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. These measures should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with U.S. generally accepted accounting principles (GAAP).

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
		Third Quarter				Nine-Month Period
		2019		2018		2019		2018
Net cash provided by operating activities	$	11,389	$	12,346	$	36,725	$	31,522
Less: Capital expenditures		(5,189)		(5,873)		(15,843)		(17,099)
Free Cash Flow		6,200		6,473		20,882		14,423

Less: Dividends paid		(3,726)		(3,631)		(11,162)		(9,775)
Fee Cash Flow after Dividends	$	2,474	$	2,842	$	9,720	$	4,648
Free Cash Flow Dividend Payout Ratio		60.1%		56.1%		53.5%		67.8%

Cash Paid for Capital Investment

In connection with capital improvements, we negotiate with some of our vendors to obtain favorable payment terms of 120 days or more, referred to as vendor financing, which are excluded from capital expenditures and reported in accordance with GAAP as financing activities. We present an additional view of cash paid for capital investment to provide investors with a comprehensive view of cash used to invest in our networks, product developments and support systems.

Cash Paid for Capital Investment
Dollars in millions
		Third Quarter				Nine-Month Period
		2019		2018		2019		2018
Capital Expenditures	$	(5,189)	$	(5,873)	$	(15,843)	$	(17,099)
Cash paid for vendor financing		(765)		(90)		(2,601)		(347)
Cash paid for Capital Investment	$	(5,954)	$	(5,963)	$	(18,444)	$	(17,446)

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, business unit and supplemental results, EBITDA excludes equity in net income (loss) of affiliates, and depreciation and amortization from operating contribution.

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 operating 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 management is responsible and upon which we evaluate 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 Mobility business unit 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. For market comparability, management analyzes 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
		Third Quarter				Nine-Month Period
		2019		2018		2019		2018
Net Income	$	3,949	$	4,816	$	12,271	$	14,823
Additions:
Income Tax Expense		937		1,391		3,059		4,305
Interest Expense		2,083		2,051		6,373		5,845
Equity in Net (Income) Loss of Affiliates		(3)		64		(36)		71
Other (Income) Expense - Net		935		(1,053)		967		(5,108)
Depreciation and amortization		6,949		8,166		21,256		20,538
EBITDA		14,850		15,435		43,890		40,474

Total Operating Revenues		44,588		45,739		134,372		122,763
Service Revenues		40,317		41,297		122,024		109,849

EBITDA Margin		33.3%		33.7%		32.7%		33.0%
EBITDA Service Margin		36.8%		37.4%		36.0%		36.8%

Segment and Business Unit EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions
		Third Quarter				Nine-Month Period
		2019		2018		2019		2018
Communications Segment
Operating Contribution	$	8,036	$	8,150	$	24,718	$	24,498
Additions:
Equity in Net (Income) Loss of Affiliates		-		1		-		3
Depreciation and amortization		4,598		4,575		13,740		13,724
EBITDA		12,634		12,726		38,458		38,225

Total Operating Revenues		35,401		36,007		105,837		106,498

Operating Income Margin		22.7%		22.6%		23.4%		23.0%
EBITDA Margin		35.7%		35.3%		36.3%		35.9%

Mobility
Operating Contribution	$	5,742	$	5,575	$	16,817	$	16,144
Additions:
Equity in Net (Income) of Affiliates		-		(1)		1		-
Depreciation and amortization		2,011		2,057		6,027		6,218
EBITDA		7,753		7,631		22,845		22,362

Total Operating Revenues		17,701		17,735		52,356		51,965
Service Revenues		13,930		13,828		41,383		40,594

Operating Income Margin		32.4%		31.4%		32.1%		31.1%
EBITDA Margin		43.8%		43.0%		43.6%		43.0%
EBITDA Service Margin		55.7%		55.2%		55.2%		55.1%

Entertainment Group
Operating Contribution	$	1,085	$	1,104	$	4,077	$	3,888
Additions:
Equity in Net (Income) Loss of Affiliates		(1)		(1)		(1)		1
Depreciation and amortization		1,316		1,331		3,978		3,986
EBITDA		2,400		2,434		8,054		7,875

Total Operating Revenues		11,197		11,589		33,893		34,498

Operating Income Margin		9.7%		9.5%		12.0%		11.3%
EBITDA Margin		21.4%		21.0%		23.8%		22.8%

Business Wireline
Operating Contribution	$	1,209	$	1,471	$	3,824	$	4,466
Additions:
Equity in Net (Income) Loss of Affiliates		1		3		-		2
Depreciation and amortization		1,271		1,187		3,735		3,520
EBITDA		2,481		2,661		7,559		7,988

