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 AT&T Reports Fourth-Quarter Results
   Wednesday, January 30, 2019 6:51:00 AM ET

Full-Year Consolidated Results

  • Diluted EPS of $2.85 as reported compared to $4.76 in the prior year (2017 impacted by tax reform)
  • Adjusted EPS of $3.52 compared to $3.05 in the prior year
  • Cash from operations of $43.6 billion, up 15%
  • Capital expenditures of $21.3 billion
  • Free cash flow of $22.4 billion, up 36%
  • Dividend payout ratio of 60%1
  • Consolidated revenues of $170.8 billion


Fourth-Quarter Consolidated Results

  • Diluted EPS of $0.66 as reported compared to $3.08 in the year-ago quarter (2017 impacted by tax reform)
  • Net income of $4.9 billion compared to $19.0 billion in the year-ago quarter (2017 impacted by tax reform)
  • Adjusted EPS of $0.86 compared to $0.78 in the year-ago quarter
  • Cash from operations of $12.1 billion, up 27%
  • Capital expenditures of $4.2 billion
  • Dividend payout ratio 46%1
  • Free cash flow of $7.9 billion, up 78%
  • Consolidated revenues of $48.0 billion

As Part of Fourth-Quarter Results, AT&T Reports:

  • Strong Cash from Operations and Record Free Cash Flow
  • Consolidated Pro Forma Adjusted EBITDA Growth
  • Deleveraging Plan on Track
  • 2019 Guidance Reaffirmed

Note: AT&T's fourth-quarter earnings conference call will be webcast at 8:30 a.m. ET on Wednesday, January 30, 2019. The webcast and related materials will be available on AT&T’s Investor Relations website at https://investors.att.com .

DALLAS--(BUSINESS WIRE)-- AT&T Inc. (NYSE:T ) reported strong Mobility and WarnerMedia results in the fourth quarter, including solid domestic wireless service revenue growth with record fourth-quarter wireless service margins. (On a GAAP basis, domestic service revenues declined 3.0%; however, on a comparable basis, service revenues grew 2.9%.)

“Our top priority for 2018 and 2019 is reducing our debt and I couldn’t be more pleased with how we closed the year. In 2018, we generated record free cash flow while investing at near-record levels. Our dividend payout as a percent of free cash flow was 46% for the quarter and 60% for the year, allowing us to increase the dividend for the 35th consecutive year,” said Randall Stephenson, AT&T chairman and CEO. “This momentum will carry us into 2019 allowing us to continue reducing our debt while investing in the business and continuing our strong record for paying dividends.”

Fourth-Quarter Results

North America Wireless Highlights:

  • 3.8 million total wireless net adds:
    • 2.8 million in U.S., driven by connected devices and smartphones
    • 1.0 million in Mexico

Communications Highlights

  • Operating income up 3.1% on a comparable basis; EBITDA up 1.9%
  • Mobility:
    • Service revenues up 2.9% on a comparable basis; operating income up 18.7% with EBITDA up 13.3% on a comparable basis
    • 147,000 phone net adds in the U.S.
      • 134,000 postpaid phone net adds
      • 13,000 prepaid phone net adds
    • 467,000 branded smartphones added to base
  • Entertainment Group:
    • Focus on profitability and reduced promotions leads to losses in video subscribers
    • More than 11 million customer locations passed with fiber

WarnerMedia Highlights

  • Revenues up with operating income gains in all business units
    • Strong Warner Bros. theatrical and television licensing revenue growth
    • Turner subscription revenue growth
    • HBO digital subscriber growth continued
    • 11 Academy Award® nominations

Latin America Highlights

  • 3.2 million Mexico wireless full-year net adds
  • 250,000 full-year Vrio net adds

Xandr Highlights

  • Advertising revenues grew by 48.6%; up 26.0% excluding the AppNexus acquisition
  • Continued progress in strategic initiatives

Consolidated Financial Results2

AT&T's consolidated revenues for the fourth quarter totaled $48.0 billion versus $41.7 billion in the year-ago quarter, up 15.2%, primarily due to the Time Warner acquisition partially offset by the impact of ASC 606 which includes the policy election of netting of approximately $980 million of USF revenues with operating expenses. Without the accounting change, revenues were $48.9 billion, an increase of 17.2% primarily due to the Time Warner acquisition. Declines in legacy wireline services, wireless equipment, domestic video and Vrio were more than offset by WarnerMedia and growth in domestic wireless services and Xandr.

