0 million Term Loan and a $100.0 million Revolving Credit Facility, with sub-limits for multicurrency borrowings, letters of credit, swing-line loans, as well as a $100.0 million uncommitted accordion feature that allows us to request the existing lenders or, if necessary, third-party financial institutions, to provide additional capacity in the Revolving Credit Facility.  The Term Loan and Revolving Credit Facility are referred to as the "Credit Facilities", and have a maturity date of June 27, 2019.  The Term Loan has periodic scheduled principal repayments; however, we may prepay the loan without penalty.  The Term Loan has $150.9 million outstanding as of March 31, 2017, while the Revolving Credit Facility remains undrawn.  The Credit Agreement contains covenants that restrict the ability of the Company and its subsidiaries to take certain actions, including, among other things and subject to certain significant exceptions and according to certain terms: creating liens, incurring indebtedness, making investments, engaging in mergers, selling property, paying dividends or amending organizational documents.  The Credit Agreement requires us to comply with certain financial ratio maintenance covenants.  These include a maximum consolidated leverage ratio of 2.75 to 1.00 and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00 through the expiration of the Credit Agreement.  As of March 31, 2017, our consolidated leverage ratio was 1.03 to 1.00 and our consolidated fixed charge coverage ratio was 3.54 to 1.00.  The Credit Agreement also contains customary affirmative covenants and events of default.  We believe we are in compliance with these covenants.  See Note 8 of the Notes to the Consolidated Financial Statements of this Form 10-Q for additional information regarding the Credit Agreement.

As of March 31, 2017, we had $343.7 million of cash and cash equivalents, $198.5 million of which was held in foreign subsidiaries in Japan, the Netherlands, Singapore, South Korea and Taiwan where we have elected to permanently reinvest the earnings rather than repatriate the earnings to the U.S.  See Part II, Item 1A entitled "Risk Factors" in this Form 10-Q for additional discussion of our foreign operations.


We believe that our current balance of cash, cash generated by our operations, and available borrowing capacity under our Credit Facilities will be sufficient to fund our operations, expected capital expenditures, merger and acquisition activities, dividend payments, and share repurchases for at least the next twelve months.  However, in pursuit of corporate development initiatives, we may need to raise additional funds in the future through equity or debt financing, strategic relationships or other arrangements.  Depending on future conditions in the capital and credit markets, we could encounter difficulty securing additional financing in the type or amount necessary to pursue these objectives.


OFF-BALANCE SHEET ARRANGEMENTS

At March 31, 2017, and September 30, 2016, we did not have any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which might have been established for the purpose of facilitating off-balance sheet arrangements.


TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following summarizes our contractual obligations at March 31, 2017, and the effect such obligations are expected to have on our liquidity and cash flow in future periods
CONTRACTUAL OBLIGATIONS
       
Less Than
    1-3    
3-5
   
After 5
 
(In millions)
 
Total
   
1 Year
   
Years
   
Years
   
Years
 
Long-term debt
 
$
150.9
   
$
9.8
   
$
141.1
   
$
-
   
$
-
 
Interest expense and fees on long-term debt
   
7.9
     
3.9
     
4.0
     
-
     
-
 
Purchase obligations
   
29.7
     
26.6
     
3.1
     
-
     
-
 
Operating leases
   
14.5
     
2.9
     
4.3
     
2.6
     
4.7
 
Severance agreements
   
1.5
     
1.5
     
-
     
-
     
-
 
Other long-term liabilities
   
14.6
     
1.0
     
1.5
     
-
     
12.1
 
Total contractual obligations
 
$
219.1
   
$
45.7
   
$
154.0
   
$
2.6
   
$
16.8
 

Engineered abrasive particles are significant raw materials that we use in many of our CMP slurries.  In an effort to mitigate our risk to rising raw material costs and to increase supply assurance and quality performance requirements, we have entered into multi-year supply agreements with a number of suppliers, the costs of which are reflected in the purchase obligations in the table above.  We have a multi-year supply agreement with Cabot Corporation, which is not a related party and has not been one since 2002, for the purchase of fumed silica, the current term of which runs through December 31, 2019.  It provides us the option to purchase fumed silica for the remaining term of the agreement beyond calendar year 2016, for which we will pay a fee of $1.5 million in each of calendar years 2017, 2018 and 2019, of which the 2017 payment has already been made.  The purchase obligations in the table above reflect management's expectation that we will meet our forecasted purchase quantities in calendar 2017.  Purchase obligations include an aggregate amount of $3.5 million of contractual commitments related to our Cabot Corporation supply agreement for fumed silica.  The $1.5 million payment for 2018 is included in accrued liabilities on our Consolidated Balance Sheet as of March 31, 2017, and the 2019 payment is included in other long-term liabilities in the table above.

Interest payments on long-term debt reflect interest rates in effect at March 31, 2017.  The interest payments reflect variable LIBOR-based rates currently in effect on $75.5 million of our outstanding debt, and fixed interest rates on $75.5 million of outstanding debt for which we have implemented interest rate swaps.  Commitment fees are based on our estimated consolidated leverage ratio in future periods.  See Note 8 of the Notes to the Consolidated Financial Statements of this Form 10-Q for additional information regarding our long-term debt.

Refer to Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of Part II of our A nnual Report on Form 10-K for the fiscal year ended September 30, 2016, for additional information regarding our contractual obligations.



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

EFFECT OF FOREIGN CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT

We conduct business operations outside of the United States through our foreign operations.  Some of our foreign operations maintain their accounting records in their local currencies.  Consequently, period to period comparability of results of operations is affected by fluctuations in exchange rates.  The primary currencies to which we have exposure are the Korean won, Japanese yen, and the New Taiwan dollar.  Approximately 20% of our revenue is transacted in currencies other than the U.S. dollar.  However, we also incur expenses in foreign countries that are transacted in currencies other than the U.S. dollar, which mitigates the exposure on the Consolidated Statement of Income.  We periodically enter into forward contracts in an effort to manage foreign currency exchange exposure on our Consolidated Balance Sheet.  However, we are unlikely to be able to hedge these exposures completely.  We do not enter into forward contracts or other derivative instruments for speculative or trading purposes.

Fluctuations of the won and yen have not had a material impact on our Consolidated Income Statement for the six months ended March 31, 2017 and 2016; however, they have had a significant impact on other comprehensive income on our Consolidated Balance Sheet.  During the first six months of fiscal 2017, we recorded $3.7 million in foreign currency translation losses, net of tax, that are included in other comprehensive income.  During the first six months and full fiscal year 2016, we recorded $6.4 million and $16.0 million, respectively, in foreign currency translation gains, net of tax, that are included in other comprehensive income.  These gains and losses primarily relate to changes in the U.S. dollar value of assets and liabilities denominated in local currencies when these asset and liability amounts are translated at month-end exchange rates.

MARKET RISK AND SENSITIVITY ANALYSIS RELATED TO FOREIGN CURRENCY EXCHANGE RATE RISK

We have performed a sensitivity analysis assuming a hypothetical 10% additional adverse movement in foreign currency exchange rates.  As of March 31, 2017, the analysis demonstrated that such market movements would not have a material adverse effect on our consolidated financial position, results of operations or cash flows over a one-year period.  Actual gains and losses in the future may differ materially from this analysis based on changes in the timing and amount of foreign currency exchange rate movements and our actual exposures.

INTEREST RATE RISK

At March 31, 2017, we had $150.9 million in long-term debt outstanding on our Term Loan.  In fiscal 2015, we entered into interest rate swap agreements to hedge the variability in LIBOR-based interest rate payments on half of our outstanding debt.  The notional amount of the swaps decreases each quarter by an amount in proportion to our scheduled quarterly principal repayment to maintain a fixed rate of interest on half of our outstanding debt.  As of March 31, 2017, the fair value of this cash flow hedge was de minimis.  At March 31, 2017, we had $75.5 million of outstanding debt at a variable rate of interest.  Assuming a hypothetical 100 basis point increase in our current variable interest rate, our interest expense would increase by approximately $0.2 million per quarter.

MARKET RISK RELATED TO INVESTMENTS IN AUCTION RATE SECURITIES

At March 31, 2017, we owned two auction rate securities (ARS) with a total estimated fair value of $5.0 million and par value of $5.5 million, which were classified as other long-term assets on our Consolidated Balance Sheet.  Beginning in 2008, general uncertainties in the global credit markets significantly reduced liquidity in the ARS market, and this illiquidity continues.  For more information on our ARS, see Note 6 of the Notes to the Consolidated Financial Statements of this Form 10-Q.



ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2017.  Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and to ensure that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

While we believe the present design of our disclosure controls and procedures is effective enough to make known to our senior management in a timely fashion all material information concerning our business, we intend to continue to improve the design and effectiveness of our disclosure controls and procedures to the extent we believe necessary in the future to provide our senior management with timely access to such material information, and to correct deficiencies that we may discover in the future, as appropriate.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS

Because of inherent limitations, our disclosure controls or our internal control over financial reporting may not prevent all errors and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must take into account the benefits of controls relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include possible faulty judgment in decision-making and breakdowns due to a simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.



PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

While we are not involved in any legal proceedings that we believe will have a material impact on our consolidated financial position, results of operations or cash flows, we periodically become a party to legal proceedings in the ordinary course of business.


ITEM 1A.  RISK FACTORS

We do not believe there have been any material changes in our risk factors since the filing of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.  However, we may update our risk factors, including adding or deleting them, in our SEC filings from time to time for clarification purposes or to include additional information, at management's discretion, even when there have been no material changes.

RISKS RELATING TO OUR BUSINESS

DEMAND FOR OUR PRODUCTS FLUCTUATES AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY WORLDWIDE ECONOMIC AND INDUSTRY CONDITIONS

Our business is affected by economic and industry conditions and our revenue is primarily dependent upon semiconductor demand.  Historically, semiconductor demand has fluctuated due to economic and industry cycles and seasonal shifts in demand, which can affect our business, causing demand for our products to fluctuate.  For example, the strengthening of demand conditions in the semiconductor industry we experienced during the second half of fiscal 2016 continued through the first half of fiscal 2017, following relatively soft demand conditions during the second half of fiscal 2015 and the first half of fiscal 2016.  Furthermore, competitive dynamics within the semiconductor industry may impact our business.  Our limited visibility to future customer orders makes it difficult for us to predict industry trends.  If the global economy or the semiconductor industry weakens, whether in general or as a result of specific factors, such as macroeconomic factors, or unpredictable events such as natural disasters, we could experience material adverse impacts on our results of operations and financial condition.

Adverse global economic and industry conditions could have other negative effects on our Company.  For instance, we could experience negative impacts on cash flows due to the inability of our customers to pay their obligations to us, or our production process could be harmed if our suppliers cannot fulfill their obligations to us.  We also might have to reduce the carrying value of goodwill and other intangible assets, which could harm our financial position and results of operations.

Some additional factors that affect demand for our products include: demand trends for different types of electronic devices; products that our customers may produce, such as logic versus memory IC devices, or digital versus analog IC devices; the various technology nodes at which those products are manufactured; customers' efficiencies in the use of CMP consumables; customers' device architectures and specific manufacturing processes; the short order to delivery time for our products; quarter-to-quarter changes in customer order patterns; market share and competitive gains and losses; and pricing changes by us and our competitors.



WE HAVE A NARROW PRODUCT RANGE AND OUR PRODUCTS MAY BECOME OBSOLETE, OR TECHNOLOGICAL CHANGES MAY REDUCE OR LIMIT INCREASES IN THE CONSUMPTION OF CMP SLURRIES AND PADS

Our business is substantially dependent on a single class of products, CMP slurries, which account for the majority of our revenue.  We also continue to develop our business in CMP pads, and we acquired NexPlanar Corporation (NexPlanar), a supplier of advanced CMP pad solutions, in the first quarter of fiscal 2016.  Our business would suffer if these products became obsolete or if consumption of these products decreased.  Our success depends on our ability to keep pace with technological changes and advances in the semiconductor industry and to adapt, improve and customize our products for advanced IC applications in response to evolving customer needs and industry trends.  Since its inception, the semiconductor industry has experienced technological changes and advances in the design, manufacture, performance and application of IC devices.  Our customers continually pursue lower cost of ownership and higher quality and performance of materials consumed in their manufacturing processes, including CMP slurries and pads, as a means to reduce costs, increase the yield in their manufacturing facilities, and achieve desired performance of the IC devices they produce.  We expect these technological changes, and this drive toward lower costs, higher quality and performance and higher yields, will continue in the future.  Potential technology developments in the semiconductor industry, as well as our customers' efforts to reduce consumption of CMP consumables, including through use of smaller quantities, could render our products less important to the IC device manufacturing process.


A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF LARGE CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST ONE OR MORE OF THESE CUSTOMERS

Our CMP consumables customer base is concentrated among a limited number of large customers.  The semiconductor industry has been consolidating as the larger semiconductor manufacturers have generally grown faster than the smaller ones, through business gains, mergers and acquisitions, and strategic alliances.  Industry analysts predict that this trend will continue, which means the semiconductor industry will be comprised of fewer and larger participants in the future if their prediction is correct.  One or more of these principal customers could stop buying CMP consumables from us or could substantially reduce the quantity of CMP consumables purchased from us.  Our principal customers also hold considerable purchasing power, which can impact the pricing and terms of sale of our products.  Any deferral or significant reduction in the quantity or price of CMP consumables sold to these principal customers could seriously harm our business, financial condition and results of operations.

During the six months ended March 31, 2017 and 2016, our five largest customers accounted for approximately 57% and 54% of our revenue, respectively.  During the six months ended March 31, 2017, Samsung, Taiwan Semiconductor Manufacturing Company (TSMC), and Micron Technology Inc. (following its acquisition of Inotera Memories Inc.) were our largest customers, accounting for approximately 16%, 14%, and 11%, respectively, of our revenue.  During the six months ended March 31, 2016, Samsung and TSMC were our largest customers accounting for approximately 16% and 15%, respectively, of our revenue.  During full fiscal year 2016, our five largest customers accounted for approximately 54% of our revenue, with TSMC and Samsung each accounting for approximately 15% of our revenue.


OUR BUSINESS COULD BE SERIOUSLY HARMED IF OUR COMPETITORS DEVELOP COMPETITIVE CMP CONSUMABLES PRODUCTS, OFFER BETTER PRICING, SERVICE OR OTHER TERMS, OR OBTAIN CERTAIN INTELLECTUAL PROPERTY RIGHTS

Competition from other CMP consumables manufacturers or any new entrants could seriously harm our business and results of operations, and this competition could continue to increase.  Competition has and will likely continue to impact the prices we are able to charge for our CMP consumables products, as well as our overall business.  In addition, our competitors could have or obtain intellectual property rights that could restrict our ability to market our existing products and/or to innovate and develop new products, could attempt to introduce products similar to ours following the expiration of our patents, as referenced with respect to certain intellectual property important to some of our legacy business, or could attempt to introduce products that do not fall within the scope of our intellectual property rights.



ANY PROBLEM OR DISRUPTION IN OUR SUPPLY CHAIN, INCLUDING SUPPLY OF OUR MOST IMPORTANT RAW MATERIALS, OR IN OUR ABILITY TO MANUFACTURE AND DELIVER OUR PRODUCTS TO OUR CUSTOMERS,  COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS

We depend on our supply chain to enable us to meet the demands of our customers.  Our supply chain includes the raw materials we use to manufacture our products, our production operations and the means by which we deliver our products to our customers.  Our business could be adversely affected by any problem or interruption in the supply of the key raw materials we use in our CMP slurries and pads, including raw materials that do not meet the stringent quality and consistency requirements of our customers, any problem or interruption that may occur during production or delivery of our products, such as weather-related problems, natural disasters, or geopolitical or labor-related issues, or any difficulty in producing sufficient quantities of our products to meet growing demand from our customers.  Our supply chain may also be negatively impacted by unanticipated price increases due to supply restrictions beyond the control of our Company or our raw materials suppliers.

We believe it would be difficult to promptly secure alternative sources of key raw materials in the event one of our suppliers becomes unable to supply us with sufficient quantities of raw materials that meet the quality and technical specifications required by us and our customers.  In addition, new contract terms, contractual amendments to existing agreements with, or non-performance by, our suppliers, including any significant financial distress our suppliers may suffer, could adversely affect us.   Also, if we change the supplier or type of key raw materials we use to make our CMP slurries or pads, or are required to purchase them from a different manufacturer or manufacturing facility or otherwise modify our products, in certain circumstances our customers might have to requalify our CMP slurries and pads for their manufacturing processes and products.  The requalification process could take a significant amount of time and expense to complete and could occupy technical resources of our customers that might otherwise be used to evaluate our new products, thus delaying potential revenue growth, or motivate our customers to consider purchasing products from our competitors, possibly interrupting or reducing our sales of CMP consumables to these customers.


WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS

We currently have operations and a large customer base outside of the United States.  Approximately 86% of our revenue was generated by sales to customers outside of the United States for both the six months ended March 31, 2017 and full fiscal year ended September 30, 2016.  We may encounter risks in doing business in certain foreign countries, including, but not limited to, adverse changes in economic and political conditions, both in foreign locations and in the United States with respect to non-U.S. operations of U.S. businesses like ours, geopolitical tensions, fluctuation in exchange rates, compliance with a variety of foreign laws and regulations and related audits and investigations, as well as difficulty in enforcing business and customer contracts and agreements, including protection of intellectual property rights.  We also may encounter risks that we may not be able to repatriate earnings from our foreign operations, derive anticipated tax benefits of our foreign operations or recover the investments made in our foreign operations, whether due to regulatory or policy changes in the U.S. or in the countries outside of the U.S. in which we do business, or other factors.