Total Operating Revenues		6,503		6,683		19,588		20,035

Operating Income Margin		18.6%		22.1%		19.5%		22.3%
EBITDA Margin		38.2%		39.8%		38.6%		39.9%

Segment and Business Unit EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions
		Third Quarter				Nine-Month Period
		2019		2018		2019		2018
WarnerMedia Segment
Operating Contribution	$	2,544	$	2,528	$	6,879	$	2,992
Additions:
Equity in Net (Income) of Affiliates		(15)		39		(137)		55
Depreciation and amortization		150		134		384		166
EBITDA		2,679		2,701		7,126		3,213

Total Operating Revenues		7,846		8,204		24,575		9,709

Operating Income Margin		32.2%		31.3%		27.4%		31.4%
EBITDA Margin		34.1%		32.9%		29.0%		33.1%

Segment and Business Unit EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions
		Third Quarter				Nine-Month Period
		2019		2018		2019		2018
Latin America Segment
Operating Contribution	$	(166)	$	(201)	$	(548)	$	(462)
Additions:
Equity in Net (Income) of Affiliates		(13)		(9)		(25)		(24)
Depreciation and amortization		284		297		868		942
EBITDA		105		87		295		456

Total Operating Revenues		1,730		1,833		5,205		5,809

Operating Income Margin		-10.3%		-11.5%		-11.0%		-8.4%
EBITDA Margin		6.1%		4.7%		5.7%		7.8%

Vrio
Operating Contribution	$	13	$	66	$	43	$	281
Additions:
Equity in Net (Income) of Affiliates		(13)		(9)		(25)		(24)
Depreciation and amortization		162		168		496		559
EBITDA		162		225		514		816

Total Operating Revenues		1,013		1,102		3,112		3,710

Operating Income Margin		0.0%		5.2%		0.6%		6.9%
EBITDA Margin		16.0%		20.4%		16.5%		22.0%

Mexico
Operating Contribution	$	(179)	$	(267)	$	(591)	$	(743)
Additions:
Depreciation and amortization		122		129		372		383
EBITDA		(57)		(138)		(219)		(360)

Total Operating Revenues		717		731		2,093		2,099

Operating Income Margin		-25.0%		-36.5%		-28.2%		-35.4%
EBITDA Margin		-7.9%		-18.9%		-10.5%		-17.2%

Segment EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions
		Third Quarter				Nine-Month Period
		2019		2018		2019		2018
Xandr
Operating Contribution	$	327	$	333	$	905	$	952
Additions:
Depreciation and amortization		15		3		41		4
EBITDA		342		336		946		956

Total Operating Revenues		504		445		1,415		1,174

Operating Income Margin		64.9%		74.8%		64.0%		81.1%
EBITDA Margin		67.9%		75.5%		66.9%		81.4%

Adjusting Items

Adjusting items include revenues and costs we consider non-operational 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 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 adjustments that, given their magnitude, can drive a change in the effective tax rate, in these cases we use the actual tax expense or combined marginal rate of approximately 25%.

Adjusting Items
Dollars in millions
		Third Quarter				Nine-Month Period
		2019		2018		2019		2018
Operating Revenues
Time Warner merger adjustment	$	-	$	-	$	72	$	-
Adjustments to Operating Revenues		-		-		72		-
Operating Expenses
Time Warner and other merger costs		190		361		579		792
Employee separation costs		39		76		381		260
Natural disaster costs		-		-		-		104
Adjustments to Operations and Support Expenses		229		437		960		1,156
Amortization of intangible assets		1,771		2,329		5,719		4,669
Adjustments to Operating Expenses		2,000		2,766		6,679		5,825
Other
Merger-related interest and fees¹		-		-		-		1,029
(Gains) losses on sale of investments		-		(357)		(638)		(357)
Special termination charges, debt redemption costs and other adjustments		11		30		362		78
Actuarial (gain) loss		1,917		-		4,048		(2,726)
Adjustments to Income Before Income Taxes		3,928		2,439		10,523		3,849
Tax impact of adjustments		755		548		2,183		765
Tax-related items		-		-		141		(96)
Adjustments to Net Income	$	3,173	$	1,891	$	8,199	$	3,180
¹Includes interest expense incurred on debt issued, redemption premiums 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
		Third Quarter				Nine-Month Period
		2019		2018		2019		2018
Operating Income	$	7,901	$	7,269	$	22,634	$	19,936
Adjustments to Operating Revenues		-		-		72		-
Adjustments to Operating Expenses		2,000		2,766		6,679		5,825
Adjusted Operating Income		9,901		10,035		29,385		25,761

EBITDA		14,850		15,435		43,890		40,474
Adjustments to Operating Revenues		-		-		72		-
Adjustments to Operations and Support Expenses		229		437		960		1,156
Adjusted EBITDA		15,079		15,872		44,922		41,630