Operating expenses were $41.8 billion versus $40.4 billion in the year-ago quarter, primarily due to the Time Warner acquisition, partially offset by the netting of USF and other regulatory fees and the deferral of commissions under ASC 606. Excluding those impacts, operating expenses were $43.3 billion, an increase of about $2.9 billion due to the Time Warner acquisition and Entertainment Group content cost pressure, partially offset by the write-off of certain network assets in the prior year, lower wireless equipment costs and cost efficiencies.

Versus results from the fourth quarter of 2017, operating income was $6.2 billion versus $1.3 billion, primarily due to the Time Warner acquisition and the write-off of certain network assets in the prior year; and operating income margin was 12.8% versus 3.1%. On a comparative basis, operating income was $5.6 billion and operating income margin was 11.4%. When adjusting for amortization, merger- and integration-related expenses and other items, operating income was $9.4 billion, or $8.8 billion on a comparative basis, versus $6.3 billion in the year-ago quarter, and operating income margin was 19.6%, or 18.1% on a comparative basis, versus 15.1% in the year-ago quarter due to the acquisition of Time Warner and impact of ASC 606.

Fourth-quarter net income attributable to AT&T was $4.9 billion, or $0.66 per diluted share, versus $19.0 billion, or $3.08 per diluted share, in the year-ago quarter which reflected the impact of the December 2017 federal Tax Cuts and Jobs Act. Adjusting for $0.20, which includes amortization costs, merger- and integration-related expenses and other items, a true-up of deferred tax liability remeasurement and other tax items and a non-cash actuarial gain on benefit plans from the annual remeasurement process, earnings per diluted share was $0.86 compared to an adjusted $0.78 in the year-ago quarter, a 10% increase.

Cash from operating activities was $12.1 billion, and capital expenditures were $4.2 billion. Capital investment included about $270 million in FirstNet capital costs and $1.1 billion in FirstNet capital reimbursements. Free cash flow — cash from operating activities minus capital expenditures — was $7.9 billion for the quarter.

Full-Year Results

For full-year 2018 when compared with 2017 results, AT&T's consolidated revenues totaled $170.8 billion versus $160.5 billion, up 6.4%, primarily due to the Time Warner acquisition partially offset by the impact of ASC 606 which includes the policy election of netting approximately $3.7 billion of USF revenues with operating expenses. Without the accounting change, revenues were $174.3 billion, an increase of 8.6% primarily due to the Time Warner acquisition.

Operating expenses were $144.7 billion compared with $140.6 billion, primarily due to the Time Warner acquisition partially offset by the netting of USF and other regulatory fees and the deferral of commissions under ASC 606. Excluding those impacts, operating expenses were $150.6 billion, an increase of about $10.0 billion due to the Time Warner acquisition, Entertainment Group content cost pressure and higher wireless equipment costs, partially offset by the write-off of certain network assets in the prior year and cost efficiencies.

Versus results from 2017, operating income was $26.1 billion, up 30.7% primarily due to the Time Warner acquisition and the write-off of certain network assets in the prior year; and operating income margin was 15.3% versus 12.4%. On a comparative basis, operating income was $23.7 billion and operating income margin was 13.6%. With adjustments for both years, operating income was $35.2 billion, or $32.8 billion on a comparable basis, versus $29.5 billion in 2017, and operating income margin was 20.6%, or 18.8% on a comparative basis, versus 18.4% in 2017.

2018 net income attributable to AT&T was $19.4 billion, or $2.85 per diluted share, versus $29.5 billion, or $4.76 per diluted share in 2017. With adjustments for both years, earnings per diluted share was $3.52 compared to an adjusted $3.05 in 2017, up 15% primarily due to lower rates associated with tax reform, the impact of ASC 606 and the acquisition of Time Warner.