BECAUSE WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO ADEQUATELY OBTAIN OR PROTECT IT COULD SERIOUSLY HARM OUR BUSINESS

Protection of intellectual property is particularly important in our industry because we develop complex technical formulas and processes for CMP products that are proprietary in nature and differentiate our products from those of our competitors.  Our intellectual property is important to our success and ability to compete.  We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as employee and third-party nondisclosure and assignment agreements.  In addition, we protect our product differentiation through various other means, such as proprietary supply arrangements for certain raw materials, and use of certain manufacturing technologies.  Due to our international operations, we pursue protection in different jurisdictions, which may provide varying degrees of protection, and we cannot provide assurance that we can obtain adequate protection in each such jurisdiction.  Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason, including through the patent prosecution process or in the event of litigation related to such intellectual property, could seriously harm our business.  In addition, certain types of intellectual property, such as patents, expire after a certain period of time, and products protected by our patents then lose such protection, so we refresh our intellectual property portfolio on an ongoing basis through continued innovation, and failure to do so could adversely affect our business.  Also, the costs of obtaining or protecting our intellectual property could negatively affect our operating results.


WE MAY PURSUE ACQUISITIONS OF, INVESTMENTS IN, AND MERGERS OR STRATEGIC ALLIANCES WITH OTHER ENTITIES, WHICH COULD DISRUPT OUR OPERATIONS AND HARM OUR OPERATING RESULTS IF THEY ARE UNSUCCESSFUL

We expect to continue to make investments in technologies, assets and companies, either through acquisitions, mergers, investments or alliances, in order to supplement our internal growth and development efforts.  Acquisitions, mergers, and investments, including our acquisition of NexPlanar, which we completed on October 22, 2015, involve numerous risks, including the following: difficulties and risks in integrating the operations, technologies, products and personnel of acquired companies; diversion of management's attention from normal daily operations of the business; increased risk associated with foreign operations; potential difficulties and risks in entering markets in which we have limited or no direct prior experience and where competitors in such markets have stronger market positions; potential difficulties in operating new businesses with different business models; potential difficulties with regulatory or contract compliance in areas in which we have limited experience; initial dependence on unfamiliar supply chains or relatively small supply partners; insufficient revenues to offset increased expenses associated with acquisitions; potential loss of key employees of the acquired companies; or inability to effectively cooperate and collaborate with our alliance partners.

Further, we may never realize the perceived or anticipated benefits of a business combination or merger with, or asset or other acquisition of, or investments in, other entities.  Transactions such as these could have negative effects on our results of operations, in areas such as contingent liabilities, gross profit margins, amortization charges related to intangible assets and other effects of accounting for the purchases of other business entities.  Investments in and acquisitions of technology-related companies or assets are inherently risky because these businesses or assets may never develop, and we may incur losses related to these investments.  For example, in fiscal 2016, we recorded $1.0 million of impairment expense related to certain in-process technology, related to the NexPlanar acquisition.  In addition, we may be required to impair the carrying value of these acquisitions or investments to reflect other than temporary declines in their value, which could harm our business and results of operations.



BECAUSE WE HAVE LIMITED EXPERIENCE IN BUSINESS AREAS OUTSIDE OF CMP CONSUMABLES, EXPANSION OF OUR BUSINESS INTO OTHER PRODUCTS AND APPLICATIONS MAY NOT BE SUCCESSFUL

An element of our strategy has been to leverage our current customer relationships, technological expertise and other capabilities to expand our business beyond CMP consumables into other areas, such as other electronic materials.  Additionally, in our Engineered Surface Finishes business, we are pursuing other surface modification applications.  Expanding our business into new product areas could involve technologies, production processes and business models in which we have limited experience, and we may not be able to develop and produce products or provide services that satisfy customers' needs, or we may be unable to keep pace with technological or other developments.  Also, our competitors may have or obtain intellectual property rights that could restrict our ability to market our existing products and/or to innovate and develop new products.


OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD CAUSE OUR BUSINESS TO SUFFER

We utilize and rely upon a global workforce.  If we fail to attract and retain the necessary managerial, technical and customer support personnel, our business and our ability to maintain existing and obtain new customers, develop new products and provide acceptable levels of customer service could suffer.  We compete worldwide with other industry participants for qualified personnel, particularly those with significant experience in the semiconductor industry.  The loss of services of key employees, or our ability to obtain or maintain visas or other travel or residency documents on their behalf with respect to our business needs, could harm our business and results of operations.  Periodically, we engage in succession planning for our key employees, and our Board of Directors reviews succession planning for our executive officers, including our chief executive officer, on an annual basis.


RISKS RELATING TO THE MARKET FOR OUR COMMON STOCK

THE MARKET PRICE MAY FLUCTUATE SIGNIFICANTLY AND RAPIDLY

The market price of our common stock has fluctuated and could continue to fluctuate significantly as a result of factors such as: economic, geopolitical, political and stock market conditions generally and specifically as they may impact participants in the semiconductor and related industries; changes in financial estimates and recommendations by securities analysts who follow our stock; earnings and other announcements, and changes in market evaluations, by securities analysts, investors, market participants or others, of or related to, us or participants in the semiconductor and related industries; changes in business, trade or regulatory conditions affecting us or participants in the semiconductor and related industries; announcements or implementation by us, our competitors, or our customers of technological innovations, new products or different business strategies; changes in our capital deployment strategy, or entering into a business combination; and trading volume of our common stock.


ANTI-TAKEOVER PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DISCOURAGE THIRD PARTIES FROM MAKING AN UNSOLICITED BID FOR OUR COMPANY

Our certificate of incorporation, our bylaws, and various provisions of the Delaware General Corporation Law may make it more difficult or expensive to effect a change in control of our Company.  For instance, our amended and restated certificate of incorporation provides for the division of our Board of Directors into three classes as nearly equal in size as possible with staggered three-year terms.

We have adopted change in control arrangements covering our executive officers and other key employees.  These arrangements provide for a cash severance payment, continued medical benefits and other ancillary payments and benefits upon termination of service of a covered employee's employment following a change in control, which may make it more expensive to acquire our Company.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

Period
 
Total Number of Shares Purchased
   
Average Price Paid Per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Approximate Dollar Value of
Shares that May Yet Be
Purchased Under the Plans or
Programs (in thousands)
 
Jan. 1 through Jan. 31, 2017
   
8,720
   
$
64.33
     
5,657
   
$
132,578
 
Feb. 1 through Feb. 28, 2017
   
5,697
   
$
68.82
     
5,697
   
$
132,186
 
Mar. 1 through Mar. 31, 2017
   
6,900
   
$
71.86
     
6,900
   
$
131,690
 
 Total
   
21,317
   
$
67.97
     
18,254
   
$
131,690
 

In January 2016, our Board of Directors authorized an increase in the amount available under our share repurchase program from the previously remaining $75.0 million to $150.0 million.  Under this program, we repurchased 18,254 shares for $1.3 million during the second quarter of fiscal 2017.  As of March 31, 2017, $131.7 million remained outstanding under our share repurchase program.  The manner in which the Company repurchases its shares is discussed in Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, under the heading "Liquidity and Capital Resources", of this Form 10-Q.  To date, we have funded share purchases under our share repurchase program from our available cash balance, and anticipate we will continue to do so.

Separate from this share repurchase program, a total of 3,063 shares were purchased during the second quarter of fiscal 2017 pursuant to the terms of our 2012 Omnibus Incentive Plan, as amended effective March 7, 2017, (OIP) as shares withheld from award recipients to cover payroll taxes on the vesting of shares of restricted stock granted under the OIP.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.



ITEM 6. EXHIBITS

The exhibit numbers in the following list correspond to the number assigned to such exhibits in the Exhibit Table of Item 601 of Regulation S-K:

Exhibit
Number
 
Description
10.61
Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan, as amended effective March 7, 2017.
   
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   
CABOT MICROELECTRONICS CORPORATION
   
[Registrant]
     
Date: May 5, 2017
By:
/s/ WILLIAM S. JOHNSON
   
William S. Johnson
   
Executive Vice President and Chief Financial Officer
   
[Principal Financial Officer]
     
Date: May 5, 2017
By:
/s/ THOMAS S. ROMAN
   
Thomas S. Roman
   
Corporate Controller
   
[Principal Accounting Officer]


