Preferred and Common Stock

12 Months Ended

Dec. 31, 2012

Preferred and Common Stock

R. Preferred and Common Stock

Preferred Stock. Alcoa has two classes of preferred stock: Class A Preferred Stock and Class B Serial Preferred Stock. Class A Preferred Stock has 660,000 shares authorized at a par value of $100 per share with an annual $3.75 cumulative dividend preference per share. There were 546,024 of such shares outstanding at December 31, 2012 and 2011. Class B Serial Preferred Stock has 10 million shares authorized (none issued) and a par value of $1 per share.

Common Stock. There are 1.8 billion shares authorized at a par value of $1 per share, and 1,177,906,557 shares were issued at December 31, 2012 and 2011. The current dividend yield as authorized by Alcoa’s Board of Directors is $0.12 per annum or $0.03 per quarter.

In January 2011, Alcoa contributed 36,518,563 newly issued shares of its common stock to a master trust that holds the assets of certain U.S. defined benefit pension plans in a private placement transaction. These shares were valued at $16.43 per share (the closing price of Alcoa’s common stock on January 24, 2011), or $600 in the aggregate, and were issued to satisfy the estimated minimum required funding and to provide additional funding towards maintaining an approximately 80% funded status of Alcoa’s U.S. pension plans. On January 25, 2011, the 36,518,563 shares were registered under Alcoa’s then-current shelf registration statement dated March 10, 2008 (replaced by shelf registration statement dated February 18, 2011) for resale by the master trust, as selling stockholder.

In January 2010, Alcoa contributed 44,313,146 newly issued shares of its common stock to a master trust that holds the assets of certain U.S. defined benefit pension plans in a private placement transaction. These shares were valued at $13.54 per share (the closing price of Alcoa’s common stock on January 26, 2010), or $600 in the aggregate, and were issued to satisfy a portion of Alcoa’s future funding obligations to these plans, including a portion of the estimated minimum required funding for 2011. On January 27, 2010, the 44,313,146 shares were registered under Alcoa’s then-current shelf registration statement dated March 10, 2008 for resale by the master trust, as selling stockholder.

As of December 31, 2012, 110 million and 86 million shares of common stock were reserved for issuance upon conversion of convertible notes and under Alcoa’s stock-based compensation plans, respectively. Alcoa issues shares from treasury stock to satisfy the exercise of stock options and the conversion of stock awards.

Share Activity (number of shares)

	Common stock
	Treasury			Outstanding
Balance at end of 2009		122,695,718			974,378,820
Private placement		-			44,313,146
Conversion of convertible notes		-			310
Issued for stock-based compensation plans		(3,333,689	)		3,333,689
Balance at end of 2010		119,362,029			1,022,025,965
Private placement		-			36,518,563
Issued for stock-based compensation plans		(5,867,538	)		5,867,538
Balance at end of 2011		113,494,491			1,064,412,066
Issued for stock-based compensation plans		(2,799,887	)		2,799,887
Balance at end of 2012		110,694,604			1,067,211,953

Stock-based Compensation

Stock options under Alcoa’s stock-based compensation plans are granted in January each year at market prices on the dates of grant. Prior to 2011, performance stock options were also granted to certain individuals. For performance stock options granted in 2010, the final number of options earned was based on Alcoa’s adjusted free cash flow and profitability against pre-established targets. Stock option features based on date of original grant were as follows:

Date of original grant	Vesting	Term	Reload feature
2002 and prior	1 year	10 years		One reload over option term
2003	3 years (1/3 each year)	10 years		One reload in 2004 for 1/3 vesting in 2004
2004 - 2009	3 years (1/3 each year)	6 years		None
2010 and forward	3 years (1/3 each year)	10 years		None

In addition to the stock options described above, Alcoa grants stock awards that vest three years from the date of grant. In 2010, certain of these stock awards were granted with the same performance conditions described above for performance stock options. In 2012 and 2011, the final number of performance stock awards earned will be based on the achievement of sales and profitability targets over a three-year period. One-third of the award will be earned each year based on the performance against pre-established targets for that year. The performance stock awards earned over the three-year period vest at the end of the third year.

Most plan participants can choose whether to receive their award in the form of stock options, stock awards, or a combination of both. This choice is made before the grant is issued and is irrevocable.

The following table summarizes the total compensation expense recognized for all stock options and stock awards (there was no stock-based compensation expense capitalized in 2012, 2011, or 2010):

	2012		2011		2010
Compensation expense recognized:
Stock option grants	$	27	$	34	$	44
Stock award grants		40		49		40
Total compensation expense before income taxes		67		83		84
Benefit for income taxes		21		27		27
Total compensation expense, net of income taxes	$	46	$	56	$	57

As part of Alcoa’s stock-based compensation plan design, individuals who are retirement-eligible have a six-month requisite service period in the year of grant. As a result, a larger portion of expense will be recognized in the first half of each year for these retirement-eligible employees. Of the total compensation expense before income taxes included in the table above, $13, $18, and $19 in 2012, 2011, and 2010, respectively, pertains to the acceleration of expense related to retirement-eligible employees.

