I. 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.

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


	Second quarter ended June 30,						Six months ended June 30,
	2013			2012			2013		2012
Net (loss) income attributable to Alcoa common shareholders	$	(119	)	$	(2	)	$	30	$	92
Less: preferred stock dividends declared		—			—			1		1

Net (loss) income available to common equity		(119	)		(2	)		29		91
Less: dividends and undistributed earnings allocated to participating securities		—			—			—		—

Net (loss) income available to Alcoa common shareholders – basic		(119	)		(2	)		29		91
Add: interest expense related to convertible notes		—			—			—		—

Net (loss) income available to Alcoa common shareholders – diluted	$	(119	)	$	(2	)	$	29	$	91

Average shares outstanding – basic		1,069			1,067			1,069		1,066
Effect of dilutive securities:
Stock options		—			—			2		4
Stock and performance awards		—			—			8		5
Convertible notes		—			—			—		—

Average shares outstanding – diluted		1,069			1,067			1,079		1,075

Participating securities are defined as unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) and are included in the computation of earnings per share pursuant to the two-class method. 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. At June 30, 2013, there were no outstanding participating securities, as all such securities have vested and were converted into shares of common stock. At June 30, 2012, there were less than 1 million participating securities outstanding.

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 June 30, 2013 and 2012, there were 17 million and 12 million such awards outstanding, respectively.

In the 2013 second quarter, 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, 17 million stock awards, and 9 million stock options were not included in the computation of diluted EPS. Had Alcoa generated sufficient income from continuing operations in the second quarter of 2013, 89 million, 8 million, and 1 million potential shares of common stock related to the convertible notes, stock awards, and stock options, respectively, would have been included in diluted average shares outstanding.

In the 2012 second quarter, 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, 12 million stock awards, and 19 million stock options were not included in the computation of diluted EPS. Had Alcoa generated sufficient income from continuing operations in the second quarter of 2012, 89 million, 6 million, and 4 million potential shares of common stock related to the convertible notes, stock awards, and stock options, respectively, would have been included in diluted average shares outstanding.

In the 2013 and 2012 six-month periods, 89 million share equivalents related to convertible notes were not included in the computation of diluted EPS because their effect was anti-dilutive.

Options to purchase 48 million and 28 million shares of common stock at a weighted average exercise price of $10.77 and $15.44 per share were outstanding as of June 30, 2013 and 2012, 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.