40
CABOT MICROELECTRONICS CORPORATION
2012 OMNIBUS INCENTIVE PLAN
(as amended effective March 7, 2017)

1.   PURPOSE
The purpose of this Cabot Microelectronics Corporation 2012 Omnibus Incentive Plan, as amended (the "Plan"), is to advance the interests of Cabot Microelectronics Corporation (the "Company") and its stockholders by enhancing the Company's ability to (a) attract and retain employees, directors, consultants and advisors who are in a position to make significant contributions to the success of the Company and its subsidiaries; (b) reward these individuals for these contributions; (c) encourage these individuals to take into account the short-term and long-term interests of the Company and its stockholders; and (d) reward individuals who have contributed, or are expected to contribute, to the Company's success, by providing them equity and cash incentives ("Awards").
2.   ADMINISTRATION
(a)   The Plan shall be administered by the Compensation Committee of the Board of Directors (the "Board") of the Company (the "Committee").  The Committee shall hold meetings at such times as the Committee shall deem necessary for the proper administration of the Plan.  The Committee shall consist of at least two directors of the Company, each of whom shall be a "Non-Employee Director" as defined in Rule 16b-3(b)(3) promulgated under Section 16 of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and (ii) to the extent necessary for any Award intended to qualify as "qualified performance-based compensation" under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), to so qualify, each member of the Committee shall be an "outside director" (as defined in Section 162(m) and the regulations promulgated thereunder).  Subject to applicable law, the Committee may delegate its authority under the Plan to any other person or persons other than with respect to grants to individuals subject to  Section 16 of the 1934 Act.
(b)   No member of the Committee shall be liable for any action, failure to act, determination or interpretation made in good faith with respect to this Plan or any transaction hereunder.  The Company hereby agrees to indemnify each member of the Committee for all costs and expenses and, to the fullest extent permitted by applicable law, any liability incurred in connection with defending against, responding to, negotiating for the settlement of or otherwise dealing with any claim, cause of action or dispute of any kind arising in connection with any actions in administering this Plan or in authorizing or denying authorization to any transaction hereunder.
(c)   Subject to the express terms and conditions set forth herein, the Committee shall have the power from time to time:
(i)   to determine the employees of the Company, its subsidiaries and affiliates ("Employees"), non-employee members of the board of directors of the Company, its subsidiaries or affiliates ("Directors"), and consultants and advisors of the Company or any of its subsidiaries ("Advisors"), to whom Awards shall be granted under the Plan (any such individual, a "Participant") and the number of shares of Stock subject to share-based Awards; to prescribe the terms and conditions (which need not be identical) of each such Award, including with respect to determining exercise prices, vesting conditions, restrictions on transfer, and, to the extent consistent with the terms of the Plan, whether to waive or modify such conditions (including to accelerate or waive vesting conditions); and to make any amendment or modification to any Award Agreement (as defined herein) consistent with the terms of the Plan;
(ii)   to construe and interpret the Plan and the Awards granted hereunder; to establish, amend and revoke rules and regulations for the administration of the Plan, including, but not limited to, correcting any defect or supplying any omission, or reconciling any inconsistency in the Plan or in any Award Agreement, in the manner and to the extent it shall deem necessary or advisable; and otherwise to give full effect to the Plan;
(iii)   to exercise its discretion with respect to the powers and rights granted to it as set forth in the Plan;
(iv)   to establish any "blackout" period that the Committee in its sole discretion deems necessary or advisable; and
(v)   generally, to exercise such powers and to perform such acts as are deemed by it necessary or advisable to promote the best interests of the Company with respect to the Plan.
All decisions and determinations of the Committee in the exercise of the foregoing powers shall be final, binding and conclusive upon the Company and its subsidiaries and affiliates, all Participants, and all other persons claiming any interest herein.
3.   EFFECTIVE DATE AND TERM OF PLAN
The Plan, as amended through March 7, 2017, was originally effective as of January 16, 2012, the date of its adoption by the Board (the "Effective Date"), subject to approval  by the Company's stockholders.  No Award may be granted under the Plan after the tenth anniversary of the Effective Date, but Awards previously granted may extend beyond that date.
4.   SHARES SUBJECT TO THE PLAN
(a)   Awards under the Plan shall consist of Restricted Stock, RSUs, Options, SARs, Performance Shares, Performance Units, and Cash Incentive Awards (each as defined and described in Section 6 below).
(b)   Subject to adjustment as provided in Section 8.6: (i) the maximum number of shares of the Company's common stock, par value $.001 per share ("Stock"), subject to Awards that may initially be delivered under the Plan is 2,901,360, plus any shares of Stock that are or become available under the Second Amended and Restated Cabot Microelectronics Corporation 2000 Equity Incentive Plan, As Amended and Restated September 23, 2008 (the "Prior Plan"), on or after the date the Plan is approved by the Company's stockholders; (ii) the maximum number of shares of Stock and share equivalent units that may be granted during any calendar year to any one Participant under Awards other than Options, SARs, or Cash Incentive Awards, in the aggregate, is 435,204, to the extent such Awards are intended to qualify as "qualified performance-based compensation" under Section 162(m) of the Code, which limit shall apply regardless of whether the Award(s) are paid in Stock or cash; (iii) the maximum number of shares of Stock and share equivalent units that may be granted during any calendar year to any one Participant under Options and SARs, in the aggregate, is 435,204; and (iv) in no event shall the Company issue more than 2,030,952 shares of Stock in the aggregate under Awards other than Options, SARs, and Cash Incentive Awards under the Plan.  No awards shall be granted under the Prior Plan following the date the Plan is initially approved by the Company's stockholders. For the avoidance of doubt, each limit on shares of Stock and share equivalent units described in this Section 4(b) reflects the adjustment previously made in accordance with the Plan's terms following the Company's leveraged recapitalization with a special cash dividend completed on March 2, 2012.
(c)   Any Stock covered by an Award which is forfeited, canceled or expires in whole or in part shall be deemed not to be delivered for purposes of determining the maximum number of shares of Stock available for grants under the Plan.  For purposes of determining the number of shares of Stock available for grant under the Plan, (i) if the exercise price of an Option or Stock-settled SAR (including any Option or Stock-settled SAR granted under the Prior Plan) is satisfied by delivering shares of Stock to the Company (by either actual delivery or by attestation), the total number of shares subject to such Option or Stock-settled SAR shall be deemed delivered for purposes of determining the maximum number of Shares available for delivery pursuant to Awards under the Plan; (ii) shares subject to an Award of Options or Stock-settled SARs (including any Option or Stock-settled SAR granted under the Prior Plan) that are not delivered to a Participant because such shares are used to satisfy an applicable tax withholding or exercise price obligation shall be deemed delivered hereunder and shall not again be available for delivery in connection with Awards; and (iii) shares subject to an Award other than an Option or Stock-settled SAR (including an Award granted under the Prior Plan) that are not delivered to a Participant because such shares are used to satisfy an applicable tax withholding obligation shall be deemed delivered hereunder and shall not again be available for delivery in connection with Awards. Shares purchased on the open market using the cash proceeds from the exercise of an Option (including any Option granted under the Prior Plan) shall not be added to the shares of Stock available for delivery hereunder in determining the maximum number of shares of Stock available for delivery pursuant to Awards under the Plan.
(d)   In no event shall the Company issue ISOs (as defined herein) under the Plan covering more than 2,538,690 shares of Stock (which number reflects the adjustment previously made in accordance with the Plan following the Company's leveraged recapitalization with a special cash dividend completed on March 2, 2012), subject to adjustment as provided in Section 8.6 to the extent that such adjustment would not affect the qualification of such Awards as ISOs.
(e)   Awards granted through the assumption of, or in substitution or exchange for, similar awards in connection with the acquisition of another corporation or business entity shall not be counted for purposes of applying the limitations of this Section on numbers of shares of Stock available for Awards generally or any particular kind of Award under the Plan.
(f)   Stock delivered under the Plan may be either from authorized but unissued Stock, from treasury shares or from shares of Stock purchased in open-market transactions and private sales.
5.   ELIGIBILITY AND PARTICIPATION
Employees, Directors, and Advisors, who in the opinion of the Committee are in a position to make a significant contribution to the success of the Company, its subsidiaries and affiliates, are eligible to receive Awards under the Plan.  For purposes of the Plan, "Service" means the provision of services to the Company or its subsidiaries or affiliates in the capacity of (a) an Employee, (b) a Director, or (c) an Advisor.  An "affiliate" for purposes of the Plan is an entity that controls, is controlled by or is under common control with, the Company.  A "subsidiary" for purposes of the Plan is an entity in which the Company owns, directly or indirectly, equity interests possessing a majority of the total combined voting power of all classes of equity.  The Committee will from time to time select the Employees, Directors and/or Advisors who are to be granted Awards.
6.   TYPES OF AWARDS
6.1.   RESTRICTED STOCK AND RESTRICTED STOCK UNITS.
(a)   Nature of Restricted Stock Awards .  An Award of restricted stock entitles the recipient to acquire, at such time or times as the Committee may determine, shares of Stock subject to the restrictions described in paragraph (e) below ("Restricted Stock").
(b)   Nature of Restricted Stock Unit Awards .  An Award of restricted stock units entitles the recipient to acquire, at such time or times as the Committee may determine, shares of Stock subject to the restrictions described in paragraph (e) below ("RSUs").  An RSU represents a contingent right to receive a Share or an amount equivalent in value to a Share.
(c)   Payment for Restricted Stock Awards .  The Committee may require, as a condition to an Award of Restricted Stock or RSUs, that a Participant deliver to the Company a purchase price in any amount set by the Committee for such Restricted Stock or RSUs.
(d)   Rights as a Stockholder .  A Participant who receives an Award of Restricted Stock will have all the rights of a stockholder with respect to the Stock, including voting and dividend rights, subject to the restrictions described in paragraph (f) below and any other conditions imposed by the Committee in the Award Agreement at the time of grant.  The Award Agreement evidencing an Award of RSUs shall specify whether the Participant is entitled to any voting rights or to receive any dividends on the shares of Stock underlying the RSUs.  Subject to Section 8.2, an Award of Restricted Stock or RSUs may provide for the right to receive Dividend Equivalents (as defined herein).
