EX-99.3 4 ex99_3.htm DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURES
Exhibit 99.3
Discussion and Reconciliation of Non-GAAP Measures
We believe the following measures are relevant and useful information to investors as they are part of AT&T's internal management reporting and planning processes and are important metrics that management uses to evaluate the operating performance of AT&T and its segments. Management also uses these measures as a method of comparing performance with that of many of our competitors.

Certain amounts have been conformed to the current period's presentation, including our change in accounting to capitalize customer set-up and installation costs and amortize them over the expected economic life of the customer relationship.
Free Cash Flow
Free cash flow is defined as cash from operations minus Capital expenditures. Free cash flow after dividends is defined as cash from operations minus Capital expenditures and dividends. Free cash flow dividend payout ratio is defined as the percentage of dividends paid to free cash flow. We believe these metrics provide useful information to our investors because management views free cash flow as an important indicator of how much cash is generated by routine business operations, including Capital expenditures, and makes decisions based on it. Management also views free cash flow as a measure of cash available to pay debt and return cash to shareowners.

Free Cash Flow and Free Cash Flow Dividend Payout Ratio
  
Dollars in millions
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
   
2016
    
2015
    
2016
    
2015
  
Net cash provided by operating activities
  
$
10,307
    
$
9,160
    
$
18,207
    
$
15,898
  
Less: Capital expenditures
    
(5,470
)
    
(4,696
)
    
(10,139
)
    
(8,667
)
Free Cash Flow
    
4,837
      
4,464
      
8,068
      
7,231
  
                                 
Less: Dividends paid
    
(2,952
)
    
(2,439
)
    
(5,899
)
    
(4,873
)
Free Cash Flow after Dividends
  
$
1,885
    
$
2,025
    
$
2,169
    
$
2,358
  
Free Cash Flow Dividend Payout Ratio
    
61.0
%
    
54.6
%
    
73.1
%
    
67.4
%
Capital Investment
Capital Investment is a non-GAAP financial measure that adds to Capital expenditures the amount of vendor financing arrangements for capital improvements to our wireless network in Mexico. These favorable payment terms are considered vendor financing arrangements and are reported as repayments of debt instead of Capital expenditures. Management believes that Capital Investment provides relevant and useful information to investors and other users of our financial data in evaluating long-term investment in our business.
Capital Investment
Dollars in millions
  
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2016
    
2015
    
2016
    
2015
  
Capital expenditures
  
$
5,470
    
$
4,696
    
$
10,139
    
$
8,667
  
Vendor financing
    
95
      
-
      
138
      
-
  
Capital Investment
  
$
5,565
    
$
4,696
    
$
10,277
    
$
8,667
  

EBITDA
Our calculation of EBITDA, as presented, may differ from similarly titled measures reported by other companies. For AT&T, EBITDA excludes other income (expense) – net, and equity in net income (loss) of affiliates, as these do not reflect the operating results of our subscriber base or operations that are not under our control. Equity in net income (loss) of affiliates represents the proportionate share of the net income (loss) of affiliates in which we exercise significant influence, but do not control. Because we do not control these entities, management excludes these results when evaluating the performance of our primary operations. EBITDA also excludes interest expense and the provision for income taxes. Excluding these items eliminates the expenses associated with our capital and tax structures. Finally, EBITDA excludes depreciation and amortization in order to eliminate the impact of capital investments. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA is not presented as an alternative measure of operating results or cash flows from operations, as determined in accordance with U.S. generally accepted accounting principles (GAAP).

EBITDA service margin is calculated as EBITDA divided by service revenues.

When discussing our segment results, EBITDA excludes equity in net income (loss) of affiliates, and depreciation and amortization from segment contribution. For our supplemental presentation of our combined domestic wireless operations (AT&T Mobility), EBITDA excludes depreciation and amortization from Operating Income.

