8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

Date of report (Date of earliest event reported) January 31, 2018

AT&T INC.

(Exact Name of Registrant as Specified in Charter)

Delaware	1-8610	43-1301883
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

208 S. Akard St., Dallas, Texas	75202
(Address of Principal Executive Offices)	(Zip Code)

Registrant's telephone number, including area code (210) 821-4105

__________________________________

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240-14d-2(b))

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Item 2.02 Results of Operations and Financial Condition.

The registrant announced on January 31, 2018, its results of operations for the fourth quarter of 2017. The text of the press release and accompanying financial information are attached as exhibits and incorporated herein by reference.

Item 9.01 Financial Statements and Exhibits.

The following exhibits are furnished as part of this report:

(d)          Exhibits

99.1	Press release dated January 31, 2018 reporting financial results for the fourth quarter ended December 31, 2017.
99.2	AT&T Inc. selected financial statements and operating data.
99.3	Discussion and reconciliation of non-GAAP measures.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	AT&T INC.
Date: January 31, 2018	By: /s/ Debra L. Dial                                  .        Debra L. Dial Senior Vice President and Controller

EX-99.1

AT&T Reports Fourth-Quarter and Full-Year Results

Full Year

● Consolidated revenues of $160.5 billion

● Diluted EPS of $4.76 as reported and $3.05 as adjusted, compared to $2.10 and $2.84 in the prior year

● Cash from operations of $39.2 billion

● Free cash flow of $17.6 billion

Fourth Quarter

● Consolidated revenues of $41.7 billion

● Diluted EPS of $3.08 as reported and $0.78 as adjusted, compared to $0.39 and $0.66 in the year-ago quarter

● Cash from operations of $9.9 billion

● Free cash flow of $4.8 billion

2018 Outlook¹ (inclusive of tax reform and new accounting standard)

● Adjusted EPS in the $3.50 range

● Free cash flow of about $21 billion

● Capital expenditures approaching $25 billion; $23 billion net of expected FirstNet reimbursements

● With the passage of tax reform:

o $1 billion 2018 incremental capital investment

o More than $200 million in bonuses paid to frontline employees in fourth quarter

o $800 million in voluntary funding to medical plans in fourth quarter

o Additional impacts include a $20.3 billion increase in reported fourth-quarter net income, including a more than $800 million increase in adjusted net income in the fourth quarter

● 4.1 million total wireless net adds for the fourth quarter:

o 2.7 million in U.S., driven by connected devices, postpaid phones and prepaid

o 1.3 million in Mexico

● 300,000 total video net adds: 161,000 in U.S. and 139,000 in Latin America

● U.S. wireless results:

o Operating income margin of 22.1% with EBITDA margin of 32.7% and wireless service margin of 43.8%

o 329,000 postpaid phone net adds

o Added nearly 700,000 branded smartphones to base

o Best-ever fourth-quarter postpaid phone churn of 0.89%

● Entertainment Group results:

o 95,000 IP broadband net adds; 19,000 total broadband net adds; more than 7 million customer locations passed with fiber

o 161,000 total video net adds; 368,000 DIRECTV NOW net adds to reach nearly 1.2 million DIRECTV NOW subscribers

● International results:

o Revenues up 16.0% with strong growth in Mexico wireless and DIRECTV Latin America

o Improved operating income and EBITDA growth driven by improvements in Mexico and strong gains in Latin America

o 139,000 DIRECTV Latin America net adds with 13.6 million total subscribers

Note: AT&T's fourth-quarter earnings conference call will be webcast at 4:30 p.m. ET on Wednesday, January 31, 2018. The webcast and related materials will be available on AT&T's Investor Relations website at https://investors.att.com.

DALLAS, January 31, 2018— AT&T Inc. (NYSE:T) reported solid wireless, business and international results in the fourth quarter. Highlights include strong postpaid phone gains, record-low fourth-quarter postpaid phone churn and DIRECTV NOW surpassing 1 million subscribers.

"The impact of tax reform and regulatory rationalization will be substantial and positive for the U.S. economy and AT&T," said Randall Stephenson, AT&T Chairman and CEO. "Our FirstNet win and the opt-in by 100 percent of all states and territories will enable us to put the industry's most robust spectrum assets to work in building a best-in-class nationwide network for public safety and first responders. On the Time Warner front, we look forward to presenting our case in court and closing the deal."

Consolidated Financial Results

AT&T's consolidated revenues for the fourth quarter totaled $41.7 billion versus $41.8 billion in the year-ago quarter, primarily due to declines in legacy wireline services, wireless service revenues and domestic video, which were mostly offset by growth in wireless equipment and International. Compared with results for the fourth quarter of 2016, operating expenses were $41.3 billion versus $37.6 billion primarily due to a write-off of certain network assets and higher wireless equipment costs; operating income was $0.4 billion versus $4.2 billion; and operating income margin was 0.9% versus 10.2%. When adjusting for the write-off of certain network assets, non-cash actuarial loss on benefit plans, amortization, merger- and integration-related expenses and other items, operating income was $6.9 billion versus $7.3 billion in the year-ago quarter and operating income margin was 16.5%, versus 17.5% in the year-ago quarter.

Fourth-quarter net income attributable to AT&T was $19.0 billion, or $3.08 per diluted share, and reflects the impact of the Tax Cuts and Jobs Act, compared to $2.4 billion, or $0.39 per diluted share, in the year-ago quarter. Adjusting for the ($3.16) benefit from the remeasurement of deferred tax liabilities, $0.41 write-off of certain network assets and natural disaster impacts, $0.19 non-cash actuarial loss on benefit plans from the annual remeasurement process and $0.26 of costs for amortization, merger- and integration-related expenses and other items, earnings per diluted share was $0.78 compared to an adjusted $0.66 in the year-ago quarter. (The increase in adjusted diluted earnings per share includes $0.13 impact of the new tax law on the fourth-quarter 2017.)

Cash from operating activities was $9.9 billion in the fourth quarter, and capital expenditures were $5.1 billion. Free cash flow — cash from operating activities minus capital expenditures — was $4.8 billion for the quarter.

Full-Year Results

For full-year 2017, compared with 2016 results, AT&T's consolidated revenues totaled $160.5 billion versus $163.8 billion, primarily due to declines in legacy wireline services and wireless service revenues, which were partially offset by growth in International and strategic business services. Operating expenses were $139.6 billion compared with $139.4 billion.  Excluding a $2.9 billion write-off of certain network assets, operating expenses decreased due to cost efficiencies. Operating income was $20.9 billion versus $24.3 billion; and operating income margin was 13.0% versus 14.9%. Net income attributable to AT&T reflects the impact of the new tax law and was $29.5 billion versus $13.0 billion; and earnings per diluted share was $4.76, compared with $2.10. With adjustments for both years, operating income was $31.8 billion versus $31.8 billion; operating income margin was 19.8% versus 19.4%; and earnings per diluted share totaled $3.05, compared with $2.84, an increase of 7.4%. (The increase in adjusted diluted earnings per share includes $0.13 impact of the new tax law on the fourth-quarter 2017.)