(e)   Restrictions .  The restrictions on each grant of Restricted Stock or RSUs will lapse at such time or times, and on such terms and conditions (including upon meeting pre-established performance goals), as the Committee may specify.  Except as otherwise specifically provided by the Plan or by the Committee in any particular case, until these restrictions lapse, neither Restricted Stock nor RSUs may be sold, assigned, transferred, pledged or otherwise encumbered or disposed of.  If the Participant's Service terminates before such restrictions have lapsed, the Company shall have the right to repurchase the Restricted Stock for the amount of any consideration (excluding services) it received for the Restricted Stock plus, if the Committee shall so determine, an amount equal to the Withholding Requirements met by the Participant in connection with the sale of the Stock, or for such other consideration as the Committee shall determine, including for no consideration if no consideration other than services was paid for such Restricted Stock.
(f)   Deferral .  If a Participant so elects in accordance with such procedures as the Committee may specify from time to time, in accordance with the requirements of Section 409A of the Code and the interpretive guidance thereunder ("Section 409A"), the delivery of Restricted Stock and, if the deferral election so specifies, of the Dividend Equivalents with respect thereto, shall be deferred until the date or dates specified in such election.
(g)   Section 83(b) Election .  If a Participant, in connection with the acquisition of shares of Stock under the Plan or otherwise, makes an election under Section 83(b) of the Code, such Participant shall notify the Company within ten (10) days of filing notice of the election with the Internal Revenue Service or other governmental authority, in addition to any filing and notification required pursuant to regulations issued under Section 83(b) of the Code or any other applicable provision.
6.2.   OPTIONS.
(a)   Nature of Options .  An option is an Award entitling the recipient on exercise thereof to purchase shares of Stock at a specified exercise price (an "Option").  Both incentive stock options (as defined in Section 422 of the Code) ("ISOs") and Options that are not ISOs may be granted under the Plan; provided that the Committee may award ISOs only to Employees.
(b)   Exercise Price .  The exercise price of an Option shall be determined by the Committee and set forth in an applicable Award Agreement; provided, however, that the exercise price of an Option shall not be less than the Fair Market Value of a share of the Stock on the date the Option is granted (110% of the Fair Market Value of a share of Stock on the date of grant in the case of an ISO granted to an Employee who owns (within the meaning of Section 422(b)(6) of the Code) stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company, or of a parent or a subsidiary (such person, a "Ten Percent Stockholder")).  For purposes of this Plan, "Fair Market Value" on any date means the closing sales price of the Stock on such date on the principal national securities exchange on which the Stock is listed or admitted to trading, or, if the Stock is not so listed or admitted to trading, the average of the per share closing bid price and per share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System ("Nasdaq") or such other market in which such prices are regularly quoted, or, if there have been no published bid or asked quotations with respect to shares on such date, the Fair Market Value shall be the value established by the Board in good faith and in accordance with Section 409A and, in the case of an ISO, Section 422 of the Code.  Except for adjustment as provided in Section 8.6, any outstanding Option (i) shall not be repriced; (ii) shall not be canceled for the purpose of reissuing the Option to the Participant at a lower exercise price; and (iii) in the case of an Option that, at the time of cancellation, has an exercise price that exceeds the Fair Market Value of the underlying share of Stock, shall not be canceled for the purpose of exchanging the Option for any other Award and/or cash payment.
(c)   Duration of Options .  The latest date on which an Option may be exercised will be the tenth anniversary of the date the Option was granted (five years in the case of an ISO granted to a Ten Percent Stockholder), or such earlier date as may have been specified by the Committee in the Award Agreement at the time the Option was granted.
(d)   Vesting and Exercise of Options .  An Option will become vested and exercisable at such time or times, and on such terms and conditions (including upon meeting pre-established performance goals), as the Committee may specify in the Award Agreement for such Option.  The Committee may at any time accelerate the time at which all or any part of the Option may be exercised.
(e)   Exercise Procedures . Subject to the next following sentence, any exercise of an Option must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (i) any documents required by the Committee and (ii) payment in full for the number of shares for which the Option is exercised.  The exercise price for any Stock purchased pursuant to the exercise of an Option may, if permitted under the Award Agreement applicable to the Option, be paid in the following forms: (1) cash; (2) the transfer, either actually or by attestation, to the Company of shares of Stock that have been held by the Participant for at least six months (or such lesser period as may be permitted by the Committee) prior to the exercise of the Option, such transfer to be upon such terms and conditions as determined by the Committee; (3) by a "net exercise" arrangement, pursuant to which the number of shares of Stock issuable upon exercise of the Option shall be reduced by the largest whole number of shares of Stock having an aggregate Fair Market Value that does not exceed the aggregate exercise price (plus tax withholdings, if applicable); provided, however, that the Company shall accept a cash or other payment from the Participant to the extent of any remaining balance of the aggregate exercise price not satisfied by such reduction in the number of whole shares of Stock to be issued; (4) such other methods as the Committee makes available to Participants from time to time; or (5) a combination thereof.  In addition, Options may be exercised through a registered broker-dealer pursuant to such cashless exercise procedures which are, from time to time, deemed acceptable by the Committee.  Any shares of Stock transferred to the Company as payment of the exercise price under an Option shall be valued at their Fair Market Value on the day of exercise of such Option.  If requested by the Committee, the Participant shall deliver the Award Agreement to the Secretary of the Company who shall endorse thereon a notation of such exercise and return such Award Agreement to the Participant. No fractional shares of Stock (or cash in lieu thereof) shall be issued upon exercise of an Option, and the number of shares of Stock that may be purchased upon exercise shall be rounded to the nearest number of whole shares. Notwithstanding any contrary provision of this Section 6.2, if, on the date an outstanding Option would expire (other than due to a termination of Service for Cause (as defined below)), the exercise of the Option, including by a "net exercise" or cashless exercise, would violate applicable securities laws or any insider trading policy maintained by the Company from time to time, the expiration date applicable to the Option will be extended to a date that is the earlier of (i) thirty (30) calendar days after the date the exercise of the Option would no longer violate applicable securities laws or any such insider trading policy and (ii) the expiration of the original term of the Option.
(f)   Exercise Limit .  To the extent that the aggregate Fair Market Value (determined as of the date of the grant) of shares of Stock with respect to which ISOs granted under the Plan and "incentive stock options" (within the meaning of Section 422 of the Code) granted under all other plans of the Company or its subsidiaries (in either case determined without regard to this Section 6.2(f)) are exercisable by a Participant for the first time during any calendar year exceeds $100,000, such ISOs shall be treated as Options that are not ISOs.  In applying the limitation in the preceding sentence in the case of multiple Options, Options that are intended to be ISOs shall be treated as Options which are not ISOs according to the order in which they were granted, such that the most recently granted Options are first treated as Options that are not ISOs.
(g)   ISO Exercise . An ISO must be exercised, if at all, within three months after the Participant's termination of Service for a reason other than death or Disability and within twelve months after the Participant's termination of Service for death or Disability.  For purposes of this Plan, "Disability" is defined as permanent and total disability within the meaning of Section 22(e)(3) of the Code.
6.3.   STOCK APPRECIATION RIGHTS.
(a)   Nature of Stock Appreciation Rights .  A stock appreciation right is an Award entitling the recipient to receive upon exercise thereof payment of an amount determined by multiplying the excess of the Fair Market Value of a share of Stock on the date of exercise over the exercise price of the SAR, by the number of shares of Stock with respect to which the SAR is exercised (a "SAR").  The payment upon exercise of a SAR may be made in Stock, cash, or a combination of Stock and cash, as specified in the applicable Award Agreement.
(b)   Exercise Price .  The exercise price of a SAR shall be determined by the Committee and set forth in an applicable Award Agreement; provided, however, that the exercise price of a SAR shall not be less than the Fair Market Value of a share of the Stock on the date the SAR is granted.   Except for adjustment as provided in Section 8.6, any outstanding SAR (i) shall not be repriced; (ii) shall not be canceled for the purpose of reissuing the SAR to the Participant at a lower exercise price; and (iii) in the case of a SAR that, at the time of cancellation, has an exercise price that exceeds the Fair Market Value of the underlying share of Stock, shall not be canceled for the purpose of exchanging the SAR for any other Award and/or cash payment.
(c)   Duration of SARs .  The latest date on which a SAR may be exercised will be the tenth anniversary of the date the SAR was granted, or such earlier date as may have been specified by the Committee in the Award Agreement at the time the SAR was granted.
(d)   Exercise of SARs .  A SAR will become exercisable at such time or times, and on such terms and conditions (including upon meeting pre-established performance goals), as the Committee may specify in the Award Agreement for such SAR.  The Committee may at any time accelerate the time at which all or any part of the SAR may be exercised.  Any exercise of a SAR must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by any documents required by the Committee.  If requested by the Committee, the Participant shall deliver the Award Agreement to the Secretary of the Company who shall endorse thereon a notation of such exercise and return such Award Agreement to the Participant. No fractional shares of Stock (or cash in lieu thereof) shall be issued upon exercise of a SAR, and the number of shares of Stock that may be acquired upon exercise shall be rounded to the nearest number of whole shares.
6.4.   PERFORMANCE SHARES AND PERFORMANCE UNITS.
(a)   Nature of Performance Shares and Performance Units .  A performance share is an Award with an initial value equal to the Fair Market Value of a share of Stock on the date of grant (a "Performance Share"), and a performance unit is an Award with an initial value determined by the Committee on the date of grant (a "Performance Unit"), in each case, that entitles the recipient to receive payment upon the attainment of performance goals and other terms and conditions determined by the Committee.  Payment of Performance Shares or Performance Units may be made in Stock, cash, or a combination of Stock and cash, as specified in the applicable Award Agreement.  In no event shall the amount of a Performance Unit payable to any Participant that is not denominated in shares of Stock and that is designed to qualify for the performance-based exception from the tax deductibility limitations of Section 162(m) of the Code exceed $5,000,000 for any calendar year.