Total Operating Revenues		44,588		45,739		134,372		122,763
Adjustments to Operating Revenues		-		-		72		-
Total Adjusted Operating Revenue		44,588		45,739		134,444		122,763
Service Revenues		40,317		41,297		122,024		109,849
Adjustments to Service Revenues		-		-		72		-
Adjusted Service Revenue		40,317		41,297		122,096		109,849


Operating Income Margin		17.7%		15.9%		16.8%		16.2%
Adjusted Operating Income Margin		22.2%		21.9%		21.9%		21.0%
Adjusted EBITDA Margin		33.8%		34.7%		33.4%		33.9%
Adjusted EBITDA Service Margin		37.4%		38.4%		36.8%		37.9%

Adjusted Diluted EPS

		Third Quarter				Nine-Month Period
		2019		2018		2019		2018
Diluted Earnings Per Share (EPS)	$	0.50	$	0.65	$	1.57	$	2.19
Amortization of intangible assets		0.19		0.25		0.62		0.55
Merger integration items¹		0.02		0.04		0.08		0.22
(Gain) loss on sale of assets, impairments and other adjustments²		0.02		(0.04)		(0.01)		0.02
Actuarial (gain) loss³		0.21		-		0.44		(0.31)
Tax-related items		-		-		(0.02)		-
Adjusted EPS	$	0.94	$	0.90	$	2.68	$	2.67
Year-over-year growth - Adjusted		4.4%				0.4%
Weighted Average Common Shares Outstanding with Dilution (000,000)		7,356		7,320		7,350		6,630
¹Includes combined merger integration items and merger-related interest income and expense, and redemption premiums.
²Includes gains on transactions, natural disaster adjustments and charges, and employee-related and other costs.
³Includes adjustments for actuarial gains or losses (losses of $1.9 billion in the third quarter and $4.0 billion for the first nine months of 2019) associated with our pension benefit plan. As a result, adjusted EPS reflects an expected return on plan assets of $905 million in the third quarter and $2.6 billion for the first nine months (based on an expected return on plan assets of 7.00%), rather than the actual return of $792 million in the quarter and $4.2 billion for the first nine months (actual return of 3.4% for the quarter and 13.4% for the first nine months), included in the GAAP measure of income.

Constant Currency

Constant Currency is a non-GAAP financial measure that management uses to evaluate the operating performance of certain international subsidiaries by excluding or otherwise adjusting for the impact of changes in foreign currency exchange rates between comparative periods. We believe constant currency enhances comparison and is useful to investors to evaluate the performance of our business without taking into account the impact of changes to the foreign exchange rates to which our business is subject. To compute our constant currency results, we multiply or divide, as appropriate, our current year U.S. dollar results by the current year average foreign exchange rates and then multiply or divide, as appropriate, those amounts by the prior year average foreign exchange rates. In calculating amounts on a constant currency basis, for our Vrio business unit, we exclude our Venezuela subsidiary in light of the hyperinflationary conditions in Venezuela, which we do not believe are representative of the macroeconomics of the rest of the region in which we operate.

Constant Currency
Dollars in millions
		Third Quarter
		2019		2018
AT&T Inc.
Total Operating Revenues	$	44,588	$	45,739
Exclude Venezuela		(6)		(18)
Impact of foreign exchange translation		234		-
Operating Revenues on Constant Currency Basis		44,816		45,721
Year-over-year growth		-2.0%

Adjusted EBITDA		15,079		15,872
Exclude Venezuela		8		13
Impact of foreign exchange translation		85		-
Adjusted EBITDA on Constant Currency Basis		15,172		15,885
Year-over-year growth		-4.5%

WarnerMedia Segment
Total Operating Revenues	$	7,846	$	8,204
Impact of foreign exchange translation		71		-
Warner Media Operating Revenues on Constant Currency Basis		7,917		8,204
Year-over-year growth		-3.5%

EBITDA		2,679		2,701
Impact of foreign exchange translation		18		-
Warner Media EBITDA on Constant Currency Basis		2,697		2,701
Year-over-year growth		-0.1%

Latin America Segment
Total Operating Revenues	$	1,730	$	1,833
Exclude Venezuela		(6)		(18)
Impact of foreign exchange translation		163		-
Latin America Operating Revenues on Constant Currency Basis		1,887		1,815
Year-over-year growth		4.0%

EBITDA		105		87
Exclude Venezuela		8		13
Impact of foreign exchange translation		67		-
Latin America EBITDA on Constant Currency Basis		180		100
Year-over-year growth		80.0%

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. Our Net Debt to Adjusted EBITDA ratio is calculated by dividing the Net Debt by the sum of the most recent four quarters 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.