AT&T's full-year cash from operating activities was $39.2 billion versus $39.3 billion in 2016. Capital expenditures, including capitalized interest, totaled $21.6 billion versus $22.4 billion in 2016. Full-year free cash flow was $17.6 billion compared to $16.9 billion in 2016. The company's free cash flow dividend payout ratio for the full year was 68%.²

2018 Outlook¹

On a standalone basis, including impacts of tax reform and the new ASC 606 revenue recognition standard, AT&T expects in 2018:

● Adjusted EPS in the $3.50 range

● Free cash flow of about $21 billion

● Capital expenditures approaching $25 billion; $23 billion net of expected FirstNet reimbursements and inclusive of $1 billion incremental tax reform investment

¹Adjustments include a non-cash mark-to-market benefit plan gain/loss, merger-related interest expense, merger integration and amortization costs and other adjustments. We expect the mark-to-market adjustment which is driven by interest rates and investment returns that are not reasonably estimable at this time, to be the largest of these items. Accordingly, we cannot provide a reconciliation between forecasted adjusted diluted EPS and reported diluted EPS without unreasonable effort.

²Free cash flow dividend payout ratio is dividends divided by free cash flow

*About AT&T

AT&T Inc. (NYSE:T) is a holding company. AT&T products and services are provided or offered by subsidiaries and affiliates of AT&T Inc. under the AT&T brand and not by AT&T Inc. Additional information about AT&T Inc. is available at about.att.com.

© 2018 AT&T Intellectual Property. All rights reserved. AT&T, the Globe logo and other marks are trademarks and service marks of AT&T Intellectual Property and/or AT&T affiliated companies. All other marks contained herein are the property of their respective owners.

Cautionary Language Concerning Forward-Looking Statements

Information set forth in this news release contains financial estimates and other forward-looking statements that are subject to risks and uncertainties, and actual results might differ materially. A discussion of factors that may affect future results is contained in AT&T's filings with the Securities and Exchange Commission. AT&T disclaims any obligation to update and revise statements contained in this news release based on new information or otherwise.

This news release may contain certain non-GAAP financial measures. Reconciliations between the non-GAAP financial measures and the GAAP financial measures are available on the company's website at https://investors.att.com.

For more information, contact:

Erin McGrath – AT&T Global Media Relations

Email: erin.mcgrath@att.com

Phone: (214) 862-0651

EX-99.2

 

AT&T Inc.
Financial Data
Consolidated Statements of Income
Dollars in millions except per share amounts	Three Months Ended						Twelve Months Ended
Unaudited	December 31,				Percent		December 31,				Percent
		2017		2016	Change			2017		2016	Change
Operating Revenues
Service	$	36,225	$	37,369	-3.1	%	$	145,597	$	148,884	-2.2	%
Equipment		5,451		4,472	21.9	%		14,949		14,902	0.3	%
Total Operating Revenues		41,676		41,841	-0.4	%		160,546		163,786	-2.0	%
Operating Expenses
Cost of services and sales
Equipment		6,532		5,667	15.3	%		18,709		18,757	-0.3	%
Broadcast, programming and operations		6,003		5,612	7.0	%		21,159		19,851	6.6	%
Other cost of services (exclusive of depreciation           and amortization shown separately below)		9,797		9,840	-0.4	%		37,511		38,276	-2.0	%
Selling, general and administrative		10,000		9,984	0.2	%		34,917		36,347	-3.9	%
Asset abandonment and impairments		2,914		361	-	%		2,914		361	-	%
Depreciation and amortization		6,071		6,129	-0.9	%		24,387		25,847	-5.6	%
Total Operating Expenses		41,317		37,593	9.9	%		139,597		139,439	0.1	%
Operating Income		359		4,248	-91.5	%		20,949		24,347	-14.0	%
Interest Expense		(1,926)		(1,221)	57.7	%		(6,300)		(4,910)	28.3	%
Equity in Net Income (Loss) of Affiliates		20		41	-51.2	%		(128)		98	-	%
Other Income (Expense) - Net		264		123	-	%		618		277	-	%
Income (Loss) Before Income Taxes		(1,283)		3,191	-	%		15,139		19,812	-23.6	%
Income Tax (Benefit) Expense		(20,419)		676	-	%		(14,708)		6,479	-	%
Net Income		19,136		2,515	-	%		29,847		13,333	-	%
Less: Net Income Attributable to     Noncontrolling Interest		(99)		(78)	26.9	%		(397)		(357)	11.2	%
Net Income Attributable to AT&T	$	19,037	$	2,437	-	%	$	29,450	$	12,976	-	%
Basic Earnings Per Share Attributable to AT&T	$	3.08	$	0.39	-	%	$	4.77	$	2.10	-	%
Weighted Average Common        Shares Outstanding (000,000)		6,163		6,161	-	%		6,164		6,168	-0.1	%
Diluted Earnings Per Share Attributable to AT&T	$	3.08	$	0.39	-	%	$	4.76	$	2.10	-	%
Weighted Average Common         Shares Outstanding with Dilution (000,000)		6,182		6,181	-	%		6,183		6,189	-0.1	%

AT&T Inc.
Financial Data
Consolidated Balance Sheets
Dollars in millions
Unaudited		Dec. 31,		Dec. 31,
		2017		2016
Assets
Current Assets
Cash and cash equivalents	$	50,498	$	5,788
Accounts receivable - net of allowances for doubtful accounts of $663 and $661		16,522		16,794
Prepaid expenses		1,369		1,555
Other current assets		10,757		14,232
Total current assets		79,146		38,369
Property, Plant and Equipment - Net		125,222		124,899
Goodwill		105,449		105,207
Licenses		96,136		94,176
Customer Lists and Relationships - Net		10,676		14,243
Other Intangible Assets - Net		7,464		8,441
Investments in Equity Affiliates		1,560		1,674
Other Assets		18,444		16,812
Total Assets	$	444,097	$	403,821
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year	$	38,374	$	9,832
Accounts payable and accrued liabilities		34,470		31,138
Advanced billing and customer deposits		4,213		4,519
Accrued taxes		1,262		2,079
Dividends payable		3,070		3,008
Total current liabilities		81,389		50,576
Long-Term Debt		125,972		113,681
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes		43,207		60,128
Postemployment benefit obligation		31,775		33,578
Other noncurrent liabilities		19,747		21,748
Total deferred credits and other noncurrent liabilities		94,729		115,454
Stockholders' Equity
Common stock		6,495		6,495
Additional paid-in capital		89,563		89,604
Retained earnings		52,029		34,734
Treasury stock		(12,714)		(12,659)
Accumulated other comprehensive income		5,488		4,961
Noncontrolling interest		1,146		975
Total stockholders' equity		142,007		124,110
Total Liabilities and Stockholders' Equity	$	444,097	$	403,821

