J. 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):


	Third quarter ended September 30,					Nine months ended September 30,
	2012			2011		2012			2011
(Loss) income from continuing operations attributable to Alcoa common shareholders	$	(143	)	$	172	$	(51	)	$	807
Less: preferred stock dividends declared		1			1		2			2

(Loss) income from continuing operations available to common equity		(144	)		171		(53	)		805
Less: dividends and undistributed earnings allocated to participating securities		—			—		—			2

(Loss) income from continuing operations available to Alcoa common shareholders – basic		(144	)		171		(53	)		803
Add: interest expense related to convertible notes		—			8		—			22

(Loss) income from continuing operations available to Alcoa common shareholders – diluted	$	(144	)	$	179	$	(53	)	$	825

Average shares outstanding – basic		1,067			1,064		1,066			1,060
Effect of dilutive securities:
Stock options		—			7		—			8
Stock and performance awards		—			4		—			3
Convertible notes		—			89		—			89

Average shares outstanding – diluted		1,067			1,164		1,066			1,160

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 September 30, 2012 and 2011, there were less than 1 million and 2 million such participating securities outstanding, respectively.

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 September 30, 2012 and 2011, there were 12 million and 8 million such awards outstanding, respectively.

In the 2012 third quarter and nine-month period, 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 were not included in the computation of diluted EPS in both periods. Additionally, 12 million stock awards and 18 million stock options in the 2012 third quarter and 11 million stock awards and 20 million stock options in the 2012 nine-month period were not included in the computation of diluted EPS in the respective periods. Had Alcoa generated sufficient income from continuing operations, 89 million, 7 million, and 3 million potential shares of common stock related to the convertible notes, stock awards, and stock options, respectively, in the 2012 third quarter and 89 million, 6 million, and 4 million potential shares of common stock related to the convertible notes, stock awards, and stock options, respectively, in the 2012 nine-month period would have been included in diluted average shares outstanding.

Options to purchase 27 million shares of common stock at a weighted average exercise price of $15.42 and $23.98 per share were outstanding as of September 30, 2012 and 2011, 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.