(b)   Performance Goals .  The Committee shall determine the number of Performance Shares or Performance Units, the length of the performance period, and the other terms and conditions of each Award.
6.5.   CASH INCENTIVE AWARDS.
(a)   Nature of Cash Incentive Awards .  A cash incentive award is an Award denominated in cash that entitles the recipient to an amount (payable in cash or a share-based Award as described below) upon the attainment of performance goals and other terms and conditions determined by the Committee, which may include annual performance goals and periods ("Cash Incentive Award"); provided, however, that in no event shall the amount of a Cash Incentive Award payable to any Participant that is designed to qualify for the performance-based exception from the tax deductibility limitations of Section 162(m) of the Code in accordance with Section 9 exceed $5,000,000 for any calendar year (whether payable in cash or in the form of a share-based Award).  A Cash Incentive Award may be satisfied in cash or, if the Committee so determines, by a grant of share-based Awards under the Plan with such terms and conditions as the Committee determines, or a combination of cash or share-based Awards. 
(b)   Performance Goals .  The Committee shall determine the amount of the Cash Incentive Award, the length of the performance period, and the terms and conditions of each Cash Incentive Award, including the form of payment.
6.6   SUBSTITUTE AWARDS.
(a)   In connection with any acquisition by the Company or any of its subsidiaries, the Committee may grant Awards to persons who became Employees, Directors or Advisors in connection with such acquisition in substitution for equity incentives held by them in the seller or acquired entity.  In such case the Committee may set the prices and other terms of the substitute Awards at such amounts and in such manner as it, in its sole discretion, deems appropriate to preserve for the Participants the economic values of the equity incentives for which such Awards are substitutes (as determined by the Committee in its sole discretion) or otherwise to provide such incentives as the Committee may determine are appropriate.
(b)   Unless required by applicable law, any substitute Awards granted pursuant to Section 6.6 shall not count toward the share limitations set forth in Section 4.
7.   EVENTS AFFECTING OUTSTANDING AWARDS
7.1.   TERMINATION OF SERVICE.
Unless otherwise set forth in an Award Agreement, an Award shall immediately terminate on the date a Participant's Service terminates, and (a) any Options or SARs held by a Participant shall not be exercisable and all rights of the Participant with respect thereto shall immediately terminate, (b) any shares of Restricted Stock or RSUs with respect to which the restrictions have not lapsed shall be immediately forfeited and must be transferred to the Company in accordance with Section 6.1, and (c) any Performance Shares, Performance Units or Cash Incentive Awards shall be immediately forfeited.
7.2   TERMINATION OF AWARD.
The Company may terminate, cancel, rescind, recover, or revoke an Award immediately under certain circumstances, including, but not limited to a Participant's:
(a)   actions constituting "Cause", which shall have the meaning provided under an employment, consulting or other agreement between a Participant and the Company, or if there is no such meaning provided under such agreement or no such agreement, shall include, but not be limited to, the: (i) conviction of or entering a plea of guilty or nolo contendere with respect to a crime, whether or not connected with the Company; (ii) commission of any act of fraud with respect to the Company; (iii) theft, embezzlement or misappropriation of any property of the Company; (iv) excessive absenteeism (other than as resulting from Disability); (v) failure to observe or comply with any Company work rules, policies, procedures, guidelines or standards of conduct which the Company has adopted for the regulation of the general conduct of its employees, as generally known to the employees of the Company or evidenced by the terms of any employee handbook, written memorandums or written policy statements; (vi) continued willful refusal to carry out and perform the material duties and responsibilities of a Participant's position, excluding nonperformance resulting from Disability; or (vii) any other conduct or act determined to be injurious, detrimental or prejudicial to any interest of the Company (in each case as determined in good faith by the Company);
(b)   rendering of services for a competitor prior to, or within six (6) months after, the exercise of any Option or SAR or the termination of Participant's Service with the Company;
(c)   unauthorized disclosure of any confidential/proprietary information of the Company to any third party;
(d)   failure to comply with the Company's policies regarding the identification, disclosure and protection of intellectual property;
(e)   violation of the Proprietary Rights Agreement/Cabot Microelectronics Corporation Employee Confidentiality, Intellectual Property and Non-Competition Agreement for Employees signed by the Participant; or
(f)   violation of the Cabot Microelectronics Corporation Code of Business Conduct, including those provisions related to financial reporting.
The existence of any such circumstances shall be determined in good faith by the Company.
In the event of any termination, cancellation, rescission, recovery, or revocation, the Participant shall return to the Company any Stock received pursuant to an Award, or pay to the Company the amount of any gain realized on the sale of any such Stock, in such manner and on such terms and conditions as may be required, and the Company shall be entitled to set off against the amount of any such gain any amount owed to the Participant by the Company.
7.3   CHANGE IN CONTROL.
The Committee shall have the discretion to provide in applicable Award Agreements that, in the event of a "Change in Control" (as defined in Appendix A) of the Company, the following provisions will apply:
(a)   Each outstanding Option or SAR (or such lesser portion of each Option or SAR as is set forth in an applicable Award Agreement) will immediately become exercisable in full.
(b)   Each outstanding share of Restricted Stock or RSU (or such lesser number of shares as is set forth in an applicable Award Agreement) will immediately become free of the restrictions.
(c)   The vesting of each Performance Share, Performance Unit, or Cash Incentive Award will immediately be accelerated, and the Participant will be paid in cash, Stock, or other property, as determined by the Committee, within thirty (30) days after the effective date of the Change in Control, a pro rata amount based on assumed achievement of all relevant performance measures at target levels, and upon the length of time within the applicable performance period that elapsed prior the effective date of the Change in Control; provided, however, that if the Committee determines that actual performance to the effective date of the Change in Control exceeds target levels, the prorated payouts will be made at levels commensurate with the actual performance (determined by extrapolating the actual performance to the end of the applicable performance period).
(d)   In the event of a Change in Control that is a merger or consolidation in which the Company is not the surviving corporation or that results in the acquisition of substantially all the Company's outstanding Stock by a single person or entity or by a group of persons or entities acting in concert, or in the event of a sale or transfer of all or substantially all of the Company's assets (a "Covered Transaction"), the Committee shall have the discretion to provide for the termination of all outstanding Options or SARs as of the effective date of the Covered Transaction; provided, that, if the Covered Transaction follows a Change in Control or would give rise to a Change in Control, no Option or SAR will be so terminated (without the consent of the Participant) prior to the expiration of twenty (20) days following the later of (i) the date on which the Option or SAR became fully exercisable and (ii) the date on which the Participant received written notice of the Covered Transaction.
8.   GENERAL PROVISIONS
8.1.   DOCUMENTATION OF AWARDS.
Awards may be evidenced by written or electronic instruments prescribed by the Committee from time to time (each such instrument, an "Award Agreement").  Award Agreements may be in the form of agreements, to be executed by both the Participant and the Company, or certificates, letters or similar instruments, and may be provided in electronic form, acceptance of which will evidence agreement to the terms thereof and hereof.
8.2.   RIGHTS AS A STOCKHOLDER; DIVIDEND EQUIVALENTS.
Except as specifically provided by the Plan, the receipt of an Award will not give a Participant rights as a stockholder, and the Participant will obtain such rights, subject to any limitations imposed by the Plan or the Award Agreement, only upon actual receipt of Stock.  However, the Committee may, on such conditions as it deems appropriate, provide in an Award Agreement that a Participant will receive a benefit in lieu of cash dividends that would have been payable on any or all Stock subject to the Participant's Award had such Stock been outstanding.  Without limitation, the Committee may provide for payment to the Participant of amounts representing dividends on such Award (other than Options and SARS) (such amounts, "Dividend Equivalents"), either currently or in the future, or for the investment of such amounts on behalf of the Participant; provided that the Committee shall design such payment to be exempt from or, in the alternative, comply with Section 409A; provided, further, that with respect to performance-based Awards, Dividend Equivalents shall not be paid until vesting (if any) of such Awards.
8.3   CONDITIONS ON DELIVERY OF STOCK.
The Company will not be obligated to deliver any shares of Stock, whether by electronic book entry or in certificate form, pursuant to the Plan or to remove any restriction from shares of Stock previously delivered under the Plan (a) until all conditions of the Award have been satisfied or removed, (b) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, (c) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of notice of issuance and (d) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel.  If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer.
8.4.   TAX WITHHOLDING.
(a)   The Company may withhold from any payment made pursuant to an Award an amount as may be necessary and sufficient to satisfy all federal, state, local, and other applicable tax withholding requirements (the "Withholding Requirements").
(b)   The Committee will have the right to require that the Participant or other appropriate person remit to the Company an amount sufficient to satisfy the Withholding Requirements, or make other arrangements satisfactory to the Committee with regard to such requirements, prior to the delivery of any Stock.  If and to the extent that any such withholding is required, the Committee may permit the Participant or such other person to elect at such time and in such manner as the Committee provides to have the Company hold back from the shares to be delivered, or to deliver to the Company, Stock having a value calculated to satisfy the Withholding Requirements. Notwithstanding anything herein to the contrary, the Committee may, in its sole discretion, permit a Participant to satisfy the Withholding Requirements by tendering shares of Stock having a Fair Market Value equal to the amount required to be withheld or such other greater amount up to the maximum statutory rate under applicable law, as applicable to such Participant, if such other greater amount would not result in adverse financial accounting treatment, as determined by the Committee (including in connection with the effectiveness of FASB Accounting Standards Update 2016-09).
