Note 10.

Share-Based Compensation Plans

The Company’s Board of Directors adopted the II-VI Incorporated Amended and Restated 2012 Omnibus Incentive Plan (the “Plan”) which was approved by the shareholders at the Annual Meeting in November 2014. The Plan provides for the grant of non-qualified stock options, stock appreciation rights, restricted shares, restricted share units, deferred shares, performance shares and performance share units to employees, officers and directors of the Company. The maximum number of shares of the Company’s Common Stock authorized for issuance under the Plan is limited to 4,900,000 shares of Common Stock, not including any remaining shares forfeited under the predecessor plans that may be rolled into the Plan. The Plan has vesting provisions predicated upon the death, retirement or disability of the grantee. As of June 30, 2015, there were approximately 3,502,571 shares available to be issued under the Plan, including forfeited shares from predecessor plans.

The Company records share-based compensation expense for these awards in accordance with U.S. GAAP, which requires the recognition of the grant-date 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. The Company accounts for cash-based stock appreciation rights, cash-based restricted share unit awards and cash-based performance share unit awards as liability awards, in accordance with applicable accounting standards.

Share-based compensation expense for the fiscal years ended June 30, 2015, 2014 and 2013 is as follows ($000):

Year Ended June 30,	2015		2014		2013
Stock Options and Cash-Based Stock Appreciation Rights	$	5,158	$	5,818	$	5,046
Restricted Share Awards and Cash-Based Restricted Share Unit Awards		5,182		4,868		4,411
Performance Share Awards and Cash-Based Performance Share Unit Awards		2,649		2,311		3,200
	$	12,989	$	12,997	$	12,657

The share-based compensation expense is allocated approximately 20% to cost of goods sold and 80% to selling, general and administrative expense in the Consolidated Statements of Earnings, based on the employee classification of the grantees. Share-based compensation expense associated with liability awards was $1.6 million in fiscal year 2015 and $0.7 million in fiscal years 2014 and 2013, respectively.

Stock Options and Cash-Based Stock Appreciation Rights:

The Company utilized the Black-Scholes valuation model for estimating the fair value of stock option expense. During the fiscal years ended June 30, 2015, 2014 and 2013, the weighted-average fair value of options granted under the stock option plan was $5.76, $8.21 and $8.37, respectively, per option using the following assumptions:

Year Ended June 30,	2015			2014			2013
Risk-free interest rate		1.71	%		1.71	%		0.98	%
Expected volatility		41	%		47	%		49	%
Expected life of options	5.94 years			5.56 years			5.66 years
Dividend yield	None			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 options. The risk-free interest rate shown above is the weighted average rate for all options 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 options. The expected life calculation is based on the observed time to post-vesting exercise and/or forfeitures of options by our employees. The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no current intention to pay cash dividends in the future. The estimated annualized forfeitures are based on the Company’s historical experience of option pre-vesting cancellations and are estimated at a rate of 17%. 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.

Stock option and cash-based stock appreciation rights activity during the fiscal year ended June 30, 2015 was as follows:

	Stock Options					Cash-Based Stock Appreciation Rights
	Number of			Weighted Average		Number of			Weighted Average
	Shares			Exercise Price		Rights			Exercise Price
Outstanding - July 1, 2014		4,704,554		$	16.37		108,718		$	18.28
Granted		648,540		$	14.03		63,550		$	14.19
Exercised		(498,250	)	$	10.41		(136	)	$	14.03
Forfeited and Expired		(290,020	)	$	18.72		(4,960	)	$	16.28
Outstanding - June 30, 2015		4,564,824		$	16.54		167,172		$	16.80
Exercisable - June 30, 2015		2,899,994		$	16.42		31,672		$	18.50

As of June 30, 2015, 2014 and 2013, the aggregate intrinsic value of stock options and cash-based stock appreciation rights outstanding and exercisable was $14.3 million, $5.2 million and $9.7 million, respectively. Aggregate intrinsic value represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year ended June 30, 2015, and the option’s exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2015. This amount varies based on the fair market value of the Company’s stock. The total intrinsic value of stock options and cash-based stock appreciation rights exercised during the fiscal years ended June 30, 2015, 2014, and 2013 was $2.9 million, $3.1 million, and $2.9 million, respectively. As of June 30, 2015, total unrecognized compensation cost related to non-vested stock options and cash-based stock appreciation rights was $7.7 million. This cost is expected to be recognized over a weighted-average period of approximately three years. Outstanding and exercisable stock options at June 30, 2015 were as follows:

	Stock Options and Cash-Based Stock						Stock Options and Cash-Based Stock
	Appreciation Rights Outstanding						Appreciation Rights Exercisable
			Weighted		Weighted				Weighted		Weighted
	Number of		Average Remaining		Average		Number of		Average Remaining		Average
Range of	Shares or		Contractual Term		Exercise		Shares or		Contractual Term		Exercise
Exercise Prices	Rights		(Years)		Price		Rights		(Years)		Price
$8.80 - $13.23		933,284		2.97	$	11.27		932,670		2.97	$	11.27
$13.34 - $20.26		3,211,940		6.79	$	16.81		1,434,334		5.17	$	17.03
$20.47 - $27.18		586,772		3.38	$	23.51		564,662		3.27	$	23.49
		4,731,996		5.51	$	16.55		2,931,666		4.07	$	16.44

Restricted Share Awards and Cash-Based Restricted Share Unit Awards:

Restricted share awards and cash-based restricted share unit awards 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 (for restricted share awards) or the stock price at the period end date (for cash-based restricted share unit awards), and is being recognized over the vesting period. Generally, the restricted share awards and restricted share unit awards have a three year cliff-vesting provision and an estimated forfeiture rate of 10.3%.

Restricted share and cash-based restricted share unit activity during the fiscal year ended June 30, 2015, was as follows:

	Restricted Share Awards					Cash-Based Restricted Share Units
	Number of			Weighted Average		Number of			Weighted Average
	Shares			Grant Date Fair Value		Units			Grant Date Fair Value
Nonvested - June 30, 2014		784,035		$	17.66		64,310		$	17.72
Granted		323,365		$	16.28		41,585		$	14.74
Vested		(273,125	)	$	18.09		(415	)	$	18.93
Forfeited		(43,265	)	$	17.69		(6,485	)	$	16.13
Nonvested - June 30, 2015		791,010		$	16.94		98,995		$	16.57

As of June 30, 2015, total unrecognized compensation cost related to non-vested restricted share and cash-based restricted share unit awards was $5.8 million. This cost is expected to be recognized over a weighted-average period of approximately two years. The restricted share compensation expense was calculated based on the number of shares expected to be earned multiplied by the stock price at the date of grant and is being recognized over the vesting period. The cash-based restricted share unit compensation expense was calculated based on the number of shares expected to be earned multiplied by the stock price at the period-end date and is being recognized over the vesting period. The total fair value of the restricted share and cash-based restricted share unit awards granted during the years ended June 30, 2015, 2014 and 2013, was $5.9 million, $4.5 million and $7.0 million, respectively. The total fair value of restricted shares vested was $5.1 million, $3.8 million and $0.7 million during fiscal years 2015, 2014 and 2013, respectively.

Performance Share Awards and Cash-Based Performance Share Unit Awards:

The Compensation Committee of the Board of Directors of the Company has granted certain executive officers and employees performance share awards and performance share unit awards under the Plan. As of June 30, 2015, 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 the creation of long-term shareholder value. These awards are payable only if the Company achieves specified levels of financial performance during the performance periods.

The performance share compensation expense was calculated based on the number of shares expected to be earned multiplied by the stock price at the date of grant, and is being recognized over the vesting period. The cash-based performance share unit compensation expense was calculated based on the number of shares expected to be earned multiplied by the stock price at the period-end date, and is being recognized over the vesting period. Performance share and cash-based performance share unit award activity relating to the plan during the year ended June 30, 2015, was as follows:

	Performance Share Awards					Cash-Based Performance Share Units
	Number of			Weighted Average		Number of			Weighted Average
	Shares			Grant Date Fair Value		Units			Grant Date Fair Value
Nonvested - June 30, 2014		332,180		$	18.46		99,144		$	18.94
Granted		152,226		$	13.99		8,709		$	13.99
Vested		(73,631	)	$	18.93		(1,663	)	$	18.93
Forfeited		(103,330	)	$	18.88		(4,756	)	$	18.93
Nonvested - June 30, 2015		307,445		$	15.99		101,434		$	18.52

As of June 30, 2015, total unrecognized compensation cost related to non-vested performance share and cash-based performance share unit awards was $2.6 million. This cost is expected to be recognized over a weighted-average period of approximately one year. The total fair value of the performance share and cash-based performance share unit awards granted during the fiscal years ended June 30, 2015, 2014 and 2013 was $2.3 million, $2.1 million and $5.9 million, respectively. The total fair value of performance shares vested during the fiscal years ended June 30, 2015, 2014 and 2013 was $1.6 million, $1.3 million and $2.6 million, respectively.