Alcoa 2000 Annual Report Download - page 56

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L. Earnings Per Share
Basic earnings per common share (EPS) amounts are computed by
dividing earnings after the deduction of preferred stock dividends
by the average number of common shares outstanding. Diluted
EPS amounts assume the issuance of common stock for all potentially
dilutive equivalents outstanding. Antidilutive outstanding stock
options have been excluded from the diluted
EPS calculation. See
Note M for additional information.
The details of basic and diluted
EPS follow:
2000 1999 1998
Income before cumulative effect $1,489 $1,054 $ 853
Less: preferred stock dividends 222
Income available to common stock-
holders before cumulative effect $1,487 $1,052 $ 851
Cumulative effect of accounting
change (5) ——
Income available to common stock-
holders after cumulative effect $1,482 $1,052 $ 851
Average shares outstanding — basic 814.2 733.8 698.2
Effect of dilutive securities:
Shares issuable upon exercise
of dilutive stock options 9.0 13.4 5.0
Average shares outstanding — diluted 823.2 747.2 703.2
Basic EPS (before cumulative effect) $ 1.83 $ 1.43 $ 1.22
Basic EPS (after cumulative effect) 1.82 1.43 1.22
Diluted EPS (before cumulative effect) 1.81 1.41 1.21
Diluted EPS (after cumulative effect) 1.80 1.41 1.21
Options to purchase 44 million shares of common stock at an average
exercise price of $36.00 were outstanding as of December 31, 2000
but were not included in the computation of diluted EPS because the
option exercise price was greater than the average market price of
the common shares.
In April 2000, Alcoa entered into a forward share repurchase
agreement to partially hedge the equity exposure related to its stock
option program. The contract, which matures in 2002, allows the
company to repurchase up to 10 million shares from a financial
institution. The company may elect to settle the contract on a net
share basis in lieu of physical settlement. The contract permits
early settlement. As of December 31, 2000, 10 million shares had
been committed at an average price of $31.90 per share. The effect
of this repurchase agreement has been considered in determining
diluted
EPS .
M. Preferred and Common Stock
Preferred Stock. Alcoa has two classes of preferred stock. Serial
preferred stock has 557,740 shares authorized, with a par value of
$100 per share and an annual $3.75 cumulative dividend preference
per share. 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. As of December 31, 2000, 90,620,594 shares of
common stock were reserved for issuance under the long-term stock
incentive plan.
Stock options under the company’s stock incentive plan have been
and may be granted, generally at not less than market prices on
the dates of grant, except for the 12.5 cents per-share options issued
as a payout of earned performance share awards. The stock option
program includes a reload or stock continuation ownership feature.
Stock options granted have a maximum term of 10 years. Vesting
periods are one year from the date of grant and six months for
options granted under the reload feature.
Alcoa’s net income and earnings per share would have been
reduced to the pro forma amounts shown below if compensation cost
had been determined based on the fair value at the grant dates.
2000 1999 1998
Net income:
As reported $1,484 $1,054 $853
Pro forma 1,277 912 815
Basic earnings per share:
As reported 1.82 1.43 1.22
Pro forma 1.57 1.24 1.16
Diluted earnings per share:
As reported 1.80 1.41 1.21
Pro forma 1.55 1.22 1.16
The weighted average fair value per option granted was $10.13 in
2000, $5.35 in 1999 and $2.87 in 1998.
The fair value of each option is estimated on the date of grant or
subsequent reload using the Black-Scholes pricing model with the
following assumptions:
2000 1999 1998
Average risk-free interest rate 6.1% 5.0% 5.2%
Expected dividend yield 1.6 1.4 2.1
Expected volatility 40.0 37.0 25.0
Expected life (years):
New option grants 2.5 2.5 2.5
Reload option grants 2.0 1.5 1.5
The transactions for shares under options were:
2000 1999 1998
Outstanding, beginning of year:
Number of options 53.0 53.2 42.2
Weighted average exercise price $22.15 $16.50 $15.84
Options assumed from acquisitions:
Number of options 15.2 ——
Weighted average exercise price $25.09 ——
Granted:
Number of options 31.3 43.6 23.6
Weighted average exercise price $37.87 $24.47 $17.19
Exercised:
Number of options (24.3) (43.2) (12.0)
Weighted average exercise price $22.03 $17.22 $15.07
Expired or forfeited:
Number of options (.4) (.6) (.6)
Weighted average exercise price $34.90 $18.59 $18.25
Outstanding, end of year:
Number of options 74.8 53.0 53.2
Weighted average exercise price $29.29 $22.15 $16.50
Exercisable, end of year:
Number of options 44.6 26.4 27.6
Weighted average exercise price $23.42 $19.21 $15.24
Shares reserved for future options 15.8 28.6 22.8
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