EX-99.3 4 t-1q2023exhibit993.htm EX-99.3 DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURES Document

Discussion and Reconciliation of Non-GAAP Measures for Continuing Operations
 
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 and cash distributions from DIRECTV classified as investing activities minus capital expenditures and cash paid for vendor financing (classified as financing activities). Free cash flow after dividends is defined as cash from operations and cash distributions from DIRECTV, minus capital expenditures, cash paid for vendor financing 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 vendor financing, and from our continued economic interest in the U.S. video operations as part of our DIRECTV equity method investment, 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 
 First Quarter
 20232022
Net cash provided by operating activities from continuing operations1
$6,678 $7,630 
Add: Distributions from DIRECTV classified as investing activities774 1,315 
Less: Capital expenditures(4,335)(4,568)
Less: Cash paid for vendor financing(2,113)(1,566)
Free Cash Flow1,004 2,811 
Less: Dividends paid(2,014)(3,749)
Free Cash Flow after Dividends$(1,010)$(938)
Free Cash Flow Dividend Payout Ratio200.6 %133.4 %
1Includes distributions from DIRECTV of $534 in the first quarter of 2023 and $522 in the first quarter of 2022.

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
 First Quarter
 20232022
Capital Expenditures$(4,335)$(4,568)
Cash paid for vendor financing(2,113)(1,566)
Cash paid for Capital Investment$(6,448)$(6,134)

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 GAAP.

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

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 cash generation potential 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 
 First Quarter
 20232022
Income from Continuing Operations$4,453 $5,149 
Additions:  
Income Tax Expense1,314 1,440 
Interest Expense1,708 1,626 
Equity in Net (Income) of Affiliates(538)(521)
Other (Income) Expense - Net(935)(2,157)
Depreciation and amortization4,631 4,462 
EBITDA10,633 9,999 
Transaction and other costs— 98 
   Benefit-related (gain) loss (44)93 
Adjusted EBITDA1
$10,589 $10,190 
1See "Adjusting Items" section for additional discussion and reconciliation of adjusted items.
   

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Segment and Business Unit EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions 
 First Quarter
 20232022
Communications Segment
Operating Income$6,743 $6,487 
  Add: Depreciation and amortization4,289 4,124 
EBITDA$11,032 $10,611 
Total Operating Revenues$29,152 $28,876 
Operating Income Margin23.1 %22.5 %
EBITDA Margin37.8 %36.7 %
Mobility
Operating Income$6,271 $5,689 
  Add: Depreciation and amortization2,098 2,059 
EBITDA$8,369 $7,748 
Total Operating Revenues$20,582 $20,075 
Service Revenues15,483 14,724 
Operating Income Margin30.5 %28.3 %
EBITDA Margin40.7 %38.6 %
EBITDA Service Margin54.1 %52.6 %
Business Wireline
Operating Income$378 $639 
  Add: Depreciation and amortization1,330 1,299 
EBITDA$1,708 $1,938 
Total Operating Revenues$5,331 $5,640 
Operating Income Margin7.1 %11.3 %
EBITDA Margin32.0 %34.4 %
Consumer Wireline
Operating Income$94 $159 
  Add: Depreciation and amortization861 766 
EBITDA$955 $925 
Total Operating Revenues$3,239 $3,161 
Operating Income Margin2.9 %5.0 %
EBITDA Margin29.5 %29.3 %
Latin America Segment
Operating Income (Loss)$(30)$(102)
  Add: Depreciation and amortization175 161 
EBITDA$145 $59 
Total Operating Revenues$883 $690 
Operating Income Margin-3.4 %-14.8 %
EBITDA Margin16.4 %8.6 %


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Adjusting Items

Adjusting items include revenues and costs we consider non-operational in nature, including items arising from asset acquisitions or dispositions, including the amortization of intangible assets. While the expense associated with the amortization of certain wireless licenses and customer lists is excluded, the revenue of the acquired companies is reflected in the measure and that those assets contribute to revenue generation. 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. Prior periods have been recast for consistency to include gains on benefit-related and other cost investments.

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 
 First Quarter
 20232022
Operating Expenses  
Transaction and other costs$— $98 
   Benefit-related (gain) loss(44)93 
Adjustments to Operations and Support Expenses(44)191 
   Amortization of intangible assets17 27 
Adjustments to Operating Expenses(27)218 
Other  
 DIRECTV intangible amortization (proportionate share)341 416 
   Benefit-related (gain) loss and other(111)92 
Actuarial (gain) loss— (1,053)
Adjustments to Income Before Income Taxes203 (327)
Tax impact of adjustments46 (103)
Adjustments to Net Income$157 $(224)

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, benefit-related gains and losses, employee separation 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.

