EX-99.3 4 t-4q2022exhibit993.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).

On April 8, 2022, we completed the previously announced separation of our WarnerMedia business. With the separation and distribution, the WarnerMedia business met the criteria for discontinued operations. For discontinued operations, we evaluated transactions that were components of AT&T’s single plan of a strategic shift, including dispositions that may not have individually met the criteria due to materiality, and have determined discontinued operations to be comprised of WarnerMedia, Vrio, Xandr and Playdemic Ltd. (Playdemic). These businesses are reflected in our historical financial statements as discontinued operations, including for periods prior to the consummation of the WarnerMedia/Discovery transaction. The information below refers only to our continuing operations and does not include discussion of balances or activity of WarnerMedia, Vrio, Xandr and Playdemic.

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 
 Fourth QuarterYear Ended
 2022202120222021
Net cash provided by operating activities from continuing operations1
$10,348 $8,077 $35,812 $37,170 
Add: Distributions from DIRECTV classified as investing
         activities		444 1,323 2,649 1,323 
Less: Capital expenditures(4,229)(3,494)(19,626)(15,545)
Less: Cash paid for vendor financing(460)(583)(4,697)(4,596)
Free Cash Flow2
6,103 5,323 14,138 18,352 
Less: Dividends paid(2,014)(3,749)(9,859)(15,068)
Free Cash Flow after Dividends$4,089 $1,574 $4,279 $3,284 
Free Cash Flow Dividend Payout Ratio33.0 %70.4 %69.7 %82.1 %
1Includes distributions from DIRECTV of $379 in the fourth quarter and $1,808 for the year ended December 31, 2022.
2For Standalone free cash flow see Exhibit 99.4

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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 
 Fourth QuarterYear Ended
 2022202120222021
Capital Expenditures$(4,229)$(3,494)$(19,626)$(15,545)
Cash paid for vendor financing(460)(583)(4,697)(4,596)
Cash paid for Capital Investment$(4,689)$(4,077)$(24,323)$(20,141)

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.

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EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions 
 Fourth QuarterYear Ended
 2022202120222021
Income (Loss) from Continuing Operations$(23,120)$5,202 $(6,874)$23,776 
Additions:  
Income Tax Expense (Benefit)(77)939 3,780 5,395 
Interest Expense1,560 1,626 6,108 6,716 
Equity in Net (Income) of Affiliates(374)(444)(1,791)(603)
Other (Income) Expense - Net919 (2,429)(5,810)(9,387)
Depreciation and amortization4,595 4,500 18,021 17,852 
EBITDA(16,497)9,394 13,434 43,749 
Transaction and other cost84 (2)425 41 
Benefit-related (gain) loss (109)(20)108 (128)
Assets impairments and abandonment and restructuring26,753 108 27,498 213 
Adjusted EBITDA1
$10,231 $9,480 $41,465 $43,875 
Less: Video and Other dispositions— 4 — (3,807)
Standalone AT&T Adjusted EBITDA2
$10,231 $9,484 $41,465 $40,068 
1See page 5 for additional discussion and reconciliation of adjusted items.
2See Exhibit 99.4 for reconciliation of Standalone AT&T Adjusted EBITDA.

