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 on common and preferred shares. Free cash flow dividend payout ratio is defined as the percentage of dividends paid on common and preferred shares 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
		Second Quarter				Six-Month Period
		2020		2019		2020		2019
Net cash provided by operating activities	$	12,059	$	14,284	$	20,925	$	25,336
Less: Capital expenditures		(4,466)		(5,472)		(9,432)		(10,654)
Free Cash Flow		7,593		8,812		11,493		14,682

Less: Dividends paid		(3,737)		(3,722)		(7,474)		(7,436)
Free Cash Flow after Dividends	$	3,856	$	5,090	$	4,019	$	7,246
Free Cash Flow Dividend Payout Ratio		49.2%		42.2%		65.0%		50.6%

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
		Second Quarter				Six-Month Period
		2020		2019		2020		2019
Capital Expenditures	$	(4,466)	$	(5,472)	$	(9,432)	$	(10,654)
Cash paid for vendor financing		(563)		(1,017)		(1,354)		(1,836)
Cash paid for Capital Investment¹	$	(5,029)	$	(6,489)	$	(10,786)	$	(12,490)
¹ Gross capital investment excludes FirstNet reimbursements of $72 in the second quarter and $79 for the first six months of 2020.

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
		Second Quarter				Six-Month Period
		2020		2019		2020		2019
Net Income	$	1,563	$	3,974	$	6,526	$	8,322
Additions:
Income Tax Expense		935		1,099		2,237		2,122
Interest Expense		2,041		2,149		4,059		4,290
Equity in Net (Income) Loss of Affiliates		10		(40)		16		(33)
Other (Income) Expense - Net		(1,017)		318		(1,820)		32
Depreciation and amortization		7,285		7,101		14,507		14,307
EBITDA		10,817		14,601		25,525		29,040

Total Operating Revenues		40,950		44,957		83,729		89,784
Service Revenues		37,051		41,023		75,934		81,707

EBITDA Margin		26.4%		32.5%		30.5%		32.3%
EBITDA Service Margin		29.2%		35.6%		33.6%		35.5%

Segment and Business Unit EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions
		Second Quarter				Six-Month Period
		2020		2019		2020		2019
Communications Segment
Operating Contribution	$	8,112	$	8,671	$	16,315	$	16,682
Additions:
Depreciation and amortization		4,639		4,584		9,274		9,142
EBITDA		12,751		13,255		25,589		25,824

Total Operating Revenues		33,592		35,267		67,841		70,436

Operating Income Margin		24.1%		24.6%		24.0%		23.7%
EBITDA Margin		38.0%		37.6%		37.7%		36.7%

*Mobility*
Operating Contribution	$	5,805	$	5,767	$	11,593	$	11,076
Additions:
Depreciation and amortization		2,012		2,003		4,057		4,016
EBITDA		7,817		7,770		15,650		15,092

Total Operating Revenues		17,149		17,292		34,551		34,655
Service Revenues		13,669		13,824		27,637		27,453

Operating Income Margin		33.9%		33.4%		33.6%		32.0%
EBITDA Margin		45.6%		44.9%		45.3%		43.5%
EBITDA Service Margin		57.2%		56.2%		56.6%		55.0%

*Entertainment Group*
Operating Contribution	$	1,030	$	1,514	$	2,365	$	2,992
Additions:
Depreciation and amortization		1,309		1,339		2,598		2,662
EBITDA		2,339		2,853		4,963		5,654

Total Operating Revenues		10,069		11,368		20,584		22,696

Operating Income Margin		10.2%		13.3%		11.5%		13.2%
EBITDA Margin		23.2%		25.1%		24.1%		24.9%

*Business Wireline*
Operating Contribution	$	1,277	$	1,390	$	2,357	$	2,614
Additions:
Depreciation and amortization		1,318		1,242		2,619		2,464
EBITDA		2,595		2,632		4,976		5,078