AT&T's full-year cash from operating activities was $43.6 billion versus $38.0 billion in 2017. Capital expenditures, including capitalized interest, totaled $21.3 billion versus $21.6 billion in 2017. Capital investment included about $1.2 billion in FirstNet capital costs and $1.4 billion in FirstNet capital reimbursements. Full-year free cash flow was $22.4 billion compared to $16.5 billion in 2017, up 36%. The company’s free cash flow dividend payout ratio for the full year was 60%.1

2019 Outlook3

AT&T expects in 2019:

  • Free cash flow in the $26 billion range;
  • Low single-digit adjusted EPS growth;
  • Dividend payout ratio in the high 50s% range;
  • End-of-year net debt to adjusted EBITDA in the 2.5x range;
  • Gross capital investment in the $23 billion range4

3Adjustments to EPS include merger-related amortization in the range of $7.5 billion, a non-cash mark-to-market benefit plan gain/loss, merger integration and other adjustments. We expect the mark-to-market adjustment which is driven by interest rates and investment returns that are not reasonably estimable at this time, to be a significant item. Our EPS, free cash flow and EBITDA estimates depend on future levels of revenues and expenses which are not reasonably estimable at this time. Accordingly, we cannot provide a reconciliation between our non-GAAP metrics and the reported GAAP metrics without unreasonable effort. (Our 2019 outlook for Net Debt to Adjusted EBITDA ratio excludes the impact of a new accounting standard for leases (ASC 842) that is effective beginning January 1, 2019 to be consistent with our existing multi-year guidance on this debt ratio.)

1Free cash flow dividend payout ratio is dividends divided by free cash flow.

2 AT&T adopted new U.S. accounting standards that deal with revenue recognition (ASC 606), post-employment benefit costs and certain cash receipts on installment receivables. These changes impact the company’s income statements and cash flows. With the adoption of ASC 606, the company made a policy decision to record Universal Service Fees (USF) and other regulatory fees on a net basis. The company is providing comparable results in addition to GAAP to help investors better understand the impact on financials from ASC 606 and the policy decision. Historical income statements and cash flows have been recast to show only the impact of the adoption of the other two accounting standards.

4Excludes expected FirstNet reimbursements in the $1 billion range; includes potential vendor financing.

*About AT&T

AT&T Inc. (NYSE:T ) is a diversified, global leader in telecommunications, media and entertainment, and technology. It executes in the market under four operating units. WarnerMedia’s HBO, Turner and Warner Bros. divisions are world leaders in creating premium content, operate one of the world’s largest TV and film studios, and own a world-class library of entertainment. AT&T Communications provides more than 100 million U.S. consumers with entertainment and communications experiences across TV, mobile and broadband services. Plus, it serves more than 3 million business customers with high-speed, highly secure connectivity and smart solutions. AT&T Latin America provides pay-TV services across 11 countries and territories in Latin America and the Caribbean, and is the fastest growing wireless provider in Mexico, serving consumers and businesses. Xandr provides marketers with innovative and relevant advertising solutions for consumers around premium video content and digital advertising through its AppNexus platform.

AT&T products and services are provided or offered by subsidiaries and affiliates of AT&T Inc. under the AT&T brand and not by AT&T Inc. Additional information is available at about.att.com . © 2019 AT&T Intellectual Property. All rights reserved. AT&T, the Globe logo and other marks are trademarks and service marks of AT&T Intellectual Property and/or AT&T affiliated companies. All other marks contained herein are the property of their respective owners.

Cautionary Language Concerning Forward-Looking Statements

Information set forth in this news release contains financial estimates and other forward-looking statements that are subject to risks and uncertainties, and actual results might differ materially. A discussion of factors that may affect future results is contained in AT&T’s filings with the Securities and Exchange Commission. AT&T disclaims any obligation to update and revise statements contained in this news release based on new information or otherwise.

This news release may contain certain non-GAAP financial measures. Reconciliations between the non-GAAP financial measures and the GAAP financial measures are available on the company’s website at https://investors.att.com .

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.

Certain amounts have been conformed to the current period's presentation, including our adoption of new accounting standards; ASU No. 2017-07, "Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," and ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash; and our revised operating segments.