(c)   With respect to the exercise of ISOs, the Committee may require as a condition of exercise that the person exercising the ISO agree (i) to inform the Company promptly of any disposition of Stock received upon exercise of the ISO, and (ii) if the Company determines that it could be liable for Withholding Requirements with respect to a disposition of the Stock received upon exercise, to give such security as the Committee deems adequate to meet the potential liability of the Company for the Withholding Requirements and to augment such security from time to time in any amount reasonably deemed necessary by the Committee to preserve the adequacy of such security.
8.5.   NONTRANSFERABILITY OF AWARDS.
No Award shall be transferable by a Participant otherwise than by will or by the laws of descent and distribution or, except in the case of an ISO, pursuant to a domestic relations order (within the meaning of Rule 16a-12 promulgated under the Exchange Act), and an Option or SAR shall be exercisable during the lifetime of such Participant only by such Participant or such Participant's executor or administrator or by the person or persons to whom the Option or SAR is transferred by will or the applicable laws of descent and distribution (such person, the Participant's "Legal Representative").  Notwithstanding the foregoing sentence, the Committee may in a manner consistent with applicable law set forth in an Award Agreement evidencing an Award (other than an ISO) that the Award may be transferred to members of the Participant's immediate family, to trusts solely for the benefit of such immediate family members and to partnerships in which such family members and/or trusts are the only partners, and for purposes of this Plan, such a transferee of an Award shall be deemed to be the Participant.  For this purpose, "immediate family" shall refer only to the Participant's spouse, parents, children, stepchildren and grandchildren and the spouses of such parents, children, stepchildren and grandchildren.  The terms of an Award shall be final, binding and conclusive upon the beneficiaries, executors, administrators, heirs and successors of the Participant.
8.6.   ADJUSTMENTS IN THE EVENT OF CERTAIN TRANSACTIONS.
In the event of a merger, consolidation, acquisition of property or shares, stock rights offering, liquidation, disaffiliation of a subsidiary or affiliate, or similar event affecting the Company or any of its subsidiaries (each, a "Corporate Transaction"), the Committee or the Board may in its discretion make such substitutions or adjustments as it deems appropriate and equitable to (i) the aggregate number and kind of shares of Stock or other securities reserved for issuance and delivery under the Plan, (ii) the various maximum limitations set forth in Section 4 upon certain types of Awards and upon the grants to individuals of certain types of Awards, (iii) the number and kind of shares of Stock or other securities subject to outstanding Awards; and (iv) the exercise price of outstanding Options and SARs.  In the event of a stock dividend, stock split, reverse stock split, separation, spinoff, reorganization, extra-ordinary dividend of cash or other property, share combination, or recapitalization or similar event affecting the capital structure of the Company (each, a "Share Change"), the Committee or the Board shall make such substitutions or adjustments as it deems appropriate and equitable to (A) the aggregate number and kind of shares of Stock or other securities reserved for issuance and delivery under the Plan, (B) the various maximum limitations set forth in Section 4 upon certain types of Awards and upon the grants to individuals of certain types of Awards, (C) the number and kind of shares of Stock or other securities subject to outstanding Awards; and (D) the exercise price of outstanding Options and SARs.  In the case of Corporate Transactions, such adjustments may include, without limitation, (1) the cancellation of outstanding Awards in exchange for payments of cash, property or a combination thereof having an aggregate value equal to the value of such Awards, as determined by the Committee or the Board in its sole discretion (it being understood that in the case of a Corporate Transaction with respect to which stockholders of Stock receive consideration other than publicly traded equity securities of the ultimate surviving entity, any such determination by the Committee that the value of an Option or SAR shall for this purpose be deemed to equal the excess, if any, of the value of the consideration being paid for each share of Stock pursuant to such Corporate Transaction over the exercise price of such Option or SAR shall conclusively be deemed valid), provided, that in the event of the cancellation of such Awards pursuant to this clause (1), the Awards shall vest in full immediately prior to the consummation of such Corporate Transaction; (2) the substitution of other property (including, without limitation, cash or other securities of the Company and securities of entities other than the Company) for the shares of Stock subject to outstanding Awards; and (3) in connection with any disaffiliation of a subsidiary or affiliate, arranging for the assumption of Awards, or replacement of Awards with new awards based on other property or other securities (including, without limitation, other securities of the Company and securities of entities other than the Company), by the affected subsidiary, affiliate, or division or by the entity that controls such subsidiary, affiliate, or division following such disaffiliation of a subsidiary or affiliate (as well as any corresponding adjustments to Awards that remain based upon Company securities).
8.7.   PARTICIPANT'S RIGHTS.
Neither the adoption of the Plan nor the grant of Awards will confer upon any person any right to continued employment or Service with the Company or any subsidiary or affiliate or affect in any way the right of the Company any subsidiary or affiliate to terminate an employment or Service relationship at any time.
8.8.   PAYMENT FOR STOCK; LOANS.
Stock awarded under this Plan as Restricted Stock or received upon exercise of an Option or SAR may be paid for with such legal consideration as the Committee may determine.  If and to the extent authorized by the Committee and permitted by applicable law, the Company may permit Participants to pay for Stock with promissory notes, and may make loans to Participants of all or a portion of any Withholding Requirements to be met in connection with the grant, exercise or vesting of any Award. Any such extensions of credit may be secured by Stock or other collateral, or may be made on an unsecured basis, as the Committee may determine.
8.9.   SUCCESSORS.
All obligations of the Company under the Plan or any Award Agreement will be binding on any successor to the Company, whether the existence of the successor results from a direct or indirect purchase of all or substantially all of the Company's shares, or a merger, consolidation, or otherwise.
8.10.   SEVERABILITY.
If any provision of the Plan is held illegal or invalid for any reason, the illegality or invalidity will not affect the remaining parts of the Plan, and the Plan will be construed and enforced as if the illegal or invalid provision had not been included.
8.11.   REQUIREMENTS OF LAW.
The granting of Awards and the issuance of Share and/or cash payouts under the Plan will be subject to all applicable laws, rules, and regulations, and to any approvals by governmental agencies or national securities exchanges as may be required.
8.12.   SECURITIES LAW COMPLIANCE.
As to any individual who is, on the relevant date, an officer, director or ten percent beneficial owner of any class of the Company's equity securities that is registered pursuant to Section 12 of the Exchange Act, all as defined under Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 under the Exchange Act, or any successor rule.  To the extent any provision of the Plan or action by the Board fails to so comply, it will be deemed null and void, to the extent permitted by law and deemed advisable by the Board.
8.13.   AWARDS TO FOREIGN NATIONALS AND EMPLOYEES OUTSIDE THE UNITED STATES.
To the extent the Board deems it necessary, appropriate or desirable to comply with foreign law or practice and to further the purposes of this Plan, the Board may, without amending the Plan, (i) establish rules applicable to Awards granted to Participants who are foreign nationals, are employed or providing Service outside the United States, or both, including rules that differ from those set forth in this Plan, and (ii) grant Awards to such Participants in accordance with those rules that would require the application of the law of any other jurisdiction.
8.14.   GOVERNING LAW.
To the extent not preempted by federal law, the Plan and all agreements hereunder will be construed and enforced in accordance with, and governed by, the laws of the State of Delaware, without giving effect to its conflicts of laws principles that would require the application of the law of any other jurisdiction.  All references to statutory provisions and related regulatory provisions used herein shall include any similar or successor provisions.  The jurisdiction and venue for any disputes arising under, or any action brought to enforce (or otherwise relating to), this Plan shall be exclusively in the courts in the State of Illinois, County of Cook, including the Federal Courts located therein (should Federal jurisdiction exist).
8.15   SECTION 409A COMPLIANCE.
(a)   Notwithstanding any provision of this Plan to the contrary, all Awards made under this Plan are intended to be exempt from or, in the alternative, comply with Section 409A and the interpretive guidance thereunder, including the exceptions for stock rights and short-term deferrals.  The Plan shall be construed and interpreted in accordance with such intent.  Each payment under an Award shall be treated as a separate payment for purposes of Section 409A.  With respect to a Cash Incentive Award, the cash portion will be paid, and the grant of any portion payable as a share-based Award will be awarded, not later than March 15 of the calendar year following the calendar year in which the applicable performance period ended.
(b)   If a Participant is a "specified employee" (as such term is defined for purposes of Section 409A) at the time of his or her termination of Service, no amount that is nonqualified deferred compensation subject to Section 409A and that becomes payable by reason of such termination of Service shall be paid to the Participant (or in the event of the Participant's death, the Participant's representative or estate) before the earlier of (i) the first business day after the date that is six months following the date of the Participant's termination of Service, and (ii) within 30 days following the date of the Participant's death.  For purposes of Section 409A, a termination of Service shall be deemed to occur only if it is a "separation from service" within the meaning of Section 409A, and references in the Plan and any Award Agreement to "termination of Service" or similar terms shall mean a "separation from service." If any Award is or becomes subject to Section 409A, unless the applicable Award Agreement provides otherwise, such Award shall be payable upon the Participant's "separation from service" within the meaning of Section 409A. If any Award is or becomes subject to Section 409A and if payment of such Award would be accelerated or otherwise triggered under a Change in Control, then the definition of Change in Control shall be deemed modified, only to the extent necessary to avoid the imposition of an excise tax under Section 409A, to mean a "change in control event" as such term is defined for purposes of Section 409A.
(c)   Any adjustments made pursuant to Section 8.6 to Awards that are subject to Section 409A shall be made in compliance with the requirements of Section 409A, and any adjustments made pursuant to Section 8.6 to Awards that are not subject to Section 409A shall be made in such a manner as to ensure that after such adjustment, the Awards either (i) continue not to be subject to Section 409A or (ii) comply with the requirements of Section 409A.
8.16   ERRONEOUSLY AWARDED COMPENSATION.
All Awards shall be subject to any incentive compensation recoupment or "clawback" policy established and amended from time to time by the Company, including any such policy established to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act, or as determined by the Company from time to time to comport with good corporate governance practices.