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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, and Adjusted EBITDA Margin
Dollars in millions 
 First Quarter
 20232022
Operating Income$6,002 $5,537 
Adjustments to Operating Expenses(27)218 
Adjusted Operating Income$5,975 $5,755 
EBITDA$10,633 $9,999 
Adjustments to Operations and Support Expenses(44)191 
Adjusted EBITDA$10,589 $10,190 
Total Operating Revenues$30,139 $29,712 
Operating Income Margin19.9 %18.6 %
Adjusted Operating Income Margin19.8 %19.4 %
Adjusted EBITDA Margin35.1 %34.3 %

Adjusted Diluted EPS
 First Quarter
 20232022
Diluted Earnings Per Share (EPS)$0.57 $0.65 
 DIRECTV intangible amortization (proportionate share)0.04 0.04 
Actuarial (gain) loss— (0.11)
   Benefit-related, transaction and other costs1
(0.01)0.05 
Adjusted EPS$0.60 $0.63 
Year-over-year growth - Adjusted-4.8 % 
Weighted Average Common Shares Outstanding with Dilution (000,000)7,474 7,556 
1As of January 1, 2022, we adopted, through retrospective application, Accounting Standards Update (ASU) No. 2020-06, which requires that instruments which may be settled in cash or stock to be presumed settled in stock in calculating diluted EPS. While our intent is to settle the Mobility II preferred interests in cash, the ability to settle this instrument in AT&T shares will result in additional dilutive impact, the magnitude of which is influenced by the fair value of the Mobility II preferred interests and the average AT&T common stock price during the reporting period, which could vary from period-to-period. For these reasons, we have excluded the impact of ASU 2020-06 from our adjusted EPS calculation. The per share impact of ASU 2020-06 was to decrease reported diluted EPS $0.01 and $0.01 for the quarters ended March 31, 2023 and 2022, respectively. The Mobility II preferred interests were repurchased on April 5, 2023.

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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 - 2023
Dollars in millions   
 Three Months Ended 
 June 30,Sept. 30,Dec. 31,March 31,Four Quarters
 
20221
20221
20221
2023
Adjusted EBITDA$10,330 $10,714 $10,231 $10,589 $41,864 
End-of-period current debt    13,757 
End-of-period long-term debt    123,727 
Total End-of-Period Debt    137,484 
Less: Cash and Cash Equivalents    2,821 
Net Debt Balance    134,663 
Annualized Net Debt to Adjusted EBITDA Ratio   3.22 
1As reported in AT&T's Form 8-K filed January 25, 2023.

Net Debt to Adjusted EBITDA - 2022
Dollars in millions   
 Three Months Ended 
 June 30,Sept. 30,Dec. 31,March 31,Four Quarters
 
20211
20221
20221
20221
Adjusted EBITDA$11,931 $10,803 $9,480 $10,190 $42,404 
End-of-period current debt    27,209 
End-of-period long-term debt    148,820 
Total End-of-Period Debt    176,029 
Less: Cash and Cash Equivalents    17,084 
Net Debt Balance    158,945 
Annualized Net Debt to Adjusted EBITDA Ratio  3.75 
1As reported in AT&T's Form 8-K filed January 25, 2023.


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Supplemental Operational Measures

As a supplemental presentation to our Communications segment operating results, we are providing a view of our AT&T Business Solutions results which includes both wireless and fixed operations. This combined view presents a complete profile of the entire business customer relationship and underscores the importance of mobile solutions to serving our business customers. Our supplemental presentation of business solutions operations 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
 First Quarter
 March 31, 2023March 31, 2022
 MobilityBusiness
Wireline
Adj.1
Business
Solutions		MobilityBusiness
Wireline
Adj.1
Business
Solutions		Percent Change
Operating Revenues        
Wireless service$15,483 $— $(13,203)$2,280 $14,724 $— $(12,590)$2,134 6.8 %
Wireline service— 5,200 — 5,200 — 5,478 — 5,478 (5.1)%
Wireless equipment5,099 — (4,326)773 5,351 — (4,452)899 (14.0)%
Wireline equipment— 131 — 131 — 162 — 162 (19.1)%
Total Operating Revenues20,582 5,331 (17,529)8,384 20,075 5,640 (17,042)8,673 (3.3)%
Operating Expenses        
Operations and support12,213 3,623 (10,196)5,640 12,327 3,702 (10,169)5,860 (3.8)%
EBITDA8,369 1,708 (7,333)2,744 7,748 1,938 (6,873)2,813 (2.5)%
Depreciation and amortization2,098 1,330 (1,712)1,716 2,059 1,299 (1,698)1,660 3.4 %
Total Operating Expenses14,311 4,953 (11,908)7,356 14,386 5,001 (11,867)7,520 (2.2)%
Operating Income$6,271 $378 $(5,621)$1,028 $5,689 $639 $(5,175)$1,153 (10.8)%
Operating Income Margin12.3 %13.3 %(100) BP
1Non-business wireless reported in the Communications segment under the Mobility business unit.
Results have been recast to conform to the current period's classification.
 
 
 
 
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