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Segment and Business Unit EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions 
 Fourth QuarterYear Ended
 2022202120222021
Communications Segment
Operating Income$7,221 $6,410 $29,107 $28,393 
Additions:  
Depreciation and amortization4,258 4,156 16,681 16,409 
EBITDA11,479 10,566 45,788 44,802 
Total Operating Revenues30,365 30,206 117,067 114,730 
Operating Income Margin23.8 %21.2 %24.9 %24.7 %
EBITDA Margin37.8 %35.0 %39.1 %39.0 %
Mobility
Operating Income$6,044 $5,332 $24,528 $23,370 
Additions:  
Depreciation and amortization2,080 2,050 8,198 8,122 
EBITDA8,124 7,382 32,726 31,492 
Total Operating Revenues21,501 21,146 81,780 78,254 
Service Revenues15,434 14,669 60,499 57,590 
Operating Income Margin28.1 %25.2 %30.0 %29.9 %
EBITDA Margin37.8 %34.9 %40.0 %40.2 %
EBITDA Service Margin52.6 %50.3 %54.1 %54.7 %
Business Wireline
Operating Income$801 $876 $3,252 $4,027 
Additions:
Depreciation and amortization1,360 1,317 5,314 5,192 
EBITDA2,161 2,193 8,566 9,219 
Total Operating Revenues5,635 5,901 22,538 23,937 
Operating Income Margin14.2 %14.8 %14.4 %16.8 %
EBITDA Margin38.3 %37.2 %38.0 %38.5 %
Consumer Wireline
Operating Income$376 $202 $1,327 $996 
Additions:
Depreciation and amortization818 789 3,169 3,095 
EBITDA1,194 991 4,496 4,091 
Total Operating Revenues3,229 3,159 12,749 12,539 
Operating Income Margin11.6 %6.4 %10.4 %7.9 %
EBITDA Margin37.0 %31.4 %35.3 %32.6 %
Latin America Segment - Mexico
Operating Income$(79)$(117)$(326)$(510)
Additions:
Depreciation and amortization164 153 658 605 
EBITDA85 36 332 95 
Total Operating Revenues861 704 3,144 2,747 
Operating Income Margin-9.2 %-16.6 %-10.4 %-18.6 %
EBITDA Margin9.9 %5.1 %10.6 %3.5 %
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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. 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 
 Fourth QuarterYear Ended
 2022202120222021
Operating Expenses  
Transaction and other costs84 (2)425 41 
Benefit-related (gain) loss(109)(20)108 (128)
Asset impairments and abandonment and restructuring26,753 108 27,498 213 
Adjustments to Operations and Support Expenses26,728 86 28,031 126 
   Amortization of intangible assets16 28 76 170 
Adjustments to Operating Expenses26,744 114 28,107 296 
Other  
   DIRECTV intangible amortization (proportionate share)359 434 1,547 826 
Benefit-related (gain) loss, transaction financing costs and other420 (84)1,242 (421)
Actuarial (gain) loss1,839 (1,119)(1,999)(4,140)
Adjustments to Income Before Income Taxes29,362 (655)28,897 (3,439)
Tax impact of adjustments1,082 (131)882 (854)
Tax-related items329 240 977 608 
Adjustments to Net Income$27,951 $(764)$27,038 $(3,193)

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.

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.

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Adjusted Operating Income, Adjusted Operating Income Margin,
Adjusted EBITDA and Adjusted EBITDA Margin
Dollars in millions 
 Fourth QuarterYear Ended
 2022202120222021
Operating Income$(21,092)$4,894 $(4,587)$25,897 
Adjustments to Operating Expenses26,744 114 28,107 296 
Adjusted Operating Income5,652 5,008 23,520 26,193 
EBITDA(16,497)9,394 13,434 43,749 
Adjustments to Operations and Support Expenses26,728 86 28,031 126 
Adjusted EBITDA10,231 9,480 41,465 43,875 
Total Operating Revenues31,343 31,095 120,741 134,038 
Operating Income Margin(67.3)%15.7 %(3.8)%19.3 %
Adjusted Operating Income Margin18.0 %16.1 %19.5 %19.5 %
Adjusted EBITDA Margin32.6 %30.5 %34.3 %32.7 %

Adjusted Diluted EPS
 Fourth QuarterYear Ended
 2022202120222021
Diluted Earnings Per Share (EPS)$(3.20)$0.66 $(1.10)$3.02 
DIRECTV intangible amortization (proportionate share)0.04 0.05 0.16 0.09 
Actuarial (gain) loss 1
0.19 (0.11)(0.20)(0.42)
   Impairments, abandonments and restructuring3.57 0.01 3.59 0.02 
   Benefit-related, transaction and other costs1, 2
0.05 (0.02)0.25 — 
Tax-related items(0.04)(0.03)(0.13)(0.08)
Adjusted EPS$0.61 $0.56 $2.57 $2.63 
Less: Video and Other dispositions— — — (0.22)
Standalone AT&T Adjusted EPS$0.61 $0.56 $2.57 $2.41 
Year-over-year growth - Adjusted8.9 %6.6 % 
Weighted Average Common Shares Outstanding
   with Dilution (000,000)		7,533 7,541 7,587 7,503 
1Includes adjustments for actuarial gains or losses associated with our pension and postemployment 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 gains of $2.0 billion in 2022. As a result, adjusted EPS reflects an expected return on plan assets of $3.2 billion (based on an average expected return on plan assets of 6.75% for our pension trust and 4.5% for our VEBA trusts), rather than the actual return on plan assets of $11.3 billion loss (actual pension return of -14.8% and VEBA return of -13.2%), included in the GAAP measure of income. Adjustments also include the impact to our 2022 quarterly benefit expense accruals that resulted from quarterly remeasurements of plan assets and obligations, which included increases in the assumed discount rates.
2As 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.