AT&T Inc.
Financial Data
Consolidated Statements of Cash Flows
Dollars in millions		Year Ended
Unaudited		December 31,
			2017		2016
Operating Activities
Net income		$	29,847	$	13,333
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization		24,387		25,847
	Undistributed loss (earnings) from investments in equity affiliates		174		(37)
	Provision for uncollectible accounts		1,642		1,474
	Deferred income tax (benefit) expense		(15,940)		2,947
	Net (gain) loss from sale of investments, net of impairments		(282)		(169)
	Actuarial loss (gain) on pension and postretirement benefits		1,258		1,024
	Asset abandonments and impairments		2,914		361
Changes in operating assets and liabilities:
	Accounts receivable		(986)		(1,003)
	Other current assets		(777)		1,708
	Accounts payable and other accrued liabilities		816		118
	Equipment installment receivables and related sales		(263)		(576)
	Deferred fulfillment costs		(1,422)		(2,359)
Retirement benefit funding			(1,066)		(910)
Other - net			(1,151)		(2,414)
Total adjustments			9,304		26,011
Net Cash Provided by Operating Activities			39,151		39,344
Investing Activities
Capital expenditures:
	Purchase of property and equipment		(20,647)		(21,516)
	Interest during construction		(903)		(892)
Acquisitions, net of cash acquired			1,123		(2,959)
Dispositions			59		646
(Purchases) sales of securities, net			(4)		506
Other			1		-
Net Cash Used in Investing Activities			(20,371)		(24,215)
Financing Activities
Issuance of long-term debt			48,793		10,140
Repayment of long-term debt			(12,339)		(10,823)
Purchase of treasury stock			(463)		(512)
Issuance of treasury stock			33		146
Dividends paid			(12,038)		(11,797)
Other			1,944		(1,616)
Net Cash Provided by (Used in) Financing Activities			25,930		(14,462)
Net increase in cash and cash equivalents			44,710		667
Cash and cash equivalents beginning of year			5,788		5,121
Cash and Cash Equivalents End of Year		$	50,498	$	5,788

AT&T Inc.
Consolidated Supplementary Data
Supplementary Financial Data
Dollars in millions except per share amounts		Three Months Ended						Twelve Months Ended
Unaudited		December 31,				Percent		December 31,					Percent
			2017		2016	Change			2017		2016		Change
Capital expenditures
	Purchase of property and equipment	$	4,891	$	6,233	-21.5	%	$	20,647	$	21,516		-4.0	%
	Interest during construction	$	185	$	223	-17.0	%	$	903	$	892		1.2	%
Dividends Declared per Share		$	0.50	$	0.49	2.0	%	$	1.97	$	1.93		2.1	%
End of Period Common Shares Outstanding (000,000)									6,139		6,139		-	%
Debt Ratio									53.6	%	49.9	%	370	BP
Total Employees									254,000		268,540		-5.4	%
Supplementary Operating Data
Subscribers and connections in thousands
Unaudited								December 31,					Percent
									2017		2016		Change
Wireless Subscribers
	Domestic								141,567		134,859		5.0	%
	Mexico								15,099		11,973		26.1	%
Total Wireless Subscribers									156,666		146,832		6.7	%
Total Branded Wireless Subscribers									108,105		103,011		4.9	%
Video Connections
	Domestic								25,270		25,560		-1.1	%
	PanAmericana								8,270		7,206		14.8	%
	Brazil								5,359		5,249		2.1	%
Total Video Connections									38,899		38,015		2.3	%
Broadband Connections
	IP								14,487		13,864		4.5	%
	DSL								1,232		1,741		-29.2	%
Total Broadband Connections									15,719		15,605		0.7	%
Voice Connections
	Network Access Lines								11,753		13,986		-16.0	%
	U-verse  VoIP Connections								5,682		5,787		-1.8	%
Total Retail Consumer Voice Connections									17,435		19,773		-11.8	%
		Three Months Ended						Twelve Months Ended
		December 31,				Percent		December 31,					Percent
			2017		2016	Change			2017		2016		Change
Wireless Net Additions
	Domestic		2,741		1,522	80.1	%		9,427		6,196		52.1	%
	Mexico		1,320		1,275	3.5	%		3,126		3,289		-5.0	%
Total Wireless Net Additions			4,061		2,797	45.2	%		12,553		9,485		32.3	%
Total Branded Wireless Net Additions			2,029		2,221	-8.6	%		4,811		6,102		-21.2	%
Video Net Additions
	Domestic		160		239	-33.1	%		(291)		136		-	%
	PanAmericana		69		67	3.0	%		232		140		65.7	%
	Brazil		70		(88)	-	%		(190)		(195)		2.6	%
Total Video Net Additions			299		218	37.2	%		(249)		81		-	%
Broadband Net Additions
	IP		103		149	-30.9	%		623		596		4.5	%
	DSL		(99)		(162)	38.9	%		(509)		(769)		33.8	%
Total Broadband Net Additions			4		(13)	-	%		114		(173)		-	%

BUSINESS SOLUTIONS
The Business Solutions segment provides services to business customers, including multinational companies; governmental and wholesale customers; and individual subscribers who purchase wireless services through employer-sponsored plans. We provide advanced IP-based services including Virtual Private Networks (VPN); Ethernet-related products and broadband, collectively referred to as strategic business services; as well as traditional data and voice products. We utilize our wireless and wired networks (referred to as “wired” or “wireline”) to provide a complete communications solution to our business customers.
Segment Results
Dollars in millions		Three Months Ended							Twelve Months Ended
Unaudited		December 31,					Percent		December 31,					Percent
			2017		2016		Change			2017		2016		Change
Segment Operating Revenues
	Wireless service	$	7,933	$	7,982		-0.6	%	$	31,902	$	31,850		0.2	%
	Fixed strategic services		3,138		2,962		5.9	%		12,227		11,431		7.0	%
	Legacy voice and data services		3,359		3,793		-11.4	%		13,931		16,370		-14.9	%
	Other service and equipment		938		947		-1.0	%		3,451		3,566		-3.2	%
	Wireless equipment		3,022		2,349		28.7	%		7,895		7,771		1.6	%
Total Segment Operating Revenues			18,390		18,033		2.0	%		69,406		70,988		-2.2	%
Segment Operating Expenses
Operations and support expenses			12,207		11,746		3.9	%		42,929		44,330		-3.2	%
Depreciation and amortization			2,354		2,264		4.0	%		9,326		9,832		-5.1	%
Total Segment Operating Expenses			14,561		14,010		3.9	%		52,255		54,162		-3.5	%
Segment Operating Income			3,829		4,023		-4.8	%		17,151		16,826		1.9	%
Equity in Net Income (Loss) of Affiliates			(1)		-		-	%		(1)		-		-	%
Segment Contribution		$	3,828	$	4,023		-4.8	%	$	17,150	$	16,826		1.9	%
Segment Operating Income Margin			20.8	%	22.3	%				24.7	%	23.7	%
Supplementary Operating Data
Subscribers and connections in thousands
Unaudited									December 31,					Percent
										2017		2016		Change
Business Solutions Wireless Subscribers
	Postpaid/Branded									51,811		50,688		2.2	%
	Reseller									87		65		33.8	%
	Connected Devices									38,534		30,649		25.7	%
Total Business Solutions Wireless Subscribers										90,432		81,402		11.1	%
Business Solutions IP Broadband Connections										1,025		977		4.9	%
		Three Months Ended							Twelve Months Ended
		December 31,					Percent		December 31,					Percent
			2017		2016		Change			2017		2016		Change
Business Solutions Wireless Net Additions
	Postpaid/Branded		221		250		-11.6	%		147		759		-80.6	%
	Reseller		4		1		-	%		7		(33)		-	%
	Connected Devices		2,624		1,263		-	%		9,639		5,330		80.8	%
Total Business Solutions Wireless Net Additions			2,849		1,514		88.2	%		9,793		6,056		61.7	%
Business Solutions Wireless Postpaid Churn			1.08	%	1.11	%	-3	BP		1.04	%	1.00	%	4	BP
Business Solutions IP Broadband  Net Additions			7		14		-50.0	%		48		66		-27.3	%