Net Debt to Adjusted EBITDA
Dollars in millions
		Three Months Ended
		Dec. 31,		Mar. 31		June 30,		Sept. 30,		Four Quarters
		2018¹		2019¹		2019		2019		Four Quarters
Adjusted EBITDA²	$	15,029	$	14,802	$	15,041	$	15,079	$	59,951
Add back severance		(327)		-		-		-		(327)
Net Debt Adjusted EBITDA		14,702		14,802		15,041		15,079		59,624
End-of-period current debt										11,608
End-of-period long-term debt										153,568
Total End-of-Period Debt										165,176
Less: Cash and Cash Equivalents										6,588
Net Debt Balance										158,588
Annualized Net Debt to Adjusted EBITDA Ratio										2.66
¹As reported in AT&T's Form 8-K filed January 30, 2019 and April 24, 2019.
² Includes the purchase accounting reclassification of released content amortization of $545 million in the fourth quarter of 2018, $150 million, $112 million, and $108 million in the first, second and third quarters of 2019, respectively.

Supplemental Operational Measures

We provide a supplemental discussion of our business solutions operations that is calculated by combining our Mobility and Business Wireline operating units, and then adjusting to remove non-business operations. The following table presents a reconciliation of our supplemental Business Solutions results.

Supplemental Operational Measure
		Third Quarter
		September 30, 2019								September 30, 2018
		Mobility		Business Wireline		Adjustments¹		Business Solutions		Mobility		Business Wireline		Adjustments¹		Business Solutions
Operating Revenues
Wireless service	$	13,930	$	-	$	(11,921)	$	2,009	$	13,828	$	-	$	(11,971)	$	1,857
Strategic and managed services		-		3,900		-		3,900		-		3,677		-		3,677
Legacy voice and data services		-		2,252		-		2,252		-		2,602		-		2,602
Other services and equipment		-		351		-		351		-		404		-		404
Wireless equipment		3,771		-		(3,077)		694		3,907		-		(3,321)		586
Total Operating Revenues		17,701		6,503		(14,998)		9,206		17,735		6,683		(15,292)		9,126

Operating Expenses
Operations and support		9,948		4,022		(8,327)		5,643		10,104		4,022		(8,551)		5,575
EBITDA		7,753		2,481		(6,671)		3,563		7,631		2,661		(6,741)		3,551
Depreciation and amortization		2,011		1,271		(1,709)		1,573		2,057		1,187		(1,759)		1,485
Total Operating Expenses		11,959		5,293		(10,036)		7,216		12,161		5,209		(10,310)		7,060
Operating Income		5,742		1,210		(4,962)		1,990		5,574		1,474		(4,982)		2,066
Equity in Net Income (Loss) of Affiliates		-		(1)		-		(1)		1		(3)		(1)		(3)
Operating Contribution	$	5,742	$	1,209	$	(4,962)	$	1,989	$	5,575	$	1,471	$	(4,983)	$	2,063
¹Non-business wireless reported in the Communication segment under the Mobility business unit.

Supplemental Operational Measure
		Nine-Month Period
		September 30, 2019								September 30, 2018
		Mobility		Business Wireline		Adjustments¹		Business Solutions		Mobility		Business Wireline		Adjustments¹		Business Solutions
Operating Revenues
Wireless service	$	41,383	$	-	$	(35,482)	$	5,901	$	40,594	$	-	$	(35,154)	$	5,440
Strategic and managed services		-		11,513		-		11,513		-		10,849		-		10,849
Legacy voice and data services		-		6,973		-		6,973		-		8,176		-		8,176
Other services and equipment		-		1,102		-		1,102		-		1,010		-		1,010
Wireless equipment		10,973		-		(9,071)		1,902		11,371		-		(9,634)		1,737
Total Operating Revenues		52,356		19,588		(44,553)		27,391		51,965		20,035		(44,788)		27,212

Operating Expenses
Operations and support		29,511		12,029		(24,770)		16,770		29,603		12,047		(24,926)		16,724
EBITDA		22,845		7,559		(19,783)		10,621		22,362		7,988		(19,862)		10,488
Depreciation and amortization		6,027		3,735		(5,119)		4,643		6,218		3,520		(5,330)		4,408
Total Operating Expenses		35,538		15,764		(29,889)		21,413		35,821		15,567		(30,256)		21,132
Operating Income		16,818		3,824		(14,664)		5,978		16,144		4,468		(14,532)		6,080
Equity in Net Income (Loss) of Affiliates		(1)		-		1		-		-		(2)		-		(2)
Operating Contribution	$	16,817	$	3,824	$	(14,663)	$	5,978	$	16,144	$	4,466	$	(14,532)	$	6,078
¹Non-business wireless reported in the Communication segment under the Mobility business unit.