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    
Fourth Quarter Year Ended
      2018       2017       2018       2017  
Net cash provided by operating activities   $ 12,080     $ 9,537     $ 43,602     $ 38,010
Less: Capital expenditures     (4,152 )     (5,076 )     (21,251 )     (21,550 )
Free Cash Flow     7,928       4,461       22,351       16,460  
   
Less: Dividends paid     (3,635 )     (3,008 )     (13,410 )     (12,038 )
Free Cash Flow after Dividends   $ 4,293     $ 1,453     $ 8,941     $ 4,422  
Free Cash Flow Dividend Payout Ratio     45.9 %     67.4 %     60.0 %     73.1 %
 

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. Management compensates for these limitations by carefully analyzing how its competitors present 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    
Fourth Quarter Year Ended
      2018       2017         2018       2017  
Net Income $ 5,130   $ 19,136 $ 19,953   $ 29,847
Additions:
Income Tax (Benefit) Expense 615 (20,419 ) 4,920 (14,708 )
Interest Expense 2,112 1,926 7,957 6,300
Equity in Net (Income) Loss of Affiliates (23 ) (20 ) 48 128
Other (Income) Expense - Net (1,674 ) 658 (6,782 ) (1,597 )
Depreciation and amortization     7,892       6,071         28,430       24,387  
EBITDA     14,052       7,352         54,526       44,357  
 
Total Operating Revenues 47,993 41,676 170,756 160,546
Service Revenues 42,496 36,225 152,345 145,597
 
EBITDA Margin 29.3 % 17.6 % 31.9 % 27.6 %
EBITDA Service Margin     33.1 %     20.3 %       35.8 %     30.5 %
 
 
Supplemental Historical EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions  
Fourth Quarter Year Ended
      2018           2018    
Net Income $ 4,690     $ 18,157

 

Additions:
Income Tax (Benefit) Expense 472 4,337
Interest Expense 2,112 7,957
Equity in Net (Income) Loss of Affiliates (23 ) 48
Other (Income) Expense - Net (1,674 ) (6,782 )
Depreciation and amortization     7,892           28,430    
EBITDA     13,469           52,147    
 
Total Operating Revenues 48,857 174,303
Service Revenues 43,931 157,979
 
EBITDA Margin 27.6 % 29.9 %
EBITDA Service Margin     30.7 %         33.0 %  
 
 
Segment and Business Unit EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions    
Fourth Quarter Year Ended
      2018       2017       2018       2017  
Communications Segment                        
Operating Contribution $ 7,639   $ 6,864 $ 32,262   $ 31,685
Additions:
Equity in Net (Income) Loss of Affiliates 1 2 4 2
Depreciation and amortization     4,604       4,600       18,424       18,425  
EBITDA     12,244       11,466       50,690       50,112  
 
Total Operating Revenues 37,458 39,110 144,631 150,378
 
Operating Income Margin 20.4 % 17.6 % 22.3 % 21.1 %
EBITDA Margin     32.7 %     29.3 %     35.0 %     33.3 %
Mobility
Operating Contribution $ 5,455 $ 4,275 $ 21,722 $ 20,204
Additions:
Equity in Net (Income) of Affiliates - - 1 -
Depreciation and amortization     2,068       2,027       8,355       8,015  
EBITDA     7,523       6,302       30,078       28,219  
 
Total Operating Revenues 18,769 19,168 71,344 71,090
Service Revenues 13,859 14,282 54,933 57,696
 
Operating Income Margin 29.1 % 22.3 % 30.4 % 28.4 %
EBITDA Margin 40.1 % 32.9 % 42.2 % 39.7 %
EBITDA Service Margin 54.3 % 44.1 % 54.8 % 48.9 %
                         
Entertainment Group
Operating Contribution $ 825 $ 1,001 $ 4,713 $ 5,471
Additions:
Equity in Net (Income) Loss of Affiliates 1 - 2 -
Depreciation and amortization     1,329       1,367       5,315       5,621  
EBITDA     2,155       2,368       10,030       11,092  
 
Total Operating Revenues 11,962 12,560 46,460 49,995
 
Operating Income Margin 6.9 % 8.0 % 10.1 % 10.9 %
EBITDA Margin     18.0 %     18.9 %     21.6 %     22.2 %
Business Wireline
Operating Contribution $ 1,359 $ 1,588 $ 5,827 $ 6,010
Additions:
Equity in Net (Income) Loss of Affiliates - 2 1 2
Depreciation and amortization     1,207       1,206       4,754       4,789  
EBITDA     2,566       2,796       10,582       10,801  
 