ENTERTAINMENT GROUP
The Entertainment Group segment provides video, internet, voice communication, and interactive and targeted advertising services to customers located in the U.S. or in U.S. territories. We utilize our copper and IP-based wired network and/or our satellite technology.
Segment Results
Dollars in millions		Three Months Ended							Twelve Months Ended
Unaudited		December 31,					Percent		December 31,					Percent
			2017		2016		Change			2017		2016		Change
Segment Operating Revenues
	Video entertainment	$	9,355	$	9,567		-2.2	%	$	36,728	$	36,460		0.7	%
	High-speed internet		1,890		1,910		-1.0	%		7,674		7,472		2.7	%
	Legacy voice and data services		910		1,104		-17.6	%		3,920		4,829		-18.8	%
	Other service and equipment		590		625		-5.6	%		2,376		2,534		-6.2	%
Total Segment Operating Revenues			12,745		13,206		-3.5	%		50,698		51,295		-1.2	%
Segment Operating Expenses
Operations and support expenses			10,308		10,463		-1.5	%		39,420		39,338		0.2	%
Depreciation and amortization			1,367		1,381		-1.0	%		5,623		5,862		-4.1	%
Total Segment Operating Expenses			11,675		11,844		-1.4	%		45,043		45,200		-0.3	%
Segment Operating Income			1,070		1,362		-21.4	%		5,655		6,095		-7.2	%
Equity in Net Income (Loss) of Affiliates			(7)		8		-	%		(30)		9		-	%
Segment Contribution		$	1,063	$	1,370		-22.4	%	$	5,625	$	6,104		-7.8	%
Segment Operating Income Margin			8.4	%	10.3	%				11.2	%	11.9	%
Supplementary Operating Data
Subscribers and connections in thousands
Unaudited									December 31,					Percent
										2017		2016		Change
Video Connections
	Satellite									20,458		21,012		-2.6	%
	U-verse									3,631		4,253		-14.6	%
	DIRECTV NOW									1,155		267		-	%
Total Video Connections										25,244		25,532		-1.1	%
Broadband Connections
	IP									13,462		12,888		4.5	%
	DSL									888		1,291		-31.2	%
Total Broadband Connections										14,350		14,179		1.2	%
Voice Connections
	Retail Consumer Switched Access Lines									4,774		5,853		-18.4	%
	U-verse Consumer VoIP Connections									5,222		5,425		-3.7	%
Total Retail Consumer Voice Connections										9,996		11,278		-11.4	%
		Three Months Ended							Twelve Months Ended
		December 31,					Percent		December 31,					Percent
			2017		2016		Change			2017		2016		Change
Video Net Additions
	Satellite		(147)		235		-	%		(554)		1,228		-	%
	U-verse		(60)		(262)		77.1	%		(622)		(1,361)		54.3	%
	DIRECTV NOW		368		267		37.8	%		888		267		-	%
Total Video Net Additions			161		240		-32.9	%		(288)		134		-	%
Broadband Net Additions
	IP		95		136		-30.1	%		574		532		7.9	%
	DSL		(76)		(133)		42.9	%		(403)		(639)		36.9	%
Total Broadband Net Additions			19		3		-	%		171		(107)		-	%

CONSUMER MOBILITY
The Consumer Mobility segment provides nationwide wireless service to consumers and wholesale and resale wireless subscribers located in the U.S. or in U.S. territories. We utilize our U.S. wireless network to provide voice and data services, including high-speed internet, video, and home monitoring services.
Segment Results
Dollars in millions		Three Months Ended							Twelve Months Ended
Unaudited		December 31,					Percent		December 31,					Percent
			2017		2016		Change			2017		2016		Change
Segment Operating Revenues
	Service	$	6,409	$	6,731		-4.8	%	$	26,053	$	27,536		-5.4	%
	Equipment		1,864		1,688		10.4	%		5,499		5,664		-2.9	%
Total Segment Operating Revenues			8,273		8,419		-1.7	%		31,552		33,200		-5.0	%
Segment Operating Expenses
Operations and support expenses			5,367		5,316		1.0	%		18,966		19,659		-3.5	%
Depreciation and amortization			886		918		-3.5	%		3,507		3,716		-5.6	%
Total Segment Operating Expenses			6,253		6,234		0.3	%		22,473		23,375		-3.9	%
Segment Operating Income			2,020		2,185		-7.6	%		9,079		9,825		-7.6	%
Equity in Net Income of Affiliates			-		-		-	%		-		-		-	%
Segment Contribution		$	2,020	$	2,185		-7.6	%	$	9,079	$	9,825		-7.6	%
Segment Operating Income Margin			24.4	%	26.0	%				28.8	%	29.6	%
Supplementary Operating Data
Subscribers and connections in thousands
Unaudited									December 31,					Percent
										2017		2016		Change
Consumer Mobility Subscribers
	Postpaid									26,064		27,095		-3.8	%
	Prepaid									15,335		13,536		13.3	%
Branded										41,399		40,631		1.9	%
Reseller										9,279		11,884		-21.9	%
Connected Devices										457		942		-51.5	%
Total Consumer Mobility Subscribers										51,135		53,457		-4.3	%
		Three Months Ended							Twelve Months Ended
		December 31,					Percent		December 31,					Percent
			2017		2016		Change			2017		2016		Change
Consumer Mobility Net Additions
	Postpaid		320		270		18.5	%		447		359		24.5	%
	Prepaid1		140		406		-65.5	%		1,013		1,575		-35.7	%
Branded			460		676		-32.0	%		1,460		1,934		-24.5	%
Reseller			(533)		(673)		20.8	%		(1,878)		(1,813)		-3.6	%
Connected Devices1			(35)		5		-	%		52		19		-	%
Total Consumer Mobility Net Additions			(108)		8		-	%		(366)		140		-	%
Total Churn			2.48	%	2.43	%	5	BP		2.36	%	2.15	%	21	BP
Postpaid Churn			1.18	%	1.25	%	-7	BP		1.17	%	1.19	%	-2	BP
1Effective July 1, 2017 we prospectively reclassified prepaid internet of things (IoT) connections from connected devices to prepaid.

