Share-Based Compensation

3 Months Ended

Sep. 30, 2012

Share-Based Compensation

Note 11. Share-Based Compensation

The Board of Directors adopted the II-VI Incorporated 2009 Omnibus Incentive Plan (the “Plan”) which was approved by the shareholders of the Company. The Plan provides for the grant of non-qualified stock options, stock appreciation rights, restricted share awards, restricted share units, deferred share awards, performance share awards and performance share units to employees, officers, directors and consultants of the Company. The Company records share-based compensation expense for these awards in accordance with U.S. GAAP, which requires the recognition of the fair value of share-based compensation in net earnings. The Company recognizes the share-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period.

During the three months ended September 30, 2012 and 2011, the Company recorded $3.6 million and $4.6 million, respectively, of share-based compensation expense in its Condensed Consolidated Statements of Earnings. The share-based compensation expense is allocated approximately 20% to cost of goods sold and 80% to selling, general and administrative expense in the Condensed Consolidated Statements of Earnings, based on the employee classification of the grantees.

Stock Options and Stock Appreciation Rights:

The Company utilizes the Black-Scholes valuation model for estimating the fair value of these awards. During the three months ended September 30, 2012 and 2011, the weighted-average fair values of awards granted under the Plan were $8.49 and $9.33 per award, respectively, using the following assumptions:

	Three Months Ended September 30, 2012			Three Months Ended September 30, 2011
Risk free interest rate		0.93	%		1.07	%
Expected volatility		49	%		59	%
Expected life of options		5.65 years			5.51 years
Dividend yield		None			None

The risk-free interest rate is derived from the average U.S. Treasury Note rate during the period, which approximates the rate in effect at the time of grant related to the expected life of the awards. The risk free interest rate shown above is the weighted average rate for all awards granted during the fiscal year. Expected volatility is based on the historical volatility of the Company’s Common Stock over the period commensurate with the expected life of the awards. The expected life calculation is based on the observed time to post-vesting exercise and/or forfeitures of awards by our employees. The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no intention to pay cash dividends in the future. The estimated annualized forfeitures are based on the Company’s historical experience of award cancellations pre-vesting and are estimated at a rate of 16%. The Company will record additional expense in future periods if the actual forfeiture rate is lower than estimated, and will adjust expense in future periods if the actual forfeitures are higher than estimated.

Included in the $3.6 million and $4.6 million of share-based compensation expense for the three months ended September 30, 2012 and 2011, respectively, was $1.6 million and $2.9 million of share-based compensation expense related to these awards.

Restricted Share Awards and Restricted Share Units:

The restricted share awards and units compensation expense was calculated based on the number of shares or units expected to be earned by the grantee multiplied by the stock price at the date of grant and is being recognized over the vesting period. Generally, the restricted share awards and units have a three year cliff-vesting provision and an estimated forfeiture rate of 7.5%. Included in the $3.6 million and $4.6 million of share-based compensation expense for the three months ended September 30, 2012 and 2011, respectively, was $1.1 million and $0.8 million, respectively, of share-based compensation expense related to restricted share awards and units.

Performance Share Awards and Performance Share Units:

The Compensation Committee of the Board of Directors of the Company has granted certain named executive officers and employees performance share awards and units under the Plan. As of September 30, 2012, the Company had outstanding grants covering performance periods ranging from 24 to 48 months. These awards are intended to provide continuing emphasis on specified financial performance goals that the Company considers important contributors to long-term shareholder value. These awards are payable only if the Company achieves specified levels of financial performance during the performance periods.

In conjunction with the Company’s acquisition of Photop, the Compensation Committee established both a short-term and long-term performance and retention program under the Plan for certain Photop employees. As of September 30, 2012, a portion of this long-term performance and retention program was still outstanding, covering a performance period from January 1, 2012 to December 31, 2012. The remaining long-term retention and performance awards are payable only if Photop achieves the levels of revenue and earnings specified for the outstanding performance period as well as certain other pre-established non-financial performance targets.

The performance share awards and units compensation expense is calculated based on the estimated number of shares or units expected to be earned multiplied by the stock price at the date of grant. Included in the $3.6 million and $4.6 million of share-based compensation expense for each of the three months ended September 30, 2012 and 2011, respectively, was $0.9 million of share-based compensation expense related to performance share awards and units.