These measures are used by management as a gauge of our success in acquiring, retaining and servicing subscribers because we believe these measures reflect AT&T's ability to generate and grow subscriber revenues while providing a high level of customer service in a cost-effective manner. Management also uses these measures as a method of comparing segment performance with that of many of its competitors. The financial and operating metrics which affect EBITDA include the key revenue and expense drivers for which segment managers are responsible and upon which we evaluate their performance.

We believe EBITDA Service Margin (EBITDA as a percentage of service revenues) to be a more relevant measure than EBITDA Margin (EBITDA as a percentage of total revenue) for our Consumer Mobility segment operating margin and our supplemental AT&T Mobility operating margin. For the periods covered by this report, we subsidized a portion of some of our wireless handset sales, which are recognized in the period in which we sell the handset. Management views this equipment subsidy as a cost to acquire or retain a subscriber, which is recovered through the ongoing service revenue that is generated by the subscriber. We also use wireless service revenues to calculate margin to facilitate comparison, both internally and externally with our wireless competitors, as they calculate their margins using wireless service revenues as well.


There are material limitations to using these non-GAAP financial measures. EBITDA, EBITDA margin and EBITDA service margin, as we have defined them, may not be comparable to similarly titled measures reported by other companies. Furthermore, these performance measures do not take into account certain significant items, including depreciation and amortization, interest expense, tax expense and equity in net income (loss) of affiliates. Management compensates for these limitations by carefully analyzing how its competitors present performance measures that are similar in nature to EBITDA as we present it, and considering the economic effect of the excluded expense items independently as well as in connection with its analysis of net income as calculated in accordance with GAAP. EBITDA, EBITDA margin and EBITDA service margin should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP.

EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
   
2016
    
2015
    
2016
    
2015
  
Net Income
  
$
3,515
    
$
3,184
    
$
7,400
    
$
6,523
  
Additions:
                                
   Income Tax Expense
    
1,906
      
1,738
      
4,028
      
3,127
  
   Interest Expense
    
1,258
      
932
      
2,465
      
1,831
  
   Equity in Net (Income) of Affiliates
    
(28
)
    
(33
)
    
(41
)
    
(33
)
   Other (Income) Expense – Net
    
(91
)
    
(48
)
    
(161
)
    
(118
)
   Depreciation and amortization
    
6,576
      
4,696
      
13,139
      
9,274
  
EBITDA
    
13,136
      
10,469
      
26,830
      
20,604
  
                                 
Total Operating Revenues
    
40,520
      
33,015
      
81,055
      
65,591
  
Service Revenues
    
37,142
      
29,541
      
74,243
      
58,503
  
                                 
EBITDA Margin
    
32.4
%
    
31.7
%
    
33.1
%
    
31.4
%
EBITDA Service Margin
    
35.4
%
    
35.4
%
    
36.1
%
    
35.2
%


Segment EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
   
2016
    
2015
    
2016
    
2015
  
Business Solutions Segment
                        
Segment Contribution
  
$
4,201
    
$
4,232
    
$
8,500
    
$
8,374
  
Additions:
                                
   Equity in Net (Income) Loss of Affiliates
    
-
      
-
      
-
      
-
  
   Depreciation and amortization
    
2,521
      
2,460
      
5,029
      
4,802
  
EBITDA
    
6,722
      
6,692
      
13,529
      
13,176
  
                                 
Total Segment Operating Revenues
    
17,579
      
17,664
      
35,188
      
35,221
  
                                 
Segment Operating Income Margin
    
23.9
%
    
24.0
%
    
24.2
%
    
23.8
%
EBITDA Margin
    
38.2
%
    
37.9
%
    
38.4
%
    
37.4
%
                                 
Entertainment Group Segment
                                
Segment Contribution
  
$
1,651
    
$
(208
)
  
$
3,246
    
$
(478
)
Additions:
                                
   Equity in Net (Income) Loss of Affiliates
    
2
      
12
      
(1
)
    
