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 adoption of new accounting standards; ASU No. 2017-07, "Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," and ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash; and our realignment of certain responsibilities and operations within our segments, the most significant of which is to report wireless accounts with employer discounts in our Consumer Mobility segment.

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
		March 31,
		2018		2017
Net cash provided by operating activities	$	8,947	$	8,965
Less: Capital expenditures		(6,118)		(6,015)
Free Cash Flow		2,829		2,950

Less: Dividends paid		(3,070)		(3,009)
Free Cash Flow after Dividends	$	(241)	$	(59)
Free Cash Flow Dividend Payout Ratio		108.5%		102.0%

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.

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
		March 31,
		2018		2017
Net Income	$	4,759	$	3,574
Additions:
Income Tax (Benefit) Expense		1,382		1,804
Interest Expense		1,771		1,293
Equity in Net (Income) Loss of Affiliates		(9)		173
Other (Income) Expense - Net		(1,702)		(488)
Depreciation and amortization		5,994		6,127
EBITDA		12,195		12,483

Total Operating Revenues		38,038		39,365
Service Revenues		33,646		36,456

EBITDA Margin		32.1%		31.7%
EBITDA Service Margin		36.2%		34.2%

Segment EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions		Three Months Ended
		March 31,
		2018		2017
Consumer Mobility Segment
Segment Contribution	$	4,655	$	4,530
Additions:
Depreciation and amortization		1,807		1,716
EBITDA		6,462		6,246

Total Segment Operating Revenues		14,986		14,806
Service Revenues		11,612		12,465

Segment Operating Income Margin		31.1%		30.6%
EBITDA Margin		43.1%		42.2%
EBITDA Service Margin		55.6%		50.1%

Business Solutions Segment
Segment Contribution	$	2,084	$	2,187
Additions:
Equity in Net (Income) Loss of Affiliates		1		-
Depreciation and amortization		1,462		1,465
EBITDA		3,547		3,652

Total Segment Operating Revenues		9,185		9,692

Segment Operating Income Margin		22.7%		22.6%
EBITDA Margin		38.6%		37.7%

Entertainment Group Segment
Segment Contribution	$	1,335	$	1,570
Additions:
Equity in Net (Income) Loss of Affiliates		(9)		6
Depreciation and amortization		1,312		1,420
EBITDA		2,638		2,996

Total Segment Operating Revenues		11,577		12,601

Segment Operating Income Margin		11.5%		12.5%
EBITDA Margin		22.8%		23.8%

International Segment
Segment Contribution	$	(111)	$	(100)
Additions:
Equity in Net (Income) of Affiliates		-		(20)
Depreciation and amortization		332		290
EBITDA		221		170

Total Segment Operating Revenues		2,025		1,929

Segment Operating Income Margin		-5.5%		-6.2%
EBITDA Margin		10.9%		8.8%

Supplemental AT&T Mobility EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions		Three Months Ended
		March 31,
		2018		2017
AT&T Mobility
Operating Income	$	5,158	$	5,220
Add: Depreciation and amortization		2,095		1,992
EBITDA		7,253		7,212

Total Operating Revenues		17,355		17,097
Service Revenues		13,403		14,468

Operating Income Margin		29.7%		30.5%
EBITDA Margin		41.8%		42.2%
EBITDA Service Margin		54.1%		49.8%

Supplemental Latin America EBITDA and EBITDA Margin
Dollars in millions		Three Months Ended
		March 31,
		2018		2017
International - Latin America
Operating Income	$	148	$	77
Add: Depreciation and amortization		205		214
EBITDA		353		291

Total Operating Revenues		1,354		1,341

Operating Income Margin		10.9%		5.7%
EBITDA Margin		26.1%		21.7%

Supplemental Mexico EBITDA and EBITDA Margin
Dollars in millions		Three Months Ended
		March 31,
		2018		2017
International - Mexico
Operating Income (Loss)	$	(259)	$	(197)
Add: Depreciation and amortization		127		76
EBITDA		(132)		(121)

Total Operating Revenues		671		588

Operating Income Margin		-38.6%		-33.5%
EBITDA Margin		-19.7%		-20.6%

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.

Adjusting Items
Dollars in millions		Three Months Ended
		March 31,
		2018		2017
Operating Expenses
Time Warner and other merger costs	$	67	$	41
Employee separation costs		51		-
Natural disaster costs		104		-
DIRECTV merger integration costs		-		127
Mexico merger integration costs		-		39
(Gain) loss on transfer of wireless spectrum		-		(118)
Venezuela devaluation		25		-
Adjustments to Operations and Support Expenses		247		89
Amortization of intangible assets		1,062		1,202
Adjustments to Operating Expenses		1,309		1,291
Other
Merger-related interest and fees¹		393		109
Actuarial (gain) loss		(930)		-
(Gain) loss on sale of assets, impairments and other adjustments		-		257
Adjustments to Income Before Income Taxes		772		1,657
Tax impact of adjustments		173		556
Adjustments to Net Income	$	599	$	1,101
¹Includes interest expense incurred on debt issued and interest income earned on cash held prior to the close of merger transactions.