INTERNATIONAL
The International segment provides entertainment services in Latin America and wireless services in Mexico. Video entertainment services are provided to primarily residential customers using satellite technology. We utilize our regional and national wireless networks in Mexico to provide consumer and business customers with wireless data and voice communication services. Our international subsidiaries conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates.
Segment Results
Dollars in millions		Three Months Ended							Twelve Months Ended
Unaudited		December 31,					Percent		December 31,					Percent
			2017		2016		Change			2017		2016		Change
Segment Operating Revenues
	Video entertainment	$	1,391	$	1,261		10.3	%	$	5,456	$	4,910		11.1	%
	Wireless service		501		477		5.0	%		2,047		1,905		7.5	%
	Wireless equipment		323		171		88.9	%		766		468		63.7	%
Total Segment Operating Revenues			2,215		1,909		16.0	%		8,269		7,283		13.5	%
Segment Operating Expenses
Operations and support expenses			1,936		1,879		3.0	%		7,404		6,830		8.4	%
Depreciation and amortization			313		298		5.0	%		1,218		1,166		4.5	%
Total Segment Operating Expenses			2,249		2,177		3.3	%		8,622		7,996		7.8	%
Segment Operating Income (Loss)			(34)		(268)		87.3	%		(353)		(713)		50.5	%
Equity in Net Income of Affiliates			25		28		-10.7	%		87		52		67.3	%
Segment Contribution		$	(9)	$	(240)		96.3	%	$	(266)	$	(661)		59.8	%
Segment Operating Income Margin			(1.5)	%	(14.0)	%				(4.3)	%	(9.8)	%
Supplementary Operating Data
Subscribers and connections in thousands
Unaudited									December 31,					Percent
										2017		2016		Change
Mexican Wireless Subscribers
	Postpaid									5,498		4,965		10.7	%
	Prepaid									9,397		6,727		39.7	%
Branded										14,895		11,692		27.4	%
Reseller										204		281		-27.4	%
Total Mexican Wireless Subscribers										15,099		11,973		26.1	%
Latin America Satellite Subscribers
	PanAmericana									8,270		7,206		14.8	%
	SKY Brazil									5,359		5,249		2.1	%
Total Latin America Satellite Subscribers										13,629		12,455		9.4	%
		Three Months Ended							Twelve Months Ended
		December 31,					Percent		December 31,					Percent
			2017		2016		Change			2017		2016		Change
Mexican Wireless Net Additions
	Postpaid		182		233		-21.9	%		533		677		-21.3	%
	Prepaid		1,166		1,062		9.8	%		2,670		2,732		-2.3	%
Branded			1,348		1,295		4.1	%		3,203		3,409		-6.0	%
Reseller			(28)		(20)		-40.0	%		(77)		(120)		35.8	%
Total Mexican Wireless Net Additions			1,320		1,275		3.5	%		3,126		3,289		-5.0	%
Latin America Satellite Net Additions
	PanAmericana		69		67		3.0	%		232		140		65.7	%
	SKY Brazil		70		(88)		-	%		(190)		(195)		2.6	%
Total Latin America Satellite Net Additions			139		(21)		-	%		42		(55)		-	%

SUPPLEMENTAL OPERATING INFORMATION - AT&T MOBILITY
As a supplemental discussion of our operating results, for comparison purposes, we are providing a view of our combined domestic wireless operations (AT&T Mobility).
Operating Results
Dollars in millions		Three Months Ended							Twelve Months Ended
Unaudited		December 31,					Percent		December 31,					Percent
			2017		2016		Change			2017		2016		Change
Operating Revenues
	Service	$	14,342	$	14,713		-2.5	%	$	57,955	$	59,386		-2.4	%
	Equipment		4,886		4,037		21.0	%		13,394		13,435		-0.3	%
Total Operating Revenues			19,228		18,750		2.5	%		71,349		72,821		-2.0	%
Operating Expenses
Operations and support expenses			12,947		12,064		7.3	%		43,255		43,886		-1.4	%
Depreciation and amortization			2,028		2,048		-1.0	%		8,027		8,292		-3.2	%
Total Operating Expenses			14,975		14,112		6.1	%		51,282		52,178		-1.7	%
Operating Income		$	4,253	$	4,638		-8.3	%	$	20,067	$	20,643		-2.8	%
Operating Income Margin			22.1	%	24.7	%				28.1	%	28.3	%
Supplementary Operating Data
Subscribers and connections in thousands
Unaudited									December 31,					Percent
										2017		2016		Change
AT&T Mobility Subscribers
	Postpaid									77,875		77,783		0.1	%
	Prepaid									15,335		13,536		13.3	%
Branded										93,210		91,319		2.1	%
Reseller										9,366		11,949		-21.6	%
Connected Devices										38,991		31,591		23.4	%
Total AT&T Mobility Subscribers										141,567		134,859		5.0	%
Domestic Licensed POPs (000,000)										326		322		1.2	%
		Three Months Ended							Twelve Months Ended
		December 31,					Percent		December 31,					Percent
			2017		2016		Change			2017		2016		Change
AT&T Mobility Net Additions
	Postpaid		541		520		4.0	%		594		1,118		-46.9	%
	Prepaid1		140		406		-65.5	%		1,013		1,575		-35.7	%
Branded			681		926		-26.5	%		1,607		2,693		-40.3	%
Reseller			(529)		(672)		21.3	%		(1,871)		(1,846)		-1.4	%
Connected Devices1			2,589		1,268		-	%		9,691		5,349		81.2	%
Total AT&T Mobility Net Additions			2,741		1,522		80.1	%		9,427		6,196		52.1	%
M&A Activity, Partitioned Customers and   Other Adjustments			-		(1)		-	%		(2,719)		23		-	%
Total Churn			1.38	%	1.71	%	-33	BP		1.36	%	1.48	%	-12	BP
Postpaid Churn			1.12	%	1.16	%	-4	BP		1.08	%	1.07	%	1	BP
1Effective July 1, 2017 we prospectively reclassified prepaid internet of things (IoT) connections from connected devices to prepaid.