Total Operating Revenues 6,727 7,382 26,827 29,293
 
Operating Income Margin 20.2 % 21.5 % 21.7 % 20.5 %
EBITDA Margin     38.1 %     37.9 %     39.4 %     36.9 %
 
 
Segment and Business Unit EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions    
Fourth Quarter Year Ended
      2018       2017       2018       2017  
WarnerMedia Segment
Operating Contribution $ 2,703   $ 41 $ 5,695   $ 62
Additions:
Equity in Net (Income) of Affiliates (80 ) 6 (25 ) 29
Depreciation and amortization     139       1       305       4  
EBITDA     2,762       48       5,975       95  
 
Total Operating Revenues 9,232 107 18,941 430
Operating Income Margin 28.4 % 43.9 % 29.9 % 21.2 %
EBITDA Margin 29.9 % 44.9 % 31.5 % 22.1 %
                         
Turner
Operating Contribution $ 1,306 $ 61 $ 3,108 $ 140
Additions:
Equity in Net (Income) of Affiliates (15 ) (13 ) (54 ) (45 )
Depreciation and amortization     60       1       131       4  
EBITDA     1,351       49       3,185       99  
 
Total Operating Revenues 3,212 107 6,979 430
Operating Income Margin 40.2 % 44.9 % 43.8 % 22.1 %
EBITDA Margin 42.1 % 45.8 % 45.6 % 23.0 %
                         
Home Box Office
Operating Contribution $ 650 $ - $ 1,384 $ -
Additions:
Equity in Net (Income) Loss of Affiliates (28 ) - (29 ) -
Depreciation and amortization     26       -       56       -  
EBITDA     648       -       1,411       -  
 
Total Operating Revenues 1,673 - 3,598 -
 
Operating Income Margin 37.2 % - 37.7 % -
EBITDA Margin     38.7 %     -       39.2 %     -  
Warner Bros.
Operating Contribution $ 807 $ - $ 1,449 $ -
Additions:
Equity in Net (Income) Loss of Affiliates 4 - 28 -
Depreciation and amortization     42       -       96       -  
EBITDA     853       -       1,573       -  
 
Total Operating Revenues 4,476 - 8,703 -
 
Operating Income Margin 18.1 % - 17.0 % -
EBITDA Margin 19.1 % - 18.1 % -
 
 
Segment and Business Unit EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions    
Fourth Quarter Year Ended
      2018       2017       2018       2017  
Latin America Segment                        
Operating Contribution $ (248 )   $ (9 ) $ (710 )   $ (266 )
Additions:
Equity in Net (Income) of Affiliates (10 ) (25 ) (34 ) (87 )
Depreciation and amortization     296       313       1,238       1,218  
EBITDA     38       279       494       865  
 
Total Operating Revenues 1,843 2,215 7,652 8,269
 
Operating Income Margin -14.0 % -1.5 % -9.7 % -4.3 %
EBITDA Margin 2.1 % 12.6 % 6.5 % 10.5 %
                         
Vrio
Operating Contribution $ 66 $ 160 $ 347 $ 522
Additions:
Equity in Net (Income) of Affiliates (10 ) (25 ) (34 ) (87 )
Depreciation and amortization     169       207       728       849  
EBITDA     225       342       1,041       1,284  
 
Total Operating Revenues 1,074 1,391 4,784 5,456
 
Operating Income Margin 5.2 % 9.7 % 6.5 % 8.0 %
EBITDA Margin 20.9 % 24.6 % 21.8 % 23.5 %
                         
Mexico
Operating Contribution $ (314 ) $ (169 ) $ (1,057 ) $ (788 )
Additions:
Depreciation and amortization     127       106       510       369  
EBITDA     (187 )     (63 )     (547 )     (419 )
 
Total Operating Revenues 769 824 2,868 2,813
 
Operating Income Margin -40.8 % -20.5 % -36.9 % -28.0 %
EBITDA Margin     -24.3 %     -7.6 %     -19.1 %     -14.9 %
 
 
Segment EBITDA, EBITDA Margin and EBITDA Service Margin
Dollars in millions
Fourth Quarter Year Ended
      2018       2017       2018       2017  
Xandr                        
Operating Contribution $ 381 $ 329 $ 1,333 $ 1,202
Additions:
Depreciation and amortization     5       1       9       2  
EBITDA     386       330       1,342       1,204  
 
Total Operating Revenues 566 381 1,740 1,373
 
Operating Income Margin 67.3 % 86.4 % 76.6 % 87.5 %
EBITDA Margin     68.2 %     86.6 %     77.1 %     87.7 %
 

Adjusting items include revenues and costs we consider nonoperational 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 fourth-quarter results, unless earlier remeasurement is required (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, reflect the actual tax expense or combined marginal rate of approximately 38% for transactions prior to tax reform and 25% for transactions after tax reform.