18
  
   Depreciation and amortization
    
1,489
      
1,065
      
2,977
      
2,130
  
EBITDA
    
3,142
      
869
      
6,222
      
1,670
  
                                 
Total Segment Operating Revenues
    
12,711
      
5,782
      
25,369
      
11,442
  
                                 
Segment Operating Income Margin
    
13.0
%
    
-3.4
%
    
12.8
%
    
-4.0
%
EBITDA Margin
    
24.7
%
    
15.0
%
    
24.5
%
    
14.6
%
                                 
Consumer Mobility Segment
                                
Segment Contribution
  
$
2,574
    
$
2,619
    
$
5,068
    
$
4,854
  
Additions:
                                
   Equity in Net (Income) Loss of Affiliates
    
-
      
-
      
-
      
-
  
   Depreciation and amortization
    
932
      
934
      
1,854
      
1,936
  
EBITDA
    
3,506
      
3,553
      
6,922
      
6,790
  
                                 
Total Segment Operating Revenues
    
8,186
      
8,755
      
16,514
      
17,533
  
Service Revenues
    
6,948
      
7,359
      
13,891
      
14,656
  
                                 
Segment Operating Income Margin
    
31.4
%
    
29.9
%
    
30.7
%
    
27.7
%
EBITDA Margin
    
42.8
%
    
40.6
%
    
41.9
%
    
38.7
%
EBITDA Service Margin
    
50.5
%
    
48.3
%
    
49.8
%
    
46.3
%
                                 
International Segment
                                
Segment Contribution
  
$
(184
)
  
$
(131
)
  
$
(368
)
  
$
(141
)
Additions:
                                
   Equity in Net (Income) Loss of Affiliates
    
(9
)
    
-
      
(23
)
    
-
  
   Depreciation and amortization
    
298
      
93
      
575
      
121
  
EBITDA
    
105
      
(38
)
    
184
      
(20
)
                                 
Total Segment Operating Revenues
    
1,828
      
491
      
3,495
      
727
  
                                 
Segment Operating Income Margin
    
-10.6
%
    
-26.7
%
    
-11.2
%
    
-19.4
%
EBITDA Margin
    
5.7
%
    
-7.7
%
    
5.3
%
    
-2.8
%
 
 
Supplemental AT&T Mobility EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
   
2016
    
2015
    
2016
    
2015
  
AT&T Mobility
                        
Operating Income
  
$
5,342
    
$
5,300
    
$
10,616
    
$
10,009
  
 Add: Depreciation and amortization
    
2,081
      
2,031
      
4,137
      
4,036
  
EBITDA
    
7,423
      
7,331
      
14,753
      
14,045
  
                                 
Total Operating Revenues
    
17,925
      
18,304
      
35,879
      
36,490
  
Service Revenues
    
14,912
      
15,115
      
29,710
      
29,927
  
                                 
Operating Income Margin
    
29.8
%
    
29.0
%
    
29.6
%
    
27.4
%
EBITDA Margin
    
41.4
%
    
40.1
%
    
41.1
%
    
38.5
%
EBITDA Service Margin
    
49.8
%
    
48.5
%
    
49.7
%
    
46.9
%
 
Adjusting Items
Adjusting items include revenues and costs we consider nonoperational in nature, such as items arising from asset acquisitions or dispositions. We also adjust for net actuarial gains or losses associated with our pension and postemployment benefit plans due to the often significant impact on our fourth-quarter results (we immediately recognize this gain or loss in the income statement, pursuant to our accounting policy for the recognition of actuarial gains and losses.) Consequently, our adjusted results reflect an expected return on plan assets rather than the actual return on plan assets, as included in the GAAP measure of income.

The tax impact of adjusting items is calculated using the effective tax rate during the quarter except for (1) adjustments related to Mexico operations, which are taxed at the 30% marginal rate for Mexico and (2) adjustments that, given their magnitude can drive a change in the effective tax rate, reflect the actual tax expense or combined marginal rate of approximately 38%.

