EX-99.3 4 t-2q2023exhibit993.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 
 Second QuarterSix-Month Period
 2023202220232022
Net cash provided by operating activities from continuing operations1
$9,922 $7,740 $16,600 $15,370 
Add: Distributions from DIRECTV classified as investing activities200 323 974 1,638 
Less: Capital expenditures(4,270)(4,908)(8,605)(9,476)
Less: Cash paid for vendor financing(1,643)(1,771)(3,756)(3,337)
Free Cash Flow4,209 1,384 5,213 4,195 
Less: Dividends paid(2,083)(2,086)(4,097)(5,835)
Free Cash Flow after Dividends$2,126 $(702)$1,116 $(1,640)
Free Cash Flow Dividend Payout Ratio49.5 %150.7 %78.6 %139.1 %
1Includes distributions from DIRECTV of $377 and $911 in the second quarter and for the first six months of 2023, and $515 and $1,037 in the second quarter and for the first six months 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 
 Second QuarterSix-Month Period
 2023202220232022
Capital Expenditures$(4,270)$(4,908)$(8,605)$(9,476)
Cash paid for vendor financing(1,643)(1,771)(3,756)(3,337)
Cash paid for Capital Investment$(5,913)$(6,679)$(12,361)$(12,813)

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 
 Second QuarterSix-Month Period
 2023202220232022
Income from Continuing Operations$4,762 $4,751 $9,215 $9,900 
Additions:  
Income Tax Expense1,403 1,509 2,717 2,949 
Interest Expense1,608 1,502 3,316 3,128 
Equity in Net (Income) of Affiliates(380)(504)(918)(1,025)
Other (Income) Expense - Net(987)(2,302)(1,922)(4,459)
Depreciation and amortization4,675 4,450 9,306 8,912 
EBITDA11,081 9,406 21,714 19,405 
Transaction and other costs— 185 — 283 
   Benefit-related (gain) loss (28)108 (72)201 
Assets impairments and abandonment and
    restructuring		— 631 — 631 
Adjusted EBITDA1
$11,053 $10,330 $21,642 $20,520 
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 
 Second QuarterSix-Month Period
 2023202220232022
Communications Segment
Operating Income$7,177 $6,683 $13,920 $13,170 
  Add: Depreciation and amortization4,313 4,115 8,602 8,239 
EBITDA$11,490 $10,798 $22,522 $21,409 
Total Operating Revenues$28,845 $28,695 $57,997 $57,571 
Operating Income Margin24.9 %23.3 %24.0 %22.9 %
EBITDA Margin39.8 %37.6 %38.8 %37.2 %
Mobility
Operating Income$6,613 $6,048 $12,884 $11,737 
  Add: Depreciation and amortization2,123 2,017 4,221 4,076 
EBITDA$8,736 $8,065 $17,105 $15,813 
Total Operating Revenues$20,315 $19,926 $40,897 $40,001 
Service Revenues15,745 15,004 31,228 29,728 
Operating Income Margin32.6 %30.4 %31.5 %29.3 %
EBITDA Margin43.0 %40.5 %41.8 %39.5 %
EBITDA Service Margin55.5 %53.8 %54.8 %53.2 %
Business Wireline
Operating Income$396 $490 $774 $1,129 
  Add: Depreciation and amortization1,333 1,313 2,663 2,612 
EBITDA$1,729 $1,803 $3,437 $3,741 
Total Operating Revenues$5,279 $5,595 $10,610 $11,235 
Operating Income Margin7.5 %8.8 %7.3 %10.0 %
EBITDA Margin32.8 %32.2 %32.4 %33.3 %
Consumer Wireline
Operating Income$168 $145 $262 $304 
  Add: Depreciation and amortization857 785 1,718 1,551 
EBITDA$1,025 $930 $1,980 $1,855 
Total Operating Revenues$3,251 $3,174 $6,490 $6,335 
Operating Income Margin5.2 %4.6 %4.0 %4.8 %
EBITDA Margin31.5 %29.3 %30.5 %29.3 %
Latin America Segment
Operating Income (Loss)$(39)$(82)$(69)$(184)
  Add: Depreciation and amortization185 169 360 330 
EBITDA$146 $87 $291 $146 
Total Operating Revenues$967 $808 $1,850 $1,498 
Operating Income Margin-4.0 %-10.1 %-3.7 %-12.3 %
EBITDA Margin15.1 %10.8 %15.7 %9.7 %


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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.