 
Adjusting Items
Dollars in millions  
Fourth Quarter Year Ended
      2018       2017       2018       2017  
Operating Revenues    
Time Warner deferred revenue $ 49 $ - $ 49 $ -
Natural disaster revenue credits     -       154       -       243  
Adjustments to Operating Revenues     49       154       49       243  
Operating Expenses
Time Warner and other merger costs 436 63 1,185 214
Employee separation costs 327 177 587 445
Natural disaster costs 77 265 181 384
Asset abandonments and impairments 46 2,914 46 2,914
Holding losses on benefit-related investments 42 - 42 -
DIRECTV merger integration costs - 95 - 412
Mexico merger integration costs - 19 - 172
Tax reform special bonus - 220 - 220
(Gain) loss on transfer of wireless spectrum - - - (181 )
Foreign currency exchange     -       -       43       98  
Adjustments to Operations and Support Expenses     928       3,753       2,084       4,678  
Amortization of intangible assets 2,261 1,100 6,930 4,608
Impairments     26       33       26       33  
Adjustments to Operating Expenses     3,215       4,886       9,040       9,319  
Other
Merger-related interest and fees1 - 432 1,029 1,104
Actuarial (gain) loss (686 ) 1,517 (3,412 ) 1,258
Holding losses on benefit-related investments 208 - 208 -
(Gain) loss on sale of assets,

impairments and other adjustments

    (352 )     161       (631 )     382  
Adjustments to Income Before Income Taxes     2,434       7,150       6,283       12,306  
Tax impact of adjustments 412 1,908 1,177 3,625
Tax-related items     601       19,455       505       19,309  
Adjustments to Net Income   $ 1,421     $ (14,213 )   $ 4,601     $ (10,628 )
1 Includes 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  
Fourth Quarter Year Ended
      2018       2017       2018       2017  
Operating Income $ 6,160   $ 1,281 $ 26,096   $ 19,970
Adjustments to Operating Revenues 49 154 49 243
Adjustments to Operating Expenses     3,215       4,886       9,040       9,319  
Adjusted Operating Income     9,424       6,321       35,185       29,532  
                         
EBITDA 14,052 7,352 54,526 44,357
Adjustments to Operating Revenues 49 154 49 243
Adjustments to Operations and Support Expenses     928       3,753       2,084       4,678  
Adjusted EBITDA     15,029       11,259       56,659       49,278  
 
Pro forma as of June 30, 2018
WarnerMedia Operating Income - 3,047
Additions:
Depreciation and amortization - 339
Merger costs     -             694  
WarnerMedia Adjusted EBITDA - 4,080
WarnerMedia segment income (post acquisition) - (451 )

WarnerMedia segment depreciation and amortization (post acquisition)

- (30 )
WarnerMedia merger costs (post acquisition) - (159 )
Film and television cost amortization (release prior to June 14)     -             1,103  
Pro Forma Adjusted EBITDA 1     15,029             61,202  
 
Total Operating Revenues 47,993 41,676 170,756 160,546
Adjustments to Operating Revenues     49       154       49       243  
Total Adjusted Operating Revenue     48,042       41,830       170,805       160,789  
Service Revenues 42,496 36,225 152,345 145,597
Adjustments to Service Revenues     49       154       49       243  
Adjusted Service Revenue     42,545       36,379       152,394       145,840  
 
 
Operating Income Margin 12.8 % 3.1 % 15.3 % 12.4 %
Adjusted Operating Income Margin 19.6 % 15.1 % 20.6 % 18.4 %
Adjusted EBITDA Margin 31.3 % 26.9 % 33.2 % 30.6 %
Adjusted EBITDA Service Margin 35.3 % 30.9 % 37.2 % 33.8 %
 