SUPPLEMENTAL SEGMENT RECONCILIATION
Three Months Ended
Dollars in millions
Unaudited
December 31, 2017
		Revenues		Operations and Support Expenses		EBITDA		Depreciation and Amortization		Operating Income (Loss)		Equity in Net Income (Loss) of Affiliates		Segment Contribution
Business Solutions	$	18,390	$	12,207	$	6,183	$	2,354	$	3,829	$	(1)	$	3,828
Entertainment Group		12,745		10,308		2,437		1,367		1,070		(7)		1,063
Consumer Mobility		8,273		5,367		2,906		886		2,020		-		2,020
International		2,215		1,936		279		313		(34)		25		(9)
Segment Total		41,623		29,818		11,805		4,920		6,885	$	17	$	6,902
Corporate and Other		207		157		50		18		32
Acquisition-related items		-		176		(176)		1,100		(1,276)
Certain Significant items		(154)		5,095		(5,249)		33		(5,282)
AT&T Inc.	$	41,676	$	35,246	$	6,430	$	6,071	$	359
December 31, 2016
		Revenues		Operations and Support Expenses		EBITDA		Depreciation and Amortization		Operating Income (Loss)		Equity in Net Income (Loss) of Affiliates		Segment Contribution
Business Solutions	$	18,033	$	11,746	$	6,287	$	2,264	$	4,023	$	-	$	4,023
Entertainment Group		13,206		10,463		2,743		1,381		1,362		8		1,370
Consumer Mobility		8,419		5,316		3,103		918		2,185		-		2,185
International		1,909		1,879		30		298		(268)		28		(240)
Segment Total		41,567		29,404		12,163		4,861		7,302	$	36	$	7,338
Corporate and Other		284		233		51		11		40
Acquisition-related items		-		385		(385)		1,228		(1,613)
Certain Significant items		(10)		1,442		(1,452)		29		(1,481)
AT&T Inc.	$	41,841	$	31,464	$	10,377	$	6,129	$	4,248
Twelve Months Ended
Dollars in millions
Unaudited
December 31, 2017
		Revenues		Operations and Support Expenses		EBITDA		Depreciation and Amortization		Operating Income (Loss)		Equity in Net Income (Loss) of Affiliates		Segment Contribution
Business Solutions	$	69,406	$	42,929	$	26,477	$	9,326	$	17,151	$	(1)	$	17,150
Entertainment Group		50,698		39,420		11,278		5,623		5,655		(30)		5,625
Consumer Mobility		31,552		18,966		12,586		3,507		9,079		-		9,079
International		8,269		7,404		865		1,218		(353)		87		(266)
Segment Total		159,925		108,719		51,206		19,674		31,532	$	56	$	31,588
Corporate and Other		864		554		310		72		238
Acquisition-related items		-		798		(798)		4,608		(5,406)
Certain Significant items		(243)		5,139		(5,382)		33		(5,415)
AT&T Inc.	$	160,546	$	115,210	$	45,336	$	24,387	$	20,949
December 31, 2016
		Revenues		Operations and Support Expenses		EBITDA		Depreciation and Amortization		Operating Income (Loss)		Equity in Net Income (Loss) of Affiliates		Segment Contribution
Business Solutions	$	70,988	$	44,330	$	26,658	$	9,832	$	16,826	$	-	$	16,826
Entertainment Group		51,295		39,338		11,957		5,862		6,095		9		6,104
Consumer Mobility		33,200		19,659		13,541		3,716		9,825		-		9,825
International		7,283		6,830		453		1,166		(713)		52		(661)
Segment Total		162,766		110,157		52,609		20,576		32,033	$	61	$	32,094
Corporate and Other		1,043		1,173		(130)		65		(195)
Acquisition-related items		-		1,203		(1,203)		5,177		(6,380)
Certain Significant items		(23)		1,059		(1,082)		29		(1,111)
AT&T Inc.	$	163,786	$	113,592	$	50,194	$	25,847	$	24,347

EX-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.

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			Twelve Months Ended
		December 31,				December 31,
		2017		2016		2017		2016
Net cash provided by operating activities	$	9,877	$	10,142	$	39,151	$	39,344
Less: Capital expenditures		(5,076)		(6,456)		(21,550)		(22,408)
Free Cash Flow		4,801		3,686		17,601		16,936
Less: Dividends paid		(3,008)		(2,947)		(12,038)		(11,797)
Free Cash Flow after Dividends	$	1,793	$	739	$	5,563	$	5,139
Free Cash Flow Dividend Payout Ratio		62.7%		80.0%		68.4%		69.7%

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) and our supplemental presentation of the Mexico Wireless and Latin America operations of our International segment, EBITDA excludes depreciation and amortization from operating income.

1

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. Management uses Mexico Wireless EBITDA in evaluating profitability trends after our two Mexico wireless acquisitions in 2015, and our investments in building a nationwide LTE network by end of 2018. Management uses Latin America EBITDA in evaluating the ability of our Latin America operations to generate cash to finance its own operations.

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. 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			Twelve Months Ended
		December 31,				December 31,
		2017		2016		2017		2016
Net Income	$	19,136	$	2,515	$	29,847	$	13,333
Additions:
Income Tax (Benefit) Expense		(20,419)		676		(14,708)		6,479
Interest Expense		1,926		1,221		6,300		4,910
Equity in Net (Income) Loss of Affiliates		(20)		(41)		128		(98)
Other (Income) Expense - Net		(264)		(123)		(618)		(277)
Depreciation and amortization		6,071		6,129		24,387		25,847
EBITDA		6,430		10,377		45,336		50,194
Total Operating Revenues		41,676		41,841		160,546		163,786
Service Revenues		36,225		37,369		145,597		148,884
EBITDA Margin		15.4%		24.8%		28.2%		30.6%
EBITDA Service Margin		17.8%		27.8%		31.1%		33.7%

2

Segment EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions		Three Months Ended			Twelve Months Ended
		December 31,				December 31,
		2017		2016		2017		2016
Business Solutions Segment
Segment Contribution	$	3,828	$	4,023	$	17,150	$	16,826
Additions:
Equity in Net (Income) Loss of Affiliates		1		-		1		-
Depreciation and amortization		2,354		2,264		9,326		9,832
EBITDA		6,183		6,287		26,477		26,658
Total Segment Operating Revenues		18,390		18,033		69,406		70,988
Segment Operating Income Margin		20.8%		22.3%		24.7%		23.7%
EBITDA Margin		33.6%		34.9%		38.1%		37.6%
Entertainment Group Segment
Segment Contribution	$	1,063	$	1,370	$	5,625	$	6,104
Additions:
Equity in Net (Income) Loss of Affiliates		7		(8)		30		(9)
Depreciation and amortization		1,367		1,381		5,623		5,862
EBITDA		2,437		2,743		11,278		11,957
Total Segment Operating Revenues		12,745		13,206		50,698		51,295
Segment Operating Income Margin		8.4%		10.3%		11.2%		11.9%
EBITDA Margin		19.1%		20.8%		22.2%		23.3%
Consumer Mobility Segment
Segment Contribution	$	2,020	$	2,185	$	9,079	$	9,825
Additions:
Depreciation and amortization		886		918		3,507		3,716
EBITDA		2,906		3,103		12,586		13,541
Total Segment Operating Revenues		8,273		8,419		31,552		33,200
Service Revenues		6,409		6,731		26,053		27,536
Segment Operating Income Margin		24.4%		26.0%		28.8%		29.6%
EBITDA Margin		35.1%		36.9%		39.9%		40.8%
EBITDA Service Margin		45.3%		46.1%		48.3%		49.2%
International Segment
Segment Contribution	$	(9)	$	(240)	$	(266)	$	(661)
Additions:
Equity in Net (Income) of Affiliates		(25)		(28)		(87)		(52)
Depreciation and amortization		313		298		1,218		1,166
EBITDA		279		30		865		453
Total Segment Operating Revenues		2,215		1,909		8,269		7,283
Segment Operating Income Margin		-1.5%		-14.0%		-4.3%		-9.8%
EBITDA Margin		12.6%		1.6%		10.5%		6.2%