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
		March 31,
		2018		2017
Operating Income	$	6,201	$	6,356
Adjustments to Operating Expenses		1,309		1,291
Adjusted Operating Income		7,510		7,647

EBITDA		12,195		12,483
Adjustments to Operations and Support Expenses		247		89
Adjusted EBITDA		12,442		12,572

Total Operating Revenues		38,038		39,365
Service Revenues		33,646		36,456

Operating Income Margin		16.3%		16.1%
Adjusted Operating Income Margin		19.7%		19.4%
Adjusted EBITDA Margin		32.7%		31.9%
Adjusted EBITDA Service Margin		37.0%		34.5%
Supplemental Operating Income under Historical Accounting Method		5,564
Adjustments to Operating Expenses		1,309
Adjusted Supplemental Operating Income under Historical Accounting Method		6,873

Supplmental Operating Revenues under Historical Accounting Method		38,930

Adjusted Supplemental Operating Income Margin under Historical Accounting Method		17.7%

Adjusted Diluted EPS
		Three Months Ended
		March 31,
		2018		2017
Diluted Earnings Per Share (EPS)	$	0.75	$	0.56
Amortization of intangible assets		0.13		0.13
Merger integration items¹		0.06		0.03
(Gain) loss of sale of assets, impairments and other adjustments²		0.03		0.02
Actuarial (gain) loss³		(0.12)		-
Adjusted EPS	$	0.85	$	0.74
Year-over-year growth - Adjusted		14.9%
Weighted Average Common Shares Outstanding with Dilution (000,000)		6,180		6,186
¹Includes combined merger integration items and merger-related interest income and expense.
²Includes natural disaster, employee-related and other costs.
³Includes adjustments for actuarial gains or losses ($930 million in the first quarter of 2018) 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 EPS reflects an expected return on plan assets of $77 million (based on an average expected return on plan assets of 5.75% for our VEBA trusts), rather than the actual return on plan assets of $31 million loss (VEBA return of (3.08)%), included in the GAAP measure of income.

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,		YTD
		2018		2018
Adjusted EBITDA	$	12,442	$	12,442
Add back severance		(51)		(51)
Net Debt Adjusted EBITDA		12,391		12,391
Annualized Adjusted EBITDA				49,564
End-of-period current debt				29,322
End-of-period long-term debt				133,724
Total End-of-Period Debt				163,046
Less: Cash and Cash Equivalents				48,872
Net Debt Balance				114,174
Annualized Net Debt to Adjusted EBITDA Ratio				2.30

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
		March 31, 2018								March 31, 2017
		Consumer Mobility		Business Solutions		Adjustments¹		AT&T Mobility		Consumer Mobility		Business Solutions		Adjustments¹		AT&T Mobility
Operating Revenues
Wireless service	$	11,612	$	1,791	$	-	$	13,403	$	12,465	$	2,003	$	-	$	14,468
Strategic services		-		3,138		(3,138)		-		-		2,974		(2,974)		-
Legacy voice and data services		-		2,839		(2,839)		-		-		3,549		(3,549)		-
Other service and equipment		-		839		(839)		-		-		878		(878)		-
Wireless equipment		3,374		578		-		3,952		2,341		288		-		2,629
Total Operating Revenues		14,986		9,185		(6,816)		17,355		14,806		9,692		(7,401)		17,097

Operating Expenses
Operations and support		8,524		5,638		(4,060)		10,102		8,560		6,040		(4,715)		9,885
EBITDA		6,462		3,547		(2,756)		7,253		6,246		3,652		(2,686)		7,212
Depreciation and amortization		1,807		1,462		(1,174)		2,095		1,716		1,465		(1,189)		1,992
Total Operating Expenses		10,331		7,100		(5,234)		12,197		10,276		7,505		(5,904)		11,877
Operating Income	$	4,655	$	2,085	$	(1,582)	$	5,158	$	4,530	$	2,187	$	(1,497)	$	5,220
¹Business wireline operations reported in Business Solutions segment.

Supplemental International

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

Supplemental International
		Three Months Ended
		March 31, 2018						March 31, 2017
		Latin America		Mexico		International		Latin America		Mexico		International
Operating Revenues
Video service	$	1,354	$	-	$	1,354	$	1,341	$	-	$	1,341
Wireless service		-		404		404		-		475		475
Wireless equipment		-		267		267		-		113		113
Total Operating Revenues		1,354		671		2,025		1,341		588		1,929

Operating Expenses
Operations and support		1,001		803		1,804		1,050		709		1,759
Depreciation and amortization		205		127		332		214		76		290
Total Operating Expenses		1,206		930		2,136		1,264		785		2,049
Operating Income (Loss)		148		(259)		(111)		77		(197)		(120)
Equity in Net Income of Affiliates		-		-		-		20		-		20
Segment Contibution	$	148	$	(259)	$	(111)	$	97	$	(197)	$	(100)