Adjusting Items
Dollars in millions
  
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2016
    
2015
    
2016
    
2015
  
Operating Expenses
                        
   DIRECTV and other video merger integration costs
  
$
133
    
$
92
    
$
306
    
$
164
  
   Mexico merger integration costs
    
66
      
24
      
147
      
41
  
   Wireless merger integration costs
    
33
      
215
      
75
      
424
  
   Leap network decommissioning
    
-
      
364
      
-
      
364
  
   Employee separation costs
    
29
      
-
      
54
      
217
  
   Gain on transfer of wireless spectrum
    
-
      
-
      
(736
)
    
-
  
Adjustments to Operations and Support Expenses
    
261
      
695
      
(154
)
    
1,210
  
Amortization of intangible assets
    
1,316
      
63
      
2,667
      
113
  
Adjustments to Operating Expenses
    
1,577
      
758
      
2,513
      
1,323
  
Other
                                
   DIRECTV-related interest expense and exchange fees1
    
-
      
104
      
16
      
104
  
   (Gain) loss on sale of investments2
    
-
      
-
      
4
      
-
  
Adjustments to Income Before Income Taxes
    
1,577
      
862
      
2,533
      
1,427
  
   Tax impact of adjustments
    
550
      
301
      
881
      
497
  
   Tax-related items
    
-
      
-
      
-
      
262
  
Adjustments to Net Income
  
$
1,027
    
$
561
    
$
1,652
    
$
668
  
1 Includes interest expense incurred on the debt issued prior to the close of the DIRECTV transaction and fees associated with the exchange of DIRECTV notes for AT&T notes.
2 Residual effect of previously adjusted item.

Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBITDA service margin and Adjusted diluted EPS are non-GAAP financial measures calculated by excluding from operating revenues, operating expenses and income tax expense certain significant items that are non-operational or non-recurring in nature, including dispositions and merger integration and transaction costs. Management believes that these measures provide relevant and useful information to investors and other users of our financial data in evaluating the effectiveness of our operations and underlying business trends.

Adjusted Operating Revenues, Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBITDA service margin and Adjusted diluted EPS should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP. AT&T's calculation of Adjusted items, as presented, may differ from similarly titled measures reported by other companies.



Adjusted Operating Income, Adjusted Operating Income Margin,
 Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA Service Margin
Dollars in millions
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
   
2016
    
2015
    
2016
    
2015
  
Operating Income
  
$
6,560
    
$
5,773
    
$
13,691
    
$
11,330
  
 Adjustments to Operating Expenses
    
1,577
      
758
      
2,513
      
1,323
  
Adjusted Operating Income
    
8,137
      
6,531
      
16,204
      
12,653
  
                                 
EBITDA
    
13,136
      
10,469
      
26,830
      
20,604
  
Adjustments to Operations and Support Expenses
    
261
      
695
      
(154
)
    
1,210
  
Adjusted EBITDA
    
13,397
      
11,164
      
26,676
      
21,814
  
                                 
Total Operating Revenues
    
40,520
      
33,015
      
81,055
      
65,591
  
Service Revenues
    
37,142
      
29,541
      
74,243
      
58,503
  
                                 
Operating Income Margin
    
16.2
%
    
17.5
%
    
16.9
%
    
17.3
%
Adjusted Operating Income Margin
    
20.1
%
    
19.8
%
    
20.0
%
    
19.3
%
Adjusted EBITDA Margin
    
33.1
%
    
33.8
%
    
32.9
%
    
33.3
%
Adjusted EBITDA Service Margin
    
36.1
%
    
37.8
%
    
35.9
%
    
37.3
%

Adjusted Diluted EPS
   
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2016
    
2015
    
2016
    
2015
  
Diluted Earnings Per Share (EPS)
  