3

Supplemental AT&T Mobility EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions		Three Months Ended			Twelve Months Ended
		December 31,				December 31,
		2017		2016		2017		2016
AT&T Mobility
Operating Income	$	4,253	$	4,638	$	20,067	$	20,643
Add: Depreciation and amortization		2,028		2,048		8,027		8,292
EBITDA		6,281		6,686		28,094		28,935
Total Operating Revenues		19,228		18,750		71,349		72,821
Service Revenues		14,342		14,713		57,955		59,386
Operating Income Margin		22.1%		24.7%		28.1%		28.3%
EBITDA Margin		32.7%		35.7%		39.4%		39.7%
EBITDA Service Margin		43.8%		45.4%		48.5%		48.7%

Supplemental Latin America EBITDA and EBITDA Margin
Dollars in millions		Three Months Ended			Twelve Months Ended
		December 31,				December 31,
		2017		2016		2017		2016
International - Latin America
Operating Income	$	135	$	49	$	435	$	228
Add: Depreciation and amortization		207		215		849		835
EBITDA		342		264		1,284		1,063
Total Operating Revenues		1,391		1,261		5,456		4,910
Operating Income Margin		9.7%		3.9%		8.0%		4.6%
EBITDA Margin		24.6%		20.9%		23.5%		21.6%

Supplemental Mexico EBITDA and EBITDA Margin
Dollars in millions		Three Months Ended			Twelve Months Ended
		December 31,				December 31,
		2017		2016		2017		2016
International  - Mexico
Operating Income (Loss)	$	(169)	$	(317)	$	(788)	$	(941)
Add: Depreciation and amortization		106		83		369		331
EBITDA		(63)		(234)		(419)		(610)
Total Operating Revenues		824		648		2,813		2,373
Operating Income Margin		-20.5%		-48.9%		-28.0%		-39.7%
EBITDA Margin		-7.6%		-36.1%		-14.9%		-25.7%

4

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, unless earlier remeasurement is required (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 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% for transactions prior to tax reform and 25% for transactions after tax reform. Certain foreign operations with losses, where such losses are not realizable for tax purposes, are not tax effected, resulting in no tax impact for Venezuelan devaluation. For years prior to 2017, adjustments related to Mexico operations were taxed at the 30% marginal rate for Mexico.

Adjusting Items
Dollars in millions		Three Months Ended			Twelve Months Ended
		December 31,				December 31,
		2017		2016		2017		2016
Operating Revenues
Natural disaster revenue credits	$	154	$	10	$	243	$	23
Adjustments to Operating Revenues		154		10		243		23
Operating Expenses
DIRECTV and other video merger integration costs		95		259		412		754
Mexico merger integration costs		19		78		172		309
Time Warner and other merger costs		63		47		214		47
Wireless merger integration costs		-		1		-		93
Actuarial (gain) loss		1,517		1,024		1,258		1,024
Asset abandonments and impairments		2,914		361		2,914		361
Employee separation costs		177		30		445		344
Tax reform special bonus		220		-		220		-
Natural disaster costs		265		27		384		44
(Gain) loss on transfer of wireless spectrum		-		-		(181)		(714)
Venezuela devaluation		-		-		98		-
Adjustments to Operations and Support Expenses		5,270		1,827		5,936		2,262
Amortization of intangible assets		1,100		1,228		4,608		5,177
Impairments		33		29		33		29
Adjustments to Operating Expenses		6,403		3,084		10,577		7,468
Other
Merger-related interest and fees1		432		-		1,104		16
Debt exchange costs, (gain) loss on sale of assets,     impairments and other adjustments		161		28		382		32
Adjustments to Income Before Income Taxes		7,150		3,122		12,306		7,539
Tax impact of adjustments		1,908		1,097		3,625		2,618
Tax reform		19,455		-		19,455		-
Tax-related items		-		359		(146)		359
Adjustments to Net Income	$	(14,213)	$	1,666	$	(10,628)	$	4,562
1 Includes interest expense incurred on debt issued and interest income earned on cash held prior to the close of  merger transactions, and fees to exchange DIRECTV notes.

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.

5

Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA Service Margin
Dollars in millions		Three Months Ended			Twelve Months Ended
		December 31,				December 31,
		2017		2016		2017		2016
Operating Income	$	359	$	4,248	$	20,949	$	24,347
Adjustments to Operating Revenues		154		10		243		23
Adjustments to Operating Expenses		6,403		3,084		10,577		7,468
Adjusted Operating Income1		6,916		7,342		31,769		31,838
EBITDA		6,430		10,377		45,336		50,194
Adjustments to Operating Revenues		154		10		243		23
Adjustments to Operations and Support Expenses		5,270		1,827		5,936		2,262
Adjusted EBITDA1		11,854		12,214		51,515		52,479
Total Operating Revenues		41,676		41,841		160,546		163,786
Adjustments to Operating Revenues		154		10		243		23
Total Adjusted Operating Revenues		41,830		41,851		160,789		163,809
Service Revenues		36,225		37,369		145,597		148,884
Adjustments to Service Revenues		154		10		243		23
Adjusted Service Revenues		36,379		37,379		145,840		148,907
Operating Income Margin		0.9%		10.2%		13.0%		14.9%
Adjusted Operating Income Margin1		16.5%		17.5%		19.8%		19.4%
Adjusted EBITDA Margin1		28.3%		29.2%		32.0%		32.0%
Adjusted EBITDA Service Margin1		32.6%		32.7%		35.3%		35.2%
1 Adjusted Operating Income,  Adjusted EBITDA and associated margins exclude all actuarial gains or losses ($1.3 billion loss for the year end 2017) associated with our postemployment benefit plan, which we immediately recognize in the income statement, pursuant to our accounting policy for the recognition of actuarial gains/losses. As a result, Adjusted Operating Income and Margin reflect an expected return on plan assets of $3.5 billion (based on an average expected return on plan assets of 7.75% for our pension trust and 5.75% for our VEBA trusts), rather than the actual return on plan assets of $6.6 billion (actual pension return of 14.6% and VEBA return of 10.7%), included in the GAAP measure of income.