Total Operating Revenues		6,374		6,607		12,706		13,085

Operating Income Margin		20.0%		21.0%		18.6%		20.0%
EBITDA Margin		40.7%		39.8%		39.2%		38.8%

Segment and Business Unit EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions
		Second Quarter				Six-Month Period
		2020		2019		2020		2019
WarnerMedia Segment
Operating Contribution	$	1,917	$	2,350	$	3,930	$	4,913
Additions:
Equity in Net (Income) of Affiliates		(4)		(55)		(19)		(122)
Depreciation and amortization		167		104		330		260
EBITDA		2,080		2,399		4,241		5,051

Total Operating Revenues		6,814		8,835		14,662		17,640

Operating Income Margin		28.1%		26.0%		26.7%		27.2%
EBITDA Margin		30.5%		27.2%		28.9%		28.6%

Segment and Business Unit EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions
		Second Quarter				Six-Month Period
		2020		2019		2020		2019
Latin America Segment
Operating Contribution	$	(201)	$	(209)	$	(385)	$	(382)
Additions:
Equity in Net (Income) of Affiliates		(8)		(12)		(12)		(12)
Depreciation and amortization		242		284		523		584
EBITDA		33		63		126		190

Total Operating Revenues		1,232		1,757		2,822		3,475

Operating Income Margin		-17.0%		-12.6%		-14.1%		-11.3%
EBITDA Margin		2.7%		3.6%		4.5%		5.5%

*Vrio*
Operating Contribution	$	(28)	$	(2)	$	(67)	$	30
Additions:
Equity in Net (Income) of Affiliates		(8)		(12)		(12)		(12)
Depreciation and amortization		127		165		274		334
EBITDA		91		151		195		352

Total Operating Revenues		752		1,032		1,639		2,099

Operating Income Margin		-4.8%		-1.4%		-4.8%		0.9%
EBITDA Margin		12.1%		14.6%		11.9%		16.8%

*Mexico*
Operating Contribution	$	(173)	$	(207)	$	(318)	$	(412)
Additions:
Equity in Net (Income) Loss of Affiliates		-		-		-		-
Depreciation and amortization		115		119		249		250
EBITDA		(58)		(88)		(69)		(162)

Total Operating Revenues		480		725		1,183		1,376

Operating Income Margin		-36.0%		-28.6%		-26.9%		-29.9%
EBITDA Margin		-12.1%		-12.1%		-5.8%		-11.8%

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
		Second Quarter				Six-Month Period
		2020		2019		2020		2019
Operating Revenues
Time Warner merger adjustment	$	-	$	30	$	-	$	72
Adjustments to Operating Revenues		-		30		-		72
Operating Expenses
Time Warner and other merger costs		211		316		393		389
Employee separation costs and benefit-related (gain) loss¹		765		94		884		342
Impairments		2,319		-		2,442		-
Gain on spectrum transaction		-		-		(900)		-
Adjustments to Operations and Support Expenses		3,295		410		2,819		731
Amortization of intangible assets		2,145		1,959		4,201		3,948
Adjustments to Operating Expenses		5,440		2,369		7,020		4,679
Other
Gain on sale of investments -net		-		(638)		-		(638)
Debt redemptions, impairments and other adjustments		293		140		407		351
Employee benefit related (gain) loss^1,2		(161)		1,699		42		2,131
Adjustments to Income Before Income Taxes		5,572		3,600		7,469		6,595
Tax impact of adjustments		749		779		1,143		1,428
Tax-related items		-		-		-		141
Impairment attributable to noncontrolling interest		105		-		105		-
Adjustments to Net Income	$	4,718	$	2,821	$	6,221	$	5,026
¹ Total holding gains on benefit-related investments were approximately $300 million in the second quarter, and flat for the first six months of 2020.
² Includes holding (gains) losses on benefit-related investments in 2020 and an actuarial loss on our pension plan in 2019.