Additionally, in the fourth quarter of 2022, all outstanding Mobility II preferred interests were put to us, with approximately one-third redeemed in the fourth-quarter; approximately 107 million interests will be redeemed primarily in October 2023 and 107 million redeemed in October 2024, per the terms of the agreement, unless called or put is accepted by AT&T prior. With the certainty of redemption, the remaining Mobility preferred interest was reclassified from equity to a liability at fair value, with approximately $2.7 billion recorded in current as “Accounts payable and accrued liabilities” and $2.7 billion as “Other noncurrent liabilities. The difference between the carrying value of the Mobility preferred interest and the fair value of the instrument upon settlement and/or balance sheet reclassification was recorded as an adjustment to additional paid-in capital; the fair value adjustment of these instruments is required to be included when calculating EPS.

Given our intent to settle the Mobility II preferred interests in cash, and the nonoperational fair value adjustment recorded as "Additional Paid in Capital," we have excluded these impacts from our adjusted EPS calculation. The per share impact was to decrease reported diluted EPS $0.01 and $0.01 for the quarters ended December 31, 2022 and 2021, and $0.06 and $0.03 for the year ended December 31, 2022 and 2021, respectively.
3See Exhibit 99.4 for reconciliation of Standalone AT&T Adjusted EPS.

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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 - 2022
Dollars in millions   
 Three Months Ended 
 March. 31June 30,Sept. 30,Dec. 31,Four Quarters
 
2022 1
2022 1
2022 1
2022 1
Adjusted EBITDA$10,190 $10,330 $10,714 $10,231 $41,465 
End-of-period current debt    7,467 
End-of-period long-term debt    128,423 
Total End-of-Period Debt    135,890 
Less: Cash and Cash Equivalents    3,701 
Net Debt Balance    132,189 
Annualized Net Debt to Adjusted EBITDA Ratio  3.19 
1As reported in Exhibit 99.4
Net Debt to Adjusted EBITDA - 2021
Dollars in millions   
 Three Months Ended 
 March 31,June 30,Sept. 30,Dec. 31,Four Quarters
 
2021 1
2021 1
2021 1
2021 1
Adjusted EBITDA$11,661 $11,931 $10,803 $9,480 $43,875 
End-of-period current debt    24,620 
End-of-period long-term debt    151,011 
Total End-of-Period Debt    175,631 
Less: Cash and Cash Equivalents    19,223 
Net Debt Balance    156,408 
Annualized Net Debt to Adjusted EBITDA Ratio  3.56 
1As reported in Exhibit 99.4

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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
 Fourth Quarter
 December 31, 2022December 31, 2021
 MobilityBusiness
Wireline
Adjustments1
Business
Solutions		MobilityBusiness
Wireline
Adjustments1
Business
Solutions
Operating Revenues        
Wireless service$15,434 $— $(13,176)$2,258 $14,669 $— $(12,561)$2,108 
Wireline services— 5,473 — 5,473 — 5,727 — 5,727 
Wireless equipment6,067 — (5,130)937 6,477 — (5,447)1,030 
Wireline equipment— 162 — 162 — 174 — 174 
Total Operating Revenues21,501 5,635 (18,306)8,830 21,146 5,901 (18,008)9,039 
Operating Expenses    
Operations and support13,377 3,474 (11,195)5,656 13,764 3,708 (11,437)6,035 
EBITDA8,124 2,161 (7,111)3,174 7,382 2,193 (6,571)3,004 
Depreciation and amortization2,080 1,360 (1,716)1,724 2,050 1,317 (1,700)1,667 
Total Operating Expenses15,457 4,834 (12,911)7,380 15,814 5,025 (13,137)7,702 
Operating Income6,044 801 (5,395)1,450 5,332 876 (4,871)1,337 
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
 Year Ended
 December 31, 2022December 31, 2021
 MobilityBusiness
Wireline
Adjustments1
Business
Solutions		MobilityBusiness
Wireline
Adjustments1
Business
Solutions
Operating Revenues        
Wireless service$60,499 $— $(51,710)$8,789 $57,590 $— $(49,429)$8,161 
Wireline service— 21,891 — 21,891 — 23,224 — 23,224 
Wireless equipment21,281 — (17,712)3,569 20,664 — (17,250)3,414 
Wireline equipment— 647 — 647 — 713 — 713 
Total Operating Revenues81,780 22,538 (69,422)34,896 78,254 23,937 (66,679)35,512 
Operating Expenses        
Operations and support49,054 13,972 (40,547)22,479 46,762 14,718 (38,702)22,778 
EBITDA32,726 8,566 (28,875)12,417 31,492 9,219 (27,977)12,734 
Depreciation and amortization8,198 5,314 (6,763)6,749 8,122 5,192 (6,744)6,570 
Total Operating Expenses57,252 19,286 (47,310)29,228 54,884 19,910 (45,446)29,348 
Operating Income24,528 3,252 (22,112)5,668 23,370 4,027 (21,233)6,164 
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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