8.17   UNFUNDED PLAN.

It is presently intended that the Plan shall be unfunded.  Except for reserving a sufficient number of authorized shares of Stock, to the extent required by law to meet the requirements of the Plan, the Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the delivery of shares of Stock relating to Awards granted pursuant to the Plan.

9.   QUALIFIED PERFORMANCE-BASED AWARDS.
9.1   GRANT OF QUALIFIED PERFORMANCE-BASED AWARDS.
If the Committee makes Awards (other than Options or SARs) that are designed to qualify for the performance-based exception from the tax deductibility limitations of Section 162(m) of the Code and any regulations promulgated thereunder (a "Qualified Performance-Based Award"), such Awards shall be subject to the attainment of performance goals related to one or more of the following performance measures and business metrics: earnings before interest and taxes, earnings before interest, taxes, depreciation and amortization, stock price (including, but not limited to, growth measures and total stockholder return), revenue, net revenue, net revenue growth, gross margin, net income (before or after taxes), operating earnings or income, revenue backlog, economic value added, customer satisfaction, cost control or expense reduction, attainment of identified business opportunities, earnings per share, return on operating assets or capital, return on net assets, economic profit, appreciation in fair market value, volume/production, employee retention, cash flow ( e.g ., operating cash flow, free cash flow, discounted cash flow return on investment), market share, return to stockholders, cost management, business growth through market and technology extension, safety, improvement in technology and quality leadership, business processes, and organizational effectiveness and operational excellence, in each case, absolute or relative to a peer group or index.
9.2   PERFORMANCE GOALS
(a)   The performance goals established for the performance period established by the Committee shall be objective (as that term is described in regulations under Section 162(m) of the Code), and will be established in writing by the Committee not later than ninety (90) days after the beginning of the applicable performance period (but in no event after twenty-five percent (25%) of the performance period has elapsed), and while the outcome as to the performance goals is substantially uncertain. The performance goals established by the Committee will be based on one or more of the performance measures and business metrics set forth in Section 9.1 and any of such performance measures and business metrics may be used to measure the performance of the Company as a whole or of any business unit, division, acquired business, minority investment, partnerships or joint venture of the Company.  The Committee may specify any reasonable definition of the performance measures and business metrics it uses.  A Participant otherwise entitled to receive a Qualified Performance-Based Award for any performance period will not receive a settlement or payment of such Award until the Committee has determined that the applicable performance goals have been attained. The Committee may adjust in its sole discretion the performance goals applicable to any Awards to reflect any unusual or non-recurring events, including, but not limited to, exogenous events, financing activities, acquisitions, divestitures, recapitalizations (including stock splits and dividends), impact of charges for restructurings, discontinued operations, the cumulative effects of accounting or tax changes, and other items determined to be unusual in nature and/or infrequent in occurrence, each as defined by generally accepted accounting principles or as identified in the Company's financial statements, notes to the financial statements, management's discussion and analysis or other the Company's filings with the Securities and Exchange Commission, provided that in the case of performance goals applicable to any Qualified Performance-Based Awards, such adjustment does not violate Section 162(m) of the Code. However, the Committee may not in any event increase the amount of compensation payable to a covered employee (within the meaning of Section 162(m) of the Code) upon attainment of a performance goal above the maximum amount approved by the Committee.

(b)   In the event that the Committee determines that it is advisable to grant Awards that may not qualify as Performance-Based Awards, the Committee may grant such Awards without satisfying the requirements of Section 162(m) of the Code, to the extent consistent with its other compensation objectives.
10.   DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION
(a)   The Committee may at any time discontinue granting Awards under the Plan.  The Board or the Committee may at any time or times amend the Plan or any outstanding Award, provided that no such amendment (other than an amendment made to comply with applicable law, including without limitation Section 409A, stock exchange listing standards or accounting rules) would materially impair the rights of a Participant with respect to a previously granted Award without such Participant's consent.  The Committee may at any time terminate the Plan as to any further grants of Awards.  Except to the extent expressly required or permitted by the Plan, no amendment to the Plan or any outstanding Award will, without the approval of the stockholders of the Company, (a) increase the maximum number of shares available under the Plan, (b) extend the time within which Awards may be granted, (c) permit the Company to reprice any outstanding Option or SAR, (d) otherwise effect an action that would require stockholder approval under applicable law or the listing standards of Nasdaq or (e) amend the provisions of this Section 10, and no amendment or termination of the Plan may adversely affect the rights of any Participant (without his or her consent) under any Award previously granted.
(b)   Subject to the immediately preceding paragraph, the Committee, to the extent it deems necessary or advisable in its sole discretion, reserves the right, but shall not be required, to unilaterally amend or modify the Plan and any Award granted under the Plan so that the Award qualifies for exemption from or complies with Section 409A; provided, however, that the Committee makes no representations that Awards granted under the Plan shall be exempt from or comply with Section 409A and makes no undertaking to preclude Section 409A from applying to Awards granted under the Plan.
APPENDIX A TO 2012 OMNIBUS INCENTIVE PLAN

A "Change in Control" shall be deemed to have occurred if:

(a)   any "person" as such term is used in Sections 13(d) and 14(d) of the 1934 Act (other than (i) the Company, (ii) any subsidiary of the Company, (iii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or of any subsidiary of the Company, or (iv) any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Section 13(d) of the 1934 Act), together with all Affiliates and Associates (as such terms are used in Rule 12b-2 of the General Rules and Regulations under the 1934 Act) of such person, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; or

(b)   the consummation of a merger or consolidation of the Company with any other company, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least sixty percent (60%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) after which no "person" (with the method of determining "beneficial ownership" used in clause (a) of this definition) owns more than thirty percent (30%) of the combined voting power of the securities of the Company or the surviving entity of such merger or consolidation; or

(c)   during any period of two consecutive years (not including any period prior to the execution of the Plan), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has conducted or threatened a proxy contest, or has entered into an agreement with the Company to effect a transaction described in clause (a), (b) or (d) of this definition) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved cease for any reason to constitute at least a majority thereof; or

(d)   the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets.








Exhibit 31.1
CERTIFICATION

I, David H. Li, Chief Executive Officer of Cabot Microelectronics Corporation, certify that:
 
 
1.
I have reviewed this quarterly report on Form 10-Q of Cabot Microelectronics Corporation;

 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:

 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting
  
 Date: May 5, 2017
/s/ DAVID H. LI
David H. Li
 
Chief Executive Officer

Exhibit 31.2
CERTIFICATION

I, William S. Johnson, Chief Financial Officer of Cabot Microelectronics Corporation, certify that:

 
1.
I have reviewed this quarterly report on Form 10-Q of Cabot Microelectronics Corporation;

 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:

 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
  
Date: May 5, 2017
/s/ WILLIAM S. JOHNSON
 
William S. Johnson
 
Chief Financial Officer

Exhibit 32.1



CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of Cabot Microelectronics Corporation (the "Company") on Form 10-Q for the fiscal quarter ended March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 
Date: May 5, 2017
/s/ DAVID H. LI
 
   
David H. Li
 
   
Chief Executive Officer
 
       
       
 
Date: May 5, 2017
/s/ WILLIAM S. JOHNSON
 
   
William S. Johnson
 
   
Chief Financial Officer