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, actuarial gains and losses, significant abandonments and impairment, severance and other material gains and losses. 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
		Second Quarter				Six-Month Period
		2020		2019		2020		2019
Operating Income	$	3,532	$	7,500	$	11,018	$	14,733
Adjustments to Operating Revenues		-		30		-		72
Adjustments to Operating Expenses		5,440		2,369		7,020		4,679
Adjusted Operating Income		8,972		9,899		18,038		19,484

EBITDA		10,817		14,601		25,525		29,040
Adjustments to Operating Revenues		-		30		-		72
Adjustments to Operations and Support Expenses		3,295		410		2,819		731
Adjusted EBITDA		14,112		15,041		28,344		29,843

Total Operating Revenues		40,950		44,957		83,729		89,784
Adjustments to Operating Revenues		-		30		-		72
Total Adjusted Operating Revenue		40,950		44,987		83,729		89,856
Service Revenues		37,051		41,023		75,934		81,707
Adjustments to Service Revenues		-		30		-		72
Adjusted Service Revenue		37,051		41,053		75,934		81,779


Operating Income Margin		8.6%		16.7%		13.2%		16.4%
Adjusted Operating Income Margin		21.9%		22.0%		21.5%		21.7%
Adjusted EBITDA Margin		34.5%		33.4%		33.9%		33.2%
Adjusted EBITDA Service Margin		38.1%		36.6%		37.3%		36.5%

Adjusted Diluted EPS

		Second Quarter				Six-Month Period
		2020		2019		2020		2019
Diluted Earnings Per Share (EPS)	$	0.17	$	0.51	$	0.81	$	1.06
Amortization of intangible assets		0.24		0.21		0.46		0.42
Merger integration items		0.02		0.05		0.04		0.07
(Gain) loss on sale of assets, impairments and other adjustments		0.08		(0.06)		0.02		(0.01)
Actuarial (gain) loss		-		0.18		-		0.23
Impairments		0.32		-		0.34		-
Tax-related items		-		-		-		(0.02)
Adjusted EPS	$	0.83	$	0.89	$	1.67	$	1.75
Year-over-year growth - Adjusted		-6.7%				-4.6%
Weighted Average Common Shares Outstanding with Dilution (000,000)		7,170		7,353		7,192		7,347

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
		Second Quarter
		2020		2019
AT&T Inc.
Total Operating Revenues	$	40,950	$	44,957
Exclude Venezuela		(2)		(8)
Impact of foreign exchange translation		440		-
Operating Revenues on Constant Currency Basis		41,388		44,949
Year-over-year growth		-7.9%

Adjusted EBITDA		14,112		15,041
Exclude Venezuela		(3)		2
Impact of foreign exchange translation		112		-
Adjusted EBITDA on Constant Currency Basis		14,221		15,043
Year-over-year growth		-5.5%

WarnerMedia Segment
Total Operating Revenues	$	6,814	$	8,835
Impact of foreign exchange translation		81		-
WarnerMedia Operating Revenues on Constant Currency Basis		6,895		8,835
Year-over-year growth		-22.0%

EBITDA		2,080		2,399
Impact of foreign exchange translation		39		-
WarnerMedia EBITDA on Constant Currency Basis		2,119		2,399
Year-over-year growth		-11.7%

Latin America Segment
Total Operating Revenues	$	1,232	$	1,757
Exclude Venezuela		(2)		(8)
Impact of foreign exchange translation		359		-
Latin America Operating Revenues on Constant Currency Basis		1,589		1,749
Year-over-year growth		-9.1%

EBITDA		33		63
Exclude Venezuela		(3)		2
Impact of foreign exchange translation		73		-
Latin America EBITDA on Constant Currency Basis		103		65
Year-over-year growth		58.5%