The fair value of new options was estimated on the date of grant using a lattice-pricing model with the following assumptions:

	2012			2011			2010
Weighted average fair value per option	$	3.11		$	4.96		$	4.67
Average risk-free interest rate		0.06-1.89	%		0.19-3.44	%		0.14-3.62	%
Dividend yield		0.9	%		0.9	%		1.1	%
Volatility		39-45	%		36-43	%		47-51	%
Annual forfeiture rate		5	%		5	%		4	%
Exercise behavior		45	%		45	%		35	%
Life (years)		5.8			5.8			5.6

The range of average risk-free interest rates was based on a yield curve of interest rates at the time of the grant based on the contractual life of the option. The dividend yield was based on a one-year average. Volatility was based on historical and implied volatilities over the term of the option. Alcoa utilized historical option forfeiture data to estimate annual pre- and post-vesting forfeitures. Exercise behavior was based on a weighted average exercise ratio (exercise patterns for grants issued over the number of years in the contractual option term) of an option’s intrinsic value resulting from historical employee exercise behavior. Based upon the other assumptions used in the determination of the fair value, the life of an option was an output of the lattice-pricing model.

The activity for stock options was as follows (options in millions):

	2012			2011			2010
Outstanding, beginning of year:
Number of options		46.8			56.1			65.5
Weighted average exercise price	$	17.41		$	19.29		$	24.44
Granted:
Number of options		10.5			4.5			9.0
Weighted average exercise price	$	10.17		$	16.24		$	13.52
Exercised:
Number of options		(1.5	)		(4.3	)		(1.6	)
Weighted average exercise price	$	8.28		$	8.59		$	8.34
Expired or forfeited:
Number of options		(10.8	)		(9.5	)		(16.8	)
Weighted average exercise price	$	31.83		$	31.90		$	37.21
Outstanding, end of year:
Number of options		45.0			46.8			56.1
Weighted average exercise price	$	12.58		$	17.41		$	19.29
Exercisable, end of year:
Number of options		29.8			28.8			30.2
Weighted average exercise price	$	13.02		$	20.90		$	26.91

The total intrinsic value of options exercised during 2012, 2011, and 2010 was $2, $34, and $8, respectively. In 2012, 2011, and 2010, the cash received from option exercises was $12, $37, and $13 and the total tax benefit realized from these exercises was $1, $11, and $2, respectively.

The following tables summarize certain stock option information at December 31, 2012 (number of options and intrinsic value in millions):

Options Fully Vested and/or Expected to Vest*

Range of exercise price	Number		Weighted average remaining contractual life		Weighted average exercise price		Intrinsic Value
$6.12 - $8.33		17.9		2.06	$	8.33	$	7
$8.34 - $11.33		10.3		8.93		10.17		-
$11.34 - $17.40		11.2		7.21		14.47		-
$17.41 - $46.77		5.6		0.26		26.96		-
Total		45.0		4.69		12.58	$	7

* Expected forfeitures are immaterial to the Company and are not reflected in the table above.

Options Fully Vested and Exercisable

Range of exercise price	Number		Weighted average remaining contractual life		Weighted average exercise price		Intrinsic Value
$6.12 - $8.33		17.9		2.06	$	8.33	$	7
$8.34 - $11.33		0.1		6.65		10.72		-
$11.34 - $17.40		6.2		7.07		14.10		-
$17.41 - $46.77		5.6		0.26		26.96		-
Total		29.8		2.77		13.02	$	7

In addition to stock option awards, the Company grants stock awards and performance share awards, both of which vest three years from the date of grant. Performance share awards are issued at target and the final award amount is determined at the end of the performance period.

The following table summarizes the outstanding stock and performance share awards (awards in millions):

	Stock Awards			Performance Share Awards			Total			Weighted average FMV per award
Outstanding, January 1, 2012		6.4			2.9			9.3		$	13.63
Granted		3.0			1.9			4.9			10.08
Converted		(1.0	)		(0.8	)		(1.8	)		8.42
Forfeited		(0.5	)		(0.2	)		(0.7	)		13.49
Performance share adjustment		-			0.2			0.2			12.74
Outstanding, December 31, 2012		7.9			4.0			11.9			12.96

At December 31, 2012, there was $22 and $35 of unrecognized compensation expense (pretax) related to non-vested stock option grants and non-vested stock award grants, respectively. This expense is expected to be recognized over a weighted average period of 1.5 years. As of December 31, 2012, the following table summarizes the unrecognized compensation expense expected to be recognized in future periods:

	Stock-based compensation expense (pretax)
2013	$	38
2014		18
2015		1
Totals	$	57