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 QuarterSix-Month Period
 2023202220232022
Operating Expenses  
Transaction and other costs$— $185 $— $283 
   Benefit-related (gain) loss(28)108 (72)201 
Assets impairments and abandonment and restructuring— 631 — 631 
Adjustments to Operations and Support Expenses(28)924 (72)1,115 
   Amortization of intangible assets17 17 34 44 
Adjustments to Operating Expenses(11)941 (38)1,159 
Other  
 DIRECTV intangible amortization (proportionate share)324 396 665 812 
   Benefit-related (gain) loss and other(82)314 (193)406 
Actuarial and settlement (gain) loss - net(74)(1,345)(74)(2,398)
Adjustments to Income Before Income Taxes157 306 360 (21)
Tax impact of adjustments35 38 81 (65)
Tax-related items— (79)— (79)
Adjustments to Net Income$122 $347 $279 $123 

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 
 Second QuarterSix-Month Period
 2023202220232022
Operating Income$6,406 $4,956 $12,408 $10,493 
Adjustments to Operating Expenses(11)941 (38)1,159 
Adjusted Operating Income$6,395 $5,897 $12,370 $11,652 
EBITDA$11,081 $9,406 $21,714 $19,405 
Adjustments to Operations and Support Expenses(28)924 (72)1,115 
Adjusted EBITDA$11,053 $10,330 $21,642 $20,520 
Total Operating Revenues$29,917 $29,643 $60,056 $59,355 
Operating Income Margin21.4 %16.7 %20.7 %17.7 %
Adjusted Operating Income Margin21.4 %19.9 %20.6 %19.6 %
Adjusted EBITDA Margin36.9 %34.8 %36.0 %34.6 %

Adjusted Diluted EPS
 Second QuarterSix-Month Period
 2023202220232022
Diluted Earnings Per Share (EPS)$0.61 $0.59 $1.19 $1.23 
 DIRECTV intangible amortization (proportionate share)0.03 0.04 0.07 0.08 
Actuarial and settlement (gain) loss - net1
(0.01)(0.13)(0.01)(0.24)
   Restructuring and impairments— 0.06 — 0.06 
   Benefit-related, transaction and other costs2
— 0.08 (0.02)0.13 
Tax-related items— 0.01 — 0.01 
Adjusted EPS$0.63 $0.65 $1.23 $1.27 
Year-over-year growth - Adjusted-3.1 %-3.1 % 
Weighted Average Common Shares Outstanding with Dilution (000,000)7,180 7,611 7,327 7,584 
1Includes adjustments for actuarial gains or losses associated with our pension and postretirement benefit plans, which we immediately recognize in the income statement, pursuant to our accounting policy for the recognition of actuarial gains/losses. We recorded total net actuarial and settlement gains of $0.1 billion in the second quarter of 2023. As a result, adjusted EPS reflects an expected return on plan assets of $0.7 billion (based on an average expected return on plan assets of 7.50% for our pension trust), rather than the actual return on plan assets of $0.9 billion (actual pension return of 4.1%), included in the GAAP measure of income.
2As of January 1, 2022, we adopted 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 was to settle the Mobility II preferred interests in cash, the ability to settle this instrument in AT&T shares resulted in additional dilutive impact, the magnitude of which was 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 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 $0.00 and $0.02 for the quarters ended June 30, 2023 and 2022, and $0.01 and $0.02 for the six months ended June 30, 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 deposits at financial institutions that are greater than 90 days (e.g., certificates of deposit and time deposits), 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 
 Sept. 30,Dec. 31,March 31,June 30,Four Quarters
 
20221
20221
20231
2023
Adjusted EBITDA$10,714 $10,231 $10,589 $11,053 $42,587 
End-of-period current debt    15,268 
End-of-period long-term debt    128,012 
Total End-of-Period Debt    143,280 
Less: Cash and Cash Equivalents    9,528 
Less: Time Deposits1,750 
Net Debt Balance    132,002 
Annualized Net Debt to Adjusted EBITDA Ratio   3.10 
1As reported in AT&T's Form 8-K filed January 25, 2023 and April 20, 2023.