$
0.55
    
$
0.59
    
$
1.17
    
$
1.22
  
   Amortization of intangible assets
    
0.14
      
0.01
      
0.28
      
0.01
  
   Merger integration and other costs 1
    
0.03
      
0.10
      
0.06
      
0.16
  
   Gain on transfer of wireless spectrum
    
-
      
-
      
(0.08
)
    
-
  
   Tax-related items
    
-
      
-
      
-
      
(0.05
)
Adjusted EPS
  
$
0.72
    
$
0.70
    
$
1.43
    
$
1.34
  
Year-over-year growth – Adjusted
    
2.9
%
            
6.7
%
        
Weighted Average Common Shares Outstanding
    with Dilution (000,000)
    
6,195
      
5,220
      
6,193
      
5,220
  
1 Includes combined merger and integration costs, Leap network decommissioning, DIRECTV-related interest expense and exchange fees, employee separation charges and other costs.

Entertainment Group Segment Adjusted Operating Revenues includes the external operating revenues from DIRECTV U.S. as reported in the DIRECTV Form 10-Q/A dated June 30, 2015 adjusted to (1) include operations reported in other DIRECTV operating segments that AT&T has chosen to manage in our Entertainment Group segment, (2) conform DIRECTV's practice of recognizing revenue to be received under contractual commitments on a straight line basis over the minimum contract period to AT&T's method of limiting the revenue recognized to the monthly amounts billed and (3) eliminate intercompany transactions from DIRECTV U.S. and the Entertainment Group segment. Adjusting Entertainment Group segment operating revenues provides for comparability between periods.

Entertainment Group Adjusted Operating Revenues
Dollars in millions
  
Three Months Ended
June 30,
    
Six Months Ended
June 30,
  
   
2016
    
2015
    
2016
    
2015
  
Segment Operating Revenues
  
$
12,711
    
$
5,782
    
$
25,369
    
$
11,442
  
DIRECTV Operating Revenues
            
6,708
              
13,164
  
Adjustments:
                                
   Other DIRECTV operations
            
94
              
182
  
   Revenue recognition
            
99
              
194
  
   Intercompany eliminations
            
(18
)
            
(34
)
Adjusted Segment Operating Revenues
  
$
12,711
    
$
12,665
    
$
25,369
    
$
24,948
  
Year-over-year growth – Adjusted
    
0.4
%
            
1.7
%
        

Net Debt to Adjusted EBITDA Discussion
Net Debt to EBITDA ratios are non-GAAP financial measures frequently used by investors and credit rating agencies and management believes these measures provide relevant and useful information to investors and other users of our financial data. The Net Debt to Adjusted EBITDA ratio is calculated by dividing the Net Debt by annualized Net Debt Adjusted EBITDA. Annualized Net Debt Adjusted EBITDA excludes severance-related adjustments as described in our credit agreements. Net Debt is calculated by subtracting cash and cash equivalents and certificates of deposit and time deposits that are greater than 90 days, from the sum of debt maturing within one year and long-term debt. Annualized Adjusted EBITDA is calculated by annualizing the year-to-date Net Debt Adjusted EBITDA.

Net Debt to Adjusted EBITDA
Dollars in millions
                  
   
Three Months Ended
        
   
Mar. 31, 2016
    
Jun. 30, 2016
    
YTD 2016
  
Adjusted EBITDA
  
$
13,279
    
$
13,397
    
$
26,676
  
   Add back severance
    
(25
)
    
(29
)
    
(54
)
Net Debt Adjusted EBITDA
    
13,254
      
13,368
      
26,622
  
Annualized Net Debt Adjusted EBITDA
                    
53,244
  
   End-of-period current debt
                    
9,528
  
   End-of-period long-term debt
                    
117,308
  
Total End-of-Period Debt
                    
126,836
  
   Less Cash and Cash Equivalents
                    
7,208
  
Net Debt Balance
                    
119,628
  
Annualized Net Debt to Adjusted EBITDA Ratio
                    
2.25