S. Earnings Per Share

Basic earnings per share (EPS) amounts are computed by dividing earnings, after the deduction of preferred stock dividends declared and dividends and undistributed earnings allocated to participating securities, by the average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive share equivalents outstanding not classified as participating securities.

As disclosed in Note A, on January 1, 2009, Alcoa adopted changes issued by the FASB to the calculation of earnings per share. These changes state that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method for all periods presented. Prior to January 1, 2010, under Alcoa's stock-based compensation programs, certain employees were granted stock and performance awards, which entitle those employees to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of Alcoa's common stock. As such, these unvested stock and performance awards met the definition of a participating security. Under the two-class method, all earnings, whether distributed or undistributed, are allocated to each class of common stock and participating securities based on their respective rights to receive dividends. Prior to the adoption of these changes, stock and performance awards that contain nonforfeitable rights to dividends or dividend equivalents were considered potential shares of common stock and were included only in the diluted EPS calculation under the treasury stock method as long as their effect was not anti-dilutive. At December 31, 2011, 2010, and 2009 there were 2 million, 4 million, and 7 million such participating securities outstanding, respectively. None of the loss from continuing operations in 2009 was allocated to these participating securities because these awards do not share in any loss generated by Alcoa.

Effective January 1, 2010, new grants of stock and performance awards do not contain a nonforfeitable right to dividends during the vesting period. As a result, an employee will forfeit the right to dividends accrued on unvested awards if that person does not fulfill their service requirement during the vesting period. As such, these awards are not treated as participating securities in the EPS calculation as the employees do not have equivalent dividend rights as common shareholders. These awards are included in the EPS calculation utilizing the treasury stock method similar to stock options. At December 31, 2011 and 2010, there were 8 million and 4 million such awards outstanding, respectively.

The information used to compute basic and diluted EPS attributable to Alcoa common shareholders was as follows (shares in millions):


	2011		2010		2009
Income (loss) from continuing operations attributable to Alcoa common shareholders	$	614	$	262	$	(985	)
Less: preferred stock dividends declared		2		2		2

Income (loss) from continuing operations available to common equity		612		260		(987	)
Less: dividends and undistributed earnings allocated to participating securities		1		1		—

Income (loss) from continuing operations available to Alcoa common shareholders—basic		611		259		(987	)
Add: interest expense related to convertible notes		30		—		—

Income (loss) from continuing operations available to Alcoa common shareholders—diluted	$	641	$	259	$	(987	)

Average shares outstanding—basic		1,061		1,018		935
Effect of dilutive securities:
Stock options		7		6		—
Stock and performance awards		4		1		—
Convertible notes		89		—		—

Average shares outstanding—diluted		1,161		1,025		935

In 2010, 89 million share equivalents related to convertible notes were not included in the computation of diluted EPS because their effect was anti-dilutive. In 2009, basic average shares outstanding and diluted average shares outstanding were the same because the effect of potential shares of common stock was anti-dilutive since Alcoa generated a loss from continuing operations. As a result, 89 million share equivalents related to convertible notes and 26 million stock options were not included in the computation of diluted EPS. Had Alcoa generated sufficient income from continuing operations in 2009, 69 million and 2 million potential shares of common stock related to the convertible notes and stock options, respectively, would have been included in diluted average shares outstanding.

Options to purchase 27 million, 23 million, and 39 million shares of common stock at a weighted average exercise price of $24.00, $32.73, and $35.33 per share were outstanding as of December 31, 2011, 2010, and 2009, respectively, but were not included in the computation of diluted EPS because they were anti-dilutive, as the exercise prices of the options were greater than the average market price of Alcoa's common stock.