Net Debt to Adjusted EBITDA - 2022
Dollars in millions   
 Three Months Ended 
 Sept. 30,Dec. 31,March 31,June 30,Four Quarters
 
20211
20211
20221
20221
Adjusted EBITDA$10,803 $9,480 $10,190 $10,330 $40,803 
End-of-period current debt    6,210 
End-of-period long-term debt    129,747 
Total End-of-Period Debt    135,957 
Less: Cash and Cash Equivalents    4,018 
Net Debt Balance    131,939 
Annualized Net Debt to Adjusted EBITDA Ratio  3.23 
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
 Second Quarter
 June 30, 2023June 30, 2022
 MobilityBusiness
Wireline
Adj.1
Business
Solutions		MobilityBusiness
Wireline
Adj.1
Business
Solutions		Percent Change
Operating Revenues        
Wireless service$15,745 $— $(13,371)$2,374 $15,004 $— $(12,829)$2,175 9.1 %
Wireline service— 5,114 — 5,114 — 5,416 — 5,416 (5.6)%
Wireless equipment4,570 — (3,796)774 4,922 — (4,048)874 (11.4)%
Wireline equipment— 165 — 165 — 179 — 179 (7.8)%
Total Operating Revenues20,315 5,279 (17,167)8,427 19,926 5,595 (16,877)8,644 (2.5)%
Operating Expenses        
Operations and support11,579 3,550 (9,440)5,689 11,861 3,792 (9,718)5,935 (4.1)%
EBITDA8,736 1,729 (7,727)2,738 8,065 1,803 (7,159)2,709 1.1 %
Depreciation and amortization2,123 1,333 (1,733)1,723 2,017 1,313 (1,664)1,666 3.4 %
Total Operating Expenses13,702 4,883 (11,173)7,412 13,878 5,105 (11,382)7,601 (2.5)%
Operating Income$6,613 $396 $(5,994)$1,015 $6,048 $490 $(5,495)$1,043 (2.7)%
Operating Income Margin12.0 %12.1 %(10) 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.

Supplemental Operational Measure
 Six-Month Period
 June 30, 2023June 30, 2022
 MobilityBusiness
Wireline
Adj.1
Business
Solutions		MobilityBusiness
Wireline
Adj.1
Business
Solutions		Percent Change
Operating Revenues        
Wireless service$31,228 $— $(26,574)$4,654 $29,728 $— $(25,419)$4,309 8.0 %
Wireline service— 10,314 — 10,314 — 10,894 — 10,894 (5.3)%
Wireless equipment9,669 — (8,122)1,547 10,273 — (8,500)1,773 (12.7)%
Wireline equipment— 296 — 296 — 341 — 341 (13.2)%
Total Operating Revenues40,897 10,610 (34,696)16,811 40,001 11,235 (33,919)17,317 (2.9)%
Operating Expenses        
Operations and support23,792 7,173 (19,636)11,329 24,188 7,494 (19,887)11,795 (4.0)%
EBITDA17,105 3,437 (15,060)5,482 15,813 3,741 (14,032)5,522 (0.7)%
Depreciation and amortization4,221 2,663 (3,445)3,439 4,076 2,612 (3,362)3,326 3.4 %
Total Operating Expenses28,013 9,836 (23,081)14,768 28,264 10,106 (23,249)15,121 (2.3)%
Operating Income$12,884 $774 $(11,615)$2,043 $11,737 $1,129 $(10,670)$2,196 (7.0)%
Operating Income Margin12.2 %12.7 %(50) 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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