Supplemental Results under Historical Accounting Method
Operating Income 5,577 23,717
Adjustments to Operating Revenues 49 49
Adjustments to Operating Expenses     3,215             9,040        
Adjusted Supplemental Operating Income     8,841             32,806        
 
EBITDA 13,469 52,147
Adjustments to Operating Revenues 49 49
Adjustments to Operations and Support Expenses     928             2,084        
Adjusted Supplemental EBITDA     14,446             54,280        
 
Supplemental Operating Revenues 48,857 174,303
 
Adjusted Supplemental Operating Income Margin 18.1 % 18.8 %
Adjusted Supplemental EBITDA margin     29.6 %           31.1 %      

1 Pro Forma Adjusted EBITDA reflects the combined results operations of the combined company based on the historical financial statements of AT&T and Time Warner, after giving effect to the merger and certain adjustments, and is intended to reflect the impact of the Time Warner acquisition on AT&T. WarnerMedia operating income, depreciation and amortization expense and merger costs are provided on Item 7.01 Form 8-K filed by AT&T on July 24, 2018. Pro Forma adjustments are to (1) remove the duplication of operating results for the 16-period in which AT&T also reported Time Warner results and (2) to recognize the purchase accounting classification of released content as intangible assets and accordingly reclassify associated content amortization from operating expense to amortization expense. Intercompany revenue and expense eliminations net and do not impact EBITDA.

 
 
Adjusted Diluted EPS
     
Fourth Quarter Year Ended
      2018       2017         2018       2017  
Diluted Earnings Per Share (EPS) $ 0.66   $ 3.08 $ 2.85   $ 4.76
Amortization of intangible assets 0.25 0.12 0.81 0.50
Merger integration items1 0.06 0.07 0.26 0.21

(Gain) loss on sale of assets, impairments and other adjustments2

0.04 0.48 0.05 0.58
Actuarial (gain) loss3 (0.07 ) 0.19 (0.38 ) 0.16
Tax-related items     (0.08 )     (3.16 )       (0.07 )     (3.16 )
Adjusted EPS   $ 0.86     $ 0.78       $ 3.52     $ 3.05  
Year-over-year growth - Adjusted     10.3 %             15.4 %      

Weighted Average Common Shares Outstanding with Dilution (000,000)

    7,328       6,182         6,806       6,183  
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 associated with our 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 $3.4 billion in 2018. As a result, adjusted EPS reflects an expected return on plan assets of $3.5 billion (based on an average expected return on plan assets of 7.00% for our pension trust and 5.75% for our VEBA trusts), rather than the actual return on plan assets of $1.2 billion loss (actual pension return of -1.4% and VEBA return of -4.2%), included in the GAAP measure of income.
 

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 Pro Forma Adjusted EBITDA ratio is calculated by dividing the Net Debt by Annualized Pro Forma 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. Annualized Pro Forma Adjusted EBITDA is calculated by annualizing the year-to-date Pro Forma Adjusted EBITDA.

Our Annualized Net Debt to Pro Forma Adjusted EBITDA ratio for the year ended December 31, 2018 reflects the benefit of amortization of prior service credits of $1,754 in Other Income (Expense) - net rather than EBITDA, consistent with treatment for consolidated reported results. Segment results continue to show this benefit as a reduction in their operating expenses, consistent with treatment prior to adoption of accounting rules in first-quarter 2018. If we had used the historical method of accounting for prior service credits, our 2018 Annualized Net Debt to Pro Forma Adjusted EBITDA Ratio would be 2.75.

 
Net Debt to Pro Forma Adjusted EBITDA
Dollars in millions      
Three Months Ended
Mar. 31,   Jun. 30,   Sep. 30, Dec. 31, YTD 2018
      2018     2018     2018     2018    
Pro Forma Adjusted EBITDA1 $ 15,182 $ 15,119 $ 15,872 $ 15,029 $ 61,202
Add back severance (51 ) (133 ) (76 ) (327 ) (587 )
Net Debt Pro Forma Adjusted EBITDA 15,131 14,986 15,796 14,702 60,615
Annualized Pro Forma Adjusted EBITDA 60,615
End-of-period current debt 10,255
End-of-period long-term debt 166,250
Total End-of-Period Debt 176,505
Less: Cash and Cash Equivalents 5,204
Net Debt Balance                             171,301  
Annualized Net Debt to Pro Forma Adjusted EBITDA Ratio                             2.83  
1Includes the purchase accounting reclassification of released content amortization of $612 million pro forma in the first quarter, $491 million pro forma and $98 million reported by AT&T in the second quarter and $772 million reported and $545 million reported by AT&T in the third and fourth quarters of 2018, respectively.
 