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
		Sept 30,		Dec. 31,		March 31,		June 30,		Four Quarters
		2019¹		2019¹		2019¹		2020		Four Quarters
Adjusted EBITDA²	$	15,079	$	14,365	$	14,232	$	14,112	$	57,788
End-of-period current debt										15,576
End-of-period long-term debt										153,388
Total End-of-Period Debt										168,964
Less: Cash and Cash Equivalents										16,941
Net Debt Balance										152,023
Annualized Net Debt to Adjusted EBITDA Ratio										2.631
¹ As reported in AT&T's Form 8-K filed October 28, 2019, January 29, 2020, and April 22, 2020.
² Includes the purchase accounting reclassification of released content amortization of $108 million, $102 million, $69 million and $75 million in the four quarters presented, 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
		Second Quarter
		June 30, 2020								June 30, 2019
		Mobility		Business Wireline		Adjustments¹		Business Solutions		Mobility		Business Wireline		Adjustments¹		Business Solutions
Operating Revenues
Wireless service	$	13,669	$	-	$	(11,785)	$	1,884	$	13,824	$	-	$	(11,943)	$	1,881
Strategic and managed services		-		3,943		-		3,943		-		3,834		-		3,834
Legacy voice and data services		-		2,067		-		2,067		-		2,324		-		2,324
Other services and equipment		-		364		-		364		-		449		-		449
Wireless equipment		3,480		-		(2,895)		585		3,468		-		(2,851)		617
Total Operating Revenues		17,149		6,374		(14,680)		8,843		17,292		6,607		(14,794)		9,105

Operating Expenses
Operations and support		9,332		3,779		(7,687)		5,424		9,522		3,975		(7,985)		5,512
EBITDA		7,817		2,595		(6,993)		3,419		7,770		2,632		(6,809)		3,593
Depreciation and amortization		2,012		1,318		(1,693)		1,637		2,003		1,242		(1,700)		1,545
Total Operating Expenses		11,344		5,097		(9,380)		7,061		11,525		5,217		(9,685)		7,057
Operating Income		5,805		1,277		(5,300)		1,782		5,767		1,390		(5,109)		2,048
Equity in Net Income (Loss) of Affiliates		-		-		-		-		-		-		-		-
Operating Contribution	$	5,805	$	1,277	$	(5,300)	$	1,782	$	5,767	$	1,390	$	(5,109)	$	2,048
¹Non-business wireless reported in the Communication segment under the Mobility business unit.

Supplemental Operational Measure
		Six-Month Period
		June 30, 2020								June 30, 2019
		Mobility		Business Wireline		Adjustments¹		Business Solutions		Mobility		Business Wireline		Adjustments¹		Business Solutions
Operating Revenues
Wireless service	$	27,637	$	-	$	(23,804)	$	3,833	$	27,453	$	-	$	(23,795)	$	3,658
Strategic and managed services		-		7,822		-		7,822		-		7,613		-		7,613
Legacy voice and data services		-		4,196		-		4,196		-		4,721		-		4,721
Other services and equipment		-		688		-		688		-		751		-		751
Wireless equipment		6,914		-		(5,619)		1,295		7,202		-		(5,995)		1,207
Total Operating Revenues		34,551		12,706		(29,423)		17,834		34,655		13,085		(29,790)		17,950

Operating Expenses
Operations and support		18,901		7,730		(15,497)		11,134		19,563		8,007		(16,444)		11,126
EBITDA		15,650		4,976		(13,926)		6,700		15,092		5,078		(13,346)		6,824
Depreciation and amortization		4,057		2,619		(3,414)		3,262		4,016		2,464		(3,410)		3,070
Total Operating Expenses		22,958		10,349		(18,911)		14,396		23,579		10,471		(19,854)		14,196
Operating Income		11,593		2,357		(10,512)		3,438		11,076		2,614		(9,936)		3,754
Equity in Net Income (Loss) of Affiliates		-		-		-		-		-		-		-		-
Operating Contribution	$	11,593	$	2,357	$	(10,512)	$	3,438	$	11,076	$	2,614	$	(9,936)	$	3,754
¹Non-business wireless reported in the Communication segment under the Mobility business unit.
Results have been recast to conform to the current period's classification.