Adjusted Diluted EPS
		Three Months Ended			Twelve Months Ended
		December 31,				December 31,
		2017		2016		2017		2016
Diluted Earnings Per Share (EPS)	$	3.08	$	0.39	$	4.76	$	2.10
Amortization of intangible assets		0.12		0.13		0.50		0.55
Merger integration items1		0.07		0.04		0.21		0.13
Asset abandonments, impairments and natural disasters		0.41		0.05		0.45		0.05
Actuarial (gain) loss		0.19		0.10		0.16		0.10
(Gain) loss on transfer of wireless spectrum		-		-		(0.02)		(0.07)
Other2		0.07		0.01		0.13		0.04
Tax reform		(3.16)		-		(3.16)		-
Tax-related items		-		(0.06)		0.02		(0.06)
Adjusted EPS	$	0.78	$	0.66	$	3.05	$	2.84
Year-over-year growth - Adjusted		18.2%				7.4%
Weighted Average Common Shares Outstanding      with Dilution (000,000)		6,182		6,181		6,183		6,189
1Includes combined merger integration items and merger-related interest income and expense.
2Includes employee-related charges, Venezeula devaluation and debt exchange costs. 6

Net Debt to Adjusted EBITDA

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 Adjusted EBITDA. 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 Adjusted EBITDA.

Net Debt to Adjusted EBITDA
Dollars in millions
		Three Months Ended
		Mar. 31,		Jun. 30,		Sep. 30,		Dec. 31,		YTD
		2017		2017		2017		2017		2017
Adjusted EBITDA	$	13,080	$	13,587	$	12,994	$	11,854	$	51,515
Add back severance		-		(60)		(208)		(177)		(445)
Net Debt Adjusted EBITDA		13,080		13,527		12,786		11,677		51,070
Annualized Adjusted EBITDA										51,070
End-of-period current debt										38,374
End-of-period long-term debt										125,972
Total End-of-Period Debt										164,346
Less: Cash and Cash Equivalents										50,498
Net Debt Balance										113,848
Annualized Net Debt to Adjusted EBITDA Ratio										2.23

7

Supplemental Operational Measures

We provide a supplemental discussion of our domestic wireless operations that is calculated by combining our Consumer Mobility and Business Solutions segments, and then adjusting to remove non-wireless operations. The following table presents a reconciliation of our supplemental AT&T Mobility results.

Supplemental Operational Measure
		Three Months Ended
		December 31, 2017								December 31, 2016
		Consumer Mobility		Business Solutions		Adjustments1		AT&T Mobility		Consumer Mobility		Business Solutions		Adjustments1		AT&T Mobility
Operating Revenues
Wireless service	$	6,409	$	7,933	$	-	$	14,342	$	6,731	$	7,982	$	-	$	14,713
Fixed strategic services		-		3,138		(3,138)		-		-		2,962		(2,962)		-
Legacy voice and data services		-		3,359		(3,359)		-		-		3,793		(3,793)		-
Other services and equipment		-		938		(938)		-		-		947		(947)		-
Wireless equipment		1,864		3,022		-		4,886		1,688		2,349		-		4,037
Total Operating Revenues		8,273		18,390		(7,435)		19,228		8,419		18,033		(7,702)		18,750
Operating Expenses
Operations and support		5,367		12,207		(4,627)		12,947		5,316		11,746		(4,998)		12,064
EBITDA		2,906		6,183		(2,808)		6,281		3,103		6,287		(2,704)		6,686
Depreciation and amortization		886		2,354		(1,212)		2,028		918		2,264		(1,134)		2,048
Total Operating Expense		6,253		14,561		(5,839)		14,975		6,234		14,010		(6,132)		14,112
Operating Income	$	2,020	$	3,829	$	(1,596)	$	4,253	$	2,185	$	4,023	$	(1,570)	$	4,638
1 Business wireline operations reported in Business Solutions segment.
Supplemental Operational Measure
		Twelve Months Ended
		December 31, 2017								December 31, 2016
		Consumer Mobility		Business Solutions		Adjustments1		AT&T Mobility		Consumer Mobility		Business Solutions		Adjustments1		AT&T Mobility
Operating Revenues
Wireless service	$	26,053	$	31,902	$	-	$	57,955	$	27,536	$	31,850	$	-	$	59,386
Fixed strategic services		-		12,227		(12,227)		-		-		11,431		(11,431)		-
Legacy voice and data services		-		13,931		(13,931)		-		-		16,370		(16,370)		-
Other services and equipment		-		3,451		(3,451)		-		-		3,566		(3,566)		-
Wireless equipment		5,499		7,895		-		13,394		5,664		7,771		-		13,435
Total Operating Revenues		31,552		69,406		(29,609)		71,349		33,200		70,988		(31,367)		72,821
Operating Expenses
Operations and support		18,966		42,929		(18,640)		43,255		19,659		44,330		(20,103)		43,886
EBITDA		12,586		26,477		(10,969)		28,094		13,541		26,658		(11,264)		28,935
Depreciation and amortization		3,507		9,326		(4,806)		8,027		3,716		9,832		(5,256)		8,292
Total Operating Expense		22,473		52,255		(23,446)		51,282		23,375		54,162		(25,359)		52,178
Operating Income	$	9,079	$	17,151	$	(6,163)	$	20,067	$	9,825	$	16,826	$	(6,008)	$	20,643
1Business wireline operations reported in Business Solutions segment.

8

Supplemental International

We provide a supplemental presentation of the Latin America and Mexico Wireless operations within our International segment. The following table presents a reconciliation of our International segment.

Supplemental International
		Three Months Ended
		December 31, 2017					December 31, 2016
		Latin America		Mexico		International		Latin America		Mexico		International
Operating Revenues
Video service	$	1,391	$	-	$	1,391	$	1,261	$	-	$	1,261
Wireless service		-		501		501		-		477		477
Wireless equipment		-		323		323		-		171		171
Total Operating Revenues		1,391		824		2,215		1,261		648		1,909
Operating Expenses
Operations and support		1,049		887		1,936		997		882		1,879
Depreciation and amortization		207		106		313		215		83		298
Total Operating Expenses		1,256		993		2,249		1,212		965		2,177
Operating Income (Loss)		135		(169)		(34)		49		(317)		(268)
Equity in Net Income of Affiliates		25		-		25		28		-		28
Segment Contribution	$	160	$	(169)	$	(9)	$	77	$	(317)	$	(240)
Supplemental International
		Twelve Months Ended
		December 31, 2017					December 31, 2016
		Latin America		Mexico		International		Latin America		Mexico		International
Operating Revenues
Video service	$	5,456	$	-	$	5,456	$	4,910	$	-	$	4,910
Wireless service		-		2,047		2,047		-		1,905		1,905
Wireless equipment		-		766		766		-		468		468
Total Operating Revenues		5,456		2,813		8,269		4,910		2,373		7,283
Operating Expenses
Operations and support		4,172		3,232		7,404		3,847		2,983		6,830
Depreciation and amortization		849		369		1,218		835		331		1,166
Total Operating Expenses		5,021		3,601		8,622		4,682		3,314		7,996
Operating Income (Loss)		435		(788)		(353)		228		(941)		(713)
Equity in Net Income of Affiliates		87		-		87		52		-		52
Segment Contribution	$	522	$	(788)	$	(266)	$	280	$	(941)	$	(661)

9