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
  Three Months Ended
  December 31, 2018     December 31, 2017
  Business     Business   Business     Business
      Mobility     Wireline    

Adjustments(1)

    Solutions   Mobility     Wireline    

Adjustments(1)

    Solutions
Operating Revenues
Wireless service $ 13,859 $ - $ (11,959 ) $ 1,900 $ 14,282 $ - $ (12,303 ) $ 1,979
Strategic services - 3,142 - 3,142 - 3,070 - 3,070
Legacy voice and data services - 2,521 - 2,521 - 3,251 - 3,251
Other services and equipment - 1,064 - 1,064 - 1,061 - 1,061
Wireless equipment     4,910       -       (4,130 )     780     4,886     -       (4,322 )     564  
Total Operating Revenues     18,769       6,727       (16,089 )     9,407     19,168     7,382       (16,625 )     9,925  
Operations and support 11,246 4,161 (9,496 ) 5,911 12,866 4,586 (11,103 ) 6,349
EBITDA 7,523 2,566 (6,593 ) 3,496 6,302 2,796 (5,522 ) 3,576
Depreciation and amortization     2,068       1,207       (1,768 )     1,507     2,027     1,206       (1,741 )     1,492  
Total Operating Expenses     13,314       5,368       (11,264 )     7,418     14,893     5,792       (12,844 )     7,841  
Operating Income 5,455 1,359 (4,825 ) 1,989 4,275 1,590 (3,781 ) 2,084
Equity in net Income of Affiliates     -       -       -       -     -     (2 )     1       (1 )
Contribution   $ 5,455     $ 1,359     $ (4,825 )   $ 1,989     $ 4,275   $ 1,588     $ (3,780 )   $ 2,083  
1 Non-business wireless reported in the Communication segment under the Mobility business unit.
                                                 
Supplemental Operational Measure
Year Ended
  December 31, 2018   December 31, 2017
Business

 

Business Business Business
      Mobility     Wireline    

Adjustments(1)

    Solutions   Mobility     Wireline    

Adjustments(1)

    Solutions
Operating Revenues
Wireless service $ 54,933 $ - $ (47,536 ) $ 7,397 $ 57,696 $ - $ (49,687 ) $ 8,009
Strategic services - 12,310 - 12,310 - 11,950 - 11,950
Legacy voice and data services - 10,697 - 10,697 - 13,565 - 13,565
Other services and equipment - 3,820 - 3,820 - 3,778 - 3,778
Wireless equipment     16,411       -       (13,879 )     2,532     13,394     -       (11,842 )     1,552  
Total Operating Revenues     71,344       26,827       (61,415 )     36,756     71,090     29,293       (61,529 )     38,854  
 
Operating Expenses
Operations and support 41,266 16,245 (34,792 ) 22,719 42,871 18,492 (36,867 ) 24,496
EBITDA 30,078 10,582 (26,623 ) 14,037 28,219 10,801 (24,662 ) 14,358
Depreciation and amortization     8,355       4,754       (7,158 )     5,951     8,015     4,789       (6,903 )     5,901  
Total Operating Expenses     49,621       20,999       (41,950 )     28,670     50,886     23,281       (43,770 )     30,397  
Operating Income     21,723       5,828       (19,465 )     8,086     20,204     6,012       (17,759 )     8,457  
Equity in net Income of Affiliates     (1 )     (1 )     1       (1 )   -     (2 )     1       (1 )
Contribution   $ 21,722     $ 5,827     $ (19,464 )   $ 8,085     $ 20,204   $ 6,010     $ (17,758 )   $ 8,456  
1 Non-business wireless reported in the Communication segment under the Mobility business unit.
 

Erin McGrath
AT&T Inc.
Phone: (214) 862-0651
Email: erin.mcgrath@att.com

Source: AT&T Inc.



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